Tag Archive for: trust

What is a Revocable Trust?

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Revocable trusts have long been a mainstay of American estate planning. A trust is relationship between three parties: (i) the settlor who creates and funds the trust, (ii) the trustee who manages the assets held in trust, and (iii) the beneficiary who enjoys the assets. Each of these parties can be a single person or a group of people. Similarly, one individual can hold more than one of these titles at the same time, but a single person cannot hold all titles at once. 

What is a Trust?

Clients often ask what the difference is between a trust and a Will. The simple answer is, because a trust is a relationship, it is an intangible thing. It can neither be touched nor measured in objective, real-world units. In contrast, a Will is a document. It is a physical thing that can be felt, carried, and (usually) torn up. While most trusts are described and governed by a physical thing—a document we call a trust instrument—the trust itself remains abstract. Note that most trust instruments can create an unlimited number of separate trusts.

Trusts can be categorized in variety of ways. Here are just a handful of ways that trusts can be classified:

  • Revocable or irrevocable;
  • Grantor or non-grantor (also called a “true” trust);
  • Simple or complex;
  • Express or implied;
  • Self-settled or third party-settled; and
  • Testamentary or inter vivos (established during the grantor’s lifetime).

Revocable Trusts

Revocable trusts are self-settled, revocable, grantor trusts that are express and established during the settlor’s lifetime. (Note that grantor trusts can be neither simple nor complex.) This means they are easier to change than irrevocable trusts. They are taxed to the settlor directly, and they are governed by a written trust instrument that is drafted to be effective during the settlor’s life.

Characteristics

Nearly all revocable trusts have a few standard characteristics. Typically, the settlors will also be a trust’s primary beneficiaries. As such, they typically have expansive rights to demand distributions of trust assets, hire and fire trustees, amend and restate the trust instrument, etc. Revocable trust settlors also typically serve as trustees of their trust. Sometimes, they take on this role exclusively, and other times, they bring additional parties to serve as co-trustees. Finally, when the settlors of a revocable trust die, the trust assets are generally distributed to their descendants or other remainder beneficiaries they might select. In this regard, a revocable trust instrument will be very similar to a Will, and the settlors can choose whether the remaining property will be distributed to the remainder beneficiaries outright or in trust.

Uses

Revocable trusts may be deployed for several reasons, but the most common uses are:

  • Assisting elderly clients with asset management;
  • Holding out-of-state property;
  • Probate avoidance;
  • Assets management;
  • Contest avoidance; and
  • Privacy.

While revocable trusts have a number of very important uses, some misinformation exists regarding what can and cannot be achieved with a revocable trust. For example, a revocable trust cannot be used for creditor protection in Texas. Additionally, a revocable trust will not offer any tax savings over other estate planning tools.

Funding

A trust is only effective over property which has been transferred to it. Thus, to make assets subject to the terms of a trust, the settlor must take the affirmative steps to transfer those assets to the trust. For example, financial accounts must be “replated” to reflect trust ownership. Similarly, interests in closely-held businesses are typically transferred using assignments of interest, and real property is transferred by deed. Settlors often fail to transfer all their assets to their trusts during life. Because of this, “pourover Wills” are often prepared in conjunction with a revocable trust instrument. A pourover Will is a Will, just like any other, except that it distributes estate property to a revocable trust rather than to the heirs directly. As such, a pourover Will pours assets over from the settlor’s estate to the trust. From there, the assets are distributed to the ultimate beneficiaries. 

Conclusion

Revocable trusts are a fantastic tool for achieving many goals. They solve an array of real-world problems and make life better for many people. But they can also be overwhelming. To avoid confusion, prospective settlors should seek out quality assistance from competent advisors.

Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX
Christian Kelso

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Wills v Trusts

Wills v. Trusts: What’s the Difference?

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Wills v Trusts
What is a Will?

Often, the first 10 minutes of an estate planning consultation involve explaining the differences between a Last Will and Testament (or, simply a “Will”) and a trust. Each may have a critical role to play in a client’s estate plan. A Will is a testamentary instrument, which is a lawyerly way of describing a document that does not become effective until an individual’s death. In other words, a Will is merely a stack of paper with words and a few signatures until the individual executing it (called the “testator”) has passed away. Texas law provides stringent requirements for the proper execution of a legal, valid Will.[1] After the testator’s death, his or her Will must be “admitted to probate” by a court of appropriate jurisdiction. This requires someone (usually the executor) going before a judge and proving up all the various requirements of the Will. Only then can a personal representative take control of the deceased testator’s property, wind up his or her affairs, and distribute the estate in accordance with the Will’s provisions.

