New York Law School
ABA – STEP Training Program
Drafting Estate Planning Document
3:15 – 6:30 p.m. July 13, 2010
By: Martin M. Shenkman, CPA, MBA, PFS, JD
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Contents
Practical does and don’ts of estate planning drafting ................................................... 1
Introduction to drafting considerations.......................................................................... 3
Drafting Case Studies. ...................................................................................................... 4
Human aspects of estate drafting .................................................................................. 13
Drafting Fiduciary Provisions ....................................................................................... 19
Drafting for HIPAA issues ............................................................................................. 28
Coordination of estate document drafting with non-estate planning document
drafting............................................................................................................................. 28
Additional Articles and Materials Illustrating and discussing drafting options ...... 37
Tangible Personal Property........................................................................................... 37
Power of attorney.......................................................................................................... 37
Blind or vision impaired client ..................................................................................... 37
Psychological and Emotional considerations................................................................ 37
Pre-nuptial Agreement clauses ..................................................................................... 37
Chronic Illness Drafting................................................................................................ 37
HIPAA .......................................................................................................................... 37
Religion and Estate Planning ........................................................................................ 37
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Drafting Estate Planning Documents
1. Practical does and don’ts of estate planning drafting.
a. Do try to write clearly and understandably.
b. Don’t permit a client to pressure you to arbitrarily shorten or simplify a
document that will obscure the meaning or potentially undermine the
intent.
c. Do use defined terms consistently within each document, and when
applicable from document to document.
d. Don’t use a term as a defined term without providing a definition for it.
Don’t assume that because the term has a definition in some realm (e.g.,
the Internal Revenue Code) that such a definition will apply. It won’t if
you don’t specify that it will.
e. Do evaluate not only the drafting of the tax allocation clause but the
source of the funds, the flow of funds to pay taxes, etc.
f. Do coordinate all estate planning documents. Watch for inconsistencies
between various trusts, will, and other documents. If there is a difference
that is intentional, state the nature of the difference so that there is no
ambiguity.
g. Don’t leave something obvious unmentioned. It won’t be obvious five
years from now.
h. Do document a client’s competency, reasons for a particular decision and
the degree of physical, financial or other harm to the client from a
particular course of action, and that a particular course of action is
consistent with the client’s long-term goals and values. For example, if the
client is permitting an agent under a power of attorney to modify
beneficiary designations consider stating the reason for this power being
given and the logic for it, or restrict the exercise of the power granted. “I
expressly have permitted my Agent the authority to modify beneficiary
designations for my retirement plan only restricting such power to the
degree necessary to preserve approximate equality between my two
children’s families, because of the substantial pending changes in the tax
system, the current tax uncertainty, and for fear that the progression of my
Alzheimer’s disease or other future health issues, may prevent me from
modifying my beneficiary designations at a future date to better address
then current tax considerations.”
i. Do name sufficient successors for every fiduciary position.
j. Don’t say equal share per stirpes. What does it mean? Do instead “to my
then living issue per stirpes.”
k. Don’t be too creative if you refer to an ascertainable standard. See what
the regulations stay and consider sticking to it.
l. Do appropriately document the intent and rationale for unexpected gifts or
distributions. Demonstrate that the client’s actions are rational, expected
and appropriate, especially if the action is otherwise counter-intuitive. For
example, would people expect in the normal course for the testator to
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m.
n.
o.
p.
q.
benefit the particular person (e.g. a health aide) or to not benefit a specific
person (e.g. a child from a prior marriage)? It is much easier to prove that
a parent would benefit his children then a home health aide. This is the
burden counsel may face in a court proceeding. If you have to establish the
burden of proof that the testator did something contrary to what normal
expectation would be, then you know you will have a more serious
problem. Consider: “I have bequeathed $50,000 to my home health aide
Mr. X because of the extraordinary attention and personal care he has
shown me over many years of care. My children’s financial security will
not be materially impacted by this gift, but for Mr. X this modest bequest
will enable him to hopefully secure important personal goals and will have
a substantial and positive impact on him.”
Do draft so documents can be understood. While this is obviously quite a
challenge when dealing with the complexities of the generation-skipping
transfer (GST) tax, directed versus delegated trusts, determining what
portion of a limited liability company (LLC) distribution is allocable to
principal, etc., effort towards understandability should be made. The
courts will not believe that the testator understood the document if they
cannot understand it. If a jury cannot understand what the will or other
document intends, there will be a tendency for them to believe that the
client may also have had an issue, especially when the client’s competency
is in question. The document must be sufficiently clear, with consideration
to the unavoidable complexity of tax and other laws, so that the average
person could understand it. If the document is so dense and technical as to
be incomprehensible, it will be difficult to convince the court or jury that
the client understood it. Anything that makes the document intelligible to a
lay person is helpful. Often all this requires is a simple, explanatory, lead
in sentence. How much mental acuity does the client need to understand
this document? It is a much easier road to showing competency if the
document the client signed is in relatively understandable English. When
the complexity necessitated by tax laws, property laws (e.g., rule against
perpetuities), asset protection and other steps makes a simple document an
impossibility, captions, statements of intent in the trust or other document,
may help demonstrate that the client did in fact understand it.
Do be consistent between husband and wife’s wills, but if there are
differences expressly identify them so it is clear they are not merely a
drafting oversight.
Do review the application of the survival clauses and the final distribution
clauses and be certain that the order of death doesn’t arbitrarily change the
distributions. If there is a simultaneous death who should be deemed to die
first? If done incorrectly it could create avoidable probate costs and
involvement and undermine the tax plan.
Do stress test the amounts of distributions. What if the estate increases,
decreases?
Don’t refer to a tax definition without providing a default. Consider how
estate tax repeal has affected drafting. Funding a bypass trust to the
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amount of the federal estate tax exclusion has wreaked havoc with many
estates, but this is far from the only tax reference that appears in estate
planning documents.
r. Do use an ascertainable standard if you permit a trustee to make
distributions to himself or herself, or if the trustee is a remainder
beneficiary. Better yet, see the “do” below.
s. Do draft with a view towards beneficiary asset protection. Do consider
discretionary standards instead of an ascertainable standard or mandatory
support distribution. Do consider spendthrift provisions.
t. Do include a final distribution in all dispositive documents. Do include in
an ILIT “heirs at law” if no charity otherwise it could be deemed a
reversion to the estate.
u. Do consider the reciprocal trust doctrine when drafting trusts for family
members.
v. Don’t rely on a “standard” or “typical” technique few client situations are
“boilerplate.”
w. Don’t forget to include express provisions in a trust to make it a grantor
trust if you intend it to be a grantor trust.
x. Don’t rely on rules of thumb or conventions if you don’t understand what
they really mean. Too often conventions get taken out of context and
morph way beyond their original implications.
y. Do remember your client is not your friend and your client’s heirs are
even less likely to be your friends. If a client does not wish to maximize
ever tax benefit (none do) indicate it in the document. There is nothing
improper about including understandable statements in a document as to
what a client intended. “I recognize and understand that the following
disposition could be significantly affected by positions taken my Executor
and have intentionally opted not to address these eventualities.” “I
recognize and understand that the charitable bequests in this will may not
generate any federal estate tax charitable contribution deduction and that
from purely a tax perspective it might be advantageous to provide for
these contributions to be made prior to death or by my heirs but I have
intentionally opted not to do so.”
z. Do expressly state a significant decision or assumption a client makes in
the documents to avoid potential arguments of oversight. Most
draftspersons are pretty careful to document when a client excludes one or
more persons who are members of a beneficiary class that is otherwise
included,
2. Introduction to drafting considerations.
a. Review of Obvious General drafting considerations.
i. Definitions.
1. In body of document.
a. Easier to read provisions, impossible to find
otherwise.
2. In single definition provision and front/end of document.
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a. Easy to find but easy to err in definition of
underlying provisions change.
ii. Dealing with sufficient “what ifs.”
iii. Illustration of complex provision or incorporation by reference.
1. Example, appraisal methodology incorporated by reference
to a specific report for a buy sell.
iv. Formalities and structure.
1. Captions. Pros, cons, usage.
2. Table of contents.
v. Meta data warning.
vi. Simple conventions that can facilitate drafting.
1. Use a table of contents to organize your documents.
Regenerate and reorganize.
2. Use “#” or another infrequently used symbol as a marker to
avoid overlooking points, issues, unfinished items.
3. Use descriptive titles for documents and captions.
b. Perspective on tax oriented drafting.
i. What percentage of the population is likely to face an estate tax?
1. Approximately 16,000 estate tax returns filed in 2009 with
a $3.5 million exclusion.
c. Non-tax drafting considerations.
i. Viewed as “fluff” but in reality the most important planning issues
include preserving some form of family harmony, respecting the
wishes of the decedent, etc.
ii. Broad in scope, not just inter-personal issues.
1. Prudent investor act and the Principal and income act.
2. Trustee powers.
3. Successor fiduciaries.
4. Inter-relationship of various fiduciaries.
5. Preserving a family business.
6. ….and more.
