By Marc J. Lane
Architects say that form follows function. So do good lawyers. That's why, when designing an estate plan, the careful lawyer might recommend that her client set up several trusts.
We all know that the simplest approach is often the best approach. That point of view is why you'll find "overlawyering" in your Webster's.
Tax lawyers are painfully aware that the most obvious tax savings opportunity once afforded multiple trusts has been outlawed. Once upon a time, one could create many small trusts, each with its own low tax bracket, instead of one big one. But that trick no longer works: if all the trusts have similar beneficiaries and terms, they're "consolidated" for income tax purposes and treated as one trust, taxed based on its highest applicable bracket. And now that trust income over $8,350 is taxed at the highest, 39.6% rate, the economic benefit of maintaining many trusts has evaporated, anyway.
But transferring different kinds of assets into different trusts can be a very smart move. A few examples should prove the point. Too often, trust beneficiaries are at odds with one another. Even siblings (perhaps we say should, especially siblings) can disagree about how trust funds should be invested and when they should be distributed. A separate trust for each avoids, or at least isolates, these issues.
More trusts than ever own "hot" assets. Perhaps they are businesses in the throes of litigation or real estate tainted by environmental hazards. Keeping those kinds of assets segregated each in its own trust ensures that they won't infect other assets and that beneficiaries will receive their fair share of those assets that aren't involved.
Qualified retirement plan assets can maintain their tax-deferred character even after the death of the employee who earned them. But, tax deferral requires special handling. Still greater tax benefits are available when retirement accounts are cut up into IRA "subaccounts." All this suggests the need for one more trust.
Granted, the income tax strategy of spreading one's assets among a string of low-bracket trusts is dead. But fancier tax opportunities remain. Take the case of Frederick's of Hollywood's founder. He saw to it that, when he died, his 27.9% interest in the company would be placed in a trust for the benefit of his wife and the rest of his family. She independently held an equal interest in another trust. Upon her death, the IRS was persuaded that the two blocks of stock were separately owned and that she had no voting control over the shares her husband owned and, consequently, that her estate could take a 25% "marketability discount" on their value in calculating its estate tax bill. Valuation discounts are a popular way to save estate taxes and separate trusts are a good way to perfect them.
One final word, a word of caution. Too many lawyers still think that many kinds of complicated trust features and provisions can safely be built into one "supertrust" that does it "all." The upfront convenience of drafting one omnibus document can be dwarfed by the enormous pain its beneficiaries might suffer should that trust need to be "reformed" - fixed - by a court or "partitioned" - split - into separate trusts. Rather than relying on the kindness of strangers - even those in black robes - makes no sense. In trust planning, as elsewhere in the law, form can become substance and the prudent planner will develop precisely that form which best meets his clients' needs.
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