What is a Trust?

By contrast, a trust describes a relationship between three parties: (i) the settlor, (ii) trustee, and (iii) the beneficiaries. Thus, a trust is an abstract intangible thing, so it is not a document at all. Also, unlike a Will, a trust may become effective during the grantor’s life, or at death, and there is no requirement that a trust be proved up, authorized, or otherwise sanctioned by a court. To establish a trust, a settlor simply entrusts property to a trustee, who accepts a legal obligation to manage, administer, and distribute that property for the benefit of the beneficiaries. Each of these parties may be a single individual or a group of people. Even though the trust itself is amorphous, the terms, conditions, standards of distributions and other guidelines for this trust relationship are often memorialized in a written document called a “trust instrument.” A trust instrument may be a stand-alone document, or it may constitute a section in a testator’s Will. Either way, a single trust instrument will often govern many different trusts.

Trusts can take an endless variety of forms and serve myriad purposes. Many trusts are created to achieve special tax, asset protection, or wealth transfer goals. But when clients are weighing their options between a Will and a trust for estate planning purposes, they are generally thinking of a “revocable living trust.” This is commonly structured to have an individual or couple simultaneously serve as the settlor, trustee, and initial beneficiary. Revocable living trusts are similar to Wills in that they dictate what will happen with a person’s property when he or she dies. Thus, they remain a standard tool of estate planning attorneys.[2] 

Deciding whether a Will or a (revocable living) trust best matches a given situation will depend on the particular client’s needs, goals, outlook and other circumstances. Often, a Will is all that is needed in Texas to plan a person’s estate. In some circumstances, however, a revocable living trust will better address the situation. Understanding the fundamental distinctions between a Will and a trust is an important starting point to both a client’s decision about the overall structure of his or her estate plan, as well as the client’s ability to maintain that estate planning structure in the years to come.

Spencer Turner

Spencer Turner is an associate attorney at Farrow-Gillespie Heath Witter LLP. Since obtaining his license to practice law in 2016, Mr. Turner has focused his legal efforts primarily in the trust and estates arena. He has been featured as a speaker on various aspects of the probate process at several seminars hosted by the National Business Institute. Spencer is a graduate of from Baylor University School of Law.

[1] See Ch. 251 of the Texas Estates Code.

[2] Mr. Turner and Christian S. Kelso, Esq., a partner at Farrow-Gillespie Heath Witter LLP, recently co-authored an article for the State Bar of Texas’ Continuing Legal Education program. The article is entitled The Alchemy of Revocable Trusts: Creating the Perfect Solution for Each Client’s Problem, and may be found among the written materials for the “Handling Your First (or Next) Trust 2021” webcast.

Executing Texas Estate Plans in the Era of COVID-19

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These are unprecedented times, even for estate planning attorneys. The advent of COVID-19 has “persuaded” many clients to either consider establishing an estate plan for the first time or to re-assess their current estate plans. As a result, estate planning attorneys across Texas are working hard during this period of great uncertainty to develop and protect their clients’ legacies.

Yet a finely crafted estate plan is useless if it is not properly signed and executed. Texas law has strict parameters for the signing of certain estate planning documents. For example, a valid will in Texas must be in writing, signed by the individual making the will (the testator), and attested by two or more witnesses. The witnesses must be within the physical presence of the testator when witnessing the execution of the will. A notary public signs the will as well (though this is technically not a requirement under Texas law). Between the testator, witnesses, notary, and estate planning attorney, a total of five or more people typically attend a will-signing ceremony. In the era of COVID-19, that’s a social faux pas. Government regulations may forbid a gathering of such size, and in the author’s experience, clients are presently uncomfortable with exposure to more than one non-family member at a time. Therein lies the chief problem facing estate planners: how to safely convene with clients to sign and execute their essential documents?