3. Drafting Case Studies.
a. Residence Bequest for Minor children. Real Property Distribution.
[Comment: A divorced parent wished to name the older children as
guardians and to assure that the family home would be available as a
home for the minor children. While somewhat unusual the provision
illustrates how many different drafting issues, such as guardianship, life
estate, personal tangible property, etc. can be integrated and coordinated
to endeavor to accomplish a specific personal goal. Focus on the ancillary
issues that are raised and dealt with in an attempt to make the provision
workable. What issues exist that were not raised? What other approaches
might you have recommended to the client?]
i. I currently own a residence located at 123 Big Avenue, City, State.
At the time of the execution of this Will, my parents are currently
residing in such residence. For purposes of this Will, the term
"Residence" shall refer to either this residence or, any other
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residence in the Area-Name metropolitan area which is considered
my primary residence at the time of my death. I recognize that
there is potential for confusion if I own more than one residence on
my death, but I to not believe this to be a practical issue and have
not endeavored to address risk in my Will. [Comment: Review last
sentence. When a decision is made that could be problematic,
confirming the client was aware of the issue can protect the
attorney and avoid incurring considerable costs dealing with a
possibility the client deems remote.]
ii. If, following my death, any Younger Child [Definition provided
elsewhere in Will this clause was extracted from.] has not reached
majority and if either of my Older Children shall be the Guardian
of any Younger Child, then the following shall apply:
1. The Residence shall be added to the Client-Name Family
Trust, established hereunder, to be administered as a part
thereof. In administering the portion of the Trust Estate
which shall consist of the Residence, the Trustee shall take
the following into account:
a. The Residence is intended to be for the primary
benefit of any of my children who are minors and
the Guardian of the minor child who is either of my
Older Children. I also intend that during such time
as the Guardian of the minor child is either of my
Older Children (the "Guardianship Period") (i) if
my Relative-Names are living in the Residence, and
wish to remain in the Residence, they be able to do
so, without the payment of rent or other carrying
charges and (ii) any of my other children may reside
and/or use the Residence as their residence.
b. Neither of my Relatives and no child of mine or
trust established for the benefit of any child of mine,
or the guardian of such child, shall be required to
pay any rent or other compensation for the use of
the Residence.
c. My intent in this provision is to allow my children
to remain in the house so long as there is a minor
child and the guardian of the minor child is another
child of mine. [Explanations of an intent or
objective that is not obvious, if done carefully to
avoid interpretive issues, can be helpful if there is a
later challenge or action concerning the provision.
It can also put a “face” on the provision to
facilitate it accomplishing its personal objectives].
2. I request, but do not direct, that the Residence be sold upon
the following conditions:
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a. If any of my Younger Children are under age of
majority and the Guardians of all Younger Children
who are Older Children advise the Trustee that such
Guardians no longer wish to reside in the
Residence.
b. Upon the youngest of my then living minor children
reaching majority.
c. Upon the determination by the Trustee that the
Residence be sold, if either of my parents are then
living and are using the Residence as his or her
primary residence, the Trustee shall allow my
Relatives a reasonable period of time to relocate to
a new residence. I suggest, but do not direct that the
reasonable period of time shall be Nine (9) months.
d. Upon the sale of the Residence, the net proceeds of
the sale shall be held as a part of the Trust Estate.
3. If, following my death, all of my Younger Children have
reached majority or if neither of my Older Children are
Guardians of any Younger Child, then I specifically request
that, if at the time of my death, one or both of my Relatives
who survive me are living in the Residence, my surviving
Relatives be permitted the limited right to reside in the
Residence and the use of the any furniture, furnishings and
household effects, appurtenant thereto, (and any insurance
policies related thereto, if any), for a reasonable the period
of time following my death, so as to allow them sufficient
time to relocate. I suggest, but do not require that such
reasonable period of time be Nine (9) months after the date
of my death.
4. During such period of time as my Relatives choose to
remain in the Residence my parents shall not be responsible
to pay rent or furnish bond or other security therefore,
furthermore, they shall not be responsible for all real
property and similar taxes, assessments, carrying charges
(including fire and extended coverage insurance premiums
for the full insurable value thereof), and normal costs of
maintenance and repair in respect thereto. Temporary, even
long term absences, including but not limited to a
temporary hospital or nursing home stay shall not affect
their status as living in the Residence as provided herein.
[Note the integration of life estate type provisions into this
clause.]
b. Tangible Personal Property – A simple solution. General Bequest of
Tangible Personal Property. [Comment: Client’s daughter lived in her
home with her. One obvious issue is what personal property in the home
belongs to the daughter and what belongs to the mother. What issues
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might this raise? How might it be dealt with to avoid family issues or tax
issues?]
i. Bequest of Tangible Personal Property.
1. I give and bequeath my tangible personal property to my
then living children in such manner as my children shall
agree within Ninety (90) days from the date of the
appointment of my Executor. If my children fail to agree
as to any property, than any such property not agreed to
shall be sold by my Executor, and the net proceeds of such
sales shall be divided, to the extent possible, in the manner
to most closely equalize the value of all personal property
distributed under this provision, and all cash distributed
under this provision.
2. I have considered making up a list to distribute personal
property and have determined not to do so. [Comment: The
client opted after much discussion not to address the issue.
If the will were silent and a fight erupts between the
children, how can it be demonstrated that the draftsperson
addressed the issue rather than overlooking a potential
serious and obvious problem? Is it sufficient to note the
discussion in the attorney’s files? Is it even necessary for
the attorney to document anything? Some attorneys save no
notes or drafts.]
ii. General Provisions Governing Disposition of Personal Property.
1. Property May Be Stored. My Fiduciary may store any
tangible personal property (other than cash) hereby given to
any minor or any beneficiary under a disability (as defined
in the provision "Beneficiary Under Disability") until such
minor shall attain majority or until the disability ceases, and
may charge the expenses of such storage to my estate so
long as my estate is open, or to such minor or other
beneficiary, in my Fiduciary's discretion. My Fiduciary
may sell such property, for such price and upon such terms
as my Fiduciary shall determine, and dispose of the net
proceeds of such sale as if such net proceeds had been
given to such minor or disabled beneficiary by the
provisions hereof.
2. Shipping and Related Costs. All costs, if any, of shipping,
packing and insuring any of my personal property
transferred under any provision of this Will shall be paid by
my estate. In addition, any insurance policy covering
personal property, shall, to the extent advantageous to the
administration of my estate, be transferred with the
property insured. [Comment: Standard and common
sounding provision. Issue – when the personal property
included a bequest of the piano to the child living on the
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opposite cost, shipping, insurance and related costs
exceeded the value of the piano. What was done? What
could be done to avoid this issue?]
iii. Disposition of Proceeds from Sale of Tangible Property. In the
event any items of tangible personal property are sold, if the
proceeds of such sale are material in amount, as determined in the
discretion of the Fiduciary, then my Fiduciary may direct that such
proceeds be given to the intended beneficiary hereunder, outright
or in trust, in accordance with the applicable provisions in this
Will.
c. Pets Bequest.
i. If my spouse does not survive me, and if, at the time of my death I
shall own any dogs (herein the dogs or pets which I own at the
time of my death shall be referred to as "Pets"), then the following
shall apply:
1. The expenses of maintaining the Pets for a period of time
following my death shall be a proper charge in the
administration of my estate. It is my express intent that the
expenses of caring for my Pets until such time as their care
is assumed as provided herein by the person or institution
named below, or until such time as the Executor makes
alternate arrangements.
ii. If my friend, Dogman Sam, who resides at 456 Main Street, Ruff
Town, USA, survives me and shall notify my Executor, in writing,
that he is willing to care for my Pets, then my Executor shall pay to
Dogman Sam the Pet Bequest, as calculated below, outright and
free of trust. The notification shall consist of a letter stating his
willingness and intent to abide by this request to care for my Pets.
My Executor shall be permitted to rely on such notice without any
duty of inquiry or verification. [Consider the last sentence.
Including a mechanism that creates an unreasonable obligation on
a fiduciary or other person can defeat the intent.]
iii. Pet Bequest shall be calculated as follows:
1. My Executor shall determine the age of each Pet Dogman
Sam is willing to accept, to its nearest birthday. The
Executor shall then multiply Two Thousand Dollars
($2,000) by the difference between the age of each such Pet
and Fifteen (15). Dogman Sam’s Bequest shall be the total
for all the Pets that I own at the time of my death and which
Dogman Sam accepts.
