15.3 A-b Trust Planning Approach: Equalization of Estate Between Husband and Wife

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

15.3 A-B Trust Planning Approach: Equalization of Estate between Husband and Wife

The last will and testament and trust agreement that follow are based on the discussion in Chapter 7 and in particular 7.3. The basic planning concept is quite simple. This trust will be used when the couple's estate may equal or exceed their combined estate tax exclusion amount ($10,980,000 in 2017), and the estate values are expected to increase between the death of the first spouse to die and the death of the second spouse to die. When possible, the estate will be divided equally between the two spouses. Each should own property in his or her individual name, rather than jointly with right of survivorship. If it is not possible or appropriate to divide the estate equally between the spouses, survivorship ownership should be limited because such property will pass directly to the survivor rather than into the trust. The intent is to trap assets in Trust B in the amount of the exclusion amount so that future increases in Trust B asset values will not be taxed in the estate of the survivor. Any insurance should be made payable to the insured's trust, not to the other spouse. An additional ABA publication that deals extensively with drafting is J. Horn, Flexible Trusts and Estates for Uncertain Times (5th ed.; ABA, 2014).

In some situations the estate should not be divided equally between the husband and wife; an example is a second marriage in which the spouses do not have common heirs. The estate may be largely held in the ownership of one spouse. In this situation, the same will and trust used in the prior illustration is appropriate for the spouse with the larger estate. The will and trust of the spouse with the smaller estate need not be the same.

Assuming the husband's estate is the larger one, the will and trust set forth in 15.3 may be used for his estate. The wife's will could be a simple will that passes the entire estate to the husband if she predeceases him, or she may will her assets to other beneficiaries.

The forms that follow and the accompanying comments are based on the husband's will and trust. A similar will and trust agreement should be used for the wife. When using these forms, be sure to make appropriate changes as needed for such terms as wife, he, she, his, or hers.

The Trust Agreement that follows has a number of options, not all of which are essential. The comments clarify what paragraphs are needed. There are two basic approaches to follow: (1) a trust for the survivor with a general power of appointment over Trust A or (2) a trust for the survivor that qualifies as a QTIP trust. The first approach would use the following paragraphs: 1, 2.1 or 2.1A, 3, 4.1, 4.2, 4.3, 4.4, 4.5; such paragraphs in Article 5 as are appropriate; and generally all of the remaining paragraphs. The second approach (QTIP) would use paragraphs 1, 2.1 or 2.1A, 3, 4.1A, 4.2, 4.3A, 4.5, 4.6, 4.7; such paragraphs in Article 5 as are appropriate; and generally all of the remaining paragraphs. For a complete discussion of marital deduction planning, see Chapter 7. Chapter 6, on the use of powers of appointment, will also be helpful.

LAST WILL AND TESTAMENT OF RICHARD HENRY ROE

I, Richard Henry Roe, a resident of Madisonville, Hopkins County, Kentucky, make this my Last Will and Testament, hereby revoking all prior wills and codicils.

ARTICLE I

I direct that my just debts, funeral expenses, costs of administration, and all estate, inheritance, succession, and transfer taxes imposed by the United States or any state, which become payable by reason of my death, be paid out of my residuary estate as soon as practicable after my death.

ARTICLE II

I direct that, after the payment of all administration expenses and death taxes as hereinabove provided, my Personal Representative shall deliver and convey all the remainder of my residuary estate wheresoever situated, including all the property which I may acquire or become entitled to after the execution of this Will, including all lapsed legacies and devises, but expressly excluding any property over or concerning which I may have any power of appointment, to the Trustee of the Richard Henry Roe Trust, to be held, administered, and distributed pursuant to the terms of a trust agreement I entered into on the ___ day of __________, 20___, including any amendments thereto.

? Comment: This will simply pours over the entire estate after the payment of death taxes and the various estate settlement-related expenses into the trust, which then makes all of the necessary provisions for the distribution of the estate. If specific bequests are desired, they should be inserted as a separate article preceding this article.