Governor Greg Abbot’s Emergency Order

In recent weeks, Texas Governor Greg Abbot has attempted to provide estate planners with a method for electronically notarizing wills, powers of attorney, and other estate planning documents. Typically, a notary public must also be in the physical presence of a client while he or she is executing a will. Governor Abbot’s emergency order enables a notary to instead observe a will-signing ceremony over Zoom or similar “electronic means.” The notary would then need to receive a faxed or scanned copy of the will (or other estate planning document) and affix his or her signature and stamp to the same. The notarization process is complete upon the notary’s return of the will and other estate planning documents to the client by scan or fax. This temporary fix aims to alleviate the need for large gatherings and can help clients execute their estate plans without undue delay.

Concerns with Electronic Notarization

But as with any temporary amendment to the law, Governor Abbot’s relaxation of notarial standards remains fraught with questions and legal concerns. For one, the required witnesses must still physically attend a will-signing. That fact alone may still dissuade clients from pursuing execution of their estate plan during the pandemic. Questions also remain about the extent of Governor Abbot’s authority to authorize such a suspension of Texas law. Probate litigators may later capitalize on the legal uncertainty surrounding wills notarized by electronic means and initiate a contest in probate court[1]. All this to say, estate planners must proceed with caution when utilizing electronic notarization for estate plans. Certain clients and potentially contentious dispositions of property in an estate plan may not warrant this unproven method of execution.

Trusts and Holographic Wills

However, estate planners have developed another creative approach to this executionary quandary brought on by COVID-19. Trusts can provide a workaround for the more stringent execution requirements of a will. A valid trust in Texas only requires the signature of the client seeking to establish the trust. As a result, clients may print the final version of a trust instrument and sign in the safety of their own home. No public gatherings are necessary.

A trust’s terms provide for the disposition of the client’s property upon death, much like a will. But for a trust’s terms to be effective, a client must transfer his or her assets into the trust. This can be a tedious task involving the drafting of deeds, assignments of interest, and many more documents. A client might also need to personally visit a financial institution to change accounts into the name of the trust: another no-no in the era of COVID-19.

A holographic will might serve as the catchall for assets that have yet to be transferred into a client’s trust. Unlike typewritten wills, a holographic will is entirely in a client’s handwriting. Texas law does not require witnesses or a notary to sign holographic wills. A client could then print and sign the trust while also drafting his or her own holographic will (with an attorney’s instruction) to sign as well.

These homemade, holographic wills are only intended as an interim solution. But they ensure that the assets in a deceased client’s estate will “pour over” into the trust that he or she established, thereby making the estate assets subject to the trust’s dispositive terms. In short, a properly drafted trust and holographic will can provide clients with a temporary fix to the dangers of gathering in larger groups for signing a will and other estate planning documents. Together with the electronic notarization of wills and estate planning documents, these methods give estate planners a chance to achieve their clients’ goals in the midst of the current pandemic.

Spencer Turner

Spencer Turner is an associate attorney at Farrow-Gillespie Heath Witter LLP. Since obtaining his license to practice law in 2016, Mr. Turner has focused his legal efforts primarily in the trust and estates arena. He has been featured as a speaker on various aspects of the probate process at several seminars hosted by the National Business Institute. Spencer is a graduate of from Baylor University School of Law. 

[1] Few things excite probate litigators more than a video of an elderly testator executing his or will. An astute attorney can use a recorded Zoom session to sow doubt and concern among members of the jury regarding the elderly testator’s mental capacity.

The Secure Act | Retirement | Estate Plan

The SECURE Act: Will it Affect Your Retirement Plan?

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 A Late 2019 tax change will have a major impact on retirement planning!

The Secure Act | Retirement | Estate Plan

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the “SECURE Act.” Although it passed the House in July, the SECURE Act only recently passed through the Senate on December 19, as part of an end-of-year appropriations act. The SECURE Act implements quite a few technical changes which will affect retirement planning in general.  However, some of the most significant changes will have a direct and very substantial impact on estate planning.

In previous years, a plan participant (i.e. the individual who initially established and funded the IRA) could pass unused IRA assets to a so-called “stretch-IRA” for the benefit of a designated beneficiary (i.e. a person inheriting IRA funds on the participant’s death). The purpose of a stretch IRA was to extend the tax-deferral of the IRA. This would allow the minimum required distributions to be stretched out over many years, thereby increasing the overall tax benefit of the account. Often, participants would establish stretch-IRAs for their young grandchildren, hoping that the minimum required distributions would be based on each grandchild’s age. This would allow more assets to retain tax-deferred status longer and thereby decrease the overall tax burden.  For large IRAs, this decreased tax burden could be very significant.