2. By way of example and not limitation, at the time of the
execution of this Will I have Two (2) Pets, a dog Killer
(born December 21, 1998) and a dog Bad Dog (born
January 3, 2003). If I were to die during the remaining
portion of 2009 and Dogman Sam is willing to care for
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both Pets, then Dogman Sam's Bequest would be
determined as follows:
a. On behalf of Killer: $2,000 x (15-11) = $8,000, plus
b. On behalf of Bad Dog: $2,000 x (15-7) = $16,000,
c. For a total of $24,000.
iv. My Executor may rely upon the writing of Dogman Sam and shall
have no further duty or responsibility regarding same.
v. Upon making any such payment, my Executor shall have no
further duty or liability to investigate the use of said funds, the care
of the Pets, or any other matter regarding the same. Although it is
not my intent, I recognize that Dogman Sam may use this bequest
for any purpose and not simply to care for my pets. [Comment: The
client could have set up a trust or used another trust under the will
to make payments and monitor them but because of the modest
dollar size opted to merely trust the beneficiary. This phrase
documents that decision.]
vi. If Dogman Sam does not notify my Executor, within Ninety (90)
days of the date of the appointment of my Executor, that he is
willing to care for any or all of the Pets which I own at the time of
my death, then this bequest shall lapse.
vii. If my friend Dogman Sam does not survive me, or if he does not
notify my Executor, in writing, within Ninety (90) days of the
appointment of my Executor, that he shall be willing to care for
any or all of the Pets, then:
1. My Executor shall give such Pets to Pet Farm, Inc., located
at 123 Pet Way, City, State, Tax Exempt ID Number
____________.
viii. My Executor shall pay the Pet Bequest, as calculated for each of
the Pets that it accepts, to the above charity, for its general use. No
obligations shall be imposed on said charity, concerning such
funds.
ix. No interest shall be payable on the above legacies by reason of
nonpayment prior to the final determination of the federal or state
estate tax.
x. For purposes of determining whether or not my spouse has
predeceased me, and in applying the simultaneous death provision
hereinbelow, if my spouse and I shall die in such a manner that it
cannot be determined who predeceased the other, then I request
that the Executor of my estate together with the Executor of my
spouse's estate determine which estate is to pay the pecuniary
bequests.
d. Right of First Refusal on Family Home, Farm or other Asset. Right of
First Refusal for Specific Personal Residence.
i. If, at the time of my death, I own any interest in the real property
located at 2 Street-Name Avenue, City-Name, State-Name Zip
Code and the improvements thereon (the “Real Property”), I direct
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my Fiduciary to provide my son, Son-Name Last-Name (herein
referred to in such capacity as “Buyer”), a right of first refusal to
purchase the Real Property at its fair market value, as defined
below (“Right of First Refusal”). I recognize that Son-Name LastName may also be the Fiduciary and intentionally make no
provisions to appoint an independent Fiduciary in this regards.
[Client made a personal decision that raises conflict and other
issues and opted not to address it. This clearly will be a potential
issue with the other children. So it has been noted here as the
client’s decision.] I do not intend the Right of First Refusal to
extend to a successor or replacement property. [Comment:
consider the “what ifs” and how far the planning should extend.] I
recognize that the above property might be sold or mortgaged prior
to my death and I intentionally make no provision for such
contingencies. [Comment: consider the “what ifs” and how far the
planning should extend.]
ii. My Fiduciary shall inform Son-Name Last-Name of this Right of
First Refusal, by notice, as defined below. The notice shall be sent
within Thirty (30) days of the final determination of the fair market
value of the Real Property, as determined below. If Son-Name
Last-Name is the Fiduciary then he shall be deemed to have
received said Notice on the date of the final determination of the
fair market value of the Real Property, as determined below,
without any formal notice.
iii. Son-Name Last-Name may exercise this Right of First Refusal by
giving my Fiduciary (but if he is the Fiduciary notice shall be
deemed automatically to have been given) and my other living
Children (but not the other Children’s heirs, successors or assigns)
notice of the intention to exercise the Right of First Refusal within
Thirty (30) days of the mailing or delivery by the Fiduciary of the
notice of this Right of First Refusal to Son-Name Last-Name (or
the effective date of such notice if Son-Name Last-Name is also
the Fiduciary). If the statement of intent is not provided by SonName Last-Name within Thirty (30) days, then this Right of First
Refusal shall lapse.
iv. The fair market value of the Real Property for purposes of this
provision shall be determined as follows:
1. My Fiduciary shall obtain a written appraisal (which must
specify the assumptions upon which it is based, the
credentials of the appraiser, and identify and analyze
comparable properties) of the Real Property within Ninety
(90) days of the appointment of my Fiduciary (the
“Fiduciary Appraisal”). The expense of the Fiduciary
Appraisal shall be borne by my Estate. I have intentionally
not mandated that the Fiduciary Appraisal be certified or
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2.
3.
4.
5.
6.
7.
comply with any specific tax regulations or other
promulgated standards.
A copy of the Fiduciary Appraisal shall be distributed by
my Fiduciary by notice, as hereinafter defined, to each of
my Children who survive me, within Ten (10) business
days of the Fiduciary’s receipt of the Fiduciary Appraisal.
If any of my Children object to the Fiduciary Appraisal,
then said objectant shall give written notice to my
Fiduciary within Twenty Five (25) days from the date that
the Fiduciary sent the notice of the Fiduciary Appraisal.
Son-Name Last-Name may only object if he is not the
Fiduciary.
The objectant’s notice must include a complete copy of an
appraisal obtained by the objectant at the objectant’s own
cost and expense (the “Challenge Appraisal”).
Any Challenge Appraisal must expressly address the
differences between its assumptions and conclusions and
that of the Fiduciary Appraisal in reasonable detail.
Any Challenge Appraisal shall be sent by the Fiduciary to
each of my then living Children within Ten (10) business
days of the Fiduciary’s receipt of such Challenge
Appraisal. If Son-Name Last-Name shall be Fiduciary he
shall be deemed to have received the Challenge Appraisal
individually when he receives it in his capacity as
Fiduciary.
If an unanimous agreement is not reached among all parties
as to the fair market value of the Real Property within
Fifteen (15) days from the date of the last Challenge
Appraisal being distributed by notice by my Fiduciary, then
all appraisers (i.e., the appraiser who performed the
Fiduciary Appraisal, and the appraisers who performed
each Challenge Appraisal) shall select one of the following
options. If no selection is agreed upon within Thirty (30)
days from the date of the last Challenge Appraisal being
distributed by notice by my Fiduciary to then a simple
average of all appraisals shall be made:
a. Agree on an appraised value which is somewhere
between the highest to lowest of the various values.
b. Average any two or more of the Appraisals.
c. If the difference between the highest and lowest
appraisal is more than Fifty Thousand Dollars
($50,000.00) then all of the appraisers may select
another independent appraiser, who must be an
MAI certified appraiser (unless all parties agree to
the contrary in writing), whose appraisal shall
control as the final and uncontestable fair market
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v.
vi.
vii.
viii.
value of the Real Property. [The objective is to
resolve small differences with no further costs.]
8. If my Fiduciary does not receive any Challenge Appraisal
by the Twenty Fifth (25th) day following the date of the
dispatch of the notice containing such Fiduciary Appraisal
(excluding the day of dispatch), then all beneficiaries shall
be bound by the Fiduciary Appraisal.
If all of my Children agree in writing to forgo their rights to obtain
a Challenge Appraisal, my Fiduciary may rely on such written
agreement and proceed as if the time period for such challenge has
passed.
Any “notice” required hereunder shall be in writing, via certified
mail, hand delivery or national overnight courier, costs of shipping
or mailing pre-paid by the sender thereof, and, if such person
sending the notice is not my Fiduciary, with a copy to the
Fiduciary.
The closing of the sale of the Real Property shall be at the time and
place agreed to by the Buyer and my estate, but shall in no event
be more than One Hundred Twenty (120) days following the date
upon which my Fiduciary received notice from the Buyer
indicating that the Buyer elected to exercise this Right of First
Refusal, or Thirty (30) days from the end of the above process.
The terms of the payment shall be as follows:
1. Buyer shall pay Twenty Five (25%) percent of the purchase
price of the Real Property at the time of the closing of the
transaction.
2. The balance of the purchase price, plus interest, shall be
paid by the Buyer to my Fiduciary (or the beneficiaries of
the estate, in the event the estate is terminated during such
time) within Two (2) years of the closing.
3. Notwithstanding the previous sentence, the Buyer shall
have the right to prepay.
4. The interest rate shall be the federal short term interest rate,
calculated in accordance with Section 1274(d) of the
Internal Revenue Code.
5. The amounts unpaid shall be evidenced by a promissory
note executed by the Buyer in favor of my estate and
secured by a mortgage on said Real Property. In
consummating such purchase, the Fiduciary is directed to
permit the Buyer to use any portion of such Buyer’s
bequest under this Will to pay for the Real Property.
6. [The above details are intended to minimize the disputes
between the heirs and provide some reasonable time for the
child opting to buy the property to obtain financing without
undue hardship.]
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ix. The Fiduciary shall be given reasonable latitude to interpret and
apply the above provisions and resolve any inconsistencies or
uncertainty in the above process.
4. Human aspects of estate drafting.
a. Emotional and interpersonal considerations.
i. Tangible personal property.
