Upstate Estate Law, P.C. Blog

This installment of Greenville Estate Attorney A – Z is CAPACITY, as in, CAPACITY to make a Last Will and Testament. The capacity to make a Last Will is actually a lower standard than that to enter into a regular contract.

Capacity to make a Last Will requires the following:

1. The Testator (person making the Will) understands what his/her estate assets are;

2. The Testator knows the natural objects of his affections; and

3. The Testator knows to whom he/she wishes to leave his/her estate to.

This is a rather low standard, even a clinically insane person can execute a Last Will and Testament if it is done during a lucid interval. The capacity to make a Revocable Trust is actually the same as that to make a Last Will, this is stated by statute, SC Code 62-7-601.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

A BYPASS TRUST (also called a credit shelter trust, the “B” trust of the “AB” trust arrangement, or the family trust) is a type of trust typically set up by a married couple that is concerned about estate tax liability.

The bypass trust is set up to receive that amount of assets that equals the amount of the federal estate tax exemption in effect when the first spouse dies.  It is called a bypass trust because the assets contained in the trust escape estate taxation when the surviving spouse passes away, in effect, ‘bypassing’ estate taxation in the surviving spouse’s estate.

The beneficiary of the bypass trust is usually the surviving spouse, but this is actually not required. Children of the first spouse to die are often included as beneficiaries as well.

The requirements of the bypass trust are rather simple. It is usually funded by a provision in a Last Will or Revocable Living Trust which in effect states that it is to be funded up to the amount of the federal estate tax exemption amount (there are numerous ways that this funding provision can be drafted, but it is usually easily recognized once you see it).

Other requirements are that the surviving spouse is typically entitled to all the income from the bypass trust, plus a portion of the principal of the trust each year equal to the greater of $5,000.00 or 5% of the principal.  The surviving spouse may have some power to appoint the bypass trust assets upon death to certain beneficiaries that he or she names, this is called a limited power of appointment. (*A limited power of appointment cannot be included in the event that it is expected that the bypass trust will be funded as a result of a qualified disclaimer by the surviving spouse.)

The surviving spouse may be the sole trustee of the bypass trust, but this requires some restrictive language if the bypass trust allows for the making of discretionary principal distributions from the trust. The language allowing distributions must state that distributions from the trust may only be made for the health, education, maintenance, and support of the surviving spouse. If there is a co-trustee serving with the surviving spouse, the co-trustee can be given broad discretion to make distributions for the welfare of the surviving spouse. It is typically beneficial to have a co-trustee serve alongside the surviving spouse.

The bypass trust offers a method by which spouses whose estates will be valued near the federal estate tax exclusion amount can be sure to take full advantage of each of their estate tax exclusions. It should not be attempted without professional help, it takes more than just signing the trust document to make it work, the ownership of assets will most likely need to be rearranged as well.

I will revisit the bypass trust once I make my way to P, when I will discuss the new estate tax concept of Portability.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation. 

I originally wrote this post last week, but for some reason it did not publish to the blog.  Anyway, a deal has been announced by President Obama between Republicans and Democrats concerning the federal estate tax. It seems that the Blanche Lincoln/John Kyl proposal is currently winning the day, with a $5,000,000.00 exemption per estate and a 35% tax rate.  I previously wrote about this proposal here.  The devil is in the details, and unfortunately details are a bit scanty at this time.  This proposal of course has to be passed by both the Senate and the House of Representatives, and there is fierce opposition at the moment from some Congressional Democrats.  There may be a provision as well to allow estates of persons dying in 2010 the option of filing an estate tax return under the 2011 law, or to elect to use the 2010 law with its carry over basis scheme, which would eliminate the possibility of litigation over the constitutionality of retroactive estate tax legislation.  Stay tuned…..

In 2009, it was inconceivable that in 2010 there would be no federal estate tax or generation skipping tax.  Now with 29 days left in 2010, it is inconceivable that in 2011 there will be a resurrected federal estate tax with a one million dollar exemption level and a 55% top rate, and a generation skipping transfer tax exemption of approximately 1.3 million dollars with a 55% rate.  The change over from 2010 to 2011 may usher in monumental changes in U.S. tax law.  The Congress continues to debate.  Will anything get done? Stay tuned.  If your net worth is anywhere in the one million dollar range, you need to be paying attention over the next few weeks.

Attorneys can be a strange lot.  They make up terms that nobody understands seemingly for no reason.  One such term is the intentionally defective grantor trust.  What is a grantor trust? Why would it ever be defective? And why would this be done intentionally?  Good questions all.

First, what is a grantor?  Well, a grantor is the person that sets up the trust and transfers his/her assets to it.

Second, what is a grantor trust? A grantor trust is a trust that is deemed to be owned by the grantor. This is important because it is the owner who is responsible for paying and filing the income taxes.  When the trust is a grantor trust, then it is the grantor that owns the income from the trust, and gets the benefit of the deductible expenses of the trust.  This allows the trust income tax brackets to be avoided in favor of the more favorable individual income tax brackets.  A grantor trust does not have to apply for a new taxpayer identification number because the grantor’s social security number is used.

How do you know whather a trust is a grantor trust? You determine this by reference to the trust instrument itself. What does the trust say? What powers does it grant? How is it structured? When you know this, you then take a look at the Internal Revenue Code, Sections 672 through 678. These sections are commonly known as the Grantor Trust rules.  As an example, a trust that is revocable by the Grantor is a grantor trust, and we know this by reference to IRC Section 676.  A trust that allows the Grantor to amend it to add beneficiaries (other than after adopted or born children) is a grantor trust and we know this by reference to IRC Section 674.  There are many other powers that can be granted in the trust to cause the trust to be a grantor trust.

Now that we know what a grantor trust is, why would we ever set up an intentionally defective grantor trust? An intentionally defective grantor trust is a trust that intentionally contains a provision that causes the trust to be a grantor trust.  This is done in the situation where it is desirable to structure a trust in a way that allows the trust assets to not be includible in the grantor’s estate, but still taxable for income tax purposes to the grantor.

The Irrevocable Life Insurance Trust (ILIT) is an example of Click here to finish this post.