The SECURE Act rescinds major tax benefits that had been available before 2020. Under the new rules, IRA assets inherited by a designated beneficiary must be distributed within 10 years of the participant’s death. A few exceptions to this rule apply, including surviving spouses, minor children (but not grandchildren), and disabled beneficiaries. The new 10-year distributions rule will apply in most other circumstances. 

Obviously, the loss of the stretch-IRA is important for tax planning purposes, but its significance goes even deeper. For example, when planning for a stretch-IRA, a participant is likely to have established one or more trusts in his or her estate plan. This type of planning would be particularly important where minors (like grandchildren) were expected to be the designated beneficiaries of the IRA.  Often, these trusts directed that no distributions were to be made from the trusts except for the required minimum distributions which would have been required under then-applicable law.  The expectation was that the IRA would be depleted incrementally over years. This would give the beneficiary limited access to the IRA assets with marginal tax impact triggered by each distribution.  Under the new law, however, the (only) required distribution comes at the end of the 10-year period.  Not only does this prevent the beneficiary from enjoying the extended use of the IRA assets, but the lump-sum distribution can have a seriously detrimental tax impact on the beneficiary.

Estate planning around retirement assets has always been complicated. The SECURE Act compounds this complexity. For clients whose planning was carefully tailored to the old regime, significant changes may be needed to avoid a major tax trap.

If you’d like to discuss how your estate plan might be impacted by the SECURE Act, please contact our office to set up a consultation.

Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Trust Accountings and the Duty to Inform in Texas

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Spoiled Trust Fund Kids

Trustees have a duty to share trust information with beneficiaries. The nature and extent of the duty to inform is not well defined in the Texas Trust Code, however, and there is little case law on point. There is slightly more guidance with regard to the duty to account, which is a subpart of the duty to inform, although many questions remain and can pose significant problems for trustees.

When considering a trustee’s fiduciary duty, most practitioners turn to the Texas Trust Code first. However, the thoughtful practitioner will notice that the common law duty to inform predates the Trust Code and is broader than the statutory duty to account. Also, the Trust Code directs trustees to “perform all of the duties imposed on [them] by the common law,” so an examination that is limited to the Trust Code may be incomplete.

A broad array of people are generally entitled to trust information and may include “a trustee, beneficiary, or any other person having an interest in or a claim against the trust or any person who is affected by the administration of the trust.”

Trust beneficiaries need information to protect their interests. For a beneficiary to hold a trustee accountable, the beneficiary must know of the trust’s existence, the beneficiary’s interest in the trust, the trust property, and how that property is being managed. Trustees have a duty to provide this information to beneficiaries. This duty to inform is independent of the trustee’s duty of care. Although a trustee holds legal title to trust property, that property is held for the benefit of the beneficiary. Similarly, the books and records of the trust belong to the trust estate. As such, it stands to reason that the beneficiaries should have access to them as well. 

On the other hand, settlors may not want their children to know about assets in their trusts for fear that they might become “trust fund babies,” and information sharing may be a security concern in the modern world. Formal accountings, in particular, are burdensome on both trustees and trust assets. A typical accounting takes many hours to prepare. A trustee may be able to do much of the initial work to prepare the accounting, but significant time spent by attorneys, accountants, and other professionals will likely also be required, and the related fees will usually be borne by the trust.

Additionally, the duties to inform and account cannot be waived in a trust instrument. If this were possible, no trustee would serve unless such a waiver were present. However, the duties may be limited in Texas to so-called “first-tier beneficiaries” who are generally entitled to distributions, either presently under the trust’s terms, or hypothetically, if the trust were to terminate. By restricting the non-waivable provisions to first-tier beneficiaries, settlors can minimize frivolous pestering by contingent remainder beneficiaries.

Even where beneficiaries are entitled to information, caution is advised to those seeking it. If a trust is revocable by, or grants a power of appointment to, someone who might be perturbed by such request, the requesting party might find herself written out of the trust! 