1. See separate outline attached.
2. Comments: Tangible property can be extraordinarily
valuable, or modest in worth, but regardless of monetary
value, tangibles often weigh heavily in psychic value and
can raise more contention then any other disposition. If the
client is divorced or separated all provisions need to be
reviewed. Consider use of trust to hold tangibles for minor
children to protect those assets from an ex
spouse/guardian. Consider removing right for guardian,
who might be ex-spouse, to hold or control personal
property.
3. As Directed by Executor.
a. I give and bequeath all of my tangible personal
property, wherever located, to and among my then
living children in such proportions or shares and
upon such terms and conditions as the Executor
may direct and appoint by a written instrument
delivered to each child with respect to the specific
article or articles so appointed. [Comment: And if
the client has three children and one is named
Executor?]
b. If any child of mine had attained the age of
majority, the receipt of such adult child shall be a
full and sufficient discharge to the Executor from all
liabilities with respect to the specific item of
tangible personal property so appointed and
distributed.
c. Comment: It will often be simpler if the personal
property is not very valuable to leave amounts to
the guardian for the child. In a divorce situation,
after the death of both parents, or if there is
valuable property, a bequest to a trust for the child
may be more appropriate. A middle ground is to
give the Executor discretion.
d. If any child of mine is a minor at the time such item
or items of tangible personal property are appointed
and distributed, then such item or items of tangible
personal property shall be distributed to #the
guardian for the Child #the person with whom the
Child then resides #the Trustee of the Child's Trust
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created for such minor child established under the
provision below entitled "#Residuary To Issue, Per
Stirpes" and administered pursuant to the terms of
the #Child's Trust, below.
e. I direct that all items of tangible personal property
not effectively appointed shall be sold by the
Executor and I give and bequeath the net proceeds
thereof to and among the Child's Trusts established
for the benefit of my children in such proportions
and amounts as shall equalize, so far as may be
practicable, the value of the items of tangible
personal property previously appointed to or for the
benefit of each of my children. [Comment: Consider
the valuation problems and costs this creates. This
common clause – sell and distribute proceeds, could
be costly and cumbersome.]
4. To Surviving Issue Per Stirpes. I give and bequeath all of
my tangible personal property, not disposed of in prior
provision of this Will, wherever located, to my then living
issue, per stirpes. [Comment: How do you divide the piano.]
5. To Spouse if Survives for Sixty Days. I give and bequeath
all of my tangible personal property, not disposed of in
prior provision of this Will, wherever located, to my
spouse, if my spouse survives me for Sixty (60) days.
6. To Spouse or as Children Agree.
a. I give and bequeath all of my tangible personal
property, not disposed of in any prior provision of
this Will, wherever located, to my spouse, if my
spouse survives me. If my spouse does not survive
me, I give and bequeath my tangible personal
property to my then living children in such manner
as my then living children shall agree within Ninety
(90) days from the date of the appointment of my
Executor. If my children fail to agree as to any
property, then any such property not agreed to shall
be sold by my Executor, and the net proceeds of
such sales shall be divided, to the extent possible, in
the manner to most closely equalize the value of all
personal property distributed under this provision,
and all cash distributed under this provision.
b. [Comment: The client is survived by five children,
four good kids and the proverbial bad child. The
four good children agree on the distribution of all
property. The bad son, out of spite disagrees on any
allocation made. All property, including sentimental
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family heirlooms that have been in the family for
generations, must be sold. Is this really the intent?]
7. As Directed by the Executor. I give and bequeath such
articles of my tangible personal property, not disposed of in
prior provision of this Will, wherever located, to and
among such persons as the Executor may direct and appoint
by a written instrument delivered to each appointee with
respect to the specific article or articles so appointed. The
receipt of the appointee if adult, or if a minor of his or her
parent or the person with whom he or she resides, shall be a
full and sufficient discharge to the Executor from all
liabilities with respect to the specific article or articles so
appointed. I request, but do not direct, that the Executor
dispose of my tangible personal property in accordance
with such wishes as I may have expressed to such
Executor. I direct that any articles not effectively appointed
shall be sold by the Executor, and the net proceeds of any
such sale shall be added to and form a part of my residuary
estate and be dealt with and disposed of accordingly.
8. By Lottery to Designated Persons.
a. I give and bequeath to such of my *LOTTERY
BENEFICIARIES, as shall survive me, the balance
of my *LOTTERY PROPERTY as may be selected
by each of them as provided below.
b. In making such selections, *FIRST BENEFICIARY
shall choose first in each round. All other
beneficiaries shall draw lots to determine who shall
choose second and who shall choose third (in
alternate rounds their positions shall reverse); and
shall choose fourth in each round. Each person shall
have the right to select one item per round, and this
procedure shall continue until all of the property
designated in this provision shall have been selected
or three of the above-named persons, at the end of a
round, have no interest in proceeding. Any items
not selected shall be sold by the Fiduciary and the
net proceeds of sale shall be added to and form a
part of my residuary estate and be dealt with and
disposed of accordingly.
c. In case of any difference of opinion with respect to
the property passing under this provision, the
decision of the Executor shall be final and
conclusive upon all parties.
9. As Adult Children Shall Agree. I give and bequeath such of
my tangible personal property, in such manner as my adult
children shall agree within Ninety (90) days from the date
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of the appointment of my Executor. If my children fail to
agree as to any property, than any such property not agreed
to shall be sold by my Executor, and the net proceeds of
such sales shall be divided, to the extent possible, in the
manner to most closely equalize the value of all personal
property distributed under this provision, and all cash
distributed under this provision.
ii. Burial, funeral and related decisions.
1. See separate handout on religious issues.
2. Which documents should address burial and related
provisions and why?
a. Will – costs and authority. Example: Who can
authorize and pay for perpetual care of a grave site?
Who could authorize a costly funeral (e.g., shipping
the body to a foreign country for a particular
religious funeral or rite).
b. Living will – statement of wishes and likely
considered pre-death, will may only be read weeks
or longer after death.
c. Health care proxy – authorize agent to take steps.
d. Other thoughts?
iii. Drafting to minimize or even avoid conflict.
1. Life estates are commonly used and often generate conflict.
The fact that a provision is commonly used does not assure
that the technique is appropriate or as simple as many
believe. Each situation is unique and crafting a tailored
provision can minimize conflict. Careful drafting can
mitigate many life estate issues, the use of a carefully
crafted trust will likely be better.
a. Life Estate in Residence. I give, devise and
bequeath to *LIFE ESTATE BENEFICIARY, the
*LIFE ESTATE PROPERTY (including any
furniture, furnishings, and household effects,
appurtenant thereto, and any insurance policies
related thereto, if any)[Comment: A common
dispute with life estates is what is or is not included.
If spouse number 4 is given a life estate, don’t be
surprised that a poorly crafted provision will have
the children from marriage number 1 empty the
residence of all antiques and art, etc. leaving it a
literal shell of what was intended.], if I should own
such property at the time of my death, to have and
to hold the same for and during such beneficiary's
lifetime, without the necessity of paying rent or
furnishing bond or other security therefore, but
subject to and upon the condition that he pay all real
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property and similar taxes (but excluding estate or
inheritance taxes), assessments, carrying charges
(including fire and extended coverage insurance
premiums for the full insurable value thereof), and
normal costs of maintenance and repair in respect
thereof. [Comment: Be precise about what expenses
which party pays and also consider whether they
have adequate cash flow to do so. Subjecting a
partner or significant other to the costs of
maintaining a costly pied-à-terre could be
disastrous.]
b. On the death of *LIFE ESTATE BENEFICIARY,
or upon such life estate beneficiary's earlier
renunciation or disclaimer of the interest in said
property, or on my death if such life estate
beneficiary does not survive me, I give, devise and
bequeath said real property to *REMAINDER
BENEFICIARY upon such terms and conditions as
the Executor may direct and appoint by a written
instrument delivered to each appointee with respect
to such property. I direct that if, after the death of
*LIFE ESTATE BENEFICIARY, or upon such life
estate beneficiary's earlier renunciation or
disclaimer of any interest in said property, #or such
life estate beneficiary's earlier disability which
prevents such beneficiary from occupying and
maintaining the property subject to the life estate
herein granted [Comment: if the life tenant must
reside in a nursing facility because of health issues,
the life estate could continue with the property
vacant, and the intended heirs waiting.], and if
either (i) such property is not effectively appointed,
or (ii) the Executor shall determine that it is
preferable to sell such property, then such property
shall be sold by the Executor and I give and
bequeath the net proceeds thereof equally to
*REMAINDER BENEFICIARY.
c. #Marital Deduction Savings Clause. It is intended
that the above provision providing for a life estate
in certain real property to my spouse shall qualify
for the estate tax marital deduction under Code
Section 2056, and shall be so applied, and modified
as necessary, in order to comply with such
requirements.
d. #Additional Privileges/Responsibilities of Life
Estate Beneficiary.
