Michael Wing wrote:

- quote -

I don't typically limit principal (or income) distributions.
Why give up the flexibility to make principal distributions
for any reason? A fully discretionary trust may also
provide better protection if the spouse ever goes into a
nursing home. It may also make it easier to keep the assets
in further trust for the son if he might have a taxable
estate, or might have a creditor problem, or might get
divorced, or might survive his wife and remarry, or might
someday go into a nursing home. (The same could be
accomplished if the spouse has a power of appointment.)

You didn't say (at least in your most recent message)
whether it's the trustees who have the power to distribute
principal for the specified purposes, or whether it's the
spouse who has the power to withdraw principal for the
specified purposes. If it's the latter, you may wany to
take a closer look to see whether the inclusion of "welfare"
makes it a general power of appointment.

But even with this limited standard, it should generally be
possible to distribute principal to the spouse if she needs
it.

Bruce Steiner, attorney
NYC
also admitted in NJ and FL

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"Michael T Wing CPA" <mtwingcpa[at]yahoo.com> wrote:
- quote -

Agreed. I always tell people that they can have more
flexibility and ease of administration without the bypass
trust, but it will cost their children more.

I also tell them that they can save those taxes for their
children without a bypass trust by simply taking the
property that would have gone into that trust and giving it
directly to the kids. I've never had anyone take that
option.

Stu

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D. Stussy wrote:

- quote -

At least once a year....

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Stuart O. Bronstein <spamtrap[at]lexregia.com> wrote:

- quote -

Strategies to avoid probate are always an "easy sell." <gBut, a "bypass trust" isn't inherently part of that (probate
avoidance).

MTW

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Bruce Steiner <bsteiner[at]att.net> wrote:

- quote -

The trust contains the typical "health, maintenance and
welfare" principal distribution option. The surviving spouse
and the couple's son are co-trustees of the trust. The son
is the sole residual beneficiary. A charity is the
contingent residual beneficiary.

MTW

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Stuart O. Bronstein wrote:

- quote -

Arizona has it, and had it before California did. I know
there are other community property states out there with the
same thing. Of course, some wonder aloud *if* the IRS
will deem that to still be community property as the IRC
defines it (remember, it's the IRC that gives us the "extra"
step up <grin> , so if this is "different" from community
property...)

- quote -

It can be. However, I think we've all seen cases where
flexibility wasn't put in and, as well, some flexibility
will be lost.

- quote -

True, some do. But others don't and still more often I get
the surviving spouse whining about how "if Joe would have
known how much of a hassle this was going to be..." she
wouldn't be stuck with this.

Now, of course, sometimes I know that Joe *would* have stuck
her with it <grin> , since he was concerned with control from
the grave, but that's another issue...

- quote -

I have no problem with that. Where I do have a problem is
if an adviser suggests that is the *only* valid choice and
any other choice shows the client is crazy. Too often
advisers confuse the advisory role with the decision making
role--and deciding that the kids can be happy with whatever
they end up with is a perfectly valid decision that doesn't
indicate the client needs to be locked up in a mental
institution, despite what the kids may think <grin> .

--
Ed Zollars, CPA
Phoenix, Arizona

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"Ed Zollars, CPA" <ezollar[at]mindspring.com> wrote:
- quote -

Generally but not completely. If you're in a community
property state and purchased a home with your spouse, title
insurance companies generally place title in joint tenancy,
presumably because it avoids probate. But with real estate
prices in California (and anywhere if the property concerned
is not your residence), title in joint tenancy could result
in a substantial income tax if you wish to sell your
property after your spouse dies.

On the other hand declaring it to be community property and
holding it in a trust will both avoid probate and income
tax.

California now as "community property with rights of
survivorship" to give people the benefit of both. But have
other states followes suit?

- quote -

Again to a large extent true, though there are a lot of
places that flexibility can be inserted to avoid some of the
uncertainty.

- quote -

And when the savings for children is hundreds of thousands
of dollars, many opt for that.

- quote -

I agree. I always tell people that there will be no or few
real savings until they are gone. It's for the client to be
educated and make up his own mind what is best for his
situation.

- quote -

It's not only taxes, but also the delay, bureaucracy and
cost of probate that one must consider. I have had very few
people say that they would prefer not to spend a bit of
money now so that their kids can save a hundred thousand
dollars and months if not years of time later on.