The common law duty to inform and the statutory duty to account are complicated elements of Texas law. Farrow-Gillespie Heath Witter, LLP has helped many beneficiaries gain the information they need about their trusts. We have also advised many trustees through the accounting process. If you are in either position, we would be glad to talk with you about your rights or responsibilities and the potential risks you face.

Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Spencer Turner | Farrow-Gillespie Heath Witter

Those Pesky Trusts! A Brief Primer on Terminating Unwanted Trusts

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Spencer Turner | Farrow-Gillespie Heath Witter

Estate planning attorneys often wax poetic about the multitude of advantages found in a simple trust instrument. They’re not wrong. A well-crafted trust is an excellent vehicle for addressing a client’s concerns under a variety of different circumstances. Clients may place assets in a trust for tax benefits, creditor and divorce protection, planning for incapacity, family dynamics and a host of other reasons.

Yet no trust exists without a level of complexity and sophistication. Every trust has a trustee who must fulfill strict fiduciary duties and carefully manage the trust assets for the beneficiaries. The terms for distributing property from the trust may involve difficult calculations or restrictive standards that are not easily met. In some cases, a trust instrument’s vague provisions may leave both the trustee and beneficiaries confused as to how to proceed with the trust administration. Eventually, these complexities may become overly burdensome. Life circumstances may also render the trust’s intended benefits and purpose unnecessary.

Whatever the reason, trustees and beneficiaries often find themselves stuck with a trust that no longer meets their needs. But many of these trusts are or have become irrevocable and cannot be unilaterally terminated. Trustees and beneficiaries should not despair, however. Texas law has recognized several different ways to modify or ultimately terminate those pesky trusts.

A. Uneconomical Trusts

The Texas Trust Code enables a trustee to terminate a trust whose assets are valued less than $50,000. The trustee must consider the purpose of the trust and the nature of the assets, and ultimately determine that the value of the assets is insufficient to match the costs of continued administration. A common example of this occurs when a trust established under the provisions of a deceased person’s will receives only minimal funding from the deceased’s estate. The amount held in trust often does not justify the time, effort, and cost in administering the trust.

B. Combining Separate Trusts

Typically, the Texas Trust Code does not allow the outright termination of a trust without petitioning a court of proper jurisdiction for approval. But its provisions do allow for combining two or more separate trusts into a single trust without a judicial proceeding. This is only permissible where the combination would not impair the rights of any beneficiary or prevent the trustee from carrying out the purposes of either trust. Again, this is a great tool for consolidating trusts established under a deceased person’s will.“

C. “Decanting”

Another alternative to judicial termination of a trust, “decanting,” is the distribution of trust assets from one trust to a new trust that may have slightly different terms. The helpfulness of this provision of the Texas Trust Code largely depends on how much discretion the original trust grants the trustee. An attorney will need to carefully evaluate the level of variance the new trust may have under the circumstances.

D. Judicial Termination

A trustee or beneficiary may petition a court of proper jurisdiction to order the termination or modification of a trust. However, the grounds to do so are limited and specifically outlined in the Texas Trust Code. Petitioners should not expect a quick and easy process; terminating a trust in a court of law requires careful preparation, evidence, and a willing judge.

E. Termination by Agreement

Texas case law has recognized that in certain instances the settlor, trustee, and beneficiaries of an irrevocable trust may collectively agree to terminate the trust. This is a great tool if all parties are agreeable. But it does have its drawbacks. If the settlor is dead, then no agreement may be reached. Furthermore, an incapacitated beneficiary may not enter the agreement, further halting any opportunity to proceed under this method.

Trusts are excellent vehicles to achieve any number of tax, asset protection, or family dynamics-related objectives. At some point, these irrevocable trusts may become burdensome and unnecessary. An attorney may use the methods mentioned above to terminate or modify those pesky trusts.

Spencer Turner | Farrow-Gillespie Heath Witter
Spencer Turner

Spencer Turner is an associate attorney at Farrow-Gillespie Heath Witter LLP. Since obtaining his license to practice law in 2016, Mr. Turner primarily has focused his legal efforts in the trust and estates arena. He has been featured as a speaker on various aspects of the probate process at several seminars hosted by the National Business Institute. Spencer graduated from Baylor University School of Law.  