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i. The beneficiary of the life estate granted
herein shall have no responsibility or
liability for waste, and shall have no duty to
account to any remaindermen. [Comment:
This provision could permit the life tenant to
let considerable damage occur to the
residence. On the other hand, this broad
clause for a trusted life tenant could prevent
antagonistic remainder beneficiaries from
creating issues and conflict.]
ii. Such life beneficiary shall have the authority
to sell such property and invest and reinvest
the proceeds without the consent of the
remaindermen and any purchaser may deal
with such life beneficiary as if such
beneficiary owned title in fee interest in
such property.
iii. To the extent not inconsistent with the estate
tax marital deduction, if such deduction is to
be claimed for the life estate granted herein,
I request, but do not require, that the life
beneficiary pay for all principal payments
due on any mortgage or loan which is a lien
on the property which is the subject of the
life estate granted herein.
2. Alternative dispute resolution and mediation.
b. Religious issues.
i. See separate outline below.
ii. Wills.
iii. Health proxies.
1. Few people take the time to understand what end of life
decisions are really about. Jane Brody in her recent book
Guide to the Great Beyond (a must read) notes that there no
significant survival benefit for pursuing aggressive medical
options over hospice! Hospice can provide a more dignified
and peaceful death, chance to address religious and
spiritual issues and save a fortune in cost. One of the
studies she cites found that those receiving aggressive end
of life intervention survived 33 days while those receiving
hospice instead survived 31 days. While any such studies
are subject to wide interpretation and variation, and so
much depends on the facts of the specific patient, there are
some really important lessons and questions. Many
religions view it as inappropriate to “pull the plug” on
someone, even if in a vegetative state. If your wishes
whether for religious or philosophical reasons are not to be
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5.
removed from a ventilator or to have mechanical feeding
cease, even if you are in a persistent vegetative state, make
these wishes clearly known. They should be respected,
health care reform or not. However, broad generalizations
are dangerously inappropriate. If you face days of invasive
medical procedures and what might be at most statistically
insignificant longer life, or you can spend statistically about
the same time in hospice, with the warmth of family, the
guidance of your spiritual adviser, etc., even for someone
with a strict fundamental faith what is preferable? Too
often the decision is reduced to black and white
inaccuracies, just like the death panel hyperbole.
Consultations with appropriate advisers (medical, religious
or other) is the only way to make informed decisions.
Everyone should endeavor to address known issues and
likely scenarios in advance. If the unforeseen occurs, that is
why you should have a signed health proxy or medical
directive appointing someone to undertake this analysis on
your behalf.
iv. Other documents.
c. Chronic illness and health issues.
i. See separate outline below.
ii. Health proxies.
iii. Powers of attorney.
iv. Trusts.
Drafting Fiduciary Provisions
a. Evolving fiduciary roles and drafting of fiduciary provisions.
i. Many practitioners have integrated many new fiduciary positions
into the ever increasingly complex trust instruments that have
become more common. There is little law on these positions so that
while potentially helpful, caution is in order.
b. Fiduciary succession drafting.
c. ####
d. Trust protectors.
i. Trust Protectors. In a recent case the trust protector was sued for
not monitoring the trustees, not preventing the theft of trust assets,
breach of loyalty (they argued that the protector was more loyal to
trustees then to the beneficiaries). The Court struggled with the
issues since state law didn’t provide direction. See UTC Sec. 808.
This was a case of first impression. The Court considered the trust
document which gave powers and said trust protector was a
fiduciary. It gave the protector the power to remove the trustee and
appoint successor, but no standards for these acts were provided.
The trust protector had power to resign and appoint a successor.
The Court held that the trust protector had a fiduciary duty but did
not define the scope of those duties. The trust exonerated the trust
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e.
f.
g.
h.
protector for acts taken in good faith. The Court said this implied
that the protector would be liable for acts which were not in good
faith.
ii. What if the Trust Protector doesn’t even know they are appointed
trust protector.
iii. What are the duties?
iv. Is a protector a fiduciary?
v. Is the protector supposed to do the same things that a trustee is
required to do?
vi. Some states require that the protector submit to jurisdiction in the
state of situs.
vii. Did trust protector sign document accepting the position? If not,
how can you hold them liable.
viii. Given all the above, how can you protect the trust protector? Can
you protect the protector by stating that if they make a mistake
they should not be sued. Robert T. McLean Irrevocable Trust v.
Patrick Davis, P.C., 283 S.W. 3d 786 (Mo. Ct. App. 2009).
Investment advisers.
Co-trustees.
Administrative trustees.
Coordination provisions.
i. Fiduciary Terminology.
1. Grantor recognizes that the relationships between the
various fiduciaries serving hereunder may change over time
as to the number serving, the capacities or functions which
are filled, the capacities or functions filled by the same or
different individuals or institutions, and in other manners
(for example, due to the restrictions as to a Fiduciary
making decisions should this trust purchase life insurance
on the life of the Fiduciary). Therefore, in interpreting and
applying the provisions of this Trust Agreement as
concerning the roles, rights, obligations and other matters
affecting fiduciaries, consideration will have to be given to
the Objectives and intent of this trust and the particular
facts and circumstances existing at execution and at the
time a decision is required to be made. The use of singular
or plural, current and successors, masculine, feminine or
neuter, and other terminology, including in some instances
the category of fiduciary, shall be interpreted as appropriate
for the time and context. If the term "Fiduciary" is used it
should be applied in a manner that carries out the terms and
intent of this Trust agreement. By way of example and not
limitation, the term "Fiduciary" or even "Trustee" as it
pertains to certain investment provisions may at one time
refer to the Institutional Trustee, but at other times to an
individual named as Trust Protector, or Investment
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Adviser, even in the context of the same provision.
General powers granted to the Trustee may have to be
applied or interpreted in the context of a Fiduciary
expressly given the role that absent such other Fiduciary's
appointment would be filled by the Trustee. These
interpretations are also intended to be limiting so that if a
provision refers to the actions of a "Fiduciary" and in the
context and circumstances should be a reference to the
Distribution Committee if one is serving and named, then
the use of the term "Fiduciary" shall not grant to the Trust
Protector or Trustee the power and right to act concerning
that matter.
2. In no event shall the interpretation and application of the
term Fiduciary be made which would grants rights or
powers to an individual that would cause the Trust Estate to
be included in that individual's estate, or enable the
creditors of that individual to reach the Trust Estate as a
result of such interpretation.
ii. Limitations on Responsibilities of Institutional Trustee When
Other Fiduciaries Named.
1. Notwithstanding anything in this Trust Agreement to the
contrary, the Institutional Trustee shall not have any
responsibility or obligation whatsoever, #other than to
serve in an administrative trustee capacity under this Trust
Agreement. This limitation on responsibility shall include
by way of example and not limitation, any discretion over
which the Investment Adviser regarding any investment
decisions, any obligations of a Distribution Committee
regarding any distribution or Personal Use Assets, any
obligations of the #Trust Protector regarding change of
Institutional Trustee or situs, or the decision of identifying
assets to be characterized as "readily marketable"
securities.
2. This limitation shall apply unless and until, the Institutional
Trustee has received written Notice requesting that the
Institutional Trustee assume a particular responsibility or
obligation, and such Institutional Trustee consents to such
additional responsibility or obligation in an affirmative
written acknowledgement furnished to the Individual
Trustee, Trust Protector, Investment Adviser, or by Notice
sent to the Beneficiaries over age Twenty Five (25)
("Acceptance"). ##
3. Upon the initial creation of the Trust, the Institutional
Trustee shall not have any responsibility or obligation
whatsoever, other than to serve in an administrative trustee
capacity under this Agreement by having custody of Trust
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Estate. This limitation on responsibility shall include by
way of example, and not limitation, any investment
decisions which are obligations of the Investment Adviser
and to whom the Institutional Trustee shall have the
relationship of a directed trustee. Further, by way of
example and not limitation, the Institutional Trustee shall
have no duty to review or monitor trust investments while
the Investment Adviser is acting, or to seek advice or
direction from the Investment Adviser, it being specifically
intended that the Institutional Trustee be relieved and
excluded from all responsibility for investment
performance of the Trust Estate while the Investment
Adviser is acting, and the Institutional Trustee shall have
no liability for following the directions of the Investment
Adviser.
4. This limitation shall remain unless and until such
Institutional Trustee has received written Notice requesting
that the Institutional Trustee assume a particular
responsibility or obligation, and such Institutional Trustee
consents to such additional responsibility or obligation in
an affirmative written acknowledgement furnished to the
other Fiduciaries then serving and if none, to the
Beneficiaries or Lifetime Beneficiary ("Acceptance"). By
way of example and not limitation the Trust Protector may
divide the Trust Estate into two or more sub-trusts, each
with different assets, and the Institutional Trustee may
agree to manage the assets of one or more such sub-trusts
in which event the Institutional Trustee shall thereupon
assume investment responsibility for such sub-trust.
iii. Special Limitations of Liability of Institutional Trustee.
1. The Institutional Trustee shall not be liable for any loss or
depreciation in value sustained by reason of any action
taken in the discretion of the Individual Trustee or the Trust
Protector where such action is designated as within the
authority of the Individual Trustee or Trust Protector
hereunder.