Stu

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- quote -

One way of partly having your cake and eating it too is to
slip into the will a disclaimer option for the surviving
spouse where anything he/she disclaims goes to the trust.

Unfortunately, when going through this, I find all to often
that a hidden desire behind A-B Trusts is that the spouses
don't trust one another... they secretly suspect that once
they die, the surviving spouse will give all their stuff to
the first bimbo/stud that comes along. <grin
-HW "Skip" Weldon
Columbia, SC

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HW "Skip" Weldon wrote:
- quote -

Another comment: Estate planning should be reviewed
periodically, especially when a change in the law has
occurred since the last review....

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<SNIP
- quote -

charitable beneficiary's interest....I'm handling a trust
reformation lawsuit right now where this exact issue is
causing major legal turmoil. When you remove someone's
beneficial interest without giving them adequate
notice...and when you're the fiduciary....

Ouch.

fwiw.

Jason
Attorney, CPA
Sherman, Texas

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"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote in
- quote -

I understand completely. At times I almost resort to, "What
part of irrevocable = NO changes do you not understand?"

Folks don't want to pay tax and don't want to lose control.
This is one area where you can't have it both ways.

Martha Matthews, EA

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Michael T Wing wrote

- quote -

Does the Will permit the trustees to distribute the trust
assets to her? (She can't participate in the decision, but
her co-trustee can make that decision.)

Distributing the trust assets to her will allow for a basis
step-up at her death, but will throw the assets into her
estate if her estate turns out to be a taxable estate, and
will expose the assets to claims of her creditors (including
any subsequent spouse).

As anyone who has participated in this group over the years
know, I prefer to make trusts very flexible, so that the
trustees can adapt to future changes in circumstances and in
the tax law.

Bruce Steiner, attorney
NYC
also admitted in FL

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HW "Skip" Weldon wrote:

- quote -

The real issue, which I point out to every client where we
are talking estate planning issues, is that virtually every
mechanism for planning for the estate tax imposes out of
pocket costs and restrictions on the person involved, and
that all benefits from these costs and restrictions will
only be realized after that person is no longer around to
realize them <grin> . As well, as time showed in the case
that started this thread, all tax planning in this area is
based on figuring out what the tax law will be at some
uncertain date in the future (when the person actually
dies)--something that almost certainly will change over time.

The "future decedent" eventually tends to realize that they
bear the costs (out of pocket and in limitations on them)
while their kids (or other heirs) reap all of the
benefits--and the deal looks worse every year <grin> .

Where I think advisers sometimes get in trouble is when we
bypass that entire issue and simply work from the assumption
that "obviously" everyone first and foremost wants to
minimize the estate tax paid at their death--and all other
matters are secondary, to be taken care if and only if they
don't negatively impact that primary goal. Clients tend to
initially go along with this as well, since most have a
knee-jerk reaction against taxes and so initially feel they
will do "anything" to reduce the government's share.

When I actually raise these issues with clients, it's
interesting that a good number will actually decide that
maybe, just maybe, taxes aren't the key driver here--and
that, rather, they have other priorities and that we first
take care of those other factors and *then* deal with the
tax angle if those can be minimize without negatively
impacting the other, more important to the client, goals of
their estate plan.

--
Ed Zollars, CPA
Phoenix, Arizona

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Michael T Wing CPA" <mtwingcpa[at]yahoo.com> wrote:

- quote -

Seems to me I've heard that somewhere myself. <grin
I grow weary of cautioning consumers about irrevocable acts
in the face of so many unknowns - one of which is the tax
code.

-HW "Skip" Weldon
Columbia, SC

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HW "Skip" Weldon <skip5700removethis[at]hotmail.com> wrote:

- quote -

The couple simply went along with the "standard" estate tax
planning techniques of the day. If your combined estate was
worth more than $600,000 (at that time), you provided for a
bypass trust. (In fact, I'll bet some people would suggest
that it would be "malpractice" if the estate planner
recommended differently. <g> )

But, as the surviving wife has said on multiple occasions,
"I know our attorney knew what he was doing and gave us good
advice at the time, but I wish I hadn't been left with this
trust."

MTW

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- quote -

Good point. But there may be more than taxes involved.

