Probate & Trust Law Section Conference Manual ... - Minnesota CLE

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Probate & 

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Section Conference Manual 

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Minnesota State Bar Association 

Continuing Legal Education 

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The 39 th Annual 

Probate &Trust 

Law Section 

Conference 

Minnesota State Bar Association 

Continuing Legal Education 

2550 University Avenue West, Suite 160S 

Saint Paul, Minnesota 55114 

(651) 227-8266 • (800) 759-8840 

http://www.minncle.org 

June 2013 

290-13

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Minnesota Continuing Legal Education 

Board Members 

2012 – 2013 

Michael J. Wahlig 

Chairperson 

Minneapolis 

Hildy Bowbeer 

Saint Paul 

Thaddeus R. Lightfoot 

Minneapolis 

Angela M. Christy 

Minneapolis 

Nelson Peralta 

Minneapolis 

Dyan J. Ebert 

Saint Cloud 

Robert F. Enger 

MSBA President 

Hibbing 

Professor 

J. David Prince 

Saint Paul 

Steven L. Reyelts 

Duluth 

Kevin D. Hofman 

Minneapolis 

William F. Stute 

Minneapolis 

Susan M. Holden 

Minneapolis 

Jason C. Kohlmeyer 

Mankato 

Frank V. Harris 

Director 

Saint Paul 

Professor 

Steven R. Swanson 

Saint Paul 

Cindy K. Telstad 

Winona 

The Minnesota CLE Board consists of practicing attorneys from throughout Minnesota as well as one professor representing each 

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Minnesota Continuing Legal Education is a non-profit division of the Minnesota State Bar Association. Minnesota CLE receives no 

subsidy from Bar dues or any other source. The only source of support is revenue from program tuition and publication sales. The 

basic ingredient in Minnesota CLE’s success is the involvement of the very best Minnesota lawyers from the practicing bar, bench and 

academic community. These dedicated individuals have given generously of their time and talent to make Minnesota CLE courses and 

its publications what they are today.

Faculty & Planners* 

Jill A. Adkins 

Henningson & Snoxell Ltd 

Maple Grove 

*Todd D. Andrews 

Andrews Law Office 

Eagan 

Andrew M. Baese 

Briggs and Morgan, P.A. 

Saint Paul 

Robert K. Barbetti 

JP Morgan 

New York, NY 

Susan T. Bart 

Sidley Austin LLP 

Chicago, IL 

John R. Bedosky 

Attorney at Law 

Plymouth 

*Katharine A. Bickle 

The Private Client Reserve of 

U.S. Bank 

Estate Settlement 

Saint Paul 

Anne L. Bjerken 

Gray Plant Mooty 

Minneapolis 

Andrea S. Breckner 

Olson & Breckner, P.A. 

Minneapolis 

Wendy M. Brekken 

Felhaber, Larson, Fenlon & Vogt, P.A. 

Saint Paul 

*Christopher J. Burns 

Henson & Efron, P.A. 

Minneapolis 

Jennifer L. Carey 

Hanft Fride 

Minneapolis 

Hans K. Carlson 

Costello, Carlson & Butzon, LLP 

Jackson 

*Cynthia R. Costello 

Maslon, Edelman, Borman & Brand, 

LLP 

Minneapolis 

*Adam D. Cox 

Trust Point Inc. 

Minneapolis 

Chris DeSantis 

CPDeSantis.com 

Chicago, IL 

Paul J. Dinzeo 

Sawmill Trust Company 

Minneapolis 

Samuel A. Donaldson 

Georgia State University College of Law 

Atlanta, GA 

P. Daniel Donohue 

Davenport, Evans, Hurwitz & Smith, LLP 

Sioux Falls, SD 

Daniel R. Donovan, Jr. 

Faegre Baker Daniels 

Minneapolis 

Angela T. Fogt 


Minneapolis 

*William S. Forsberg 

Leonard, Street and Deinard, P.A. 

Minneapolis 

Matthew J. Frerichs 

Robins, Kaplan, Miller & Ciresi LLP 

Minneapolis 

Laura J. Garbe 

Erickson & Associates PA 

Minneapolis 

*David B. Gollin 

Fredrikson & Byron, P.A. 

Minneapolis 

*Melinda K. Greer 

Dorsey & Whitney LLP 

Minneapolis 

Courtney A. Grimsrud 


Minneapolis 

Julie Grothe 

Guild Incorporated 

Saint Paul 

Jennifer A. Gumbel 

Springer & Gumbel, P.A. 

Preston 

Jamie F. Held 

Held Law Office 

Edina 

Peter M. Hendricks 

Garvey, Boggio & Hendricks, P.A. 

Bloomington 

*E. Burke Hinds 

Hindsight FBS 

New Brighton 

Bradley Hintze 


Minneapolis 

*Christopher B. Hunt 


Minneapolis 

Emily G. Irwin 


Minneapolis 

Bryan Jamison 

Jamison & Jamison, P.A. 

Shoreview 

Susan E. Johnson-Drenth 

JD Legal Plannig PLLC 

Fargo, ND 

Al W. King 

South Dakota Trust Co 


Donna C. Mohr Kinney 

U.S. Trust, Bank of America 

Private Wealth Management 

Minneapolis 

*Kathleen L. Kuehl 

Oxford Financial Group, Ltd. 

Minneapolis 

William C. Kuhlmann 

Security Bank & Trust Co. 

Glencoe

* 

Faculty & Planners* 

Jennifer A. Lammers 


Minneapolis 

*Susan J. Link 


LLP 

Minneapolis 

Robert A. McLeod 

Lindquist & Vennum, PLLP 

Minneapolis 

*James T. McNary 

McNary Law Offices 

Red Wing 

Kristine J. Merta 


Edina 

Darryl L. Meyers 

Wells Fargo 

Vadnais Heights 

Sonny F. Miller 


Minneapolis 

*Sheryl G. Morrison 


Minneapolis 

*Scott M. Nelson 

Mackall, Crounse & Moore PLC 

Minneapolis 

Amy E. Papenhausen 


Minneapolis 

Charles T. (Chip) Parks 


Minneapolis 

William G. Peterson 

Peterson Law Office LLC 

Bloomington 

Karin C. Prangley 

Krasnow Saunders Cornblath 

Kaplan & Beninati 

Chicago, IL 

Mary Frances M. Price 

Edina Estate & Elder Law, P.A. 

Edina 

*Thomas H. Rauenhorst 


Shoreview 

Claudia M. Revermann 

Reichert Wenner, P.A. 

Saint Cloud 

Marya P. Robben 


Minneapolis 

*Michael P. Sampson 

JP Morgan Private Wealth 

Management 

Minneapolis 

Elizabeth Schlueter 


Minneapolis 

Jeffrey W. Schmidt 

Schimtz & Schmidt, P.A. 

Saint Paul 

Jacqueline M. Schuh 


Saint Cloud 

Victor J. Schultz 

BMO Harris Bank NA 

Milwaukee, WI 

Cameron R. Seybolt 


Minneapolis 

*Mary E. Shearen 

Best & Flanagan, LLP 

Minneapolis 

Catherine L Sjoberg 


Minneapolis 

Roy A. Sjoberg 

Sjobert & Tebelius, P.A. 

Woodbury 

*Terry L. Slye 


Saint Paul 

Lisa T. Spencer 


Minneapolis 

*Lloyd S. Stern 

The Private Client Reserve of 

U.S. Bank 

Estate Settlement 

Saint Paul 

Will Susens 

NAMI Ramsey County Alliance for 

the Mentally Ill 

Maplewood 

Ivory S. Umanah 

Engelmeier & Umanah, P.A. 

Minneapolis 

John P. Vuchetich, M.D., Ph.D. 


Saint Paul 

Cory R. Wessman 

Erickson & Associates, P.A. 

Minneapolis 

*Thomas J. Woessner 


Minneapolis 

Alan J. Yanowitz 

Yanowitz Law Firm, PLLC 

Rochester 

Peggy Zdon 

Anoka County Court 

Anoka 

Julian Zebot 


LLP 

Minneapolis 

*Julian J. Zweber 

Julian J. Zweber Law Office 

Saint Paul

Table of Contents 

Plenary Day 1 

Non-Tax Case Law Update 

– Courtney A. Grimsrud & Sonny F. Miller 

Federal Tax Update – Important Cases, Rulings, Legislation and Regulations from 

the Past 12 Months 

– Professor Samuel A. Donaldson 

Decanting: Refining an Old Vintage Trust 

– Susan T. Bart 

Alternate Plenary 

Tax Issues (For the Non-Tax Specialist) for Small and Medium Size Estates 

– Bryan Jamison 

Bonus Session 

Minnesota Gift Tax 

– Jennifer A. Lammers & Terry L. Slye 

1. Funding Education: The Gift of Opportunity 

– Susan T. Bart 

2. Avoiding the Uncommon Difficulties Caused by Common Drafting Issues: Oops, I 

Did It Again 

– William C. Kuhlmann & Cameron R. Seybolt 

3. Unlimited Duration Trusts – Why, When, Where and How? Your Client Will Not Live 

Forever But Their Family Values Will 

– Al W. King 

4. Drafting and Administering Supplemental and Special Needs Trusts 

– Jeffrey W. Schmidt 

5. Notable North Dakota Nuances: Mineral Interests 

– Susan E. Johnson-Drenth

6. I Want What’s Mine – Now! Practical Solutions for Avoiding the Pitfalls and 

Problems of Working with Trust Beneficiaries 

– Kathleen L. Kuehl & Elizabeth Schlueter 

7. “Bleak House” Revisited or How Much Justice Can Your Client Afford? 

– William G. Peterson 

8. Estate Planning for Executives – Personal Wealth Preservation Strategies 

– Robert K. Barbetti 

9. Spousal Elections Under Minnesota Statutes Chapter 524.2-201 through 524.2-215 

– Spousal Elections: “The Good, the Bad and the Ugly” 

– Jacqueline M. Schuh & Ivory S. Umanah 

10. Large Estates Panel – Dealing with Dastardly Drafting Dilemmas: Solving Problems 

in Advance 

– John R. Bedosky, E. Burke Hinds, Darryl L. Meyers, Charles T. “Chip” Parks, Alan J. 

Yanowitz & Kristine J. Merta, moderator 

11. Federal and Minnesota Income Tax Developments – Mirror, Mirror on the Wall, 

What Is the Fairest Tax Rate for Us All? 

– Paul J. Dinzeo 

12. Transnational Planning – A Baker’s Dozen of Dangerous Assumptions When 

Planning for Transnational Clients 

– Jennifer A. Gumbel 

13. Drafting Documents With the Corporate Fiduciary in Mind – ”It Would Have Been 

Neat If...” 

– Donna C. Mohr Kinney 

14. The Current Status of Wisconsin Trust Law: The Long, Long, Long Road to 

Reforming the Wisconsin Trust Code 

– Victor J. Schultz 

15. Fiduciaries and Fighting Families: How to Pick Up the Pieces During and After 

Family Trust Litigation 

– Adam D. Cox & Julian Zebot 

16. Medical Assistance 2013 

– Julian J. Zweber

17. Marital Deduction Planning and Administration – First Comes Love, Then Comes 

Marriage, Then Comes a Maritalized Estate Plan 

– Marya P. Robben 

18. Estate Planning Issues for Farmers 

– Hans K. Carlson 

19. Representing the Fiduciary with IRS and Minnesota Revenue Tax Controversies 

– Claudia M. Revermann 

20. Portability Under the New Tax Law and Regulations – Porta-Planning 

– Robert A. McLeod 

21. New Lawyer Panel: “What Law School Didn’t Teach Us” 

– Anne L. Bjerken, Wendy M. Brekken, Jamie F. Held, Amy E. Papenhausen & Cory R. 

Wessman, moderator 

22. Small Estates Panel – Practical Planning Ideas for the Modest Estate 

– Peter M. Hendricks, Bryan Jamison, Mary Frances M. Price & James T. McNary, 

moderator 

23. Transfer on Death Deeds; Frequently Asked Questions and Unresolved Issues 

– Jennifer L. Carey & Julian J. Zweber 

24. Sales of Real Estate: From Listing Agreement to Closing 

– Bradley Hintze & Catherine L. Sjoberg 

25. A Gift for All Donors: Advising Philanthropic Clients About Charitable Gift 

Strategies 

– Angela Fogt & Sheryl G. Morrison 

26. Incentive Disincentive Provisions 

– P. Daniel Donohue 

27. New Law Update - Changes to Minnesota's Statutory Short Form Power of Attorney 

– Jill A. Adkins & Laura J. Garbe

Plenary Day 2 

Digital Life, Virtual Assets and Email – Digital Death – Who Gets Grandma’s Twitter 

Account? 

– Karin C. Prangley 

Bonus Session – Elimination of Bias 

I Am Not My Illness: Dealing with Mental Illness 

– Matthew J. Frerichs, Julie Grothe, Michael P. Sampson, Will Susens & John P. 

Vuchetich, M.D., Ph.D.

PLENARY DAY 1 

Non-Tax Case Law Update 

Courtney A. Grimsrud 

Sonny F. Miller 


Minneapolis 

WE WISH TO THANK OUR COLLEAGUES MELINDA GREER, EMILY IRWIN, JENNIFER EDE, 

JESSICA ZUBA AND ALYSIA ZENS FOR THEIR SUBSTANTIAL HELP WITH THE PREPARATION OF 

THIS OUTLINE. 

The 2013 Probate & Trust Law Section Conference – June 10 & 11, 2013

TABLE OF CONTENTS 

Note: Minnesota cases are indicated below by an asterisk before the case name. 

I. UNIFORM PROBATE CODE .........................................................................................1 

A. Effect of Fraud and Evasion: 1-106 .....................................................................1 

1. In re Estate of McKee ........................................................................................1 

B. Intestate Estate; Share of the Spouse: 2-102 ......................................................1 

1. Pestrikoff v. Hoff...............................................................................................1 

C. Intestate Succession for Heirs Other Than Surviving Spouse: 2-103; and 

Requirement that Heir Survive Decedent for 120 Hours: 2-104 ......................2 

1. Amen v. Astrue .................................................................................................2 

D. Parent and child relationship: 2-114 ...................................................................3 

1. In re Estate of Boehm ........................................................................................3 

E. Execution; Witnessed Wills: 2-502 ......................................................................3 

1. Farrell v. McDonnell .........................................................................................3 

2. Glenn v. Roberts ................................................................................................4 

F. Harmless Error: 2-503 ..........................................................................................5 

1. In re Estate of Ehrlich ........................................................................................5 

G. Nonexoneration: 2-607..........................................................................................6 

1. In re Estate of Afrank ........................................................................................6 

H. Life Insurance; Retirement Plan; Account with POD Designation; 

Transfer-on-Death Registration; Deceased Beneficiary: UPC 2-805; 

Reformation to Correct Mistakes: 2-706 ............................................................6 

1. Morey v. Everbank ............................................................................................6 

I. Effect of Divorce, Annulment, and Decree of Separation: 2-802 .....................7 

1. Johnson v. Wilson .............................................................................................7 

J. Revocation by Dissolution of Marriage; No Revocation by Other Changes 

of Circumstances: 2-804 .......................................................................................8 

1. Malloy v. Malloy ...............................................................................................8 

2. Thrivent Financial for Lutherans v. Andronescu ..............................................8 

K. When Disclaimer is Barred or Limited: 2-1106 .................................................9 

1. In re Estate of Gardner ......................................................................................9 

L. Probate, Testacy and Appointment Proceedings; Ultimate Time Limit: 3- 

108..........................................................................................................................10 

1. In re Estate of Strand .......................................................................................10 

M. Priority Among Persons Seeking Appointment as Personal 

Representative: 3-203 .........................................................................................10 

1. *In re Estate of Franta .....................................................................................10 

N. Formal Testacy Proceedings; Notice of Hearing on Petition: 3-403 ..............11 

1. Walker v. Bailey ..............................................................................................11 

O. General Duties; Relation and Liability to Persons Interested in Estate; 

Standing to Sue: 3-703 ........................................................................................11 

1. Farm Bureau Mutual Insurance Co. of Idaho v. Eisenman .............................11 

P. Improper Exercise of Power; Breach of Fiduciary Duty: 3-712.....................12

1. *In re Estate of Neuman and In re Estate of Wiggs ........................................12 

Q. Expenses in Estate Litigation: 3-720 .................................................................13 

1. *In re Estate of Holmberg ...............................................................................13 

R. Notice to Creditors: 3-801 ..................................................................................14 

1. Phillips v. Quick ..............................................................................................14 

S. Limitations on Presentation of Claims: 3-803; Manner of Presentation of 

Claims: 3-804 .......................................................................................................15 

1. In re Estate of Hamilton ..................................................................................15 

T. Penalty Clause for Contest: 3-905 ......................................................................15 

1. In re Estate of Stewart .....................................................................................15 

U. Partition for Purpose of Distribution: 3-911 ....................................................16 

1. In re Estate of McKillip ...................................................................................16 

V. Effect of Approval of Agreements Involving Trusts, Inalienable Interests, 

or Interests of Third Persons: 3-1101................................................................16 

1. Estate of Riley .................................................................................................16 

W. Procedure for Securing Court Approval of Compromise: 3-1102 .................17 

1. Wilson v. Dallas ..............................................................................................17 

X. Jurisdiction by Act of Foreign Personal Representative: 4-301 .....................19 

1. Juega v. Davidson ...........................................................................................19 

Y. Judicial Appointment of Guardian: Petition: 5-303 ........................................20 

1. *In re Guardianship of Samson .......................................................................20 

Z. Findings; Order of Appointment; Who May Be Conservator; Priorities: 

5-310 and 5-413 ....................................................................................................21 

1. *In re Guardianship of Pates ...........................................................................21 

II. OTHER WILL AND PROBATE CASES .....................................................................22 

A. Elements of a gift ..................................................................................................22 

1. Welch v. Dececco ............................................................................................22 

B. Accrual of Interest on Probate Court Judgment ..............................................22 

1. *Estate of Rutt .................................................................................................22 

C. Establishing Lost Will .........................................................................................23 

1. Smith v. DeParry .............................................................................................23 

D. Ownership of Joint Account and Prenuptial Agreement .................................24 

1. Connell v. Connell...........................................................................................24 

E. Adverse Possession ...............................................................................................25 

1. *Jokela v. Jokela .............................................................................................25 

F. No-Contest Clauses ..............................................................................................25 

1. Martin v. Ullsperger ........................................................................................25 

G. Retroactive Application of Statutes and Violations of Due Process ................26 

1. Bird v. BNY Mellon N.A. ...............................................................................26 

H. Survival of Claims After Decedent’s Death .......................................................27 

1. Kraft Power Corporation v. Merrill .................................................................27 

I. Validity of Bequest ...............................................................................................28 

1. Osman v. Osman .............................................................................................28 

ii

III. TRUST ISSUES ...............................................................................................................28 

A. Trust Amendments ..............................................................................................28 

1. McEachern v. Budnick ....................................................................................28 

2. Johnessee v. Schnepf .......................................................................................29 

3. Perosi v. LiGreci .............................................................................................29 

4. King v. Lynch ..................................................................................................29 

B. Dealing With Trust Assets...................................................................................30 

1. Ford v. Reddick ...............................................................................................30 

2. In the Matter of the Judicial Settlement of Knox ............................................30 

3. Estate of Nuo Djeljaj .......................................................................................31 

4. Kesling v. Kesling ...........................................................................................31 

5. Rose v. Waldrop ..............................................................................................31 

6. In re HSBC Bank USA and Ely ......................................................................31 

7. In the Matter of Brownell ................................................................................32 

8. Fulp v. Gilliland ..............................................................................................32 

9. Shelton v. Tamposi ..........................................................................................32 

C. Trust Construction...............................................................................................33 

1. Thorpe v. Reed ................................................................................................33 

2. Tait v. Community First Trust Company ........................................................33 

3. In the Matter of the Cecilia Kincaid Gift Trust for George ............................34 

4. *In the Matter of the Frank J. Rekucki, Sr. Revocable Trust under Agreement 

dated September 8, 1997 ........................................................................................35 

5. In the Matter of the Trust created by Lydia Butler Dwight ............................35 

6. In re Final Accounting of Leonard B. Boehner ...............................................36 

7. Rockland Trust Company v. Attorney General ...............................................36 

8. Koulogeorge v. Campbell ...............................................................................37 

9. Otto v. Gore .....................................................................................................37 

10. Dixon v. Weitekamp-Diller ...........................................................................38 

11. Sefton v. Sefton .............................................................................................38 

12. Trusts for McDonald .....................................................................................39 

13. Van Gundy v. Van Gundy .............................................................................39 

14. SBS Financial Services v. Plouf Family Trust ..............................................39 

15. *Larkin v. Wells Fargo Bank ........................................................................40 

16. White v. Call .................................................................................................40 

17. Svenningsen v. Svenningsen .........................................................................40 

18. Evans v. Moyer .............................................................................................41 

19. Kristoff v. Centier Bank ................................................................................41 

21. In re G.B. Van Dusen Marital Trust ..............................................................41 

D. Spendthrift Clauses ..............................................................................................43 

1. Rush University Medical Center v. Sessions ..................................................43 

2. *Fannie Mae v. Heather Apartments Limited Partnership ..............................43 

3. Watterson v. Burnard ......................................................................................44 

4. Gottstein v. Kraft .............................................................................................44 

E. Undue Influence ...................................................................................................44 

1. Davison v. Hines .............................................................................................44 

2. Watermann v. Eleanor E. Fitzpatrick Revocable Living Trust .......................45 

iii

3. Edwards v. Gillis .............................................................................................45 

4. In the Matter of DelGatto ................................................................................46 

5. In the Matter of Estate of Donaldson ..............................................................46 

F. Breach of Fiduciary Duty ....................................................................................46 

1. Campell v. Chitty, III ......................................................................................46 

2. Nalley v. Langdale ..........................................................................................47 

3. Hastings v. PNC Bank .....................................................................................48 

4. In the Matter of Jastrzebski .............................................................................48 

5. Regions Bank v. Lowrey .................................................................................48 

6. In the Matter of the Mark C.H. Discretionary Trust .......................................49 

G. Prudent Investor Rule .........................................................................................49 

1. Matter of Hunter ..............................................................................................49 

2. In the Matter of the Judicial Settlement of the Intermediate Account of HSBC 

Bank USA, N.A. ....................................................................................................49 

3. In the Matter of the Judicial Settlement of Knox ............................................50 

H. Trust Accounting Disputes ..................................................................................51 

1. Church of the Little Flower v. U.S. Bank .......................................................51 

2. In the Matter of the Examination of the Annual Inventory and Account of 

John Martin ............................................................................................................51 

3. Isle v. Brady ....................................................................................................52 

4. In the Matter of Trust of Trimble ....................................................................52 

I. Procedural Issues in Trust Dispute ....................................................................52 

1. Estate of Giraldin ............................................................................................52 

2. Estate of Stewart ..............................................................................................53 

3. Arnott v. Arnott ...............................................................................................53 

4. Beekhuis v. Morris ..........................................................................................53 

5. Regions Bank v. Kramer .................................................................................54 

6. Miami Children’s Hospital Foundation v. Hillman ........................................54 

7. DiGaetano v. DiGaetano .................................................................................54 

8. Gamboa v. Gamboa .........................................................................................55 

9. Nalley v. Langsale ...........................................................................................55 

10. *In re Spencer Irrevocable Trust ...................................................................55 

11. Blankenship v. Washington Trust Bank ........................................................56 

12. In re Peierls Charitable Lead Unitrust ...........................................................56 

J. Statute of Limitations ..........................................................................................56 

1. Hemphill v. Shore ...........................................................................................56 

K. Resulting and Constructive Trust as Remedy ...................................................56 

1. Elter-Nodvin v. Nodvin ...................................................................................56 

2. Beason v. Kleine .............................................................................................57 

3. Reinhardt University v. Castleberry ................................................................57 

L. Damages and Attorneys’ Fees in Trust Litigation ............................................57 

1. Masse v. Perez .................................................................................................57 

M. Special or Supplemental Needs Trust ................................................................58 

1. Lewis v. Alexander .........................................................................................58 

iv

IV. 

NON-PROBATE, NON-TRUST ASSETS (JOINT TENANCY, LIFE INSURANCE, 

BENEFICIARY DESIGNATIONS) ..............................................................................58 

A. Joint Tenancy/Joint Accounts .............................................................................58 

1. Stephenson v. Spiegle III ................................................................................58 

B. Nonprobate Transfers .........................................................................................59 

1. Manary v. Anderson ........................................................................................59 

C. Life Insurance.......................................................................................................59 

1. State Mutual Insurance Co. v. Ard ..................................................................59 

D. Totten Trusts ........................................................................................................59 

1. In re Estate of Strahsmeier ..............................................................................59 

2. In the Matter of O’Connell ..............................................................................60 

E. Community Property ...........................................................................................60 

1. In re Estate of Kirkes .......................................................................................60 

F. Inter Vivos Gifts ...................................................................................................61 

1. Jirak v. Eichten ................................................................................................61 

2. Richards v. Wasylyshyn ..................................................................................61 

G. Joint Tenancy .......................................................................................................61 

1. Hom v. Hom ....................................................................................................61 

2. Smith v. Bank of Amer. ..................................................................................61 

H. Beneficiary Designations Post-Divorce ..............................................................62 

1. Malloy v. Malloy .............................................................................................62 

2. Hoffman v. Hoffman .......................................................................................62 

I. Intentional Interference with an Expected Inheritance ...................................62 

1. Beckwith v. Dahl .............................................................................................62 

V. POWER OF ATTORNEY ..............................................................................................63 

A. Improper Use ........................................................................................................63 

1. Neuman v. Trice ..............................................................................................63 

v

I. UNIFORM PROBATE CODE 

A. Effect of Fraud and Evasion: 1-106 

1. In re Estate of McKee, 283 P.3d 749 (Idaho 2012). The discovery of 

fraud in connection with the probate of an estate does not toll the 

statute of limitations for commencement of probate proceedings, but 

relief may be separately sought from the perpetrator of the fraud. 

Decedent executed a holographic will in June 1994 which gave decedent’s 

entire estate to daughter. Decedent died in December 1994. Despite 

decedent’s husband being aware of the holographic will at all times, he did 

not provide it to daughter until 2004. After discovery of the existence of 

the will, daughter requested that the will be informally probated and 

suggested that tardy probate and appointment of a personal representative 

were authorized because daughter did not learn of the will’s whereabouts 

until 2004. Decedent’s son argued that the will could not be probated 

because Idaho Code § 15-3-108 requires a will to be probated within three 

years of the decedent’s death. Relying on Idaho Code § 15-1-106, 

daughter argued that the will may be probated because she commenced 

proceedings within two years of discovering the fraudulent concealment of 

the will. That section provides that, whenever fraud has been perpetrated 

in connection with any probate proceeding or if fraud is used to avoid or 

circumvent the provisions or purposes of the probate code, an injured 

party may obtain appropriate relief against the perpetrator of the fraud or 

restitution from any person benefitting from the fraud; any proceeding 

under § 15-1-106 must be commenced within two years after the 

discovery of the fraud. Daughter argued that § 15-1-106 extends the 

three-year requirement in § 15-3-108 for commencement of probate to an 

additional two years following the discovery of the fraud. The court 

disagreed. It held that, while § 1-106 allows for the commencement of an 

action against the perpetrator of the fraud up to two years following the 

discovery of fraud, it does not toll the three year statute of limitations in § 

15-3-108. As a result, daughter is barred from commencing probate 

proceedings, but she may still seek appropriate relief against the 

perpetrator of the fraud. 

B. Intestate Estate; Share of the Spouse: 2-102 

1. Pestrikoff v. Hoff, 278 P.3d 281 (Alaska 2012). The equitable 

distribution framework for divorce proceedings does not apply in the 

probate context; title concepts determine which assets are included in 

decedent’s estate. Decedent died intestate survived by her husband and 

three adult children from a previous marriage. Using marital funds, the 

husband had acquired a boat for a fishing charter business during his 

marriage to decedent, but the boat and charter business were titled in his 

name alone. Relying on principles of equitable distribution for divorce 

cases, decedent’s children argued that half the value of the boat and

charter business should be included in decedent’s estate because marital 

funds had been used to purchase them. The court held that the equitable 

distribution framework for divorce proceedings does not apply in the 

probate context and title cannot be disregarded in determining which 

spouse owns property at death. Alaska law does not limit a married 

couple’s ability to preserve individual title in property. The court also 

noted that the children’s argument is contrary to the intent of the 1990 

revisions of the Uniform Probate Code, which served to increase the 

surviving spouse’s share of an intestate decedent’s estate, even where the 

decedent left children from another marriage. The court, therefore, 

rejected the children’s argument that divorce-like marital property 

concepts and equitable distribution should apply in probate proceedings, 

and continued its reliance on title concepts for the determination of a 

decedent’s estate. 

C. Intestate Succession for Heirs Other Than Surviving Spouse: 2-103; and 

Requirement that Heir Survive Decedent for 120 Hours: 2-104 

1. Amen v. Astrue, 822 N.W.2d 419 (Neb. 2012). A child conceived after 

her father’s death by artificial insemination is not entitled to inherit 

from her father under the laws of intestacy. Decedent was diagnosed 

with cancer prior to marrying his wife in 2004. Before beginning cancer 

treatment, decedent cryogenically preserved his sperm at a sperm bank. 

Decedent died in 2006. Seven days after decedent’s death, his wife 

underwent artificial insemination using decedent’s cryopreserved sperm. 

The procedure was successful and the wife gave birth to a child in August 

2007. Subsequently, the wife applied to the Social Security 

Administration (SSA) for surviving child’s insurance benefits, on behalf 

of her child, based on decedent’s earnings record. SSA denied the 

application, finding that because the child does not have inheritance rights 

in decedent’s estate under Nebraska intestacy law, she is not a “child” of 

decedent under the Social Security Act, 42 U.S.C. § 416(h)(2)(A) and (B) 

or (3)(C), and therefore is not entitled to child’s insurance benefits. The 

wife appeals the decision. Neb. Rev. Stat. § 30-2303 provides that, if 

there is no surviving spouse, the intestate estate passes to the issue of 

decedent. “Issue” includes all of decedent’s lineal descendants of all 

generations. Section 30-2209(23). However, § 30-2304 provides that any 

person who fails to survive decedent by one hundred twenty hours is 

deemed to have predeceased decedent for purposes of intestate succession. 

The court held that a child conceived after her father’s death does not 

“survive” her father as required under this section. Furthermore, the child 

is also excluded from inheriting under Nebraska’s afterborn heirs statute, § 

30-2308, which provides that relatives of the decedent conceived before 

his death but born thereafter inherit as if they had been born in the lifetime 

of the decedent. The court held that this section contains a plain, direct, 

and unambiguous limiting clause to the afterborn heirs exception: the heir 

must be conceived before decedent’s death. Because the child was not 

2

conceived until after decedent’s death, she cannot inherit under the laws of 

intestacy and is not entitled to receive child’s insurance benefits from the 

SSA. See also, Burns v. Astrue, 289 P.3d 551 (Utah 2012) (holding that a 

child born as a result of artificial insemination after the sperm donor’s 

death was not a “child” as defined by the Social Security Act because the 

sperm donor did not consent to becoming a “parent” within the meaning of 

Utah’s Uniform Parentage Act, despite a signed sperm storage agreement). 

D. Parent and child relationship: 2-114 

1. In re Estate of Boehm, 816 N.W.2d 793 (N.D. 2012). Granddaughter’s 

adoption by her step-father did not alter her relationship with respect 

to her biological father and she was entitled to inheritance as 

biological father’s “issue”. When granddaughter was a minor, she was 

adopted by her step-father and her biological father’s parental rights were 

thereby terminated. Biological father’s mother (i.e. granddaughter’s 

paternal grandmother) executed a will which divided her estate among her 

children. In the event that a child predeceased grandmother, such 

predeceased child’s share would pass to his or her issue. Biological father 

predeceased grandmother. Granddaughter argued that she should be 

entitled to biological father’s share of grandmother’s estate, despite 

granddaughter having been legally adopted by her step-father. The term 

“issue” is not defined in grandmother’s will, but N.D.C.C. § 30.1-01- 

06(22) indicates that issue of a person means all of his lineal descendants 

of all generations, with the relationship of parent and child at each 

generation being further defined by the Code. “Child” includes any 

individual entitled to take as a child by intestate succession from the 

parent whose relationship is at issue. N.D.C.C. § 30.1-01-06(4). Section 

30.1-04-09 further provides, “An adopted person is the child of an 

adopting parent and not of the natural parents, except that adoption of a 

child by the spouse of a natural parent has no effect on the relationship 

between the child and either natural parent.” According to this provision, 

granddaughter’s adoption had no effect on her relationship with her 

biological father. As a result, granddaughter is entitled to take as a child 

under North Dakota’s intestate succession laws and falls within the 

definition of “child” incorporated within the definition of “issue.” 

Accordingly, the court held that she was entitled to biological father’s 

share of grandmother’s estate. 

E. Execution; Witnessed Wills: 2-502 

1. Farrell v. McDonnell, 967 N.E.2d 637 (Mass. App. Ct. 2012). Even if 

witnesses do not actually see testator signing her will, circumstances 

may warrant finding that testator’s acknowledgment of the signature 

was implicit. In 2006, decedent went to the bank with the intention of 

executing her will. At the bank, decedent read aloud an attestation clause 

and then signed the bottom of her will in front of a notary public. The 

3

notary public then signed the will and completed the notary block. 

Following this, the notary public called over two witnesses who were 

requested to also sign the bottom of the will. The witnesses did not have 

any conversation with decedent nor did they see decedent sign the will. 

After decedent’s death, several family members contested the will as 

having been improperly executed. The trial court found that, with no 

conversation having taken place between decedent and the witnesses, there 

was no explicit acknowledgment of the signature as hers nor was there a 

formal statement that the document was her will. On appeal, the court 

noted that G.C. c. 191 § 1 provides that a validly executed will must be 

signed by the testator and attested in his presence by two or more 

competent witnesses. The court further found that a presumption of 

proper execution is inferred upon proof of all the signatures, even though 

the living witnesses can recollect nothing of the circumstances. Based on 

all the circumstances surrounding the execution of decedent’s will, the 

court held that decedent implicitly acknowledged her desire to execute her 

will by being present when the will was given to the notary public, reciting 

the attestation clause aloud to the notary public, and then signing the will 

in the notary’s presence. Decedent’s actions, following as they did upon 

her reading the attestation clause, signing the will, and being present while 

the notary notarized it, indicated that decedent was acknowledging the 

presentment of her will to the witnesses for execution consistent with her 

original request to the notary public. As a result, the court held that the 

decree disallowing the will based on improper execution should be 

reversed. 

2. Glenn v. Roberts, 95 So.3d 271 (Fla. Dist. Ct. App. 2012). Inclusion of 

precatory, as opposed to mandatory, language regarding desired 

distributions will not cause a will to fail as an impermissible oral will. 

Decedent left a will which contained a provision giving the entire residue 

of her estate to friend, “having full confidence that he will honor all 

requests made to him by [decedent] prior to [her] death as to friends whom 

[decedent] desired he benefit.” Granddaughter challenged the will, 

arguing that the devise to friend of the residuary estate was ineffective as a 

testamentary disposition because it was an oral instruction and did not 

meet the statutory requirement that the will be in writing. Granddaughter 

asserted that, as a result, the will was invalid and all of decedent’s 

property should be distributed in accordance with Florida’s law of 

intestate succession. On appeal, the court held that decedent’s will was 

not an oral will and intestacy did not result. Although Florida does not 

recognize oral wills or provide for incorporation of oral instructions, the 

court found the unambiguous language in decedent’s will was merely 

precatory, not mandatory. It gave friend the discretion to honor the 

request or not, and consequently, was not an oral instruction. Furthermore, 

the court noted that, later in decedent’s will, she expressly disinherited her 

family, including granddaughter. This provision confirmed decedent’s 

intent that the residue of her estate should go to friend, rather than 

4

granddaughter. Ultimately, the court held that decedent’s will was valid, 

and that friend was the sole beneficiary under the will. 

F. Harmless Error: 2-503 

1. In re Estate of Ehrlich, 47 A.3d 12 (N.J. Super. Ct. App. Div. 2012). 

Flaws in execution of a will may be excused as harmless error if 

decedent’s intent to have the document serve as his will is proved by 

clear and convincing evidence. Decedent was a trusts and estates 

attorney who only had three nieces and nephews as next of kin at the time 

of his death. Of those nieces and nephews, decedent only had a close 

relationship with nephew. After decedent’s death, nephew located a copy 

of a purported will; no other will was found amongst decedent’s 

belongings. The purported will did not contain decedent’s signature or 

that of any witnesses. It did, however, contain a handwritten note stating 

that the original, executed copy of the will had been sent to the executor 

named under the will. The executor had predeceased decedent and the 

original was never returned. In relevant part, the purported will gave 

nominal sums to nephew’s siblings, and left 75% of the residue to nephew. 

Nephew’s siblings objected to the will being admitted for probate. At 

issue is whether the unexecuted copy of a purportedly executed original 

document sufficiently represents decedent’s final testamentary intent to be 

admitted into probate under N.J.S.A. 3B:3-2. That section provides that a 

valid will must be signed by the testator and at least two witnesses. 

N.J.S.A. 3B:3-3 further provides that a document that does not comply 

with the requirements of N.J.S.A. 3B:3-2 is nevertheless valid as a will 

and may be admitted into probate if the proponent of the document or 

writing establishes by clear and convincing evidence that decedent 

intended the document or writing to constitute the decedent’s will. The 

court noted that modern authority has tended to move away from 

insistence on strict compliance with statutory formalities and toward 

excusing harmless errors. New Jersey courts have held that an unsigned 

writing may be admitted to probate as a will if it is proven by clear and 

convincing evidence that: 1) decedent actually reviewed the document in 

question; and 2) thereafter gave his final assent to it. The court here found 

that decedent undeniably reviewed the purported will because he was the 

one who prepared it. Additionally, the handwritten notation, indicating 

that the will had been signed and sent to the executor, suggests that he 

gave his final assent to the document. External evidence also confirmed 

that decedent desired to leave the majority of his estate to nephew, as he 

told others about the existence of the will and the planned disposition of 

his estate. Consequently, the court held that the will was properly 

admitted to probate. 

5

G. Nonexoneration: 2-607 

1. In re Estate of Afrank, 291 P.3d 576 (Mont. 2012). A specific devise 

passes subject to any existing security interest, without right of 

exoneration, regardless of a general directive in the will to pay debts. 

Decedent and his wife owned a motorhome as joint tenants with the right 

of survivorship. At the time of decedent’s death, there was an outstanding 

purchase money security interest on the motorhome. Decedent and wife 

both signed the loan document and it specifically provided that each of 

them was independently obligated for the full amount of the debt. 

Decedent’s will contained a provision directing his personal representative 

to pay all of decedent’s “just debts.” Based on this provision, wife filed a 

claim against decedent’s estate for one-half of the outstanding debt on the 

motor home. The district court allowed the claim and the personal 

representative appealed. On appeal, the court noted that because the 

motorhome was held as joint tenants with right of survivorship, no interest 

in the motorhome actually passed to wife under decedent’s will. Even if it 

had, however, Montana has a statutory policy of nonexoneration, under 

MCA § 72-2-617, which provides that a specific devise passes subject to 

any security interest existing at the date of death, without right of 

exoneration, regardless of a general directive in the will to pay debts. 

Therefore, even if the motor home had passed to wife under decedent’s 

will, it would have passed to her along with the entire debt. The court 

held that decedent’s estate was not required to pay any part of the 

outstanding security interest on the motorhome. 

H. Life Insurance; Retirement Plan; Account with POD Designation; Transferon-Death 

Registration; Deceased Beneficiary: UPC 2-805; Reformation to 

Correct Mistakes: 2-706 

1. Morey v. Everbank, No. 1D11-1401, 2012 WL 300608 (Fla. Dist. Ct. 

App. July 24, 2012). Proceeds of insurance policy payable to 

decedent’s revocable trust were available to decedent’s creditors, and 

reformation of decedent’s revocable trust was not available when 

there was no evidence of any mistake of fact or law at the execution of 

the trust. Decedent’s revocable trust contained language for the payment 

of death obligations, stating that the trust should be used to pay death 

obligations of the decedent and his estate. After such payment, the 

remaining trust proceeds were to be used to fund sub-trusts for the 

decedent’s children. Decedent’s revocable trust was the beneficiary of two 

life insurance policies. Decedent’s estate was insolvent, and the question 

before the court was whether the proceeds of the insurance policies could 

be used to satisfy the creditors of decedent’s estate. The trustee/executor 

(the same individual) argued that the insurance proceeds shouldn’t be 

available to satisfy the debts under Fla.Stats. §222.13(1), which states as 

follows: “Whenever any person residing in the state shall die leaving 

insurance on his or her life, the said insurance shall inure exclusively to 

6

the benefit of the person for whose use and benefit such insurance is 

designated in the policy, and the proceeds thereof shall be exempt from 

the claims of creditors of the insured unless the insurance policy or a valid 

assignment thereof provides otherwise.” The trustee/executor claimed that 

the plain language of the statute exempted such insurance proceeds. The 

creditors argued that the proceeds were only protected as far as delivery to 

the trust. The terms of the trust then directed satisfaction of the debts. The 

creditors relied upon Fla.Stats. §733.808(1), which states that, “death 

benefits [including life insurance] shall be… disposed of… in accordance 

with the terms of the trust as they appear in writing on the date of… 

death.” They argued that since the terms directed that the trust was to pay 

death obligations, the insurance proceeds should be available. The trial 

court and appellate courts agreed with creditors; the proceeds were subject 

to creditor claims. The trustee/executor then sought to reform the trust 

under Fla. Stats. § 736.0415, which states that “a court may reform the 

terms of a trust, even if unambiguous, to conform the terms to the settlor’s 

intent if it is proved by clear and convincing evidence that both the 

accomplishment of the settlor’s intent and the terms of the trust were 

affected by a mistake of fact or law” and “may consider evidence relevant 

to the settlor’s intent even though the evidences contradicts an apparent 

plain meaning of the trust instrument.” However, the court rejected the 

request to reform, finding that the purpose of the insurance was to provide 

liquidity to the decedent’s estate so that payments could be made to 

maintain the assets of the estate during administration, and there was no 

indication that decedent’s intent was thwarted by mistake in the trust 

instrument. 

I. Effect of Divorce, Annulment, and Decree of Separation: 2-802 

1. Johnson v. Wilson, No. 12CA0191, 2012 WL 5871448 (Colo. App. Nov. 

21, 2012). Insurance policy’s requirement that change of beneficiary 

must be accompanied by written notice was not sufficient to supersede 

Colorado statute providing that divorce revokes designation of former 

spouse as beneficiary under an insurance policy. Husband named 

former wife as beneficiary of an insurance policy while they were married. 

Husband died several years after the couple divorced without changing his 

beneficiary designation. Under Colorado law, a divorce revokes any 

revocable disposition of property made by the divorced individual to the 

former spouse in a governing instrument, including beneficiary 

designations in insurance policies. The effect is as if former spouse 

disclaimed all rights as a beneficiary. Colorado’s statute provides 

exceptions to this rule if express terms to the contrary are provided in the 

governing instrument, a court order, or a contract relating to the division 

of the marital estate. The terms of the insurance policy at issue provided 

that a change in beneficiary was only allowed if, while the insured was 

living, the insured sent a written notice to change the owner or beneficiary. 

Former wife argued since no written notice was given that she was still a 

7

eneficiary under the insurance policy. The court held that Colorado’s 

statute superseded provision in insurance policy and that because the 

policy contained no express language exempting former spouses from 

automatic revocation of beneficiary status upon divorce, the exception to 

the statute was not met. The language in the policy stating that changes 

need to be made in writing was not sufficient to trigger the exception. The 

court also held that former wife lacked standing to reform beneficiary 

designation because she had been removed as beneficiary under the 

Colorado statute. 

J. Revocation by Dissolution of Marriage; No Revocation by Other Changes of 

Circumstances: 2-804 

1. Malloy v. Malloy, 288 P.3d 597 (Utah Ct. App. 2012). A life insurance 

manual may be considered a governing instrument, the express terms 

of which can displace the statutory default providing for revocation of 

beneficiary designation upon divorce. Husband and first wife married 

in 1989. Husband subsequently purchased a life insurance policy and 

named first wife as the beneficiary. Although husband and first wife 

divorced in 2004, he never removed her as the beneficiary of his life 

insurance policy prior to his death. Husband married second wife in 2006. 

After husband’s death, second wife claimed that, pursuant to Utah Code § 

75-2-804, husband’s divorce from first wife automatically revoked his 

designation of first wife as the beneficiary of the life insurance policy. 

That section provides, “Except as provided by the express terms of a 

governing instrument . . . the divorce or annulment of a marriage revokes 

any revocable disposition or appointment of property made by a divorced 

individual to his former spouse in a governing instrument.” Husband’s 

life insurance manual states that a divorce does not invalidate a 

designation that names a former spouse as beneficiary. Second wife 

argued that the manual is not a “governing instrument” as contemplated by 

§ 75-2-804, so the express terms exception should not apply and the 

designation of first wife should be revoked. The beneficiary designation 

form of husband’s life insurance policy refers to the terms of the manual. 

The court held that, because husband signed and executed the beneficiary 

designation form, the manual is incorporated by reference and should be 

considered a “governing instrument.” Consequently, the designation of 

first wife as beneficiary of husband’s life insurance policy is not revoked 

and first wife is entitled to receive the life insurance proceeds. 

2. Thrivent Financial for Lutherans v. Andronescu, No. OP 12-0408, 

2013 WL 227954 (Mont. Jan. 22, 2013). Statute which revokes former 

spouse as life insurance beneficiary upon dissolution of marriage 

operates at the death of decedent and applies to any divorce that took 

place during decedent’s lifetime. Husband purchased a life insurance 

policy and named his then wife as the primary beneficiary. Some years 

later, husband and wife divorced. Subsequently, Montana enacted § 72-2- 

8

814 MCA, which provides that a divorce revokes any revocable 

disposition or appointment of property made by a divorced individual to 

the individual’s former spouse in a governing instrument. Husband died 

in 2010, having never changed the designation of his former wife as 

primary beneficiary under his life insurance policy. The insurance 

company filed an interpleader action to determine the rightful beneficiary 

under husband’s policy, given that he and wife divorced prior to 

enactment of § 72-2-814, but husband died after its enactment. The court 

held that the statute operates at the time of the death of the insured and 

applies to any divorce that took place during the insured’s lifetime, thus 

removing husband’s former wife as beneficiary of the policy in this case. 

Former wife argued that revoking her as beneficiary would require 

impermissible retroactive application of the law. Until the insured’s death, 

however, a beneficiary has a mere expectancy in the life insurance 

proceeds because the beneficiary designation may be revoked at any time. 

Since the statute applies at the time of decedent’s death, the court reasoned 

that it was not given retroactive effect. Prior to decedent’s death, former 

wife had no vested right in the life insurance proceeds. Therefore, it was 

permissible for wife to be revoked as beneficiary of decedent’s life 

insurance policy under § 72-2-814. 

K. When Disclaimer is Barred or Limited: 2-1106 

1. In re Estate of Gardner, 283 P.3d 676 (Ariz. Ct. App. 2012). 

Disclaimer of an interest in property is barred if the disclaimant has 

already accepted the interest sought to be disclaimed. Upon decedent’s 

death, friend was granted a life estate in a parcel of decedent’s real 

property. Under the terms of decedent’s revocable trust, the property 

would pass to decedent’s two children at the termination of friend’s life 

estate. At decedent’s death, the property was subject to a $205,330 

mortgage. The trustee of decedent’s revocable trust petitioned the court 

for instructions to determine who, between friend and the remaindermen 

(decedent’s two children), would be responsible for paying the interest and 

principal of the mortgage. The court found that friend was required under 

the terms of the trust to pay the interest on the mortgage. After this 

determination, friend mailed a letter to the trustee seeking to disclaim her 

interest in the property. The trustee claimed that friend was barred from 

disclaiming her interest under A.R.S. § 14-10013(B) because she had 

already accepted the interest that she sought to disclaim. The trial court 

found that friend had accepted the life estate in decedent’s property by 

asserting her right to exclusive possession to the exclusion of the 

remaindermen and their agents, and thus, any later disclaimer was 

irrevocably barred. Friend appeals the decision. On appeal, the court 

reasoned that when a devisee takes possession and exercises control over 

the devised property, without contemporaneously and objectively 

manifesting any intent to disclaim, the acts of possession and control 

constitute conclusive evidence of acceptance. Acceptance is further 

9

evidenced by a devisee’s failure to exercise her opportunity to renounce or 

disclaim her interest within a reasonable time period. The facts in this 

case show that friend had physically occupied the property and arranged to 

pay the utilities and taxes on the property. Furthermore, she made 

repeated and affirmative statements to the trustee asserting her present 

right to enjoy the benefits of ownership during her lifetime. 

Consequently, the court held that friend had accepted her life estate 

interest and was therefore barred from disclaiming it. 

L. Probate, Testacy and Appointment Proceedings; Ultimate Time Limit: 3-108 

1. In re Estate of Strand, 281 P.3d 268 (Utah Ct. App. 2012). Probate 

court may appoint a personal representative to distribute intestate 

estate, even if more than three years have elapsed since decedent’s 

death. Decedent died intestate and neither an heir nor a creditor requested 

the administration of decedent’s estate within three years of her death. 

Utah Code Ann. Section 75-3-107 provides that formal testacy or 

appointment proceedings may not be commenced more than three years 

after the decedent’s death, but this limitation does not apply to 

proceedings to determine heirs of an intestate estate. The probate court 

entered an order identifying decedent’s heirs and the property owned by 

decedent at the time of her death, and appointed a personal representative 

to establish the status of such property with respect to any secured 

encumbrances held against it. Decedent’s heirs argued that the probate 

code did not authorize the probate court to appoint a personal 

representative in the context of administering the intestate estate and 

sought to invalidate all actions taken by the personal representative. The 

court held that Section 75-3-107 clearly allows the probate court to handle 

all matters necessary to distribute the decedent’s property, and that, when, 

as here, the probate court is unable or does not have sufficient information 

to effectuate the distribution of property, it is proper for it to appoint a 

personal representative for the purpose of taking those actions necessary to 

settle and distribute the estate of the decedent in accordance with the terms 

of the probate code. The order appointing the personal representative was 

upheld. 

M. Priority Among Persons Seeking Appointment as Personal Representative: 

3-203 

1. *In re Estate of Franta, No. A12-0663, 2013 WL 491530 (Minn. Ct. 

App. Feb. 11, 2013). An individual nominated as personal 

representative under decedent’s will may not be appointed as 

personal representative if the court finds him or her to be unsuitable 

for the position. Father named daughter as his personal representative 

under his will. Despite this nomination, the district court determined that 

daughter was unsuitable to serve as personal representative of father’s 

estate. Daughter challenged this determination. Under Minn. Stat. § 

10

524.3-203, persons who are nominated by a power conferred in a will are 

accorded priority for appointment as personal representative. However, 

“no person is qualified to serve as personal representative who is . . . a 

person whom the court finds unsuitable in formal proceedings.” Id. at 

subd. (f)(2). Generally, if the named personal representative is willing, 

suitable, and competent, he or she shall be appointed notwithstanding that 

there is another whom the appointing court might consider more suitable 

or competent. “Suitable” is not defined by statute; rather, the court 

reasoned that suitability is determined by analyzing a proposed personal 

representative’s level of experience and whether he or she has the 

temperament and prudence to administer the estate. The court ultimately 

upheld the district court’s finding of unsuitability because it found that 

daughter had no experience dealing with the administration of assets. She 

commenced probate proceedings after her father was deceased for more 

than six months and, in the meantime, allowed estate expenses to go 

unpaid. Furthermore, the court found that daughter lacked the appropriate 

personality characteristics to administer the estate because she knowingly 

made false allegations about the destruction of her father’s will. 

Consequently, the district’s court’s determination that daughter was 

unsuitable to serve as father’s personal representative was not an abuse of 

discretion. 

N. Formal Testacy Proceedings; Notice of Hearing on Petition: 3-403 

1. Walker v. Bailey, 89 So.3d 297 (Fla. Dist. Ct. App. 2012). Failure of 

court to hold hearing on distribution of wrongful death proceeds 

violated father’s due process rights even though he received notice of 

the hearing and did not object to the relief requested by the mother 

set forth in the notice of hearing. Mother, as personal representative of 

deceased child’s estate, petitioned for equitable distribution of wrongful 

death proceeds. Pursuant to probate court rules, mother provided notice of 

the petition to father. Father did not respond within the time prescribed by 

statute, and the probate court entered an order awarding all funds to 

mother prior to the hearing. The appeals court reversed the probate 

court’s decision, holding that father’s due process rights were violated, in 

part, because the notice scheduling the hearing only indicated that mother 

was requesting to receive “a majority” of the proceeds, not the entire 

proceeds. Moreover, no evidence was considered. Thus, the court 

remanded the case for a new trial. 

O. General Duties; Relation and Liability to Persons Interested in Estate; 

Standing to Sue: 3-703 

1. Farm Bureau Mutual Insurance Co. of Idaho v. Eisenman, 286 P.3d 

185 (Idaho 2012). Decedent’s estate is not entitled to sue for wrongful 

death damages because this claim is distinct from any action decedent 

could have brought on her own behalf prior to death. Insurance 

11

company sold decedent an insurance policy that provided coverage up to 

$500,000 for damages caused by an underinsured motorist. In November 

2007, decedent was struck and killed by a drunk driver. The driver was an 

underinsured motorist within the definition of decedent’s policy. The 

personal representatives of decedent’s estate filed a claim with insurance 

company seeking accidental death and wrongful death damages. 

Insurance company paid the accidental death claim, but it denied the claim 

for wrongful death damages. Decedent’s estate argued that it holds all 

contract rights that decedent held before her death and that it is legally 

entitled to recover damages for decedent’s death under Idaho’s wrongful 

death statute, Idaho Code § 5-311. Therefore, it argued, the estate is 

entitled to the payment of those damages pursuant to the underinsured 

motorist provision in the policy, which provides that the insurance 

company will pay damages that an insured is legally entitled to receive. 

Insurance company sought a declaratory judgment holding that decedent’s 

heirs and estate are not “insureds” under the policy and that they cannot 

recover underinsured motorist payments under the decedent’s plan. I.C. § 

15-3-703(c) provides that, except as to proceedings which do not survive 

the death of a decedent, a personal representative has the same standing to 

sue and be sued as the decedent had immediately prior to death. Thus, the 

court noted, while the personal representative steps into the shoes of the 

decedent to administer the estate, and may sue on causes of action the 

decedent may have pursued, the personal representative may not bring an 

action that abated upon the death of the decedent. Although the personal 

representatives are entitled to bring a wrongful death suit on their own 

behalf, a wrongful death claim is an entirely new cause of action and is 

distinct from any action decedent could have brought on her own behalf, 

prior to her death. Furthermore, Idaho courts have held that a judgment 

granted in a wrongful death action inures to the benefit of the heirs of the 

decedent and in no case becomes a part of the assets of the estate of the 

deceased. Accordingly, the court held that decedent’s estate was not 

legally entitled to recover damages for the decedent’s wrongful death; 

only decedent’s heirs may recover those damages, either through an action 

brought by the heirs themselves or through an action brought by the estate 

on behalf of the heirs. The underinsured motorist coverage in this case did 

not extend did not extend to the heirs or the estate because they are not 

insureds under the policy. 

P. Improper Exercise of Power; Breach of Fiduciary Duty: 3-712 

1. *In re Estate of Neuman and In re Estate of Wiggs, 819 N.W.2d 211 

(Minn. Ct. App. 2012). The existence of an employer-employee 

relationship among co-personal representatives does not excuse the 

employee-personal representative from her duty to act in the best 

interests of the estate. Business owner and employee became the 

attorneys-in-fact for decedent, an elderly woman, and, after her death, they 

became the co-personal representatives of her estate. Business owner had 

12

also been the sole personal representative of the estate of decedent’s 

housemate, who had predeceased decedent. Business owner made a 

$5,000 gift to employee from the housemate’s estate and also made loans 

to himself from the estate accounts. Furthermore, business owner and 

employee billed decedent’s estate for their services at the company’s 

normal rates, despite there being no evidence that these rates were 

reasonable for personal representative services. Finally, business owner 

and employee charged decedent’s estate personal representative fees in 

addition to these hourly service charges. Beneficiaries of both estates 

objected to the final estate accountings submitted by business owner and 

employee. The district court found that business owner and employee 

breached their fiduciary duties with respect to their administration of both 

estates for charging at excessive billing rates, engaging in conflicts of 

interest, and double billing. Business owner and employee were held 

jointly and severally liable for the damages to the estates. Employee 

appealed. As to the $5,000 gift that was made to her from housemate’s 

estate, employee contended that because she was not a personal 

representative of housemate’s estate, she owed that estate no fiduciary 

duty and should not be liable for its $5,000 loss. She argued that Minn. 

Stat. § 524.3-712 provides that only a personal representative is liable to 

interested persons for damage resulting from a breach of fiduciary duty. 

The court noted that employee was a personal representative of decedent’s 

estate and certainly owed that estate a fiduciary duty; the $5,000 employee 

received from housemate’s estate was destined for decedent’s estate (since 

decedent’s estate was the sole beneficiary of housemate’s estate). So by 

retaining the money, employee breached her duty to decedent’s estate and 

the court found it proper to remedy that breach by ordering employee to 

repay the rightful end recipients of the converted funds. As to the 

overcharging and double-billing of decedent’s estate, employee contended 

that she ought to be held to some lower fiduciary standard (rather than the 

normal “prudent person” standard) because business owner, the other 

personal representative, had the real authority over the improper decisions, 

as he made them in the context of his role as employee’s supervisor. 

Employee argued that she was subject to potential termination if she 

objected to his decisions. The court rejected the notion that a fiduciary 

must prudently protect the funds entrusted to her only if prudence is in her 

own best interests. Rather, a fiduciary must put the interests of the estate 

above her own. Consequently, the court held it was proper to hold 

employee jointly and severally liable for the losses to decedent’s and 

housemate’s estates. 

Q. Expenses in Estate Litigation: 3-720 

1. *In re Estate of Holmberg, 823 N.W.2d 875 (Minn. Ct. App. 2012). A 

person who was not nominated as decedent’s personal representative 

cannot be awarded payment for attorneys’ fees incurred in challenge 

to will because such individual was not nominated as personal 

13

epresentative by the will of the decedent nor did such individual have 

priority for appointment under Minnesota’s priority of appointment 

statute. Decedent left a handwritten will that did not nominate a personal 

representative. The will gave $10,000 to each of decedent’s estranged 

children from a prior marriage and the remainder of decedent’s estate to 

his current wife. Decedent’s wife submitted decedent’s will for formal 

probate and nominated herself as personal representative of decedent’s 

estate under Minnesota’s priority of appointment statute. Decedent’s 

estranged daughter challenged the will and sought appointment as 

personal representative but was unsuccessful in her efforts. She then 

sought attorney’s fees under Minn. Stat. 524.3-720 which states in part 

that “Any personal representative of person nominated as personal 

representative who defends or prosecutes any proceeding in good faith, 

whether successful or not, or any interested person who successfully 

opposes the allowance of a will, is entitled to receive from the estate 

necessary expenses and disbursements including reasonable attorney’s 

fees incurred.” The court held that in order to be a “person nominated as 

personal representative who defends or prosecutes any proceeding in good 

faith, whether successful or not” under Minn. Stat. 524.3-720, a person’s 

nomination must be made with authority from a will or the priority of 

appointment statute. Here, because decedent’s wife had priority and 

nominated herself, the daughter was not entitled to payment attorney’s 

fees under the statute. Instead, daughter was an “interested party” and 

could have only collected if her challenge had been successful. 

R. Notice to Creditors: 3-801 

1. Phillips v. Quick, 731 S.E.2d 327 (S.C. Ct. App. 2012). The discovery 

rule does not apply to extend the period allowed for the presentation 

of creditor’s claims against an estate. Decedent’s daughter filed two 

statements of creditor’s claim with the probate court, alleging that 

decedent took funds belonging to daughter under the Uniform Gift to 

Minors Act (“UGMA”) without notifying her and failed to provide her 

with the funds that were being held on her behalf. Notice to creditors of 

decedent’s estate was published in February and March of 2003, but 

daughter did not file her claims until December 2003 because she did not 

learn of the existence of the UGMA accounts held for her benefit until that 

time. The personal representative of decedent’s estate argued that 

daughter’s claims were barred because they were not made within the 

eight-month period provided by law. The probate court, applying the 

discovery rule, found that because daughter had no notice or knowledge of 

the claim prior to discovering it in December 2003, her claim was not 

barred. The personal representative appealed. South Carolina Probate 

Code § 62-3-801(a) mandates that creditors who are not given actual 

notice must present their claims within eight months after the date of the 

first publication of the creditor’s notice or be forever barred. The court 

held that § 62-3-801 is a non-claim statute and, thus, unless a claim is filed 

14

within the prescribed time set out in the statute, no enforceable right of 

action is created. The court reasoned that non-claim statutes are different 

than general statutes of limitation. The former create a right of action if 

commenced within the time prescribed by the statute, whereas the latter 

create a defense to an action brought after the expiration of the time 

allowed by law for the bringing of such an action. While equitable 

principles, like the discovery rule, may extend the time for commencing 

an action under statutes of limitation, non-claim statutes impose a 

condition precedent to the enforcement of a right of action and are not 

subject to equitable exceptions. Given that the discovery rule does not 

extend to § 62-3-801, daughter’s claims are barred because they were not 

timely filed. 