2. The Institutional Trustee shall not be liable for any loss or
depreciation in value sustained by reason of any action
taken in the discretion of, or at the direction of, the
Investment Adviser, where such action is designated as
being within the purview of the Investment Adviser
hereunder.
3. The aforementioned provisions shall not create any
affirmative obligation on the Institutional Trustee to obtain
the approval of either the Individual Trustee or the Trust
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Protector where same is not required under the terms of this
Trust Agreement.
4. The Institutional Trustee shall be relieved of all
responsibility for investment performance where
investment decisions are within the purview of an
Investment Adviser who is independent, unrelated to and
not affiliated with or subservient to, the Institutional
Trustee. Further, by way of example and not limitation, the
Institutional Trustee shall have no duty to review or
monitor trust investments while the Investment Adviser is
acting, or to seek advise or direction from the Investment
Adviser, it being specifically intended that the Institutional
Trustee be relieved and excluded from all responsibility for
investment performance of the Trust Estate while the
Investment Adviser is acting, and the Institutional Trustee
shall have no liability for following the directions of the
Investment Adviser.
5. In the event that at any time there is added to the Trust
Estate any real property, any life insurance policy, any
tangible personal property, any other Personal Use Assets,
or any interest in any closely held businesses, the
Institutional Trustee shall have no duty to retain such asset
or divest itself of such asset unless the #Trust Protector,
#Investment Adviser, or the Individual Trustee, as the case
may be, directs the Institutional Trustee to retain or divest
itself of such asset. Further, the Institutional Trustee shall
have no duty to acquire such assets unless directed by the
#Trust Protector #Investment Adviser, or the Individual
Trustee, as the case may be, then serving.
iv. Decision or Action Solely Within Purview of Specified Person. If
a specific decision under this Trust Agreement is designated as
solely within the purview of a particular Fiduciary then such
designated fiduciary shall have sole authority to make such
specific decision and any other fiduciaries shall not be held
responsible for the decision.
v. Trustee Decision by Individual Trustee or Institutional Trustee.
1. Where a decision in this Trust Agreement is designated as
solely within the purview of the Institutional Trustee then
the Institutional Trustee shall have sole authority to make
such determination and the Individual Trustee shall not be
held responsible for the decision of the Institutional
Trustee.
2. Where a decision in this Trust Agreement is designated as
solely within the purview of the Individual Trustee then the
Individual Trustee shall have sole authority to make such
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determination and the Institutional Trustee shall not be held
responsible for the decision of the Individual Trustee.
3. If both an Institutional Trustee and Individual Trustee are
serving, then the Institutional Trustee shall have sole
possession and custody of Trust Assets. If no Institutional
Trustee is serving then the Individual Trustee shall have
sole possession and custody of Trust Assets. The Trustee
shall become responsible for the Trust Estate only when, as
and if, such property shall have been received and accepted
by such Trustee.
4. If any conflict arises with respect to a decision or action by
the Institutional Trustee and the Individual Trustee with
respect to a matter for which the Institutional Trustee is
given express authority hereunder, then the Individual
Trustee shall defer to the decision of the Institutional
Trustee.
vi. Coordination of Institutional Trustee and Trust Protector
Provisions. If any conflict arises with respect to a decision or
action by the Institutional Trustee and the Trust Protector with
respect to a matter for which the Trust Protector is given express
authority hereunder, then the Institutional Trustee shall defer to the
decision of the Trust Protector #and the Institutional Trustee's
responsibility and liability shall be so limited.
1. Comment: The following provision may help address the
broad authority to remove Institutional Trustee which is
often given.
2. Coordination of the Beneficiary and Trust Protector
Provisions. In the event of a conflict between the power of
the Beneficiaries right to remove an Institutional Trustee, if
any, and the right of the Trust Protector to do the same,
then the decision of the Trust Protector shall control.
However, should at any time Three Fourths (3/4ths) of the
identifiable current Beneficiaries (but expressly excluding
Grantor) above the age of Twenty Five (25) notify the Trust
Protector that a particular Institutional Trustee shall be
removed or shall not be appointed, the Trust Protector shall
be bound to remove said Institutional Trustee, or not
appoint such Institutional Trustee.
3. Comment: Amend or modify the following to reflect
whether this Trust Agreement includes a Distribution
Committee. Review and coordinate this provision with the
Trust Coordination provisions, below.
vii. Coordination of Trustee and #Distribution Committee Provisions.
1. If there is no Distribution Committee serving, then the
#Institutional Trustee #Individual Trustee #Individual
Trustee, so long as one is serving and not prohibited from
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making distribution decisions under provisions of this Trust
Agreement, and the Institutional Trustee # shall be
responsible for distribution decisions.
2. If a Distribution Committee is serving #only in an advisory
capacity only, then the Trustee (as provided for
hereinabove) shall consider, but shall not be bound by the
recommendations of the Distribution Committee.
3. If a Distribution Committee is serving with the authority to
make actual distribution decisions, then the Fiduciaries
shall be bound by the determinations of the Distribution
Committee and shall act accordingly.
4. If a Distribution Committee is serving but thereafter ceases
to serve, the Trustee (as provided for hereinabove), after
Notice requesting the Trustee to assume the functions of
the Distribution Committee, and the Trustee's Acceptance
in its sole discretion to assume the functions of the
Distribution Committee, shall have sole and absolute
discretion to make distribution determinations.
5. The exercise by the Fiduciary of the discretionary powers
herein granted with respect to the payment, distribution or
application of principal or income of any trust created
under this Trust Agreement is final and conclusive upon all
persons and shall not be subject to any review whatsoever.
Grantor intends that the Distribution Committee, if one is
then acting, or if not the Trustee, shall have discretion in
exercising the powers, and that the persons entitled to
receive the principal of any trust created under this Trust
Agreement shall upon the termination of such trust be
entitled only to such principal as may remain after the last
exercise of the Fiduciary's continuing discretionary powers.
viii. Coordination with Investment Adviser and Trustee Actions.
1. When an Investment Adviser is acting hereunder, the
Investment Adviser shall have sole responsibility and
authority over investment decisions, rather than the
Trustee. However, in the event that the Trustee determines
to hold non-productive property for the use of a
beneficiary, the Investment Adviser shall not have
investment authority or responsibility as to such assets.
2. The Trustees shall be responsible for formulating and
implementing an investment policy in accordance with the
terms of this Trust Agreement, except when such
responsibilities are expressly being handled by the
#Investment Advisor.
3. The Trustees shall be responsible for formulating and
implementing an investment policy in accordance with the
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terms of this Trust Agreement, and with consideration to
the recommendations of the Investment Adviser.
4. The Investment Adviser shall be responsible for
formulating and implementing an investment policy in
accordance with the terms of this Trust Agreement.
5. The #Business Investment Adviser shall be responsible for
formulating and implementing an investment policy for the
Trust Estate comprised of closely held business and nonmarketable investments, in accordance with the terms of
this Trust Agreement. #The #Marketable Investment
Adviser shall be responsible for formulating and
implementing an investment policy for the Trust Estate
comprised of marketable security investments, in
accordance with the terms of this Trust Agreement. The
#Trust Protector shall be responsible for transferring assets
between each of these segments of the Trust Estate.#
6. Specified categories of Investment Advisers shall be
responsible for investment policies as follows:
a. The Business Investment Adviser shall be
responsible for formulating and implementing an
investment policy for the Trust Estate comprised of
closely held business and non-marketable
investments, in accordance with the terms of this
Trust Agreement, excluding *SPECIALBUSINESS
(as defined below).
b. The *SPECIALBUSINESS Investment Adviser
shall be responsible for formulating and
implementing an investment policy for the Trust
Estate comprised of closely held business and nonmarketable investments, in accordance with the
terms of this Trust Agreement.
*SPECIALBUSINESS are defined as
*#DEFINEBUSINESS.
c. The Marketable Investment Adviser shall be
responsible for formulating and implementing an
investment policy for the Trust Estate comprised of
marketable security investments, in accordance with
the terms of this Trust Agreement.
d. Comment: The following provision should be
considered if separate investment advisers are
named for marketable and non-marketable (e.g.,
venture capital) investments.
e. Determination of Assets Classified as Readily
Marketable for Purposes of Determining Investment
Adviser Responsibility.
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f. The Business Investment Adviser shall be
responsible for formulation and implementing an
investment policy for the Trust Estate comprised of
closely held business and non-marketable
investments in accordance with the terms of this
Trustee Agreement, excluding
*SPECIALBUSINESS (as defined below.
g. The *SPECIALBUSINESS Investment Adviser
shall be responsible for formulating and
implementing an investment policy for the Trust
Estate comprised of closely held business and
nonmarketable investments in accordance with the
terms of this Trust Agreement.