The IRS’s Trust Fund Recovery Penalty: A Perilous Trap for the Unwary

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Under the Internal Revenue Code (the “IRC”), employers must withhold certain taxes from employee pay. These monies are referred to as “trust fund taxes” because they are held in trust on behalf of the government, and employers must turn these withheld amounts over to the government on a regular basis.

For various reasons, employers sometimes fail to remit these trust fund taxes to the government when they are supposed to. For example, struggling businesses facing challenging financial decisions as to which creditors will be paid to keep the business afloat, may fail to pay withheld taxes and instead “borrow” from the government to pay other creditors first. This may be a perilous path not only for the employer but also for individuals within the organization who have decision-making authority. While other creditors may have to rely on veil-piercing concepts to collect the company’s liability from anyone other than the company, the federal government does not.

To allow the IRS to collect, Congress authorized § 6672 of the IRC which allows IRS to collect directly from the personal assets of certain control individuals. As was stated in Wright v. United States, “[t]he statute is harsh, but the danger against which it is directed—that of failing to pay over money withheld from employees until it is too late, because the company has gone broke—is an acute one against which, perhaps, only harsh remedies are availing.” 809 F.2d 425, 428 (7th Cir. 1987).

In a nutshell, § 6672 provides that any person required to collect, account for, and pay any tax imposed under the IRC who willfully fails to do is liable for a penalty equal to the total amount of the unpaid tax. Thus, liability under § 6672 attaches if an individual both (i) qualifies as a “responsible person”; and (ii) “willfully” fails to pay over the amount due.

Section 6672 has been interpreted by the courts quite broadly to encourage individuals to stay abreast of their companies’ withholding and employment taxes. As such, the penalty has ensnared many an unsuspecting charitable board member, officer, bookkeeper, accountant, investor, or other person associated with a taxpaying organization. Thus, it is important for anyone in such a position to bear in mind that their title carries significant risk. Even where such a person is completely non-complicit in the discouraged activity, they may still bear the burden of mounting a legal defense against IRS claims.

It is also important to understand that each such responsible person is liable for 100% of the trust fund recovery penalty. Perhaps the only significant limitation on the IRS’s latitude is that, while it may assess any and all responsible persons until the amount due has been paid, it can collect the tax due only once. Also, IRS claims preempt state law, rendering for example, creditor protections for homestead real property inapplicable.

While the government bears the burden of proving that the taxpayer is a responsible person, taxpayers bear the burden of proving a failure was not willful. Willfulness has been defined as the “voluntary, conscious, and intentional decision to prefer other creditors over the United States.” Ruscitto v. United States, 629 Fed. Appx. 429, 430 (3d Cir. 2015).

Illustration by legal assistant Charles Jackson

The willfulness requirement is satisfied when the responsible person makes the deliberate choice to pay the withheld taxes to other creditors, instead of paying the government. Where the responsible person does not segregate the trust fund taxes but uses them to cover operating expenses (such as employees’ wages and claims of other creditors), each payment may be a voluntary, conscious, and intentional decision to prefer other creditors over the government. This requirement is satisfied with something as simple as making payroll. Thus, in most business scenarios, negating willfulness can present a significant challenge.  Importantly, § 6672 is a civil, and not a criminal, statute. Its criminal analogue, § 7202, requires the additional concept of “known legal duty” to comply with due process of law requirements under the Constitution. However, no such requirement is associated with § 6672, so it is much easier for the government to meet its burden of proof.

To sum up, it is absolutely critical for all control persons within any taxpaying organization (including nonprofits and government entities, which are nonetheless subject to withholding requirements and employment taxes) make themselves aware of applicable deadlines and other procedural requirements. Failure to do so can result in life-altering penalties being assessed against personal assets including homesteads and other property which is generally considered exempt from creditor claims. Could you write a personal check for 100% of your organization’s employment taxes?

If you have questions regarding the Trust Fund Recovery Penalty or are facing other IRS issues, please reach out to FGHW for a consultation.

Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

The Effects of Divorce on Wills and Estate Plans in Texas

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Here is a guide to the legal effects of divorce on Wills, Trust instruments, and financial accounts in Texas.