S. Limitations on Presentation of Claims: 3-803; Manner of Presentation of 

Claims: 3-804 

1. In re Estate of Hamilton, 814 N.W.2d 141 (S.D. 2012). An extension 

to collect from an estate may only be granted where there is first a 

timely claim made against that estate. On the night of his death in 

October 2009, decedent and his friend were drinking in decedent’s home. 

The decedent put a gun to his head in a simulated game of Russian roulette 

and accidentally killed himself. The friend witnessed decedent’s death 

and was later diagnosed with post-traumatic stress disorder. On May 12, 

2011, the friend sent a letter to the attorney for decedent’s estate, 

requesting information in order to assess a potential claim against the 

estate for negligent and intentional infliction of emotional distress. The 

personal representative filed a verified statement for informal closing of 

the estate on June 2, 2011, and informed the friend that all claims against 

the estate were then bared under SDCL 29A-3-803. The friend filed a 

petition to extend time to file a creditor’s claim against the estate under 

SDCL 29A-3-804(c). Section 29A-3-804(c) provides that no proceeding 

to obtain payment of a claim presented under subsection (a)(1) may be 

commenced more than sixty days after the personal representative has 

mailed or delivered notice of disallowance; but, in the case of a claim 

which is not presently due or which is contingent or unliquidated, a sixtyday 

extension period may be granted. The court held that an extension 

under Section 29A-3-804(c) could not be granted here because that section 

deals only with the timing for bringing suit to collect from an estate after a 

claim has been denied; in order to be eligible for the extension, there must 

first be a claim that was timely presented under Section 29A-3-803. The 

friend here had not yet made a claim, so no extension may be granted. 

T. Penalty Clause for Contest: 3-905 

1. In re Estate of Stewart, 286 P.3d 1089 (Ariz. Ct. App. 2012). Under 

Arizona law, an in terrorem clause was not invalid on statutory or 

public policy grounds. The decedent died in an accident with his wife 

15

and their minor child. The decedent was survived by 5 adult children. 

Three years before his death, the decedent executed a will and trust 

agreement, both of which intentionally omitted one of the decedent’s sons 

and contained no contest clauses. The omitted son filed a petition for 

formal testacy seeking to invalidate the will. On appeal, the court held 

that the omitted son had standing to contest the no contest clauses, even 

though he was not a beneficiary of the will or trust. The court further held 

that it was not necessary for the trust beneficiaries to seek to enforce the 

no contest clauses to make their validity ripe for adjudication. 

U. Partition for Purpose of Distribution: 3-911 

1. In re Estate of McKillip, 820 N.W.2d 868 (Neb. 2012). Division of 

jointly-owned, devised property will be made by partition in kind, 

rather than partition by sale, unless great prejudice would result to 

the owners. Under his will, decedent left all real property owned by him 

to his three daughters in equal shares. One daughter brought an action to 

partition the real estate, and the county court appointed a referee. The 

referee determined that the property could not be partitioned in kind 

without great prejudice to the owners and recommended a public sale. 

The court ordered the referee to sell the real estate, and the personal 

representative of decedent’s estate appealed. Neb. Rev. Stat. § 30-24,109 

provides that when one or more devisees are entitled to distribution of 

undivided interests in any real or personal property of an estate, the 

personal representative or one or more of the devisees may petition the 

court to make partition. The court shall partition the property in the same 

manner as provided by the law for civil actions of partition. Nebraska 

courts have long expressed a preference for partition in kind as opposed to 

petition by sale. Under Neb. Rev. Stat. § 25-2181, partition by sale will 

only be allowed in instances where a partition in kind cannot be made 

without great prejudice to the parties. The court held that it was, in fact, 

possible to partition the real estate in kind and convey to each sister a 

share that was close to equal in value. This could be accomplished by 

dividing the real estate into three tracts, one for each sister, and 

distributing cash from the estate to the sisters, if necessary, to equalize any 

discrepancy in the value of the tract received as compared to the value 

received by the other two sisters. Consequently, the court vacated the 

order to sell the property. 

V. Effect of Approval of Agreements Involving Trusts, Inalienable Interests, or 

Interests of Third Persons: 3-1101 

1. Estate of Riley, 295 P.3d 428 (Ariz. 2013). Failure to obtain signatures 

of all beneficiaries of estate on settlement agreement did not void the 

agreement, however agreement is not binding on those parties who 

did not sign. Sibling beneficiary brought an action against defendant 

siblings arguing that defendant siblings, as co-personal representatives of 

16

mother’s estate, had breached fiduciary duties and improperly 

administrated estate. Successor personal representative was thereafter 

appointed and objected to accountings filed by defendant siblings. 

Successor personal representative and defendant siblings entered into a 

compromise agreement wherein one of the defendant personal 

representatives agreed to disclaim his interest in the estate and the estate 

agreed to release all claims against defendant siblings. Only defendant 

siblings and Successor personal representative signed the agreement, and 

the probate court issued an order approving the settlement. The nine 

siblings who were beneficiaries of the estate but did not sign the 

agreement appealed the courts approval of the settlement agreement. On 

appeal, the court then considered whether the settlement agreement was 

“void for failing to be executed by all the necessary parties.” Arizona's 

statute for court approval of settlement agreements are identical to sections 

3-1101 and 3-1102 of the Uniform Probate Code. The court held that for 

the agreement to be binding on all beneficiaries of the estate, all 

beneficiaries must have signed the agreement. However, the failure to 

obtain the signatures did not void the agreement, as it would still be 

binding on those who signed the agreement. 

W. Procedure for Securing Court Approval of Compromise: 3-1102 

1. Wilson v. Dallas, No. 27227, 2013 WL 697042 (S.C. Feb. 27, 2013). 

Beneficiaries may present a compromise agreement, settling claims 

against an estate, to the court for approval, but this agreement will 

not be approved unless it settles good faith claims and is both just and 

reasonable. Legendary singer James Brown died in 2006, leaving the 

residue of his estate to the James Brown 2000 Irrevocable Trust via a 

pour-over provision in his will. Upon Brown’s death, the 2000 

Irrevocable Trust was to be divided into two subtrusts: one was 

designated for the education of Brown’s grandchildren; the other was a 

charitable trust, which Brown declared should be used solely for the 

education of financially needy children. Brown’s will and trust each 

contained a no-contest clause and specifically disinherited everyone other 

than Brown’s six adult children (who were to receive his tangible personal 

property) and those grandchildren identified by name in the will and trust 

agreement. Brown also noted in both documents that he was unmarried 

and did not want any portion of his estate to go to any former or future 

spouse. After the execution of the will and trust agreement, Brown and 

his purported wife executed a prenuptial agreement (which waived any 

claim she might have against his estate) and later participated in a 

marriage ceremony. Some years later, Brown attempted to annul the 

marriage because the purported wife was allegedly still married to another 

individual. Brown and purported wife had a son together and the matter of 

the annulment was never settled. In 2007, Brown’s adult children and 

purported wife brought actions to set aside his will and the 2000 

Irrevocable Trust based on undue influence. The adult children argued 

17

that Brown’s estate should pass by the laws of intestacy and purported 

wife claimed that she was entitled to an elective share or omitted spouse’s 

share of the estate and that her son was entitled to an omitted child’s share. 

The adult children and purported wife, along with the attorney general, 

entered into a compromise agreement regarding the settlement of Brown’s 

estate; the personal representatives of Brown’s estate and the trustees of 

his Irrevocable Trust (collectively, “the fiduciaries”) were not given an 

opportunity to participate in the negotiation process and they did not sign 

the agreement. The compromise agreement gave the adult children and 

purported wife an interest in a newly-created “settlement entity,” removed 

the fiduciaries, and created a new charitable trust over which the attorney 

general was given broad discretionary powers. The circuit court approved 

this compromise agreement and the fiduciaries appealed. The fiduciaries 

first argue that the compromise agreement was not eligible for court 

consideration under South Carolina Probate Code § 62-3-1102 because the 

trust was the chief holder of a beneficial interest in the estate and the trust 

had not agreed to the compromise. Under that section, court approval of a 

compromise agreement may be sought if the agreement is in writing and 

executed by all parties with beneficial interests in the estate, if it is 

submitted to the court by an interested party, if notice is given to all 

interested parties, and if there is an opportunity to be heard. The court 

found that all of these requirements were met and the compromise was 

eligible for the court’s consideration: although the fiduciaries did not have 

notice of the negotiations themselves, they did receive notice of the 

hearing to approve the compromise. This is all that the statute requires. 

Furthermore, the court found that, while the fiduciaries were necessary 

signatories to the agreement (because they had a beneficial interest in the 

estate), § 62-3-1102 specifically grants the court authority to direct the 

fiduciaries to execute the document in the event that it is deemed worthy 

of approval. Therefore, the compromise was properly presented to the 

court for consideration. The court ultimately held, however, that the 

agreement should not have been approved. In order to approve a 

compromise agreement, the court must find that 1) the compromise settles 

a good faith claim and 2) the compromise is just and reasonable. The 

court found there was no good faith basis for the undue influence claim 

asserted by Brown’s adult children and purported wife. In support of that 

claim, the children and purported wife pointed to the fact that the attorney 

who drafted Brown’s will and trust agreement was currently in jail for a 

violent crime and that the trust allocated a large amount of management 

fees to the trustees. The court held that the parties could not reasonably 

believe there was undue influence based on these facts; although full proof 

of the claim is not required, something more than a subjective belief or 

mere allegation of undue influence is necessary. The court noted that the 

attorney’s crime was wholly unrelated to his services as an estate planner 

and management fees could be reformed if they were found to be 

exorbitant, but this alone did not justify throwing out Brown’s entire estate 

18

plan. The court found that Brown was of sound mind at the time he 

executed the will and trust agreement and that he had painstakingly 

developed his estate plan (including explicit instructions regarding who 

should inherit) over a number of years. Consequently, the court found 

there was no reasonable basis to believe Brown was unduly influenced and 

no good faith claim made by the adult children and purported wife. The 

court also held that the compromise agreement was not just and 

reasonable. To be just and reasonable, an estate plan in a settlement 

agreement must defer to the testator’s intent unless departure is necessary 

to protect the interests of the beneficiaries. The court found the 

compromise orchestrated by the attorney general destroyed the estate plan 

Brown had established and put in place an arrangement overseen virtually 

exclusively by the attorney general. The result was to take a large portion 

of Brown’s estate that he had designated for charity and to turn it over to 

family members that, under the terms of Brown’s will, were given either 

limited devises or excluded entirely. The court found the attorney general 

had no authority to direct the settlement in this fashion and, therefore, the 

compromise agreement could not be approved. 

X. Jurisdiction by Act of Foreign Personal Representative: 4-301 

1. Juega v. Davidson, 105 So.3d 575 (Fla. Dist. Ct. App. 2012). A foreign 

personal representative does not personally submit to the jurisdiction 

of U.S. courts by merely participating in a civil action in his capacity 

as personal representative. Decedent died testate in Spain and was 

survived by his son and brother. Friend, a citizen and resident of Spain, 

was appointed by the Spanish court to serve as administrator of decedent’s 

estate. At the time of his death, decedent was the director of a foreign 

corporation; by virtue of his appointment as personal representative, friend 

became the director of the corporation after decedent’s death because it 

was an asset of the estate. The corporation filed suit against decedent’s 

brother in Miami, Florida, seeking repayment of a note based upon a $5 

million loan made by the corporation to brother prior to decedent’s death. 

Friend, as personal representative of the estate, joined the suit and asserted 

additional claims on behalf of the estate. While this litigation was 

ongoing in Miami, the decedent’s estate was fully administered and closed 

in Spain, and friend was discharged from his duties as personal 

representative. Following friend’s discharge, brother moved to dismiss 

friend’s claims for lack of standing. Brother argued that the real party in 

interest was decedent’s son since he was decedent’s sole heir and, as such, 

inherited decedent’s interest in the underlying lawsuit. Son filed an 

affidavit in support of friend’s standing which stated that friend was acting 

as son’s agent in prosecuting the action on son’s behalf. The court held 

that friend lacked standing after his discharge as personal representative, 

but he was ultimately allowed to proceed as son’s agent. Thereafter, 

brother filed a counterclaim against friend in his individual capacity for 

civil conspiracy and conversion. Friend moved to dismiss the counts 

19

against him in his individual capacity for lack of personal jurisdiction, as 

he had never resided or owned property in Florida and the only contact or 

dealings he had with brother in Florida were in his capacity as personal 

representative of decedent’s estate or as director of the corporation. 

Brother argued that Florida Probate Code § 734.201(3) conferred personal 

jurisdiction upon friend. The trial court denied the motion to dismiss and 

friend appealed. On appeal, the court noted that procedurally, friend, in 

his individual capacity, could not have been named a defendant in 

brother’s counterclaim because his participation in the underlying case 

was in his capacity as the personal representative of decedent’s estate, and 

later as agent of son. Friend, individually, was never a named party. A 

plaintiff who brings or maintains an action solely in his capacity as the 

representative of another is not an “opposing party” against whom a 

counterclaim might be filed. The court found that this basis alone merited 

reversal. The court further found that there was no personal jurisdiction 

over friend. Florida Probate Code § 734.201(3) provides that a foreign 

personal representative submits personally to the jurisdiction of the courts 

of Florida in any proceeding concerning the estate by doing any act as 

personal representative in this state that would have given the state 

jurisdiction over that person as an individual. The court found no basis for 

brother’s assertion that by virtue of participating in a civil action in 

capacities other than as an individual, friend submitted to the jurisdiction 

of the court under the Probate Code. No ancillary estate was ever opened 

in Florida and friend was never appointed a personal representative by a 

Florida court. As a result, the court held that the requirements of personal 

jurisdiction over friend were not met and the counterclaims filed against 

him were dismissed. 

Y. Judicial Appointment of Guardian: Petition: 5-303 

1. *In re Guardianship of Samson, No. A11-2180, 2012 WL 2203010 

(Minn. Ct. App. June 18, 2012). A Power of Attorney for Health Care 

may be a less restrictive alternative to guardianship, rendering 

guardianship unnecessary. In 1997, mother executed a Durable Power 

of Attorney for Health Care designating daughter as her health-care agent. 

Mother was subsequently determined to be incapacitated by dementia. 

Son petitioned for guardianship of mother. The district court dismissed 

son’s petition for guardianship on the ground that the health care power of 

attorney rendered guardianship unnecessary. Minn. Stat. § 524.5-303 

provides that a guardian may only be appointed by a court if it finds that 

the respondent is an incapacitated person and that the respondent’s 

identified needs cannot be met by less restrictive means. On appeal, 

brother argued that appointment of a guardian was necessary because 

daughter lives out of state for two months of the year, and thus, could not 

adequately address mother’s needs. The court found that there was no 

evidence showing that daughter was unavailable to fulfill her duties as 

mother’s health care agent. The court also held that mother’s health care 

20

power of attorney was, in fact, a less restrictive alternative to 

guardianship, because if son’s petition for guardianship were granted, it 

would suspend daughter’s power to act as mother’s health care agent. 

Given that mother expressly chose daughter as her health care agent, the 

court will not override her wishes absent a showing that the power of 

attorney was insufficient to provide for her needs. Son’s petition for 

guardianship was, therefore, properly denied. 

Z. Findings; Order of Appointment; Who May Be Conservator; Priorities: 5- 

310 and 5-413 

1. *In re Guardianship of Pates, 823 N.W.2d 881 (Minn. Ct. App. 2012). 

It was proper to appoint son as mother’s conservator even though he 

did not have statutory priority for the position, but the granting of 

protective powers is not warranted absent a finding of incapacity. 

Mother was diagnosed with Alzheimer’s disease in February 2011. After 

her diagnosis, she executed a series of estate planning documents which 

had the effect of changing, several times, those of her children who were 

named as beneficiaries under her will and those who were named as her 

agents under her health care directive and power of attorney. In October 

2011, son filed a petition seeking to be appointed as a guardian and 

conservator for his mother. Siblings opposed the petition. The district 

court denied son’s petition for guardianship but appointed him as his 

mother’s conservator. The court also granted son limited protective 

powers to select mother’s medical professionals, arrange her medical 

appointments, and determine her place of residence, powers not typically 

granted to a conservator. Siblings argue that the district court erred by 

appointing a conservator, but that if one is necessary, the court should 

have appointed brother instead. Under Minn. Stat. § 524.5-409, the court 

may appoint a conservator if it finds: 1) the individual is unable to 

manage property and business affairs because of an impairment in the 

ability to receive and evaluate information or make decisions; 2) the 

individual has property that will be wasted or dissipated unless 

management is provided; and 3) the identified needs cannot be met by less 

restrictive means. Based on these criteria, the court found that it was 

proper to appoint a conservator. Mother was not able to handle her own 

property and frequently forgot to pay bills. There was the potential for 

waste and dissipation of her property as she was vulnerable to being taken 

advantage of in financial matters. Finally, no less restrictive means 

existed: mother’s power of attorney was not an appropriate alternative to 

a conservatorship because of her susceptibility to influence. The court 

also found it was proper to appoint son as mother’s conservator. Brother 

had statutory priority under Minn. Stat. § 524.5-413 because he was 

serving as mother’s attorney in fact. The court may, however, in the best 

interests of the incapacitated person, decline to appoint a person having 

priority and instead appoint a person having a lower priority. Here, the 

court found son was the most qualified to serve as conservator because 

21

evidence shows that brother tried to exert undue influence over mother. 

Lastly, siblings contend that the district court erred in granting son 

protective powers over mother under § 524.5-310. The court agreed and 

held that the granting of protective powers is only appropriate if there is a 

finding of incapacity sufficient to justify the appointment of a guardian. 

Because the district court found that mother was not incapacitated and did 

not require the appointment of a guardian, the granting of limited 

protective powers is not warranted in this case. 

II. OTHER WILL AND PROBATE CASES 

A. Elements of a gift 

1. Welch v. Dececco, 101 So.3d 421 (Fla. Dist. Ct. App. 2012). All relevant 

evidence must be considered in determining donative intent to make a 

gift; failure to register stock in the name of donee after a purported 

gift does not prevent the finding of the requisite donative intent to 

determine there has been a completed gift. The issue before the court 

was whether certain stocks were assets of the decedent’s estate. Decedent 

had purportedly transferred the stocks to his nephew before his death, but 

the stocks were still registered in decedent’s name at decedent’s death. 

The court laid out the three requirements of gift: donative intent, delivery, 

and acceptance. Evidence was presented at trial showing that decedent 

had intended to transfer stocks. However, trial court concluded that 

“present donative intent” was not proved because stocks were still 

registered in decedent’s name at his death. The appeals court, on the other 

hand, held that registration of stocks is just one of many factors to 

consider when determining whether the requisite donative intent to make 

an inter vivos gift is present, and failure to register stocks is not 

dispositive. Therefore, it remanded the case back to the trial court and 

instructed the court to clarify whether it considered all relevant evidence 

in finding that decedent did not intend to make a gift of the stock. 

B. Accrual of Interest on Probate Court Judgment 

1. *Estate of Rutt, 824 N.W.2d 641 (Minn. Ct. App. 2012). Interest under 

Minnesota Statutes § 549.09 accrued on probate court judgment from 

the time the petition to probate decedent’s will was filed. The district 

court found that decedent’s sons had effectively transferred assets to 

themselves prior to decedent’s death, and held that those assets should be 

included in the assets of decedent’s probate estate. These assets included 

various cash transfers to a bank account (totaling $73,592) that was later 

distributed to decedent’s sons, and the sale of the decedent’s lake home at 

a discount to one of decedent’s sons. It awarded judgments in the form of 

accounts receivable and ordered the sons to pay interest on those 

judgments from the date of decedent’s death under Minn. Stat. § 549.09 at 

the rate prescribed for judgments over $50,000. On appeal, the pertinent 

22

questions before the court were the following: (1) Did the district court 

err in ordering interest accrue under Minn. Stat. § 549.09 on the lake home 

debt from the date of the decedent’s death; and (2) Did the district court 

err in aggregating the Voyager account debts for purposes of the $50,000 

threshold in Minn. Stat. § 549.09. As to the first question, under Minn. 

Stat. § 549.09, interest is to begin accruing at the earliest of (1) the 

commencement of the action; (2) a demand for arbitration; and (3) the 

time of written notice of the claim. Because there was no demand or 

written notice of the claim, the appeals court concluded that interest 

should begin to occur at the commencement of the action –which was the 

time the petition for probate of decedent’s will was presented. As to the 

second question, the sons argued that because the $73,592 judgment 

relating to the cash transfers to the bank account were actually comprised 

of several transactions, each of which were less than $50,000, so the 

$50,000 threshold rate shouldn’t apply, but rather the rate applicable to 

each transfer. The appeals court rejected this argument as well. It held 

that because the court referred to the total $73,592 as the judgment in 

favor of the estate, and that judgment was for the total amount, and not the 

three separate transactions. The court went onto discuss that the district 

court essentially has the discretion to refer to the judgments in the manner 

it deems advisable, and the reference in this case was not an abuse of 

discretion. 

C. Establishing Lost Will 

1. Smith v. DeParry, 86 So.3d 1228 (Fla. Dist. Ct. App. 2012). Because 

personal representatives could be held personally liable for incorrect 

distribution of funds under lost codicil they did not qualify as 

disinterested witnesses under Florida’s lost wills statute. Decedent’s 

attorney had prepared his estate planning documents for several years and 

was appointed along with another individual as personal representatives of 

decedent’s estate. Under an apparent codicil to decedent’s will which had 

been lost, the personal representatives transferred $40,000 from decedent’s 

estate to a trust for the care of his dogs (the “pet trust”). One of the 

personal representatives was the trustee of the pet trust. The personal 

representatives transferred the money before filing a petition to establish 

the lost codicil. In establishing the lost codicil, the copy proffered was a 

printed version of the draft on the personal representative-attorney’s 

computer system, and the witnesses who testified included the personal 

representatives, personal representative-attorney’s assistant who printed 

out the codicil but was not present at the purported execution, and a 

witness who testified that she did not read the document signed by 

decedent at the purported execution. The probate court rejected the 

petition to establish the lost codicil, and on appeal two questions were 

before the appeals court. First, the appeals court considered whether a 

printout of a draft of the codicil from a computer was a sufficient copy 

under the lost-wills statute. It held that it was. Second, the court 

23

considered the sufficiency of the witnesses’ testimony. As to the 

testimony of the personal representatives, the court held that they were not 

disinterested witnesses and thus their testimony was not to be considered. 

Notably, it made clear that they were not disinterested witnesses merely by 

acting as personal representatives, but because they had already 

transferred the funds to the trust and could be held liable to the 

beneficiaries if that transfer had been incorrect. In addition, the court 

pointed out that the attorneypersonal representative who lost the codicil 

could be held liable for malpractice and was interest for that reason as 

well. The testimony of the others was insufficient as well: the attorneypersonal 

representatives assistant printed the document but was not 

present at the signing and therefore did not have the requisite first-hand 

knowledge; and a witnesses had already testified that she did not read any 

of the documents to which she served as a witness and thus could not 

testify as to the content of the codicil. Thus, the court held that the codicil 

could not be submitted. 

D. Ownership of Joint Account and Prenuptial Agreement 

1. Connell v. Connell, 93 So.3d 1140 (Fla. Dist. Ct. App. 2012). Funds 

withdrawn from joint account lose their joint character upon 

withdrawal. Prior to their marriage, husband and wife entered into an 

antenuptial agreement which provided that the property acquired by each 

prior to and during the marriage was the separate property of each. The 

agreement also stated that the parties may acquire jointly held property 

and that “any property…hereafter acquired jointly or in their joint shall 

become and be considered the joint property of the parties” and that upon 

death, the survivor shall succeed to the entire interest in all jointly-held 

property. During their marriage, husband and wife opened a joint bank 

account with right of survivorship. Using those funds, husband purchased 

a rolodex and diamond ring. Wife was with husband when the items were 

purchased. Husband wore the ring and watch every day, and before he 

went to the hospital where he passed away, gave the watch and ring to his 

wife to hold. At issue before the court was whether the watch and ring 

worn by the husband should be considered an estate asset or whether it 

was a joint asset such that it would be the property of wife. In analyzing 

the issue, the court declared that “when a joint account holder withdraws 

funds from a bank account that is held as joint tenancy” it “terminates the 

joint tenancy nature of the funds and severs the right of survivorship.” 

Thus, once the funds were withdrawn from the checking account, they 

were no longer joint funds. The court went on to consider whether a joint 

tenancy was created with respect to the ring and watch, and considered the 

four “unities” of joint tenancy: possession, interest, title and time. 

Because husband exclusively used the watch and ring and treated them as 

his property, there was no unity of possession, and the court therefore held 

the ring and watch should be assets of the estate. 

24

E. Adverse Possession 

1. *Jokela v. Jokela, No. A11-1246, 2012 WL 3553110 (Minn. Ct. App. 

Aug. 20, 2012). Surviving son’s continuous occupancy of decedent’s 

land and failure to agree to probate proceeding to determine descent 

of land was not sufficient to support a finding that son adversely 

possessed land. Decedent died intestate in 1982 and owned a large 

amount of farmland. Decedent was survived by three children. One of 

decedent’s sons occupied the farmland (Wendell) after decedent’s death, 

however decedent’s estate was never probated due to Wendell’s reluctance 

to do so. Decedent’s other children died in 2005 and 2006. In 2010, the 

deceased children’s surviving spouses petitioned for a decree of descent to 

divide the property so they would receive their spouse’s share of the 

property. The petition was granted, and Wendell appealed, arguing that he 

had acquired title to the property by adverse possession. Under Minnesota 

law, adverse possession requires a showing, “by clear and convincing 

evidence, an actual, open, hostile, continuous, and exclusive possession” 

for 15 years. Even though Wendell had not agreed to settle his father’s 

estate, the evidence did not show that he made any explicit or implicit 

attempt to oust his siblings from using the property nor did it show that he 

even communicated to his siblings his belief that he was the sole owner of 

the farmland. For these reasons, the court rejected Wendell’s argument 

and upheld the district court’s determination of descent ruling. 

F. No-Contest Clauses 

1. Martin v. Ullsperger, 822 N.W.2d 382 (Neb. 2012). A will cannot be 

attacked, for purposes of no-contest clause analysis, after a court has 

issue an order closing decedent’s estate. Under decedent’s will, his four 

surviving children are beneficiaries of a joint life estate interest in 

farmland. The will provided that no life tenant or remainderman could 

partition the property during the existence of any life tenancy. Through a 

codicil, decedent later added a no-contest provision, which would serve to 

disinherit any child who contested his will. After the probate court 

entered the final order in decedent’s probate proceeding, daughter and son 

brought a partition action in district court to divide the property. The 

district court dismissed the partition action because it concluded that 

daughter and son were bound by the will’s restriction against partition. 

The remaining siblings, however, argue that daughter and son have also 

forfeited their interest in the farmland by contesting the will through a 

partition action. The court held that the prohibition on partition was 

enforceable as a result of the probate of decedent’s will without objection; 

but the attempt to partition does not act as a will contest, requiring 

forfeiture of daughter and son’s interest. Even if a partition action may be 

considered an indirect will challenge, the court reasoned that it is not 

possible to attack a will after the court has issued an order closing the 

25

estate. Consequently, the no-contest clause was not triggered by daughter 

and son’s partition action. 

G. Retroactive Application of Statutes and Violations of Due Process 

1. Bird v. BNY Mellon N.A., 974 N.E.2d 21 (Mass. 2012). The 

retroactive application of a statute, changing the presumptive 

definition of “issue,” is unconstitutional as applied to a trust where 

the beneficiary’s interest had already vested. Decedent executed a will 

with a testamentary trust that benefitted her son, her grandsons, and their 

issue. Decedent died in 1942. At the time decedent’s will was executed, 

G.L. c. 210 § 8, a statute prescribing a rule of construction for certain 

types of instruments relating to inheritance, provided that unless the 

contrary plainly appeared by the terms of the instrument, an adopted child 

was excluded from the definition of “child,” unless the child had been 

adopted by the person creating the testamentary instrument. In 1958, the 

Massachusetts legislature amended the statute to effectively reverse the 

presumption: the term “child” would include adopted children unless a 

contrary intent plainly appeared in the instrument. The legislature enacted 

another amendment to the statute in 2009 that made the 1958 amendment 

applicable to all testamentary instruments, regardless of when executed. 

Great-granddaughter of decedent had two adopted brothers. Since greatgranddaughter’s 

father’s death in 2007, she had been receiving income 

distributions from the testamentary trust established by decedent in her 

will; great-granddaughter’s two adopted brothers had not. After the 

effective date of the 2009 amendment, trustees of decedent’s trust 

informed great-granddaughter that her two adopted brothers would now be 

considered “issue” of the decedent, and as such, were to become income 

beneficiaries under the trust. Accordingly, great-granddaughter’s income 

share would be split three ways, so that great-granddaughter and her two 

adopted brothers would all receive an equal share. Great-granddaughter 

claimed that the retroactive application of the amendment was 

unconstitutional as applied to the trust and constituted a violation of due 

process. The court noted that retroactive statutes are generally not deemed 

to be unconstitutional unless they are unreasonable, upon a balancing of 

opposing considerations. The court considered three factors in assessing 

reasonableness: the nature of the public interest motivating the 2009 

amendment’s enactment, the nature of the rights affected retroactively, 

and the extent of the 2009 amendment’s impact on those rights. 

Ultimately, the court found that, although equalizing inheritance rights 

between biological and adopted children is an important initiative, it is 

clear that great-granddaughter’s interest in the trust had vested prior to the 

effective date of the amendment because she had received income 

distributions from the trust since her father’s death in 2007; this vested 

interest was diminished by the 2009 amendment. The retroactive 

application of the amendment was also unfair to decedent, who was long 

deceased and unable to change her estate plan in response to the new 

26

presumption. Finally, the court found that the scope of greatgranddaughter’s 

deprivation was large and the statute was not narrowly 

tailored to meet its goal. Consequently, the court held that the retroactive 

application of the 2009 amendment was unreasonable and unconstitutional 

as applied to decedent’s trust. 

H. Survival of Claims After Decedent’s Death 

1. Kraft Power Corporation v. Merrill, 981 N.E.2d 671 (Mass. 2013). 

Whether claims based on corporate disregard survive decedent’s 

death depends on the underlying substance of the claim; contract 

claims typically survive, while tort claims typically do not. Decedent 

was the sole shareholder, director, and officer of a corporation. Kraft sold 

equipment to the corporation, but the corporation could not pay for it. 

Decedent sold the equipment to a third party and used the proceeds to pay 

personal obligations rather than to pay off the corporation’s outstanding 

debt to Kraft. The corporation filed for receivership and decedent 

transferred all of the corporation’s assets to another corporation wholly 

owned by him. Kraft sued the corporation for breach of contract. 

Decedent died and default judgment was entered against the corporation. 

Based on the doctrine of corporate disregard (i.e. piercing the corporate 

veil), Kraft sought to hold decedent, and, hence, his estate, directly liable 

for the corporation’s actions; Kraft’s claims alleged breach of contract, 

fraudulent transfers under the Uniform Fraudulent Transfer Act (UFTA), 

violations of Massachusetts Chapter 93A, and fraud. The court noted that, 

for purposes of determining whether Kraft’s claims survived decedent’s 

death, the analysis is no different when a cause of action is premised on 

piercing the corporate veil than when it has been brought directly against 

an alleged wrongdoer. The doctrine is not itself a cause of action but an 

equitable tool that authorizes courts, in rare circumstances, to ignore 

corporate formalities in order to avoid injustice. To determine whether a 

cause of action survives the death of a party, the court reasoned that is 

must look beneath the corporate veil to the underlying substantive claim 

for which a plaintiff seeks to impose a corporation’s liability on an 

individual shareholder. Under G.L. c. 228 § 1, claims which survive a 

decedent’s death include certain enumerated tort actions, in addition to the 

actions “which survived by the common law.” At common law, actions 

based on contract survived the death of a party. Accordingly, the court 

held that Kraft’s breach of contract claim survived decedent’s death. As 

to the UFTA claim, the court found that where relief from a fraudulent 

transfer is premised on a contractual right to payment, the claim survives 

because contract actions survive at common law. Because the underlying 

claim for which Kraft sought relief under UFTA was contractual, not 

tortious, the court held that the UFTA claim also survived decedent’s 

death. With respect to Chapter 93A, which governs commercial 

transactions between two parties acting in a business context, the court 

noted that some Chapter 93A claims are tort-based while others are 

27

I. Validity of Bequest 

III. TRUST ISSUES 

contract-based. Damages under Chapter 93A, however, are meant to be 

punitive. The court reasoned that a person who has already died cannot be 

punished, and, as a result, multiple damages may not be sought under 

Chapter 93A after a decedent’s death. Finally, Kraft’s fraud claim alleged 

that decedent misrepresented to Kraft whether the corporation was 

insolvent. Under the common law, a claim of fraud abated upon the death 

of either party. Moreover, fraud is not one of the enumerated torts saved 

by Massachusetts’s survival statute, G.L. c. 228 § 1. As a result, the court 

held that Kraft’s fraud claim should be dismissed. 

1. Osman v. Osman, 737 S.E.2d 876 (Va. 2013). The murderer of the 

decedent was not entitled to his share of the estate despite being found 

not guilty by reason of insanity. Decedent died as a result of being 

murdered by one of her sons. That son was found not guilty by reason of 

insanity. The executors of the estate filed a petition to determine that the 

son was a “slayer” under the Slayer Statute and, as a result, not entitled to 

inherit asset from his mother’s estate. The statute defines a slayer as 

anyone who is convicted of murder or who is determined by a 

preponderance of the evidence to have committed an action that results in 

the death of the decedent. The question before the Court was whether the 

son committed the action by a preponderance of the evidence. The 

purpose of the statute is to not allow a person to profit by his wrong. 

While the son was excused from criminal punishment because he did not 

understand his actions, he nevertheless did intend to take such actions. 

The Court held that the son was found to have committed the action that 

resulted in his mother’s death by a preponderance of the evidence, and 

was a “slayer” under the statute. The Court continued and stated that 

someone who commits murder in self-defense is not a “slayer” under the 

statute because that action is not a “wrong.” 

A. Trust Amendments 

1. McEachern v. Budnick, 964 N.E.2d 999 (Mass. App. Ct. 2012). The 

execution of a trust amendment by an individual who is both the 

settlor and trustee of the trust does not automatically constitute 

delivery of the amendment to the trustee so as to make it effective. In 

a revocable trust agreement, the settlor, who was also the sole trustee, 

expressly excluded her son as a beneficiary. In two subsequent 

amendments, the settlor added language by which certain real property 

was to be distributed to her son upon her death. Upon executing these 

amendments, however, the settlor retained the originals in her possession, 

telling her lawyer that she wanted to hold them until she decided whether 

she actually wanted to provide anything for her son. After the settlor’s 

28

death, her daughter, in her capacity as the successor trustee, brought an 

action to evict the son from the real property. The son argued in 

opposition that he was the rightful owner pursuant to the trust 

amendments. The Superior Court agreed, granting summary judgment in 

the son’s favor and holding that the trust amendments were effective when 

executed because the settlor was also the sole trustee, and so delivery was 

automatic. On appeal, the court reversed and remanded for further 

proceedings to determine the settlor’s intent. In so doing, the appellate 

court explained that delivery means more than physical transfer of 

possession. “Under Massachusetts law, delivery of a written instrument 

amending a trust ... is principally a question of intent.” 

2. Johnessee v. Schnepf, 975 N.E.2d 1090 (Ill. App. Ct. 2012). The trust 

agreement did not provide that anyone had the power to direct the 

trustee; therefore, the grantor did not have the right to amend the 

trust agreement. Grantor created a land trust and funded it with certain 

property. The trust agreement did not contain an express provision 

granting any person the power to amend or revoke the trust agreement. 

Grantor crossed out some of the beneficiaries’ names in an attempt to 

amend the trust agreement. Illinois statutes provide that a land trust may 

be amended if the trust agreement vests in the beneficiary the right to 

direct the trustee to convey title. The trust agreement did not provide the 

beneficiaries or anyone else with the power to direct the trustee; therefore, 

the grantor did not have the power to amend the trust agreement. 

3. Perosi v. LiGreci, 948 N.Y.S.2d 629 (N.Y. App. Div. 2012). The 

settlor’s attorney-in-fact had authority to amend the trust agreement. 

Grantor established an irrevocable trust agreement and appointed his 

brother as trustee. At a later time, grantor executed a power of attorney 

appointing his daughter as attorney-in-fact with the power to engage in 

“estate transactions.” The attorney-in-fact subsequently executed an 

amendment to the trust agreement attempting to remove the trustee and 

successor trustee. Fifteen days later, the grantor died. The attorney-infact 

and the newly appointed successor trustee filed a petition against the 

removed trustee for an accounting. New York law provides that, unless 

the trust agreement provides otherwise, an irrevocable trust agreement 

may be amended by the grantor upon consent of all persons beneficially 

interested in the trust. The Court stated that New York statutes do not 

specifically authorize an attorney-in fact to amend a trust agreement but 

that an attorney-in-fact is “essentially an alter ego” of the principal and is 

authorized to act with respect to any and all matters on behalf of the 

principal. Therefore, the Court held that absent a special delegation of the 

power in the trust agreement or in the power of attorney, the attorney-infact 

had the power to amend the trust as the alter ego of the grantor. 

4. King v. Lynch, 139 Cal. Rptr. 3d 553 (Cal. Ct. App. 2012). Any 

modification of the trust agreement must satisfy the requirements of 

29

the trust agreement. Husband and wife were the settlors of a joint 

revocable trust, which provided that it may be amended during the 

settlors’ lifetimes by a writing signed by both settlors and delivered to the 

trustee. Wife suffered a severe brain injury in 2006, which left her 

incompetent. After that time, husband amended the trust agreement to 

reduce the specific bequests to four of his children, but not reducing the 

share that his fifth child would receive. After the deaths of both settlors, 

the children filed a proceeding to determine the operative trust agreement. 

California statutes provide a mechanism for revoking and amending trusts, 

but provided that the statute only applies if the agreement does not address 

the mechanisms of revocation and amendment. Because the trust 

agreement included a provision for amending the trust, the settlors were 

required to satisfy such procedure in order for any amendment to be valid. 

B. Dealing With Trust Assets 

1. Ford v. Reddick, 735 S.E.2d 809 (Ga. Ct. App. 2012). A deed that does 

not properly designate a grantee does not convey title, and, under 

Georgia’s Trust Code, in order for a deed to convey real property to a 

trust, the trustee must be designated as the grantee of legal title. Prior 

to her death, decedent’s attorney-in-fact executed two warranty deeds 

conveying decedent’s real property to “Morison Outreach, a Trust.” Prior 

to her death, decedent sued to set aside those deeds. Decedent contended 

that the deeds were invalid as they conveyed property to a trust instead of 

a trustee. Following decedent’s death, decedent’s executor was 

substituted as the plaintiff. The trial court and the Georgia Court of 

Appeals agreed with decedent’s contention. The court held that it is wellsettled 

in Georgia that a trust can only convey or receive property through 

its trustee. 

2. In the Matter of the Judicial Settlement of Knox, 946 N.Y.S.2d 817 

(N.Y. App. Div. 2011). (See related case in outline at II. G. 3.) All 

cotrustees are jointly liable for any damages and one cofiduciary may 

not prevail in a cause of action against other cofiduciaries for breach 

of an obligation. Two individual cotrustees filed a claim against the 

corporate trustee for its investment in a stock which became worthless 

within one year of the investment arguing that the corporate trustee failed 

to adhere to the prudent investor rule. The Court held that pursuant to the 

cofiduciary liability rule, all cotrustees are jointly liable. Additionally, 

while a cotrustee may delegate some aspect of trust management, such 

delegation does not give a trustee the right to abdicate such trustee’s duty 

to remain active in the trust administration. The exception to the 

cofiduciary liability rule where cofiduciaries are unaware of the action was 

not applicable in this case because the individual trustees were active in 

the trust administration and this particular investment was directed by one 

of the individual trustees. 

30

3. Estate of Nuo Djeljaj, 954 N.Y.S.2d 853 (N.Y. Surr. Ct. 2012). De facto 

fiduciary has duty to account to beneficiaries. After decedent’s death, 

attorney provided beneficiaries with an informal accounting reporting 

transactions involving decedent’s funds. Attorney later argued that he 

never acted as attorney-in-fact and is not a fiduciary, and he does not have 

a duty to account. An agent who receives funds on behalf of a principal 

has a duty to keep and render an accounting. Additionally, a court has the 

equitable power to compel an accounting. In this case, attorney acted as a 

de facto fiduciary and was required to furnish an accounting. 

4. Kesling v. Kesling, 967 N.E.2d 66 (Ind. Ct. App. 2012). Shareholder’s 

transfer of shares of stock into a revocable trust did not extinguish 

shareholder’s ownership of the stock. Shareholders entered into a 

shareholder’s agreement, which limited the rights of the shareholders to 

transfer the stock. Settlor transferred his shares to a revocable trust, and 

other shareholders argued that they had the right to purchase such shares 

pursuant to the shareholder agreement. The Court held that because the 

trust was revocable by the settlor, was included in his estate for federal 

estate tax purposes, and that his creditors could attach the trust assets, the 

settlor remained the shareholder of the stock. 

5. Rose v. Waldrop, 730 S.E.2d 529 (Ga. Ct. App. 2012). After acquired 

property clauses are insufficient in and of themselves and a court 

must review the circumstances surrounding the transfer of the 

property to a trust. The trust agreement indicated that the decedent was 

transferring assets “presently owned or hereafter acquired…” to the trust. 

The issue before the court was whether the after acquired assets were 

properly transferred to the trust. The Court held that a formal transfer of 

property to a trust is not required but that a clause transferring after 

acquired property does not automatically result in the property being 

transferred. A court must explore the circumstances surrounding each 

property to determine whether the settlor intended to transfer it to the trust. 

6. In re HSBC Bank USA and Ely, 952 N.Y.S.2d 740 (N.Y. Surr. Ct. 

2012). When determining whether trustee held a concentration of 

assets, all assets were to be considered. Trust was established for 

decedent and upon decedent’s death, the remaining trust funds were paid 

to a new trust for the benefit of his surviving spouse. The corporate 

trustee sought to have its accountings approved and the surviving spouse 

objected as a beneficiary and as executor of decedent’s estate alleging that 

the trustee violated the prudent investor rule. In particular, the acquisition 

and retention of various stock holdings was objected to as it comprised 

more than five percent of the trust’s assets if the closely-held assets held in 

the trust were excluded. The Court held that standard of conduct 

contained in the prudent investor rule does not focus on the outcome; 

rather, compliance is determined in light of facts and circumstances 

prevailing at the time of the decision. It was proper to consider the 

31

closely-held asset as part of the portfolio when determining whether the 

trustee held a concentration of assets and the trustee need not diversify 

when it is in the best interests of the beneficiaries. 

7. In the Matter of Brownell, 44 A.3d 534 (N.H. 2012). Post-divorce trust 

distributions were properly characterized as marital property. 

Husband and wife were married for thirteen years and the only marital 

asset is the husband’s inheritance from a trust created by his mother. 

Husband was one of five beneficiaries of the trust and he received 

distributions from the trust, a portion of which he spent on illegal drugs. 

Husband claimed that the potential post-divorce distributions from the 

trust should not be classified as marital property subject to equitable 

distribution. The Court upheld the trial court’s determination that such 

distributions were marital property. Additionally, the Court determined 

that the husband dissipated trust distributions and he had to pay wife her 

proper share of such marital property. 

8. Fulp v. Gilliland, 972 N.E.2d 955 (Ind. Ct. App. 2012). Settlor of a trust 

entered into a valid agreement and the other party was entitled to 

specific performance. Settlor executed a revocable trust and transferred 

the family farm to it. Settlor’s son proposed purchasing the farm from 

settlor, and presented her with a variety of sales price options. Relying on 

a transaction six years prior when the settlor sold some acreage to her 

granddaughter, settlor selected a sales price of $2,250 per acre despite the 

son’s admission that the value of the farm was worth more than that. 

Settlor entered into a written purchase agreement, selling the farm for a 

price of $450,252. The farm was subsequently appraised at $900,000. 

Shortly thereafter, settlor’s attorney notified son that the settlor was not 

competent and that a successor trustee was repudiating the contract. Son 

sued the revocable trust for specific performance. The Court found that 

the settlor entered into a valid agreement as the settlor of the trust, and that 

by taking such action, she was essentially amending the trust agreement. 

The Court additionally noted that to hold that the settlor did not have the 

authority to enter into the contract as trustee would in effect make the trust 

irrevocable. As a result, son was entitled to specific performance. 

9. Shelton v. Tamposi, 62 A.3d 741 (N.H. 2013). Investment directors 

had exclusive authority to disburse trust assets. Trust agreement 

provided that two children were to act as investment directors with 

respect to the various subtrusts created by the trust agreement, and as 

investment directors the two children had fiduciary duties that are 

more commonly vested in a trustee. Trustee and beneficiary of one of 

the trusts filed a complaint against the investment directors, which 

requested among other things that the trustee, and not the investment 

directors, had the power to determine disbursements from the trust. The 

Court found that the investment directors had the authority to control the 

trust assets. The investment directors controlled distributions to the trust 

32

C. Trust Construction 

but that the trustee had the authority to determine the amount and timing 

of distributions from the trust. The Court held that the authority of the 

trustee was subordinate to the investment directors and the investment 

directors had exclusive authority to determine disbursements to the 

various subtrusts. The trust agreement also had an in terrorem clause. 

The trustee also contested the ruling that the beneficiary had violated the 

in terrorem clause contained in the trust agreement. The Court held that 

the trustee did not have standing to challenge the in terrorem clause 

because the trustee was not the party harmed by it. Finally, the trial court 

had the authority to require the trustee to pay her own attorneys’ fees 

because the litigation was constituted a breach of fiduciary duties. 

1. Thorpe v. Reed, 150 Cal. Rptr. 3d 454 (Cal. Ct. App. 2012). Successor 

trustee was not entitled to compensation if the terms of the trust 

agreement provide that a successor trustee would not be compensated. 

A young man was injured in two separate accidents. A special needs trust 

was established to hold a home and funds from the resulting litigations. 

The man’s mother was named as the trustee of the special needs trust. 

Ultimately, the mother was replaced by the public guardian who served as 

the temporary trustee. The public guardian was replaced by a professional 

fiduciary who was appointed as the temporary successor trustee. After a 

series of hearings and continuances, at which the family, the trust 

beneficiary, and the public guardian all suggested that the conservatorship 

was no longer necessary and that a family member could act as trustee, the 

trial court appointed the professional fiduciary as the permanent trustee. 

The trial court cited California Probate Code §§15642, subd. (e), and 

17206 as authority for the court to award fees in spite of the specific 

prohibition of fees to a successor trustee in the trust agreement, and, 

accordingly, the trial court awarded fees to the professional fiduciary, in 

its capacity as the successor trustee. The appellate court reversed the trial 

court and held that there was no authority for a court to award fees to a 

successor trustee who accepted appointment as trustee and acted in that 

capacity, but did not have to accept the appointment if it did not want to 

act because the trust agreement restricted or prohibited trustee 

compensation. 

2. Tait v. Community First Trust Company, 2012 Ark. 455 (2012). The 

interests of the beneficiaries who predeceased the surviving settlor of 

an inter vivos trust did not lapse upon the death of the beneficiaries. A 

husband and wife created a joint revocable trust. The trust assets 

consisted of three classes of property: (1) the husband’s separate property; 

(2) the wife’s separate property; and (3) the couple’s joint property. The 

trust agreement was revocable, but became irrevocable upon the death of 

the first spouse. At the death of the surviving spouse, the remaining trust 

assets would be distributed as follows: (1) the joint property and the 

33

husband’s separate property would be distributed to two stepchildren and 

certain nephews and nieces; and (2) the wife’s separate property would be 

distributed among three of her children. The wife died in May 2001. The 

husband’s stepsons died in November 2004, and November 2008, 

respectively, and each stepson was survived by his own children. One of 

the husband’s nephews also died in June 2009, without surviving issue. 

The husband then died in January 2011. The trustee filed a petition to 

construe the trust, taking the position that the interests of the deceased 

beneficiaries lapsed because they predeceased the husband, who was the 

surviving settlor, and that the descendants of the deceased beneficiaries 

were not entitled to share in the remaining trust assets. The descendants 

argued that the interests of the deceased beneficiaries did not lapse 

because their interests vested at the time the trust was created. In a case of 

first impression, the Arkansas Supreme Court addressed the issue of 

whether the interest of a beneficiary to an inter vivos trust lapsed when the 

beneficiary dies before the settlor. The court held that the great weight of 

authority holds that the interest of a beneficiary to an inter vivos trust does 

not lapse when the beneficiary predeceases the settlor because the interest 

of such beneficiary vests when the trust is created, and, thus, does not 

lapse with the death of that beneficiary. 

3. In the Matter of the Cecilia Kincaid Gift Trust for George, 278 P.3d 

1026 (Mont. 2012). A decedent’s biological child who was given up for 

adoption was not entitled to a distribution from the trust as a 

descendant of the decedent because she was excluded as a beneficiary 

by the provisions of the trust agreement. In 1976, a mother created a 

trust for the benefit of her son. The son died intestate in 2009, triggering 

the termination of the trust and the distribution of the remaining trust 

assets. In 2010, the trustees filed a final account and petitioned for 

settlement and distribution of the trust assets. The deceased son’s 

daughter, whom the son had given up for adoption, objected to being 

omitted from the proposed trust distribution. The trust agreement 

provided that, upon the son’s death, the remaining trust assets were to be 

distributed to the son’s “living descendants” defined to include lawful 

blood descendants, but also provided that an adopted child would be 

considered the child of the adopting parent and not the biological parents. 

The trial court construed the trust to limit the adopted child provisions to 

only children adopted into the family (and not the child who was adopted 

out of the family), and held that adopted child was entitled to a distribution 

from the trust. The trustees appealed. On appeal, the Montana Supreme 

Court reversed the trial court and excluded the adopted child from the trust 

distributions on the grounds that: (1) the trust terms were not ambiguous 

and that the plain meaning of the trust made no distinction between 

children adopted into the family and children adopted out of the family; 

(2) language would need to be added to include the adopted child, and 

adding terms to the trust was improper; and (3) the plain language of the 

trust excluded the adopted child as the son’s descendant. 

34

4. *In the Matter of the Frank J. Rekucki, Sr. Revocable Trust under 

Agreement dated September 8, 1997, No. A11-2028, 2012 WL 2368992 

(Minn. Ct. App. June 25, 2012). Because the settlement agreement 

conflicted with the trust agreement provision regarding the 

appointment and succession of trustees, the settlement agreement was 

unenforceable. After the decedent died, his children got involved in 

litigation regarding his revocable trust. Some of the parties signed a 

settlement agreement that provided that the trustee of the trust would 

resign and would be replaced by two specifically named cotrustees. One 

of the parties then petitioned the court to enforce the settlement agreement. 

The district court entered an order enforcing the settlement agreement, but 

the Minnesota Court of Appeals reversed. The problem was that the 

decedent’s revocable trust agreement contained a specific provision 

regarding the appointment and succession of trustees. The appellate court 

held that, under Minnesota law, a trustee has no inherent power to appoint 

a cotrustee or a successor trustee, and, absent legislation to the contrary, 

the trust agreement controls the appointment of trustees. Minnesota law 

provides that only by order of a district court can a successor trustee other 

than the one specified in the trust agreement be appointed. Because the 

settlement agreement conflicted with the settlor’s intent as expressed in 

trust agreement’s provisions regarding the appointment and succession of 

trustee, it was unenforceable. 

5. In the Matter of the Trust created by Lydia Butler Dwight, 949 

N.Y.S.2d 921 (N.Y. Surr. Ct. 2012). The term “lawful issue” in the 

trust agreement does not include children born out of wedlock. The 

decedent created a trust for the benefit of her “lawful issue” per stirpes. 

The decedent was survived by three children. One of the decedent’s 

children died and his income became distributable to his three children, 

one of who later died but was survived by one nonmarital child. 

JPMorgan Chase Bank, N.A., as trustee of the trust, filed an action to 

determine whether the trust term “lawful issue” included the nonmarital 

child. The nonmarital child submitted evidence that she was the deceased 

child’s daughter, including affidavits from both of her paternal aunts who 

would have otherwise received her share, her birth certificate, photos, 

letters, a copy of her deceased grandfather’s will, and a copy of her 

deceased father’s will, which named the child as his daughter, executor, 

and beneficiary. The court, however, held that the term “lawful issue” 

could only be interpreted to include marital children on the grounds that: 

(1) in spite of the extensive evidence of paternity that would have allowed 

the nonmarital child to take under the laws of intestacy from her father, the 

evidence did not suffice to qualify her as “lawful issue” under the terms of 

the trust agreement; (2) under the law as it existed when the trust was 

created in 1971, “lawful issue” included only those children born in 

wedlock; (3) after the execution of the trust agreement, New York enacted 

a law that allowed for a child born out of wedlock to be “legitimized” and 

thus deemed “lawful issue,” but this statute was ineffective to render the 

35

nonmarital child a beneficiary because it was not the law when the trust 

was executed and would be applied only if there was a court adjudication 

of legitimacy. 

6. In re Final Accounting of Leonard B. Boehner, 941 N.Y.S.2d 155 

(N.Y. App. Div. 2012). While former law prohibited adopted children 

from defeating rights of remainder beneficiaries when an adoptive 

parent died without biological children, it did not apply to prevent 

adopted children of one of the lifetime beneficiary’s three children, as 

descendants of the lifetime beneficiary, from sharing in the remaining 

trust assets with other remainder beneficiaries. In 1957, the decedent 

created an irrevocable trust for the lifetime benefit of her daughter, Lydia. 

The trust agreement provided that, upon Lydia’s death, the remaining trust 

assets would be divided into equal shares for each of Lydia’s children. 

Upon the death of one of Lydia’s children, the trustee was to distribute 

that deceased child’s share to the descendants of such child. In 1988, 

Lydia died and the court approved the division of the remaining trust 

assets into three separate trusts, one of each of Lydia’s children. One of 

her children did not have any biological issue, but married a woman who 

had two children whom he adopted in 1984 when they were 31 and 29 

years old, respectively. That child of Lydia’s then died. The court upheld 

the decision that the remaining trust assets should be distributed 1/3 to 

each of Lydia’s living children and 1/3 to the deceased child’s adopted 

children. 

7. Rockland Trust Company v. Attorney General, 976 N.E.2d 801 (Mass. 

2012). The trust agreement would be reformed to provide that if 

distributable funds exceeded $10,000, they would be divided into a 

number of scholarships in equal amounts, each scholarship being at 

least $10,000. The decedent established a trust that, upon her death, 

would pay from the income one or two $10,000 scholarships to certain 

high school students and, if the income was less than $10,000, the trust 

provided that the whole amount of the net income to be paid as a 

scholarship. The trust did not identify any other beneficiaries. The trust 

applied to the IRS to be treated as a private foundation, but the IRS 

declined to grant the status unless the trust agreement was amended to 

demonstrate a general intent to benefit charity and not merely a specific 

intent to benefit a particular institution. Although the trust set forth a 

specific charitable purpose, it did not contain language evidencing a 

general charitable intent. (The consequence of failing to qualify as a 

private foundation was payment of income taxes at a high marginal rate, 

which would reduce the income available for scholarships.) The trustee 

filed an action to reform the trust and alleged that, due to a scrivener’s 

error, the trust language did not reflect the settlor’s general charitable 

intent. The attorney who drafted the trust agreement gave an affidavit that 

confirmed this. Also, two of the decedent’s friends gave affidavits 

attesting to her charitable donations and volunteer work. In addition to 

36

adding the “general charitable intent” language, the trustee also asked that 

the trust be reformed to avoid certain taxes on the undistributed income of 

the trust. The trustee was finding it difficult to comply with IRC § 4942 

(which imposes a tax on any undistributed income retained by a private 

foundation at the end of any taxable period in which the initial tax is 

imposed) because the scholarship amounts could not exceed $10,000 (or 

multiples thereof). Therefore, the trustee asked that the trust be reformed 

to allow the scholarship committee to distribute all the distributable funds 

in one or more scholarships. The Massachusetts Supreme Court allowed 

the trust to be reformed as requested because the record was clear that the 

settlor intended to provide scholarships annually and that she intended that 

as much of the trust income as possible be used for that purpose. As it 

was written, the trust agreement resulted in tax consequences that reduced 

the amount of income used for scholarships and frustrated the settlor’s 

intent. The court further found that the proposed reformation would not 

be adverse to any person’s or entity’s interests under the trust agreement 

as there were no other beneficiaries. Therefore, the reformation was 

allowed. 

8. Koulogeorge v. Campbell, 2012 Ill. Ct. App. 112812 (2012). The 

deceased settlor of a revocable trust agreement did not adeem or 

revoke certain bequests to charitable foundations by lifetime gifts 

made by the settlor to such foundations. During his lifetime, the 

decedent was a member and regular contributor to the Rotary Foundations. 

The decedent died in 2007, leaving behind a pourover will and revocable 

trust agreement to dispose of his estate. The trust agreement provided 

that, upon the decedent’s death, the trustee was to distribute a certain 

number of shares of Walgreen Co. stock to various beneficiaries, including 

the Rotary Foundations, pursuant to Exhibit A to the trust agreement. The 

decedent then gave the Exhibit A in a sealed envelope to his nominated 

trustee. In the fall of 1999, the decedent made charitable contributions of 

Walgreens stock to the Rotary Foundation, among others. At the time of 

the decedent’s death, he owned an insufficient amount of shares to satisfy 

all of the gifts on Exhibit A. The trust beneficiaries, who were the 

decedent’s descendants, argued that the lifetime gift made by the decedent 

to the Rotary Foundations adeemed the gifts to be made to such 

foundations from the trust estate at the decedents’ death. The court held 

that to presume that the decedent intended to adeem gifts to the Rotary 

Foundations would be contrary to the plain language of the trust as a 

whole, and the trust beneficiaries had failed to demonstrate that a latent 

ambiguity existed in the trust agreement. 

9. Otto v. Gore, 45 A.3d 120 (Del. 2012). Extrinsic evidence may be 

considered when determining the validity of a trust agreement and it 

was not the settlors’ intent to treat adult adoptees as grandchildren. 

Settlors created two documents in 1972, one in May and another in 

October due to concerns over their estate tax liability exposure. Some 

37

documentation was discovered that indicated that there was an intent to 

fund the May trust; however, none of the formal procedures were 

observed. The October trust, however, was formally funded. The ultimate 

disposition of the trust for the grandchildren involved a calculation that 

took into consideration the stock that each grandchild should receive from 

his or her respective parent, which was not included in the May trust. One 

family line, therefore, would receive less from the October trust because 

they were expected to receive more than their cousins from their mother; 

however, the mother had had much of her stock redeemed and her children 

ultimately would have less stock than their cousins. To reduce the 

perceived unfairness, the mother adopted her ex-husband and the father of 

her children, who would then presumably gift his shares to their children. 

However, after being adopted, the ex-husband had a change of heart and 

decided to keep the distributions for himself. 

The Court found that extrinsic evidence could be considered when 

determining whether there was intent to create the trust. The Court found 

that the May trust was not properly created because the settlors did not 

disclose the existence of the trust to anyone and they did not follow the 

procedures for funding the trust. Additionally, Schedule A of the trust was 

not initialed. The Court further upheld the formula found in the October 

trust as a clear expression of the settlors’ intent. Finally, the Court found 

that adult adoptees with whom the settlors’ children did not have a parentchild 

relationship were not intended to be treated as grandchildren for 

purposes of becoming a beneficiary of the trust. The adoption was an 

attempt to thwart the purpose of the trust and the ex-husband is not 

recognized as a grandchild. 

10. Dixon v. Weitekamp-Diller, 979 N.E.2d (Ill. App. Ct. 2012). Adopted 

adults were not treated as descendants for purposes of determining 

interest in trust. At age 87, trust beneficiary married for the first time. 

When beneficiary attained the age of 94, he adopted the three adult 

daughters of his wife, who were in their 50’s. Upon beneficiary’s death, 

adopted children argued that they were beneficiaries of the trusts. The law 

provides that adopted children are to be treated as being born to the 

adoptive parent. The Court held that to permit the beneficiary to 

circumvent the desires of the settlors by adopting three adults would 

thwart the intent of those grantors and the adopted adults were not treated 

as beneficiary’s descendants for purposes of becoming trust beneficiaries. 