*SPECIALBUSINESS. are defined as
*#DEFINEBUSINESS.
h. The Marketable Investment Adviser shall be
responsible for formulating and implementing an
investment policy for the Trust Estate comprised of
marketable security investment, in accordance with
the terms of this Trust Agreement.
i. COMMENT: The following provisions should be
considered if separate investment advisers are
named for marketable and non-marketable assets.
j. Determination of Assets Classified as Readily
Marketable for purposes of Determining Investment
Responsibility.
k. In the event of any conflict between the Investment
Adviser for "readily marketable" securities, and the
Investment Adviser for the assets of the Trust Estate
which are closely held business assets or other not
readily marketable assets as to whether a particular
asset should be classified as "readily marketable",
shall be determined in the absolute discretion of the
Trust Protector.
l. If no Trust Protector shall then be serving, then the
determination shall be made by the Institutional
Trustee, after Notice requesting the Institutional
Trustee to assume the responsibility for such
determination, and the Institutional Trustee's
Acceptance in its sole discretion to assume such
decision making responsibility, shall make such
determination. The Institutional Trustee shall not, as
a result of making such a determination, have any
responsibility for the investment decisions or results
concerning such particular asset made by others.
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m. The #Trust Protector shall be responsible for
transferring assets between each of these segments
of the Trust Estate in the Trust Protector's discretion
and shall have no liability whatsoever for the
consequences of such actions unless made with
intentional malice or in bad faith.
6. Drafting for HIPAA issues
a. See separate handout.
b. Drafting a HIPAA release.
c. Living wills and health proxies.
d. Buyout agreements.
e. Trusts.
i. Trustees.
ii. Beneficiaries.
f. Powers of attorney.
i. Generally.
ii. New York amendment as an example.
7. Coordination of estate document drafting with non-estate planning
document drafting
a. S Corporation Shareholders’ agreements.
i. Ineffectiveness of Improper Share Transfer.
1. No purported sale, assignment, creation of a security
interest in or lien upon, gift of, trust (#Comment: S
Corporation considerations# other than a QSST trust or
other Trust, as permitted above, for the benefit of his
immediate family) of, or other disposition of any of the
Shares of the Corporation by any Shareholder in violation
of the provisions of this Agreement, the Certificate of
Incorporation or the By-laws shall be valid, and the
Corporation shall not transfer any of such Shares on the
books of the Corporation nor shall any of said Shares be
entitled to vote, nor shall any dividends be paid thereon,
during the period of any such violation. Such
disqualifications shall be in addition to and not in lieu of,
any other remedies legal or equitable to enforce the
foregoing provisions.
ii. S corporation provisions and character of trusts.
1. Qualifying shareholders include only individuals who are
U.S. citizens or residents, estates, certain types of trusts
(ESBT, QSST or grantor trusts), or certain exempt
organizations. Each shareholder should affirmatively
represent in the Shareholder’s Agreement that they qualify
as an S corporation shareholder, and that they will not
make a transfer to a non-qualified shareholder. Individual S
corporation shareholders’ should represent that any trusts to
which they may gift or bequeath stock (subject to an
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restrictions on transfer in the Shareholders’ Agreement)
will qualify to hold S corporation stock.
2. An estate of a deceased shareholder can own stock in an S
corporation. While there is no time limit restriction on the
eligibility of an estate to remain an S corporation
shareholder, the estate may have to justify its continuation
for longer than two years. There is also a risk that a
protracted estate administration period could result in the
IRS reclassifying an estate as a trust. If the resulting trust is
not considered an eligible S corporation shareholder the S
corporation could face loss of its S corporation status. IRC
Sec. 1361(b)(1); Treas. Reg. 1.1361-1(e)(2).
3. Notwithstanding anything herein to the contrary, any
Shareholder may transfer any portion of his shares of stock
in the Corporation to a trust for the benefit of his immediate
family. However, since the Corporation is taxed as an S
corporation, such trust must meet the requirements of:
a. Code Section 1361(d) of the Internal Revenue Code
of 1986, as amended (a "QSST trust").
b. Code Section 1361(c)(2)(A)(v), Electing Small
Business Trust. The Trustee of said trust shall
comply with the following requirements of an
ESBT:
i. The Trust shall not have any beneficiaries
other than individuals, estates or charitable
organizations described in Code Section 170
(c)(2), (3), (4) and (5), if said organizations
are otherwise named as beneficiaries
thereunder.
ii. No interests in the Trust shall have been or
shall be acquired by purchase.
iii. An election to be a Small Business Trust
shall apply to said Trust.
iv. The Trust shall not have made a QSST
election with respect to any stock held by
the Trust and is not a tax-exempt trust.
c. The Trustee shall be authorized to make any minor
technical corrections necessary to the terms of the
Trust to assure that, with respect to the S
corporation Assets, such part of such trust shall
continue to meet the requirements of an Electing
Small Business Trust.
d. Further, any trust agreement governing such trust
shall make such trust subject to all of the
restrictions and requirements of this Agreement.
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e. Further, any trust agreement governing such trust
shall make such trust subject to all the of the
restrictions and requirements of this Agreement.
f. If such Shares are to be voted, they may only be
voted after a majority consent of the Shareholders
such Shares shall be non-voting effective with the
date of such transfer.
iii. Buy out provisions.
1. Shares of Deceased Shareholder.
a. Required Transfer of Deceased Shareholder's
Shares. If all of the Corporation's Shares owned by
any Shareholder at the time of death #or Final
Disability# have not been sold or transferred #to the
Corporation pursuant to the preceding provisions of
this Agreement then the if the Corporation does not
exercise such right, then each Shareholder shall be
jointly and severally personally obligated to
purchase the entire interest of the deceased
Shareholder, in the Corporation. The purchase shall
be in accordance with the provisions hereinbelow,
and within the earliest of the following time periods
such Shares shall be transferred as provided in this
provision:
i. One Hundred Eighty (180) days after the
qualification of a Shareholder's personal
representative.
ii. At the election of such personal
representative after qualification.
iii. Ten (10) days prior to the dates set forth in
Section 1361(c)(2) in order to avoid a
disqualification of the Corporations election
of S corporation status; then such personal
representative shall sell to the Corporation,
and the Corporation shall purchase from
such personal representative, the unsold
Shares at a price equal to their fair market
value as of the end of the calendar month in
which death occurs.
b. Notwithstanding anything in this provision to the
contrary, any required purchase hereunder shall not
be completed later than as required under any
applicable statute [#including but not limited to any
state statute governing the holding of shares in a
professional corporation].
b. LLC Operating agreements.
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i. It is common to have trusts own membership interests in limited
liability companies (“LLCs”). What provisions might be advisable
to include in an LLC operating agreement?
1. Tax oriented provisions creating restrictions that support
discounts.
2. What procedural steps are necessary to assure compliance
with transfer provisions on a gift or sale of LLC interests to
a trust?
3. How can you draft to address the issue of a custodial
account being transferred into an LLC?
a. Whereas, it is the express desire of the parties,
notwithstanding anything in this Agreement or
applicable partnership law to the contrary, that if
any partner is a trust for which trust assets were in
whole or in part invested in this Partnership, and the
governing trust agreement provides for the
distribution of some portion or all of the principal or
income of that trust to one or more beneficiaries
upon the attaining of an age specified in that trust
agreement, then in such event as the beneficiary
attaining the such specified age such beneficiary
may upon notice given at any time within Sixty (60)
days of the date of attaining such age demand that
all of his or her partnership interests subject to said
distribution right must be either distributed in kind
to said beneficiary, or that the Partnership interest
subject to such right may must be liquidated and the
fair value therefore be distributed to said partner. If
this right is not exercised within said period this
right shall lapse. The General Partner may require
any assurances and proof of said right, and any
releases or other consents from any trustee, cotrustee, successor trustee or other beneficiary, an
opinion of counsel to the trust as to the propriety of
such right, and indemnification for the General
Partner and this Partnership for making such
distribution, as a pre-requisite for making such a
distribution.
4. Annual exclusion gift qualification.
a. Consider the pros/cons of addressing the issue
raised in Hackl V. Commr. 118 TC 14 (2002), aff'd,
335 F.3d 664 (7th Cir. 2003), of the existence of a
present interest to support gifts of Membership
interests qualifying for the annual gift tax exclusion.
This might be achieved by adding a right of first
refusal, or provision analogous to a "Crummey"
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demand power to the general transfer restrictions or
distribution clauses. If there is no present
contemplation of annual gift transfers, this issue
may be better not to be addressed in the Operating
Agreement as such a provision may detract from the
general discounts.
b. If a Member or a Substitute Member desires to sell
his, her or its Interest (the “Offeror”) and has
received a bona fide third party offer in writing (the
“Offer”), the Offeror shall, within Ten (10) days of
receiving such Offer, provide the Company Notice
of same and the first option to purchase the
Offeror’s Interest on the same terms and conditions
as the Offer (the “First Option”) by written notice
(the “Offer Notice”) to the Company and each of its
Members. The Company may elect, by written
notice to the Offeror and to the other Members (the
“First Exercise Notice”) given within Sixty (60)
days after receiving the Offer Notice (the “First
Response Date”), to purchase the Offeror’s Interest.
