Scary Stuff

I recently attended a seminar put on by the American Bankers Assn. and learned some cringe-producing lessons that attorneys have perpetrated over the years. Most of the problems arise when attorneys who are not well versed in estate planning and tax matters mess up. One issue: the practitioner did not satisfy all the statutory requirements to obtain a marital or charitable deduction. For example, in a trust, the surviving spouse was given the income from the trust until her death or remarriage. Because her income interest could terminate upon her remarriage, it was considered a terminal interest trust and therefore did not qualify for the marital deduction. Ouch. Big tax bill.
In another case the attorney did not make a proper allocation of the tax apportionment clauses and used a boilerplate provision stating that the residue would pay the taxes. When it was later discovered that significant assets had passed outside of the trust and will, the residual estate beneficiaries bore a greater portion of the taxes. Unfortunately, the residual estate would have qualified for the marital deduction. That was a double whammy. Not only were the taxes increased but the marital deduction was reduced, and hence the tax burden was increased accordingly.
Other examples include cases where individuals have tried to increase the annual gift exclusion by making gifts to individuals who in turn make gifts back to individuals children. This may seem like a great idea until you get caught. Another case involved a litigator who was asked to draft an irrevocable life insurance trust yet had no estate planning experience. This litigator used a form book and did not have a clue about using Crummey powers. The net result was that the IRS pulled back into the estate all of the gifts for tax purposes because Crummey letter had not been prepared.