4.3 Additional Cautions

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

4.3 Additional Cautions

There are several areas where caution must be exercised. A failure to recognize these problem areas could be quite costly. These are examined throughout the remainder of this chapter.

4.31 Pot Trusts

Often a donor establishes one trust for the benefit of a number of beneficiaries. For example, in his will a father establishes a trust for his three children to pay income and principal as needed among them. The trust terminates on the youngest child attaining a specified age, such as age 30. A problem exists at termination of the trust if one of the children dies before termination and that child's share is payable to his or her issue. On distribution from the trust, those issue are subject to the tax because a taxable termination has occurred that affected their share. Because a taxable termination is a distribution to a skip person²⁶ and the issue of the deceased child are skip persons, the taxable termination has occurred.

Planning Pointer 1

The result just described can be avoided (1) if the decedent's executor makes the election to use the GST exemption for the assets in this trust²⁷ or (2) if the trust is divided into separate subaccounts or separate trusts for each beneficiary rather than having the so-called pot trust for all beneficiaries. This second approach will qualify the trust for the predeceased child exception.²⁸ Obviously, pot trusts should not be used if there is a possibility of a skip person becoming a trust beneficiary. The first approach must be taken by an election made by the executor at the time of filing the federal estate tax return, which is due within nine months of the decedent's death. The second approach obviously must be chosen when drafting the trust instrument. If the trust is for the lifetime benefit of the surviving spouse and the couple's children, the division of the trust into separate subaccounts or trusts for each beneficiary may be done at the death of the surviving spouse.

4.32 Tax Apportionment Clauses

The generation-skipping transfer tax specifies who is liable for the tax. The trustee is liable for the tax in a taxable termination or if there is a direct skip from the trust.²⁹ A direct skip, other than from a trust, must be paid by the transferor or estate. In the case of a taxable distribution, the tax must be paid by the skip person (transferee).³⁰ In the event of a taxable termination or distribution, the tax is paid from the transferred property. The tax on direct skips is paid by...