Wills and Divorce in Texas. When a person’s marriage is dissolved by divorce, the former spouse cannot receive any payments, benefits or inherit property from that person’s will unless it expressly states otherwise. Not only is the former spouse not allowed to take any benefits or serve in a fiduciary role with regard to the estate, but neither can a relative of the former spouse do so, unless the relative is also a relative of the testator.

Trust Instruments and Divorce in Texas. A person can create a trust through provisions in a will. However, if that person’s marriage is dissolved by divorce, Texas law will operate as if the former spouse has disclaimed his or her interest in the trust. The divorce cancels the former spouse’s right to receive any property from the trust, to act as trustee, or to be appointed in any other fiduciary capacity. However, this rule applies only to trusts created in a will, and not to trusts created during one’s lifetime.

Divorce on P.O.D. and Multiple-party accounts. If a deceased individual has established a “pay on death”, multiple-party account, or any other beneficiary designation during a marriage that ends in divorce, the beneficiary designation of the former spouse, as well as of relatives of the former spouse who are not a relative of the decedent, are no longer effective.

Exceptions to the Rule. Some exceptions to the general rules occur under the following circumstances:

  1. The Court’s divorce decree so orders.
  2. Express terms in a trust instrument grant rights regardless of divorce.
  3. An express provision of a pre-nup or post-nup relates to the division of the marriage estate.
  4. The decedent reaffirms the survivorship agreement in writing.
  5. There are express provisions in joint trust documents.
  6. The former spouse is re-designated as the P.O.D. payee or beneficiary after a divorce.

This article brushes the surface of the many estate planning issues that can occur after a divorce in Texas. Be sure to review your estate planning documents yearly and seek the counsel of an attorney when there has been a major life event, such as marriage, birth, death, changes in investment accounts, property changes, or divorce.

Elaine Price | Farrow-Gillespie & Heath LLP | Probate Proceedings

Elaine Price practices in the areas of probate, heirship, and guardianship proceedings. Ms. Price is a graduate of the Thurgood Marshall School of Law and holds a Bachelor of Arts in political science from Prarie View A&M. Elaine was formerly with the law office of Rhonda Hunter.

Bethany Kelso | Preston Kelso | Christian Kelso

Upjohn Clause: A Trap for the Unwary Trustee

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Bethany Kelso | Preston Kelso | Christian Kelso

Featured image: Bethany and Preston Kelso. Photo used with subjects’ permission.

Many trust instruments prohibit trustees from relieving themselves of a legal duty under applicable law. Such language, which is sometimes referred to as an “Upjohn” clause after the case of Upjohn v. U.S. (30 A.F.T.R. 2d. 72-5918 (W.D. Mich 1972)), is most often, intended to prohibit a trustee from using trust assets to pay for anything which he or she is obligated to provide to his or her child as a matter of law and regardless of the trust.

Section 151.001 of the Texas Family Code imposes a legal obligation on parents to support their minor children. This includes the duty to provide a child with clothing, food, shelter, education, and medical and dental care.

The prohibitive language of an Upjohn clause typically comes into play in one of two scenarios: Either a grandparent has established a trust for the benefit of a minor grandchild and named the intervening child as trustee, or a spouse has established a trust for the benefit of a minor child and named the other spouse as trustee.  In either case, the trustee is the parent of the beneficiary and owes the beneficiary a legal duty of support because the beneficiary is a minor. Although there are other circumstances where an Upjohn clause might apply (for example in the context of a marriage or guardianship), corporate and unrelated trustees generally do not need to concern themselves with this particular legal landmine.

The legal obligations prohibition is primarily meant to prevent inclusion of the entire trust corpus in a trustee’s estate under Treas. Reg. § 20.2041-1(c)(1), which treats the power to relieve a support obligation as a general power of appointment. Importantly, the trustee does not have to actually discharge an obligation. The mere power to do so is enough to cause inclusion. This is why some affirmative mechanism is needed to deny the trustee such power in the first place.

Legal support prohibitions are often contained in the boilerplate of a trust instrument which individual trustees are unlikely to bother reading and less likely to understand. Litigators who specialize in trust administration issues know to look for these clauses and point out violations. If a trustee makes even a small distribution in violation of an Upjohn clause, he or she has violated his or her fiduciary duty and may be subject to severe reprimand. This underscores the point that trustees, and in particular individual trustees, should maintain a close relationship with their attorneys and other professional advisors.