ARTICLE III

I nominate and appoint my wife, Mary Jane Roe, to be the Personal Representative of my estate. If my wife fails to qualify as Personal Representative, or having qualified, she dies, resigns, or declines to serve, then and in such event, I nominate and appoint ____________ , to serve as Successor Personal Representative. Neither my wife nor the Successor Personal Representative shall be required to furnish any surety upon their bond as my Personal Representative.

? Comment: The wife is named as personal representative, with either an individual or a corporate fiduciary acting as a successor. If the wife does not wish to serve in this capacity, or if the estate is large or contains assets that may require skilled oversight, it may be better to name only the corporate fiduciary.

ARTICLE IV

My Personal Representative shall have the following powers in addition to any other powers expressly or impliedly granted by law:

A. To retain any property owned by me at the time of my death and no sale thereof shall be required;

B. To sell, lease, transfer, and convey any estate property, real or personal, at public or private sale, and at such price and upon such terms as my Personal Representative deems proper. A lease of real estate shall be binding for the full time thereof, even though it may extend beyond the duration of the settlement of my estate;

C. To invest and reinvest in any investments my Personal Representative deems proper without diversification and without restriction of any law or regulation limiting the investment authority of a fiduciary;

D. To borrow money (from the Personal Representative or from others) upon such terms and conditions as my Personal Representative deems proper, and when required to mortgage or pledge estate assets as collateral;

E. To divide and distribute my estate, in cash or in kind or partly in cash and partly in kind, without regard to the income tax basis of any in-kind property allocated to any beneficiary;

F. To compromise and settle any claim by or against my estate;

G. To employ accountants, attorneys, or other advisors and when relying upon their recommendations to do so without any liability.

ARTICLE V

In the event that my wife predeceases me, I nominate and appoint __________ as guardian of any of my children during their minority. I direct that no surety shall be required of my guardian in the event it shall be necessary for __________ to be appointed by order of any court.

? Comment: This article is only needed if the couple have minor children. The precise wording may have to be modified to conform to unique state law.

ARTICLE VI

In the event that my wife and I die simultaneously or under such circumstances as to render it impossible or difficult to determine which predeceased the other, I direct that it shall be deemed that I predeceased my wife, and that this Will and any and all of its provisions shall be constructed on that assumption and basis.

? Comment: This provision should not be used when the separate estates of the spouses are equal. It is only needed when the estates of the spouses are significantly unequal. If it is needed, the spouse with the larger estate should be presumed to have died first. For example, if the husband's estate is the larger, then the husband's will should state that he is presumed to predecease his wife and the wife's will should state that it is presumed that she survives her husband. See Chapter 7, at 7.21.

IN TESTIMONY WHEREOF, I have hereunto set my hand on this the __________ day of __________, 20___.

__________

Testator

We, whose names are hereto signed as subscribing witnesses, have, at the request of the Testator, __________, witnessed the execution of this Will, consisting of this page and the __________ (__________) pages, and each has signed as subscribing witness in the presence of the Testator and in the presence of each other, on this the __________ day of __________, 20___.

__________

Witness

__________

Address

__________

Witness

__________

Address

[ADD SELF-PROVING NOTARIZATION AS PROVIDED BY STATE LAW]

TRUST AGREEMENT

THIS TRUST AGREEMENT is entered into by me, Richard Henry Roe, of Madisonville, Kentucky, as both Settlor and Trustee.

? Comment: This introductory paragraph simply names the parties to the agreement. This trust names the husband as both Settlor (grantor) and Trustee, rather than naming a third party, such as a bank, as the Trustee. If a third party acts as Trustee, an appropriate modification is necessary. Also, this trust is written in the first person, as that wording is more client-friendly than traditional third-party legalese. This form is for a Settlor who is the husband. Obviously, when the Settlor is the wife, the various gendered terms, such as wife and she, must be changed to husband and he.

WITNESSETH

In consideration of the promises and the covenants hereinafter contained, I own certain insurance policies on my life listed in Schedule "A," attached hereto, and have named this trust as beneficiary under said policies to receive the proceeds thereof. I may, at any time and from time to time, deposit with the Trustee other insurance policies on my life in which the trust is named as beneficiary, as well as other assets all of which shall be held and administered in...