11. Sefton v. Sefton, 206 Cal. Rptr. 3d 875 (Cal. Ct. App. 2012). The 

statute governing powers of appointment in effect when the power 

was created governs the exercise of the power. The beneficiary was 

granted a power of appointment over the trust assets which could be 

exercised in favor of his issue. The law governing powers of 

appointments in effect when the trust was established provided that unless 

the grant of the power of appointment provided otherwise, an exercise 

38

may provide that at least a substantial portion went to each member of the 

class of appointees. By the time that the power was exercised, however, 

the law provided that powers of appointments could be exclusive, meaning 

that a potential appointee could be excluded. Beneficiary exercised the 

power of appointment to exclude one of his children. The Court held that 

to apply the law at the time of exercise could have constitutional 

implications and, therefore, the law in effect when the power was created 

governed the exercise. As a result, the exercise was invalid because one 

of the appointees did not receive a substantial portion. 

12. Trusts for McDonald, 953 N.Y.S.2d 751 (N.Y. App. Div. 2012). Trustee 

has broad discretion to make distributions and a trustee will not be 

removed solely due to friction with the beneficiaries. Beneficiaries’ 

mother was trustee of the trust created by trustee’s father. The trust 

agreement provided that the trustee had “sole discretion” to make 

distributions as she “deems advisable” to provide for the beneficiaries’ 

“maintenance, support, education, health and welfare….” Trustee refused 

to make distributions to the beneficiaries for their educational expenses. 

The Court provided that it would not interfere with the trustee’s discretion 

unless it can be shown that there was an abuse. The trust agreement 

manifested an intent to give the trustee broad discretion and there was no 

abuse of discretionary because the beneficiaries had other sources of funds 

available to provide for their education expenses. Additionally, the trustee 

will not be removed due to “mere friction or disharmony.” 

13. Van Gundy v. Van Gundy, 292 P.3d 1201 (Colo. App. 2012). Trust 

agreement may limit trustee’s duties with respect to investments. 

Beneficiary created a trust which included a provision that permits the 

trustee to make investments, “whether or not such investments are of the 

character permissible for investments by fiduciaries under any applicable 

law.” Trustee invested 100% in stocks and mutual funds, many of which 

were purchased on margin and the trust suffered significant losses. 

Beneficiary asserted a breach of fiduciary duty against the trustee. While 

the prudent investor rule requires diversification, a trust provision may 

alter or eliminate such requirement. The Court held that a trust agreement 

may relax the duty to diversify and absent fraud, duress, or incapacity, a 

court should not change the terms of an agreement merely because the 

terms end up to be improvident. 

14. SBS Financial Services v. Plouf Family Trust, 821 N.W.2d 842 (S.D. 

2012). Trust agreement mandated that beneficiary’s share be offset by 

current amount of outstanding loan. Settlors loaned funds to daughter, 

which was secured by a mortgage. The mortgage was subsequently 

assigned to a trust of which the settlors were lifetime beneficiaries and 

trustees. Subsequently, daughter gave a bank another mortgage on the 

home. The trust agreement provided that a beneficiary’s interest shall be 

reduced by “any financial obligation of any beneficiar[y].” The Court 

39

held that such language was an unambiguous offset and the mortgage on 

the daughter’s property held by the trust was extinguished upon the 

settlors’ deaths. 

15. *Larkin v. Wells Fargo Bank, No. A12-0236, 2012 WL 4052844 (Minn. 

Ct. App. Sept. 17, 2012). Trustee could not delegate its duties if not 

authorized in trust agreement. A marital trust and a residuary trust were 

established for beneficiary and beneficiary was the sole beneficiary of the 

trusts during her lifetime. Beneficiary also was a co-trustee of each trust. 

Beneficiary executed a power of attorney appointing her attorney-in-fact, 

who stated that pursuant to the power of attorney, he was assuming 

beneficiary’s role as trustee. The corporate trustee filed a petition to have 

beneficiary removed as trustee. The Court subsequently revoked the 

attorney-in-fact’s authority to act on behalf of the beneficiary in trust 

related matters. While the power of attorney authorized the attorney-infact 

to engage in fiduciary transactions, the Court held that the beneficiary 

could not delegate her fiduciary duties unless authorized under the trust 

agreement. 

16. White v. Call, 738 S.E.2d 617 (Ga. 2013). Beneficiaries who waived 

their interest in a trust were not entitled to the proceeds. Decedent 

executed a trust agreement naming his wife and his three then living 

children as beneficiaries and that his wife would continue to be a 

beneficiary after his death provided that she had not remarried. The trust 

agreement provided that at wife’s death, the trust assets would be 

distributed to the surviving children of decedent. After the execution of the 

trust agreement, another child was born. After decedent’s death, wife 

remarried. Additionally, the three oldest children waived their interest in 

the trust. At wife’s death, the three oldest children claimed that they were 

entitled to a share of the trust. The Court held that the three oldest 

children waived their interest in the trust and that the youngest child was 

entitled to receive all the trust assets. 

17. Svenningsen v. Svenningsen, 959 N.Y.S.2d 237 (N.Y. App. Div. 2013). 

Adopted child who was subsequently adopted by another family 

remained an issue of decedent, and remained a beneficiary of various 

family trusts. In 1996, decedent and wife had four biological children 

when they adopted petitioner. Shortly thereafter, they had a fifth 

biological child. In 1995, decedent has established a trust for his children, 

which provided that when the oldest child attained the age of 30, it was to 

split into separate shares for each of his children. The trust agreement 

defined children as his four biological children by name and any 

additional children born to or adopted by the decedent. After petitioner’s 

adoption, decedent created a 1996 trust, with separate shares for each of 

his six children. Decedent died in 1997, and wife gave up her rights as the 

adoptive parent in 2004, and petitioner was adopted by another family. 

Petitioner brought an action to seek accountings for the various trusts, 

40

including those created for the benefit of wife pursuant to decedent’s will. 

Wife argued that petitioner was an adopted-out child and was not a 

beneficiary of the trusts. Adopted children are entitled to equal rights to 

those of biological children for all rights, including rights of inheritance. 

Adopted-out children do not have inheritance rights with respect to their 

biological relatives. The Court held that the petitioner’s second adoption 

did not remove her from the class of issue because she was the adopted 

daughter of decedent at his death. Wife also argued that the petitioner was 

not a beneficiary of the 1995 Trust because her interest did not vest until 

the oldest child was 30. The Court held that a trust that is subject to a 

condition precedent does not deny her standing to protect her interest, and 

her interest in that trust was fully vested, subject only to the condition of 

her survival. 

18. Evans v. Moyer, 282 P.3d 1203 (Wyo. 2012). The term “convenient 

installment” did not require quarterly payments of income to 

beneficiary. Beneficiary filed a petition against the trustee seeking an 

accounting, distribution of income, and a declaration of the meaning of the 

trust documents. The trust agreement provided that payments could be 

made to the beneficiary’s mother in order to avoid a generation-skipping 

transfer tax, which the Court held was appropriate. Additionally, the 

Court ruled that the payment of income in “convenient installments” did 

not mean in quarterly installments, the term used in other trusts created 

under the agreement. Finally, the phrase that principal “may” be 

distributed to the beneficiary was non-mandatory and did not require any 

distribution to be made. 

19. Kristoff v. Centier Bank, 985 N.E.2d 20 (Ind. Ct. App. 2013). The 

primary purpose of the trust was not defeated by the fact that the 

beneficiary did not have children as that could have been anticipated 

by the settlor. Settlor established two trusts for her daughters which were 

exempt from generation-skipping transfer taxes. Neither daughter had 

children, and one daughter sought to have the trust terminated arguing that 

the primary purpose of the trust was defeated due to the fact that she did 

not have children. The Court held that while tax avoidance was a part of 

the purpose of the trust, it was not the only purpose. Additionally, the fact 

that the beneficiary did not have children was not an unforeseen 

consequence. The terms of the trust agreement are clear and there was no 

reason to terminate the trust. 

21. In re G.B. Van Dusen Marital Trust, A12-0503, A12-0994, A12-1469 

(Minn. Ct. App. 2013). Trustee misinterpreted trust agreement by 

refusing to make discretionary principal distributions to surviving 

spouse. Decedent’s revocable trust provided that upon his death, a portion 

of his assets were to be allocated to the marital trust for the benefit of his 

wife. The trust agreement provided for mandatory income as well as 

principal distributions “as the Trustees deem advisable to provide for her 

41

health, education, support, maintenance and care.” The Trustees “shall 

have no obligation to consider other assets or available” to the wife. The 

trust agreement also provided that the trustees were to “use principal 

liberally for [his wife] to enable her to maintain insofar as possible the 

standard of living to which she was accustomed during the Grantor’s 

lifetime.” In addition, the trust agreement provided that the wife had the 

power to require the trustees to convert unproductive property to 

productive property. 

From 2000 to 2011, the wife received income distributions from the trust 

and limited principal distributions. In 2010, the wife requested that the 

trustee make a principal distribution to her to pay various living expenses 

and attorneys’ fees. The trustee denied the requested based on her other 

sources of income. While the case was pending, the wife made five 

additional requests for distributions and she requested that the trustee 

convert the trust property to income producing investments. The trustee 

denied both requests. The district court held that the denials for principal 

distributions were justified and that the wife was not entitled to require the 

trustee to convert the trust property to 100% income producing. 

The court held that its role is to ascertain and give effect to the grantor’s 

intent. The language that principal was to be used for the wife’s health, 

education, support, maintenance and care” implies that the trustee had a 

duty to ensure that principal remains available for such purposes 

throughout her lifetime. Additionally, the court found that the language 

used for the marital trust indicated that the grantor’s intent was for the 

principal to be used liberally in favor of the wife, without concern for the 

preservation of principal. The court compared the language used in the 

marital trust to the language in another trust in the same document, which 

did not have as liberal as language. The Court held that the trustee did 

have discretion in exercising its duties but that such discretion was not so 

broad as to permit the trustee to contradict the grantor’s intent. The Court 

held that the district court misinterpreted the trust instrument when it held 

in favor of the trustee’s actions. 

The Court also found that the district court misinterpreted the trust 

agreement but not considering the standard of living to which the wife was 

accustomed to, and that by doing so, the trustee contradicted the grantor’s 

intent and the plain language of the trust agreement. The Court also found 

that the trustee was not required or prohibited from considering the wife’s 

other sources of income; however, when considering such sources of 

income, the trustee was still required to provide liberally for the wife. 

The Court held that the trustee did not act within its discretion by failing to 

convert the trust property to income-producing property. The language 

“productive property” has been interpreted to mean “productive so that a 

reasonable income” will be available. 

42

D. Spendthrift Clauses 

Finally, the Court held that the remainder beneficiaries’ attorneys’ fees 

should have been paid from the principal of the trust rather than the 

income of the trust, as the district court had ordered, because their 

challenges related to the trustee’s distribution of principal. 

1. Rush University Medical Center v. Sessions, 980 N.E.2d 45 (Ill. 2012). 

The Fraudulent Transfer Act did not abrogate the common law rule 

that a self-settled spendthrift trust was void as to existing and future 

creditors. Rush University Medical Center (the “University”) sought the 

payment of $1.5 million from certain trusts based on a philanthropic 

pledge that the decedent had made to the University prior to his death. 

Based upon this pledge (which the decedent reiterated and provided for in 

his subsequent will and codicils), the University constructed a building 

which it dedicated to the decedent despite never having received any 

actual funding from him. In 1994, prior to making this pledge, the 

decedent settled an irrevocable trust (the “Sessions Family Trust”) that he 

funded with Illinois real estate and a 99% limited partnership interest in a 

Colorado FLP. The Sessions Family Trust was governed by Cook Islands 

law, and, as permitted under that law, the decedent was a beneficiary of 

the trust as well as the trust protector. In 2005, having made no payments 

on the pledge, the decedent was diagnosed with terminal cancer. The 

decedent blamed the doctors at the University for not diagnosing his 

cancer early enough to be able to take effective action. As a result, the 

decedent revoked his will and all codicils that had provided funding for 

the pledge. He died shortly thereafter. The University sued the trust on 

several grounds. Ruling in favor of the University, the Illinois Supreme 

Court relied on the principle “that if a settlor creates a spendthrift trust for 

his own benefit, it is void as to existing or future creditors and such 

creditors can reach the settlor’s interest under the trust.” 

2. *Fannie Mae v. Heather Apartments Limited Partnership, 811 

N.W.2d 596 (Minn. 2012). The debtor’s/beneficiary’s interest in his 

father’s spendthrift trust was not property due to the beneficiary. An 

Oklahoma district court entered a judgment against an individual in favor 

of Fannie Mae to collect on a commercial mortgage loan. Fannie Mae 

learned that the individual was a beneficiary of a spendthrift trust created 

by his father. Fannie Mae filed a motion for a temporary restraining order 

to prohibit the individual from transferring or disposing of any interest he 

had in his father’s estate. The district court granted the motion and, 

following briefing and a hearing, converted the order into a temporary 

injunction pursuant to Minn. Stat. § 575.05. The Minnesota Supreme 

Court held that the plain language of Minn. Stat. § 575.05 allowed a 

district court to order a debtor’s property to be applied toward the 

satisfaction of a judgment provided the property is in the hands of the 

debtor, in the hands of another person, or is property due to the debtor. 

43

However, the individual’s interest as a beneficiary in proceeds from his 

father’s trust did not fall into any of these three categories. Fannie Mae 

argued that the injunction was an “anticipatory, standstill injunction.” The 

court reasoned, however, that the plain language of Minn. Stat. § 575.05 

did not authorize a district court to issue an anticipatory order forbidding a 

debtor from disposing of property not in the hands of or due to the debtor 

at the time the order was issued. Accordingly, the district court abused its 

discretion when it issued the temporary injunction. 

3. Watterson v. Burnard, No. L-12-1012, 2013 WL 425161 (Ohio Ct. App. 

Feb. 1, 2013). Settlor’s death did not preclude use of revocable trust 

assets to satisfy judgment of settlor. Claimant was injured in an 

automobile accident caused by decedent. While the lawsuit was pending, 

decedent died. At the time of her death, there was a revocable trust which 

held the assets of decedent. Claimant filed a motion requesting the court 

to issue an order that the trust assets were available to satisfy the judgment 

as a result of the personal injury lawsuit. Relying on the fact that the 

revocable trust assets were subject to the claims of the decedent during her 

lifetime, the Court found that the legislature intended to allow creditors of 

the settlor to access the trust assets and that an “arbitrary event” like the 

decedent’s death should not prevent claimant from recovering a judgment 

out of the assets of the revocable trust. 

4. Gottstein v. Kraft, 274 P.3d 469 (Alaska 2012). Transfer of residence 

to a revocable trust divested spouse of spousal rights. Husband and 

wife set up reciprocal revocable trusts and funded the wife’s revocable 

trust with their homestead. While the parties were separated, wife sold the 

residence at below its tax-assessed value due to pressures to pay a loan 

that the residence secured. Husband objected to the sale and recorded a 

“Notice of Interest” on the property, claiming his spousal rights. The 

Court found that the transfer to wife’s trust divested husband of his rights 

to the property because wife had full discretion with respect to the 

property. 

E. Undue Influence 

1. Davison v. Hines, 729 N.E.2d 330 (Ga. 2012). There was sufficient 

evidence to support the sons’ claim that their father’s estate planning 

documents were the products of undue influence. The decedent’s sons 

brought an action again the personal representatives of the decedent’s 

estate alleging the decedent’s will and revocable trust were products of 

undue influence. Decedent executed a will in 2001 that left the bulk of his 

estate to his wife for her life, and upon her death, divided the estate 

equally between his sons. Thereafter, although decedent did not want to 

move from his home, granddaughter made arrangements to move decedent 

into her home. The evening that decedent was moved into the 

granddaughter’s home, granddaughter hired a lawyer to draft and oversee 

44

decedent’s execution of a financial power of attorney, which gave 

granddaughter and her husband control over decedent’s affairs and 

property. Granddaughter’s husband then used this power of attorney to 

write two checks to himself: one for $100,000 and another for $150,000. 

Granddaughter also began isolating decedent from the rest of the family. 

In 2002, decedent executed a new will and revocable trust agreement that 

gave granddaughter and her husband control over decedent’s assets and 

estate. The 2002 will and trust agreement were drafted based solely on 

input from granddaughter’s husband. When decedent met with the 

granddaughter’s attorneys to discuss his estate plan, decedent indicated 

that he wanted to provide for his wife, but also stated that whatever 

granddaughter and her husband agreed upon is what he wanted to do. 

Based on the foregoing evidence, the Georgia Supreme Court concluded 

that sufficient evidence existed for the jury to conclude that a confidential 

relationship existed between decedent and granddaughter and 

granddaughter’s husband and that granddaughter and her husband took an 

active role in the planning, preparation, and execution of the 2002 will and 

trust such that their will was being substituted for that of decedent’s will in 

the creation of the documents. Therefore, the evidence was sufficient for a 

jury to conclude that these documents were the product of undue 

influence. 

2. Watermann v. Eleanor E. Fitzpatrick Revocable Living Trust, 369 

S.W.3d 69 (Mo. Ct. App. 2012). The settlor’s mental competency was 

highly material to the issue of whether she was unduly influenced by 

her son and his wife when the settlor was preparing her estate plan. 

The settlor died survived by her daughter and her sons. Prior to her death, 

the settlor executed a will that left all her assets in equal shares per stirpes 

to her four living children, and she appointed one son as her personal 

representative. She also executed two beneficiary deeds to real property to 

be divided among her four children, in equal shares. Ten years later, she 

sent a letter to a bank to remove her daughter as a beneficiary of her CD. 

The settlor also met with an attorney to revise her trust agreement to 

provide that one of the real properties subject to a beneficiary deed would 

be distributed only to her sons, and not to her daughter. The attorney 

testified that he did not believe that the settlor was under any undue 

influence. On appeal, the court held that the settlor’s mental and physical 

condition was “highly material” to the issue of undue influence, and that 

the fact that the settlor revised her estate plan to omit her daughter was 

supported by ample evidence that the settlor had a strained relationship 

with her daughter. 

3. Edwards v. Gillis, 146 Cal. Rptr. 3d 256 (Cal. Ct. App. 2012). A 

survival clause in a trust agreement does not require the trustee to 

administer the trust in a manner different from that of a reasonable 

prudent trustee. The decedent executed a revocable trust agreement 

which, upon her death, distributed her entire estate equally between her 

45

five children, including daughter. The provisions of the trust agreement 

provided that, in order to inherit their share, a beneficiary must survive 

distribution of assets (or that beneficiary’s share would be distributed 

among the surviving beneficiaries). The decedent later executed two 

amendments that removed daughter as a beneficiary. The decedent died in 

February 2007. The trustee did not distribute immediately because an 

accountant advised him to delay distributions until the IRS issued a 

closing document on the estate. Daughter challenged the trust amendment 

that disinherited her. However, daughter died before resolution of the 

contest and before any trust distributions were made. The special 

administrator of her estate argued that the trustee delayed making 

distributions. The court held that the law does not require a trustee to 

proceed “as quickly as possible,” but rather it requires the trustee to 

proceed without “unreasonable delay.” 

4. In the Matter of DelGatto, 950 N.Y.S.2d 7381 (N.Y. App. Div. 2011). 

Petitioner’s failed to establish evidence that undue influence was 

present because petitioner did not establish that decedent lacked 

mental competence. The decedent executed a trust agreement whereby 

she left everything to her neighbor, which resulted in various nephews and 

grandnieces and grandnephews receiving nothing. The Court held that 

where there is a confidential relationship between the beneficiary and the 

grantor, there is a presumption of undue influence. Decedent’s frequent 

contact with her neighbor and lack thereof with her extended family 

explains decedent’s decision. 

5. In the Matter of Estate of Donaldson, 956 N.Y.S.2d 840 (N.Y. App. 

Div. 2012). Decedent did not have the mental capacity to execute trust 

agreement, which was proven by a letter from her doctor. The 

decedent executed a trust agreement 61 days prior to her death, which was 

coordinated by one of her daughters. The Court held that a trust 

agreement could not be void by reason of fraud or undue influence upon a 

motion for summary judgment. However, relying on the doctor’s letter 

which stated that he did not think the decedent would be able to read and 

understand a contract, the Court held that the decedent did not have mental 

capacity to execute the trust documents. 

F. Breach of Fiduciary Duty 

1. Campell v. Chitty, III, No. 1D12-0861, 2012 WL 6031283 (Fla. Dist. Ct. 

App. Dec. 5, 2012). No damages could be awarded for the trustee’s 

breach of fiduciary duties except upon a finding of negligence. An 

action was brought involving the administration of three trusts. The trial 

court ordered the liquidation of trust assets and imposed monetary 

sanctions against the trustee for breach of fiduciary duty. However, one of 

the trust agreements contained an indemnification clause that held the 

trustee harmless from any damages or liabilities so long as its actions were 

46

not negligent. On appeal, the court held that damages for the breach of 

fiduciary duties could only be awarded upon a finding that the trustee was 

negligent. Further, with respect to the other two trusts, the appellate court 

held that the trustee could not be directed to repay certain amounts to the 

trust, and also direct those amounts to be set off from the trustee’s share of 

the trust because that would result in a double recovery. 

2. Nalley v. Langdale, 734 S.E.2d 908 (Ga. Ct. App. 2012). Genuine issues 

of material fact existed as to whether or not the trustees falsely 

represented to the beneficiaries that the trust terminated in a 

particular year (thus, precluding summary judgment). In 1947, the 

decedent incorporated The Langdale Company (TLC”). The ownership of 

TLC was initially divided between the decedent and his three sons. The 

decedent also had a daughter, whom he provided for in an irrevocable trust 

that owned TLC stock, with two of the sons as trustees. At the time the 

trust was created, the daughter had 3 of her own children. Over the years, 

TLC appraised its stock using the “Stanley methodology.” TLC executed 

a number of shareholder agreements restricting the sale of TLC stock. In 

1994, all of the shareholders entered into a shareholders agreement 

providing that no shareholder could sell or transfer TLC stock to a third 

patty without first offering to sell or transfer the stock to TLC or the 

remaining shareholders, and that the agreed value would be determined in 

accordance with the Stanley methodology. The trust agreement provided 

that the trust would terminate 21 years after the death of the last surviving 

beneficiary who was alive as of the date of the trust was executed. The 

daughter received a copy from the decedent, and believed that this was the 

operative trust agreement. Immediately thereafter, the decedent changed 

his mind about when the trust should terminate and executed a new trust 

agreement that stated that the trust would terminate on December 31, 

1999. In 1997, the decedent’s sons, as trustees, notified the daughter’s 

attorney that the trust was to terminate in 1999, and that the company 

intended to redeem stock. From that date forward, the trustees proceeded 

as though the 1999 terminating trust governed. TLC’s CFO developed a 

plan for TLC to redeem the stock, which was intended to give a 

son/trustee control of TLC. In 1999, TLC redeemed the trust’s stock and 

each of the three beneficiaries received checks for approximately $2.4 

million. In 2007, one of the trust beneficiaries had a conversation with her 

cousin who was involved with TLC, which led her to believe that the trust 

beneficiaries had gotten “shortchanged” in the sale of the TLC stock. The 

beneficiaries alleged that the stock was work at least $100 million more 

than what TLC paid for it. The beneficiaries asked for a constructive trust 

to be imposed on the TLC stock. In 2009, the original trust agreement was 

discovered. Based on the foregoing, the trust beneficiaries brought fraud 

and breach of fiduciary duty actions against the trustees when the trustees 

distributed the trust corpus, which comprised of TLC stock. Based on the 

record, the trust beneficiaries presented sufficient evidence on each 

element of fraud and breach of trust to survive a motion for summary 

47

judgment, and that, by accepting the proceeds from the stock redemption, 

they did not ratify the breach of trust. 

3. Hastings v. PNC Bank, 54 A.3d 714 (Md. 2012). Trustee did not 

breach fiduciary duty by requesting beneficiaries to sign release and 

indemnity agreement. Trustee began process of distributing trust assets 

after current beneficiary’s death and after estate taxes were paid and it 

requested that remainder beneficiaries sign a release and indemnification 

agreement for its actions. Remainder beneficiaries argued that the 

trustee’s requirement that the remainder beneficiaries sign a release as a 

condition precedent violated trust law. The Court held that the trustee did 

not breach its duties simply by asking the remainder beneficiaries to sign a 

release in lieu of going to court to have its actions approved. The trustee 

was entitled to some indemnity for its expenses and was entitled to be 

protected from liability. 

4. In the Matter of Jastrzebski, 948 N.Y.S.2d 689 (N.Y. App. Div. 2012). 

No matter how broad an exculpatory clause is, a trustee may be liable 

if the trustee acted in bad faith or with reckless indifference. The 

exculpatory clause in the trust provided that fiduciaries were exonerated 

from acting with undivided loyalty and permitted them to act on behalf of 

the trust with respect to entities in which the fiduciaries had an interest. 

The trustee sold the life insurance policy because it lacked funds to pay 

the premiums; however, the beneficiaries claimed that relinquishing the 

policy was an act of self-dealing. The Court held that the trustee’s 

conduct was not subject to an undivided duty of loyalty. The matter was 

remanded to determine whether the trustee acted in good faith or if the 

trustee acted with reckless indifference. 

5. Regions Bank v. Lowrey, 101 So.3d 210 (Ala. 2012). Trustee did not 

breach fiduciary duty by failing to diversify out of timberland holding 

because it acted in good faith in relying on its assumption that the 

beneficiaries wanted the asset to be retained. The trust’s primary asset 

was 20,000 acres of timberland. In 1993, the trustee obtained a court 

order which authorized the retention of the asset so long as the trustee 

considered the retention to be in the “best interests of the trust.” In 2004, 

Hurricane Ivan caused severe wind damage and destruction of the 

timberland owned by the trust, and the beneficiaries sued the trustee for 

breach of fiduciary duty for failing to diversify and for failing to obtain 

insurance against loss. The Court held that the trustee acted in good faith 

in its retention of the timberland, relying on the trustee’s reasonable 

assumption that the beneficiaries wished for the timberland to be retained 

and that there were significant income tax reasons for not selling the 

property. The retention was also consistent with the donor’s intention. 

The Court also found that the trustee did not breach its fiduciary duty for 

failing to obtain casualty loss insurance when it had investigated 

48

purchasing the insurance but determined that it was too expensive in light 

of the less than 1% chance of incurring hurricane damage. 

6. In the Matter of the Mark C.H. Discretionary Trust, 956 N.Y.S.2d 856 

(N.Y. Surr. Ct. 2012). Although distributions were to be made in the 

trustee’s sole discretion, trustees violated fiduciary duties by failing to 

inquire into beneficiary’s condition and for failing to make 

distributions. Settlor died at age 85, survived by two adopted sons, one 

of which was 16 and severely handicapped. Settlor established a 

supplemental needs trust, naming her estate planning attorney and a 

corporate trustee as trustees. The trust was a multimillion dollar trust; 

however, in the first five years, $3,525 was spent on the care of the 

beneficiary, approximately 0.1%. After “some initial missteps”, which 

included failing to visit the beneficiary, the trustees hired a care specialist 

to assist the trustees. With the services of the care specialist and the use of 

the trust funds for the benefit of the beneficiary, the beneficiary’s 

condition significantly improved. The Court stated that it is fundamental 

that the trustee take on obligations beyond those imposed in ordinary 

relationships and that the words “absolute discretion” do not insulate the 

trustees from their duties. The trustees had a duty to inquire into the 

beneficiary’s condition and apply the trust assets to improve his condition. 

The failure to exercise the trustees’ discretion was an abuse. 

G. Prudent Investor Rule 

1. Matter of Hunter, 100 A.D.3d 996 (N.Y. App. Div. 2012). The 

corporate trustee violated the prudent investor rule when it 

maintained a significant concentration of stock for over 20 years. 

JPMorgan Chase Bank served as the executor of the estate of the decedent, 

as well as a trustee of two separate testamentary trusts established by the 

decedent, referred to as the Eighth (A) Trust and the Eighth (B) Trust. 

Following the probate of the decedent’s estate in 1973, the subject trusts 

were funded almost entirely with Kodak stock. Pursuant to the terms of 

the trusts, the remaining trust assets of the Eighth (A) Trust were 

transferred to the Eighth (B) Trust in 1980. At issue was the corporate 

trustee’s management of the Eighth (B) Trust, which was established for 

the benefit of the decedent’s granddaughter, who was deceased, and 

whether the corporate trustee violated the prudent investor rule. The court 

determined that in maintaining a concentration of Kodak stock in the 

Eighth (B) Trust for more than 20 years, during which the value of the 

Kodak stock declined precipitously, the corporate trustee violated the 

prudent investor rule. 

2. In the Matter of the Judicial Settlement of the Intermediate Account 

of HSBC Bank USA, N.A., 947 N.Y.S.2d 288 (N.Y. App. Div. 2012). 

The corporate trustee violated the prudent investor rule when it 

maintained a significant concentration of stock for over 20 years. 

49

HSBC appealed an order determining that it, as cotrustee of a revocable 

trust, was negligent and that it was “liable for all damages occasioned by 

its negligence.” The objectant, who was the grantor and beneficiary, 

created the trust and served as a cotrustee along with his father and the 

bank. Upon the death of the grantor’s father, his uncle was named 

cotrustee; however, his uncle renounced his position as trustee. In 2006, 

the bank petitioned to resign as trustee and to settle the “intermediate 

account.” The objectant raised multiple objections to the accounting. The 

Surrogate’s Court concluded that the bank had violated the prudent 

investor standard by failing to comply with its internal policies and 

procedures with respect to investing in high-risk private ventures. The 

court also held that the exclusionary clause provided in the trust agreement 

did not absolve the bank of liability. On appeal, however, the court 

determined that equity could not permit the objectant, who served as a 

cotrustee, to recover damages from the bank arising from any purposed 

breaches of their joint administration of the trust. 

3. In the Matter of the Judicial Settlement of Knox, 947 N.Y.S.2d 292 

(N.Y. App. Div. 2012). (See related case in outline at II. B. 2.) The 

trustee violated its fiduciary duty by not diversifying its concentrated 

position despite language in the trust agreement authorizing 

retention. Grantor, the co-founder of Woolworth Company, established 

trust agreement in 1957 for the benefit of his son’s issue and gave the 

trustee the power to invest “without regard to diversification….” The trust 

agreement also provided that the trustee may advise with counsel and shall 

be fully protected from any action. The trial court found that the trustee 

should have divested the trust of certain assets, including its holdings in 

Woolworth Company. Common law provides that a trustee is bound to 

employ such diligence and such prudence as a prudent person would 

employ in his or her own affairs. Effective in 1995, the Prudent Investor 

Act created a new standard which provides that a trustee shall exercise 

reasonable care, skill and caution to make and implement investment and 

management decisions as prudent investor would for the entire portfolio. 

It is not sufficient that hindsight might suggest that another course of 

action would have been more beneficial. Also, it is well-established that 

the retention of securities from the grantor may be found to be prudent 

even when the purchase of the same might not. In cases of conflict 

between governing law and the document, the document controls. In such 

cases, in order to warrant a surcharge, the trustee must have acted with 

negligence or failure to act prudently. The Court held that the Woolworth 

stock should have been divested from the trust once it stopped paying 

dividends and its price began to drop. The beneficiaries also contended 

that the retention of certain concentrations also violated the trustee’s duty 

to diversify. The Court held that the mere fact that a trust might have been 

able to earn more money through other investments does not establish a 

breach of trust; therefore, the trustee did not commit a breach of fiduciary 

duty when holding the overweight positions. 

50

H. Trust Accounting Disputes 

1. Church of the Little Flower v. U.S. Bank, 979 N.E.2d 106 (Ill. App. Ct. 

2012). The fact that the trustee collected more fees than two of the 

three charitable beneficiaries received in distributions was not an 

unforeseen circumstance authorizing termination of the trust 

pursuant to the doctrine of equitable deviation. The decedent created a 

trust, designating the First National Bank of Springfield (now U.S. Bank) 

as trustee. Upon the decedent’s death, if the remaining trust assets 

exceeded $750,000, the excess was to be distributed free of trust to three 

charities, and the balance would be held in trust for the decedent’s sistersin-law. 

Upon the death of the last sister-in-law to die, if the remaining 

trust assets exceeded $500,000, the trust agreement provided for quarterly 

payment of trust income to the three charitable beneficiaries in 20/20/60 

shares. In order to lessen the trust’s tax liability, however, the trust was 

amended to comply with the private foundation rules to provide for annual 

distributions of 5% of the trust assets (as opposed to its annual income). 

As amended, the trustee’s fees (based on a percentage of the trust) and 

administrative expenses were to be taken out of the 5% distribution before 

the balance was paid to the beneficiaries. The value of the trust never fell 

below the $500,000. One of the charitable beneficiaries petitioned the 

court for reformation of a trust. On appeal, the court held that the doctrine 

of equitable deviation did not apply, and thus reformation of the trust was 

improper; rather, equitable deviation is proper only where trust is so 

inefficient that its continuation would necessarily interfere with the trust’s 

purpose. 

2. In the Matter of the Examination of the Annual Inventory and 

Account of John Martin, 957 N.Y.S.2d 608 (N.Y. Sup. Ct. 2012). The 

letter-agreement between trustees and the county department of social 

services that reflected a budget for the trust did not foreclose the 

court from independently reviewing whether the trustees’ 

expenditures were proper and permissible. The supplemental needs 

trust agreement provided that the trustees would be entitled to receive the 

“statutory compensation” for services rendered as provided by state law. 

The “letter-agreement” between the trustees and the county department of 

social services provided that if 3 or more trustees were acting, “two full 

commissions” must be apportioned among the trustees. Three individuals 

were acting as trustees of the trust, and John and Betty Martin were to split 

one full commission and Nancy Burner was to receive one full 

commission. In addition, the trustees signed a “letter-agreement” as to the 

trust’s budget. The issue before the court was the court’s role in 

overseeing the trustees’ administration of a supplemental needs trust 

established in accordance with state law. The court held that the letteragreement 

does not foreclose the court from independently reviewing 

whether or not the trustees’ expenditures were proper and permissible. 

51

3. Isle v. Brady, 288 P.3d 259 (Okla. Civ. App. 2012). Trustee’s fees to 

prepare accounting and repair property were proper. One of four trust 

beneficiaries was also a trustee, who failed to provide an accounting after 

the deaths of the settlors and also permitted rental property to fall into a 

state of disrepair. Other three beneficiaries filed a petition to have trustee 

removed, at which point an independent successor trustee was appointed. 

Successor trustee charged an hourly rate and also incurred other expenses. 

Initial trustee objected to fees charged to the trust. The Court considered 

the following factors for determining the propriety of the trustee’s fees: 

trustee’s skill and expertise, amount and character of trust property, degree 

of difficulty, nature and costs of services, and quality of trustee’s 

performance. The Court determined that given the time required by the 

rental properties and other actions required to prepare the accounting 

justified the fees charged. 

4. In the Matter of Trust of Trimble, 826 N.W.2d 474 (Iowa 2013). 

Trustee was not obligated to account to remainder beneficiaries for 

the period in which the trust was revocable and the settlor was 

competent. Eight months prior to the death of the settlor, settlor amended 

her revocable trust to name trustee as sole trustee. Trustee made verbal 

reports to the settlor on the status of the trust and regularly consulted with 

her. After settlor’s death, two of eighteen beneficiaries petitioned the 

court to require the trustee to account for the period of administration prior 

to the settlor’s death. Trustee eventually provided an account, but the 

probate court held the trustee personally liable for her attorneys’ fees. The 

Court held that while the trust is revocable and the settlor is alive and 

competent, the trustee only owes a duty to account to the settlor and that 

due to privacy concerns, beneficiaries are not entitled to an accounting 

while the trust was revocable. The probate court’s ruling that the trustee 

was required to pay her own attorneys’ fees was an abuse of discretion. 

I. Procedural Issues in Trust Dispute 

1. Estate of Giraldin, 290 P.3d 199 (Cal. 2012). The beneficiaries of a 

revocable trust have standing to sue a third party trustee for breaches 

of fiduciary duties that occurred during the settlor’s lifetime. In 2002, 

a settlor established a revocable family trust naming his son as trustee. 

The trust provided for the distribution of net income and discretionary 

principal to the settlor during his lifetime, and thereafter for the creation of 

a trust for the benefit of the settlor’s wife, with the remainder passing at 

her death equally to their nine children (some from previous marriages). 

The settlor reserved the right to revoke or amend the trust in writing. The 

settlor also executed a will leaving his separate property and his share of 

all community property to his trust, with son named as the executor. 

Thereafter, the settlor invested $4 million in son’s company through 

payments to the company. After the final payment, the company issued 

stock to the settlor that he then transferred to his trust. At the time of the 

52

settlor’s death in 2005, the trust’s interest in the company was essentially 

worthless. Four of the settlor’s children sued son as trustee for breach of 

fiduciary duties for certain actions taken during the time that the settlor 

was alive and the trust was revocable. The primary issue was whether the 

four beneficiaries had standing to sue son for alleged breach of fiduciary 

duties that occurred while the settlor was alive and the trust was revocable. 

The California Supreme Court held that the four contingent beneficiaries 

have standing to sue the trustee for his alleged breach of fiduciary duties 

owing to the settlor during the settlor’s lifetime, even though the settlor’s 

wife, who was the current trust beneficiary, was still living. In its holding, 

the court broadened the ability of beneficiaries to sue trustees for breach of 

fiduciary duties with respect to a revocable trust. 

2. Estate of Stewart, 286 P.3d 1089 (Ariz. 2012). The son of a decedent 

had standing to contest the no contest clauses contained in his father’s 

will and trust agreement, and it was not necessary for the trust 

beneficiaries to seek to enforce such clauses to make their validity ripe 

for adjudication. The decedent died in an accident with his wife and 

their minor child. The decedent was survived by 5 adult children. Three 

years before his death, the decedent executed a will and trust agreement, 

both of which intentionally omitted one of the decedent’s sons and 

contained no contest clauses. The omitted son filed a petition for formal 

testacy seeking to invalidate the will. On appeal, the court held that the 

omitted son had standing to contest the no contest clauses, even though he 

was not a beneficiary of the will or trust. The court further held that it was 

not necessary for the trust beneficiaries to seek to enforce the no contest 

clauses to make their validity ripe for adjudication. 

3. Arnott v. Arnott, 972 N.E.2d 586 (Ohio 2012). De novo standard of 

review is the proper standard for appellate review of purely legal 

questions. This matter arose out of a controversy over the trust 

provisions. The language at issue established the calculation of the price 

of trust property offered for sale to certain trust beneficiaries. One of the 

trust beneficiaries filed a complaint for declaratory judgment, seeking 

interpretation of the disputed provision. The trial court concluded that the 

disputed phrase was unambiguous and that the option price was the fair 

market value as determined by the appraisal. The court of appeals 

reversed after reviewing the trust document de novo, finding that the 

option language was susceptible to more than one interpretation and that 

the option price was the federal and/or Ohio qualified-use value. At issue 

on appeal was what standard of review an appellate court should employ 

in reviewing legal issues in a declaratory judgment action. The Ohio 

Supreme Court affirmed, holding that the de novo standard of review is 

the proper standard for appellate review of purely legal issues. 

4. Beekhuis v. Morris, 89 So.3d 1114 (Fla. Dist. Ct. App. 2012). The 

probate court should not have asserted jurisdiction over the trust 

53

assets and the trustee, when the original pleadings never raised any 

claim over the trust or its assets. Mother created a trust that provided 

that she and her daughter would serve as cotrustees. Under the trust’s 

terms, if two medical doctors opined that a trustee was legally disabled, 

then that trustee would be deemed incapacitated and the other cotrustee 

would assume the duties of the incapacitated trustee. Daughter, 

individually and not in her capacity as cotrustee, filed a petition to 

determine whether her mother was incapacitated and to appoint a 

guardian. The petition made no reference to the trust. Son filed a counterpetition, 

and, ultimately, the probate court entered an order naming son as 

the guardian. Soon thereafter, son filed several motions in the 

guardianship proceeding in which he sought to have daughter removed as 

trustee of the trust and to compel her, as trustee, to relinquish trust assets. 

Daughter made a limited appearance, only in her individual capacity, 

arguing that the probate court lacked jurisdiction over her in her capacity 

as trustee. The probate court entered an order granting son’s emergency 

motion to appoint a court monitor and to enjoin daughter as trustee from 

selling mother’s home. Daughter appealed. The appellate held that it was 

error for the probate court to have asserted jurisdiction over the trust 

property and daughter, in her capacity as trustee. 

5. Regions Bank v. Kramer, 98 So.3d 510 (Ala. 2012). Beneficiaries of a 

trust are not limited to common law claims against a trustee and may 

maintain a claim against a trustee for violations of statute. 

Beneficiaries of four separate trusts brought a cause of action against the 

corporate trustee for breaches of fiduciary duty relating to the trustee’s 

management of the assets. Among the complaints was that the trustee 

violated the Alabama Securities Act. The Court held that, whether a claim 

is created by common law or by statute, such claims may be brought 

against a trustee. 

6. Miami Children’s Hospital Foundation v. Hillman, 101 So.3d 861 (Fla. 

Dist. Ct. App. 2012). Parole evidence is not admissible when there is no 

ambiguity in the trust agreement. A claim was filed that another charity 

was the proper recipient of a bequest. The named charity, however, 

argued that there was no ambiguity in the trust document. The Court held 

that when the terms of a trust instrument are clear and unambiguous, there 

is no need for the Court to engage in a construction of such instrument and 

the named charity is the proper beneficiary. 

7. DiGaetano v. DiGaetano, 50 A.3d 10 (N.H. 2012). Trust beneficiaries 

are not entitled to a jury trial when the matters at issue involve trust 

construction. Husband and wife established a trust which held the family 

home. After the death of the husband, wife amended the trust agreement 

and named defendant as sole trustee and beneficiary. After wife’s death, 

defendant sold the home and petitioned the court for a determination that 

he was the rightful owner of the proceeds. Plaintiffs argued that they were 

54

entitled to a jury trial because the question was one of contract formation. 

The Court held that the claim involves the interpretation and construction 

of the original trust agreement and they seek equitable relief. As a result, 

the plaintiffs are not entitled to a jury trial as third party beneficiaries. 

8. Gamboa v. Gamboa, 383 S.W.2d 263 (Tex. App. 2012). In divorce 

action, spouse had standing to bring action against the trust. Prior to 

marriage, settlor established various trusts for future children. In divorce 

action, spouse claimed that the trusts were being used to perpetuate fraud 

upon her. The first issue decided by the Court was that because the trust 

agreement did not authorize a trustee to resign, the trustee needed to 

petition the court if he wished to resign. The Texas Probate Code 

provided that any interested person may bring an action against a trustee. 

Because the spouse claimed that the trusts were the settlor’s alter ego and 

were being used in a fraudulent manner, spouse was an interested person 

and could bring an action against the trustee. 

9. Nalley v. Langsale, 734 S.E.2d 908 (Ga. Ct. App. 2012). Former trustee 

lacks standing to pursue action against beneficiaries. In order to 

equalize gifts made to sons, the grantor established a trust for his daughter, 

funding it with company stock, with other shareholders acting as trustees. 

Grantor created two agreements, with each trust having a different 

termination date; the trustees proceeded as though the trust with the earlier 

terminating date governed. Company redeemed the stock owned by the 

trust pursuant to the valuation method found in the shareholders 

agreement. Sometime after the stock was redeemed, beneficiaries filed 

suit against the trustees seeking return of the stock. One of the trustees 

had since ceased to act and the Court determined that the former trustee 

lacks standing to pursue claims on behalf of remainder beneficiaries for 

return of trust funds; that action belongs exclusively to the trust 

beneficiaries and current trustees. 

10. *In re Spencer Irrevocable Trust, No. A12-0444, 2012 WL 6097226 

(Minn. Ct. App. Dec. 10, 2012). Contingent beneficiaries in default of 

exercising a power of appointment have an interest in the trust. Trust 

beneficiary, who was still living, had a testamentary power of appointment 

over a trust which could only be exercised in her last will and testament. 

Beneficiary purported to exercise the power in a notarized document 

which was not a will. Petitioners, who were excluded as remainder 

beneficiaries through the exercise of the power, argued that the exercise 

was invalid because it was not exercised in a will. The Court ruled that 

the beneficiaries who would take under the trust if the power of 

appointment was not exercised had an interest in the trust and could 

petition the Court; however, the Court would not rule on whether the 

exercise was effective until the beneficiary’s death. 

55

11. Blankenship v. Washington Trust Bank, 281 P.3d 1070 (Idaho 2012). 

Sibling of a beneficiary of a trust did not have standing to bring a 

cause of action against the trustee. Decedent’s trust agreement provided 

that the trust estate was to be divided into four separate trusts for the 

benefit of each of decedent’s four children. The separate trusts were to 

terminate when the child attained the age of 60. One child brought an 

action against the trustee for the trustee’s management of the trust of her 

brother, claiming that the trustee breached its fiduciary duty to her. The 

Court held that because each trust is a separate and distinct trust, the 

siblings do not have standing to bring an action against the trustee for its 

management of a sibling’s trust. 

12. In re Peierls Charitable Lead Unitrust, 59 A.3d 464 (Del. Ch. 2012). 

Court would not reform a trust when request was made for 

convenience and the Court will not issue advisory opinions when 

trustees’ actions are authorized in trust agreement. Trustees wished to 

reform the trust to make it a directed trustee. Trustees petitioned the Court 

requested approval for their resignation and for designating the situs of the 

trust as Delaware and for approval of the reformation. The Court held that 

a petition for judicial relief is not appropriate when expressly authorized in 

the trust agreement. The trust expressly authorizes trustees to resign as 

well as to designate the situs. The Court also held that a court will reform 

a trust when necessary to conform to the intent of the settlor; however, the 

petition at issue is requesting reformation for convenience, and the Court 

will not reform the trust for such purpose. 

J. Statute of Limitations 

1. Hemphill v. Shore, 289 P.3d 1173 (Kan. 2012). Statute of limitations 

was tolled until discovery of claim because trust’s existence was not 

disclosed to beneficiary or beneficiary’s guardian, which amounted to 

constructive fraud. Beneficiary was a minor when the trust was 

established and neither the beneficiary nor his guardian was notified of the 

trust’s existence. The Court found the failure to disclose the trust 

amounted to constructive fraud, warranting tolling of statute of limitations 

until discovery. 

K. Resulting and Constructive Trust as Remedy 

1. Elter-Nodvin v. Nodvin, 48 A.3d 908 (N.H. 2012). The change of 

beneficiaries on life insurance policies and retirement accounts by a 

father from the mother to their children during divorce proceedings 

did not violate an anti-hypothecation order instructing the couple to 

refrain from disposing of marital property while the proceedings were 

pending. A husband filed for divorce from his wife. The family court 

issued an anti-hypothecation order, which restrained the parties “from 

selling, transferring, encumbering, hypothecating, concealing or in any 

56

other manner whatsoever disposing of any property, real or personal, 

belonging to either or both of them.” While the divorce was pending, the 

husband changed the beneficiary designation on his life insurance and 

retirement accounts from the wife to their children. The husband died 

before the divorce was complete. The wife sued her children seeking to 

impose a constructive trust to recover the proceeds from the life insurance 

and retirement accounts. The superior court dismissed the wife’s claims 

against children. The New Hampshire Supreme Court held that the plain 

language of the anti-hypothecation order that required the parties to refrain 

from disposing of property allowed the husband to make the changes to 

the beneficiaries. The court reasoned that the wife did not possess a 

vested property interest, and absent a property interest, there could be no 

violation of the anti-hypothecation order. Therefore, the wife could not 

impose a constructive trust on the alleged violation of the antihypothecation 

order. 

2. Beason v. Kleine, 947 N.Y.S.2d 275 (N.Y. App. Div. 2012). Imposition 

of a constructive trust was appropriate because of confidential 

relationship and promises made to the grantor. Plaintiff transferred 

real property to his stepson retaining a life estate in the property. Plaintiff 

was not advised by his attorney that the deed transferred ownership of the 

property and that he would not be able to divide that property between 

both of his stepchildren, as he had intended. Plaintiff had communicated 

to his stepson that he intended for the property to be divided equally 

between his stepson and his sister and the stepson promised to help “make 

that happen.” The Court concluded that the close, confidential 

relationship of the plaintiff and his stepson and the trust placed in the 

stepson justified imposing a constructive trust. 

3. Reinhardt University v. Castleberry, 734 S.E.2d 117 (Ga. Ct. App. 

2012). Constructive trust was imposed on charity despite lack of any 

wrongdoing. Son was a trustee of a marital trust for his mother and 

through a series of financial transactions, trustee transferred over 

$1,000,000 to charity in partial satisfaction of his pledge. Upon mother’s 

death, other beneficiary filed an action seeking to impose a constructive 

trust on the proceeds received by the charity. Constructive trust is 

appropriate when property is acquired by fraud or where although 

acquired originally without fraud, it is against equity that the title should 

remain with the one who holds it. Because the trustee was not authorized 

to transfer the funds to the charity, the imposition of a constructive trust on 

the proceeds received was proper, even without any wrongdoing on the 

part of the charity. 

L. Damages and Attorneys’ Fees in Trust Litigation 

1. Masse v. Perez, 58 A.3d 273 (Conn. App. Ct. 2012). Treble damages 

imposed on trustee were an appropriate because of trustee’s theft of 

57

trust assets. Trust was established for beneficiary, with beneficiary’s 

mother as trustee. After some time, trustee withdrew the remaining trust 

funds from the trust. The statute provided that in the case of statutory 

theft, tremble damages are to be awarded. The Court held that the award 

of treble damages was appropriate. 

M. Special or Supplemental Needs Trust 

1. Lewis v. Alexander, 685 F.3d 325 (3rd Cir. 2012). The state statute 

which seeks to impose additional requirements on special needs trust 

was invalid and was preempted by federal statute. A class action of 

special needs trusts and beneficiaries was filed against Pennsylvania 

Department of Public Welfare seeking to preempt by federal statute the 

Pennsylvania statute. The Court first held that the plaintiffs had 

constitutional standing because they were facing imminent injury due to 

the likelihood of the Pennsylvania statute being enforced. The Court also 

held that the claims of the plaintiffs were ripe for adjudication because 

they are entitled to have their rights examined and clarified. Additionally, 

the Court held when states are determining Medicaid eligibility, states are 

required to exempt any trust that meets the federal requirements of 42 

U.S.C. § 1396p(d)(4). Finally, the Court held that the Medicaid statute 

confers on the plaintiffs the private right of action to enforce the 

application of the special needs exemptions found in the federal statute. 

IV. NON-PROBATE, NON-TRUST ASSETS (JOINT TENANCY, LIFE INSURANCE, 

BENEFICIARY DESIGNATIONS) 

A. Joint Tenancy/Joint Accounts 

1. Stephenson v. Spiegle III, 58 A.3d 1228 (N.J. Super. Ct. App. Div. 

2013). Rescission of a bank account that had a pay-on-death 

provision naming the decedent’s attorney as the beneficiary was 

appropriate to remedy the decedent’s unilateral mistake of naming 

the attorney the “pay-on-death” beneficiary instead of funding a trust 

benefiting family members which was referenced in his will. The 

decedent executed a will on December 19, 2006, leaving his estate to 

family members or trusts for the benefit of family members. The will was 

prepared by his attorney. On February 2, 2007, the decedent opened an 

account payable on death to his attorney. The decedent died on December 

19, 2007. At the time of his death, the subject account held approximately 

1/3 of his estate. The executor discovered the account during the estate 

administration, but the attorney took the position that the decedent 

probably established the account to take the money out of the estate and 

denied any knowledge of the opening of the account. The trial court held 

that rescission was appropriate because the decedent made a unilateral 

mistake by naming his attorney the “pay-on-death” beneficiary on a bank 

account instead of funding a trust referenced in his will. In his decision, 

58

the trial judge rejected – as highly unlikely – the attorney’s claim that the 

decedent decided to convey a substantial portion of his estate to his 

attorney instead of to his family members. Furthermore, the trial judge 

found nothing about the attorney’s relationship with the decedent that 

would support the intent to confer such a substantial personal benefit. On 

appeal, the Appellate Division agreed with the trial court. 

B. Nonprobate Transfers 

1. Manary v. Anderson, 292 P.3d 96 (Wash. 2013). Decedent’s will 

governed the transfer of a nonprobate asset and not the terms of the 

trust that owned the property. Husband and wife created a joint 

revocable trust and conveyed their community property residence to it. 

The trust provided that at the first spouse’s death, a family trust and a 

survivor’s trust were to be created, but the surviving spouse could retain 

the survivor’s trust portion in the trust estate originally established. Wife 

died and husband did not create the separate trusts. Later, husband 

executed a will and indicated that he intended to give his residence to his 

new companion. Relying on a statute that provides that an owner’s 

interest in any nonprobate asset specifically referred to in the decedent’s 

will will belong to the testamentary beneficiary named to receive the 

nonprobate asset, notwithstanding any rights of the beneficiary designated 

before the date of the will. The Court held that husband clearly intended 

to give the property to his companion and that the failure to establish the 

family trust pursuant to the trust agreement upon his wife’s death did not 

deprive him of that right. 

C. Life Insurance 

1. State Mutual Insurance Co. v. Ard, 730 S.E.2d 912 (S.C. Ct. App. 

2012). Because wife was not required to be the sole beneficiary of a 

life insurance policy pursuant to divorce settlement, wife was not 

entitled to the entire life insurance proceeds. During the marriage, 

decedent attempted to change the beneficiary of his life insurance policy 

to his then wife. Decedent and wife divorced and pursuant to the divorce 

settlement, husband was to continue his life insurance policy of $50,000 

and to name wife as beneficiary. At decedent’s death, the life insurance 

proceeds were in excess of $85,000 and it was discovered that his 

beneficiary designation form was improper. The Court held that because 

the divorce settlement did not identify the life insurance policy, wife was 

only entitled to $50,000 and not the entire proceeds. 

D. Totten Trusts 

1. In re Estate of Strahsmeier, 54 A.3d 359 (Pa. Super. Ct. 2012). 

Presumption of Totten Trust was overcome by evidence that decedent 

to treat all children equally. Decedent revised the ownership of his 

59

checking account, listing it as “In Trust For” (“ITF) for his daughter. 

Subsequently, decedent prepared binders containing detailed information 

as to his final affairs, which also includes a direction that the funds from 

various accounts, including the ITF account, were to be deposited into the 

estate account. After decedent’s death, daughter withdrew the funds and 

his other children filed objections to the accountings filed which did not 

include the ITF account. Transfer of the ITF account to daughter would 

have been contrary to the intent of the decedent. The Court found that the 

evidence presented proved by clear and convincing evidence that the 

decedent did not intend to create an ITF account. 

2. In the Matter of O’Connell, 951 N.Y.S.2d 28 (N.Y. App. Div. 2012). 

The probate court lacked jurisdiction over wrongful conversion action 

as it related to two living persons. Decedent established a Totten Trust, 

naming his daughter and granddaughters as beneficiaries. Three days prior 

to decedent’s death, his wife withdrew the proceeds pursuant to the power 

of attorney granted by decedent. The surrogate’s court held that it is a 

court of limited subject matter jurisdiction; the wrongful conversion action 

is between two living persons and therefore the surrogate’s court lacks 

jurisdiction. 

E. Community Property 

1. In re Estate of Kirkes, 295 P.3d 432 (Ariz. 2013). Arizona adopts the 

“aggregate theory” of community property. Husband designated his 

son from a prior marriage as the beneficiary of 83 percent of a 

community-owned individual retirement account (“IRA”) and designated 

Wife to receive the remaining 17 percent. Wife had previously been the 

sole beneficiary on the account, which was held in Husband’s name. Wife 

challenged the beneficiary designation, asking the court to award her the 

entire account, or, alternatively, to increase her share based on her 

community interest. In community property states such as Arizona, each 

spouse has an undivided half interest in community property. The court 

noted that community property jurisdictions are split on whether the 

disposition of non-probate community property at death should be based 

on the “item theory” or the “aggregate theory.” Under the “item theory,” 

each spouse has a one-half interest in each item of community property, 

whereas under the “aggregate theory” each spouse has a one-half interest 

in the total community property when viewed in the aggregate. The court 

decided that Arizona should adopt the aggregate theory and, as a result, 

the IRA designation to son was valid (assuming that Wife had already 

received her 50% share of Husband’s estate). Rather than looking at each 

item of property, the court looked at the aggregate value of community 

property. The court ultimately held that one spouse may designate a nonspouse 

beneficiary of more than 50 percent of a community property 

retirement account, as long as the other spouse receives half of the 

60

F. Inter Vivos Gifts 

community overall, and other circumstances do not make the distribution 

fraudulent or unjust. 

1. Jirak v. Eichten, 2012 WL 2505748 (Minn. App. 2012). Despite 

mother’s later denial of gifting, the court found a valid gift was made 

to daughter and grandson. Mother transferred $450,000 to daughter and 

grandson. Two years later mother and her two sons claimed she had not 

meant to gift the assets to daughter and grandson. They also claimed 

grandson had breached his fiduciary duties as a financial advisor. Court 

found the testimony credible of daughter, grandson, and mother’s attorney, 

showing that the mother indeed intended to and effectively did gift the 

assets. The case also involved a defamation claim, as grandson’s 

professional reputation was damaged. 

2. Richards v. Wasylyshyn, 2012 WL 3548201 (Ohio App. 6 Dist. 2012). 

The dispute questioned whether artwork was in possession of 

decedent’s girlfriend while he had heart surgery as a causa mortis gift 

or a permanent inter vivos gift. Decedent’s wife predeceased him. 

Decedent’s will left his property to a trust, naming his sons as the sole 

beneficiaries. Decedent’s girlfriend claims that during his life decedent 

gifted to her two paintings. The girlfriend and her mother state that the 

paintings were brought to the girlfriend’s home on her birthday (which 

was right before he had surgery). The paintings were returned to 

decedent’s home after he survived heart surgery. There is question as to 

whether the paintings were permanently gifted to the girlfriend or whether 

it was a causa mortis gift, given in contemplation of death, but voided 

when donor recovered from serious illness. The court found genuine 

issues of material fact as to art collector’s donative intent, delivery of 

paintings, and rights of ownership and possession of paintings. 

G. Joint Tenancy 

1. Hom v. Hom, 2012 WL 6176845 (N.Y.A.D. 2 Dept. 2012). Court found 

no completed inter vivos gift when father added son’s name to 

property and bank account ownership because no present intent to 

transfer ownership. Father changed deed and opened bank accounts so 

that owned jointly with son, but facts showed he did it for convenience 

and with the intent that son would then easily get assets at father’s death. 

Because father’s intent was not to presently transfer ownership of assets, 

the gift was invalid because not made by will. 

2. Smith v. Bank of Amer., 103 A.D.3d 21, 957 N.Y.S.2d 705 (N.Y. S. 

2012). Joint tenancy with right of survivorship was not severed when 

one joint tenant obtained mortgage without knowledge of other joint 

tenant. The issue of whether a mortgage given by one joint tenant 

61

without the knowledge of the other acts to destroy the unity of interest, 

was one of first impression for this court and they looked to California, 

Illinois, and other states for guidance. When joint tenancy survives, and 

the joint tenant who obtained the mortgage dies, then the mortgage 

becomes null and void upon the debtor’s death and the other joint tenant 

receives the property free and clear (the other joint tenant was unaware of 

the mortgage and not a co-signor of the loan). It is not standard practice 

for a lender to issue a mortgage on jointly owned property without first 

guaranteeing that the joint tenancy has been severed and converted to 

tenancy in common, or obtaining co-signature of all joint tenants. 

H. Beneficiary Designations Post-Divorce 

1. Malloy v. Malloy, 288 P.3d 597 (Ut. Ct. App. 2012). Despite state law 

revoking beneficiary designations after divorce, first wife remained 

beneficiary to life insurance policy because policy’s manual stated 

that divorce did not revoke beneficiary status. Divorce decree did not 

discuss life insurance policy and decedent had remarried. Second wife 

brought action against first wife who was paid benefits under decedent’s 

life insurance policy. Life insurance policy beneficiary forms and manual 

explicitly stated that divorce would not revoke a beneficiary designation. 

Decedent had not changed beneficiary and thus, first wife was entitled to 

keep the life insurance proceeds. 

2. Hoffman v. Hoffman, 54 A.3d 903 (Penn. 2012). Policy originated on a 

date prior to enactment of the law revoking beneficiary designations 

after divorce, but the former wife disputing the revocation was not 

named a beneficiary until years after the enactment of the law. 

Former wife attempted to show that retroactive enforcement of the law 

violated her rights under the contract clause because the state law about 

beneficiary designations being revoked after divorce was not enacted until 

after decedent’s life insurance policy originated. However, decedent was 

married to someone else when the policy originated and when he 

subsequently remarried and designated new wife as beneficiary, the law 

was already in place and thus, new wife’s contractual expectations did not 

begin until she was designated as a beneficiary. 