My concern would be more towards the son. I don't know if
he is getting good advice or not, but I'd think twice before
suggesting that the son go along with this. Of course, if
the son were independently wealthy...

Keep in mind that the father could have left this to Mom.
He didn't. Which makes me wonder why.

-HW "Skip" Weldon
Columbia, SC

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Herb Smith <smithff33[at]aol.com> wrote:

- quote -

While I agree with you in the strictest technical sense, I'm
not sure that conforms to the "reality" as seen by the
client. In most of the estate planning I've done (typically
for "boomer" age clients), the primary concern is to
maintain flexibility for the surviving spouse. While older
generations might have been concerned about leaving a
substantial "legacy" to their children, this objective is
notably lacking in my clients (except, perhaps, in "children
of the prior marriage" situations).

Most clients are smart enough to realize that the bypass
trust saves nothing in terms of taxes for the surviving
spouse. Rather, the people who benefit from it are the kids.
So, if leaving money to the kids is not a priority, then
neither is the bypass trust. Most clients seem to view it as
simply a "gimmick" for "tax purposes," and therefore nothing
that changes essential reality.

So, I wouldn't want to sit across the desk from a surviving
spouse and suggest that the money in that bypass trust
wasn't "hers" unless, perhaps, I could "blame" the comment
on someone else. Maybe like, "You know, if your attorney was
here, he would probably point out that you don't
~technically~ own the money in that trust," while I
tactfully duck. <g
MTW

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Stuart O. Bronstein <spamtrap[at]lexregia.com> wrote:

- quote -

I agree, there are a lot of things that could potentially go
wrong with this scenario. But, the case in question is
untypically "clean." There is only one surviving child, no
other close relatives, and the contingent remainder
beneficiary of the trust is a charity. The charity likely
doesn't know that they have been designated. And, even if
they did, are they going to risk the bad publicity that
could result from arguing over a ~contingent~ claim that is
only worth a few hundred grand?

- quote -

Yep, that's true. And, while I'm usually the first guy to
point out that Congress and FUTURE tax laws can't be
trusted, I'd be willing to stand in front of a firing squad
on these points: The estate tax will NOT be repealed in
2010, and the 2001 rates will NOT spring back to life in
2011. (Rather, the 2009 rates and exclusions will be rolled
forward in some fashion.)

Anyone else want to join me on the firing line? <g
MTW

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Dan Evans <dan[at]evans-legal.com> wrote:

- quote -

Ouch! ~Very interesting~ and I'll keep that in mind.

But, in the case in question, I'm not sure that the trust is
being terminated in a manner that is "contrary to law."
Rather, it would likely be terminated (or perhaps I should
say "exhausted") by an aggressive interpretation of the
"health, maintenance and welfare" clause. Does this rise to
criminal intent? <g
MTW

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Ed Zollars, CPA <ezollar[at]mindspring.com> wrote:

- quote -

OK, I hadn't thought of that angle, but it does make sense.
I suppose the "official" way to avoid that problem would be
to determine the values of the income and remainder
interests, and distribute them respectively to the Mother
and Son. However, a very quick peek at the valuation tables
would indicate something like 45% - 50% going to the son,
and I'm not sure Mom would go along with that. (A lessor
amount would probably be OK with her.)

What she actually has in mind is to exercise her right under
the "health, welfare, maintenance, etc." clause of the trust
to "invade" principal. She was left with the couple's very
large and very old home outside of the trust. Give the
sizable amounts that have been spent on maintenance over the
years, it wouldn't be a total stretch for her to claim
entitlement to the funds in the trust in order to "maintain"
her standard of living in this grand old house. Whether that
might justify a complete liquidation of the trust all at
once, rather than simply paying for extraordinary
maintenance expenses as they occur, is probably another
question (and a bit outside of "tax" issues).

And, by the way, I guess the reason I didn't think about the
potential value of the remainder interest is because
experience has shown that the eventual value of a trust like
this with a discretionary "health and maintenance"
distribution option is not likely to be much. <g
- quote -

I totally agree. I've already advised them (Mom and Son) to
go back to the attorney who set up the trust in the first
place. I've worked with the guy before. He is both
knowledgeable and creative, so if there is a practical and
proper way to do this, I suspect he will find it.

MTW

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