DECEMBER 2024
CURRENT ISSUES IN THE AREAS OF ESTATE, TAX AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
Importance Of Trustee Selection. The role of the trustee is very important to accomplish the purposes of a trust. The selection of a trustee can have a significant impact on family relationships and the smoothness of the trust administration process. Often an “independent” trustee will be used, which is a trustee that is not related to the creators of the trust and is not a beneficiary. It could be a friend, a professional advisor, or a corporate entity. One of the most important duties of the trustee is to determine if the distributions are permissible or should be made. Most trust agreements provide for certain standards or criteria for the purpose of making distributions, and the trustee must determine whether those criteria are met. If a trustee is too closely related or tied to a beneficiary, it may be difficult for the trustee to exercise discretion or to say no. If a trustee is given very broad discretion with limited or no criteria for guidance, a related trustee may be tempted to provide benefits that might not be in the best interest of the other beneficiaries of the trust. The trustee may need to take into account a beneficiary’s other income or resources, and somebody who is too closely related or tied to the beneficiary may find that difficult to do. A particular beneficiary’s needs must be balanced against the needs as well as the priorities of other beneficiaries. The trustee may also need to decide not only if a distribution should be made, but if it should not be made directly to the beneficiary. It might be that the beneficiary cannot be trusted with the money, or there may be other reasons for making a direct payment to a provider of a service rather than to the beneficiary. Trust relationships often go on for many years. Having an individual involved in lieu of a corporate entity may result in the need to provide for successor trustees and actually to transfer the trust administration to one or more successors during the duration of the trust. A corporate entity may be best when there are factors involved that suggest that an individual may not have the ability to make the required decisions or may be too easily influenced by certain beneficiaries.
Disclaimer-Activated IRA Gift. If an IRA holder would like to encourage an individual beneficiary to be philanthropic, the IRA owner could name a person as the primary beneficiary, and then name a charity as the contingent beneficiary and specify that the charity shall receive any benefits disclaimed by the primary beneficiary. The IRA holder may even over a period of time encourage the beneficiary to consider making such a charitable gift. If the beneficiary disclaims a part of the gift, there will be no income tax consequences to the beneficiary and the disclaimed part will simply pass outright to the charity. Obviously the disclaimer would have to be a qualified disclaimer, and made within the nine-month applicable time period, in order to avoid any tax effect on the beneficiary.
Client Competency. An issue that bears revisiting from time to time is the issue of client capacity. As attorneys we are frequently confronted with the problem of assisting a client who may appear to have some limited or marginal competence, or what we prefer to refer to now as “legal capacity.” A person may have legal capacity to perform or engage in certain acts and transactions but not others. There has been a growing recognition of the importance of individual autonomy for years. The Rules of Professional Conduct governing the practice of law require an attorney to “…as far as reasonably possible, maintain a normal client-lawyer relationship with the client…”. However, an attorney may seek the appointment of a guardian or take other protective action if the attorney reasonably believes that the client cannot adequately act in the client’s own interest. In the area of wills or trusts, “sound mind” is a central issue. In some cases it may be necessary to recommend that tests be taken, such as the Folstein Mini Mental State Exam (“MMSE”), or other types of tests designed to indicate whether or not a person may be suffering from diminished capacity. In general, an attorney should not actually conduct such a test, which should be administered by those with proper training and experience. Limited legal capacity is a conundrum that attorneys, particularly those of us who practice elder law, have to deal with on a regular and recurring basis. Even people with limited capacity are entitled to retain their autonomy and dignity and to engage in acts and transactions to the maximum extent that their legal capacity permits.
Obtaining Retirement Plan Information. The administrator of any qualified retirement plan is required to make a copy of the plan available to every participant/owner and to provide a copy to any participant/owner upon request. IRAs and other plan documents would be available from the administrator or account custodian. In many cases, for proper planning and for an evaluation of the options, it may be necessary to secure a copy of the retirement plan or the IRA custodial agreement as well as verification of the beneficiary designation. Obtaining as much information as possible is essential to providing proper representation. Many clients overlook the importance of beneficiary designations as a part of the planning process and assume that the execution of a will or trust will also determine where IRA or retirement benefits go in the event of death. That is not the case as such dispositions are controlled by the beneficiary designation.
Eligible Designated Beneficiary. The concept of an “eligible designated beneficiary” (“EDB”) arose under the Secure Act of 2019. In general, most beneficiaries now are limited to a standard ten-year maximum distribution period. An EDB is not subject to that limitation. An EDB includes the participant’s spouse, a “minor” child of the original account owner (which means a child under 21 years of age), a person more than ten years younger than the original account owner (such as a life partner or sibling), and the original account owner’s child who is either “disabled” or “chronically ill.” To qualify as “chronically ill” the beneficiary must present a medical certification that the period of inability to work is an indefinite one or which is reasonably expected to be unlimited. It should be noted that when a “minor” child attains the age of majority, the ten-year rule kicks in. There is no similar provision for a disabled or chronically ill beneficiary who recovers. It should be noted the EDB status applies only to the first beneficiary. It does not apply to a successor beneficiary.
Additional Information. Future issues of this newsletter will address other issues of current interest. Please contact my office with any questions that you might have.