I. Intentional Interference with an Expected Inheritance 

1. Beckwith v. Dahl, 2012 WL 1548178 (Cal. App. 4 Dist. 2012). 

California has joined the majority of other states in recognizing the 

tort of Intentional Interference with an Expected Inheritance (IIEI). 

Twenty-five of the forty-two states that have considered the IIEI cause of 

action, have validated it and the Supreme Court called the tort “widely 

recognized.” The court here is now officially recognizing the tort in 

California. This case involved a situation where decedent’s sister 

interfered with her brother’s partner’s expectation of inheritance. The 

62

V. POWER OF ATTORNEY 

A. Improper Use 

case also involved a deceit by false promise claim. Now that the court 

officially recognized the IIEI as a valid claim, the case was remanded for 

grant to amend the IIEI cause of action. 

1. Neuman v. Trice, 978 N.E.2d 228 (Oh. Ct. App. 2012). Personal use of 

principal’s assets pursuant to power of attorney was a procurement 

by undue influence. Decedent’s revocable trust provided that assets were 

to be distributed to various family members, excluding her son. Among 

the assets distributable to the trust were various annuities. Decedent 

became ill and while in rehabilitation, executed a power of attorney 

appointing son’s wife as agent. Agent liquidated accounts held in the trust 

and transferred assets to a “POA account.” Agent also liquidated the 

annuities and deposited them into her and her husband’s joint account, 

alleging that the transfers were gifts at the decedent’s request. Decedent 

was eventually declared incompetent and the power of attorney was 

revoked by a court. An action was filed against the agent and a jury found 

that agent was guilty of concealment and embezzlement. The Court held 

that a holder of a power of attorney has a fiduciary relationship with the 

principal. Relying on the fact that no gift tax returns were filed, the Court 

ruled that the use of the assets for personal use was invalid and the money 

was procured through undue influence. 

4817-5325-6467\2 

63

Federal Tax Update – Important Cases, 

Rulings, Legislation and Regulations from 

the Past 12 Months 

Professor Samuel A. Donaldson 


Atlanta, GA 


FEDERAL TAX UPDATE 

Important Developments in Federal Income, Estate & Gift Taxation Affecting Individuals 

Samuel A. Donaldson 

Professor of Law 


Atlanta, Georgia 

Of Counsel 

Perkins Coie LLP 

Seattle, Washington 

© 2013. All rights reserved. 


Income Tax Planning After the American Taxpayer Relief Act of 2012 2 

Estate and Gift Tax Planning After the American Taxpayer Relief Act of 2012 9 

Defined Value Gifts – Mechanics and Ethical Issues 12 

Recent Valuation Case of Interest (Elkins) 21 

Making the Most of the Portability Election (including ethical issues facing fiduciaries) 24 

The Impact of Windsor on Estate Planning for Unmarried Couples (including ethical issues) 33 

1

INCOME TAX PLANNING AFTER THE AMERICAN TAXPAYER RELIEF ACT OF 2012 

On January 1, 2013, the Senate passed the American Taxpayer Relief Act of 2012 

(“ATRA”) by a vote of 89‐8. That same day, the House passed the bill by a vote of 257‐167. 

President Obama signed the bill into law on January 2, 2013. ATRA is notable for averting the 

tax side of the so‐called “fiscal cliff” by extending or making permanent tax legislation passed in 

2001, 2003, 2009, and 2010. (Interestingly, as of this writing we are still waiting to see how 

Congress intends to address the “spending cliff:” how to pay for the estimated revenue losses 

from ATRA—an estimated $3.63 trillion over ten years, according to the Congressional Budget 

Office.) 

Though more legislation may soon be in the pipeline, ATRA itself is perhaps the most 

significant tax legislation for estate planners in nearly 12 years. For most clients, ATRA 

represents a paradigm shift in that estate planning becomes almost entirely and income tax 

game instead of an estate tax game. 

1. Understanding the Enemy 

ATRA made many important changes to the federal income tax. What is perhaps most 

surprising is that many of these changes are “permanent.” 1 The more significant of the 

permanent changes include these: 

• The 10% rate bracket continues and is now “permanent.” 

• The 25%, 28%, and 33% tax brackets continue and do not revert to 28%, 31%, and 

36%, respectively. 

• The 35% bracket continues for individuals, but not for estates and not for trusts. 2 

• The 39.6% bracket returns as the maximum marginal tax rate for individuals, estates, 

and trusts. 

1 When it comes to the Internal Revenue Code, of course, nothing is “permanent,” as Congress can (and 

undoubtedly will) later amend the laws. “Permanent” has become shorthand for “not subject to a prescribed 

expiration date (or ‘sunset’),” a feature that was all too common for tax legislation enacted over the past 12 years. 

2 For most taxpayers, the 35% bracket is not exactly bountiful. ATRA requires the 39.6% bracket to start at 

$400,000 of taxable income for unmarried filers, $450,000 for joint filers, and $425,000 for heads of households. 

But because of inflation adjustments, the 35% brackets in 2013 start at $398,351 for all filers. For married couples, 

that means $51,649 of taxable income will be taxed at 35% (the 33% bracket, in contrast, applies to $176,299 of 

taxable income). It’s even worse for unmarried filers, as the 35% bracket applies to just $1,649 of taxable income. 

For them, the 35% bracket is effectively nonexistent. 

2

• The preferential rates for net capital gain (0% for taxpayers in the 10% and 15% 

brackets; 15% for other taxpayers) continue, but a new 20% rate applies to taxpayers in 

the 39.6% bracket. 

• The preferential rates for net capital gain continue to be applied to “qualified 

dividends,” and this too is now “permanent.” 

• Repeal of the marriage penalty in the 10% and 15% brackets continues. 

In addition to the permanent changes just itemized, ATRA contains a number of notable 

“extenders” and other temporary measures, including these: 

* The dollar limitation on the §179 expensing election continues at $500,000 for 2012 

and 2013. 3 As in 2011, the $500,000 maximum is not reduced until the total amount of 

§179 property purchased and placed in service during the taxable year exceeds $2 

million. 

* So‐called “50% bonus depreciation” under §168(k) continues through 2013. 

* The above‐the‐line deduction for certain expenses of elementary and secondary 

school teachers continues through 2013. 

* The above‐the line deduction for qualified tuition and related expenses continues 

through 2013. 

* The American Opportunity Tax Credit (covering up to $2,500 credit for tuition, fees, 

and course materials for the first four years of undergraduate education) continues 

through 2017. 

* The §108(a)(1)(E) exclusion for discharge of qualified principal residence indebtedness 

continues through 2013. 

* The special rule treating mortgage insurance premiums treated as qualified residence 

interest continues through 2013. 

* The itemized deduction for state and local sales taxes continues through 2013. 

* The increased contribution limits for conservation contributions continues through 

2013. 

3 Special thanks to Congress for reinstating the $500,000 limitation for 2012 on January 1, 2013. Throughout 2012, 

taxpayers were led to believe the maximum §179 election amount was $139,000. By the time they learned it was 

really $500,000, it was already 2013. As with much in life, in this case ‘twas better to be lucky than good. 

3

* The ability for taxpayers age 70‐1/2 and older to make tax‐free distributions of up to 

$100,000 from individual retirement accounts to charities (so‐called “charitable rollovers”) 

continues through 2013. 4 

* The 100% exclusion for gain on the sale of qualified small business stock held more 

than five years under §1202 continues through 2013. 

* The insane gimmick whereby S corporation stock basis reductions for corporate 

charitable contributions are limited to the basis (not the value) of contributed property 

continues through 2013. 

* The five‐year recognition period for S corporation built‐in gains tax under §1374 

continues through 2013, with the bonus provision that all payments received under 

installment sales of built‐in gain property are treated as received in the year of sale for 

purposes of determining which recognition period applies. 

2. Sorting Clients by Income 

The income tax planning effects of ATRA and other tax legislation depend upon a 

taxpayer’s income level: 

Income Level 

FAILURES 

Adjusted gross income below $250,000 ($200,000 single) 

WANNABES 

Adjusted gross income above $250,000 ($200,000 single) 

but below $300,000 ($250,000 single) 

AFFLUENT 

Adjusted gross income above $300,000 ($250,000 single) 

but taxable income below $450,000 ($400,000 single) 

WEALTHY 

Taxable income above $450,000 ($400,000 single) 

Income Tax Concerns 

Pfft – we don’t care about you 

• 3.8% tax on net investment income (aka 

the “Medicare tax”) 

• 3.8% tax on net investment income 

• Overall limit on itemized deductions 

• 3.8% tax on net investment income 

• Overall limit on itemized deductions 

• 39.6% rate on ordinary income and 20% 

rate on adjusted net capital gain 

4 Technically, charitable roll‐overs were revived for 2012 too (the ability to make a charitable roll‐over had expired 

at the end of 2011). Here, however, since eligible taxpayers had no idea that charitable roll‐overs were in play for 

2012 until 2013, Congress provided two transition rules. First, roll‐overs made in January, 2013, were deemed to 

have been made in 2012 (thus allowing eligible taxpayers two roll‐overs in 2013). Second, distributions made to 

eligible taxpayers in December, 2012, could qualify for tax‐free treatment if the taxpayers then paid those amounts 

to charity in January, 2013. 

4

3. Planning for the Wannabes: Dealing with the Net Investment Income Tax 

A principal concern for “wannabe” taxpayers starting in 2013 is the 3.8% tax on “net 

investment income” under §1411. 5 The so‐called “Medicare tax” comes not from ATRA but 

from the Patient Protection and Affordable Care Act of 2010 (popularly known as 

“Obamacare”). The new surtax only applies to individual taxpayers with a “modified adjusted 

gross income” (generally meaning the taxpayer‘s adjusted gross income plus any foreign earned 

income excluded under §911) in excess of the “threshold amount.” The threshold amount for 

married taxpayers filing jointly is $250,000 ($125,000 for married filing separately), and the 

threshold amount for all other taxpayers is $200,000. For purposes of this surtax, a taxpayer‘s 

net investment income includes interest, dividends, rents, royalties, capital gains, annuity 

income, and passive activity income. The statute expressly provides that net investment income 

does not include the income from an active trade or business, distributions from individual 

retirement accounts, distributions from qualified plans, gain from the sale of an active interest 

in a partnership or S corporation, and income taken into account in computing self‐employment 

tax. To the extent the tax only applies to items of “income,” it does not apply to excluded forms 

of income like municipal bond interest and, for instance, the gain from the sale of a principal 

residence. 

The 3.8% tax rate is applied against the taxpayer‘s net investment income or the 

amount by which modified adjusted gross income exceeds the threshold amount, whichever is 

less. Thus, individuals with either a small amount of net investment income or a modified 

adjusted gross income barely above the threshold amount, the extra tax exposure probably 

does not merit taking any special action. More affluent individuals with lots of net investment 

income, however, may require special planning. 

For instance, §1(g) (the so‐called “Kiddie Tax”) requires the unearned income of certain 

children to be taxed at the marginal rate applicable to their parents. Some parents simply 

include such unearned income on their own tax returns, but in light of the net investment 

income tax, it now makes sense for the children to file their own returns even though the 

Kiddie Tax will still apply. This is because the net investment income tax does not impute a 

child’s net investment income to a parent even though the Kiddie Tax may apply. Few children 

will have adjusted gross incomes high enough to trigger the net investment income tax, so the 

family can avoid the 3.8% surcharge on a child’s unearned income by having that child file his or 

her own return. 

The net investment income tax may affect some traditional estate planning techniques. 

Parents considering a leveraged gift of S corporation stock to children or other descendants, for 

example, may now have more incentive to effect the wealth transfer through a grantor trust 

instead of an outright gift. Where the transferor is a material participant in the S corporation’s 

business but the intended transferee is not, the income from the S corporation would be net 

5 Neither nonresident alien individuals nor charitable trusts are subject to the tax. 

5

investment income to the transferee even though it was not (and is not) net investment income 

to the transferor. In such a case, it may be more advantageous for the transferor to assign the 

stock to a grantor trust, as the trust’s share of the S corporation would be imputed back to the 

grantor and thus avoid imposition of the net investment income tax. 

In the case of an estate or trust, the tax is 3.8% of the undistributed net investment 

income or, if less, 3.8% of the amount by which adjusted gross income exceeds the dollar 

amount at which the 39.6% bracket begins (that’s $11,950 in 2013). A trust’s exposure to the 

net investment income tax may be mitigated by a number of techniques. First, the trustee can, 

pursuant to regulatory authority under §652, allocate indirect expenses of the trust (those not 

directly attributable to an income item giving rise to the expense) entirely to undistributed 

ordinary income items of net investment income (which would otherwise be taxed at 43.4%), 

before allocating such expenses to other forms of ordinary income, then to capital gains and 

dividends. Second, trust agreements can be amended to authorize distributions of capital gains 

that would otherwise be subject to the net investment income tax. Alternatively, independent 

trustees may be given the discretion to consider the income tax consequences of distributions 

in determining whether to make a distribution. 

4. Planning for the Affluent 

In addition to the net investment income tax, affluent taxpayers have to grapple with 

the return of the overall limitation on itemized deductions. The §68 limitation on itemized 

deductions was set to return in full force (i.e., with a threshold amount slightly over $175,000 

of adjusted gross income). Under ATRA, it indeed returns, though with higher thresholds. Now, 

the overall limitation on itemized deductions applies to joint filers with adjusted gross incomes 

over $300,000, to unmarried filers with adjusted gross incomes over $250,000, and to heads of 

household with adjusted gross incomes over $275,000. These amounts will be adjusted for 

inflation in future years. 

Under §68, otherwise allowable itemized deductions are reduced by either: (1) 80% of 

the total itemized deductions otherwise allowable, or (2) three percent of the amount by which 

the taxpayer’s adjusted gross income exceeds the applicable threshold from the prior 

paragraph, whichever is less. Ultimately, then, a taxpayer subject to §68 could lose as much as 

80% of the taxpayer’s otherwise allowable itemized deductions, effectively increasing the tax 

rate otherwise applicable to the corresponding income. 

It is likely that few clients will invest much interest in aggressive planning just to avoid 

the application of §68. After all, every $10,000 reduction in adjusted gross income saves just 

$300 in federal income tax. Instead of targeted planning for the overall limitation on itemized 

deductions, the best planning here may involve simply educating the client that the effective 

marginal rate applicable to income above the applicable threshold is an additional three 

percent. 

6

Suppose, for example, that a married couple with an adjusted gross income of $300,000 

in 2013 wants to know the effective tax rate on an additional $20,000 of gross income. 

Although the couple’s marginal tax rate on the extra $30,000 would be 33% under the 2013 tax 

tables, the $30,000 excess will also cause the couple to lose $900 in itemized deductions. That 

effectively increases their taxable income by $900, resulting in $300 more tax (33% x $900). The 

total tax on the extra $30,000 would thus be $10,900, an effective rate of 36.33%. It may well 

be the extra tax does not deter the couple from earning the additional income, but most clients 

would likely want to be made aware of the added cost. 

5. Planning for the Wealthy 

In addition to the net investment income tax and the application of the overall limitation 

on itemized deductions, wealthy taxpayers have to deal with the return of the 39.6% bracket 

and a less preferential tax rate of 20% on adjusted net capital gain. 6 While taxes are just one 

factor to consider in making and managing investments, of course, ATRA has made taxes a 

more important factor. Accordingly, some of the following strategies may be worth considering. 

First, clients may wish to invest more heavily in tax‐exempt municipal bonds, keeping in 

mind that interest from some municipal bonds is a preference item for purposes of the 

alternative minimum tax purposes and that some states impose income tax on the interest 

from municipalities outside of the state. 

Second, clients may want to harvest capital losses in order to offset gains that could be 

taxed at 23.8%. This is consistent with the advice we were giving clients at the end of 2012, 

when we told them to accelerate capital gains into 2012 (to be taxed at 15% instead of the 

23.8% rate we were expecting for 2013) and to defer capital losses into 2013 and beyond. 7 

Third, clients have more incentive to channel tax‐challenged assets into tax‐deferred 

vehicles. While municipal bonds and stocks held for long‐term growth may be perfectly fine 

inside of trusts taxed as separate entities, taxable bonds and mutual funds with high turnover 

are better‐suited for pension plans, individual retirement accounts, and tax‐deferred annuities. 

Fourth, working clients should keep making maximum contributions to qualified 

retirement plans. The more that passes to the plan, the lower the client’s adjusted gross 

income (and, hence, taxable income). 

6 As before, of course, other components of net capital gain are taxed at less preferential rates. So‐called 

“unrecaptured section 1250 gain” continues to be taxed at 25% or the taxpayer’s marginal rate, whichever is less. 

Similarly, “collectibles gain” and “section 1202 stock gain” continue to be taxed at 28% or the taxpayer’s marginal 

rate, whichever is less. 

7 It’s nice when our advice proves to be correct, isn’t it? 

7

Fifth, clients should consider charitable contributions of long‐term capital gain assets, 

especially stocks. Not only does the client avoid the 23.8% effective rate on the long‐term 

capital gain, the client can likely obtain an income tax deduction for the fair market value of the 

donated property. 

8

ESTATE AND GIFT TAX PLANNING AFTER THE AMERICAN TAXPAYER RELIEF ACT OF 2012 

For the basics on the American Taxpayer Relief Act of 2012 (“ATRA”), see page 2 of these 

materials. Now we consider how ATRA dramatically affects estate and gift tax planning. 

1. The Easy Part: Understanding the Changes 

ATRA introduced a “permanent” 40% top rate for federal estate, gift, and generation‐skipping 

transfer taxes, together with a “permanent” $5 million applicable exclusion amount adjusted 

for post‐2011 inflation (the 2013 exclusion amount is $5.25 million, an increase from the $5.12 

million exclusion in effect for 2012). 

ATRA also made “permanent” the portability election first introduced in Tax Relief and 

Unemployment Insurance Reauthorization and Job Creation Act of 2010. Portability, recall, is 

implemented through a redesign the “applicable exclusion amount.” Specifically, surviving 

spouses may, following an election by the first spouse to die’s executor, add the “deceased 

spousal unused exclusion amount” (known in the regulations as the “DSUE Amount”) to the 

$5.25 million basic exclusion amount. The DSUE Amount generally consists of the unused 

portion of the basic exclusion amount from the surviving spouse’s “last deceased spouse.” 

Though the number of technical changes to the transfer tax regime is minimal, 8 the impact on 

estate planning is profound, especially for married couples. 

2. The Hard Part: Figuring Out What the Changes Change 

From an estate planning perspective, we have three kinds of married clients: couples with a 

combined estate below the $5.25 million applicable exclusion amount, those with a combined 

estate between $5.25 million and $10.5 million, and those with an estate above $10.5 million. 

Each has unique estate planning needs. 

COUPLES WITH ESTATES BELOW $5.25 MILLION 

For clients with assets below the $5.25 million exclusion amount, estate planning has a 

four‐pronged focus: (1) implementing documents that transfer assets to the desired 

beneficiaries at the appropriate time; (2) coordinating beneficiary designations consistent with 

the overall plan; (3) income tax planning; and (4) the preservation and management of assets. 

8 By repealing the “sunset” provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the 

Jobs and Growth Tax Relief Reconciliation Act of 2003, ATRA also made “permanent” various other rules including: 

(1) elimination of the deduction for qualified family‐owned business interests under §2057, (2) elimination of the 

state death tax credit in favor of the §2058 deduction for state death taxes, (3) the automatic allocation of 

generation‐skipping transfer tax exemption to lifetime transfers to generation‐skipping trusts under §2632(c), and 

(4) broader rules for conservation easements under §2031(c). 

9

Transfer tax issues are generally irrelevant. 9 This playbook assumes planners are familiar 

enough with the first two prongs and thus focuses instead on income tax planning and assetpreservation 

planning. 

Planning at this level is not considered with wealth transfers; it’s usually more about 

wealth preservation. The principal concern is making sure the surviving spouse will have 

sufficient assets to maintain his or her accustomed standard of living. 

Income Tax Planning. Here the focus is on preserving the step‐up in basis upon the 

death of the surviving spouse. This can be lost where the first spouse’s will, for instance, leaves 

everything to the surviving spouse through a trust that does not qualify for the marital 

deduction. Though the assets inside that trust will not subject to the estate tax upon the death 

of the surviving spouse, the whole premise here is that the total estate will likely not exceed the 

applicable exclusion amount anyway, whatever that inflation‐adjusted number may be upon 

the death of the surviving spouse. Yet the assets in trust will not qualify for a step‐up in basis 

upon the death of the surviving spouse. Accordingly, most plans will want to provide for the 

surviving spouse through either of two mechanisms: (1) an “I love you” will that leaves 

everything outright to the surviving spouse; or (2) a trust over which the surviving spouse has a 

testamentary general power of appointment. In either case, the assets remaining after the 

surviving spouse’s death will still be eligible for the step‐up in basis, as they would be included 

in the surviving spouse’s gross estate. 

Couples with a combined estate of $2 million to $4 million or more may have engaged in 

some tax‐driven estate planning within the past few years that might now come back to bite 

them. They may have employed techniques using valuation discounts originally designed to 

minimize estate tax exposure. If that exposure is now virtually eliminated thanks to the 

increased exclusion amount, the previously employed techniques now serve to limit the stepup 

in basis. Where possible, clients may consider unwinding those transactions in order to 

maximize the value of the assets. 

Asset‐Preservation Planning.Here the question is whether to leave assets to the 

surviving spouse outright or through a trust. As always, the decision between an outright 

bequest and a transfer in trust depends on many factors including the financial sophistication 

and consumption habits of the surviving spouse, the surviving spouse’s vulnerability to undue 

influence (whether from existing family members or those the surviving spouse might meet 

9 If the client is married, the plan should contemplate whether a portability election will be made upon the death 

of the first spouse. Though in most cases the DSUE amount will be unnecessary to protect the estate of the 

surviving spouse from federal estate or gift tax liability, it will be helpful where the surviving spouse comes into 

new, unexpected wealth (unanticipated appreciation in assets, hitting the lottery, landing and surviving a rich 

paramour without being seduced into another marriage, and the like). A portability election should not be unduly 

burdensome on the estate of the first spouse to die or its executor. After all, the regulations allow for a relaxed 

reporting procedure with respects to assets passing to the surviving spouse, and those assets passing to 

beneficiaries other than the surviving spouse will have to be valued for income tax basis purposes already. 

10

after the first spouse’s death), the extent to which the first spouse to die is confident that the 

surviving spouse will make sure to provide for beneficiaries of the first spouse to die, and the 

extent to which the first spouse to die wants to provide for other beneficiaries during the 

surviving spouse’s lifetime. 

But another factor that may weigh against the use of a trust is the applicability of the 

39.6% income tax rate and the 3.8% tax net investment income where undistributed taxable 

income exceeds $11,950 (the inflation‐adjusted figure for 2013). Trusts may also pose 

additional administrative costs. 

If creditors are a concern, part of asset preservation must include “asset protection” 

(our euphemism for planning to keep assets out of the evil talons of creditors). In that case, 

planning with trusts will be nearly essential. 10 Planners can continue to recommend lifetime 

credit shelter (or QTIP) trusts, whereby one spouse creates an irrevocable spendthrift trust for 

the benefit of the other spouse. The thinking is that the assets of such a trust would be immune 

from the creditors of either spouse. 

Finally, it’s worth remembering that many states have their own estate taxes, and the 

exclusion amounts tend to be lower than $5.25 million. Although a couple may not require 

federal estate tax planning, state estate tax planning may require the use of techniques 

normally reserved for those with taxable estates. 

COUPLES WITH ESTATES ABOVE $5.25 MILLION BUT BELOW $10.5 MILLION 

For these couples, the chief estate tax issue is whether to use a credit shelter trust or 

the portability election upon the death of the first spouse. At first blush, portability may seem 

much easier than (and thus preferable to) a credit shelter trust, as it can be implemented 

simply through an “I love you” will leaving the entire estate outright to the surviving spouse 

followed by a timely portability election by the first spouse to die’s executor. There are other 

situations where relying on the portability election may be preferable to a credit shelter trust: 

• Neither the decedent nor the surviving spouse has children from outside the marriage. 

• The complexities and costs of trust administration outweigh the benefits to all parties, 

as the surviving spouse is competent to manage assets. 

• The step‐up in basis for income tax purposes matters more than shifting future 

appreciation on assets left outright to the surviving spouse. 

10 Spouses can also achieve creditor protection in some states by holding property as tenants by the entirety, and 

spouses in many states can rely on homestead exemptions for limited creditor protection. 

11

• The principal assets of the deceased spouse’s estate are those for which a credit 

shelter trust is suboptimal, like a retirement plan and/or a personal residence. 

• One expects the surviving spouse to make one or more substantial gifts after the 

death of the first spouse, such that the added DSUE Amount will be helpful in allowing 

the surviving spouse to avoid the imposition of gift tax liability. 

• The surviving spouse is more likely to be spending down assets instead of 

accumulating more wealth. 

In other cases, of course, the credit shelter trust may be the preferred option: 

* The surviving spouse is more likely to accumulate wealth than to spend down the 

assets. 

* Regardless of the surviving spouse’s expected consumption, the clients expect 

substantial appreciation in the value of the assets between the deaths of the first 

spouse and the surviving spouse. 

* The deceased spouse wants to direct where assets will pass after the surviving 

spouse’s death. 

* There is a concern that the surviving spouse could be subject to undue influence. 

* A credit shelter trust may be necessary for state estate tax purposes. 

In many cases, clients will want to enact a plan that offers the surviving spouse and the 

executor 11 the opportunity to choose the best option (credit shelter trust or portability 

election) following the death of the first spouse, as this gives them flexibility to make the best 

decision at the proper time. A flexible plan might contemplate a disclaimer whereby the 

surviving spouse can disclaim assets to a credit shelter trust. Alternatively, assets can be left to 

a “Clayton QTIP” whereby everything nominally passes to a trust for which a QTIP election can 

be made, with any non‐elected assets pouring over into a standard credit shelter trust. 

COUPLES WITH ESTATES ABOVE $10.5 MILLION 

Little changes for the clients in this category, as the full quiver of planning strategies 

remains viable. As before, these clients will want to consider leveraged transfers in order to 

shift a substantial amount of wealth (and subsequent appreciation) out of the couple’s estates. 

Almost all couples in this category will want to employ two strategies as part of their plan. 

11 Assuming the surviving spouse is not the executor, of course. 

12

First, they will want one or more grantor trusts as gifting vehicles. The difference in tax 

rates between individuals and trusts has become even more significant in light of the early 

application of a 39.6% rate on trust taxable income. 12 For that reason, it will almost always be 

better for undistributed income to be taxed to the grantor rather than to the trust. Grantor 

trusts are also good vehicles for effecting asset sales, whether directly or under the installment 

method. 

Second, for extra planning security, these clients will want to make use of defined value 

gifts. See the discussion starting on page 12 of these materials. 

Finally, for clients who still have some or all of their applicable exclusion amounts 

available, a menu of various available strategies include the following: 

• Large gifts to grantor trusts, followed by loans or sales by the grantor 

• Large gifts to dynasty trusts 

• Gifts of qualifying income interests from QTIP trusts 

• Taxable gifts (leveraging the “tax‐exclusive” nature of the gift tax) 

• Grantor Retained Annuity Trusts 

• Low‐interest loans 

• Lifetime credit shelter trusts (aka “spousal lifetime access trusts”) 

12 Some suggest setting up grantor trusts sooner rather than later, as part of the President’s budget proposal has 

called for the inclusion of assets held by a grantor trust in the grantor’s gross estate even where the trust would 

otherwise qualify as a “defective grantor trust.” If Congress were to enact such a rule, one might fairly guess it 

would apply prospectively, though certainly there is no guarantee of this. 

13

DEFINED VALUE GIFTS – MECHANICS AND ETHICAL ISSUES 

1. A Short Primer on Defined Value Gifts 

Grantors often intend to make gifts of a specific amount of property (e.g., an amount 

equal to the annual gift tax exclusion or an amount that fully utilizes the donor’s applicable 

exclusion amount). It’s not easy to make gifts of exact amounts, especially where the gifted 

property consists of interests eligible for valuation discounts. If the grantor applies valuation 

discounts in excess of what the Service or courts subsequently permit, the grantor accidentally 

make a gift to the trust that would trigger liability for gift tax. Accordingly, some gifts include a 

“formula clause” designed to discourage the Service from challenging a valuation by providing 

for a gift over to charity of the value of the gifted property above a specified amount. 

Presumably the Service would have little incentive to challenge the valuation of a gift if 

the excess value would not be subject to gift tax. And it’s for precisely this reason that the 

Service has so actively opposed the use of formula clauses in this context. But appellate 

opinions from three federal circuits in the past seven years approve the use of defined value 

clauses where any amounts in excess of a specified dollar figure pass to a charitable 

organization. 

In McCord v. Commissioner, 13 the taxpayers (a married couple) conveyed limited 

partnership interests to three groups of beneficiaries: their children, certain trusts, and two 

charities. The assignment agreement signed by the donors stated that the amounts passing to 

the children and the trusts would be roughly $6.9 million, with any extra value passing to the 

charities. Following the assignment, the beneficiaries all executed a “confirmation agreement” 

that reflected the exact percentage amounts of the gifted interests received by each 

beneficiary. The Tax Court refused to apply the formula clause in the assignment agreement 

because the formula was based on fair market value and not “fair market value as finally 

determined for Federal gift tax purposes.” Instead, it gave effect to the allocations set forth in 

the confirmation agreement, ultimately causing more to pass to the children and the trusts 

than the donors likely intended. On appeal, the Fifth Circuit reversed the Tax Court. As the 

court stated, the “core flaw in the [Tax Court’s] inventive methodology was its violation of the 

long‐prohibited practice of relying on post‐gift events. Specifically, the [Tax Court] used the 

after‐the‐fact Confirmation Agreement to mutate the Assignment Agreement’s dollar‐value 

gifts into percentage interests in [the partnership]. It is clear beyond cavil that the [Tax Court] 

should have stopped with the Assignment Agreement's plain wording.” The court continued 

that fair market value is determined on the day the donor completesthe gift, so the Tax Court’s 

reference to value as of the time of the Confirmation Agreement was erroneous. The Fifth 

Circuit thus respected the taxpayer’s formula clause and rejected the valuations of the Tax 

Court and the Service. 

13 461 F.3d 614 (5 th Cir. 2006). 

14

In Estate of Christiansen v. Commissioner, 14 the decedent’s will left her entire estate to 

her daughter. The daughter disclaimed a portion of the bequest (the disclaimed portion 

represented all amounts over $6.35 million in value “as finally determined for federal estate tax 

purposes”). The decedent’s will provided that any disclaimed amounts would pass 25% to a 

charitable foundation and 75% to a charitable lead trust that would pay an annuity of 7% to the 

foundation for 20 years with the remainder to pass to the daughter if she was then living. The 

daughter did not disclaim this contingent remainder interest. The estate tax return claimed a 

charitable deduction for the amount passing directly to the foundation and for the present 

value of the foundation’s lead interest in the charitable lead trust. The Service disallowed a 

deduction for any amount passing to the lead trust because the daughter failed to disclaim the 

contingent remainder interest in the lead trust. While “partial disclaimers” are expressly 

permitted under § 2518(c)(1), they must still meet the requirement in § 2518(b)(4) that the 

disclaimed interest pass “to a person other than the person making the disclaimer.” The 

Service concluded that by retaining her contingent remainder interest, the daughter effectively 

disclaimed the interest to herself. The Tax Court upheld this position but allowed a deduction 

for the amount passing directly to the charity. 

That sent the Service to the Eighth Circuit, where it argued that because the final value 

of the estate was not finally determined at the time of the decedent’s death, but only after a 

partially successful challenge by the Service, the transfer to the foundation was, ultimately, 

“dependent upon the performance of some act or the happening of a precedent event” 

(namely, the Service’s challenge against the return and the subsequent settlement process) in 

violation of Regulation § 20.2055‐2(b)(1). The Eighth Circuit rejected this argument, concluding 

that the only uncertainty remaining after the disclaimer was the value of the estate (and, thus, 

the amount of the deduction). As the court observed, “the Commissioner fails to distinguish 

between events that occur post‐death that change the actual value of an asset or estate and 

events that occur post‐death that are merely part of the legal or accounting process of 

determining value at the time of death.” 

The Service also argued that the daughter’s use of a fixed‐dollar disclaimer should be 

void on public policy grounds because there’s no financial incentive for the Service to challenge 

valuation positions taken on the estate tax return. But the court rejected this argument too, 

noting that “the Commissioner's role is not merely to maximize tax receipts and conduct 

litigation based on a calculus as to which cases will result in the greatest collection. Rather, the 

Commissioner's role is to enforce the tax laws.” The court found this rule of construction 

unnecessary because the estate’s fiduciaries already have an incentive to value assets properly. 

As the court explained, “with a fixed‐dollar‐amount partial disclaimer, the contingent 

beneficiaries taking the disclaimed property have an interest in ensuring that the executor or 

administrator does not under‐report the estate's value. Such beneficiaries, therefore, have an 

interest in serving a watchdog function.” The court thus affirmed the Tax Court’s decision. 

14 586 F.3d 1061 (8 th Cir. 2009). 

15

Then, in Estate of Petter v. Commissioner, 15 the decedent inherited a large block of UPS 

stock from her uncle in 1982. She transferred the stock to a family LLC. The decedent reserved 

a fixed number of ownership units in the family LLC for herself (including all of the voting units), 

assigned (through gift and sale transactions) a fixed dollar amount of the remaining units (with 

a combined value of about $9 million) to two trusts for the benefit of two of her children, and 

gave the remainder to two charities, the Seattle Foundation and the Kitsap Community 

Foundation. When the Service determined that the value of the family LLC was higher than first 

claimed on the gift tax return that reported the transfers, the Tax Court had to decide whether 

to honor the formula clause used by the decedent and allocate more shares to the charities. 

The decedent claimed that “she gave stock to her children equal in value to her unified credit 

and gave all the rest to charity.” The Commissioner claimed that “she actually gave a particular 

number of shares to her children and should be taxed on the basis of their now‐agreed value.” 

The court held that the decedent used an effective formula clause, not a void savings 

clause. “The plain language of the documents shows that [the decedent] was giving gifts of an 

ascertainable dollar value of stock; she did not give a specific number of shares or a specific 

percentage interest in the [family LLC]. Much as in Christiansen, the number of shares given to 

the trusts was set by an appraisal occurring after the date of the gift.” 

As a result of McCord, Christiansen, and Petter, it would appear quite safe for clients to 

use a defined value clause when making gifts of “discounted” assets, especially where any 

“pour‐over” amount passes to charity. Some practitioners felt that a charitable component was 

essential to an effective defined value clause. But the Wandry case changed that. 

2. Wandry: The Game‐Changer 

In Wandry v. Commissioner, 16 the taxpayers, a married couple, formed an LLC in 2001 

that was funded in 2002. On January 1, 2004, they gave interests in the LLC to their children and 

grandchildren according to a formula that read as follows: 

I hereby assign and transfer as gifts, effective as of January 1, 2004, a sufficient 

number of my Units [in the LLC] so that the fair market value of such Units for 

federal gift tax purposes shall be as follows: 

Name 

Gift Amount 

Kenneth D. Wandry $261,000 

Cynthia A. Wandry 261,000 

Jason K. Wandry 261,000 

Jared S. Wandry 261,000 

15 653 F.3d 1012 (9 th Cir. 2011). 

16 T.C. Memo. 2012‐88 (March 26, 2012). 

16

Grandchild A 11,000 

Grandchild B 11,000 

Grandchild C 11,000 

Grandchild D 11,000 

Grandchild E 11,000 

1,099,000 

Although the number of Units gifted is fixed on the date of the gift, that number 

is based on the fair market value of the gifted Units, which cannot be known on 

the date of the gift but must be determined after such date based on all relevant 

information as of that date. Furthermore, the value determined is subject to 

challenge by the Internal Revenue Service (“IRS”). I intend to have a good‐faith 

determination of such value made by an independent third‐party professional 

experienced in such matters and appropriately qualified to make such a 

determination. Nevertheless, if, after the number of gifted Units is determined 

based on such valuation, the IRS challenges such valuation and a final 

determination of a different value is made by the IRS or a court of law, the 

number of gifted Units shall be adjusted accordingly so that the value of the 

number of Units gifted to each person equals the amount set forth above, in the 

same manner as a federal estate tax formula marital deduction amount would 

be adjusted for a valuation redetermination by the IRS and/or a court of law. 

An appraisal in July, 2005, found that the value of a one‐percent interest in the LLC was about 

$109,000. Accordingly, the gift tax return reported that each child received a 2.39‐percent 

interest in the entity and that each grandchild got a 0.101‐percent interest. The capital 

accounts of the LLC were adjusted to reflect these gifts. 

When the Service determined that the value of a one‐percent interest was in fact 

$150,000, it determined that each child received a gift of $366,000 (based on a 2.39‐percent 

interest) and each grandchild got a gift of $15,400 (based on a 0.101‐percent interest). That led 

to a deficiency. Before the Tax Court, the parties stipulated that the value of a one‐percent 

interest in the LLC was $130,000 at the time of the gift. The Service contended that each child 

received a 2.39‐percent interest that was therefore worth $315,800 and that each grandchild 

got a 0.101‐percent interest that was worth $13,346. But the taxpayers argued that the gift 

documents only conveyed $261,000 worth of LLC units to each child and $11,000 worth to each 

grandchild. If a one‐percent interest was worth $130,000, they said, then each child in fact got 

only a two‐percent interest, each grandchild only received a 0.0846‐percent interest, and the 

capital accounts would be adjusted accordingly. 

The Service argued that because the gift tax returns expressed the gifts as percentage 

interests in the LLC, the taxpayers in fact made a gift of percentage interests and not that 

number of units equal to a predetermined amount. But the Tax Court rejected this argument, 

concluding it was clear from the gift documents that the taxpayers’ intent was to give a specific 

dollar amount’s worth of units and not a specific percentage interest. It was helpful that the gift 

17

tax returns were consistent with this intent in reporting the dollar values of the gifts as 

$261,000 per child and $11,000 per grandchild. The percentage interests reflected on the 

schedules, said the court, were just derivative of the appraisal and not an expression of what 

was actually gifted. 

The Service also argued that the taxpayer in fact gave percentage interests instead of 

fixed dollar amounts because the LLC’s capital accounts were adjusted to give each child a 2.39‐ 

percent interest and each grandchild a 0.101‐percent interest. In effect, reasoned the Service, if 

the LLC’s books show each child having a 2.39‐interest, then that’s what each child in fact has. 

But the court rejected this argument too, noting that “The facts and circumstances determine … 

[the] capital accounts, not the other way around. Book entries standing along will not suffice to 

prove the existence of the facts recorded when other more persuasive evidence points to the 

contrary.” Besides, observed the court, even if the Service was right in claiming that the 

interests reflected in the capital accounts were binding, the evidence of the capital accounts 

was from an undated, handwritten register. The court was not persuaded that the Forms K‐1 

were probative of what was given, for those forms only show year‐end balances and not the 

actual percentage interests. 

Finally, the Service argued that the language used to make the gifts here was an invalid 

savings clause under Commissioner v. Procter, 142 F.2d 824 (4 th Cir. 1944), and not a valid 

formula clause like the ones upheld in three recent decisions from the federal circuit courts of 

appeal. A savings clause, you see, takes the form of “if I give too much, I get it back,” while a 

formula clause is in the form of “if I give too much, the excess goes somewhere else but not 

back to me.” The Service contended that to the extent the final determination of value for gift 

tax purposes causes a smaller percentage interest to pass to the beneficiaries, it effectively 

means that the donors are getting some of the previously gifted units back, making this a 

Procter‐like savings clause. But the Tax Court held the language used by the taxpayers was a 

valid formula clause. An ascertainable amount of interests was transferred, and the transfer 

was complete even though the value of a one‐percent interest in the entity was unknown at the 

time of the gift. “It is inconsequential that the adjustment clause reallocates membership units 

among petitioners and the donees rather than a charitable organization because the 

reallocations do not alter the transfers. On January 1, 2004, each donee was entitled to a 

predefined … percentage interest expressed through a formula. The gift documents do not 

allow for petitioners to “take property back”. Rather, the gift documents correct the allocation 

of … membership units among petitioners and the donees because the [appraisal] understated 

[the LLC’s] value. The clauses at issue are valid formula clauses.” 

Wandryis a game‐changer, and perhaps the most significant court decision for estate 

planners in several years. Virtually all gifts involving hard‐to‐value assets should involve the use 

of a formula clause like that in Wandry (or, for the philanthropically inclined, like those in 

McCord, Christiansen, and Petter) so as to minimize the risk of owing more gift tax (and 

associated penalties and interest) due to good faith reliance on an appraisal that ultimately 

proves flawed. 

18

In the end, Wandry is correctly decided. The taxpayers did not give a set percentage 

interest in the LLC while crossing their fingers that the value of that percentage interest would 

be within the applicable limitations (annual exclusion plus applicable exclusion amount). They 

instead gave each beneficiary a predefined value of interests in the LLC. When the initial 

determination of the associated percentage interest matching that value proved erroneous, the 

percentage interests were changed. The case really was that simple. 

It’s the aftermath of the case that proves more troubling for some professionals. The 

Service rightly worries that an aggressive client will now give an interest of predefined value in 

a closely‐held entity (or some other hard‐to‐value asset), but then turn around and transfer all 

or substantially all of his or her interest to the beneficiary. “Hey,” thinks the aggressive client, 

“if the Service ever catches me, then I’ll adjust the gift backward to reflect the correct 

percentage interest. But since the Service won’t collect any revenue from catching me, thanks 

to Wandry, it won’t even bother to seek me out.” If this attitude prevails, the Service is right 

that Wandrycould undermine the integrity of the federal wealth transfer tax system. Why 

should the rest of us play by the rules if the aggressive pigs can play this abusive game and 

assure themselves they never lose? That’s a hard argument to rebut. But it doesn’t mean that 

Wandry was wrong or that there is no place for the “private defined value formula clause” in 

the estate planner’s quiver. 

Congress could easily solve for the abusive cases by imposing a penalty in cases where 

the value of the initial transfer pursuant to a defined value formula clause exceeds 120% of the 

value of the transfer as finally determined for estate and gift tax purposes. For example, 

suppose a donor purports to transfer $1 million in LLC units to a beneficiary through a private 

defined value formula clause. The beneficiary then receives a 30% interest in the entity. If the 

Service could prove that the value of this 30% interest is in fact worth $3 million, two things 

would happen: (1) the beneficiary’s interest would be adjusted so that he or she receives only a 

10% interest (with retroactive changes to capital accounts, of course); and (2) the donor would 

pay a penalty, perhaps equal to the gift tax that would have been paid on a $3 million transfer 

in the year of the gift. The Service would have incentive to make sure that the actual interests 

transferred match the formula clause, and donors would have the incentive not to abuse the 

formula. Most importantly, the integrity of the federal wealth transfer tax regime is restored (at 

least on this point). 

One expects, however, that the Service will not wait for Congress to solve the problem 

through a solution like that proposed in the last paragraph. Planners were surprised that the 

Service ultimately stipulated to the dismissal of the Wandry appeal to the Tenth Circuit. Yes, the 

Service issued its nonacquiescence to the Wandryresult, the equivalent of taking its ball and 

going home. But some speculate that the Service will raise its arguments again in another case, 

perhaps ideally one in which an appeal would lie in the Fourth Circuit (where Procter is 

controlling precedent and not merely persuasive authority). Frankly, the better strategy for the 

Service would be to codify its litigation position in Wandry through regulations. We know now 

that even interpretive tax regulations are entitled to deference on judicial review, so if the 

Service were to outlaw gifts through private defined value formula clauses (the form any such 

19

egulations would take is a matter of considerable speculation) one would expect such 

regulations to be upheld if challenged. In the normal course, regulations are made retroactive 

to the date they are first published as proposed regulations. This suggests clients should act 

quickly if they intend to rely on Wandry, for once regulations come out, the opportunity to use 

a private defined value formula clause may be lost. 

20

RECENT VALUATION CASE OF INTEREST (Elkins) 

In Elkins v. Commissioner, 17 the decedent and his wife had acquired ownership of 64 

works of contemporary art, including works by Pablo Picasso, Paul Cezanne, Jackson Pollock, 

and Jasper Johns. In 1990, they each created a ten‐year grantor‐retained income trust (GRIT) to 

which each contributed his or her community property share of three works: a Picasso drawing, 

a Pollock painting, and a Henry Moore sculpture. The decedent’s wife died in 1999, before the 

termination of her GRIT. Under the terms of her GRIT agreement, her share of the works held in 

trust passed to the decedent. The decedent survived his GRIT term, however, meaning his 

original one‐half share of the works passed in equal shares to his three children. At the time of 

his death, therefore, the decedent held an undivided 50% interest (the share that had been 

placed in his spouse’s in the three works. The children then leased to the decedent their 

interests in two of these works (the Picasso drawing and the Pollock painting). The lease 

agreement gave the decedent possession of the works in exchange for a monthly rent that was 

left blank. The agreement also restricted the sale of ownership interests in any of the works 

unless all owners agreed to sell a work in its entirety. 

But wait, there’s more! As for the other 61 works, the decedent disclaimed a portion of 

the undivided 50% interest left to him by his spouse. The disclaimed portion passed in equal 

shares to the three children. At the time of his death, therefore, the decedent had roughly a 

73% interest in each of these remaining 61 works of art (his own 50% interest plus the roughly 

23% interest from his spouse that the decedent did not disclaim). Following the disclaimer, the 

decedent and the children executed a “cotenant’s agreement” under which they agreed to 

share the use of (and maintenance expenses related to) the works proportionate to their 

ownership interests. They also agreed that none of the works could be sold without their 

unanimous consent. 

In valuing the decedent’s share of these various works of art, the estate claimed a 

44.75% “combined fractional interest discount” reflecting both a minority interest discount and 

a marketability discount. 18 The Service claimed that no discount was proper, based in part on its 

assertion that the restrictions on sale of the works should be disregarded under §2703. It also 

claimed that no fractional interest discount should be applied to art because “the proper 

market in which to determine the fair market value of fractional interests in works of art is the 

retail market in which the entire work (consisting of all fractional interests) is commonly sold at 

full fair market value.” And since a fractional interest holder would receive a full share of the 

proceeds, no discount should apply. Because the parties agreed to the undiscounted value of 

the artwork (a total of just over $35.1 million), the only issue was whether a discount was 

appropriate and, if so, the amount of such discount. 

17 140 T.C. No. 5 (March 11, 2013). 

18 At trial, the estate offered expert witnesses to support its new claim that a discount of about 67% should be 

applied. Hey, better to shoot for the stars and miss than aim for a pile of manure and hit. 

21

The Tax Court held that §2703(a) applied and that the restriction on sales in the lease 

agreement and the cotenant’s agreement should therefore be disregarded. But as it turned out, 

disregarding the restriction on sales “makes little or no difference to our conclusion as to the 

value of the art.” Instead, the court was much more concerned with the appropriate discount 

to apply to a fractional interest in artwork. The court acknowledged that other cases have 

applied nominal discounts to fractional interests in artwork. But here, the court observed, “we 

are presented with unchallenged facts demonstrating that the [decedent’s] children had strong 

sentimental and emotional ties to each of the 64 works of art so that they treated the art as 

‘part of the family.’ Those facts strongly suggest that a hypothetical buyer of decedent's 

fractional interests in the art would be confronted by co‐owners who were resistant to any sale 

of the art, in whole or in part, to a new owner, a resistance that the [decedent’s] children 

specifically communicated. … That being so, the hypothetical seller and buyer necessarily would 

be faced with uncertainties regarding the latter's ability to monetize his or her investment in 

the art.” Those uncertainties, said the court, warrant a discount. 

The Service argued that a fractional interest discount here would be inconsistent with its 

traditional position that fractional interests are not discounted for purposes of the § 170 

deduction for charitable contributions when one donates fractional interests to charity. But the 

court held that the lack of discounts in the income tax context is not relevant given the support 

in the case law for fractional interest discounts in the estate tax context. 

So everything came down to the proper discount to apply. The large discount claimed by 

the estate was based on analysis that failed “to consider not only the [decedent’s] children's 

opposition to selling any ofthe art but also their ownership position vis‐a‐vis that of the 

hypothetical willingbuyer and the impact that the … ownership split would haveon the 

negotiations between seller and buyer. Both experts should have consideredthe fact that the 

Elkins children, cumulatively, were entitled to possession [for a portion of] each year. The 

relatively brief period of annual possession and the expense and inconvenience of annually 

movingthe art from the hypothetical buyer's premises back to Houston most likely wouldhave 

caused the [decedent’s] children to reassess their professed desire to cling, at allcosts, to the 

ownership status quo existing after decedent's death. Thus, thehypothetical buyer would be in 

an excellent position to persuade the children,who, together, had the financial wherewithal to 

do so, to buy the buyer's interest inany or all of the works, thereby enabling them to continue 

to maintain absoluteownership and possession of the art.” 

The court continued: “We believe that a hypothetical willing buyer and seller of 

decedent's interestsin the art would agree upon a price at or fairly close to the pro rata fair 

market valueof those interests. Because the hypothetical seller and buyer could not be 

certain,however, regarding the children's intentions, i.e., because they could not becertain that 

the children would seek to purchase the hypothetical buyer'sinterests in the art rather than be 

content with their existing fractional interests, andbecause they could not be certain that, if the 

children did seek to repurchasedecedent's interests in the art, they would agree to pay the full 

pro rata fair marketvalue for those interests, we conclude that a nominal discount from full pro 

rata fairmarket value is appropriate.We hold that, in order to account for the foregoing 

22

uncertainties, ahypothetical buyer and seller of all or a portion of decedent's interests in the 

artwould agree to a 10% discount from pro rata fair market value in arriving at apurchase price 

for those interests. We believe that a 10% discount would enable ahypothetical buyer to assure 

himself or herself of a reasonable profit on a resale ofthose interests to the Elkins children.” 

23

MAKING THE MOST OF THE PORTABILITY ELECTION (INCLUDING ETHICAL ISSUES) 

1. Understanding the Basic Mechanics of Portability 

Technically, the statute does not contain the word “portability.” 19 The portability 

concept is implemented through a redesign the “applicable exclusion amount.” The applicable 

exclusion amount, recall, is the basis for computing the “applicable credit amount” (i.e., the 

unified credit). The applicable credit amount is the amount of tentative tax payable under the § 

2001(c) rate table on the applicable exclusion amount.Prior to 2011, the applicable exclusion 

amount was expressed as a fixed dollar amount ($2 million in 2006, 2007, and 2008; $3.5 

million in 2009; $5 million in 2010). Now § 2010(c) provides (in relevant part) as follows: 

(2) Applicable exclusion amount. For purposes of this subsection, the applicable 

exclusion amount is the sum of‐‐ 

(A) the basic exclusion amount, and 

(B) in the case of a surviving spouse, the deceased spousal unused exclusion 

amount. 

(3) Basic exclusion amount. 

(A) In general. For purposes of this subsection, the basic exclusion amount is 

$5,000,000. 

(B) Inflation adjustment. In the case of any decedent dying in a calendar year 

after 2011, the dollar amount in subparagraph (A) shall be increased by an amount 

equal to‐‐ 

(i) such dollar amount, multiplied by 

(ii) the cost‐of‐living adjustment determined under section 1(f)(3) for 

such calendar year by substituting "calendar year 2010" for "calendar year 1992" in 

subparagraph (B) thereof. 

If any amount as adjusted under the preceding sentence is not a multiple of $10,000, 

such amount shall be rounded to the nearest multiple of $10,000. 

(4) Deceased spousal unused exclusion amount. For purposes of this subsection, with 

respect to a surviving spouse of a deceased spouse dying after December 31, 2010, the 

term "deceased spousal unused exclusion amount" means the lesser of‐‐ 

(A) the applicable exclusion amount, or 

(B) the excess of‐‐ 

(i) the basic exclusion amount of the last such deceased spouse of such 

surviving spouse, over 

(ii) the amount with respect to which the tentative tax is determined 

under section 2001(b)(1) on the estate of such deceased spouse. 

19 The Joint Committee’s Technical Explanation, however, does use the term. SeeTechnical Explanation of the 

Revenue Provisions Contained in the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 

2010” Scheduled for Consideration by the United States Senate, JCX‐55‐10 (Dec. 10, 2010) at 51. 

24

So portability is achieved by giving surviving spouses a “deceased spousal unused 

exclusion amount” (and its ugly acronym, “DSUE Amount”) 20 on top of the $5 million basic 

exclusion amount, and this DSUE Amount generally consists of the unused portion of the first 

deceased spouse’s basic exclusion amount. 

The Joint Committee on Taxation offers a helpful example of how the DSUE Amount 

works: 

Example 1.−Assume that Husband 1 dies in 2011, having made taxable transfers 

of $3 million and having no taxable estate. An election is made on Husband 1's 

estate tax return to permit Wife to use Husband 1's deceased spousal unused 

exclusion amount. As of Husband 1's death, Wife has made no taxable gifts. 

Thereafter, Wife's applicable exclusion amount is $7 million (her $5 million basic 

exclusion amount plus $2 million deceased spousal unused exclusion amount 

from Husband 1), which she may use for lifetime gifts or for transfers at death. 21 

2. First Spouse Must Die in 2011 or Later 

Notice that the DSUE Amount is available “with respect to a surviving spouse of a 

deceased spouse dying after December 31, 2010.” Notice that the first deceased spouse has to 

die in 2011 or later; a surviving spouse of a decedent who died in 2010, for example, cannot 

claim a DSUE Amount from the deceased spouse. 22 

3. The “Last Deceased Spouse” 

Section 2010(b)(4)(B) makes reference to the unused exclusion of the surviving spouse’s 

“last such deceased spouse” (i.e., the last spouse of the surviving spouse to have died in 2011 

or later but before the surviving spouse). Obviously this language is intended to preclude 

20 A better term would have been “initial decedent’s unused exclusion,” if only because I‐DUE would be a more apt 

acronym for a provision involving spouses. 

21 Joint Committee Report,supra note 5, at 52. 

22 One could argue that the “dying after 2010” language applies to the “surviving spouse” and not to the “deceased 

spouse.” Under this interpretation, the portability election would be available provided only that the surviving 

spouse died in 2011 or later. Thus, for example, if a 2011 decedent was the surviving spouse of a decedent who 

died in 2008 having used only $1.5 million of the $2 million applicable exclusion amount then in effect, this 

interpretation would suggest that the surviving spouse’s estate could claim a DSUE Amount of $500,000. This is 

clearly not the correct interpretation, however. First, as explained infra, the portability election is made on the 

timely filed estate tax return of the first spouse to die. No one who died in 2009 or earlier would have made an 

election, and any return now filed for one who died in 2009 or earlier would not be timely. Second, the Joint 

Committee’s Technical Explanation states that the DSUE Amount is “any applicable exclusion amount that remains 

unused as of the death of a spouse who dies after December 31, 2010.” This supports the interpretation that the 

first deceased spouse must die in 2011 or later in order for portability to be on the table, not just the surviving 

spouse. 

25

surviving spouses from serially marrying poor people not long for this world and racking up 

their DSUE Amounts. While the language is effective in precluding this practice, it has another 

interesting ramification. For one who is the surviving spouse of multiple predeceased spouses, 

the order of death matters. Another example from the Joint Committee on Taxation illustrates: 

Example 2.−Assume the same facts as in Example 1, except that Wife 

subsequently marries Husband 2. Husband 2 also predeceases Wife, having 

made $4 million in taxable transfers and having no taxable estate. An election is 

made on Husband 2's estate tax return to permit Wife to use Husband 2's 

deceased spousal unused exclusion amount. Although the combined amount of 

unused exclusion of Husband 1 and Husband 2 is $3 million ($2 million for 

Husband 1 and $1 million for Husband 2), only Husband 2’s $1 million unused 

exclusion is available for use by Wife, because the deceased spousal unused 

exclusion amount is limited to the lesser of the basic exclusion amount ($5 

million) or the unused exclusion of the last deceased spouse of the surviving 

spouse (here, Husband 2’s $1 million unused exclusion). Thereafter, Wife's 

applicable exclusion amount is $6 million (her $5 million basic exclusion amount 

plus $1 million deceased spousal unused exclusion amount from Husband 2), 

which she may use for lifetime gifts or for transfers at death. 23 

In this example, had Husband 2 predeceased Husband 1, Wife’s applicable exclusion amount 

would have been the same $7 million as in the Technical Explanation’s Example 1. 

Some planners might think an easy way to solve the problem of the surviving spouse 

who remarries a wealthier spouse who also predeceases is simply to avoid making a DSUE 

Amount election on the wealthier deceased spouse’s estate tax return. But the statute refers 

to the “last deceased spouse” and not the “last deceased spouse that made a DSUE Amount 

election.” So if the executor of the last deceased spouse makes no election at all, the surviving 

spouse’s DSUE Amount is zero, even if the intent in not making the election was to preserve the 

DSUE Amount from an earlier predeceased spouse of the surviving spouse. 24 

4. Making the Election. 

The DSUE Amount is not available automatically; the statute requires an election from 

the first deceased spouse’s executor. The 2010 Act explains in this addition to § 2010(c): 

23 Joint Committee Report,supra note 5, at 52. 

24 As the Joint Committee puts it, “The last deceased spouse limitation applies whether or not the last deceased 

spouse has any unused exclusion or the last deceased spouse’s estate makes a timely election.” Id. at n. 57. 

26

(5) Special rules. 

(A) Election required. A deceased spousal unused exclusion amount may not be 

taken into account by a surviving spouse under paragraph (2) unless the executor of the 

estate of the deceased spouse files an estate tax return on which such amount is 

computed and makes an election on such return that such amount may be so taken into 

account. Such election, once made, shall be irrevocable. No election may be made 

under this subparagraph if such return is filed after the time prescribed by law (including 

extensions) for filing such return. 

Because the executor cannot know whether and to what extent the surviving spouse will need 

or utilize the DSUE Amount, the executor in most cases will want to make a portability election. 

That means we can expect a significant increase in the number of federal estate tax returns 

filed, and many of those will be filed solely for the purpose of making the portability election. 

Temporary regulations adopted in June, 2012, confirm that an estate claiming the 

portability election must file an estate tax return within nine months of the decedent's death 

(unless an extension of time for filing has been granted), regardless of the size of the gross 

estate and regardless of whether an estate tax return would otherwise be required to file a 

return. But in the case of smaller estates, the temporary regulations provide that estates not 

otherwise required to file a Form 706 do not have to report the value of certain property that 

qualifies for the marital or charitable deduction. Instead, the personal representative must 

estimate the total value of the gross estate (including the values of the property that do not 

have to be reported on the estate tax return under this provision), based on a determination 

made in good faith and with due diligence regarding the value of all of the assets includible in 

the gross estate. It is anticipated that the instructions accompanying the revised Form 706 will 

provide ranges of dollar values from which the personal representative would select the range 

that includes his or her best estimate of the total gross estate. 

5. Statute of Limitations on the Review of the First Deceased Spouse’s Return 

The new § 2010(c)(5) continues: 

(B) Examination of prior returns after expiration of period of limitations with 

respect to deceased spousal unused exclusion amount. Notwithstanding any period of 

limitation in section 6501, after the time has expired under section 6501 within which a 

tax may be assessed under chapter 11 or 12 with respect to a deceased spousal unused 

exclusion amount, the Secretary may examine a return of the deceased spouse to make 

determinations with respect to such amount for purposes of carrying out this 

subsection. 

This language permits the Service to examine the estate tax return of the first deceased spouse 

at any time, provided the examination is for the purpose of determining the DSUE Amount 

available to the surviving spouse. Since both the composition and value of assets included in 

the decedent’s taxable estate are both significant factors in determining whether the DSUE 

27

Amount has been computed correctly, this essentially means that everything on the first 

deceased spouse’s estate tax return is up for grabs at any time until the death of the surviving 

spouse. This could be one reason for an executor of the first spouse to die not to make the 

portability election. 

6. Lifetime Use of the DSUE Amount 

The 2010 Act also amended the definition of the applicable credit amount for gift tax 

purposes. Check out the new wording (in italics) in § 2505: 

(a) General rule. In the case of a citizen or resident of the United States, there shall be 

allowed as a credit against the tax imposed by section 2501 for each calendar year an 

amount equal to— 

(1) the applicable credit amount in effect under section 2010(c) which would 

apply if the donor died as of the end of the calendar year, reduced by 

(2) the sum of the amounts allowable as a credit to the individual under this 

section for all preceding calendar periods. 

So if a surviving spouse of a 2011 decedent whose executor timely filed an estate tax return 

makes a taxable gift in 2012, for instance, the surviving spouse’s applicable exclusion amount 

for federal gift tax purposes would be the same amount available to the surviving spouse’s 

estate for estate tax purposes. The applicable exclusion amount would be the basic exclusion 

amount plus the DSUE Amount. As the Joint Committee explains, this language makes clear 

that “A surviving spouse may use the predeceased spousal carryover amount in addition to 

such surviving spouse’s own $5 million exclusion for taxable transfers made during life or at 

death.” 25 

That’s right—a surviving spouse can use the DSUE Amount of his or her last deceased 

spouse for gift tax purposes too. If one generally embraces the fundamental tenet that it is 

better to make lifetime use of the applicable exclusion amount in order to shift future 

appreciation out of one’s estate, then one should be quick to advise surviving spouse’s to make 

use of the additional DSUE Amount through lifetime gifts. 