Although the distributions prohibited by an Upjohn clause are narrow in scope, there is very little legal precedent for determining exactly what is prohibited and what is not, so the best course of action is to proceed conservatively and with an abundance of caution.

In the absence of legal precedent to the contrary, more conservative guidelines are advisable. Thus, where an Upjohn clause applies, the following expenditures are best avoided:

  • Rent or any similar payments
  • Home improvements or decor
  • Homeowners or renters’ insurance
  • Basic utilities for the home
  • Property taxes
  • Clothing
  • Health insurance
  • Non-elective healthcare
  • General dentistry
  • Dentures
  • Optometry
  • Prescription glasses
  • Food

On the other hand, there are a number of expenses which do not fall within support obligation, so trust assets may be properly expendable on the following:

  • Cell phones
  • Pets
  • TV, cable, or satellite service
  • Internet service
  • Personal accessories
  • Automobiles
  • Auto insurance
  • Private school education
  • Extracurricular activities
  • Trips and vacations
  • Elective health care
  • Orthodontics

If you would like to discuss the particular language in your trust instrument, or the circumstances in which it operates, please contact one of our trust attorneys for guidance.

Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP. He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Christian Kelso | Estate Planning | 663(b) distributions

It’s Time to Make Your 663(b) Trust and Estate Distributions!

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Trusts and estates often pay more tax than individuals in like circumstances.  This is not because they are taxed at higher rates, but rather because the same rates applicable to individuals are “compressed,” meaning that each marginal rate increase happens at a lower level of income than it does for individuals.  For example, the highest rate of income tax for both trusts and individuals for 2016 was 39.6%, but whereas this rate only applies to income over $415,050 for single individual filers, for trusts and estates, this rate applies to all income over $12,400.  Other tax burdens, such as the 3.8% Net Investment Income Tax (a/k/a the “Obamacare Tax”) and higher rates of capital gains tax follow suit along similar lines.  Obviously, these add up to a significant potential tax burden.

Fortunately, there is a way to mitigate this tax burden.  Trusts and estates may take a deduction for “distributable net income,” which is generally the amount of income that is distributed from the trust to a beneficiary.  When this happens, the income is effectively shifted from the trust to the beneficiary, who simply adds it to their personal return and pays at whatever rate is applicable to them (including the distributed trust income, of course).

Since large amounts of unnecessary tax can be avoided by shifting income to beneficiaries in this manner, it is common practice for trustees to make distributions for this purpose, assuming, of course, that such distributions are permissible and proper under the terms of the trust.  But there is a problem:  How does the trustee know how much income to distribute from a given trust before the close of a given tax year?  Unfortunately, it is impossible, to know exactly how much income a trust has until after the tax year has closed, at which point, it’s too late to distribute all the income.

Enter IRC §663(b).  Under this special provision, a trust or estate may elect to treat any distribution made within the first 65 days of a given tax year as having been made on December 31 of the previous year.  In other words, the trustee gets 65 days after the actual close of the year to calculate how much income should have been distributed and then actually make that distribution.  The trustee then makes an election on the trust or estate’s income tax return (Form 1041) and voila, the problem is solved!

Although §663(b) distributions may provide a significant benefit, the can also represent a significant danger to trustees.  On the one hand, any distribution from a trust should only be made if and to the extent it is proper under the terms of the trust.  Even if such a distribution is permissible, it may not be in the best interests of a given beneficiary, as taxes are only one of many considerations.  On the other hand, a §663(b) distributions can save a significant amount of tax, so failing to make such a distribution, if permitted, could subject a trustee to liability for waste.

Making the right decision requires careful analysis.  The fiduciary attorneys at Farrow-Gillespie & Heath, LLP are well-versed with the applicable law and have the practical experience to understand the nuanced process that is involved with make the right decision.  If we can help you with this, please don’t hesitate to call.

The trust and estate planning attorneys at Farrow-Gillespie Heath Witter LLP, located in downtown Dallas, serve all of your trust and estate planning needs, including:

  • Estate planning for small estates
  • Estate planning for large, taxable estates
  • Trust review and modification
  • Trust and estate administration
  • Trust litigation
  • Will contests
  • Probate
  • Heirship proceedings
  • Guardianships