If, on or before the First Response Date, there is a
First Exercise Notice, then the Offeror shall be
required to sell the Interest to the Company under
the same terms and conditions contained in the
Offer.
c. Members’ Second Option. If no First Exercise
Notice is received by the First Response Date or the
Company has notified the Offeror that the First
Option will not be exercised, the Offeror shall give
the other Members the second option to purchase
and redeem the Offeror’s Interest on the same terms
and conditions as the Offer (the “Second Option”)
by written notice (the “Second Offer Notice”) to the
other Members. Each of the other Members shall
initially be entitled to purchase that fraction of the
Offeror’s Interest subject to the Offer equal to each
such Member’s Percentage Interest divided by the
Percentage Interest of all Members other than that
of the Offeror. The other Members may elect, by
written notice to each Member and the Company
(the “Second Exercise Notice”) within Sixty Five
(65) days of the Second Offer Notice (the “Second
Response Date”), to purchase the Offeror’s
Membership Interests. If, on or before the Second
Response Date, there is a Second Exercise Notice,
then the Offeror shall be required to sell the Interest
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to the exercising Members (the “Purchasing
Members”). Unless otherwise agreed between the
Purchasing Members, each Purchasing Member
shall be entitled to purchase that fraction of the
Offeror’s Interest subject to the Offer equal to the
percentage of the Offeror’s Membership Interests
the Purchasing Member indicated by Notice a
willingness to purchase, divided by the aggregate of
the percentage of the Offerror’s Membership
Interests all Members indicated a willingness to
Purchase.
d. Conditions of Purchase. At the closing, which shall
take place at the principal place of business of the
Company, on a date and time mutually agreed upon
by the Company and the Offeror, the Offeror shall
deliver to the Company and/or the Purchasing
Members duly executed and acknowledged
instruments of assignment transferring the
Membership Interests of the Offeror to the
Company and/or the Purchasing Members, as the
case may be. In addition, the Offeror shall deliver
all documents and instruments reasonably requested
by counsel to the Company, including, but not
limited to evidence of the absence of any liens,
security interests and encumbrances as to such
Membership Interests, payment of any transfer or
other taxes due in connection with the sale. The
Company and/or the Purchasing Members shall pay
their respective portions of the purchase price to the
Offeror in accordance with the Offer, the cash
portion thereof by wire transfer, or certified or bank
cashier’s check payable to the order of the Offeror,
and deliver to the Offeror a duly executed
agreement indemnifying the Offeror against claims
arising from or in connection with the Company
except obligations of the Company which the
Offeror may have incurred prior to the date of such
closing. The Members shall execute all
amendments to any documents filed with the
Secretary of state or other governmental body,
and/or this Agreement as may be required to reflect
the transfer of the offered Offeror’s interest.
e. Sale to Third Party Purchaser. If no Second
Exercise Notice is received by the Second Response
Date, the Offeror shall have the right to sell the
Offeror’s Interest to a third party purchaser on the
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same terms and conditions contained in the Offer
for a period of Thirty (30) days following the
expiration of the Second Response Date. In the
event that a binding contract to sell such Interest is
not entered into between the Offeror and a third
party purchaser within such period, any sale
thereafter shall again be subject to this provision. In
the event of a completed sale of the Offeror’s
Interest to the third party purchaser, such third party
purchaser shall have the rights, duties and
obligations of a Substitute Member.
5. Crummey type of power to address present interest issue:
a. Right of Redemption. Each Member who has
acquired a Member Interest shall have the right
during the Thirty (30) day period commencing with
such Member’s acquisition of such Membership
Interest during such taxable year, to have the
Company purchase and redeem a portion of such
Member’s Member Percentage Interest having a fair
market value not in excess of Twenty Thousand
Dollars ($20,000) during said fiscal year. The value
shall be determined without giving effect to this
provision. A Member wishing to exercise the right
of redemption under this provision shall give
written notice to the Company within Thirty (30)
days.
6. Practical operational provisions that deal with trust
ownership issues.
a. WHEREAS, it is the desire of the parties that upon
the maturity of any trust which is a Member, or the
distribution of Members Interests from any such
Trust, any corpus or a portion thereof to the
beneficiaries of any such trust, that the beneficiaries
have a convenient vehicle for the continued holding,
investment and management by the Company of the
assets so distributed, in an efficient manner.
Therefore, any such beneficiary may continue to
hold individually Member Interests distributed to
such beneficiary from any Trust.
c. Prenuptial and post-nuptial agreements.
i. See separate outline.
ii. Estate planning arrangements.
1. How might the following case influence your drafting?
a. W and H signed a prenup agreement. Both were
represented by counsel, engaged in discovery, and
schedules of assets, liabilities and income tax return
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were attached to the agreement. H and W married
July 8, 2003. H died March 9, 2008. On March 31,
2008 W filed a caveat to H’s will. A caveat is a
challenge that the will should not be admitted. Issue
– should the caveat be rejected and the will
accepted, or should the prenuptial agreement be
rejected and W be permitted to take a surviving
spouse's elective share under N.J.S.A. 3B:8-1 to 19. An elective share is a minimum inheritance a
surviving spouse is entitled to by law, regardless of
a will, if this right was not properly waived. W
claimed, among other things that the agreed
payments were made to her under a trust instead of
under the will as required. The court found no
practical difference. The court noted that the law,
N.J.S.A. 37:2-38, places the burden of proof to set
aside a prenup on the party alleging the agreement
to be unenforceable and that burden must be met by
clear and convincing evidence. A challenge can
succeed on equitable considerations, such as
unconscionability, failure to disclose, etc.
b. In the matter of the estate of Donald Towbin,
Deceased, Sup Ct NJ, App Div, Docket No. A0161-08T30161-08T3, March 16, 2009.
iii. Drafting provisions so that the arrangements are viable.
iv. Other.
d. Real estate leases.
i. Drafting a real estate lease that is an integral part of the family
estate plan.
1. Recitals from a partnership agreement for trusts owning
real estate used in the family business.
a. WHEREAS, the Trusts, all of which are parties to
this Partnership Agreement, own and have owned
all of the partnership interests in a State Name
general partnership known as "ABC Street Realty
Associates" (the "Partnership").
b. WHEREAS, the Partnership owns and has owned
certain commercial rental real estate located at 123
ABC Street, Anywhere, as more fully described in
Exhibit A attached (the "Property").
c. WHEREAS, the Partnership has leased the Property
to Client Family Manufacturing, Inc. (the
"Tenant"), under a Lease Agreement dated
September 1, 2009 and March 1, 2010 (collectively,
the "Old Lease") which the parties shall terminate.
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d. WHEREAS, the Partnership shall continue to lease
the Property to the Tenant pursuant to a Lease
Agreement dated March 1, 2010 (the "New Lease").
e. WHEREAS, the Trusts which are parties to this
Partnership Agreement have formed and intend
hereby to continue the existence of the Partnership
to facilitate the management, mortgaging, leasing,
operation under a net lease arrangement, investment
and reinvestment of real property and funds held in
the Partnership, and any real estate investments that
the Partnership may own in the future, to the extent
the Trustee of the Trust is granted such powers
under Section 8.1 of the Trust Agreement (the
"Business").
2. Sale of real estate used in family business provisions in
partnership agreement.
a. Sale of Property.
b. The Managing Partner shall have sole discretion
concerning the sale of the Property to a third party
where such sale is at an arm's-length price.
Unanimous Consent shall not be required in such
instance. Where such conditions are not met
Unanimous Consent shall be required.
c. Where the Partnership Manager determines to sell
the Property as part of a transaction which includes
the sale of substantially all of the other assets or
businesses in addition to the Property, the
Partnership Manager shall give Thirty (30) days
advance Notice to all of the Partners. Such Notice
shall include the price and payment terms of such
sale. If the other Partners believe that the price or
terms are not reasonable they may obtain a written
appraisal report. [What is the objective of this
mechanism? What if child in the business sold the
business and real estate and allocated an extra $1
million to a consulting agreement thereby reducing
the price proceeds to the trusts owning the real
estate on behalf of the children not active in the
business?] If such report does not reflect a value
which, determined on a present value basis for any
deferred payments, is not at least Twenty Five
Percent (25%) in excess of the value in the Notice
given by the Partnership Manager, then no objection
shall be raised. Where the appraisal is more than
Twenty Five Percent (25%) in excess of the value in
the Notice given by the Partnership Manager, then
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the Partners shall determine the Appraised Value of
the Property in accordance with the provisions
below and such value shall be used for determining
the payments to the Partners if the Partnership
Manager wishes to proceed with such sale.
e. Other.
8. Additional Articles and Materials Illustrating and discussing drafting
options
a. Tangible Personal Property.
b. Power of attorney.
c. Blind or vision impaired client.
d. Psychological and Emotional considerations.
e. Pre-nuptial Agreement clauses.
f. Chronic Illness Drafting.
g. HIPAA.
h. Religion and Estate Planning.
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