A potential trap awaits a surviving spouse who fully utilizes the DSUE Amount of a 

deceased spouse for gift tax purposes but then remarries a wealthier spouse who also 

predeceases. If the wealthier spouse makes better use of the applicable exclusion amount, the 

DSUE Amount will likely be reduced below the amount already utilized through inter vivos 

gifting.Suppose, for example, that H died in 2011 with a taxable estate of $2 million. H was 

survived by his spouse, W. H’s executor timely filed an estate tax return computing a DSUE 

Amount of $3 million and elected to allow W to use the DSUE Amount. W then makes a $7 

million gift after H’s death, but pays no tax because her applicable exclusion amount for gift tax 

purposes is $8 million. After the gift, W marries H2. H2 then dies with a taxable estate of $4 

25 Joint Committee Report, supra note 5, at 52 (emphasis added). 

28

million, and H2’s executor makes a timely DSUE Amount election for the remaining $1 million of 

H2’s exemption. 26 At W’s death, her applicable exclusion amount will be only $6 million (her $5 

million basic exclusion amount plus the $1 million DSUE Amount from H2’s estate). How, then, 

are we to account for W’s prior $7 million gift? Will it mean any amount in W’s taxable estate 

will be subject to federal estate tax? Would her estate be required to pay estate tax on the $1 

million by which her adjusted taxable gifts ($7 million) exceed her applicable exclusion amount 

($6 million)? 

The June, 2012, temporary regulations adopt a position on this issue that is, to say the 

least, taxpayer‐friendly. The temporary regulations provide that the DSUE Amount available to 

a surviving spouse includes both the DSUE Amount of the last deceased spouse and any DSUE 

Amount from a prior deceased spouse that has already been used up. Thus, in the above 

example, when H2 dies (sometime after W’s $7 million gift), W gets another $1 million DSUE 

Amount to play with (assuming a timely filed estate tax return for H2’s estate) even though W 

already used the $2 million DSUE Amount from H1. Though the statute speaks of a surviving 

spouse using only the DSUE Amount of his or her “last deceased spouse,” this giveaway in the 

regulations effectively encourages the wealthy surviving spouse to engage in the following 

planning: (1) gift the deceased spouse’s DSUE Amount, (2) remarry (preferably one who is 

“asset‐challenged” and sickly), (3) outlive that new spouse, and (4) repeat as needed. Not a bad 

stunt if you can avoid prosecution. 

7. Sorry, Nonresidents 

The portability election is only available where both spouses are United States citizens. 

If either spouse lacks United States citizenship, portability is not possible. To illustrate, assume 

a married couple where the husband is a Japanese citizen and the wife is a United States 

citizen. If the husband dies first, his estate is entitled to a credit equal to the tax on $13,000. 27 

He does not have a “basic exclusion amount” and his credit is not determined with reference to 

§ 2010(c), so the DSUE Amount computation in § 2010(c)(4) cannot apply. 

If instead the wife dies first, the husband is still entitled to only the § 2102 credit equal 

to the tax on $13,000. Even if the wife’s executor made a timely DSUE Amount election, the 

husband has no key to the magic kingdom of § 2010(c) and thus no ability to use the DSUE 

Amount. 

8. Use of First Spouse’s DSUE Amount by the Second Spouse 

Note that the DSUE Amount is computed with reference to the last deceased spouse’s 

“applicable exclusion amount.” That’s important where a surviving spouse remarries and then 

26 Remember, if H2’s executor does not make the portability election, the DSUE Amount is zero. H2 is still W’s “last 

deceased spouse.” 

27 IRC § 2102. 

29

predeceases the second spouse. Consider this simple example from the Joint Committee 

Report: 

Example 3.−Assume the same facts as in Examples 1 and 2, 28 except that Wife 

predeceases Husband 2. Following Husband 1’s death, Wife’s applicable 

exclusion amount is $7 million (her $5 million basic exclusion amount plus $2 

million deceased spousal unused exclusion amount from Husband 1). Wife made 

no taxable transfers and has a taxable estate of $3 million. An election is made 

on Wife's estate tax return to permit Husband 2 to use Wife's deceased spousal 

unused exclusion amount, which is $4 million (Wife's $7 million applicable 

exclusion amount less her $3 million taxable estate). Under the provision, 

Husband 2's applicable exclusion amount is increased by $4 million, i.e., the 

amount of deceased spousal unused exclusion amount of Wife. 

In effect, then, Husband 2 ends up being the beneficiary of Husband 1’s unused exclusion 

amount, even though there is no privity at all between Husband 2 and Husband 1. 

9. In Defense of Credit Shelter Trusts 

Earlier in these materials, the case is made for using the portability election in lieu of a 

credit shelter trust. But the following benefits of the traditional credit shelter trust should not 

be overlooked: 

• Any assets placed in a credit shelter trust will not be subject to federal estate tax upon 

the surviving spouse’s death no matter how much they grow in value. 29 Suppose, for instance, 

Husband dies today and his executor puts $5 million into a credit shelter trust with the balance 

going outright to Wife. The trust assets grow to $21 million by the time Wife dies in 2025. 

None of the trust assets is included in Wife’s gross estate, so her executor is free to use her $5 

million exclusion (as adjusted for inflation) on Wife’s own stuff. If there were no credit shelter 

trust, alas, Wife would have a $10 million exemption but tax would due on at least $11 million 

of the assets that would have passed without any tax at all. One must still have something like 

a credit shelter trust to protect future appreciation from tax upon the death of the surviving 

spouse. (Note too that unlike the “basic exclusion amount,” the DSUE Amount is not indexed 

for inflation—so even modest appreciation due to inflation needs a credit shelter trust.) 

• Credit shelter trusts are often used to make sure at least some assets pass to the lineal 

descendants of the first spouse to die upon the death of the surviving spouse. The trust often 

provides for discretionary distributions of income and principal pursuant to an ascertainable 

28 Remember that the prior examples assumed these basis facts: Husband 1 dies in 2011 having used $3 million of 

his $5 million applicable exclusion amount. Husband 1’s executor makes a timely portability, so Wife has an 

applicable exclusion amount of $7 million. Wife then marries Husband 2. 

29 Remember when assets used to appreciate? 

30

standard, but saves the rest for the remainder beneficiaries, usually the children and other 

descendants from the marriage. Absent a credit shelter trust, dead spouses who leave 

everything to their surviving spouses risk the Fabio Effect (i.e., the surviving spouse meeting 

and marrying a new, better lover who then receives the entirety of the estate despite the 

furious whirring sound heard at the grave of the first spouse to die). 

• Related to the last point, credit shelter trusts usually offer a degree of protection 

against the creditors of the surviving spouse that outright bequests to the surviving spouse 

would lack. 

• Sometimes credit shelter trusts are helpful in providing for the professional 

management of assets. The first spouse dies content knowing that the assets will not be 

depleted too quickly. 

• Credit shelter trusts will still be employed to utilize the generation‐skipping transfer 

tax exemption of the first spouse to die. There is no portability of any unused GSTT exemption 

to the surviving spouse. 

• As explained above, there is a risk that portability may not survive to 2013 or beyond. 

Even if the expiration date is extended or removed, there is always the chance the statute could 

be amended to make portability less attractive. 30 

Steve Akers offers additional reasons for the continued use of credit shelter trusts: 

(c) the deceased spousal unused exclusion amount may decrease if the basic 

estate exclusion amount is later reduced by Congress (because the DSUE 

Amount to be applied at any particular time cannot exceed the basic estate tax 

exclusion amount), (d) the unused exclusion from a particular predeceased 

spouse will be lost if the surviving spouse remarries and survives his or her next 

spouse, … [and] (g) there is no statute of limitations on values for purposes of 

determining the unused exclusion amount that begins to run from the time the 

first deceased spouse’s estate tax return is filed whereas the statute of 

limitations does run on values if a bypass trust is funded at the first spouse’s 

death…. 31 

30 In fairness, this same risk faces credit shelter trusts—Congress could always change the Code in such a way that 

credit shelter trusts became more disadvantageous than the portability election. But we have had credit shelter 

trusts for decades and the portability election is the new kid on the block. Which one do you think Congress would 

tinker with first? Aren’t rhetorical questions annoying? 

31 Steve R. Akers, Estate Planning Current Developments 60 (2011) (copy on file with the author). 

31

10. Will States Respect Portability? 

There is no guarantee that states imposing their own wealth transfer taxes would follow 

Congress’s lead and provide for portability of unused state tax exemptions. That is why at least 

one commentator suggests, at a minimum, placing assets equal to the state estate tax 

exemption amount into a credit shelter trust and using the portability election for the balance 

of the first deceased spouse’s estate. 32 This would fully utilize the first deceased spouse’s state 

exemption amount in the event the state does not provide for portability. 

12. Lingering Questions 

Some practitioners have identified questions that planners (and clients) will have to 

consider now that the portability election is in play. 

To what extent should a testator’s will address the portability election, if at all? 

Should a testator’s will be drafted to require the executor to make the election 

or to consult with the surviving spouse? Should the estate incur the cost of the 

election if an estate tax return is not otherwise required? Can a premarital 

agreement require the election? What happens if the executor fails to make the 

election? 33 

32 See Jeffrey Pennell, Marital Deduction in Uncertain Times, ALI‐ABA Planning Techniques for Large Estates 420 

(May, 2011). 

33 Ansley C. Cella& John R. Cella, Jr.,NCBA The Will & the Way,March 2011 (copy on file with the author). 

32

THE IMAPCT OF WINDSOR ON ESTATE PLANNING FOR UNMARRIED COUPLES 

As of this writing (May 10, 2013), the Supreme Court has yet to issue its opinion in 

Windsor v. United States, 34 where lower courts held that section 3 of the Defense of Marriage 

Act (“DOMA”), defining “marriage” as between one man and one woman, is unconstitutional in 

the context of the estate tax marital deduction. 

In the case, Edie and Thea(both of New York) started a committed relationship in 1963. 

In 1993, they registered as domestic partners in New York City, and in 2007 they married in 

Canada. Theadied in 2009, and her estate passed for the benefit of Edie. Because 

Thea’sbequest did not qualify for the unlimited marital deduction her estate was required to 

pay $263,053 in federal estate tax. Two years after Thea’s death, New York recognized samesex 

marriages. 

Edie filed a refund action claiming that section 3 of DOMA violates the Equal Protection 

Clause of the Fifth Amendment of the United States Constitution. In February 2011, recall, the 

Justice Department announced that it would no longer defend DOMA’s constitutionality. It 

reasoned that a heightened standard of scrutiny should apply to classifications based on sexual 

orientation and that section 3 is unconstitutional under that standard. That led the Bipartisan 

Legal Advisory Group of the U.S. House of Representatives (“BLAG”) to intervene in this case to 

defend the constitutionality of the statute. 

The U.S. District Court for the Southern District of New York granted summary judgment 

in favor of Edie, holding that the application of DOMA to deny the estate tax marital deduction 

was unconstitutional. The court held that it did not need to determine the standard 

appropriate for testing legislation that discriminates against homosexuals (rational basis, 

intermediate scrutiny, or strict scrutiny) because DOMA failed even the rational basis test. 

A divided Court of Appeals for the Second Circuit affirmed. The Second Circuit first 

determined that Edie had standing to bring the suit because New York would have recognized a 

Canadian same‐sex marriage, even though New York did not license such unions at the time. 

The court noted that the highest court of New York had not ruled on the issue, but 

intermediate courts of appeals had uniformly upheld such foreign same‐sex marriages. 

Turning to the merits, the Second Circuit rejected the argument that Baker v. 

Nelson 35 applied. In that case, the Supreme Court summarily dismissed an appeal from the 

decision of the Minnesota Supreme Court that the use of the traditional definition of marriage 

for a state’s own regulation of marriage status did not violate equal protection. While BLAG 

made much of the case, the court noted that one can’t read too much into a summary 

34 833 F. Supp. 2d 394 (S.D. N.Y. June 6, 2012), aff’d, 2012 WL 4937310 (2d Cir. Oct. 18, 2012). 

35 409 U.S. 810 (1971). 

33

dismissal. The court observed that Bakerconcerned only whether a state could restrict same‐sex 

marriage, not whether the federal government could constitutionally define marriage. 

Unlike the lower court, the Second Circuit was unafraid to pick a standard of scrutiny, 

opting for intermediate scrutiny. Considering that homosexuals historically have been subjected 

to discrimination and have been “a minority or politically powerless,” the court determined 

that homosexuals are a “quasi‐suspect”class and that, therefore, legislation restricting their 

rights can be upheld only if it is substantially related to an important government interest. The 

court then rejected claims that DOMA advanced important government interests. 

Windsor is not the first case to challenge the constitutionality of DOMA, but the fact 

that it involves the estate tax marital deduction drives home the point that the Supreme Court’s 

decision in the case will have an important impact on the estate planning advice given to samesex 

couples. Wealthy gay and lesbian couples may no longer have to engage in more 

complicated planning (often some variation of “set up trusts and get a lot of life insurance”), at 

least not for federal tax planning purposes. 36 Perhaps some same‐sex couples will claim to be in 

common law marriages(even if there was no formal marriage) just to qualify the survivor for an 

estate tax marital deduction when one of them dies. 

36 States that do not recognize same‐sex marriage may also impose their own estate or inheritance taxes, in which 

case the traditional planning options for gay and lesbian couples would continue to apply. 

34

Decanting: Refining an Old Vintage Trust 

Susan T. Bart 


Chicago, IL 


DECANTING: REFINING AN OLD VINTAGE TRUST 

Susan T. Bart 


* * * * * * * * 

To comply with certain Treasury regulations, we state that (i) this article is written to 

support the promotion and marketing of the transactions or matters addressed herein, (ii) this 

article is not intended or written to be used, and cannot be used, by any person for the purpose 

of avoiding U.S. federal tax penalties that may be imposed on such person and (iii) each 

taxpayer should seek advice based on the taxpayer’s particular circumstances from an 

independent tax advisor. 

* * * * * * * * 

These seminar materials are intended to provide the reader with guidance in estate 

planning. The materials do not constitute, and should not be treated as, legal advice 

regarding the use of any particular estate planning technique or the tax consequences 

associated with any such technique. Although every effort has been made to assure the 

accuracy of these materials, the author and Sidley Austin LLP do not assume responsibility 

for any individual’s reliance on these materials. The reader should independently verify all 

statements made in the materials before applying them to a particular fact situation, and 

should independently determine both the tax and nontax consequences of using any particular 

estate planning technique before recommending or implementing that technique.


by 

Susan T. Bart 



I. What is Decanting? ..............................................................................................................1 

A. Decanting .................................................................................................................1 

B. Theory of Decanting ................................................................................................1 

C. Evolution of Decanting ............................................................................................1 

D. Uniform Law Project ...............................................................................................1 

II. Uses of Decanting ................................................................................................................1 

A. Administrative Change ............................................................................................1 

B. Change Investment Limitations, Authorize Acquiring or Retaining an Asset or 

Permit Lack of Diversification.................................................................................1 

C. Define (and Limit) Beneficiary Rights to Information ............................................1 

D. Change Governing Law ...........................................................................................2 

E. Trustee Change ........................................................................................................2 

F. Provide for Advisors, Trust Protectors or Directed Trustees ...................................2 

G. Divide a Trust ..........................................................................................................2 

H. Consolidate Trusts ...................................................................................................2 

I. Correct Scrivener’s Error or Ambiguity ..................................................................2 

J. Add or Remove Spendthrift Provisions ...................................................................2 

K. Create a Supplemental Needs Trust .........................................................................2 

L. Limit a Beneficiary’s Rights, or Eliminate a Beneficiary ........................................2 

M. Add a Beneficiary (with a Power of Appointment) .................................................2 

N. Convert Non-Grantor Trust to Grantor Trust...........................................................2 

O. Convert Grantor Trust to Non-Grantor Trust ...........................................................2 

III. Is Decanting Permitted Under a Particular State Statute? ...................................................2 

A. Terminology: First and Second Trust .....................................................................2 

B. Applicability of State Statute ...................................................................................2 

C. What Trusts May Be Decanted? ..............................................................................2 

D. Trust Prohibitions ....................................................................................................3 

E. Who Needs to Participate? .......................................................................................3 

F. Grantor’s Intent and Trust Purposes ........................................................................3 

G. Discretionary Distribution Authority .......................................................................3 

H. Definition of Absolute Discretion ............................................................................4 

I. Need for Present Distribution ..................................................................................5 

J. Restrictions on Trustees ...........................................................................................5 

K. Court Approval ........................................................................................................6 

i

IV. What Changes Are Permitted to Beneficial Interests? .........................................................6 

A. Beneficiaries ............................................................................................................6 

B. Can You Change the Standard for Distributions? ....................................................6 

C. Can You Change Mandatory Distribution or Withdrawal Rights? ..........................7 

D. Powers of Appointment ...........................................................................................7 

E. Are Beneficiaries of New Trust Limited to Current Beneficiaries of Old Trust? ...8 

F. Acceleration of Future Interests ...............................................................................9 

G. Supplemental Needs Trusts ....................................................................................10 

V. Other Restrictions on Decanting ........................................................................................11 

A. Treatment of Future Class Members ......................................................................11 

B. Rule Against Perpetuities .......................................................................................11 

C. Tax Restrictions .....................................................................................................12 

D. Change of Grantor Trust Treatment .......................................................................17 

E. Restrictions on Trustee Mischief ...........................................................................19 

VI. Notice .................................................................................................................................19 

A. No Notice ...............................................................................................................19 

B. Notice Required .....................................................................................................20 

C. Waiver of Notice ....................................................................................................20 

D. Effect of Objection .................................................................................................20 

VII. Procedural Issues ...............................................................................................................21 

A. Requirements for New Trust ..................................................................................21 

B. Tax Identification Number .....................................................................................21 

C. Do Assets Need to be Retitled? .............................................................................21 

D. Distribution Plan for Later Discovered Assets ......................................................21 

VIII. Application of Decanting Statute .......................................................................................21 

IX. Other Issues ........................................................................................................................22 

A. Accounting Requirements ......................................................................................22 

B. Jurisdiction of New Trust.......................................................................................22 

C. Codification of Common Law ...............................................................................22 

X. Beneficiary’s Recourse ......................................................................................................22 

A. Right to Object .......................................................................................................22 

B. Abuse of Discretion ...............................................................................................22 

C. Explicit Remedy .....................................................................................................22 

ii

XI. Trustee Liability .................................................................................................................23 

A. No Duty to Decant .................................................................................................23 

B. Fiduciary Duties .....................................................................................................23 

C. Duty of Impartiality ...............................................................................................23 

D. Standard of Review ................................................................................................23 

XII. 

Tax Issues...........................................................................................................................23 

A. Income Tax ............................................................................................................23 

B. Estate and Gift Tax ................................................................................................24 

C. GST Tax .................................................................................................................25 

XIII. 

Considerations....................................................................................................................27 

A. What state statute(s) applies to the trust? ...............................................................27 

B. Does the applicable state statute permit decanting? ..............................................27 

C. Does the applicable state statute permit decanting to achieve the desired 

result? .....................................................................................................................27 

D. Are there income, estate, gift or GST tax consequences or risks? .........................27 

E. Is the proposed decanting consistent with the material purposes of the trust? ......27 

F. Should the trustee decant? .....................................................................................27 

G. What notice is required? Advisable? ....................................................................27 

H. Is beneficiary consent desirable? Does it increase tax risks? ...............................27 

I. Is court approval required? Desirable? .................................................................27 

J. Are there better alternatives to achieve the desired result? ....................................27 

iii


by 

Susan T. Bart 


I. What is Decanting? 

A. Decanting. When wine is decanted, it’s poured from a bottle into another vessel, 

usually called the “decanter,” to leave the sediment in the bottle while pouring off 

the pure liquid into the decanter. In addition to leaving the sediment behind, 

decanting also allows the wine to aerate or to breathe. Decanting a trust is very 

similar. The assets of the old trust are poured into or transferred to a new trust 

which is free from the sediment of the old trust that might be preventing it from 

effectively and efficiently achieving its purposes. Decanting can modify trustee 

and administrative provisions and also change dispositive provisions of the trust, 

breathing new air into the trust. 

B. Theory of Decanting. The theory underlying decanting is that if a trustee has the 

discretionary power to distribute property to one or more current beneficiaries, 

then the trustee should have the power to distribute the property to a second trust 

for the benefit of such beneficiaries. Wine is decanted to bring out the best nose 

and flavor the grape offers; trusts should be decanted only in furtherance of the 

purposes of the trust. 

C. Evolution of Decanting 

1. Common Law. Some cases have held that decanting is permitted under 

common law. Phipps v. Palm Beach Trust Co., 196 So. 229 (Fla. 1940); 

Wiedenmayer v. Johnson, 254 A.2d 534 (N.J. Super. Ct. App. Div. 1969); 

In Re: Estate of Spencer, 232 N.W.2d 491 (Iowa 1975). Some state 

statutes assert that they are a codification of common law decanting 

powers. 

2. State Statutes. Nineteen states have decanting statutes. See Appendix I. 

D. Uniform Law Project. The Uniform Law Commission has formed a drafting 

committee for a Uniform Decanting Statute. 

II. 

Uses of Decanting 

A. Administrative Change 

B. Change Investment Limitations, Authorize Acquiring or Retaining an Asset or 

Permit Lack of Diversification 

C. Define (and Limit) Beneficiary Rights to Information

D. Change Governing Law 

E. Trustee Change 

F. Provide for Advisors, Trust Protectors or Directed Trustees 

G. Divide a Trust 

H. Consolidate Trusts 

I. Correct Scrivener’s Error or Ambiguity 

J. Add or Remove Spendthrift Provisions 

K. Create a Supplemental Needs Trust 

L. Limit a Beneficiary’s Rights, or Eliminate a Beneficiary 

M. Add a Beneficiary (with a Power of Appointment) 

N. Convert Non-Grantor Trust to Grantor Trust 

O. Convert Grantor Trust to Non-Grantor Trust 

III. 

Is Decanting Permitted Under a Particular State Statute? 

A. Terminology: First and Second Trust. Under some statutes, the term “first 

trust” refers to the original trust, and the trust into which the first trust is being 

decanted is referred to as the “second trust.” Thus the first trust is akin to the 

original bottle of the wine, and the second trust is the decanter. In other state 

statutes, the “first trust” may be referred to as the “old trust,” the “invaded trust” 

or the “original trust,” and the “second trust” may be referred to as the “new trust” 

or the “appointed trust.” 

B. Applicability of State Statute. In order to determine whether the decanting 

statute of a particular state can be used, first the statute should be reviewed to see 

if it contains specific provisions defining the trusts to which it applies. For 

example, the statute may require that its state law govern the administration of the 

trust or the construction of its terms. See Section VIII. Generally, decanting is 

available to trusts regardless of whether they were established before or after the 

enactment of the decanting statute. 

C. What Trusts May Be Decanted? Generally, the state statutes will apply to 

irrevocable, but not revocable trusts. Some statutes may make a distinction 

between inter vivos and testamentary trusts. Typically, the second trust may be 

either a trust already in existence or a new trust created for purposes of decanting. 

Commonly, a trust may be decanted in whole or in part and may be decanted to 

more than one trust. 

2

D. Trust Prohibitions. A trust, however, may expressly prohibit decanting or 

prohibit certain modifications through decanting. Some state statutes expressly 

prohibit decanting to the extent prohibited by the trust instrument. See, e.g., 

Delaware, Florida, Illinois, Indiana, Kentucky, New York, South Dakota, 

Tennessee and Virginia. Generally, a spendthrift provision, provision prohibiting 

amendment or provision stating that a trust is irrevocable will not be construed as 

prohibiting decanting. 

E. Who Needs to Participate? Generally, decanting is performed by one or more of 

the trustees. In some states notice is required to be given to certain beneficiaries 

(and sometimes other parties). Generally, court approval is permitted but not 

required except under certain circumstances. 

F. Grantor’s Intent and Trust Purposes. The Illinois statute explicitly states that 

the exercise of the power of decanting must be exercised “in furtherance of the 

purposes of the trust.” The South Dakota statute also directs the trustee to take 

into account the purposes of the trust: 

Before exercising its discretion to appoint and distribute assets to a 

second trust, the trustee of the first trust shall determine whether 

the appointment is necessary or desirable after taking into account 

the purposes of the first trust, the terms and conditions of the 

second trust, and the consequences of the distribution. 

The New York statute even more directly directs the trustee to consider the intent 

of the settlor: 

An authorized trustee exercising the power under this section has a 

fiduciary duty to exercise the power in the best interests of one or 

more proper objects of the exercise of the power and as a prudent 

person would exercise the power under the prevailing 

circumstances. The authorized trustee may not exercise the power 

under this section if there is substantial evidence of the contrary 

intent of the creator and it cannot be established that the creator 

would be likely to have changed such intention under the 

circumstances existing at the time of the exercise of the power. 

The provisions of the invaded trust alone are not to be viewed as 

substantial evidence of a contrary intent of the creator unless the 

invaded trust expressly prohibits the exercise of the power in the 

manner intended by the authorized trustee. 

G. Discretionary Distribution Authority. Generally, the trustee must have the 

power to make discretionary distributions to decant. Some statutes require that 

the power be over principal, some require only a power over income or principal. 

Some statutes require that the power be an “absolute power” or that the trustee 

have “absolute discretion”; other statutes permit decanting even if the discretion is 

not absolute. (The New York statute uses the term “unlimited discretion” rather 

than “absolute discretion.”) Some statutes have bifurcated standards that require 

3

absolute discretion for some modifications (generally changes to beneficial 

interests) but permit decanting for other purposes (e.g., administrative 

modifications) even when the discretion is not absolute. 

1. Absolute Discretion Not Required. The trustee may decant even if the 

trustee’s discretion is not absolute in Alaska, Arizona, Delaware, 

Kentucky, Missouri, Nevada, New Hampshire, North Carolina, South 

Dakota and Tennessee. Most of these states have restrictions on a 

beneficiary who is a trustee decanting. Alaska requires that the 

distribution standard remain the same. 

2. Bifurcated Standard. States requiring absolute discretion for some 

decanting but not others include Illinois, Michigan, New York, Ohio and 

Virginia. Michigan actually has two statutes, one of which applies when 

the trustee has absolute discretion (Michigan § 556.115a) and the other of 

which applies when the trustee has discretion (but not necessarily absolute 

discretion) (Michigan § 700.7820a). The trend of the newer statutes is to 

use a bifurcated standard. 

3. Absolute Discretion. States requiring absolute discretion include Florida, 

Indiana and Rhode Island. 

4. Discretion Over Principal. States that require that the trustee have 

discretion over principal include Alaska, Delaware, Florida, Indiana, New 

York, Ohio, Rhode Island and Tennessee. 

5. Discretion Over Income or Principal. States that permit decanting if the 

trustee has discretion over income or principal include Arizona, Kentucky, 

Michigan, Missouri, Nevada, New Hampshire, North Carolina, South 

Dakota and Virginia. 

H. Definition of Absolute Discretion. 

1. “Best Interests” Definition. A number of states provide that a standard 

such as best interests or welfare constitutes absolute discretion. For 

example, the Illinois statute states: “A power to distribute principal that 

includes purposes such as best interests, welfare, or happiness shall 

constitute absolute discretion.” A few statutes explicitly state that a 

trustee may have absolute discretion even if the trust contains a direction 

to consider other resources. 

2. Anything Beyond Ascertainable Standard. Some states define 

“absolute discretion” as any discretion that is not limited to an 

ascertainable standard. For example, the Florida statute defines “absolute 

power” as follows: 

(b) For purposes of this subsection, an absolute power 

to invade principal shall include a power to invade 

4

principal that is not limited to specific or ascertainable 

purposes, such as health, education, maintenance, and 

support, whether or not the term “absolute” is used. A 

power to invade principal for purposes such as best 

interests, welfare, comfort, or happiness shall constitute an 

absolute power not limited to specific or ascertainable 

purposes. 

FLA. STAT. ANN. § 736.04117(b). 

I. Need for Present Distribution. Some statutes explicitly state that the trustee 

may decant even where there is no current need for a distribution. See, e.g., 

Alaska, Illinois, North Carolina and Ohio. 

J. Restrictions on Trustees 

1. States Prohibiting Interested Trustee from Decanting. Some statutes 

prohibit certain interested trustees from decanting. If only interested 

trustees are acting, decanting may be prohibited. For example, in Missouri 

a trustee whose discretion is not limited by an ascertainable standard 

cannot decant if the trustee is a beneficiary or has certain powers to 

remove and replace the trustee. See also New Hampshire. In Nevada, a 

trustee who is a beneficiary may not decant. See also New York, North 

Carolina and Virginia. In North Carolina and Virginia, if all trustees are 

beneficiaries, the court may appoint a special fiduciary with authority to 

decant. 

2. States Limiting Decanting by Interested Trustee. Other statutes 

address the potential adverse tax consequences of an interested trustee 

modifying a trust by limiting the types of modifications that can be made 

by an interested trustee (see discussion below at Section V, C, 9). For 

example, see the South Dakota statute, which restricts certain changes to 

the beneficial interests of a beneficiary acting as trustee. Arguably, a 

provision in the statute that the power is to be construed as a nongeneral 

power of appointment is sufficient to impose limits on the powers of a 

beneficiary acting as a trustee so as to avoid tax issues. 

3. Absolute Discretion or Bifurcated Statutes. A statute that requires that 

a trustee have absolute discretion to decant, or a bifurcated statute that 

requires that a trustee have absolute discretion to make a beneficial 

change, may not need to include a restriction on an interested trustee 

decanting. Typically trusts will not give an interested trustee absolute 

discretion over discretionary distributions because such discretion would 

create gift and estate tax issues. In the unusual event that a trust does give 

an interested trustee absolute discretion, the trustee will incur the tax 

effects of holding a general power of appointment whether or not the 

trustee also has a decanting power. 

5

K. Court Approval. Court approval is generally not required to decant, but usually 

the trustee is free to obtain court approval. See, e.g., North Carolina and Virginia. 

Court approval may be required in certain circumstances, for example, in Illinois 

when there is not a competent adult current beneficiary and presumptive 

remainder beneficiary, or in Illinois or Kentucky if a primary beneficiary objects 

to the decanting. Ohio requires court approval for decanting a testamentary trust. 

In New York, the decanting instrument must be filed with the court if the trust had 

been subject to a proceeding in Surrogates Court. Some statutes explicitly permit 

a court to disapprove a proposed exercise of a trustee’s power to decant, though 

presumably a beneficiary can always file a claim to object to the trustee’s exercise 

of the power to decant. 

IV. 

What Changes Are Permitted to Beneficial Interests? 

A. Beneficiaries 

1. Can You Add a Beneficiary? Generally, the decanting statutes do not 

permit a new beneficiary to be added directly. In some cases it may be 

possible to give an existing beneficiary a new power of appointment or a 

broader power of appointment than the beneficiary currently holds that 

would permit the beneficiary to appoint to persons who are not existing 

trust beneficiaries or potential appointees of the existing power of 

appointment. 

2. Can You Eliminate a Beneficiary? 

a. States Where Trustee Must Have Absolute Discretion. 

Generally, statutes requiring a trustee to have absolute discretion to 

decant will not require that all of the beneficiaries of the old trust 

be beneficiaries of the new trust, thus allowing beneficiaries to be 

eliminated. See, e.g., Michigan § 556.115a. 

b. Other States. Some state statutes implicitly permit a beneficiary 

to be eliminated by permitting the decanting power to be exercised 

in favor of “one or more of” the existing beneficiaries. See, e.g., 

Florida, Missouri, Nevada and Rhode Island. 

3. Must the Beneficiaries Remain the Same? Some states explicitly 

require that the new and old beneficiaries remain the same. Generally in 

the bifurcated states, if the trustee does not have absolute discretion the 

beneficiaries must remain the same. 

B. Can You Change the Standard for Distributions? Presumably, absent a 

statutory requirement that the distribution standard or the beneficial interests 

remain the same, the new trust may have a different standard for distribution. 

States with bifurcated statutes will generally permit the standard for distributions 

to change if the trustee has absolute discretion, but require the standard to stay the 

same where the trustee does not have absolute discretion. See, e.g., Illinois, New 

6

York, North Carolina and Virginia. Some states require that the distribution 

standard remain the same. See, e.g., Alaska and Michigan § 700.7820a. Missouri 

prohibits “removing restrictions on discretionary distributions.” 

Other states permit the new trust to have a different distribution standard, with 

certain exceptions especially when the trustee is a beneficiary. See, e.g., Arizona, 

Kentucky, Nevada, New Hampshire and South Dakota. 

C. Can You Change Mandatory Distribution or Withdrawal Rights? Some 

statutes prohibit eliminating an existing mandatory right to income (Alaska and 

Tennessee), or an income, annuity or unitrust interest (Arizona, Florida, Illinois, 

Indiana, Kentucky, Nevada, New Hampshire, New York, North Carolina, Ohio, 

Rhode Island and Virginia), or all mandatory rights (Michigan § 700.7820a). 

Other states do not have such a prohibition. See, e.g., Delaware, Michigan 

§ 556.115a, Missouri and South Dakota. South Dakota prohibits eliminating 

mandatory rights with respect to marital trusts, charitable trusts and GRATs. 

Further, if the right to an income, annuity or unitrust interest is necessary to 

qualify the trust for certain tax benefits, then other provisions of the decanting 

statute may prohibit eliminating such rights. See Section V, C. 

Some states prohibit eliminating or restricting an existing withdrawal right. See, 

e.g., Illinois, Kentucky, Michigan, Missouri, Nevada, New Hampshire, New 

York, North Carolina, Ohio and South Dakota. Other states do not. See, e.g., 

Florida, Indiana, Rhode Island and Tennessee. Michigan § 556.115a prohibits 

eliminating mandatory withdrawal rights if the beneficiary is the sole beneficiary, 

but not otherwise. If a mandatory withdrawal or distribution right qualifies a trust 

for a particular tax benefit, then other provisions of the decanting statute may 

prohibit its elimination. See Section V, C. Many states, however, would permit a 

future distribution or withdrawal right to be eliminated or restricted. Thus, for 

example, in Illinois a trust that is to be distributed when a beneficiary attains age 

30 could be decanted to a trust that does not require distribution until a later age 

(or no age at all) if the beneficiary has not yet attained age 30. 

D. Powers of Appointment. Commonly, decanting statutes explicitly permit the 

trustee to grant a power of appointment to one or more of the beneficiaries. See, 

e.g., Delaware, Illinois, Kentucky, Michigan § 556.115a, Nevada, New 

Hampshire, North Carolina and South Dakota. Generally, this power of 

appointment may be a special or general power of appointment and may permit 

appointment to anyone, including persons who are not trust beneficiaries. See, 

e.g., Delaware and Michigan § 556.115a. New York, however, limits the power 

of appointment over the new trust to the same power of appointment as in the old 

trust, unless the trustee has absolute discretion, in which case the new trust may 

alternatively grant a broad special power of appointment. 

If the old trust contains a power of appointment, generally the new trust need not 

retain the same power of appointment, except where the decanting statute does 

not permit changes in beneficial interests. For example, in the bifurcated states if 

the trustee does not have absolute discretion, the trustee generally cannot 

7

eliminate beneficiaries or change the distribution standard, and the new trust 

(except in North Carolina and Virginia) must contain the same power of 

appointment as in the old trust. This may be explicit in the statute (see, e.g., 

Illinois and New York), or implicit in the requirement that the decanting not 

materially change the beneficial interests (see Michigan § 700.7820a). 

E. Are Beneficiaries of New Trust Limited to Current Beneficiaries of Old 

Trust? 

1. Limited to Current Beneficiaries. The narrowest theory of decanting 

permits decanting only to a trust for the benefit of the current beneficiaries 

(those who could receive a discretionary distribution) of the old trust. 

This appears to be the case under New Hampshire’s statute. Under such a 

statute, the remainder beneficiaries who are not also current beneficiaries 

must be deprived of their interest if the trust is decanted. This limitation 

may also apply under the Kentucky, Tennessee and Rhode Island statutes, 

and the Ohio statute where the trustee does not have absolute discretion. 

This restriction may be mitigated in states that have a “boomerang 

provision.” A “boomerang provision” permits the new trust to provide 

that at some future time the beneficial provisions of the new trust revert to 

the beneficial provisions of the old trust, including the provisions 

regarding remainder beneficiaries. States that permit changes to beneficial 

provisions for current beneficiaries, but then also permit a boomerang 

provision so that the remainder beneficiaries of the old trust do not need to 

lose their interests, include Delaware, Nevada, Michigan § 556.115a and 

Ohio (when the trustee has absolute discretion). 

2. Not Limited to Current Beneficiaries. In other states, remainder 

beneficiaries of the old trust may be, or under some statutes must be, 

beneficiaries of the new trust. 

a. Remainder Beneficiaries of Old Trust May Be Beneficiaries. 

The decanting statutes of some states appear to permit but not 

require that remainder beneficiaries of the old trust be remainder 

beneficiaries of the new trust. Generally, in these states the new 

trust could eliminate one or more of the remainder beneficiaries. 

For example, the Illinois statute permits a trustee with absolute 

discretion to decant to a trust “for the benefit of one, more than 

one, or all of the current beneficiaries of the first trust and for the 

benefit of one, more than one, or all of the successor and remainder 

beneficiaries of the first trust.” The Missouri statute permits the 

beneficiaries of the new trust to include current beneficiaries of the 

old trust and beneficiaries of the old trust “for whom a distribution 

. . . may have been made in the future . . . or upon the happening of 

an event.” See also South Dakota. Other state statutes are less 

explicit, but presumably allow the remainder beneficiaries of the 

old trust to be beneficiaries of the new trust. See, e.g., Arizona, 

Florida, Indiana and Virginia. 

8

. Remainder Beneficiaries Must Remain the Same. Other 

statutes, such as New York’s statute when the trustee has absolute 

discretion, explicitly state that all remainder beneficiaries of the 

new trust shall be the same as the remainder beneficiaries of the 

old trust. Statutes that require the beneficial interests of the new 

trust to be the same as the beneficial interests of the old trust 

implicitly require the remainder beneficiaries of the old trust to 

remain remainder beneficiaries of the new trust. 

F. Acceleration of Future Interests. In states that do not restrict the beneficiaries 

of the new trust to current beneficiaries of the old trust, can decanting accelerate a 

remainder interest in the old trust to a current interest in the new trust? In a few 

states, namely, Illinois, Missouri and South Dakota, it appears that decanting can 

be used to accelerate a remainder interest in the old trust to a present interest. 

Other states explicitly prohibit an acceleration of a remainder interest. For 

example, the Virginia statute provides that a “beneficiary who has only a future 

beneficial interest, vested or contingent, in the original trust shall not have the 

future beneficial interest accelerated to a present interest in the second trust.” See 

also New York, North Carolina and Rhode Island. Other statutes are silent about 

the acceleration of a future interest. See, e.g., Arizona, Florida and Indiana. The 

issue of accelerating a remainder interest does not arise in states that permit only 

current beneficiaries of the old trust to be beneficiaries of the new trust or that 

only permit remainder beneficiaries of the old trust to be beneficiaries of the new 

trust under a boomerang provision. 

1. Danger of Permitting Acceleration. Obviously, a statute that permits the 

acceleration of a remainder interest to a present interest has more 

flexibility. There may be, however, an income tax risk with respect to 

trusts that are not intended to be grantor trusts. Several of the exceptions 

to the grantor trust rules do not apply if the trustee has the ability to add a 

beneficiary. See, e.g., Internal Revenue Code (“Code”) section 674(b)(5), 

(b)(6), (b)(7); Code section 674(c); Code section 674(d). Under the 

grantor trust rules, the power to add a beneficiary includes the power to 

make a remainder beneficiary a current beneficiary. Treasury Regulation 

section 1.674(d)-(2)(b) provides that the “exceptions described in Section 

674(b)(5), (6) and (7), (c) and (d) are not applicable if any person has a 

power to add to the beneficiary or beneficiaries or to a class of 

beneficiaries designated to receive the income or corpus, except where the 

action is to provide for after-born or after-adopted children.” (Note that 

the power to add beneficiaries refers to a power to add to the class of 

beneficiaries who can receive “income or corpus.”) It is possible to 

construct an argument that if the trustee of the trust has the power to 

decant, and if the trustee by decanting could accelerate a remainder 

interest to a present interest, then the trustee has a power to add 

beneficiaries within the meaning of the grantor trust rules. Under the 

grantor trust rules, the mere fact that a trustee holds this power, whether or 

not ever exercised, is sufficient to make the trust a grantor trust (or more 

9

precisely, to make certain exceptions to the grantor trust rules 

inapplicable). Thus the possible risk is that the mere existence of a 

decanting statute that permits the acceleration of a future interest to a 

present interest causes trusts potentially subject to such statute to 

unintentionally become grantor trusts. 

2. Circumventing a Prohibition on Acceleration. Even in a state that 

explicitly prohibits the acceleration of a future interest to a present 

interest, it may be possible to effectively accelerate a future interest by 

decanting to a trust in which the interests of the current beneficiaries last 

for only a limited period of time such as six months. 

3. Meaning of “Acceleration.” Even in states that prohibit the acceleration 

of a remainder interest to a present interest, decanting might still result in 

the remainder interest taking effect more quickly because the decanting 

restricted or shortened the interests of the current beneficiaries. For 

example, if a trust provided that the trustee could make discretionary 

distributions among the grantor’s children, A, B and C, and then provided 

that at the death of such children the remainder of the trust should be 

distributed to grandchildren, and the trustee decanted to eliminate the 

interests of children B and C, such a decanting might result in a remainder 

interest taking effect more quickly because the remainder beneficiaries 

then only have to survive A as opposed to the survivor of A, B and C. 

G. Supplemental Needs Trusts. Two different concerns can arise around the 

intersection of supplemental needs trusts and decanting. The first is the risk that 

the existence of a decanting power could inadvertently affect the protection from 

governmental claims of an existing supplemental needs trust. The second concern 

is that under statutes that require absolute discretion in order to decant in a 

manner that restricts a beneficiary’s interest, a trustee without absolute discretion 

might not have the power to decant to a supplemental needs trust even though 

such a decanting may be in a beneficiary’s best interest. 

1. Existing Trust is a Supplemental Needs Trust. The Rhode Island 

statute expressly protects existing supplemental needs trusts from any 

argument that the decanting power permits the trustee to change the 

provisions that make the trust a supplemental needs trust. 

2. Conversion to Supplemental Needs Trust. Both Illinois and New York 

have bifurcated statutes that would not permit decanting in a manner that 

would alter a beneficial interest unless the trustee has absolute discretion. 

However, both the Illinois and New York statutes create exceptions to 

permit a trustee of a trust who does not have absolute discretion to decant 

into a supplemental needs trust under some circumstances. Virginia 

would permit a trustee of a trust who does not have absolute discretion to 

decant into a supplemental needs trust with court approval. The Illinois 

statute permits a trustee to decant a disabled beneficiary’s interest to a 

supplemental needs trust if the trustee determines that to do so would be in 

10

V. Other Restrictions on Decanting 

the best interests of the disabled beneficiary, taking into consideration the 

financial impact to the disabled beneficiary’s family. A supplemental 

needs trust is defined as a trust that would allow the disabled beneficiary 

to receive a greater degree of governmental benefits than the disabled 

beneficiary would receive if no distribution is made. The Illinois statute 

defines “disabled beneficiary” as a beneficiary who has a disability that 

substantially impairs the beneficiary’s ability to provide for his or her own 

care and custody and that constitutes a substantial handicap whether or not 

the beneficiary has been adjudicated a “disabled person.” 

A. Treatment of Future Class Members. A handful of statutes explicitly deal with 

the issue of whether future class members may (or must) be included as 

beneficiaries in the new trust. For example, if the current beneficiaries of a trust 

are “the descendants of A,” if the trustee decants to a new trust, may the new trust 

include as potential beneficiaries unborn descendants of A? It would seem 

obvious that the answer must be yes, but some states have made this logical 

assumption explicit. For example, the New York statute provides that if a trustee 

has absolute discretion, and “the beneficiary or beneficiaries of the invaded trust 

are described by a class, the beneficiary or beneficiaries of the appointed trust 

may include present or future members of such class.” Under the New York 

statute, if the trustee has limited discretion and “the beneficiary or beneficiaries of 

the invaded trust are described by a class, the beneficiary or beneficiaries of the 

appointed trust shall include present or future members of such class.” The 

Illinois statute is to the same effect. Michigan § 700.7820a (which applies to 

trusts with limited discretion) requires that future class members must be included 

in the new trust. See also Delaware. 

B. Rule Against Perpetuities. An exercise of a decanting power could 

inadvertently violate a rule against perpetuities period applicable to the old trust if 

the new trust does not comply with the same rule against perpetuities period. 

Even in states that have abolished the rule against perpetuities, the trust being 

decanted may still be subject to a rule against perpetuities under prior law or may 

be subject to a rule against perpetuities under the law of a different state. Further, 

if a trust is grandfathered from generation-skipping transfer (“GST”) tax or has an 

exclusion ratio less than one, decanting to a trust that does not comply with the 

same rule against perpetuities period (or a federal rule against perpetuities period) 

may have adverse GST consequences. Most of the decanting statutes expressly 

state that the decanting power may not be exercised in a manner that violates the 

rule against perpetuities period and/or the restriction against alienation that 

applied to the old trust. See, e.g., Alaska, Arizona, Indiana, New York, North 

Carolina, South Dakota, Tennessee and Virginia. The statutes in some states 

provide that for purposes of abiding by the rule against perpetuities, an exercise of 

the power to decant shall be treated as an exercise of a power of appointment 

under their rule against perpetuities statutes. See, e.g., Delaware, Florida and 

Ohio. Some statutes go even further and expressly state that any new power of 

11

appointment created under the new trust also cannot potentially violate the rule 

against perpetuities provision. See Section V, C, 10. Presumably, the new trust 

could adopt a shorter rule against perpetuities term and possibly could select a 

different class of measuring lives so long as they were in existence at the time the 

rule against perpetuities period began under the old trust. Illinois, however, states 

that the new trust may not “reduce, limit or modify” the rule against perpetuities 

period. Thus in Illinois apparently the new trust could not adopt a shorter rule 

against perpetuities period; this restricts the ability to use the decanting statute to 

merge two trusts, one of which has a shorter rule against perpetuities period. 

C. Tax Restrictions. Certain tax benefits granted under the Internal Revenue Code 

are dependent upon a trust containing specific provisions. For example, a 

qualified terminable interest property marital trust or general power of 

appointment marital trust requires that the surviving spouse be entitled for life to 

all income, and a general power of appointment marital trust also requires that the 

surviving spouse have a general power of appointment. If a trustee had the power 

to decant the old trust in a manner that deprived the surviving spouse of the 

requisite income interest, or in the case of a general power of appointment marital 

trust, the requisite general power of appointment, then arguably the old trust 

would not qualify for the marital deduction from the inception of the trust. Most 

state statutes have attempted to avoid adverse tax results by imposing certain tax 

restrictions on decanting. The state statutes, however, are very erratic in which 

tax provisions of the Internal Revenue Code they address. 

1. No Tax Restrictions. The Alaska and Tennessee statutes appear to 

impose no tax restrictions, not even for the marital deduction and the 

charitable deduction. 

2. Marital Deduction. With the exception of Alaska, Arizona and 

Tennessee, all of the states restrict decanting in a manner that would cause 

the old trust to not qualify for the marital deduction if it was intended to so 

qualify. A trust might not qualify for the marital deduction if state law 

permitted the trustee to alter the required provisions for qualifying for the 

marital deduction. For example, a trust qualifying as a general power of 

appointment marital trust must grant the surviving spouse a general power 

of appointment. If a trustee could decant and deprive the spouse of her 

general power of appointment, a marital deduction might not be permitted 

for such trust. For example, the Illinois statute provides that “if any 

contribution to the first trust qualified for . . . the marital deduction under 

Section 2056(a) or 2523(a) of the Code [then the trustee shall not have the 

power to decant] in a manner that would prevent the contribution to the 

first trust from qualifying for or would reduce the exclusion, deduction, or 

other tax benefit that was originally claimed with respect to that 

contribution.” The Ohio statute explicitly addresses state estate, gift and 

inheritance tax marital deductions as well as the federal deduction. While 

Arizona does not have a specific provision addressing the marital 

deduction, it does have a catchall tax savings provision. 

12

3. Charitable Deduction. Similarly, the vast majority of states provide that 

the trustee may not decant in a way that would disqualify the trust for a 

charitable deduction or reduce the amount of the deduction. This 

restriction is important to ensure that charitable lead trusts, charitable 

remainder trusts and other charitable trusts cannot be modified in a way 

that arguably would prevent them from qualifying for the charitable 

deduction or that would reduce the amount of that deduction, as could be 

the case if the trustee could decant in a way that reduced the charitable 

interest in a split-interest trust. Only Alaska, Arizona, Delaware and 

Tennessee do not have tax restrictions protecting the charitable deduction, 

and as mentioned above Arizona has a catchall provision. Note that the 

Delaware statute has a provision protecting the marital deduction but none 

protecting the charitable deduction. 

4. Gift Tax Annual Exclusion (Code Section 2503). Code section 2503(b) 

grants a gift tax annual exclusion for gifts of a “present interest.” Present 

interests are often created in trusts by granting the beneficiary a Crummey 

right of withdrawal over contributions to the trust. If a trustee could 

decant in a manner that prematurely terminated a beneficiary’s existing 

Crummey right of withdrawal over a prior contribution to the trust, then 

arguably the contribution would not qualify for the gift tax annual 

exclusion. However, the existing tax authority does not require that a 

Crummey right of withdrawal remain in existence indefinitely in order to 

qualify for the gift tax annual exclusion so long as the beneficiary has a 

reasonable period of time in which to exercise such right, which under 

some authorities may be as short as 30 days. Further, decanting to 

eliminate Crummey rights of withdrawal over future contributions to a 

trust should have no effect on the qualification of prior contributions for 

the gift tax annual exclusion. Therefore, it is not entirely clear that special 

tax restrictions are needed to protect the gift tax annual exclusion under 

Code section 2503(b). Nonetheless, most of the states have such a tax 

restriction. See, e.g., Delaware, Illinois, Kentucky, Michigan § 556.115a, 

Missouri, Nevada, New Hampshire, New York, North Carolina, Ohio, 

South Dakota and Virginia. Code section 2503(c) provides another 

method for qualifying gifts to a trust for the gift tax annual exclusion. 

Code section 2503(c) permits a gift tax annual exclusion for a gift to a 

trust for an individual under age 21 provided that the property and its 

income may be expended for the benefit of the donee before attaining age 

21 and would to the extent not so expended pass to the donee upon 

attaining age 21, and in the event the donee dies before attaining age 21, 

will be payable to the estate of the donee or pursuant to a general power of 

appointment. Michigan § 556.115a specifically contains a tax restriction 

for Code section 2503(c) (but no restriction for 2503(b)). Other statutes 

contain restrictions that apply expressly to 2503(b) and 2503(c). See, e.g., 

Delaware, Kentucky, Missouri, Nevada, North Carolina, South Dakota 

and Virginia. For example, the Virginia statute states: 

13

If contributions to the original trust have been excluded 

from the gift tax by the application of 26 U.S.C. § 2503(b) 

or (c), the second trust shall provide that the beneficiary’s 

remainder interest in the contributions shall vest and 

become distributable no later than the date upon which the 

interest would have vested and become distributable under 

the terms of the original trust. 

Other statutes expressly refer only to Code section 2503(b). See, e.g., 

Illinois, New Hampshire, New York and Ohio. Because Code section 

2503(b) is the section that provides for the gift tax annual exclusion for a 

gift “other than gifts of future interests in property,” and Code Section 

2503(c) provides that a gift complying with that subsection shall not be 

considered a gift of a future interest, it would seem that a tax restriction 

that expressly applies only to subsection 2503(b) should be sufficient to 

protect 2503(c) trusts. 

5. GST Annual Exclusion (Code Section 2642(c)). Code section 2642(c) 

grants a GST annual exclusion to gifts that qualify for the gift tax annual 

exclusion but imposes two additional requirements for gifts to trusts. 

First, the trust must be only for a single individual and second, if the 

individual dies before the termination of the trust, the assets of the trust 

must be included in the gross estate of such individual. Thus while gifts to 

trusts for multiple beneficiaries could qualify for the gift tax annual 

exclusion through the use of Crummey withdrawal rights, such gifts would 

not qualify for the GST annual exclusion. The 2642(c) restriction 

requiring a trust be for a single individual could be violated through 

decanting if the statute permitted accelerating a remainder interest to a 

current interest. The requirement that the trust be included in the gross 

estate of the individual could perhaps be violated by decanting to a trust 

that was not includible in the beneficiary’s gross estate. The Illinois, New 

York and Ohio statutes contain explicit restrictions on decanting to protect 

the GST annual exclusion. 

6. Subchapter S Qualification. Only certain types of trust qualify to hold 

subchapter S stock. These trusts are wholly grantor trusts, qualified 

subchapter S trusts (“QSSTs”) and electing small business trusts 

(“ESBTs”). 

a. QSSTs. In order for a trust to qualify as a QSST, (a) the terms of 

the trust must require that during the life of the current income 

beneficiary there shall be only one income beneficiary and (b) all 

of the income must be distributed to such beneficiary. Code 

section 1361(d)(3). Thus it may be important that a trust intended 

to qualify as a QSST not be permitted to be decanted into a trust 

that would not qualify as a QSST. The Kentucky and Ohio statutes 

would prevent a QSST from being decanted into a non-QSST. The 

Missouri statute prohibits reducing the income interest of a 

14

eneficiary of a QSST, but does not necessarily prevent other 

changes, such as granting the beneficiary a lifetime power of 

appointment, that could threaten QSST qualification. Although the 

Illinois statute prohibits decanting from a trust that qualifies as an 

S corporation shareholder trust to one that does not if the trust 

owns S corporation stock, it does not expressly prohibit decanting 

from a QSST to another type of trust that qualifies as an S 

corporation shareholder. The catch-all tax savings provision of the 

Illinois statute, however, may impose such a restriction if one 

considers qualifying as an S corporation shareholder a “tax 

benefit.” Alternatively, the requirement in the Illinois statute that 

the decanting be in furtherance of the purposes of the trust may 

implicitly impose a restriction on converting a QSST to a 

non-QSST. 

b. ESBTs. A trust that has made an ESBT election is not required to 

distribute all income to the beneficiary. Nonetheless, the Missouri 

statute prohibits decanting in a manner that reduces the income 

interest of a beneficiary of an ESBT. The Ohio and Kentucky 

statutes would prohibit decanting an ESBT to a non-ESBT, even if 

the new trust qualified as an S corporation shareholder as a wholly 

grantor trust or a QSST. 

c. Wholly Grantor Trust. The Ohio statute would appear to 

prohibit decanting from a trust that qualified as an S corporation 

shareholder as a wholly grantor trust to an ESBT or QSST. 

d. Protecting S Election. There is a risk that a trustee might 

inadvertently decant from a trust that qualified as an S corporation 

shareholder to a trust that does not so qualify. The Illinois and 

Kentucky statutes appear to prevent an inadvertent decanting from 

a qualified S corporation shareholder to a trust that does not 

qualify as an S corporation shareholder. For example, the Illinois 

statute merely provides that during any period when the first trust 

owns S corporation stock, the trustee may not decant to a new trust 

that is not a permitted shareholder. The Ohio statute also protects 

the S election but is overly restrictive in that it requires that the 

new trust qualify as an S corporation shareholder under the same 

provision as the old trust. Thus the Ohio statute would not permit 

an ESBT to be decanted to a grantor trust or to a QSST, or a 

grantor trust to be decanted to a QSST or ESBT. 

7. GRATs (Code Section 2702). The Missouri and South Dakota statutes 

specifically prohibit a decanting that would reduce the income interest of 

an income beneficiary of a GRAT. Arguably, if a trustee could decant in a 

way that would reduce the annuity interest of the beneficiary of a GRAT, 

the value of such annuity interest would not reduce the value of the gift. 

15

Qualified personal residence trusts are not explicitly addressed by the 

decanting statutes. 

8. Minimum Distribution Rules (Code Section 401(a)(9)). Complicated 

rules determine when the life expectancy of a trust beneficiary can be 

considered in determining the required minimum distribution rules when a 

trust is the beneficiary of a qualified retirement plan or IRA. Under these 

rules, only trusts with certain provisions and restrictions permit the life 

expectancy of the beneficiary to be used to determine required minimum 

distributions. If a trustee could decant to a trust that would not meet these 

requirements, then arguably the old trust would not qualify from the 

inception to use the life expectancy of the beneficiary. The Ohio statute 

recognizes this potential issue and addresses it as follows: 

If the assets of the first trust include any interest subject to 

the minimum distribution rules of Section 401(a)(9) of the 

Internal Revenue Code and the treasury regulations issued 

under that section, the governing instrument for the second 

trust shall not include or omit any term that, if included in 

or omitted from the trust instrument for the first trust, 

would have shortened the maximum distribution period 

otherwise allowable under section 401(a)(9) of the Internal 

Revenue Code and the treasury regulations with respect to 

that interest under the first trust. 

The Illinois statute provides that if the first trust owns an interest in 

property subject to the minimum distribution rules of section 401(a)(9) of 

the Code, an authorized trustee may not exercise the power to decant to 

distribute part or all of the interest in such property to a second trust that 

would result in the shortening of the minimum distribution period to 

which the property is subject in the first trust. 

9. Beneficiary as Trustee. A beneficiary who is acting as trustee could be 

deemed to have a general power of appointment that would cause 

inclusion in the beneficiary’s estate if the beneficiary could decant in a 

manner that would permit distributions to such beneficiary subject to an 

unascertainable standard. Further, a beneficiary who is acting as trustee 

and who exercised such a decanting power could be deemed to have 

exercised a general power of appointment. The decanting statutes in many 

of the states have explicit restrictions either prohibiting an interested 

trustee from exercising a decanting power altogether or restricting the 

manner in which an interested trustee can exercise a decanting power to 

avoid such estate and gift tax issues. For example, the South Dakota 

statute prohibits an interested trustee from exercising a decanting power in 

a way that would benefit the interested trustee unless the exercise is 

limited by an ascertainable standard and does not have the effect of 

increasing the distributions that can be made to the interested trustee. See 

also Arizona, Kentucky, Missouri, Nevada and New Hampshire. The 

16

Virginia statute simply prohibits an interested trustee from exercising a 

decanting power. See also North Carolina. Some states, such as Delaware 

and Michigan, have provisions in other statutes prohibiting a fiduciary 

from making distributions to the fiduciary. 

10. Delaware Tax Trap. The Delaware tax trap could be triggered if the new 

trust conferred upon a beneficiary a power of appointment that could be 

exercised in a manner that violated the rule against perpetuities period of 

the original trust. A number of the decanting statutes expressly require 

that any power of appointment granted to a beneficiary is subject to the 

original rule against perpetuities. See, e.g., Delaware, Florida, Indiana, 

Kentucky, North Carolina and Virginia. 

11. Catchall Provisions. Several states, anticipating the difficulty of 

identifying all tax benefits that might possibly be adversely affected by a 

decanting power, have inserted catchall tax-savings provisions in their 

statutes. For example, the Ohio statute provides: 

If the trust instrument for the first trust expressly indicates 

an intention to qualify for any tax benefit or if the terms of 

the trust instrument for the first trust are clearly designed to 

enable the first trust to qualify for a tax benefit, and if the 

first trust did qualify, or if not for the provisions of division 

(A) or (B) of this section would have qualified, for any tax 

benefit, the governing instrument for the second trust shall 

not include or omit any term that, if included in or omitted 

from the trust instrument for the first trust, would have 

prevented the first trust from qualifying for that tax benefit. 

See also Arizona, Illinois, Michigan § 700.7820a and New York. 

12. Material Purpose of Trust. Under a statute that requires that the trustee 

consider the material purpose of the trust when decanting if a material 

purpose of the trust was to qualify for a tax benefit, a change that would 

defeat such purpose would not be permitted. 

D. Change of Grantor Trust Treatment. Can a trustee decant a non-grantor trust 

to a grantor trust in order to permit the grantor to pay the income taxes for the 

trust? Alternatively, can the trustee of a grantor trust convert it to a non-grantor 

trust to eliminate the grantor’s liability for the trust’s income taxes? 

1. Conversion of Non-grantor Trust to Grantor Trust. A decanting 

statute that permits the conversion of a non-grantor trust to a grantor trust 

is potentially troubling in at least two respects. First, permitting such 

conversion allows a trustee to impose on the grantor of the trust a tax 

liability that the grantor did not voluntarily accept and that the grantor may 

not have the ability to eliminate. Second, a trustee does not owe fiduciary 

duties to the grantor, so how does a trustee resist a beneficiary request to 

17

enefit the beneficiaries by converting the trust to a grantor trust? Such a 

conversion would appear to be prohibited by the Arizona statute, which 

requires that any decanting “not adversely affect the tax treatment of the 

trust, the trustee, the settlor or the beneficiaries.” In contrast, the Illinois 

statute explicitly permits a decanting from a non-grantor trust to a grantor 

trust: 

Nothing in this Section shall be construed as preventing the 

authorized trustee from distributing part or all of the first 

trust to a second trust that is a trust as to which the settlor 

of the first trust is considered the owner under Subpart E of 

Part I of Subchapter J of Chapter 1 of Subtitle A of the 

Code. 

Although the New York statute does not explicitly authorize a conversion 

from a non-grantor trust to a grantor trust, the 2011 recommendation of 

the Surrogate’s Court Advisory Committee states: “There is nothing 

contained in the proposed provision that precludes the authorized trustee 

from paying assets from a non-grantor trust to a grantor trust.” New York 

Est. Powers & Trusts, Section 10-6.6. Most of the state decanting statutes 

are silent on this point, which presumably means that such a conversion is 

permitted. 

2. Conversion of Grantor Trust to Non-Grantor Trust. Presumably, 

generally a trustee may decant a trust in a manner that converts a grantor 

trust to a non-grantor trust either as an incidental result of changing the 

terms of such trust (for example, to eliminate the interest of a spouse as a 

beneficiary) or as a primary purpose of the decanting. The question can 

arise, however, in states that have catchall tax savings provisions as to 

whether the catchall provision would prohibit a decanting that would 

eliminate the grantor trust treatment. For example, the Arizona statute 

does not permit a decanting that adversely affects the “tax treatment of the 

trust, the trustee, the settlor or the beneficiaries.” Michigan § 700.7820a 

appears to come close to prohibiting explicitly a conversion of a grantor 

trust to a non-grantor trust by including the following provision: 

If the governing instrument expressly indicates an intention 

that the first trust qualify for a tax benefit or the terms of 

the first trust are clearly designed to qualify the first trust 

for a tax benefit, and if the first trust would qualify for the 

intended tax benefit, the governing instrument of the 

second trust is not inconsistent with the tax planning that 

informed the first trust. 

Arguably, converting a grantor trust to a non-grantor trust adversely 

affects the tax treatment of the trust. The Illinois statute explicitly 

addresses this issue by providing that the catchall tax restriction does not 

prevent a conversion from a grantor trust to a non-grantor trust. 

18

E. Restrictions on Trustee Mischief. Although, as discussed below, trustees must 

exercise the decanting power only with due regard to the trustee’s fiduciary 

duties, some statutes contain specific provisions restricting a trustee’s ability to 

decant in a manner that might benefit the trustee as a fiduciary, for example, by 

allowing for increased trustee fees. 

1. Trustee Compensation. The New York statute provides that unless a 

court otherwise directs, the decanting power may not be exercised to 

change the provisions regarding the determination of the compensation of 

any trustee. The Ohio statute permits a change in trustee compensation 

either with court approval or with the consent of all persons who are 

current beneficiaries of the second trust. See also Michigan § 700.7820a. 

The Illinois statute prohibits decanting solely to change the provisions 

regarding trustee compensation but permits decanting “in conjunction with 

other valid and reasonable purposes to bring the trustee’s compensation in 

accord with reasonable limits in accord with Illinois law in effect at the 

time of the exercise.” Most of the state decanting statutes are silent on the 

issue of trustee compensation. 

2. Trustee Fee for Decanting. The Illinois statute also prohibits the trustee 

from receiving a special fee for decanting. 

3. Trustee Liability. The Illinois statute also prohibits decanting to decrease 

or indemnify against a trustee’s liability or exonerate a trustee from 

liability for failure to exercise reasonable care, diligence and prudence. 

See also the proposed Alaska amendment, which has a similar restriction 

unless a court otherwise directs. 

4. Trustee Removal Provisions. The Illinois statute specifically prohibits 

decanting to eliminate a provision granting a person a right to remove or 

replace the decanting trustee under most circumstances. See also the 

proposed Alaska amendment, which has a similar restriction unless a court 

otherwise directs. 

5. Asset Valuation. The proposed amendment to the Alaska decanting 

statute would also prohibit decanting to “fix as binding and conclusive the 

value of an asset for purposes of distribution, allocation, or otherwise . . .” 

§ 13.36.158(i)(4). 

VI. 

Notice 

A. No Notice. A large number of states do not require the trustee to provide notice 

to the beneficiaries of the old trust before decanting. See, e.g., Arizona, 

Delaware, Michigan § 556.115a, Missouri, Nevada, South Dakota and Tennessee. 

New Hampshire requires notice only to charity. The Nevada statute states that the 

trustee may give notice to the beneficiaries. 

19

B. Notice Required. Other states require notice to certain parties a certain number 

of days prior to decanting. 

1. Current Beneficiaries. Ohio requires notice to current beneficiaries. 

2. Settlor and Current Beneficiaries. Michigan § 700.7820a requires 

notice to the settlor and current beneficiaries. 

3. Oldest Generation of Remainder Beneficiaries and Current 

Beneficiaries. Kentucky requires notice to the current beneficiaries and 

the oldest generation of remainder beneficiaries. 

4. Qualified Beneficiaries. Uniform Trust Code states generally require 

notice to the qualified beneficiaries. See, e.g., Florida, Indiana, North 

Carolina, Rhode Island and Virginia. 

5. Adult, Competent Beneficiaries. Illinois requires notice to the adult 

competent current beneficiaries and the adult competent presumptive 

remainder beneficiaries. If there is not at least one adult competent 

current beneficiary and at least one adult competent presumptive 

remainder beneficiary, the trustee cannot decant without court approval. 

6. Removers. New York provides for notice to trustee removers, in addition 

to the settlor and persons interested in the trust. 

7. Notice to Beneficiaries of New Trust. The state statutes containing 

notice provisions generally require notice to certain beneficiaries of the 

old trust. Missouri, however, requires notice to the beneficiaries of the 

new trust (not the old trust). 

8. Charities. Where an unidentifiable charity is a beneficiary (for example, 

the trustee under some circumstances is to select the charities), the state’s 

Attorney General may be authorized to receive notice on behalf of such 

charity. Even where a charitable beneficiary is identifiable, a statute may 

require notice to the Attorney General and the charity. See the Illinois 

statute. 

C. Waiver of Notice. Some statutes specifically provide that the beneficiaries who 

receive notice can waive the notice period to permit the trustee to immediately 

decant. See, e.g., Michigan § 700.7820a, Ohio, Rhode Island, South Dakota and 

Virginia. 

D. Effect of Objection. 

1. No Effect. In most states an objection by a beneficiary does not prevent 

the trustee from decanting. The New York statute explicitly states this. 

Other statutes merely fail to give any effect to a beneficiary objection. 

20

2. Prevents Nonjudicial Decanting. Illinois, Kentucky and Rhode Island 

provide that a beneficiary objection prohibits the trustee from decanting 

without court approval. 

VII. 

Procedural Issues 

A. Requirements for New Trust. Generally, the new trust may be one already in 

existence or may be established by the trustee. Some states require that the assets 

be transferred to a new trust under a separate trust agreement. See, e.g., Alaska, 

South Dakota and Tennessee. In contrast, Arizona expressly permits a 

restatement of the old trust. 

B. Tax Identification Number. Does the second trust need to obtain a new tax 

identification number? This issue would not arise in the event (1) the second trust 

is a grantor trust and is permitted to use the grantor’s social security number or 

(2) the second trust was a trust that was in existence prior to the decanting and 

already has a tax identification number. Further, in a case where the second trust 

was newly created for purposes of decanting, if only a portion of the first trust is 

decanted to the second trust then presumably the second trust should obtain a new 

tax identification number. If the second trust, however, was newly created for 

purposes of decanting and all of the assets of the first trust are decanted to the 

second trust, then it may be reasonable to treat the second trust as simply a 

continuation of the first trust for income tax purposes. See PLR 200736002. 

C. Do Assets Need to be Retitled? If the second trust has a different tax id number, 

the decanted trust assets should be retitled to reflect the correct tax id number (and 

the name of the second trust). If the tax id number does not change; then the 

trustee should consider where assets should be retitled to reflect the name of the 

second trust. In some cases a trustee may, for convenience, decide to give the 

second trust a name identical or similar to the name of the first trust, perhaps 

adding the phrase “as decanted on “ or “as modified on .” 

D. Distribution Plan for Later Discovered Assets. Illinois and New York 

specifically address the disposition of after-discovered assets. If the entire trust 

was decanted, they are part of the new trust. If only part of the old trust was 

decanted, they are part of the old trust. It would be wise to address this issue in 

the decanting document, and the Michigan statutes expressly state that such issue 

may be addressed in the decanting instrument. 

VIII. 

Application of Decanting Statute. When can a trustee utilize the decanting statute of a 

particular state? Many of the decanting statutes are silent. A few provide that the 

decanting statute may be used when the trust is governed by the laws of the particular 

state. See, e.g., Arizona, Missouri and South Dakota. These statutes are not specific 

about whether the trust must be governed by the relevant state’s law for purposes of 

validity and construction or for purposes of administration. For many trusts, different 

states’ laws may apply to the trust for different purposes. Delaware’s statute, in contrast, 

provides that its decanting statute is applicable when a trust is administered in Delaware. 

Other statutes provide that they may be used when the trust is administered under the law 

21

of the particular state, apparently without regard for whether or not the trust is actually 

administered in that state. See, e.g., Kentucky and Virginia. Ohio’s statute may be used 

when a trust is governed by Ohio law or Ohio is the principal place of administration. 

Illinois’s statute may be used when the trust is governed by Illinois law as to matters of 

construction or is administered in Illinois. The statutes in Alaska and New York apply 

when a trust is governed by the applicable state’s law or when there is a New York or 

Alaska trustee and the trustees agree that the primary administration of the trust will be in 

Alaska or New York, as the case may be. 

IX. 

Other Issues 

A. Accounting Requirements. The Virginia statute provides that if the old trust 

was required to file accountings with the commissioner of accounts, the new trust 

will be subject to the same requirement. 

B. Jurisdiction of New Trust. Some of the decanting statutes expressly permit the 

new trust to be under the law of a new jurisdiction. See, e.g., Kentucky. 

C. Codification of Common Law. Some of the statutes state that they are codifying 

the common law. See, e.g., Michigan § 556.115a, Missouri and Ohio. 

X. Beneficiary’s Recourse. What recourse does a beneficiary have who objects to a 

trustee’s decanting? 

A. Right to Object. As discussed above, certain states not only require notice of a 

proposed decanting to certain beneficiaries but also prohibit the trustee from 

proceeding with such decanting without court approval if a beneficiary objects 

within the notice period. 

B. Abuse of Discretion. As with any exercise of a discretionary fiduciary power, a 

beneficiary may bring a judicial claim asserting that the exercise of the power was 

an abuse of the trustee’s discretion. The Florida statute explicitly states that 

providing the required notice to the qualified beneficiaries of the first trust “shall 

not limit the right of any beneficiary to object to the exercise of the trustee’s 

power to invade principal except as provided in other applicable provisions of this 

code.” 

C. Explicit Remedy. The Illinois decanting statute includes an explicit remedies 

provision providing that a person interested in a trust may bring a claim that a 

decanting was an abuse of discretion within two years after the trustee has 

notified such person of the decanting. The Illinois statute appears to give a minor 

two years after attaining majority and receiving notice of the decanting to file a 

claim. Under the Illinois statute, the exclusive remedy is to obtain an order of the 

court to modify or reverse the decanting. 

22

XI. 

Trustee Liability 

A. No Duty to Decant. Some of the statutes expressly state that the trustee has no 

duty to decant. See, e.g., Florida, Illinois, Indiana, Kentucky, Michigan 

§ 700.7820a, Michigan § 556.115a, Missouri, Nevada, New Hampshire, New 

York, North Carolina, Ohio and Virginia. Some statutes further state that a 

trustee has no duty to even consider decanting. 

B. Fiduciary Duties. Obviously, the exercise of a trustee’s power to decant is 

subject to all of the fiduciary duties that otherwise govern the trustee’s 

administration of the trust whether imposed by the trust instrument or by 

governing law. A few of the decanting statutes make this explicit. For example, 

the Missouri statute states that the exercise of the decanting power is subject to all 

fiduciary duties otherwise imposed under the trust instrument or Missouri law. 

See also New Hampshire and Virginia. The Delaware statute is even more 

explicit in stating that the standard of care for decanting is the same as the 

standard of care when making outright distributions. 

C. Duty of Impartiality. Some have expressed concern that a trustee might violate 

its duty of impartiality by decanting. The Illinois statute provides that the trustee 

does not violate its duty of impartiality by arguing in favor of decanting unless the 

court finds that the trustee acted in bad faith. 

D. Standard of Review. Some of the state statutes reference particular standards of 

review. For example, the South Dakota statute provides that if the trustee’s 

distribution discretion is not subject to a standard or is subject to a standard that 

does not create a support interest, then the court may review the trustee’s act of 

decanting only for dishonesty, improper motive or failure to act if under a duty to 

do so. The Ohio statute provides that a trustee who acts reasonably and in good 

faith is presumed to have acted in accordance with the terms and purposes of the 

trust and in the interests of the beneficiaries. 

XII. 

Tax Issues 

A. Income Tax 

1. Conversion of Grantor Trust to Nongrantor Trust. If a trust owns 

assets that have liabilities that exceed the property’s income tax basis, a 

conversion of a grantor trust to a nongrantor trust may cause the grantor to 

recognize gain to the extent the liabilities exceed the basis. Blattmachr, 

Jonathan G., Horn, Jerold, Zeydel, Diana, “An Analysis of the Tax Effects 

of Decanting,” 47 Real Property, Trust and Estate Law Journal 141 

(Spring 2012) (hereafter, “Tax Effects”); see Madorin v. Comm’r, 84 T.C. 

667 (1985). 

2. Conversion of Nongrantor Trust to Grantor Trust. The conversion of 

a nongrantor trust to a grantor trust does not appear to have any income 

23

tax consequences. See Tax Effects at 159, citing Chief Counsel Memo. 

200923024; Rev. Rul. 2004-64, 2004-2 C.B. 7. 

3. Negative Basis Assets. When the trust property has a liability against it 

that exceeds the property’s income tax basis (a “negative basis” asset), it is 

possible that decanting the negative basis assets will result in the 

recognition of gain. See Tax Effects at 156; Crane v. Comm’r, 331 U.S. 1 

(1947). 

4. Beneficiary Recognition of Gain. It is possible that under the doctrine of 

Cottage Savings Ass’n v. Comm’r, 499 U.S. 554 (1991), the IRS may take 

the position that a beneficiary recognizes gain if the decanting changes the 

quality of the beneficiary’s interest and the beneficiary’s consent (or 

possibly the court’s approval) is required for the decanting. See Tax 

Effects at 157-159. This may be of concern under the Illinois and 

Kentucky statutes. These statutes do not require a beneficiary’s 

affirmative consent, but prohibit decanting without court approval if the 

beneficiary objects within the notice period. The IRS could construe the 

ability of a beneficiary to block decanting by objecting within the notice 

period as the equivalent of beneficiary consent. 

5. Conversion of a Domestic Trust to a Foreign Trust. The conversion of 

a domestic trust to a foreign trust may result in the recognition of gain 

under Code section 684. See Tax Effects at 159. 

6. The Accidental Grantor Trust. Several of the exceptions to grantor trust 

treatment in Code section 674, such as the power to distribute corpus 

subject to an ascertainable standard (Code section 674(b)(5)(A)), the 

power to withhold income during the disability of a beneficiary (Code 

section 674(b)(7)) and the power of an independent trustee to make 

distributions (Code section 674(c)), do not apply if any person has a power 

to add a beneficiary to the class designated to receive income or corpus. 

The Illinois, Missouri and South Dakota statutes appear to permit 

decanting to make a remainder beneficiary a current beneficiary. See 

Section IV, F. 

B. Estate and Gift Tax 

1. Gift Tax. Under the Illinois decanting statute, a trustee who has absolute 

discretion may decant to a second trust that eliminates, reduces or restricts 

the interest of a beneficiary. If such beneficiary is legally competent, such 

beneficiary will receive written notice of the trustee’s intent to decant and 

can block the decanting by an objection in writing delivered to the trustee 

within the 60-day notice period. If a beneficiary whose interest in the trust 

will be reduced or eliminated by decanting fails to object, will such 

beneficiary be treated as making a gift to the trust or the other 

beneficiaries of the trust? See Tax Effects at 160-164. Under the Illinois 

decanting statute, a beneficiary who is not legally competent is not 

24

equired to receive notice and, if the trustee does not provide notice to 

such beneficiary, would have no power to object. Thus the gift tax risk 

would seem not to be present in a case where the beneficiary whose 

interest was being reduced or eliminated was not legally competent. A 

similar concern may arise under the Kentucky statute. 

2. Estate Tax. If decanting reduced or eliminated a beneficiary’s interest in 

a manner that resulted in a gift, then such beneficiary’s estate might 

include the trust assets if Code section 2035, 2036, 2037, 2038, 2039 or 

2042 applied. See Tax Effects at 164-165. For example, if the beneficiary 

was the trustee of the second trust with the power to make discretionary 

distributions, then the decanted property subject to gift tax might be 

included in the beneficiary’s estate under section 2036(a). 

C. GST Tax 

1. Grandfathered Trusts. Generally trusts that were irrevocable on 

September 30, 1985, are grandfathered from the GST tax. Such 

grandfathering is lost if there is an addition or constructive addition to the 

grandfathered trust. 

a. A grandfathered trust will not lose its grandfathered status after 

being decanted if at the time the trust became irrevocable state law 

authorized the decanting and the terms of the second trust do not 

extend the time for vesting of any beneficial interest in the trust in 

a manner that may postpone or suspend the vesting of an interest in 

property for a period, measured from the date the original trust 

became irrevocable, extending beyond any life in being at the date 

the original trust became irrevocable plus the period of 21 years. 

More specifically, Treasury Regulation section 26.2601- 

1(b)(4)(i)(A) provides as follows: 

(A) Discretionary powers. – The 

distribution of trust principal from an exempt trust 

to a new trust or retention of trust principal in a 

continuing trust will not cause the new or 

continuing trust to be subject to the provisions of 

chapter 13, if – 

(1) Either – 

(i) The terms of the 

governing instrument of the exempt trust authorize 

distributions to the new trust or the retention of trust 

principal in a continuing trust, without the consent 

or approval of any beneficiary or court; or 

25

(ii) at the time the exempt 

trust became irrevocable, state law authorized 

distributions to the new trust or retention of 

principal in the continuing trust, without the consent 

or approval of any beneficiary or court; and 

(2) The terms of the governing 

instrument of the new or continuing trust do not 

extend the time for vesting of any beneficial interest 

in the trust in a manner that may postpone or 

suspend the vesting, absolute ownership, or power 

of alienation of an interest in property for a period, 

measured from the date the original trust became 

irrevocable, extending beyond any life in being at 

the date the original trust became irrevocable plus a 

period of 21 years, plus if necessary, a reasonable 

period of gestation. For purposes of this paragraph 

(b)(4)(i)(A), the exercise of a trustee’s distributive 

power that validly postpones or suspends the 

vesting, absolute ownership, or power of alienation 

of an interest in property for a term of years that 

will not exceed 90 years (measured from the date 

the original trust became irrevocable) will not be 

considered an exercise that postpones or suspends 

vesting, absolute ownership, or the power of 

alienation beyond the perpetuities period. If a 

distributive power is exercised by creating another 

power, it is deemed to be exercised to whatever 

extent the second power may be exercised. 

b. Alternatively, the grandfathering will not be affected if the 

modification does not shift a beneficial interest in the trust to any 

beneficiary who occupies a lower generation and the modification 

does not extend the time for vesting of any beneficial interest in the 

trust beyond the period provided for in the original trust. Treas. 

Reg. § 26.2601-1(b)(4)(i)(D). 

2. GST-Exempt Trusts. If a trust is exempt from GST tax by reason of 

allocation of GST exemption, at a minimum any change to such trust by 

decanting that would not affect the GST-exempt status of a grandfathered 

trust should not affect the GST-exempt status of such trust. See 

PLR 200919009. Thus if such a trust was created after the date when the 

decanting statute became effective, and the decanting did not extend the 

time for vesting, the decanting should not affect the GST inclusion ratio of 

the trust. Alternatively, if the decanting does not shift a beneficial interest 

in the trust to a beneficiary in a lower generation and does not extend the 

time for vesting, then the decanting should not change the inclusion ratio 

26

of the trust. See PLR 200227020; PLR 9804046; PLR 9737024; PLR 

9438023. 

3. Severed Trusts. Some decantings may create separate trusts. Thus the 

issue may arise as to whether the second trusts are treated as separate 

trusts for GST purposes. Treasury Regulation section 26.2642-6 sets forth 

the rules for a qualified severance. If the severance is not qualified, the 

GST tax regulations will still treat the trusts as separate provided that state 

law recognizes the post-severance trusts as separate trusts. Treas. Reg. 

§ 26.2642-6(h). 

XIII. 

Considerations 

A. What state statute(s) applies to the trust? 

B. Does the applicable state statute permit decanting? 

C. Does the applicable state statute permit decanting to achieve the desired 

result? 

D. Are there income, estate, gift or GST tax consequences or risks? 

E. Is the proposed decanting consistent with the material purposes of the trust? 

F. Should the trustee decant? 

G. What notice is required? Advisable? 

H. Is beneficiary consent desirable? Does it increase tax risks? 

I. Is court approval required? Desirable? 

J. Are there better alternatives to achieve the desired result? 

27

BIBLIOGRAPHY 

Articles 

1. Farhad Aghdami, Susan T. Bart and M. Patricia Culler, Decanting: Refining a Vintage 

Trust (ACTEC 2013 Annual Meeting) 

2. Jonathan G. Blattmachr, Jerold I. Horn and Diana S.C. Zeydel, An Analysis of the Tax 

Effects of Decanting, 47 REAL PROP., TR. AND EST. L.J. 141 (Spring 2012) 

3. Rashad Wareh and Eric Dorsch, Decanting: A Statutory Cornucopia, Tr. & Est. 22, 

(March 2012) 

4. Joseph T. La Ferlita, New York’s Newly Amended Decanting Statute, 34 PROB. & PROP. 

(July/August 2012) 

5. Anne Marie Levin and Todd A. Flubacher, Put Decanting to Work to Give Breath to Trust 

Purpose, 38 EST. PLAN. 3 (2011) 

6. William R. Culp, Jr. and Briani Bennett Mellen, Trust Decanting: An Overview and 

Introduction to Creative Planning Opportunities, 45 REAL PROP., TR. & EST. L.J. 1 (Spring 

2010) 

7. William R. Culp, Jr. and Briani L. Bennett, Use of Trust Decanting to Extend the Term of 

Irrevocable Trusts, 37 EST. PLAN. 3 (2010) 

8. Diana S.C. Zeydel and Jonathan G. Blattmachr, Tax Effects of Decanting – Obtaining and 

Preserving the Benefits, 111 J. TAX 288 (Nov. 2009) 

9. M. Patricia Culler and Diana S. C. Zeydel, Decanting: An In-Depth View of the Latest 

Techniques (ACTEC 2009 Fall Meeting) 

10. Alan S. Halperin and Lindsay N. O’Donnell, Modifying Irrevocable Trusts: State Law and 

Tax Considerations in Trust Decanting, 2008 University of Miami School of Law 42 nd 

Annual Heckerling Institute 

Notice 2011-101 

1. Internal Revenue Bulletin: 2011-52, Notice 2011-101, Transfers by a Trustee From an 

Irrevocable Trust to Another Irrevocable Trust (Sometimes called “Decanting”); Requests 

for Comments, December 27, 2011 

2. American Bar Association Section of Taxation, Comments on Notice 2011-101 on Trustee 

Transfers, Changes in Beneficial Interests, May 3, 2012 

3. American College of Trust and Estate Counsel, Comments of The American College of 

Trust and Estate Counsel on Transfers by a Trustee from an Irrevocable Trust to Another 

Irrevocable Trust (Sometimes called “Decanting”)(Notice 2011-101) Released 

December 21, 2011, April 2, 2012 

28

4. Bessemer Trust, Office of Fiduciary Counsel, Comments of Bessemer Trust on Transfers by 

a Trustee from an Irrevocable Trust to Another Irrevocable Trust (“Decanting”) (Notice 

2011-101, 2011-52 I.R.B. 932 (December 20, 2011)), April 24, 2012 

5. John G. Blattmachr, et al., Report of Jonathan G. Blattmachr, Elaine M. Bucher, George L. 

Cushing, Mitchell M. Gans, Jerold I. Horn, Mary Ann Mancini and Diana S.C. Zeydel on 

Transfers by a Trustee from an Irrevocable Trust to Another Irrevocable Trust (Sometimes 

called “Decanting”) (Notice 2011-101) Released December 21, 2011, March 13, 2012 

6. Brian Dooley, CPA, Regarding – IRS Notice 2011-101 – A Distribution from One Trust to 

Another Trust (Decanting), 2012 WL 359993 (I.R.S.), January 10, 2012 

7. Chris C. Gair, Notice 2011-101 “Decanting”, February 22, 2012 

8. Scott K. Martinsen, Kirkland Woods & Martinsen PC, Comments to Notice 2011-101 – in 

Transfers by a Trustee from an Irrevocable Trust to another Irrevocable Trust (sometimes 

called “Decanting”), April 24, 2012 

9. New York City Bar Association Committee on Trusts, Estates & Surrogate’s Courts & 

New York City Bar Association Committee on Estate and Gift Taxation, New York City 

Bar Association Response to Request for Comments to Notice 2011-101, undated 

10. New York State Bar Association Tax Section & New York State Bar Association Trusts 

and Estates Law Section, Report on Notice 2011-101: Request for Comments Regarding 

the Income, Gift, Estate and Generation-Skipping Transfer Tax Consequences of Trust 

Decanting, April 26, 2012 

11. New York State Society of Certified Public Accountants, IRS Notice 2011-101, Transfers 

by a Trustee From an Irrevocable Trust to Another Irrevocable Trust (Sometimes called 

“Decanting”); Requests for Comments, April 19, 2012 

12. State Bar of Texas, Comments of the State Bar of Texas, Tax Section on Transfers by a 

Trustee from an Irrevocable Trust to Another Irrevocable Trust (sometimes called 

“Decanting”), May 22, 2012 

13. Robert L. Teicher, Brody Wilkinson PC, Comments in Response to Notice 2011-101, 

April 25, 2012 

14. Uniform Law Commission, Comments from the National Conference of Commissioners on 

Uniform State Laws on Transfers by a Trustee from an Irrevocable Trust to Another 

Irrevocable Trust (often referred to as “Decanting”) in response to Notice 2011-101 

(December 21, 2011), April 21, 2011 

15. AICPA Comments on Notice 2011-101 on Transfers from Irrevocable Trusts, Changes in 

Beneficial Interests, Bloomberg BNA Daily Tax Report, June 26, 2012 

29

APPENDIX I 

STATE 

DECANTING STATUTES as of May 8, 2013 

CITE 

EFFECTIVE 

DATE 

AMENDMENTS 

Alaska ALASKA STA. § 13.36.157 9/15/98 2006 

Arizona 

Delaware 

ARIZ. REV. STATE. ANN. 

§ 14-10819 

DEL. CODE ANN. tit. 12, 

§ 3528 

9/30/09 7/20/11 

6/30/03 

Florida FLA. STAT. § 736.04117 1/1/07 

Illinois 760 ILCS 5/16.4 1/1/13 

Indiana IND. CODE § 30-4-3-36 7/1/10 

Kentucky 

Michigan 

KY. REV. STAT. ANN. 

§ 386.175 

MICH. COMP. LAWS 

§ 700.7820A 


§ 700.7103 (definitions) 

7/12/12 

12/28/12 

6/24/04, 6/27/06, 

7/5/07, 7/6/09, 

7/13/11 

Michigan 


§ 556.115A 


12/28/12 

§ 700.7103 (definitions) 

Missouri MO. REV. STAT. § 456.4-419 8/28/11 

Nevada NEV. REV. STAT. § 163.556 10/1/09 10/1/11 

New 

Hampshire 

New York 

North 

Carolina 

N.H. REV. STAT. ANN. 

§ 564-B:4-418 

N.Y. EST POWERS & TRUSTS 

§ 10-6.6 

N.C. GEN. STAT. § 36C-8- 

816.1 

9/9/08 

7/24/92 8/17/11 

10/1/09 7/20/10 

PENDING 

CHANGES 

SB165 

Proposed 

amendment passed 

and awaiting 

transmittal to the 

governor for 

signature as of 

4/14/13.

STATE 

Ohio 

Rhode 

Island 

South 

Dakota 

Tennessee 

Texas 

DECANTING STATUTES as of May 8, 2013 

CITE 

OHIO REV. CODE ANN. 

§ 5808.18 

RHODE ISLAND, R.I. GEN. 

LAWS § 18-4-31 (2012) 

S.D. CODIFIED LAWS §§ 55- 

2-15 TO 55-2-21 

TENN. CODE ANN. § 35-15- 

816(B)(27) 

Proposed TEXAS TRUST 

CODE §§ 112.071-112.089 

EFFECTIVE 

DATE 

3/22/12 

6/23/12 

3/5/07 

AMENDMENTS 

2008, 2008, 2011, 

3/2/12 and 

3/25/13 

PENDING 

CHANGES 

Amendments in 

S0286 introduced 

2/2/13 and passed 

by Senate 

H5501 introduced 

2/14/13 in 

Judiciary 

Committee 

7/1/04 HB 873 

Introduced 

2/1/13 referred 

to 

Jurisprudence 

2/25/13; 

Passed by 

House 5/2/13 

Virginia 

VA. CODE ANN. § 64.2- 

778.1 

7/1/12 

Wyoming W.S. 4-10-816(a)(xxviii) 7/1/13 

2

ALTERNATIVE PLENARY 

Tax Issues (For the Non-Tax Specialist) for 

Small and Medium Size Estates 

Bryan Jamison 

Jamison & Jamison 

Shoreview 


TAX ISSUES FOR SMALL & MEDIUM SIZE ESTATES 

I. Minnesota Estate Tax – Lifetime Gifts (etc.) ........................................................ 2 

A. Federal Law. ....................................................................................................... 2 

B. Minnesota Law ................................................................................................... 2 

C. M706 Filing Requirements ................................................................................. 2 

D. M706 Calculations and Examples ..................................................................... 2 

E. Other Issues To Consider ................................................................................... 9 

II. Income Tax Deduction For Distributions To Charity from Estates & Trusts ... 11 

A. General Rule ..................................................................................................... 11 

B. Gifts of Principal—No Deduction ................................................................... 11 

C. Source of Charitable Gift – Ordinary Income To Charities & Examples. ....... 12 

III. Deduction of Mortgage Interest By Estates and Trusts .................................... 18 

IV. Deduction of Other Post-Death Expenses ........................................................ 18 

Estate Tax Forms & Instructions .......................................................... Appedix 1 – 6 

Minnesota M706 Calculator – Examples 1 - 8 ................................... Appedix 7 - 14 

Amended IRS Reg –Charitable Gifts By Estates & Trusts ............. Appedix 15 - 16 

1

I. MINNESOTA ESTATE TAX – LIFETIME GIFTS (etc.). 

A. Federal Law. Federal tax law defines a “taxable gift” as any gift that exceeds the 

annual exclusion amount of $14,000 per calendar year, per person (the prior limits 

were: $13,000 per year during 2012 - 2009, $12,000 during 2008 - 2006, $11,000 during 

2005 – 2002, $10,000 during 2001 - 1981 and $3,000 during 1981 - 1977) or other gifts 

that don’t qualify for the current interest exclusion (i.e., gifts of a remainder interest when 

a life estate is created). Federal law gives a unified credit that can be used to shelter the 

first $5,250,000 of taxable gifts and/or assets in a decedent’s estate. 

B. Minnesota Law. Current Minnesota law does not impose a tax on gifts. But, taxable 

gifts can affect a Minnesota estate tax return (Form M706). Minnesota imposes an estate 

tax (the law is primarily contained in Minn. Stat. Chapters 291 & 289A) if the estate is 

required to file a Minnesota estate tax return, AND if persons other than a surviving 

spouse receive more than $1,000,000 of assets that are either post-death transfers or 

lifetime taxable gifts (i.e., gifts which must be reported on Form 709). 

NOTE: At the time this outline was being drafted, the Minnesota legislature was 

considering adopting a new gift tax law. The planning techniques discussed below 

may not be effective after the effective date of any new gift tax law. 

C. M706 Filing Requirement. An estate must file a Minnesota estate tax return if: 

1. For Minnesota residents, the gross estate exceeds $1,000,000 or a federal 

estate tax return is required to be filed. The federal gross estate includes ALL 

assets owned by the decedent including assets that pass to the surviving spouse 

but does not include completed lifetime gifts. 

2. For nonresidents of Minnesota, if “Minnesota sitused property” (generally, 

Minnesota real estate or tangible personal property located in Minnesota) is 

included in the federal gross and the federal gross estate exceeds $1,000,000 or a 

federal estate tax return is required to be filed. 

D. M706 Tax Calculation. If a decedent’s estate is required to file a Minnesota estate tax 

return, taxable gifts must be added to the gross federal gross estate for the Table A 

calculation--one of the two required tax calculations. The Minnesota estate tax which 

must be paid is the lower of the tax calculated by the two separate formulas. See 

Appendix pages 1 – 6. 

Table A Calculation (lines 1 - 18 of Worksheet to Determine Line 1 of M706): 

706 line # 

gross estate part 2, line 1 (all assets owned by decedent) 

minus deductions part 2, line 2 (marital, debts, charity, admin expense, etc.) 

plus taxable gifts part 2, line 4 (lifetime gifts exceeding annual exclusion amount) 

minus M706Q (MN’s small business/farm deduction-after 6-30-11) 

MN adjusted taxable estate (for Table A) 

2

This “Minnesota adjusted taxable estate” amount is used to determine the total federal 

estate tax that would have been imposed under the rules in effect in 2000; but, a credit of 

$345,800 is given that makes the tax equal to zero if this amount is $1,000,000 or less. 

Because the marginal federal estate tax bracket at this level is 41%, this calculation 

results in a 41% tax bracket for Minnesota estate taxes which are between $1,000,000 and 

1,093,785. After that threshold, the marginal tax bracket is 5.6% (for $6,215) and then 

6.4% based on the credit for state estate taxes calculated under Table B below. 

Table B Calculation (lines 19 - 25 of Worksheet to Determine Line 1 of M706): 

706 line # 

gross estate part 2, line 1 (all assets owned by decedent) 

minus deductions part 2, line 2 ($ to spouse, debts, charity, admin expense, etc.) 

minus M706Q (MN’s small business/farm deduction post 6-30-11) 

minus $60,000 

MN adjusted taxable estate (for Table B) 

This “Minnesota adjusted taxable estate” amount is used to determine the prior federal 

credit for state-level estate tax that would have been allowed under the rules in effect in 

2000. The Table B calculation does NOT include the taxable gifts. 

The actual tax due is the lesser of the tax calculated under Table A or Table B. 

SAMPLE CALCULATIONS: 

Example #1: Jack (unmarried) dies in 2012 and leaves these assets to his children: 

home 300,000 

bank 5,000 

investments 200,000 

401(k) 500,000 

lake cabin 400,000 

total federal gross estate (line 1 of worksheet): 1,405,000 

allowable MN deductions (administration expenses) 

taxable gifts (line 4 of worksheet) -0- 

Minnesota adjusted taxable estate (line 7 of worksheet) 1,395,000 

Table A calculation (worksheet lines 8-18) 510,650 

 

164,850 

Table B calculation (worksheet lines 19-24) 57,680 

Minnesota estate tax due (lesser of Table A or Table B result) 57,680 

Appendix – 7. 

3

NOTE: In the examples below, I will refer to the lines from the Minnesota estate tax 

calculator published by the Minnesota Department of Revenue. The calculator is 

designed as a tool to supply arithmetic calculations that mimic the worksheet in the M706 

instructions. The calculator (a Microsoft Excel spreadsheet) is available at: 

http://www.revenue.state.mn.us/businesses/estate/Pages/estate_calculators.aspx# 

Example #2 – Gift Lake Cabin: Assume the same facts as example #1 except that the 

lake cabin is gifted to the children prior to Jack’s death. Because the cabin is no longer 

part of the calculation for Table B, the calculated state credit is reduced and the total 

Minnesota estate tax is reduced. 

home 300,000 

bank 5,000 


401(k) 500,000 

total federal gross estate (calculator line 1): 1,005,000 

allowable deductions - administration expenses 

plus taxable gifts ($400,000 minus $13,000 for each of 3 children) 361,000 

Minnesota adjusted taxable estate (calculator line 7) 1,356,000 

Table A calculation (calculator lines 8 - 16) 493,880 

 

148,080 

Table B calculation (calculator line 17) 32,920 

Minnesota estate tax due 32,920 

Tax saved by lifetime gift ($57,680 minus $32,930) 24,760 


Example #3 – Gift Lake Cabin & $10,000: Assume the same facts as example #2 

except that in addition to the lake cabin, $10,000 of investments were also gifted in 

lifetime gifts to the children. 

home 300,000 

bank 5,000 


401(k) 500,000 

total federal gross estate (line 1 - below the filing requirement): 995,000 




4


 

148,080 


Minnesota estate tax due (because below the filing requirement) -0- 

Tax saved (compared to Example #1) 57,680 


Example #4 – Add Insurance To Spouse: Assume the same facts as example #3 except 

that prior to his death he marries Betty. He makes all of the lifetime gifts and leaves all 

of his prior assets to his children as discussed in example #3. In addition, he purchases a 

$50,000 life insurance policy which he leaves to his new spouse. 

life insurance to new spouse 50,000 

home 300,000 

bank 5,000 


401(k) 500,000 

total federal gross estate (line 1 - above the filing requirement): 1,045,000 

marital deduction (life insurance to new spouse) 





 

148,080 


Minnesota estate tax due (his estate is above the filing requirement) 32,360 

Tax cost (compared to Example #3) of $50,000 to his spouse 32,360 


Example #5 - $1,000,000 of Lifetime Gifts: Jack prior to getting married to Betty, 

makes the following lifetime gifts (Note: the values of his assets have been changed to 

make this example work better): 

home 300,000 


lake cabin 300,000 

Total Lifetime Gifts 1,000,000 

5

At his death, he leaves the following assets to his new spouse, Betty: 

401(k) 500,000 

life insurance 600,000 

1,100,000 

He also leaves the following asset (at his death) to his children: 

Bank 300,000 


marital deduction 

plus taxable gifts ($1,000,000 minus $13,000 each for 3 children) 961,000 



 

107,230 


Minnesota estate tax due (on the $300,000 given to his children) 3,600 


NOTE: Because most all of his gross estate will be given to his surviving spouse, it will 

qualify for the marital deduction. His estate tax will be based upon his Table B amount 

which does not include the lifetime taxable gifts for the assets owned at death that pass to 

his children. If only a small amount of his estate (at death) is given to his children, then 

the M706 tax is calculated at the more modest Table B rates. 

Example #6 – Add Out-Of-State Asset: Assume the same facts as example #3 (lifetime 

gifts reduce M706 tax to zero) except that prior to his death Jack’s brother, Bill, 

(unmarried with no children) dies and leaves his South Dakota farm to Jack and his 3 

other surviving siblings. Jack had previously made all of the lifetime gifts discussed in 

Example #3 above and leaves all of his assets to his children (in this example there is no 

surviving spouse). 

home 300,000 

bank 5,000 


401(k) 500,000 

995,000 

¼ of South Dakota farm + 250,000 

total federal gross estate (calculator line 1 – must file M706): 1,245,000 

6






 

257,700 


REDUCTION FOR OUT-OF-STATE ASSETS (M706 lines 2 – 6): 

Real estate located in South Dakota 250,000 

Federal Total Gross Estate ÷ 1,245,000 

Reduction percentage 20.08% 

Tentative Minnesota Estate Tax (line 1 of M706) 47,440 

Subtraction for Out-Of-State real estate 


Tax cost of inheriting South Dakota real estate 37,914 


Example #7 – Out-Of-State farm in LLC: Assume the same facts as example #6 

except that prior to his death Jack’s his brother-in-law convinces the family to create an 

LLC which will own the South Dakota farm. This is done in an attempt to make the farm 

a non-probate asset and avoid the need for probate administration in South Dakota. He 

had previously made all of the lifetime gifts discussed above and leaves all of his assets 

to his children as discussed in example #6. 

Please note that the reduction in Minnesota estate tax only applies to real estate located 

outside of Minnesota and to tangible personal property that is normally kept or located 

outside of Minnesota. By transferring the South Dakota farm to an LLC, this asset was 

converted to “intangible personal property”. Under current Minn. Stat. §291.03, the situs 

of Jack’s share of the LLC is now based on Jack’s Minnesota domicile at the time of his 

death. Thus, putting the South Dakota farm into the LLC made this an asset with its tax 

situs in Minnesota. 

¼ of South Dakota farm held by LLC 250,000 

home 300,000 

bank 5,000 


401(k) 500,000 

total federal gross estate (line 1 - above the filing requirement): 1,245,000 

7

total federal gross estate (line 1): 1,245,000 





 

257,700 


REDUCTION FOR OUT-OF-STATE ASSETS (M706 lines 1 – 6): 

Real estate located in South Dakota -0- 

Federal Total Gross Estate ÷ 1,245,000 

Reduction percentage 0% 

Tentative Minnesota Estate Tax (line 1 of M706) 47,440 

Subtraction for Out-Of-State real estate 


Tax cost of following his brother –in-law’s advice (47,440 – 37,914) 9,526 


NOTE: At the time this outline was being drafted, the Minnesota legislature was 

considering amending the law to change how the Minnesota estate tax laws treat real 

estate held in an LLC or S corporation. 

Example #8 – Funding a Credit Shelter Trust: Jack (married) dies in 2012. He had 

previously made the following gift to his children: 

Lake cabin – lifetime gift 400,000 

At the death, his only assets are held in a revocable trust with credit shelter trust 

provisions (income to spouse for life and principal to his children after his spouse’s 

death) that is drafted to fund the credit shelter trust to the maximum amount that will 

result in no federal or state estate tax. The trust holds the following assets: 


life insurance 500,000 


Without the taxable gifts, Jack’s trust would allocate $1,000,000 in his credit shelter trust 

with the excess ($100,000) being allocated and paid to his surviving spouse. Because of 

the effect of the taxable lifetime gifts (the lake cabin) for the Table A calculation, if 

$1,000,000 is allocated to the credit shelter trust, the M706 will show a Minnesota estate 

8

taxes due of $33,200. But, the standard credit shelter trust formula requires that the trust 

increase the marital share to reduce the Minnesota estate tax to zero. Given these facts, 

the spouse must be given a larger amount ($461,000) to reduce the Minnesota estate tax 

to zero as shown below: 


Marital deduction 

taxable gifts 361,000 



 

-0- 


Minnesota estate tax due -0- 


NOTE: In this scenario, the existence of taxable lifetime gifts (gifts in excess of 

the $13,000 annual exclusion amount) reduced the amount that could be allocated 

to the credit shelter trust (i.e., the “family share”) by exactly the amount of those 

taxable gifts. 

E. OTHER ISSUES TO CONSIDER. 

1) If retirement accounts or annuities are liquidated as a source of assets to fund 

lifetime gifts, then the donor (parent) must pay income taxes on the income 

generated from the withdrawal. 

• Those income taxes also either reduce the gross estate or are deductible 

as a debt on the Form 706. This may help reduce the estate taxes that are 

ultimately due. 

• It is possible that the donor’s (parent) income tax bracket is lower than 

the donee’s (child) income tax bracket. 

• If the donees (children) could benefit by deferring recognition of the tax, 

then liquidating the account during the parent’s lifetime loses this 

opportunity for deferral. 

2) If income-earning assets are gifted prior to death, the resulting loss of income 

to the donor (parent) may be a financial or emotional concern. 

3) Capital assets that are gifted during lifetime do not receive a stepped-up cost 

basis at the donor’s death. For highly appreciated capital assets, if/when the 

capital asset is sold by the donee (child), the sale will result in a large capital gain 

that must be recognized by the donee. 

9

Note: in several of the examples above, by completing lifetime gifts the family 

was able to effectively save Minnesota estate taxes. But, if the gifted asset (i.e., 

the lake cabin) has a very low cost basis and if the donee (child) sells the gifted 

asset during their lifetime, the donee will be taxed on the full gain with no step-up 

in basis at the donor’s death. 

Sample Calculation: 

Sale price (by children) 400,000 

Carried-over cost basis 

Gain 380,000 

Estimated income tax due at 15% + 7.05% $80,000 

Estimated income tax due at 35% + 7.85% $152,000 

If gifts will be made, it is frequently better for income tax purposes to gift assets 

that are not highly-appreciated capital assets. 

Practice Tip: If capital assets are gifted, warn clients in writing about the 

potential loss of the stepped-up cost basis and the future income taxes that will be 

due upon sale. 

4) The financial stability of the potential recipients can have a big impact on your 

client’s willingness to do these lifetime gifts. If the donee (child) has a financial 

crisis, the asset could be lost to the child’s creditors. 

5) When making lifetime gifts, don’t overlook assets that might increase the 

estate above the $1,000,000 filing requirement including: 

•personal property (art, jewelry, vehicles, etc.); 

•post-gift appreciation of retained assets (stock market surges can 

suddenly increase values); 

•hard to value items (i.e., some real estate, business ownership interests, 

etc.) 

6) Other emotional issues relating to gifting that should be considered include: 

• donor’s (parent) reluctance to release control; 

• sibling rivalries or other issues that might cause problems in a coownership 

status; 

• issues regarding equalization of inheritance if the gift is given other than 

proportionately. 

10

II. INCOME TAX DEDUCTION FOR DISTRIBUTIONS TO CHARITY FROM ESTATES 

AND TRUSTS. 

A. General Rule: An estate or trust is allowed an income tax deduction for contributions 

to charities if: 

1) The contribution is authorized under the terms of the governing instrument of 

the will or trust; and 

•NOTE: If the original will/trust does not clearly create the charitable gift, 

then later attempts to modify or clarify the document’s terms may not be 

honored by the IRS. The IRS rejected attempts to clarify or refine the 

charitable deduction through a court order (Chief Counsel Advice 

200848020) and through a power of appointment which was integrated 

with the will (Brownstone, Clyde v. U.S., 465 F3rd 525) because the 

original document was not sufficient by itself to establish the charitable 

gift. 

2) the contribution is paid from income. IRS Code §642, RIA C-2307. 

•NOTE: The deduction is normally taken in the year the payment is made. 

However, the estate may make an election under IRS Code §1.642(c)-1(b) 

to take the deduction on the 1041 return for the year prior to the year of 

distribution. This protects an estate which receives income but does not 

transfer that income to the charity until the next tax year. 

•Note to tax preparers: The estate/trust takes a charitable deduction for the 

charity’s portion of the taxable income. Even if charities are a residual 

beneficiary, charities should not be given a K-1 for their share of the 

estate’s income. 

•NOTE: For pooled trusts and estates or trusts established before 10-9-69, 

there is a deduction for amounts permanently set aside for the benefit of a 

charity. 

B. Gifts of Principal—No Deduction.. No income tax deduction is allowed for 

distributions of principal to charity. Thus, gifts of tangible objects (i.e., art work, other 

personal property, real estate, pecuniary gifts of cash, etc.) do NOT qualify for an income 

tax deduction for the estate or trust. 

• Charitable gifts from principal can be deducted for estate tax purposes (Form 

706) but not for income tax purposes (Form 1041). 

• Alternatively, if the item is distributed to an individual beneficiary, that person 

can donate the item to the charity and take a charitable contribution deduction on 

his/her personal income tax return (Form 1040, Schedule A & Form 8283). 

11

C. Source of Charitable Gift – Ordinary Income To Charity. When possible, estate plans 

should be drafted to allocate ordinary income to satisfy charitable gifts. 

• Individuals are taxed at different tax rates depending upon the type of income 

received. Ordinary income like retirement account distributions, interest and 

rents are taxed at high rates while long-term capital gains and qualified dividends 

are taxed at a lower rate. 

• Because charitable organizations do not pay income tax on the receipt of 

income, there is a huge tax advantage to ensuring that gifts to charities are 

properly made from ordinary income sources and that distributions to individuals 

are made from more tax-favored sources (i.e., qualified dividends or capital gains) 

or from principal. 

Example A: Betty owns the following assets: 

IRA - which names her 4 children as beneficiary $200,000 

Probate assets (Betty’s will names charities as sole beneficiary): 

home 100,000 

Bank savings and C/D’s 100,000 

RESULT: 

•Children receive the taxable assets (making the IRS a major beneficiary). 

•Charities receive the non-taxable assets. 

•Child named PR has to administer estate for benefit of charities. 

Example B – Pecuniary Gift To Charity: Betty owns the following assets: 

IRA - no beneficiary $200,000 

home 100,000 


All assets (including the IRA) are paid to her probate estate. 

Betty wants $40,000 to be given to her church. Betty’s will makes the following gifts: 

• I give $40,000 to my church; 

• I give the residue of my estate to my children. 

RESULT: 

• The estate collects the IRA and must report the entire IRA withdrawal as 

taxable income. 

• No income tax deduction is allowed for the $40,000 gift to charity. 

Because the charitable gift is a pecuniary gift (a specific sum of money), 

by definition that is a gift from principal and not a gift from income. See 

IRS Chief Counsel Advice 200644020 and RIA C-2154. 

• The rest of the estate ($360,000) is distributed to the children. 

12

• The estate’s income tax return (Form 1041) shows an income 

distribution deduction for the assets paid to the children. Each child 

receives a K-1 showing the child’s share of the distributable net income 

(DNI). The entire amount of the IRA account ($200,000) is taxable 

income that must be reported on the children’s income tax returns. 

Example C – No DNI Deduction: Assume the same facts as Example B for Betty who 

died in January 2012. The personal representative promptly collected $40,000 from the 

IRA and paid that amount to the church. Because the house wasn’t sold promptly, no 

other distributions were made during 2012 (or in the first 65 days of 2013). 

RESULT: 

•The estate’s 1041 income tax return shows $40,000 of taxable income 

from the IRA withdrawal. 

•The estate does not get a charitable contribution deduction because this is 

a pecuniary gift from principal. 

•The estate does not get an income distribution deduction to the children 

because nothing was distributed to them. 

•The estate must pay tax on the $40,000 IRA withdrawal at the estate’s 

highly compressed tax brackets. Individuals reach the top federal income 

tax bracket of 35% at $388,350 of taxable income. Estates and trusts 

(filing a 1041) reach the top tax bracket of 35% at $11,650 of taxable 

income (2012 returns). 

•The income tax due on the IRA withdrawal (1041 & Minnesota M2) 

is over $15,000. 

Example D – Charity As Residual Beneficiary: Betty owns the following assets (same 

assets as Example B): 

IRA - no beneficiary $200,000 

home 100,000 


All assets (including the IRA) are paid to her probate estate. 

Betty’s will creates the following gifts: 

• I give 10% of my net estate to my church. I specifically direct that this 

gift to my church is to be given from distributions from my IRA account. 


This will was drafted in reliance on IRS Reg §1.642(c)-3(b)(2) [relating to 

charitable deductions on Form 1041] which provided: 

“In determining whether the amounts of income so paid . . . include 

particular items of income of an estate or trust . . ., the specific provision 

controls if the governing instrument specifically provides as to [the] 

source out of which amounts are to be paid, permanently set aside, or 

used for such a purpose.” 

13

Many tax preparers relied on that regulation, to allocate retirement accounts to 

satisfy the charitable gift and claimed a charitable deduction for the full amount 

paid to the charity. This treatment was successful sometimes. See PLR 

200234019 and PLR 200845029. However, in other circumstances the IRS would 

not honor wills or trusts that attempted to identify the source of the income used 

to satisfy charitable gifts. See IRS Letter Rulings 9539009 & 9750020 and RIA 

K-3345.1. This author (and other commentators) saw inconsistency in the IRS 

treatment of this type of situation. 

However, that IRS regulation was amended in 2012 to provide that the allocation 

of specific assets to fund specific gifts must have economic effect 

independent of income tax consequences to be honored. See Appendix 

pages 15 – 16 for the text of the current regulation. The IRS’s position is that the 

prior law implicitly (by implied cross references to other IRS regulations) 

required independent economic effect other than tax consequences to allow the 

document to control the source of the charitable distribution. Their position is 

that the new regulation only clarified the existing law. 

RESULT (of Example D): 

• 10% of the estate is given to charity so 10% of the IRA withdrawal is 

considered to have been given to charity. The estate gets a $20,000 

income tax deduction for the $40,000 given to charity. 

• The children are taxed on 90% of the IRA withdrawal. 

Example E – Direct Beneficiary To Charity: Betty owns the following assets (same 

assets as Example B): 

IRA $200,000 

home 100,000 


Betty creates a direct beneficiary designation which gives $40,000 from her IRA 

account directly to her favorite charity. 

The remainder of her estate (including the rest of the IRA) is given to her 

children. 

RESULT: 

• The entire $40,000 charitable gift comes from the IRA account. No part 

of that gift is included in the estate’s taxable income. 

• This concept works very well if the client wants a specific sum or a 

specific percentage of the retirement account given to the charity. 

• If the value of her assets changes, then the $40,000 gift to charity may 

not be her intended 10% gift of her entire estate to charity. This type of 

designation may need routine adjustment if maintaining a specific 

percentage of her estate is important to the client. 

14

Example F – Direct Beneficiary to Charity with Adjustment by Will: Assume the 

same facts as Example E. Betty is adamant that exactly 10% of her estate is to be given 

to her church. The following is an attempt to accomplish that goal in a more tax-efficient 

manner. 

Betty creates a direct beneficiary designation which gives $35,000 (i.e. slightly 

less than 10%) from her IRA account to her church. The rest of the IRA account 

is given to her estate. 

Her will also contains the following provision: 

• I have created a beneficiary designation on my IRA account which gives 

a portion of that account to my church. It is my intention that the total gift 

to my church from my estate should equal exactly 10% of my net estate 

(including all probate and non-probate assets after payment of claims, 

taxes and expenses of administration). If the total given to my church 

from non-probate sources is less than 10% of my net estate, I direct my 

personal representative to give an additional gift from my probate estate 

so that the total gift to my church will equal exactly 10% of my net estate. 

I specifically direct that this additional gift be made solely from 

distributions from my IRA account. 

• I give the remainder of my estate to my children. 

RESULT: 

• The $35,000 charitable gift pursuant to the beneficiary designation 

comes directly from the IRA and no part of that distribution is included in 

the estate’s taxable income. 

• Any additional amount given to the church from probate assets is 

probably subject to the proportionate share rule discussed above. If the 

IRA beneficiary designation is only slightly less than the total charitable 

gift, this accomplishes the primary goal of giving exactly 10% to charity 

and substantially increases the amount that is given from the taxable IRA. 

• Warning: attempts to get clever could yield results that don’t work as 

well as planned if the circumstances change or if the persons 

administrating the process don’t understand the plan properly or don’t 

implement the plan in as intended. 

Example G – Gift from Trust Income: Betty’s creates a trust that is designed to benefit 

both her son and her favorite charity. The trust owns the following assets that are likely 

to earn the following annual income: 

Value Estimated Income 

Bank C/D’s 500,000 10,000 

3M stock 400,000 12,000 

The trust provides that all ordinary income (i.e., interest on the bank C/D’s) is to 

be paid to the named charity annually. 

The trustee has discretion to pay to Betty’s surviving son, Bill, all other income 

and/or principal to meet Bill’s health, education, maintenance and support needs. 

15

RESULT: 

•Because the amount paid to the charity is directly tied to the income 

earned on the bank C/D’s, there is independent economic effect of this 

provision other than the tax consequences. The interest income that is 

paid to the charity annually will qualify for a charitable contribution 

deduction on the trust’s 1041 return. 

•All distributions that are paid to Bill will be deemed to come from the 

qualified dividends (which are taxed at a lower tax bracket) or from 

principal. 

•This accomplishes Betty’s goal of making gifts to her charity in a taxefficient 

manner and also creating a source of support for Bill. 

Example H – Gift From Estate Income (with maximum): Assume Betty wants to give 

$5,000 to her favorite charity after her death. Betty’s only assets are $1,000,000 of bank 

C/D’s. 

Betty’s will makes the following gifts: 

• I give all income earned (or received) by my estate to [favorite charity]. 

However, I direct that the maximum amount of this gift shall not exceed 

$5,000. 


RESULT: 

•If the total income received after the date of her death is at least $5,000, 

then the charity will receive the intended gift of $5,000 and the estate can 

credibly argue that the entire gift was made from income which will 

qualify for the charitable deduction on the estate’s 1041 return. 

Example I – Gift From Estate Income (with minimum): Assume Betty wants exactly 

10% of her estate to be given to her church after her death. Assume she owns the 

following assets: 


Betty’s will creates the following gifts: 

• I give all income earned by my estate to my church. If the total of this 

income is not at least equal to 10% of my net probate estate, I direct that 

an additional amount be given so that the total gift to my church will equal 

10% of my net probate estate. 


RESULT: 

•This gives all income to the church so arguably the distribution should 

qualify for a charitable contribution deduction on the estate’s 1041. But, 

under that formula, the church will receive exactly 10% of her estate 

16

($10,000) regardless of the actual amount of income earned. Does this 

meet the “independent economic effect” requirement? The IRS could 

argue that because the amount paid to the church does not change based 

upon the amount of income earned by the estate, there is no independent 

economic effect other than the tax consequences. This author has serious 

doubts regarding whether this provision would be honored. 

Note: This author could find no guidance on the amount of independent 

economic effect that was sufficient to meet this standard. Arguably, even a small 

independent economic effect could be created by creatively re-writing the will 

provision to read: 

Alternate #1: I give all income earned by my estate to my church. If the 

total of this income is not at least equal to 10% of my net probate estate, I 

give my church an additional amount equal to 99% of the difference 

between the income earned by my estate and 10% of my net probate 

estate. 

Under that provision, if the income earned by the estate is $3,000, then the 

supplemental gift will give $6,930 (99% of the shortfall) and the total gift 

will be $9,930. If the estate’s income is only $2,000, then the 

supplemental gift will be $7,920 and the total gift will be $9,920 ($10 

less). The gift to the charity was different because the income was lower. 

Is a $10 difference enough to create economic effect that is independent of 

the tax consequences? 

Alternate #2: I direct that my personal representative pay to [charity] all 

of the interest income earned or received from interest-bearing assets 

owned by my estate during administration. I direct my personal 

representative to invest estate assets to ensure that my estate will earn at 

least $4,900 of interest income to fund this gift. If the total interest income 

earned by my estate exceeds $5,000, then the maximum gift under this 

paragraph shall be capped at $5 ,000. 

Under each of these versions of the will, the total gift to the charity will 

vary (slightly) based upon the amount of income earned during estate 

administration. Are either of these alternatives enough to at least 

artificially create an independent economic effect other than the income 

tax consequences? 

17

III. DEDUCTION OF MORTGAGE INTEREST BY ESTATES & TRUSTS. 

A. Qualified Residence Interest. IRS Code §163 provides that: 

•Personal interest is not deductible by non-corporate taxpayers. See §163(h). 

•Qualified Residence Interest is deductible if it is paid on acquisition indebtedness 

or home equity debt secured by the taxpayer’s principal home or a second home. 

See §163(h)(3). 

•For estates or trusts, the mortgage interest is only deductible if the home 

continues to be the principal residence or a second residence of a person who is 

either a current beneficiary or a beneficiary of the residue of the estate or trust. 

See §163(h)(4)(D), RIA -5474.1. 

B. Investment Interest. Interest expense may be deductible as investment interest 

expense if the money was borrowed to purchase investment property (i.e., assets that 

generate interest, dividends, annuity or royalty income) but the investment interest 

deduction is limited to the amount of investment income earned (i.e, net interest, nonqualified 

dividends, annuity or royalty income). See Form 4952 and instructions for 

more details. 

C. Rental or Business Interest. If the interest expense relates to property that is used as 

rental property or is used in a trade or business, the interest is deductible within the rules 

for those activities. 

D. Estate Tax Deduction. Interest expense accrued prior to the date of death but paid 

after the date of death can be deducted as a debt of the decedent for estate tax purposes. 

See Form 706, Schedule K. 

E. No Income Tax Deduction By Estate. Unless one of the rules above is met, mortgage 

interest expense that is accrued and paid after the death (even otherwise deductible 

mortgage interest expense) is classified as personal interest and is not deductible as an 

estate administration expense on either Form 1041 or Form 706. 

IV. DEDUCTION OF OTHER POST-DEATH EXPENSES. 

A. General Rule: the decedent’s final income tax return (Form 1040) shows all income 

received prior to death (cash based, not accrual) and deductible expenses actually paid 

prior to death. 

B. Decedent’s Final Form 1040. Some post-death items can be retroactively included on 

the decedent’s final Form 1040: 

•Medical expenses (pre-death) if paid within one year of death; 

•Accrued but unpaid interest on U.S. Savings bonds (Rev. Rul. 68-145) can be 

accelerated onto decedent’s final income tax return; 

18

C. Form 706 Deductions. Some post-death costs and expenses can only be deducted on 

Form 706 (estate tax) and can not be taken on the Form 1041 (estate income tax): 

•Funeral; 

•Personal debts (credit card, personal loans, etc.) including accrued but unpaid 

interest expense to the date of death; 

•Medical expenses (unless deducted on decedent’s final 1040); 

•Charitable contributions of principal (any tangible property or gifts from 

principal) that are required by the will or trust; 

•Federal and state income taxes due on decedent’s final income tax return (Form 

1040). 

D. Form 1041 Deductions. Some items can only be deducted on the estate’s (or trust’s) 

income tax return, Form 1041: 

•Charitable contributions of post-death income earned by the estate (trust); 

•Investment advisor fees that are a routine part of owning the investment 

account(s) and are not administration expenses; 

E. Deduction By Beneficiary. Some items can only be deducted by the beneficiaries on 

their personal tax returns: 

•Non-cash contribution of clothes, furniture, etc. to Goodwill, DAV or other 

appropriate organization (unless the will/trust requires the charitable 

contribution). 

F. Deduction on 1041 or 706. Some costs can be deducted on either the Form 706 or 

Form 1041: 

•Administration expenses (attorney fees, personal representative or trustee fees, 

appraisers, tax preparation fees, etc.); 

•Real estate taxes accrued prior to death but paid after death; 

•Remember to include a statement with Form 1041 waiving the right to deduct 

these costs on Form 706. 

For these expenses, choose the tax return that will yield the most tax savings: 

•Estates with assets under $1,000,000 (no M706 required): it always best to 

deduct on Form 1041. 

•Estates with net taxable assets between $1,000,000 and $1,093,785: because of 

the 41% M706 tax bracket for estates in this range, it is usually best to deduct 

these costs on the Form M706; 

•Estates with net taxable assets over $1,093,785 which have net taxable income: 

because the marginal M706 bracket is likely to be lower than the estate’s income 

tax bracket, it is usually best to deduct these costs on Form 1041; 

19

•Estates with net taxable assets over $1,093,785 which do not have net taxable 

income: if the estate has no net taxable income, then there is likely no advantage 

of claiming the deduction on Form 1041, so it is usually better to claim the 

deduction on Form M706; 

•Estates with net taxable assets over $5,250,000 (which are subject to federal 

estate tax and don’t get the benefit of spousal portability): Because of the high 

estate tax bracket under Form 706 & M706, is is almost always better to claim the 

deduction on Form 706. 

Special acknowledgement and thanks is given to Janet Jamison (my cherished wife and 

law partner) for her extensive editing of these materials and to all of the members of the 

estates and trusts list-serv ( estate@lists.statebar.gen.mn.us ) for giving me ideas and 

inspiration for these materials and a forum to share ideas with esteemed peers. Any 

comments, questions or corrections to the material presented can be sent to me directly 

at Bryan@JamisonLaw.net. 

20

BONUS SESSION 

Gift Tax and some of its Estate Tax 

Ramifications 

Jennifer A. Lammers 

Terry L. Slye 

Briggs and Morgan PA 

Saint Paul 


05/20/13 HOUSE RESEARCH ANALYST JM CCR_ART_7 

1.1 

1.2 

ARTICLE 7 

ESTATE AND GIFT TAXES 

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Section 1. Minnesota Statutes 2012, section 270B.01, subdivision 8, is amended to read: 

Subd. 8. Minnesota tax laws. For purposes of this chapter only, unless expressly 

stated otherwise, "Minnesota tax laws" means: 

(1) the taxes, refunds, and fees administered by or paid to the commissioner under 

chapters 115B, 289A (except taxes imposed under sections 298.01, 298.015, and 298.24), 

290, 290A, 291, 292, 295, 297A, 297B, and 297H, or any similar Indian tribal tax 

administered by the commissioner pursuant to any tax agreement between the state and 

the Indian tribal government, and includes any laws for the assessment, collection, and 

enforcement of those taxes, refunds, and fees; and 

(2) section 273.1315. 

EFFECTIVE DATE. This section is effective for gifts made after December 31, 

2012. 

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Sec. 2. Minnesota Statutes 2012, section 270B.03, subdivision 1, is amended to read: 

Subdivision 1. Who may inspect. Returns and return information must, on request, 

be made open to inspection by or disclosure to the data subject. The request must be made 

in writing or in accordance with written procedures of the chief disclosure officer of the 

department that have been approved by the commissioner to establish the identification 

of the person making the request as the data subject. For purposes of this chapter, the 

following are the data subject: 

(1) in the case of an individual return, that individual; 

(2) in the case of an income tax return filed jointly, either of the individuals with 

respect to whom the return is filed; 

(3) in the case of a return filed by a business entity, an officer of a corporation, 

a shareholder owning more than one percent of the stock, or any shareholder of an S 

corporation; a general partner in a partnership; the owner of a sole proprietorship; a 

member or manager of a limited liability company; a participant in a joint venture; the 

individual who signed the return on behalf of the business entity; or an employee who is 

responsible for handling the tax matters of the business entity, such as the tax manager, 

bookkeeper, or managing agent; 

(4) in the case of an estate return: 

(i) the personal representative or trustee of the estate; and 

(ii) any beneficiary of the estate as shown on the federal estate tax return; 

Article 7 Sec. 2. 1


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(5) in the case of a trust return: 

(i) the trustee or trustees, jointly or separately; and 

(ii) any beneficiary of the trust as shown in the trust instrument; 

(6) if liability has been assessed to a transferee under section 270C.58, subdivision 

1, the transferee is the data subject with regard to the returns and return information 

relating to the assessed liability; 

(7) in the case of an Indian tribal government or an Indian tribal government-owned 

entity, 

(i) the chair of the tribal government, or 

(ii) any person authorized by the tribal government; and 

(8) in the case of a successor as defined in section 270C.57, subdivision 1, paragraph 

(b), the successor is the data subject and information may be disclosed as provided by 

section 270C.57, subdivision 4.; and 

(9) in the case of a gift return, the donor. 

EFFECTIVE DATE. This section is effective the day following final enactment. 

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Sec. 3. Minnesota Statutes 2012, section 289A.10, subdivision 1, is amended to read: 

Subdivision 1. Return required. In the case of a decedent who has an interest in 

property with a situs in Minnesota, the personal representative must submit a Minnesota 

estate tax return to the commissioner, on a form prescribed by the commissioner, if: 

(1) a federal estate tax return is required to be filed; or 

(2) the sum of the federal gross estate and federal adjusted taxable gifts made within 

three years of the date of the decedent's death exceeds $1,000,000. 

The return must contain a computation of the Minnesota estate tax due. The return 

must be signed by the personal representative. 

EFFECTIVE DATE. This section is effective for estates of decedents dying after 

December 31, 2012. 

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Sec. 4. Minnesota Statutes 2012, section 291.005, subdivision 1, is amended to read: 

Subdivision 1. Scope. Unless the context otherwise clearly requires, the following 

terms used in this chapter shall have the following meanings: 

(1) "Commissioner" means the commissioner of revenue or any person to whom the 

commissioner has delegated functions under this chapter. 

(2) "Federal gross estate" means the gross estate of a decedent as required to be valued 

and otherwise determined for federal estate tax purposes under the Internal Revenue Code. 

Article 7 Sec. 4. 2


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(3) "Internal Revenue Code" means the United States Internal Revenue Code of 

1986, as amended through April 14, 2011 January 3, 2013, but without regard to the 

provisions of sections 501 and 901 of Public Law 107-16, as amended by Public Law 

111-312, and section 301(c) of Public Law 111-312 section 2011, paragraph (f), of the 

Internal Revenue Code. 

(4) "Minnesota adjusted taxable estate" means federal adjusted taxable estate as 

defined by section 2011(b)(3) of the Internal Revenue Code, plus 

(i) the amount of deduction for state death taxes allowed under section 2058 of the 

Internal Revenue Code; 

(ii) the amount of taxable gifts, as defined in section 292.16, and made by the 

decedent within three years of the decedent's date of death; less 

(ii) (iii)(A) the value of qualified small business property under section 291.03, 

subdivision 9, and the value of qualified farm property under section 291.03, subdivision 

10, or (B) $4,000,000, whichever is less. 

(5) "Minnesota gross estate" means the federal gross estate of a decedent after (a) 

excluding therefrom any property included therein which has its situs outside Minnesota, 

and (b) including therein any property omitted from the federal gross estate which is 

includable therein, has its situs in Minnesota, and was not disclosed to federal taxing 

authorities. 

(6) "Nonresident decedent" means an individual whose domicile at the time of 

death was not in Minnesota. 

(7) "Personal representative" means the executor, administrator or other person 

appointed by the court to administer and dispose of the property of the decedent. If there 

is no executor, administrator or other person appointed, qualified, and acting within this 

state, then any person in actual or constructive possession of any property having a situs in 

this state which is included in the federal gross estate of the decedent shall be deemed 

to be a personal representative to the extent of the property and the Minnesota estate tax 

due with respect to the property. 

(8) "Resident decedent" means an individual whose domicile at the time of death 

was in Minnesota. 

(9) "Situs of property" means, with respect to: 

(i) real property, the state or country in which it is located; with respect to 

(ii) tangible personal property, the state or country in which it was normally kept or 

located at the time of the decedent's death or for a gift of tangible personal property within 

three years of death, the state or country in which it was normally kept or located when 

the gift was executed; and with respect to 

Article 7 Sec. 4. 3


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(iii) intangible personal property, the state or country in which the decedent was 

domiciled at death or for a gift of intangible personal property within three years of death, 

the state or country in which the decedent was domiciled when the gift was executed. 

For a nonresident decedent with an ownership interest in a pass-through entity 

with assets that include real or tangible personal property, situs of the real or tangible 

personal property is determined as if the pass-through entity does not exist and the real 

or tangible personal property is personally owned by the decedent. If the pass-through 

entity is owned by a person or persons in addition to the decedent, ownership of the 

property is attributed to the decedent in proportion to the decedent's capital ownership 

share of the pass-through entity. 

(10) "Pass-through entity" includes the following: 

(i) an entity electing S corporation status under section 1362 of the Internal Revenue 

Code; 

(ii) an entity taxed as a partnership under subchapter K of the Internal Revenue Code; 

(iii) a single-member limited liability company or similar entity, regardless of 

whether it is taxed as an association or is disregarded for federal income tax purposes 

under Code of Federal Regulations, title 26, section 301.7701-3; or 

(iv) a trust to the extent the property is includible in the decedent's federal gross estate. 

EFFECTIVE DATE. This section is effective for decedents dying after December 

31, 2012. 

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Subdivision 1. Tax amount. (a) The tax imposed shall be an amount equal to the 

proportion of the maximum credit for state death taxes computed under section 2011 of 

the Internal Revenue Code, but using Minnesota adjusted taxable estate instead of federal 

adjusted taxable estate, as the Minnesota gross estate bears to the value of the federal 

gross estate. The tax is reduced by: 

(1) the gift tax paid by the decedent under section 292.17 on gifts included in the 

Minnesota adjusted taxable estate and not subtracted as qualified farm or small business 

property; and 

(2) any credit allowed under subdivision 1c. 

(b) The tax determined under this subdivision must not be greater than the sum of 

the following amounts multiplied by a fraction, the numerator of which is the Minnesota 

gross estate and the denominator of which is the federal gross estate: 

(1) the rates and brackets under section 2001(c) of the Internal Revenue Code 

multiplied by the sum of: 

Article 7 Sec. 5. 4


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(i) the taxable estate, as defined under section 2051 of the Internal Revenue Code; plus 

(ii) adjusted taxable gifts, as defined in section 2001(b) of the Internal Revenue 

Code; less 

(iii) the lesser of (A) the sum of the value of qualified small business property 

under subdivision 9, and the value of qualified farm property under subdivision 10, or 

(B) $4,000,000; less 

(2) the amount of tax allowed under section 2001(b)(2) of the Internal Revenue 

Code; and less 

(3) the federal credit allowed under section 2010 of the Internal Revenue Code. 

(c) For purposes of this subdivision, "Internal Revenue Code" means the Internal 

Revenue Code of 1986, as amended through December 31, 2000. 


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Sec. 6. Minnesota Statutes 2012, section 291.03, is amended by adding a subdivision 

to read: 

Subd. 1c. Nonresident decedent tax credit. (a) The estate of a nonresident 

decedent that is subject to tax under this chapter on the value of Minnesota situs property 

held in a pass-through entity is allowed a credit against the tax due under this section 

equal to the lesser of: 

(1) the amount of estate or inheritance tax paid to another state that is attributable to 

the Minnesota situs property held in the pass-through entity; or 

(2) the amount of tax paid under this section attributable to the Minnesota situs 

property held in the pass-through entity. 

(b) The amount of tax attributable to the Minnesota situs property held in the 

pass-through entity must be determined by the increase in the estate or inheritance tax that 

results from including the market value of the property in the estate or treating the value 

as a taxable inheritance to the recipient of the property. 


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Subd. 8. Definitions. (a) For purposes of this section, the following terms have the 

meanings given in this subdivision. 

Article 7 Sec. 7. 5


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(b) "Family member" means a family member as defined in section 2032A(e)(2) of 

the Internal Revenue Code, or a trust whose present beneficiaries are all family members 

as defined in section 2032A(e)(2) of the Internal Revenue Code. 

(c) "Qualified heir" means a family member who acquired qualified property from 

upon the death of the decedent and satisfies the requirement under subdivision 9, clause 

(6) (7), or subdivision 10, clause (4) (5), for the property. 

(d) "Qualified property" means qualified small business property under subdivision 

9 and qualified farm property under subdivision 10. 

EFFECTIVE DATE. This section is effective retroactively for estates of decedents 

dying after June 30, 2011. 

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Subd. 9. Qualified small business property. Property satisfying all of the following 

requirements is qualified small business property: 

(1) The value of the property was included in the federal adjusted taxable estate. 

(2) The property consists of the assets of a trade or business or shares of stock or 

other ownership interests in a corporation or other entity engaged in a trade or business. 

The decedent or the decedent's spouse must have materially participated in the trade or 

business within the meaning of section 469 of the Internal Revenue Code during the 

taxable year that ended before the date of the decedent's death. Shares of stock in a 

corporation or an ownership interest in another type of entity do not qualify under this 

subdivision if the shares or ownership interests are traded on a public stock exchange at 

any time during the three-year period ending on the decedent's date of death. For purposes 

of this subdivision, an ownership interest includes the interest the decedent is deemed to 

own under sections 2036, 2037, and 2038 of the Internal Revenue Code. 

(3) During the taxable year that ended before the decedent's death, the trade or 

business must not have been a passive activity within the meaning of section 469(c) of the 

Internal Revenue Code, and the decedent or the decedent's spouse must have materially 

participated in the trade or business within the meaning of section 469(h) of the Internal 

Revenue Code, excluding section 469(h)(3) of the Internal Revenue Code and any other 

provision provided by United States Treasury Department regulation that substitutes 

material participation in prior taxable years for material participation in the taxable year 

that ended before the decedent's death. 

(4) The gross annual sales of the trade or business were $10,000,000 or less for the 

last taxable year that ended before the date of the death of the decedent. 

Article 7 Sec. 8. 6


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(4) (5) The property does not consist of cash or, cash equivalents, publicly traded 

securities, or assets not used in the operation of the trade or business. For property 

consisting of shares of stock or other ownership interests in an entity, the amount value of 

cash or, cash equivalents, publicly traded securities, or assets not used in the operation of 

the trade or business held by the corporation or other entity must be deducted from the 

value of the property qualifying under this subdivision in proportion to the decedent's 

share of ownership of the entity on the date of death. 

(5) (6) The decedent continuously owned the property, including property the 

decedent is deemed to own under sections 2036, 2037, and 2038 of the Internal Revenue 

Code, for the three-year period ending on the date of death of the decedent. In the case of 

a sole proprietor, if the property replaced similar property within the three-year period, 

the replacement property will be treated as having been owned for the three-year period 

ending on the date of death of the decedent. 

(6) A family member continuously uses the property in the operation of the trade or 

business for three years following the date of death of the decedent. 

(7) For three years following the date of death of the decedent, the trade or business 

is not a passive activity within the meaning of section 469(c) of the Internal Revenue Code, 

and a family member materially participates in the operation of the trade or business within 

the meaning of section 469(h) of the Internal Revenue Code, excluding section 469(h)(3) 

of the Internal Revenue Code and any other provision provided by United States Treasury 

Department regulation that substitutes material participation in prior taxable years for 

material participation in the three years following the date of death of the decedent. 

(8) The estate and the qualified heir elect to treat the property as qualified small 

business property and agree, in the form prescribed by the commissioner, to pay the 

recapture tax under subdivision 11, if applicable. 



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Subd. 10. Qualified farm property. Property satisfying all of the following 

requirements is qualified farm property: 

(1) The value of the property was included in the federal adjusted taxable estate. 

(2) The property consists of a farm meeting the requirements of agricultural land and 

is owned by a person or entity that is either not subject to or is in compliance with section 

500.24, and was classified for property tax purposes as the homestead of the decedent 

Article 7 Sec. 9. 7


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or the decedent's spouse or both under section 273.124, and as class 2a property under 

section 273.13, subdivision 23. 

(3) For property taxes payable in the taxable year of the decedent's death, the 

property is classified as class 2a property under section 273.13, subdivision 23, and is 

classified as agricultural homestead, agricultural relative homestead, or special agricultural 

homestead under section 273.124. 

(4) The decedent continuously owned the property, including property the decedent 

is deemed to own under sections 2036, 2037, and 2038 of the Internal Revenue Code, for 

the three-year period ending on the date of death of the decedent either by ownership of 

the agricultural land or pursuant to holding an interest in an entity that is not subject to 

or is in compliance with section 500.24. 

(4) A family member continuously uses the property in the operation of the trade or 

business (5) The property is classified for property tax purposes as class 2a property under 

section 273.13, subdivision 23, for three years following the date of death of the decedent. 

(5) (6) The estate and the qualified heir elect to treat the property as qualified farm 

property and agree, in a form prescribed by the commissioner, to pay the recapture tax 

under subdivision 11, if applicable. 



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Subd. 11. Recapture tax. (a) If, within three years after the decedent's death and 

before the death of the qualified heir, the qualified heir disposes of any interest in the 

qualified property, other than by a disposition to a family member, or a family member 

ceases to use the qualified property which was acquired or passed from the decedent 

satisfy the requirement under subdivision 9, clause (7); or 10, clause (5), an additional 

estate tax is imposed on the property. In the case of a sole proprietor, if the qualified heir 

replaces qualified small business property excluded under subdivision 9 with similar 

property, then the qualified heir will not be treated as having disposed of an interest in the 

qualified property. 

(b) The amount of the additional tax equals the amount of the exclusion claimed by 

the estate under subdivision 8, paragraph (d), multiplied by 16 percent. 

(c) The additional tax under this subdivision is due on the day which is six months 

after the date of the disposition or cessation in paragraph (a). 

Article 7 Sec. 10. 8


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Sec. 11. [292.16] DEFINITIONS. 

(a) For purposes of this chapter, the following definitions apply. 

(b) The definitions of terms defined in section 291.005 apply. 

(c) "Resident" has the meaning given in section 290.01, subdivision 7, paragraph (a). 

(d) "Taxable gifts" means: 

(1) the transfers by gift which are included in taxable gifts for federal gift tax 

purposes under the following sections of the Internal Revenue Code: 

(i) section 2503; 

(ii) sections 2511 to 2514; and 

(iii) sections 2516 to 2519; less 

(2) the deductions allowed in sections 2522 to 2524 of the Internal Revenue Code. 

EFFECTIVE DATE. This section is effective for taxable gifts made after June 

30, 2013. 

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Sec. 12. [292.17] GIFT TAX. 

Subdivision 1. Imposition. (a) A tax is imposed on the transfer of property by gift 

by any individual resident or nonresident in an amount equal to ten percent of the amount 

of the taxable gift. 

(b) The donor is liable for payment of the tax. If the gift tax is not paid when due, 

the donee of any gift is personally liable for the tax to the extent of the value of the gift. 

Subd. 2. Lifetime credit. A credit is allowed against the tax imposed under this 

section equal to $100,000. This credit applies to the cumulative amount of taxable gifts 

made by the donor during the donor's lifetime. 

Subd. 3. Out-of-state gifts. Taxable gifts exclude the transfer of: 

(1) real property located outside of this state; 

(2) tangible personal property that was normally kept at a location outside of the 

state on the date the gift was executed; and 

(3) intangible personal property made by an individual who is not a resident at 

the time the gift was executed. 


30, 2013. 



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Sec. 13. [292.18] RETURNS. 

(a) Any individual who makes a taxable gift during the taxable year shall file a gift 

tax return in the form and manner prescribed by the commissioner. 

(b) If the donor dies before filing the return, the executor of the donor's will or 

the administrator of the donor's estate shall file the return. If the donor becomes legally 

incompetent before filing the return, the guardian or conservator shall file the return. 

(c) The return must include: 

(1) each gift made during the calendar year which is to be included in computing the 

taxable gifts; 

(2) the deductions claimed and allowable under section 292.16, paragraph (d), 

clause (2); 

(3) a description of the gift, and the donee's name, address, and Social Security 

number; 

(4) the fair market value of gifts not made in money; and 

(5) any other information the commissioner requires to administer the gift tax. 


30, 2013. 

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Sec. 14. [292.19] FILING REQUIREMENTS. 

Gift tax returns must be filed by the April 15 following the close of the calendar 

year, except if a gift is made during the calendar year in which the donor dies, the return 

for the donor must be filed by the last date, including extensions, for filing the gift tax 

return for federal gift tax purposes for the donor. 


30, 2013. 

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Sec. 15. [292.20] APPRAISAL OF PROPERTY; DECLARATION BY DONOR. 

The commissioner may require the donor or the donee to show the property subject to 

the tax under section 292.17 to the commissioner upon demand and may employ a suitable 

person to appraise the property. The donor shall submit a declaration, in a form prescribed 

by the commissioner and including any certification required by the commissioner, that the 

property shown by the donor on the gift tax return includes all of the property transferred by 

gift for the calendar year and not deductible under section 292.16, paragraph (d), clause (2). 


30, 2013. 



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Sec. 16. [292.21] ADMINISTRATIVE PROVISIONS. 

Subdivision 1. Payment of tax; penalty for late payment. The tax imposed under 

section 292.17 is due and payable to the commissioner by the April 15 following the close 

of the calendar year during which the gift was made. The return required under section 

292.19 must be included with the payment. If a taxable gift is made during the calendar 

year in which the donor dies, the due date is the last date, including extensions, for filing 

the gift tax return for federal gift tax purposes for the donor. If any person fails to pay the 

tax due within the time specified under this section, a penalty applies equal to ten percent 

of the amount due and unpaid or $100, whichever is greater. The unpaid tax and penalty 

bear interest at the rate under section 270C.40 from the due date of the return. 

Subd. 2. Extensions. The commissioner may, for good cause, extend the time for 

filing a gift tax return, if a written request is filed with a tentative return accompanied by a 

payment of the tax, which is estimated in the tentative return, on or before the last day for 

filing the return. Any person to whom an extension is granted must pay, in addition to the 

tax, interest at the rate under section 270C.40 from the date on which the tax would have 

been due without the extension. 

Subd. 3. Changes in federal gift tax. If the amount of a taxpayer's taxable gifts 

for federal gift tax purposes, as reported on the taxpayer's federal gift tax return for any 

calendar year, is changed or corrected by the Internal Revenue Service or other officer 

of the United States or other competent authority, the taxpayer shall report the change or 

correction in federal taxable gifts within 180 days after the final determination of the change 

or correction, and concede the accuracy of the determination or provide a letter detailing 

how the federal determination is incorrect or does not change the Minnesota gift tax. Any 

taxpayer filing an amended federal gift tax return shall also file within 180 days an amended 

return under this chapter and shall include any information the commissioner requires. The 

time for filing the report or amended return may be extended by the commissioner upon due 

cause shown. Notwithstanding any limitation of time in this chapter, if, upon examination, 

the commissioner finds that the taxpayer is liable for the payment of an additional tax, the 

commissioner shall, within a reasonable time from the receipt of the report or amended 

return, notify the taxpayer of the amount of additional tax, together with interest computed 

at the rate under section 270C.40 from the date when the original tax was due and payable. 

Within 30 days of the mailing of the notice, the taxpayer shall pay the commissioner the 

amount of the additional tax and interest. If, upon examination of the report or amended 

return and related information, the commissioner finds that the taxpayer has overpaid the 

tax due the state, the commissioner shall refund the overpayment to the taxpayer. 



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Subd. 4. Application of federal rules. In administering the tax under this chapter, 

the commissioner shall apply the provisions of sections 2701 to 2704 of the Internal 

Revenue Code. The words "secretary or his delegate," as used in those sections of the 

Internal Revenue Code, mean the commissioner. 


30, 2013. 


SECTION 1 

Funding Education: The Gift of Opportunity 

Susan T. Bart 


Chicago, IL 


FUNDING EDUCATION: THE GIFT OF OPPORTUNITY 

Susan T. Bart 


I. Saving and Paying for Higher Education .............................................................................2 

A. Ways to Make Lifetime Gifts to Minors ..................................................................2 

B. Large Estates and Education Funding ......................................................................2 

II. Section 2503(e) Techniques .................................................................................................2 

A. Qualified Transfers ..................................................................................................3 

B. Prepayment of Tuition .............................................................................................3 

III. 

Crummey Trusts...................................................................................................................4 

A. Gift Tax Annual Exclusion ......................................................................................4 

B. Crummey Trusts for Single Beneficiary ..................................................................4 

C. Crummey Trusts for Multiple Beneficiaries ............................................................7 

D. Other Annual Exclusion Techniques .....................................................................11 

IV. 

GST Exempt Trusts............................................................................................................11 

V. Trust Provisions for Education ..........................................................................................13 

A. Education ...............................................................................................................13 

B. Education as Prerequisite to Trust Distribution .....................................................13 

VI. General Rules for 529 Accounts ........................................................................................14 

A. 529 Savings Accounts in General ..........................................................................14 

B. Statutory and Regulatory Background ...................................................................14 

C. Definitions..............................................................................................................16 

VII. Tax Basics of 529 Accounts ..............................................................................................18 

A. Income Taxation of 529 Savings Accounts ...........................................................18 

B. Gift Taxation of Section 529 Savings Accounts ....................................................19 

C. Estate Taxation of Section 529 Savings Accounts ................................................20 

VIII. Five-Year Election Issues ..................................................................................................22 

A. Split Gifts ...............................................................................................................22 

B. GST ........................................................................................................................22 

C. Minimum Contribution for Proration .....................................................................22 

D. Proration of Excess Over Annual Exclusions ........................................................23 

i

E. Five-Year Proration Required ................................................................................23 

F. Election ..................................................................................................................23 

G. Late Election ..........................................................................................................24 

H. Substantial Compliance .........................................................................................24 

I. Future Filing Requirements ...................................................................................24 

J. Second Five-Year Averaging Election ..................................................................24 

IX. Changing Investment Options ............................................................................................24 

A. Statutory Rule ........................................................................................................24 

B. Future Contributions ..............................................................................................24 

C. Existing Account ....................................................................................................24 

D. Account Aggregation .............................................................................................25 

E. Broad-Based Investment Strategy ..........................................................................25 

X. Rollovers ............................................................................................................................25 

A. Beneficiary Aggregation ........................................................................................25 

B. Rollover with Beneficiary Change .........................................................................26 

C. State Income Taxation ...........................................................................................26 

D. Withdrawal and Recontribution Not a Rollover ....................................................26 

XI. Qualified Withdrawals .......................................................................................................28 

XII. Changing the Designated Beneficiary ...............................................................................28 

A. Family Members ....................................................................................................28 

B. Who’s Not a Family Member? ..............................................................................29 

C. Income Tax Consequences ....................................................................................29 

D. Gift Tax and GST Tax Consequences ...................................................................29 

XIII. Annuity Taxation on Nonqualified Distributions ..............................................................31 

A. Earnings .................................................................................................................31 

B. Investment in the Account .....................................................................................31 

C. Earnings Ratio ........................................................................................................31 

D. Time of Determination ...........................................................................................32 

E. Tax as Ordinary Income .........................................................................................32 

F. Advance Notice ......................................................................................................32 

G. Aggregation of Distributions .................................................................................33 

H. Aggregation of Accounts .......................................................................................33 

I. Federal Penalty on Nonqualified Distributions ......................................................33 

ii

FUNDING EDUCATION: THE GIFT OF OPPORTUNITY 

by 

Susan T. Bart 


_________________________________________________ 

Abbreviations 

COA: cost of attendance 

Code: Internal Revenue Code 

Coverdell ESA: Coverdell education savings account 

DNI: distributable net income 

EFA: estimated financial assistance 

EFC: expected family contribution 

FAFSA: Free Application for Federal Student Aid 

GST: generation-skipping transfer 

MAGI: modified adjusted gross income 

QHEEs: Qualified higher education expenses 

QSTP: Qualified state tuition program 

QTP: Qualified tuition program 

UGMA: Uniform Gifts to Minors Act 

UTMA: Uniform Transfers to Minors Act 

_________________________________________________

I. Saving and Paying for Higher Education 

A. Ways to Make Lifetime Gifts to Minors. There are various ways to make 

lifetime gifts to minors, including gifts to be used to pay for higher education 

expenses. These include: 

 

 

 

 

 

 

 

 

 

 

 

direct payment of expenses 

direct gifts 

Uniform Transfers to Minors Act accounts 

2503(c) trusts 

Crummey trusts for a single beneficiary 

Crummey trusts for multiple beneficiaries 

non-Crummey trusts, including Health and Education Exclusion 

Trusts (“HEETs”) 

Coverdell education savings accounts 

529 prepaid tuition programs 

529 savings account programs 

529 savings accounts with trust wrappers 

B. Large Estates and Education Funding. Clients with large estates generally seek 

to move assets out of their estates tax efficiently. Grandparents may be more 

enthusiastic about making gifts for the benefit of their grandchildren if they 

believe that they will enable their grandchildren to obtain the best education 

money can buy. 

II. 

Section 2503(e) Techniques. Grandparents with large estates should pay their 

grandchildren’s tuition directly to remove assets from their estates at no transfer tax cost. 

Tuition payments for grandchildren also benefit children by relieving the children of the 

responsibility for paying for tuition. Where a beneficent grandparent, aunt or uncle 

cannot be found, a parent with a large estate should plan to pay tuition directly. Other 

funding for a beneficiary’s education should be structured taking into account the 

grandparent’s or parent’s intent to pay tuition directly. Paying $20,000 tuition per year 

for kindergarten through 12 th grade, and $45,000 per year for five years for an elite 

private college, would remove almost $500,000 from a grandparent’s estate. Multiply 

that by several grandchildren, and you have some impressive savings. 

2

A. Qualified Transfers. Certain “qualified transfers” are not treated as gifts and 

therefore do not count against the gift tax annual exclusion. “Qualified transfer” 

means 

any amount paid on behalf of an individual — 

(A) as tuition to an educational organization described in section 

170(b)(1)(A)(ii) for the education or training of such individual, or 

(B) to any person who provides medical care (as defined in section 

213(d)) with respect to such individual as payment for such medical care. 

Code § 2503(e). 

Section 2503(e) permits an individual to make unlimited payments for tuition as 

long as those payments are made directly to an educational organization described 

in section 170(b)(1)(A)(ii). 

1. Tuition. The exclusion applies only to tuition (full or part time) and does 

not apply to payments for books, room and board, or supplies. 

2. Educational Institution. The educational institution must be described in 

section 170(b)(1)(A)(ii), which requires that the organization (1) have the 

primary function of the presentation of formal instruction, (2) normally 

maintain a regular faculty and curriculum, and (3) have a regularly 

enrolled body of pupils or students in attendance at the place where its 

educational activities are regularly carried on. The school may be at any 

level, from nursery school to graduate level. Tuition at foreign schools 

also qualifies. Treas. Reg. § 25.2503-6(c), Example 1. 

3. GST Exclusion. The GST tax also does not apply to a transfer that 

qualifies for the section 2503(e) exclusion (direct payment of tuition or 

medical expenses). A gift at death or a distribution from a trust is not a 

generation-skipping transfer if the transfer, “if made inter vivos by an 

individual, would not be treated as a taxable gift by reason of section 

2503(e).” Code § 2611(b)(1); see also Priv. Ltr. Rul. 9823006 (June 5, 

1998). 

4. Gift to Trust Does Not Qualify. A gift to a trust that provides that the 

funds are to be used for tuition expenses incurred by the beneficiaries does 

not qualify because the transfer to the “trust is a completed gift for federal 

gift tax purposes and is not a direct transfer to an educational 

organization.” Treas. Reg. § 25.2503-6(c), Example 2; see also Priv. Ltr. 

Rul. 9823006 (June 5, 1998). 

B. Prepayment of Tuition. Prepayment of tuition may qualify for section 2503(e) 

treatment in certain circumstances. 

3

1. TAM 199941013. In Technical Advice Memorandum 199941013 (July 9, 

1999), a grandmother prepaid tuition for two grandchildren by making 

non-refundable payments directly to the educational institution. The 

Internal Revenue Service (IRS) ruled that the non-refundable tuition 

payments qualified for section 2503(e) treatment. However, section 

2503(e) might not apply to prepayments that are refundable if the student 

fails to attend, or drops out of, the particular school. Code § 2503(e)(2). 

2. Private Letter Ruling 200602002. In Private Letter Ruling 200602002, 

the donor prepaid tuition through grade 12 for six grandchildren. The 

agreements provided that the tuition payments were nonrefundable and 

would be forfeited in the event the respective grandchild ceases to attend 

school. The tuition payments qualified under section 2503(e) and were 

not generation-skipping transfers. 

III. 

Crummey Trusts. After taking advantage of the tuition exclusion, grandparents and 

parents with large estates will want to use their gift tax annual exclusions to transfer 

assets to children and grandchildren gift tax free. 

A. Gift Tax Annual Exclusion. An individual may give $14,000 per donee each 

year (for 2013) without incurring federal gift tax. Code § 2503(b)(2). If the 

donor’s spouse elects to split gifts under section 2513, the donor and the spouse 

may give a total of $28,000 per donee each year without incurring gift tax. The 

gift tax annual exclusion was originally $10,000 and is adjusted for inflation 

periodically in $1,000 increments. However, the gift tax annual exclusion does 

not apply to gifts of future interests in property. An unrestricted right to the 

immediate use, possession, or enjoyment of property or the income from property 

is a present interest in property. Treas. Reg. § 25.2503-3(b). “Future interest” 

includes interests or estates that are limited to commence in use, possession, or 

enjoyment at some future date or time. Treas. Reg. § 25.2503-3(a). 

B. Crummey Trusts for Single Beneficiary. A grandparent will generally establish 

a separate Crummey Trust for each grandchild so that contributions to the trust 

can qualify for the GST tax annual exclusion as well as the gift tax annual 

exclusion. A parent may sometimes prefer to establish a separate Crummey Trust 

for each child. If the parent wants to make certain that each child receives the 

same pecuniary benefit, regardless of the cost of their education, separate trusts 

are best. 

1. In General. A donor can establish a trust for a single beneficiary, giving 

the beneficiary a right to withdraw contributions to the trust when made 

(“Crummey powers”), at least up to the amount of the gift tax annual 

exclusion. See Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968). 

Typically the beneficiary has a testamentary power of appointment over 

the trust to prevent the lapse of the Crummey powers, to the extent the 

lapse in any year exceeds the greater of $5,000 or five percent of the trust 

assets each year, from being a completed gift from the beneficiary to the 

4

trust. If the beneficiary is a grandchild, the trust must be includible in the 

beneficiary’s estate to obtain the GST annual exclusion for trust 

contributions. 

A Crummey trust can be used for a minor or for an adult beneficiary. 

2. Distributions. The trustee, who should not be the donor, determines 

when distributions are appropriate, subject to the terms of the trust 

instrument. Distributions may be permitted under any distribution 

standard and for any purposes. 

The trust may, but need not, provide for mandatory distribution to the 

beneficiary at a particular point in time, such as when the beneficiary 

attains a certain age. Alternatively, the trust may last for the beneficiary’s 

life. Upon the beneficiary’s death, the trust may specify how trust assets 

are distributed. 

3. Taxation 

a. Gift Tax. Assuming that the donor does not retain any interest in 

or power over the trust, the donor’s contribution to the Crummey 

trust will be a completed gift. 

The Crummey power makes contributions to the trust gifts of 

present interests and therefore qualifies such gifts for the gift tax 

annual exclusion (assuming the Crummey power is properly 

drafted and administered). Crummey v. Comm’r, 397 F.2d 82 (9th 

Cir. 1968). 

The Crummey power is a general power of appointment. When 

the power lapses, its lapse is treated as a release of the power to the 

extent that the amount of the release exceeds in any year the 

greater of (a) $5,000 or (b) five percent of the value of the trust 

property subject to the release. Code § 2514(e). A release of a 

general power of appointment is treated as a gift to the other trust 

beneficiaries. Code § 2514(b). To prevent the lapse of the 

Crummey power from being a taxable gift from the beneficiary, 

the trust could give the beneficiary a testamentary power of 

appointment sufficient to prevent the gift from being “complete” 

for gift tax purposes. See, e.g., Pvt. Ltr. Rul. 9801025 (Sept. 30, 

1997). However, in order for the testamentary power of 

appointment to make the gift incomplete, the beneficiary must be 

the sole beneficiary of the trust during the beneficiary’s life. 

Alternatively, the trust could use “hanging powers,” which may 

prevent the lapse from exceeding the five and five amount in any 

year. (NOTE: The IRS has attempted to attack hanging powers in 

the past.) 

5

. Estate Tax. Assuming that the donor does not retain any interest 

in the trust or power over the trust, the trust assets will not be 

included in the donor’s estate. Thus the donor should not act as 

trustee. 

If the beneficiary has a general testamentary power of 

appointment, the trust assets will be included in the beneficiary’s 

estate. Code § 2041(a)(2). Also, if the beneficiary ever released a 

general power of appointment over the trust property (e.g., because 

the lapse of the Crummey power exceeded the five and five 

amount), a portion of the trust assets will be included in the 

beneficiary’s estate. Id. 

c. Generation-Skipping Transfer Tax. Assuming that the 

beneficiary is the sole beneficiary during the beneficiary’s life, and 

the trust assets will be included in the beneficiary’s estate, 

contributions to the trust will qualify for the GST annual exclusion. 

Code § 2642(c). (Although the beneficiary would become the 

transferor for GST tax purposes to the extent that the lapse of the 

beneficiary’s Crummey power in any year exceeds the greater of 

$5,000 or five percent of the trust assets, this does not create any 

problem if the trust will be included in the beneficiary’s estate in 

any event.) 

To the extent that contributions to the Crummey trust exceed the 

GST annual exclusion or do not qualify for the GST annual 

exclusion, if the beneficiary is a skip person, GST exemption will 

be automatically allocated to the transfer unless the donor elects 

out of automatic allocation. Code § 2632(b). 

d. Income Tax. Assuming that the trust is not a grantor trust, the 

beneficiary may be treated as the substantial owner of the trust for 

income tax purposes under section 678. The beneficiary will be 

treated as the owner under section 678 to the extent the beneficiary 

has an outstanding Crummey power over the trust. After the lapse 

of the Crummey power, the IRS takes the position that the lapse is 

equivalent to a release, and that therefore section 678 continues to 

apply. See, e.g., Pvt. Ltr. Rul. 9034004 (May 17, 1990). Some 

attorneys take the position that a lapse is not equivalent to a 

release, and that therefore section 678 ceases to apply after the 

lapse. 

Under some circumstances the Crummey trust could be a grantor 

trust with respect to income and/or principal. If the Crummey trust 

is a grantor trust, section 678 would not apply to tax trust income 

to the beneficiary, at least with respect to trust accounting income. 

6

Code § 678(b). There is an argument, however, that section 678(b) 

does not prevent application of section 678 to capital gains. 

To the extent the trust is not a grantor trust and section 678 does 

not apply, the trust will be treated as a separate taxpayer and taxed 

under the normal fiduciary income tax rules. 

4. Financial Aid. Generally, the beneficiary must report the present value of 

the trust as an asset, even if the beneficiary’s access to the trust is 

restricted. 

5. Advantages and Disadvantages 

a. Advantages 

(1) Transfers to the trust qualify for the gift and, depending on 

the terms of the trust, GST tax annual exclusions. 

(2) Distributions may be made for any purpose, and are not 

limited to education. 

(3) The assets can be held in trust for any term, including the 

beneficiary’s life. 

b. Disadvantages 

(1) Preparing Crummey notices can be burdensome. 

(2) Correct income tax treatment involves a degree of 

uncertainty. The income taxation of the trust can be 

complicated, although usually the trustee decides to treat 

the entire trust in one manner, rather than partially as a 

section 678 trust and partially as a separate taxpayer. 

(3) The beneficiary cannot be changed. 

C. Crummey Trusts for Multiple Beneficiaries. A parent may prefer to create a 

single trust for all children to share. A grandparent may prefer a shared trust for 

grandchildren if the grandparent will not otherwise be using his or her GST 

exemption and thus has GST exemption to assign to gifts to the trust. A spray 

trust works well where the grantor intends for the trust to fund a specific purpose, 

such as the education of all of the beneficiaries, before dividing into shares. A 

shared trust also finesses any inequality that may result if, because of birth order, 

some children receive more annual exclusion gifts than others. 

1. In General. A donor can establish a trust for multiple beneficiaries, 

giving each beneficiary a right to withdraw a portion of contributions to 

the trust each year, at least up to the amount of the gift tax annual 

7

exclusion. If contributions to the trust each year will exceed $5,000 per 

Crummey withdrawal beneficiary, hanging powers could be used to 

prevent the lapse of a Crummey power from being treated as a gift from 

the beneficiary to the trust. The trust may specify the purposes for which 

discretionary distributions can be made, may specify a point in time at 

which the trust should divide into separate trusts for the beneficiaries, and 

may also specify when the trustee must distribute the trust principal to the 

beneficiaries (for example, when each beneficiary attains a certain age). 

A spray Crummey trust can be used for minor and/or adult beneficiaries. 

2. Distributions. Distributions may be permitted under any distribution 

standard and for any purposes. 

The trustee, who should not be the donor, determines when distributions 

are appropriate, subject to the terms of the trust instrument. The trustee 

may have the power to make spray distributions among the beneficiaries. 

The trust may, but need not, provide for mandatory distributions to the 

beneficiaries at a particular point in time, such as when each beneficiary 

attains a certain age. Alternatively, the trust may last for the lives of the 

beneficiaries. 

Individuals may be given powers of appointment over the trust. 

3. Equalization. If a spray trust is used, but equality is or may be important, 

the trust could provide that distributions be treated as advancements. 

Alternatively, the Trustee could have discretion whether or not to treat a 

distribution as an advancement. 

a. Do an ancestor’s advancements count against a descendant’s 

share? 

b. Do a descendant’s advancements count against an ancestor’s 

share? 

c. Is imputed interest charged? 

d. Recordkeeping burden. 

4. Taxation 

a. Gift Tax. Assuming that the donor does not retain any interest in 

or power over the trust, the donor’s contribution to the spray 

Crummey trust will be a completed gift. 

The Crummey powers make contributions to the trust gifts of 

present interests and therefore qualify such gifts for the gift tax 

8

annual exclusion (assuming the Crummey power is properly 

drafted and administered). Crummey v. Comm’r, 397 F.2d 82 (9th 

Cir. 1968). 

The Crummey power is a general power of appointment. When 

the power lapses, its lapse is treated as a release of the power to the 

extent that the amount of the release exceeds in any year the 

greater of (a) $5,000 or (b) five percent of the value of the trust 

property subject to the release. Code § 2514(e). A release of a 

general power of appointment is treated as a gift to the other trust 

beneficiaries. Code § 2514(b). To prevent the lapse of the 

Crummey power from being a taxable gift from the beneficiaries, 

the trust could use “hanging powers,” which may prevent the lapse 

from exceeding the five and five amount in any year. 

b. Estate Tax. Assuming that the donor does not retain any interest 

in or power over the trust, the trust assets will not be included in 

the donor’s estate. Therefore, the donor should not act as trustee. 

If a beneficiary has a general testamentary power of appointment 

over a portion of the trust, a portion of the trust assets will be 

included in the beneficiary’s estate. Code § 2041(a)(2). Also, if a 

beneficiary ever released a general power of appointment over the 

trust property (e.g., because the lapse of a Crummey power 

exceeded the five and five amount), a portion of the trust assets 

will be included in the beneficiary’s estate. Id. 

c. Generation-Skipping Transfer Tax. Contributions to the trust 

will not qualify for the GST annual exclusion because there are 

multiple trust beneficiaries. Code § 2642(c). Section 

2642(c)(2)(A) requires that, in order to obtain a GST annual 

exclusion for a transfer in trust, “during the life of such individual, 

no portion of the corpus or income of the trust may be distributed 

to (or for the benefit of) any person other than such individual.” 

To the extent that a beneficiary has a Crummey power and the 

lapse of the Crummey power results in a completed gift from the 

beneficiary to the trust (i.e. the lapse in any year exceeds the 

greater of $5,000 or five percent of the trust property), the 

beneficiary becomes the transferor for GST tax purposes. Treas. 

Reg. § 26.2652-1(a)(5), Example 5 provides: 

Example 5. Effect of lapse of withdrawal right on identity 

of transferor. T transfers $10,000 to a new trust providing 

that the trust income is to be paid to T’s child, C, for C's 

life and, on the death of C, the trust principal is to be paid 

to T’s grandchild, GC. The trustee has discretion to 

9

distribute principal for GC’s benefit during C’s lifetime. C 

has a right to withdraw $10,000 from the trust for a 60-day 

period following the transfer. Thereafter, the power lapses. 

C does not exercise the withdrawal right. The transfer by T 

is subject to Federal gift tax because a gift tax is imposed 

under section 2501(a) (without regard to exemptions, 

exclusions, deductions, and credits) and, thus, T is treated 

as having transferred the entire $10,000 to the trust. On the 

lapse of the withdrawal right, C becomes a transferor to the 

extent C is treated as having made a completed transfer for 

purposes of chapter 12. Therefore, except to the extent that 

the amount with respect to which the power of withdrawal 

lapses exceeds the greater of $5,000 or 5% of the value of 

the trust property, T remains the transferor of the trust 

property for purposes of chapter 13. 

To the extent the donor is the transferor for GST tax purposes, if 

the trust is a skip person, GST exemption would automatically be 

allocated to transfers exceeding the annual exclusion unless the 

donor elects out of automatic exclusion. Code § 2632(b). If the 

trust is not a skip person, the donor could allocate GST exemption 

to transfers to the trust. 

d. Income Tax. Assuming that the trust is not a grantor trust, the 

beneficiaries may be treated as the substantial owners of the trust 

for income tax purposes under section 678. The beneficiaries will 

be treated as the owners under section 678 to the extent they have 

outstanding Crummey powers over the trust. 

After the lapse of a Crummey power, the Service takes the position 

that the lapse is equivalent to a release, and that therefore Section 

678 continues to apply. See, e.g., Pvt. Ltr. Rul. 9034004 (May 17, 

1990). Some attorneys take the position that a lapse is not 

equivalent to a release, and therefore section 678 ceases to apply 

after the lapse. 

Under some circumstances the spray Crummey trust could be a 

grantor trust with respect to income and/or principal. If the spray 

Crummey trust is a grantor trust, section 678 would not apply to 

tax trust income to the beneficiaries. Code § 678(b). There is an 

argument, however, that section 678(b) does not prevent 

application of section 678 to capital gains. 

To the extent the spray Crummey trust is not a grantor trust and 

section 678 does not apply, the trust will be treated as a separate 

taxpayer and taxed under the normal fiduciary income tax rules. 

10

5. Financial Aid. Generally, the beneficiary must report the present value of 

the trust as an asset, even if the beneficiary’s access to the trust is 

restricted. 

6. Advantages and Disadvantages 

a. Advantages 

(1) Transfers to the trust qualify for the gift tax annual 

exclusion. 

(2) Distributions may be made for any purpose, and are not 

limited to education. 

(3) The assets can be held in trust for any term, including the 

beneficiaries’ lives. 

(4) Because the trust is for multiple beneficiaries, the trustee 

may be given great flexibility in deciding when and to 

whom to make distributions. 

b. Disadvantages 

(1) Preparing Crummey notices can be burdensome. 

(2) Correct income tax treatment involves a degree of 

uncertainty. 

(3) Contributions do not qualify for the GST annual exclusion. 

Optimal use occurs when the trust is for the primary 

beneficiary of children and will likely be distributed to the 

children during their lives, or when the trust is for 

grandchildren, but the grantor is not otherwise planning to 

use the donor’s GST exemption and can therefore allocate 

GST exemption to the trust. 

D. Other Annual Exclusion Techniques. Although annual exclusion gifts to a 

minor could also be made to a Code section 2503(c) trust or to a Uniform 

Transfers to Minors Act account, both of these techniques require that the 

beneficiary receive, or at last have an opportunity to withdraw, the assets at age 

21. Providing unrestricted access to any significant assets at age 21 could 

adversely affect a beneficiary’s motivation to pursue an education and a 

productive career. 

IV. 

GST Exempt Trusts. A client with a large estate will also want to use his or her GST 

exemption to either pass assets to grandchildren, or to place assets in a GST Trust, in 

either case avoiding estate tax at the children’s deaths. A GST exempt trust can permit 

distributions to grandchildren and more remote descendants for education. The following 

11

sample trust language was used where there were many grandchildren of widely varying 

ages and it was important to make certain trust assets would be available for the 

education of all grandchildren. 

Basic Distributions. The Trustee may distribute any part or all of the net 

income and principal of the trust, up to a cumulative amount of $200,000 (as 

adjusted under this Article) for each grandchild of mine, to any one or more of my 

grandchildren (whenever born) in equal or unequal shares as the Trustee from 

time to time considers advisable for the education of such grandchildren at any 

level beyond secondary school. Any undistributed net income shall be added to 

the principal of the trust at least annually. Distributions for “education” may 

include: 

(a) tuition for a beneficiary’s education at any level beyond 

secondary school at an educational institution (including, without 

limitation, any university, college, junior college, trade school or 

vocational school); 

(b) reasonable expenses directly related to such education 

(including, without limitation, expenses of room and board, costs of books 

and supplies, and expenses of travel to and from such institution, but not 

including costs of other travel); 

(c) reimbursement to a beneficiary for amounts such 

beneficiary personally paid for such beneficiary’s education expenses 

described above; and 

(d) payments to a beneficiary to reimburse or provide for any 

income taxes the beneficiary must pay on account of trust distributions to 

the beneficiary (such payments, however, shall not be considered in 

applying the $200,000 limit on distributions). 

Supplemental Education Distributions. If and to the extent the Trustee at 

any time believes the primary purpose of the trust will not be jeopardized, the 

Trustee may distribute any part or all of the net income and principal of the trust 

to or for any one or more of my grandchildren as the Trustee from time to time 

considers advisable to provide supplemental funds for such educational purposes 

in excess of the $200,000 limit. 

* * * * * * * * * 

Inflation Adjustment. Notwithstanding any other provisions, the 

$200,000 basic limit on distributions shall be adjusted for 2014 and each 

subsequent calendar year by such sum as reflects increases in the cost of living 

since January 1, 2013. For this purpose, the increase in the cost of living shall be 

determined pursuant to the Consumer Price Index for Urban Consumers U.S. City 

Average All Items (1982-84=100), as published by the Bureau of Labor Statistics 

of the U.S. Department of Labor. If such index shall cease to be published, there 

12

shall be substituted such other index as the Trustee believes most nearly reflects 

the same information. The Trustee shall have discretion in making such 

adjustments to do whatever the Trustee reasonably believes carries out my intent, 

and shall not be accountable except for lack of good faith. 

Termination. When no living grandchild of mine is under age 30, the 

Trustee shall distribute remaining Trust assets in shares per stirpes to my then 

living descendants, treating my children as then deceased. 

V. Trust Provisions for Education 

A. Education 

1. “Education” includes all expenses incurred in educating an individual 

including, without limitation, expenses incurred in connection with such 

individual’s attendance at public or private elementary or secondary 

school, including instruction in music, performing arts, fine arts or other 

subjects; college, university, graduate, postgraduate and professional 

school; vocational or technical school; and such expenses shall include 

tuition, books, supplies, equipment (including a computer), fees, tutors and 

reasonable travel and living expenses. Education shall also be construed 

to include physical, occupational and speech therapy. 

2. Questions may arise about whether education includes dance lessons, adult 

non-degree classes, study abroad, a computer, books related to but not 

required for a course, and general reference books. 

3. In some cases the donor may wish to require that the student be making 

reasonable progress towards the degree or certification, or permit the 

trustee to set standards for grade point average or number of credit hours 

taken. 

4. If the donor desires a somewhat restrictive definition of “education,” the 

trust might refer to “qualified higher education expenses” as defined under 

section 529 of the Code or “qualified education expenses” as defined 

under section 530 of the Code. 

B. Education as Prerequisite to Trust Distribution 

Qualifying Beneficiary. For purposes of this instrument, a beneficiary 

shall be a “qualifying beneficiary”: 

(a) 

(b) 

so long as such beneficiary is under the age of fifteen years; or 

so long as such beneficiary is under the age of twenty-five years 

and is either (i) a full-time student in primary or secondary school, 

or (ii) making reasonable progress towards earning an 

undergraduate or graduate degree from an accredited college or 

13

university, or (iii) making reasonable progress towards completing 

a course of vocational, trade or technical training approved by the 

Trustee; or (iv) in the military; or 

(c) 

if such beneficiary is twenty-five years or older and if prior to 

attaining the age of twenty-five years such beneficiary 

(i) graduated from an accredited college or university, or 

(ii) honorably completed at least four years of military service, or 

(iii) completed a course of vocational, trade or technical training 

approved by the Trustee and has been employed full time and has 

been self-supporting for at least five years. 

VI. 

General Rules for 529 Accounts 

A. 529 Savings Accounts in General. A donor can establish a section 529 savings 

account under the qualified tuition program (“QTP”) of a particular state for a 

particular beneficiary and make contributions to the section 529 account. 

Depending upon the QTP, this may be done directly or through a broker or 

financial advisor. In most states the donor may select among different investment 

options. In some states the donor may receive a state income tax deduction. The 

section 529 account is invested by the state or an investment manager selected by 

the state, generally in a portfolio of mutual fund investments. The earnings on the 

section 529 account are not subject to income tax while held in the section 529 

account. The account owner of the section 529 account, usually the donor, can 

generally: 

 

 

 

 

 

approve or disapprove distributions to the beneficiary; 

change investment options to the extent permitted; 

rollover the account to another QTP; 

change the beneficiary; or 

withdraw the funds and get them back. 

The earnings on the account are not subject to federal income tax when qualified 

distributions are made from the section 529 account. The earnings portion of a 

qualified distribution is subject to state income tax in some states and exempt 

from state income tax in other states. A ten percent additional federal tax is 

imposed on the earnings portion of a distribution not used for qualified higher 

education expenses. Code § 529(c)(6); Code § 530(d)(4). 

B. Statutory and Regulatory Background 

1. Statutes. Section 529 was added to the Code by the Small Business Job 

Protection Act of 1996, and was later modified and expanded by the 

Taxpayer Relief Act of 1997, the 1998 Internal Revenue Service 

Restructuring and Reform Act and the Economic Growth and Tax Relief 

Reconciliation Act of 2001 (the “2001 Act”). 

14

2. Proposed Regulations. The IRS issued proposed regulations for section 

529 on August 24, 1998. Proposed regulations carry no legal weight as far 

as the courts are concerned, but the IRS takes the position that taxpayers 

may rely on proposed regulations. With respect to taxpayer and preparer 

penalties, proposed regulations are relevant in determining whether there 

is a “reasonable basis” or “substantial authority” for a position. Treas. 

Regs. §§ 1.6664-4; 1.6662-1(a). Thus in general a taxpayer is protected in 

following a proposed regulation, but may disregard a proposed regulation 

in favor of an alternative construction of the statute. 

3. Additional Guidance. The IRS has provided some additional guidance 

by Notices. 

a. Notice 2001-55 (2001-2 C.B. 299) dealt with guidance regarding 

the statutory restriction against investment direction. It permits 

changes of investment options without beneficiary changes with 

certain restrictions. 

b. Notice 2001-81 (2001-2 C.B. 617) provides guidance on 

recordkeeping, reporting and other requirements applicable to 

QTPs. 

4. Advance Notice of Proposed Rulemaking. An Advance Notice of 

Proposed Rulemaking on section 529 was published in the Federal 

Register on January 18, 2008 (“Advance Notice”). The rules tentatively 

proposed in the Advance Notice would generally become effective only 

after the effective date of final regulations and would apply prospectively. 

5. Abuse Concerns Articulated. In addition, the Pension Protection Act of 

2006 added a new Code Section 529(f) authorizing the Secretary of the 

Treasury to “prescribe such regulations as may be necessary or appropriate 

to carry out the purposes of this section and to prevent abuse of such 

purposes, including regulations under chapters 11, 12, and 13 of this title.” 

a. Thus when final regulations are issued they will be legislative 

regulations issued pursuant to a specific grant of authority from 

Congress, and as such will be entitled to deference unless the 

regulation is arbitrary, capricious, or manifestly contrary to the 

statute. See Chevron U.S.A., Inc. v. National Resources Defense 

Council, Inc., 467 U.S. 837 (1984). 

b. The Advance Notice presages an anti-abuse rule, which may be 

applied on a retroactive basis, that “will generally follow the steps 

in the overall transaction by focusing on the actual source of the 

funds for the contribution, the person who actually contributes the 

cash to the section 529 account, and the person who ultimately 

receives any distribution from the account.” The favorable tax 

15

treatment granted by section 529 will be denied if “it is determined 

that the transaction, in whole or in part, is inconsistent with the 

intent of section 529.” We can look forward to examples “that 

provide clear guidance to taxpayers about the types of transactions 

considered abusive.” 

C. Definitions 

1. Contributor or Donor. A “contributor” is the person who contributes 

money to a section 529 account. The contributor may, but need not, be the 

account owner. In gift tax parlance, the “contributor” is a “donor,” unless 

the contributor is also the beneficiary of the section 529 account, in which 

case there is no gift and therefore no donor. Section 529 uses both terms. 

2. Account Owner. “Account owner” is defined in the proposed regulations 

as the person who has certain rights over the section 529 account: 

Account owner means the person who, under the terms of the 

QSTP or any contract setting forth the terms under which 

contributions may be made to an account for the benefit of a 

designated beneficiary, is entitled to select or change the 

designated beneficiary of an account, to designate any person other 

than the designated beneficiary to whom funds may be paid from 

the account, or to receive distributions from the account if no such 

other person is designated. 

Prop. Treas. Reg. § 1.529-1(c). The account owner may also be the 

designated beneficiary. 

3. Designated Beneficiary. The “designated beneficiary” is the person who 

can receive qualified distributions from the section 529 account. The 

designated beneficiary must be an individual. Code § 529(e)(1). 

4. Eligible Educational Institution. An “eligible educational institution” 

means “an institution which is described in section 481 of the Higher 

Education Act of 1965 (20 U.S.C. 1088) as in effect on [August 5, 1997], 

and which is eligible to participate in a program under title IV of such 

Act.” § 529(e)(5). The defining feature of an “eligible educational 

institution” is that it must be eligible to participate in Department of 

Education student aid programs. Id. The proposed regulations add: 

Such institutions generally are accredited post-secondary 

educational institutions offering credit toward a bachelor’s degree, 

an associate’s degree, a graduate level or professional degree, or 

another recognized post-secondary credential. Certain proprietary 

institutions and post-secondary vocational institutions also are 

eligible institutions. 

16

Prop. Treas. Reg. § 1.529-1(c). 

Institutions abroad may be eligible educational institutions. To verify that 

a U.S. or foreign school is an “eligible educational institution,” visit the 

U.S. Department of Education Federal School Code Search Page at: 

www.fafsa.ed.gov/FOTWWebApp/FSLookupServlet. 

5. Qualified Higher Education Expenses. Qualified higher education 

expenses (“QHEEs”) are “(i) tuition, fees, books, supplies, and equipment 

required for the enrollment or attendance of a designated beneficiary at an 

eligible educational institution; and (ii) expenses for special needs services 

in the case of a special needs beneficiary which are incurred in connection 

with such enrollment or attendance.” Code § 529(e)(3)(A); Prop. Treas. 

Reg. § 1.529-1(c). 

a. Required. If an expenditure is required by the school’s catalogue 

or included in the school’s “cost of attendance” for financial aid 

purposes, it should be a QHEE. 

b. Room and Board. Qualified higher education expenses also 

include room and board for students who are enrolled in a degree 

certificate or other program leading to a recognized educational 

credential and carrying at least half the normal full-time work load 

for the course of study being pursued. Code § 529(e)(3)(B); Prop. 

Treas. Reg. § 1.529-1(c). However, section 529 limits the amount 

allowable: 

The amount treated as qualified higher education expenses 

. . . shall not exceed (I) the allowance (applicable to the 

student) for room and board included in the cost of 

attendance (as defined in section 472 of the Higher 

Education Act of 1965 (20 U.S.C. 1087ll), as in effect on 

the date of the enactment of the Economic Growth and Tax 

Relief Reconciliation Act of 2001) [June 7, 2001] as 

determined by the eligible educational institution for such 

period, or (II) if greater, the actual invoice amount the 

student residing in housing owned or operated by the 

eligible educational institution is charged by such 

institution for room and board costs for such period. 

Code § 529(e)(3)(B)(ii). 

c. Computer and Internet. The American Recovery and 

Reinvestment Act of 2009 (the “Act”) temporarily expanded the 

definition of QHEEs to include computer technology and 

equipment, and Internet access and related services, if such 

technology equipment or services are to be used by the beneficiary 

17

and the beneficiary’s family during any of the years the beneficiary 

is enrolled at an eligible educational institution. This expansion 

applied only to expenses paid or incurred during 2009 or 2010 and 

is not currently in effect. 

d. Transportation. The cost of transportation to and from school is 

not a QHEE. 

e. Student Loans. The repayment of student loans is not a QHEE. 

f. Special Needs Expenses. Expenses necessary to permit a special 

needs beneficiary to attend an eligible educational institution are 

QHEEs. 

g. QTP Contributions. QHEEs include contributions to a QTP. 

h. Coverdell ESA Contributions. QHEEs include contributions to a 

Coverdell ESA. 

VII. 

Tax Basics of 529 Accounts 

A. Income Taxation of 529 Savings Accounts 

1. Contributions 

a. No Federal Deduction. Contributions to a section 529 account 

are not deductible for federal income tax purposes. 

b. State Deductions. In some states, contributions are deductible for 

state income tax purposes, often subject to a cap and sometimes a 

carryforward is permitted for contributions in excess of the cap. 

Generally deductions are permitted only for contributions to the 

QTP in the taxpayer’s state of residence. In some states, only 

contributions by the account owner (or the account owner’s spouse 

or the beneficiary’s parent, depending upon the state) are 

deductible. 

2. Federal Income Tax Exemption. The income earned on a section 529 

account and distributions from a section 529 account are not subject to 

federal income tax, provided they are used to pay QHEEs at an eligible 

educational institution (“qualified distributions”). Code § 529(a); Code 

§ 529(c). 

3. State Taxation of Account. Some states base the state income tax on 

federal taxable income, federal adjusted gross income or federal tax 

liability. In these states, the annual income earned on a section 529 

account and qualified distributions should not be subject to state income 

tax (absent a special provision in state law subjecting it to income tax). In 

18

states that do not base their income tax on federal income concepts, the 

taxation of annual income and qualified distributions would be determined 

on a state-by-state basis. 

4. Annual Taxation on Nonqualified Distributions. Section 529(c)(3)(A) 

provides that any distribution under a qualified tuition program shall be 

includible in the gross income of the distributee in the manner as provided 

under Code section 72 to the extent not excluded from gross income 

because it is a qualified distribution. Subject to sections 72(e)(2)(B) and 

72(e)(9), distributions are treated as consisting of two components: 

1) principal or contributions, which are generally not taxed, and 

2) earnings, which may be subject to tax. Code §§ 72(e)(2)(B) and (e)(9). 

a. Distributee’s Tax Rate. Nonqualified distributions are taxed at 

the distributee’s tax rate. 

b. Losses. If a nonqualified distribution is taken from an account that 

has a loss, the distributee can claim the loss as a miscellaneous 

itemized deduction. 

5. Federal Penalty on Nonqualified Distributions. Section 529 imposes a 

ten percent federal penalty on the earnings portion of a nonqualified 

distribution. Code § 529(c)(6). The federal penalty works in the same 

manner as the penalty for nonqualified distributions from a Coverdell 

Education Savings Account under section 530(d)(4). 

B. Gift Taxation of Section 529 Savings Accounts 

1. No Section 2503(e) Exclusion. Contributions to section 529 accounts 

after August 5, 1997 do not qualify for the tuition exclusion from gift tax 

under section 2503(e). 

2. Gift Tax Annual Exclusion. Contributions to a section 529 account are 

treated as completed present interest gifts from the donor to the 

beneficiary. Code § 529(c)(2)(A)(i); Prop. Treas. Reg. § 1.529-5(b)(1). 

The account owner is able to take advantage of the annual exclusions 

while still retaining the rights to revoke the account, to control 

distributions and to change the beneficiary of the account. Prop. Treas. 

Reg. § 1.529, Comment at paragraph [29]. 

3. GST Annual Exclusion. The portion of a contribution excludible from 

taxable gifts under section 2503(b) also satisfies the requirements of 

section 2642(c)(2) and, therefore, is also excludible for purposes of the 

generation-skipping transfer tax imposed under section 2601. Prop. Treas. 

Reg. § 1.529-5(b). 

4. Five-Year Election. Section 529 provides that a donor can elect to have 

contributions to an account treated as if made ratably over five years 

19

eginning with the year of the contribution. Code § 529(c)(2)(B); Prop. 

Treas. Reg. § 1.529-5(b)(2). That means the donor can contribute $70,000 

in 2013 without incurring gift tax or, presumably, GST tax. Section 

529(c)(2) provides: 

(2) GIFT TAX TREATMENT OF CONTRIBUTIONS. – For 

purposes of chapters 12 and 13 – 

(A) IN GENERAL. – Any contribution to a 

qualified tuition program on behalf of any designated 

beneficiary – 

(i) shall be treated as a completed gift to 

such beneficiary which is not a future interest in 

property, and 

(ii) shall not be treated as a qualified 

transfer under section 2503(e). 

(B) TREATMENT OF EXCESS CONTRIBUTIONS. – If 

the aggregate amount of contributions described in 

subparagraph (A) during the calendar year by a donor 

exceeds the limitation for such year under section 2503(b), 

such aggregate amount shall, at the election of the donor, 

be taken into account for purposes of such section ratably 

over the 5-year period beginning with such calendar year. 

The donor can make the election for some beneficiaries but not others. 

The instructions to the gift tax return (2012) state, “You can make this 

election for as many separate people as you made QTP contributions.” 

C. Estate Taxation of Section 529 Savings Accounts 

1. Exclusion from Donor’s Estate. Except as provided below with respect 

to the five-year averaging election, the value of a section 529 account will 

not be included in the gross estate of the account owner for federal estate 

tax purposes. Code § 529(c)(4)(A). 

2. Five-Year Spread. A donor electing the five-year spread must survive 

into the fifth year (but not to the end of the fifth year) to have the entire 

amount of contributions excluded from his or her estate. Code 

§ 529(c)(4)(C); Prop. Treas. Reg. § 1.529-5(d)(2). Section 529(c)(4)(A) 

provides “No amount shall be includible in the gross estate of any 

individual for purposes of chapter 11 by reason in an interest of a qualified 

tuition program.” Section 529(c)(4)(C), however, provides that “In the 

case of a donor who makes the election described in paragraph (2)(B) and 

who dies before the close of the 5-year period referred to in such 

paragraph, notwithstanding subparagraph (A), the gross estate of the donor 

20

shall include the portion of such contributions properly allocable to 

periods after the date of the death of the donor.” 

3. Inclusion in Beneficiary’s Estate. Section 529 cryptically says that 

amounts distributed on account of the death of a beneficiary are subject to 

estate tax, without defining what is meant by “distributed.” The 

legislative history and the proposed regulations suggest that the value of 

any interest in a section 529 savings account will be includible in the 

estate of a deceased beneficiary. This position does not make sense 

because the beneficiary does not have any control over the account and the 

beneficiary’s estate will not necessarily receive the account funds. The 

Advance Notice proposes five rules: 

Rule 1. If the [Account Owner] distributes the entire 

section 529 account to the estate of the deceased [Designated 

Beneficiary] within 6 months of the death of the [Designated 

Beneficiary], the value of the account will be included in the 

deceased [Designated Beneficiary’s] gross estate for Federal estate 

tax purposes. 

Rule 2. If a successor [Designated Beneficiary] is named in 

the section 529 account contract or program and the successor 

[Designated Beneficiary] is a member of the family of the 

deceased [Designated Beneficiary] and is in the same or a higher 

generation (as determined under section 2651) as the deceased 

[Designated Beneficiary], the value of the account will not be 

included in the gross estate of the deceased [Designated 

Beneficiary] for Federal estate tax purposes. 

Rule 3. If no successor [Designated Beneficiary] is named 

in the section 529 account contract or program, but the [Account 

Owner] names a successor [Designated Beneficiary] who is a 

member of the family of the deceased [Designated Beneficiary] 

and is in the same or a higher generation (as determined under 

section 2651) as the deceased [Designated Beneficiary], the value 

of the account will not be included in the gross estate of the 

deceased [Designated Beneficiary] for Federal estate tax purposes. 

Rule 4. If no successor [Designated Beneficiary] is named 

in the section 529 account contract or program, and the [Account 

Owner] does not name a new [Designated Beneficiary] but instead 

withdraws all or part of the value of the account, the [Account 

Owner] will be liable for the income tax on the distribution, and 

the value of the account will not be included in the gross estate of 

the deceased [Designated Beneficiary] for Federal estate tax 

purposes. 

21

Rule 5. If, by the due date for filing the deceased 

[Designated Beneficiary’s] estate tax return, the [Account Owner] 

has allowed funds to remain in the section 529 account without 

naming a new [Designated Beneficiary], the account will be 

deemed to terminate with a distribution to the [Account Owner], 

and the [Account Owner] will be liable for the income tax on the 

distribution. The value of the account will not be included in the 

gross estate of the deceased [Designated Beneficiary] for Federal 

estate tax purposes. 

VIII. 

Five-Year Election Issues 

A. Split Gifts. Gift-splitting is permitted, so a married donor can contribute up to 

ten times the annual exclusion amount ($140,000 in 2013) per beneficiary in a 

single year without incurring gift tax or GST tax. Prop. Treas. Reg. § 1.529- 

5(b)(2). However, if gift-splitting is elected, both spouses must make the election 

on their respective returns. The Advance Notice states: 

Rule 3. The election may be made by a donor and the donor’s spouse with 

respect to a gift considered to be made one-half by each spouse under 

section 2513. 

The instructions to the gift tax return (2012) state: “If you are electing gift 

splitting, apply the gift splitting rules before applying the QTP rules. Each spouse 

would then decide individually whether to make this QTP election.” Applying 

the gift splitting rules first is consistent with the IRS’s position (informal at this 

point) that if one spouse dies during the five-year period, only that spouse’s 

portion of the gift is brought back into the estate. 

B. GST. The reference in the introductory phrase of section 529(c)(2) to chapter 13 

(the GST rules) would seem to suggest that section 529(c)(2)(A) is intended to 

make clear that contributions to a 529 account qualify for the GST annual 

exclusion as well as the gift tax annual exclusion and that the five-year election 

operates for purposes of both GST tax and gift tax. The proposed regulations 

state that the “portion of a contribution excludible from taxable gifts under section 

2503(b) also satisfies the requirements of section 2642(c)(2) and, therefore, is also 

excludible for purposes of the generation-skipping transfer tax imposed under 

section 2601.” Prop. Treas. Reg. § 1.529-5(b)(1). However, the proposed 

regulations do not specifically state that to the extent the five-year election is 

made, the GST annual exclusion applies to the contributions attributed to all five 

years. The new proposed regulations should clarify this point. 

C. Minimum Contribution for Proration. Section 529(c)(2)(B) permits the fiveyear 

election when the “aggregate amount of contributions” to a 529 account on 

behalf of any designated beneficiary “exceeds the limitation for such year under 

section 2503(b).” If P makes an outright gift to C on January 1, 2012 of $5,000, 

and then on June 1, 2012 makes a gift of $10,000 to a section 529 account for C, 

22

can P make the five-year election over the $10,000 gift to avoid a taxable gift for 

2012? In other words, does the 2503(b) limitation for such year mean $13,000, or 

$13,000 less any annual exclusion gifts made to such beneficiary earlier in the 

year? The instructions to the gift tax return (2012) take the former position: “If 

in 2012, you contributed more than $13,000 to a Qualified Tuition Plan (QTP) on 

behalf of any one person, you may elect to treat up to $65,000 of the contribution 

for that person as if you had made it ratably over a 5-year period.” 

D. Proration of Excess Over Annual Exclusions. If the gift equals or is less than 

five times the annual exclusion amount, and the election is made, the donor 

reports one-fifth of the total contribution on the initial return, and one-fifth is 

attributed to each of the next four years. If the gift exceeds five times the annual 

exclusion, it is not clear when the excess should be reported. Section 

529(e)(2)(B) appears to require that the entire gift, including any excess over five 

times the annual exclusion, be reported ratably over the five-year period. The 

Proposed Regulations and instructions to Form 709 (2012), however, require that 

the excess be reported as a taxable gift in the first year. Prop. Treas. Reg. 

§ 1.529-5(b)(2). The Advance Notice also takes this position: 

Rule 2. The election applies to contributions to a section 529 

account on behalf of a [Designated Beneficiary] during a calendar year 

that exceed the gift tax exclusion amount for that year whether or not in 

excess of five times the exclusion amount for the year. Any excess may 

not be taken into account ratably and is treated as a taxable gift in the 

calendar year of the contribution. . . . 

The Advance Notice also provides two examples for the application of Rule 2. 

E. Five-Year Proration Required. The donor does not have the option to prorate 

the gift over a lesser number of years. For example, if the donor contributes 

$28,000 in 2013 and makes the election, the donor will be treated as making a 

$5,600 annual exclusion gift in each of years 2013-2017. The donor cannot elect 

to treat the gift as if it were two $14,000 gifts in 2013 and 2014. Alternatively, 

the five-year election could be made over a portion of the gift. If the five-year 

election was made over $19,000 of the gift, $3,800 would be attributed to 2013. 

The gifts for 2013 would be $12,800 (the $9,000 portion over which no election 

was made plus $3,800). 

F. Election. The donor must make the “five-year averaging” election on the Form 

709 gift tax return. 

1. Check Box. Form 709, Schedule A, Question B has a box to check if you 

elect to treat transfers to a section 529 account as made ratably over five 

years. Question B states: “Check here if you elect under section 

529(c)(2)(B) to treat any transfers made this year to a qualified state 

tuition program as made ratably over a 5-year period beginning this year. 

See instructions. Attach explanation.” 

23

2. Attach Explanation. An explanation must be attached to the gift tax 

return that includes the following: (1) total amount contributed per 

beneficiary; (2) the amount for which the election is being made; and (3) 

the name of the individual for whom the contribution was made. 

G. Late Election. The Advance Notice permits a late election if no prior gift tax 

return has been filed for the year. 

Rule 1. The election must be made on the last United States Gift 

(and Generation-Skipping Transfer) Tax Return (Form 709) filed on or 

before the due date of the return, including extensions actually granted, or, 

if a timely return is not filed, on the first gift tax return filed by the donor 

after the due date. The election, once made, will be irrevocable, except 

that it may be revoked or modified on a subsequent return that is filed on 

or before the due date, including extensions actually granted. 

H. Substantial Compliance. If the donor fails to check the appropriate box on Form 

709 to elect five-year averaging, relief may still be granted for substantial 

compliance if the return otherwise indicates that the donor intended to make the 

election. 

I. Future Filing Requirements. If in any of the four years following the election 

the taxpayer is not otherwise required to file Form 709, the taxpayer does not 

need to file Form 709 to report the prorated portion of the gift attributable to that 

year. 

J. Second Five-Year Averaging Election. It is unclear whether a second election 

can be made with respect to another contribution during the five-year period. An 

example in the proposed regulations could be read to suggest no, but there appears 

to be no reason to prohibit a second election. 

IX. 

Changing Investment Options 

A. Statutory Rule. Section 529(b)(4) provides: “A program shall not be treated as 

a qualified tuition program unless it provides that any contributor to, or 

designated beneficiary under, such program may not directly or indirectly direct 

the investment of any contribution to the program (or any earnings therein).” 

B. Future Contributions. The account owner should be able, at any time, to 

designate a different investment option for future contributions without violating 

the section 529(b)(4) prohibition against participating in investment decisions. 

C. Existing Account. Notice 2001-55 stated: 

The Internal Revenue Service and the Treasury Department 

recognize that there are a number of situations that might warrant a change 

in the investment strategy with respect to a §529 account. Accordingly, 

the Internal Revenue Service and the Treasury Department expect that the 

24

final regulations under §529 will provide that a program does not violate 

§529(b)(5) if it permits a change in the investment strategy selected for a 

§529 account once per calendar year and upon a change in the designated 

beneficiary of the account. It is expected that the final regulations will 

also provide that, to qualify under this special rule, a program must 

(1) allow participants to select only from among broad-based investment 

strategies designed exclusively by the program; and (2) establish 

procedures and maintain appropriate records to prevent a change in 

investment options from occurring more frequently than once per calendar 

year or upon a change in the designated beneficiary of the account. 

D. Account Aggregation. The final regulations should state the extent to which 

accounts will be aggregated for purposes of applying this rule. Because it may be 

impractical to coordinate investment changes in accounts in different QTPs to 

occur on the same day, and impractical for different account owners with 

accounts for the same beneficiary to coordinate investment changes so that they 

occur on the same day, any aggregation rule should only apply to accounts in the 

same QTP with the same account owner and the same beneficiary. 

E. Broad-Based Investment Strategy. Under Notice 2001-55, annual investment 

changes are permitted only if the program allows participants to select only from 

among “broad-based investment strategies.” In the Notice “broad-based 

investment strategy” is not defined. Presumably most mutual funds will qualify. 

Favorable private letter rulings have been issued to programs that offer the choice 

of investing in mutual funds. However, a mutual fund consisting of an investment 

in one stock should not qualify. 

X. Rollovers. Most states allow an account owner to switch to another state’s program by 

making a rollover. Under the 2001 Act, beginning in 2002 the account owner no longer 

needs to change the beneficiary in order to roll over an account from one state to another 

without being treated as having made a nonqualified distribution. Any rollover from one 

state program to another must take place within 60 days of the distribution, or it will be 

treated as a nonqualified distribution. However, a rollover is permitted only once in any 

given twelve-month period for a beneficiary. Section 529(c)(3)(C)(iii) states that section 

529(c)(3)(C)(i)(I) (permitting a rollover without changing the beneficiary) “shall not 

apply to any transfer if such transfer occurs within 12 months from the date of a previous 

transfer to any qualified tuition program for the benefit of the designated beneficiary.” 

A. Beneficiary Aggregation. The once-every-12-months limitation is a 

per-beneficiary limitation, not a per-account limitation. Thus if there are multiple 

section 529 accounts for the same beneficiary and one is rolled over, a rollover of 

any other section 529 account for the same beneficiary within the following 12 

months would be a nonqualified distribution. An account owner could roll over a 

section 529 account for a beneficiary without realizing that a section 529 account 

for the same beneficiary, but with a different account owner, had been rolled over 

within 12 months. 

25

It is impossible for an account owner of an account for a given beneficiary to 

know whether other accounts with different account owners exist for such 

beneficiary, much less whether any such accounts have been rolled over during 

the past twelve months. Therefore, the final regulations should make clear that 

section 529(c)(3)(C)(iii) applies only if the particular account owner rolled over 

the same or another account for the beneficiary within the last twelve months. 

Accounts for the same beneficiary that have different account owners should not 

be aggregated for this purpose. 

B. Rollover with Beneficiary Change. A rollover to another state plan can still be 

made at any time without adverse tax consequences if (a) the beneficiary is 

changed, (b) the new beneficiary is a member of the family of the old beneficiary 

and (c) the new beneficiary is not in a younger generation than the old 

beneficiary. Code § 529(c)(3)(C)(i)(II). 

C. State Income Taxation 

1. Outgoing Rollover: Income Tax Deduction Recapture. In some states, 

if a state income tax deduction was received for a contribution to a section 

529 savings account and the account is then rolled over to a different state, 

the income tax deduction would be recaptured. In some states recapture 

applies only if the rollover occurs within a specific period of time after 

opening the account. How the recapture is calculated if not all 

contributions to the account qualified for the deduction may vary from 

state to state. 

2. Outgoing Rollover: Nonqualified Withdrawal Treatment. In some 

states, outgoing rollovers will be treated as nonqualified withdrawals for 

state income tax purposes. 

3. Incoming Rollovers: Income Tax Deduction. In some states, rollover 

contributions (or at least the principal portion of the rollover), as well as 

original contributions, to the state program might qualify for the state 

income tax deduction. In other states rollover contributions do not qualify 

for the state income tax deduction or are only deductible if not previously 

deducted. 

D. Withdrawal and Recontribution Not a Rollover. A recent United States Tax 

Court case illustrates how easy it is to violate unintentionally the distribution and 

rollover rules under Code section 529 with disastrous results. In Karlen v. 

Comm’r (T.C. Summary Opinion 2011-129, November 10, 2011), Tim Karlen 

had 529 accounts for his three children. Tim began to experience some financial 

difficulty when his income decreased because of the downturn in the national 

economy and requested distributions of $3,500 from each of the 529 accounts. 

On the request form, Tim indicated that the withdrawals were “nonqualified 

withdrawals” rather than “withdrawals for rollover.” The 529 plan mailed the 

three checks to him. After receiving the checks, Tim conferred with his wife 

26

about the distributions, and she persuaded him that they should not withdraw the 

money from the 529 accounts. Tim then informed a representative for the 529 

plan that he did not wish to take the distributions. The representative told Tim 

that because no error had been made by the program in processing his request for 

distributions, the transactions could not be voided. The representative instructed 

Tim to endorse the three checks and return them if he wished to redeposit the 

amounts. Tim did so immediately. 

When the 529 program received the three checks, it redeposited each one as a new 

contribution into the same account from which it had been withdrawn. 

Thereafter, Tim received a Form 1099-Q, Payments from Qualified Education 

Programs (Under Sections 529 and 530), from the 529 plan for each of the three 

distributions. 

The IRS argued that the distributions were nonqualified distributions and that 

even though the uncashed checks were returned to the program, they still 

constituted nonqualified distributions followed by a recontribution. Further, the 

recontributions did not qualify as rollovers. Therefore, income tax and the 

additional penalty tax was assessed on the earnings portion of each distribution. 

Tim argued that the distributions should not be considered to have been received 

because he did not cash or deposit the checks, or alternatively that the 

recontributions should constitute a rollover. 

The Tax Court concluded that the receipt of a check, even though it is not cashed 

or deposited, completed the distributions from the 529 accounts. The Tax Court 

also found that when Tim returned the checks to be recredited to the accounts, it 

did not constitute a valid rollover. In order to comply with the rollover rules, the 

rollover either needs to be to an account for the benefit of a different beneficiary 

or needs to be to a different program. 

Had Tim consulted his tax counsel when he changed his mind, tax counsel might 

have suggested that he establish new accounts under a different state program for 

his children and deposit the proceeds from the distributions in the new accounts 

within 60 days in order to comply with the rollover rules. Possibly, the rollover 

rules would have been met even if Tim had simply directed that the distribution 

from Child A’s account be deposited in Child B’s account, the distribution from 

Child B’s account be deposited in Child C’s account, and that the distribution 

from Child C’s account be deposited in Child A’s account. 

The Tax Court feebly offered the consolation that Tim’s basis in each account 

would be increased because of the “new” contribution to the account. The basis, 

however, is irrelevant if the funds are ultimately used for qualified higher 

education expenses. 

The Tax Court did not address the gift tax consequences of the recontributions to 

the accounts, presumably because the distributions were well within the limits of 

the $13,000 gift tax annual exclusion, and presumably the taxpayer and his wife 

27

were not making other gifts to their children given their financial difficulties (or at 

least not other gifts in sufficient amounts to push them over the gift tax annual 

exclusion). 

The Tax Court, however, could not stomach applying the 10% additional tax on 

the earnings portion of the distribution. The Tax Court found that to “impose a 

10-percent additional tax upon petitioners given the unique facts in this case 

would be like throwing salt into a wound.” 

XI. 

XII. 

Qualified Withdrawals. Qualified withdrawals are those made to pay for the 

beneficiary’s qualified higher education expenses at an eligible educational institution. 

The Advance Notice proposes a rule that, in order for earnings to be excluded from 

income, any distribution from a section 529 account during a calendar year must be used 

to pay qualified higher education expenses in the same calendar year or by March 31 of 

the following year. The rule proposed in the Advance Notice, that 529 earnings will be 

excluded from income so long as any distribution from a section 529 account during a 

calendar year is used to pay qualified higher education expenses in the same calendar 

year or by March 31 of the following year, is certainly more flexible than a rule that 

would require expenses to be paid in the same calendar year as the 529 distribution. 

However, this rule would not appear to permit one to pay a qualified higher education 

expense during one year and seek reimbursement in the following year. It would be 

helpful if the proposed regulations would also exclude from income any distribution from 

a section 529 account during a calendar year that is used in reimbursement of qualified 

higher education expenses paid during the last three months of the prior year. 

Changing the Designated Beneficiary. Generally, the account owner can change the 

designated beneficiary at any time. Code § 529(c)(3)(C). In fact, the account owner does 

not even have to tell the beneficiary that an account has been established for him or her. 

Some states have age restrictions or other limits on who may be the designated 

beneficiary. There are no tax consequences to changing the designated beneficiary as 

long as (1) the new beneficiary is a member of the family of the old beneficiary and (2) 

for GST tax purposes, the new beneficiary is assigned to the same generation as (or a 

higher generation than) the old beneficiary. Code § 529(c)(3)(C)(ii); Code § 

529(c)(5)(B); Prop. Treas. Reg. § 1.529-5(b)(3)(i). 

A. Family Members. “Member of the family” is defined to mean: 

1. A son or daughter, or a descendant of either; 

2. A stepson or stepdaughter; 

3. A brother, sister, stepbrother, or stepsister; 

4. The father or mother, or an ancestor of either; 

5. A stepfather or stepmother; 

6. A cousin; 

7. A son or daughter of a brother or sister; 

8. A brother or sister of the father or mother; 

9. A son-in-law, daughter-in-law, father-in-law, mother-in-law, 

brother-in-law, or sister-in-law; or 

28

10. The spouse of the designated beneficiary or the spouse of any individual 

described in paragraphs (1) through (9) of this definition. 

Code § 529(e)(2). 

B. Who’s Not a Family Member? “Member of the family” does not include a 

grandniece or grandnephew, the descendant of a stepchild, or a spouse’s niece or 

nephew. 

C. Income Tax Consequences. If the new beneficiary is not a member of the family 

of the old beneficiary, the change in beneficiary is treated as a nonqualified 

distribution to the account owner. Prop. Treas. Reg. § 1.529-3(c)(1). Section 

529(c)(3)(A) provides that any distribution under a qualified tuition program shall 

be includible in the gross income of the distributee in the manner as provided 

under section 72 to the extent not excluded from gross income under any other 

provision of this Chapter. Generally, this would mean that the earnings portion of 

the distribution would be subject to income tax. However, the proposed rules in 

the Advance Notice would subject the account owner to income tax on the entire 

distribution “except to the extent that the account owner can substantiate that the 

[Account Owner] made contributions to the section 529 account and, therefore, 

has an investment in the account within the meaning of section 72.” Thus a 

successor account owner who did not make any contributions to the account 

would be subject to tax on the entire distribution. The ten percent additional tax 

would apply to the entire amount includible in income. 

D. Gift Tax and GST Tax Consequences 

1. New Beneficiary Not Family Member. It is likely that if the beneficiary 

is changed and the new beneficiary is not a member of the family of the 

old beneficiary, then the change of beneficiary is treated as a new gift 

from either the old beneficiary or the account owner to the new 

beneficiary. 

2. New Beneficiary in Younger Generation. Regardless of family 

relationship, the change of beneficiary is treated as a gift if the new 

beneficiary is one or more generations below the old beneficiary, and is 

also treated as a GST transfer if the beneficiary is two generations or more 

below the old beneficiary. Prop. Treas. Reg. § 1.529-5(b)(3)(ii); Code 

§ 529(c)(5)(B). 

3. Annual Exclusion. The deemed gift would be to a section 529 account 

for the new beneficiary and thus would qualify for the gift tax annual 

exclusion. Further, the proposed regulations provide that the five year 

averaging rule may be applied to this deemed transfer. Prop. Treas. Reg. 

§ 1.529-5(b)(3)(ii). 

4. Who Is Donor? The statute does not identify who is the donor of the gift. 

29

a. Proposed Regulations Tax the Beneficiary. However, the 

proposed regulations treat the old beneficiary as the donor, even 

though the account owner controls the change of beneficiary. The 

Preamble to the Proposed Regulations states: 

Also, because a contribution after August 5, 1997, 

is a completed gift from the contributor to the designated 

beneficiary, any subsequent transfer which occurs by 

reason of a change in the designated beneficiary to the 

account of another beneficiary is treated, to the extent it is 

subject to the gift and/or generation-skipping transfer tax, 

as a transfer from the original designated beneficiary to the 

new beneficiary. This is the result even though the change 

in beneficiary or the rollover is made at the direction of the 

contributor under the terms of the contract. 

The Proposed Regulations are consistent with the Committee 

Reports, which state: 

[A] transfer from one beneficiary to another beneficiary (or 

a change in the designated beneficiary) will be treated as a 

taxable gift from the old beneficiary to the new beneficiary 

to the extent it exceeds the $10,000 present-law gift tax 

exclusion. 

H.R. REPT. NO. 148 (H.R. 2014), at 327 – 328; H.R. CONF. REPT. 

NO. 105-220 (H.R. 2014), at 356, 364. 

Thus the old beneficiary is responsible for any gift and GST taxes 

if the new beneficiary is of a lower generation! Prop. Treas. Reg. 

§ 1.529-5(b)(3)(ii). There are legal and practical problems with 

treating the old beneficiary as the account owner. The Advance 

Notice notes that “several comments on the 1998 Proposed 

Regulations raised concerns about the imposition of tax on the 

former [Designated Beneficiary]. In many cases, the [Designated 

Beneficiaries] are minors who may not be aware of the existence 

of the account for that benefit.” 

b. Advance Notice Taxes the Account Owner. The Advance 

Notice proposes to assign the tax liability to the account owner by 

treating a change of beneficiary that is subject to gift tax “as a 

deemed distribution to the [Account Owner] followed by a new 

gift.” Presumably, the deemed distribution would fall within the 

rollover rule exception of section 529(c)(3)(C)(i) and therefore 

would not be treated as a nonqualified distribution. See also Code 

§ 529(c)(3)(C)(ii). However, treating the account owner as the 

transferor for gift and GST tax purposes is inconsistent with the 

30

theoretical tax universe of section 529, in which a completed gift 

was made to the old beneficiary, and therefore the old beneficiary 

should be the transferor of any subsequent gift. 

XIII. 

Annuity Taxation on Nonqualified Distributions. Section 529(c)(3)(A) provides that 

any distribution under a QTP shall be includible in the gross income of the distributee in 

the manner as provided under Code section 72 to the extent not excluded from gross 

income under any other provision of this Chapter. Subject to sections 72(e)(2)(B) and 

72(e)(9), distributions are treated as consisting of two components: 1) principal or 

contributions, which are generally not taxed, and 2) earnings, which may be subject to 

tax. Code §§ 72(e)(2)(B) and (e)(9). The earnings portion of the account is equal to the 

value of the account at a particular time minus the investment portion of the account. 

Prop. Treas. Reg. § 1.529-3(b). The earnings ratio for the account is equal to the earnings 

portion of the account divided by the total value of the account. Id. The earnings portion 

of a particular distribution is determined by multiplying the earnings ratio by the amount 

of the distribution. Id. Generally, this would mean that the earnings portion of the 

distribution would be subject to income tax. Prop. Treas. Reg. § 1.529-3(a). 

A. Earnings. The proposed regulations define “earnings” as follows: 

Earnings attributable to an account are the total account balance on 

a particular date minus the investment in the account as of that date. 


B. Investment in the Account. The proposed regulations define the “investment in 

the account” as follows: 

Investment in the account means the sum of all contributions made 

to the account on or before a particular date less the aggregate amount of 

contributions included in distributions, if any, made from the account on 

or before that date. 

Prop. Treas. Reg. § 1.529-1(c). Note this definition does not limit qualifying 

contributions only to contributions made by the account owner. 

C. Earnings Ratio. The proposed regulations define “earnings ratio” as follows: 

Earnings ratio means the amount of earnings allocable to the 

account on the last day of the calendar year divided by the total account 

balance on the last day of that calendar year. The earnings ratio is applied 

to any distribution made during the calendar year. For purposes of 

computing the earnings ratio, the earnings allocable to the account on the 

last day of the calendar year and the total account balance on the last day 

of the calendar year include all distributions made during the calendar year 

and any amounts that have been forfeited from the account during the 

calendar year. 

31


D. Time of Determination. Section 529(c)(3)(D) and the proposed regulations 

provide that the earnings portion shall be determined as of the date of distribution. 

I.R.S. Notice 2001-81, 2001-2 C.B. 617, provides: 

In response to comments received on the proposed regulations, and 

consistent with the Secretary’s authority under § 529(c)(3)(D)(iii) to adopt 

a different rule, the Treasury Department and the Internal Revenue Service 

expect that final regulations will revise the time for determining the 

earnings portion of any distribution from a § 529 account. It is expected 

that final regulations will provide that, effective for distributions made 

after December 31, 2002, programs will be required to determine the 

earnings portion of each distribution as of the date of distribution. In the 

case of direct transfers between § 529 programs, this requirement is 

effective for distributions made after December 31, 2001. In the case of 

any State program for which this change would require legislation and 

whose State legislature has a biennial legislative session, the program will 

have until January 1, 2004, to conform to this method of calculating 

earnings. 

E. Tax as Ordinary Income. Note that the earnings portion is taxed as ordinary 

income, regardless of what portion of the earnings is attributed to capital gains. 

F. Advance Notice. However, the proposed rules in the Advance Notice would 

subject the account owner to income tax on the entire distribution “except to the 

extent that the account owner can substantiate that the [Account Owner] made 

contributions to the section 529 account and, therefore, has an investment in the 

account within the meaning of section 72.” Thus a successor account owner who 

did not make any contributions to the account would be subject to tax on the 

entire distribution. The ten percent penalty would apply to the entire amount 

includible in income. 

Where an account owner directs a nonqualified distribution to the beneficiary, for 

example where the beneficiary has completed his or her education, how will the 

income tax consequences to the beneficiary be determined? Generally, it has 

been assumed that the beneficiary would pay income tax only on the earnings 

portion of the account and not on the amount of the contributions made to the 

account. Presumably, the IRS will treat the beneficiary as having made an 

investment in the account equal to the amount of the contributions, which were 

treated as a completed gift to the beneficiary when the contributions were made to 

the account. This theory works well when the beneficiary receiving the 

distribution was the beneficiary at the time contributions were made to the 

account. But if the beneficiary was changed, so that the beneficiary receiving the 

distribution was not the deemed recipient of the completed gift, by what 

mechanism does the new beneficiary acquire the old beneficiary’s “investment” in 

32

the account and why does not the same mechanism apply when the account owner 

is changed? 

G. Aggregation of Distributions. Section 529 provides that, except to the extent 

provided by the Secretary, all distributions during a taxable year shall be treated 

as one distribution. Code § 529(c)(3)(D)(ii). 

H. Aggregation of Accounts. Section 529 provides that, to the extent provided by 

the Secretary, QTPs of which a particular individual is a designated beneficiary 

shall be treated as one program. Code § 529(c)(3)(D)(i). However, Notice 2001- 

81 states that “it is expected that the final regulations will provide that only 

accounts maintained by a § 529 program and having the same account owner and 

the same designated beneficiary must be aggregated for purposes of computing 

the earnings portion of any distribution. For this purpose, a State that has both a 

prepaid § 529 program and a § 529 savings program should consider each 

program separately for purposes of calculating the earnings portion of any 

distribution from either the prepaid or the savings program.” 

I.R.S. Notice 2001-81, 2001-2 C.B. 617, anticipates that accounts established by 

the same donor for the same beneficiary, but under different state programs, will 

not be aggregated for purposes of determining the taxable earnings portion of a 

nonqualified withdrawal. 

I. Federal Penalty on Nonqualified Distributions. Section 529 imposes a ten 

percent federal additional tax on the earnings portion of a nonqualified 

distribution. Code § 529(c)(6). The federal penalty works in the same manner as 

the penalty for nonqualified distributions from a Coverdell Education Savings 

Account under Code section 530(d)(4). 

1. Exceptions. The federal penalty does not apply if the distribution meets 

one of the following requirements: (a) is made to the beneficiary’s estate 

after the beneficiary’s death; (b) is attributable to the beneficiary’s being 

disabled; or (c) is made on account of a scholarship, allowance or payment 

described in section 25A(g)(2) received by the account holder to the extent 

the amount of the distribution does not exceed the amount of the 

scholarship, allowance or payment. 

2. Hope and Lifetime Learning Credits. The federal penalty does not 

apply to a distribution that is subject to income tax because the education 

expense for which it was used was used to claim the Hope or Lifetime 

Learning credit. Job Creation and Worker Assistance Act of 2002. 

33

SECTION 2 

Avoiding the Uncommon Difficulties Caused 

by Common Drafting Issues: Oops, I Did It 

Again 

William C. Kuhlmann 

Security Bank & Trust Co. 

Glencoe 

Cameron R. Seybolt 


Minneapolis 


AVOIDING THE UNCOMMON DIFFICULTIES 

CAUSED BY COMMON DRAFTING ISSUES 

CONTENTS 

Page 

I. Introduction ....................................................................................................................... 3 

A. What Causes Drafting Issues? ............................................................................. 3 

1. Time and Money ......................................................................................... 3 

2. Inexperience ................................................................................................ 3 

3. Creativity..................................................................................................... 3 

4. Ease of Reformation ................................................................................... 3 

5. Competence................................................................................................. 3 

6. Coordination of Dispositive Instruments .................................................... 4 

7. Flexibility v. Certainty ................................................................................ 4 

B. Who suffers from a drafting problem with a will or trust provision? ............. 6 

1. The Grantor/Testator ................................................................................... 6 

2. The Drafting Attorney ................................................................................. 6 

3. The Trustee/Personal Representative .......................................................... 6 

4. The Trust Beneficiaries ............................................................................... 6 

II. Common Drafting/Administration Problems ................................................................. 6 

A. Who is the Trustee? .............................................................................................. 6 

1. Trustee Succession ...................................................................................... 6 

2. How Will Trustees be Removed and Appointed? ....................................... 7 

B. What Property is Being Given? ........................................................................... 9 

1. Classes of Gifts ........................................................................................... 9 

2. Statutory Provisions .................................................................................... 9 

3. Complications ........................................................................................... 11 

C. Rough Justice – Achieving Fairness with Formulas ........................................ 13 

1. Charge-Backs for Lifetime Gifts and Prior Trust Distributions ............... 13 

2. Taking into Account Loans to Heirs and Beneficiaries ............................ 17 

3. Addressing Valuation Discounts............................................................... 19 

D. Incentive Trusts ................................................................................................... 20 

1. Encouraging Thrift and Hard Work .......................................................... 20 

- i -

2. Discouraging Bad Behavior ...................................................................... 20 

E. Getting Burned by the Boilerplate – Apportionment and Payment of Taxes 21 

1. Minnesota Law .......................................................................................... 21 

2. Conflict in Documents .............................................................................. 22 

3. Apportionment Case Study ....................................................................... 23 

F. Family Business Succession ................................................................................ 24 

1. Personal Representative and Trustee Selection ........................................ 24 

2. Trustee Powers Provisions ........................................................................ 24 

3. Problems with Allocation of Family Business Interests ........................... 26 

4. Allocation Formulas .................................................................................. 26 

5. Trust Provisions for S Corporations ......................................................... 27 

- ii -

A well-drafted will or trust instrument can make administration simpler for the 

beneficiaries as well as easier for the trustee or personal representative. Conversely, a carelessly 

drafted instrument can complicate administration, irritate and confuse beneficiaries and be costly 

to the drafting attorney. When drafting wills or trusts for clients with large or complex estates, 

there can be a host of technical issues that require the great care on the part of the drafter to avoid 

tax or other issues in the administration of the estate. It is problems in these situations that most 

often lead to reported appellate decisions. Those areas of drafting are beyond the scope of this 

outline and here instead we will look at some common drafting problems that can arise in any 

document and how they can be avoided. 

I. Introduction. 

A. What Causes Drafting Issues? 

1. Time and Money. Clients seeing their attorney about a will or trust are 

willing to pay only so much for their planning. Frequently, the bulk of an 

attorney’s time will be devoted to the major tax issues and dispositive 

plans for the client. The finer points affecting the administration of a will 

or trust that may not come into existence for many years, if at all, do not 

draw a great deal of interest from the client. 

2. Inexperience. It is not unusual for an attorney to write many wills and 

trusts before ever being called on to deal with issues involving the 

administration of a trust that she or another attorney drafted. As a result, 

the attorney has not considered all of the administration issues potentially 

created by the documents she is drafting today. 

3. Creativity. There has been a great deal of growth in the popularity of 

exotic, or at least novel, planning concepts. The administration of these 

concepts is, however, largely untested. Years of administration experience 

will undoubtedly lead to refinements in drafting techniques in years to 

come. 

4. Ease of Reformation. Reformation of documents has generally become 

easier over time either through judicial interpretation (see e.g. In re 

Schmidt’s Will, 256 Minn. 64, 97 N.W. 2d 441 (1959), In re Estate of 

Zagar, 491 N.W. 2d 915 (Minn. App. 1985)) or through statutory changes 

to the Uniform Probate Code as codified in Minnesota in Minn. Stat. § 

524.2-601 to 524.2-711. While construction or reformation will not solve 

all problems, the general climate for addressing drafting problems is much 

different today than it was 50 or even 25 years ago. 

5. Competence. The advent of the word processor and easy to use drafting 

software makes it easy for anyone to draft a will. Individuals using 

inexpensive do-it-yourself software can easily create administration 

- 3 -

problems in a document but so can attorneys who dabble in estate 

planning. 

6. Coordination of Dispositive Instruments. If the drafting attorney is 

unaware of all of the different instruments which may give a client 

dispositive control over property, such as a power of appointment, or 

special ways in which certain assets may be titled such as joint tenancy or 

P.O.D. the client’s wishes as to the distribution plan when he or she dies 

can be affected. Not considering these issues can create significant 

problems as well if the client should become incapacitated and there is not 

clarity around which assets the client desires to be used for his or her care. 

Similarly, if there are multiple trusts for the beneficiaries of a client’s 

estate plan, whether created by the client or others, a failure to coordinate 

the distribution standards or the ages at which distributions are but several 

of the many possible areas where conflicts can arise in the future and, 

perhaps, the intentions of the client are not met. 

7. Flexibility v. Certainty. For even the most sophisticated planner there is 

always a tension in the documents that are drafted between having 

certainty in the effect of the document language and flexibility to fulfill 

the intent of the testator or grantor in light of changing circumstances 

between the time a document is drafted and when it is administered. 

Everyone who has practiced for any period of time has seen situations 

where a document’s rigidity has caused problems for a beneficiary and as 

many instances where intended flexibility has resulted in the intentions of 

the grantor to be subverted. While a court proceeding is frequently an 

option to resolve issues regarding language in a document, the 

circumstances that lead to the need for court involvement will generally 

mean that a disagreement among beneficiaries that may have 

consequences beyond the will or trust itself has occurred that could, 

perhaps, been avoided by more thoughtful drafting. 

- 4 -

The following examples show some of the pros and cons of provisions that emphasize 

certainty at the expense of flexibility, and vice versa: 

Certain Middle Ground Flexible 

Pay to my daughter, Mary, from 

income, and to the extent income is 

insufficient, from principal, the sum 

of $25,000 annually. 

 

 

 

This provision provides 

little room for interpretation 

or disagreement. The 

trustee simply will 

distribute the set dollar 

amount to the beneficiary 

each year. 

This provision also creates 

substantial risk of failing to 

achieve the testator’s goals 

if Mary’s needs change or 

if the value of the trust 

assets changes 

significantly. At a 

minimum, the amount 

could be adjusted for 

inflation. 

The $25,000 distribution 

will be subject to creditor’s 

claims once distributed to 

Mary, but future payments 

may be protected with a 

spendthrift clause and 

principal will be protected. 

Pay to my daughter, Mary, in annual 

or more frequent installments, all of 

the net income of the trust and such 

amounts of principal as the trustee 

shall determine appropriate for her 

health, education, support and 

maintenance. 

 

 

 

 

 

Requiring all income, 

instead of a dollar amount, 

will adjust the distribution 

for changes in the trust 

assets. 

Allowing distributions of 

principal will give the 

trustee discretion to make 

additional distributions if 

needed by the beneficiary. 

The power to invade 

principal also gives the 

trustee greater investment 

flexibility without the need 

to adjust between income 

and principal. 

Principal of this trust will 

be vulnerable to claims of 

creditors to the extent they 

can show the beneficiary 

needs the principal for 

“support” (e.g., Medical 

Assistance). 

There is a risk that Mary 

and the trustee (or the 

remainder beneficiaries) 

will dispute the proper 

amount to be distributed. 

Pay to my daughter, Mary, such 

amounts from principal or income as 

the Trustee in its sole discretion 

shall from time to time determine 

advisable in the Trustee’s sole 

discretion. 

 

 

 

 

This provides maximum 

creditor protection, because 

the beneficiary has no right 

to demand any amount 

from the trust. 

It also provides maximum 

ability to address changing 

circumstances. 

One problem with 

maximum flexibility, 

however, is that it also 

creates the greatest risk that 

the trustee will distribute 

more or less than the 

testator would have wanted. 

This language creates great 

potential for disagreement 

about the appropriate 

amount to distribute, but 

actually may limit the risk 

of litigation because the 

trustee’s decisions will be 

very difficult to overturn. 

Further guidance to the trustee regarding distributions is common to either clarify the 

grantors intent with respect to distributions from a trust. 

This may be clarifying guidance such as “to assist the beneficiary in purchasing her first 

home” or “to assist the beneficiary in starting a business or establishing a vocation”. 

Alternatively, language may establish parameters for the trustee in exercising discretion 

such as “such amounts from principal as the trustee determines necessary to assist the 

beneficiary with medical or other emergency needs” or “to provide for her undergraduate 

education.” 

- 5 -

B. Who suffers from a drafting problem with a will or trust provision? 

1. The Grantor/Testator. The principle guide for the drafting attorney should 

always be meeting the client’s intent. Rarely does a Grantor/Testator want 

an unclear will or trust. Preparing a document so that it meets the 

Grantor’s wishes should be the focus of the drafting attorney. 

2. The Drafting Attorney. From the attorney’s perspective, having to explain 

why it is necessary to petition a Court for clarification of a document 

provision that the attorney drafted is always an extremely unpleasant task. 

It can also prove to be expensive to the attorney. Certainly it will do little 

to inspire the Grantor’s family to have confidence in the attorney. 

3. The Trustee/Personal Representative. Similarly, the Trustee/Personal 

Representative is put into an uncomfortable position when needing to 

explain to the beneficiaries that the meaning of a document provision is 

unclear. The beneficiaries may lose confidence in the Trustee/Personal 

Representative who wants to be viewed as being expert in the 

administration of the estate or trust. The need for clarification may result 

in the Trustee and drafting attorney being placed in an adversarial position 

as well. 

4. The Trust Beneficiaries. Different beneficiaries, perhaps already having 

issues dealing with the testator’s or Grantor’s death, may find themselves 

at odds over a trust provision. This may cause lasting ill will within a 

family and may certainly create long-term problems with the 

administration of the estate or trust. 

II. 

Common Drafting/Administration Problems: 

A. Who is the Trustee? With the need for flexibility in naming trustees, providing 

for serial trustees is not uncommon or unwise. Being certain that the succession 

is clear is critical however. 

1. Trustee Succession. 

Consider the following language: 

Trustees shall be appointed, removed and 

replaced as follows: 

x1 I shall be the initial trustee of the trust created 

herein. 

x2 Unless I am incapacitated, I reserve the power to 

remove any trustee and to appoint successor or 

additional trustees. 

x3 Upon my incapacity, Mary Ex shall become a 

trustee. 

x4 Upon my death, Wye Bank shall become a 

trustee. 

- 6 -

Now think of the following situations: 

During his life grantor names Ed Zee a 

cotrustee. 

Grantor names Mary Ex and Joan Yu 

cotrustees and then removes Mary. 

Grantor then becomes incompetent. 

Remove the letter “a” in sections x3 and 

x4 

Grantor writes a letter saying that on his 

death he appoints Mary Ex as trustee? 

Who is the trustee if grantor becomes incapacitated? 

If the grantor dies? 

Who is the trustee? 

What happens? 

What happens? 

Consider the following language instead: 

Trustees shall be appointed, removed and 

replaced as follows: 

x1 I shall be the initial trustee of the trust created 

herein. 

x2 Unless I am incapacitated, I reserve the power to 

remove any trustee and to appoint successor or 

additional trustees to serve during my lifetime. 

x3 Upon my incapacity, Mary Ex shall serve as sole 

trustee. 

x4 Upon my death, Wye Bank shall serve as sole 

trustee. 

2. How Will Trustees be Removed and Appointed? In most instances the 

removal of a trustee occurs in difficult situations in which precise 

language will operate to keep the lid on a potentially volatile situation. As 

with other specific provisions of an instrument, care must be taken to 

assure that the removal language coincides with the boilerplate language 

dealing with changes in Trustees. 

a. The language from the MCLE Drafting manual dealing with 

succession, appointment and removal of trustees reads as follows: 

“Trustee Succession, Appointment and Removal Procedures. If a vacancy in the 

trusteeship occurs and a successor trustee to fill such vacancy is named in this 

agreement, the remaining trustees shall promptly notify such named successor, 

in writing, of the occurrence and date of such vacancy. A named successor 

trustee’s appointment shall become effective if the successor trustee’s written 

acceptance is filed with another trustee or, if none, with a court having 

jurisdiction over the trust, within thirty days following the date of such notice. 

To effect the appointment of a trustee, the person entitled to make such 

appointment shall file with the trustee to be appointed a written statement that 

such appointment is made. The appointment of a trustee so appointed shall 

become effective upon receipt by the person entitled to make the appointment of 

the newly appointed trustee’s written acceptance within thirty days following the 

filing of such written statement. A successor trustee shall, upon acceptance, 

- 7 -

succeed to the preceding trustee’s title to the trust assets. To effect the removal 

of a trustee other than myself, the person entitled to remove the trustee shall 

either deliver to such trustee a written statement that such removal is made, or 

mail such statement to such trustee’s last known business address by registered 

or certified mail, return receipt requested. After such delivery or mailing, a 

removed trustee shall have no further duties, other than to account, and shall not 

be liable or responsible for the acts of any successor trustee.” 

b. Given the above provision, a drafting attorney may want to 

consider: 

(1) Deleting any of the provision’s language that does not 

coincide with the more specific provisions of the document. 

For example, if there is no provision for a successor trustee, 

deleting the first two sentences may eliminate potential 

confusion. 

(2) If there is only a single trustee, whether the language of the 

first sentence providing that the remaining trustees shall 

give notice to the successor trustee should be eliminated to 

avoid confusion. 

(3) If the trustee provisions require an independent trustee, 

how the procedures for appointment of or the automatic 

succession of an independent trustee fit with this form 

language. Frequently, it may be desirable to have the 

removal of one independent trustee contingent upon the 

acceptance of appointment by the successor independent 

trustee. 

(4) How to proceed if the person with the power to appoint a 

successor trustee fails to act on that power. 

c. The power to remove a trustee is an important power that can 

operate as a check and balance on the actions of the trustee. 

Careful consideration needs to be given when determining who is 

the appropriate individual(s) to have that power from both the 

operational perspective as well as from the perspective of the 

dynamics of the family and issues of power or control among 

family members. 

d. When clients want to name a corporate trustee as a successor, it is 

important to ensure that the corporate trustee will accept the 

appointment when the time comes. Failing to take such a step can 

dramatically alter the Grantor’s intentions regarding trusteeship. 

Too often there are administrative or liability issues wrapped up in 

documents that will cause a corporate trustee to decline an 

appointment. Most corporate trustees will review documents, prior 

- 8 -

to execution, from the standpoint of their ability to administer a 

trust. This review will assist the drafting attorney in ensuring that 

the corporate trustee will accept the appointment when the time 

comes. Consider as well a provision for the appointment of an 

alternative corporate trustee if the named trustee is no longer in 

existence or if it declines to serve. 

B. What Property is Being Given? Will or trust provisions dealing with specific 

gifts may be the greatest source of family conflict following the death of a family 

member. Careful drafting frequently could minimize many of these disputes. 

. 

1. Classes of Gifts. A quick refresher on types of gifts in a will: 

a. Specific gifts are gifts of a specifically identified item e.g. “my 

silver tea service”. A lack of care in describing a specific gift is a 

frequent source of probate controversy. 

b. General gifts are ones that identify an amount of property either by 

dollar amount (a pecuniary gift) or by a portion of the estate, trust 

or residue (a fractional gift). 

c. Residuary gifts are gifts of the residue of an estate or trust after all 

specific and general gifts have been satisfied. 

2. Statutory Provisions. State law helps to address some of the more 

common problems that arise with specific gifts. 

a. Nonademption of specific devises is covered by Minn. Stat. 

§524.2-606 and provides generally that a specific devisee is 

entitled to the property and the any balance of the purchase price 

owing to the testator at the time of his death and unpaid proceeds 

of insurance or a condemnation award. Further, specifically 

devised property sold by a guardian, conservator or agent acting 

under a durable power of attorney while the principal is 

incapacitated makes the devisee of such property entitled to a 

general pecuniary devise equal to the net sale price of such 

property. But see Rose v. Rose, 80 Mass. App. Ct. 480, 2011 

where court found that a specific gift of real property was adeemed 

when decedent sold a portion of the property and combined the 

remainder with another parcel after her will was written but before 

her death. 

b. Ademption by satisfaction is the concept that applies to situations 

in which a testator makes a lifetime gift of property specified in a 

will. Minn. Stat. § 524.2-609(a) provides as follows: 

- 9 -

“ (a) Property a testator, while living, gave to a person is 

treated as a satisfaction of a devise in whole or in part, only 

if (i) the will provides for deduction of the gift, (ii) the 

testator declared in a contemporaneous writing that the gift 

is in satisfaction of the devise or that its value is to be 

deducted from the devise, or (iii) the devisee acknowledged 

in writing that the gift is in satisfaction of the devise or that 

its value is to be deducted from the value of the devise.” 

c. A specific gift of securities in a will includes additional securities 

acquired by reason of a corporate reorganization, securities of 

another corporation resulting from a merger or other distribution 

and securities of the same entity acquired through a plan of 

reinvestment. Minn. Stat. §524.2-605. 

d. Nonexoneration is the concept, codified in Minn. Stat. §524.2-607, 

that a specific devise in a will passes subject to any mortgage or 

security interest. See In re Stisser, 818 N.W. 2d 495 (Minn. 

2012) for the issues that can arise when a decedent leaves property 

passing separately under a will, a trust and through joint ownership 

all subject to encumbrances. While keeping a will or trust current 

so that it is reflective of the testator’s desires and the nature of 

hie/her assets is always sound advice, it becomes critical if the 

testamentary document provides for significant specific gifts. 

While problems most commonly arise in situations where the 

estate decreases in value, a will or trust providing specific gifts to 

the preferred devisees which would at the time consume the bulk 

of the estate may lead to an unintended result if the estate grows 

significantly in value after the date the document is executed. The 

more common problem arises when the estate declines in value and 

then Minn. Stat. §524.3-902 provides for the order in which gifts 

abate in such a situation. 

(1) Even with a statute in place specifying the order of abatement, 

problems can still arise. In In re Akerlund, 280 Neb. 89, 784 

N.W.2d 110 (2010) a trust direction to create a separate trust 

for one of the grantor’s two children to be funded with ½ of a 

former trust and to fund this share first with specifically 

identified real property with the remaining assets of the former 

trust funding a trust for grantor’s other child resulted in 

litigation when the specifically identified real property 

exceeded half of the value of the former trust. The court here 

found that it was the grantor’s intent to create two equal shares 

for his children and the language specifying the funding of the 

one share with the real property was only applicable if there 

were sufficient assets to permit the funding of equal shares. 

- 10 -

(2) A different, but equally litigious, situation was created when a 

trust called first for the payment of certain “Specific 

Testamentary Gifts” totaling $8,000,000 and then the 

distribution of the trust remainder but specified in the 

remainder clause that the share given to Elizabeth include the 

contents of the testator’s personal residence. At the time for 

distribution, after the payment of taxes and administrative costs 

the estate was less than $8,000,000. Here the court found in 

favor of Elizabeth holding that even though the gift of the 

personal property was contained in the remainder or residue 

clause, it was a specific gift and was to be paid before what 

was determined to be a general gift of the $8,000,000. Garner 

v. Redwine, 309 Ga. App. 158 (Ga. 2011) 

3. Complications. Even with the help of state law, there are many ways in 

which will or trust provisions dealing with specific or general devises can 

lead to problems. 

a. Loans and Advancements. While Minn. Stat. § 524.2-609 

discussed above does add clarity to advancements made during life 

by a testator to a devisee, the statute does not apply to loans to a 

devisee. These remain claims of the estate unless the testator 

specifically provides otherwise in a will. See 6 Page on the Law of 

Wills § 55.6, at 343 (Jeffrey A. Schoenblum, ed., 2000) 

(1) Specifying how loans are to be treated in dividing an estate 

may go a long way to avoiding controversy among the 

heirs. 

(2) Determining what constitutes a loan will still be a frequent 

cause of dispute. 

(3) Where loans and gifts are made to the same devisee, 

thoughtful drafting will be especially important. 

b. Clarity of Descriptions. While generally providing a clear 

description of tangible personal property will not be difficult, real 

property poses frequent challenges. 

(1) Consistency in the description may be one problem. For 

example, if the will provides “I leave my home to X’, 

especially if dealing with home within a city, there may not 

be an issue. However, if the home is in the outer suburbs or 

in the country, and the will provides “I leave my home, 

more fully described as …. to X”, care should be taken to 

be certain that at the time the will is written the specific 

legal description of the property fully encompasses the 

- 11 -

home. When devising recreational real estate this issue may 

become even more significant. 

(2) Where multiple homes are owned by a testator, clarifying 

which is to be considered as the “homestead” may help to 

avoid problems. 

(3) Avoiding proper names for property such as “my cabin” or 

“my farm” will also serve to eliminate possible confusion 

on which property is being referenced. 

(4) Care most also be taken in the event that a description 

changes as a result of a replatting, partial sale or other 

circumstance. Rose. 

c. Artwork, Collections and Valuable Personal Property. Even though 

it may be difficult to obtain the needed information from a client, if 

the client does have unique items of property, using a boilerplate 

personal property clause may result in a dispute among the 

beneficiaries. In a recent New York case, a gift of “…any and all 

household items” that the beneficiary desired to take from the 

testator’s residence included artwork in the residence whether or 

not it was on display. In re Estate of Isenberg, 823 N.Y.S. 381 

(App. Div. 2006). 

(1) Again if the testator owns multiple residences or vacation 

properties or has an unincorporated business, a boilerplate 

personal property provision may give rise to uncertainty of 

what was intended to pass to a devisee. 

(2) Case law abounds with cases dealing with the meaning of 

phrases such as “household goods”, “furniture” “personal 

articles”, “furnishings” and the like. Taking care to 

understand the nature of the testator’s personal property 

and his/her intended devisees of it will go a long way to 

avoid problems in the administration of the estate. 

(3) Description by location. Referring to property by location 

is particularly risky drafting technique. Not only may the 

location be imprecise, e.g. “my safe”, but the location may 

change or cease to exist after the will or trust is written e.g. 

“my Lehman Brothers account”. If there is a reason to refer 

to property at a particular location, the drafter should be 

certain to specify the location with certainty and to consider 

providing for the testator’s desire if the location does not 

exist at the time of the testator’s death. 

- 12 -

d. Specific gifts to charity. Frequently people will make a specific 

gift to a preferred charity in their will or trust. Often these are 

charities that the donor has also been making annual gifts to during 

their lifetime. The drafter must exercise care to be certain that the 

testaor’s intent is clear as to whether lifetime gifts are intended to 

reduce the specific gift. The issue can become even more 

problematic if in addition to the specific gift the testator makes a 

gift to the charity with nonprobate assets. See Estate of Gill v. 

Clemson University, 725 S.E.2d 516 (S.C. 2012) in which the 

court helod that the charity was entitled to both a $100,000 specific 

gift under a will as well as a $100,000 gift under an IRA 

beneficiary designation. 

C. Rough Justice – Achieving Fairness with Formulas 

1. Charge-Backs for Lifetime Gifts and Prior Trust Distributions. Many 

clients desire to achieve fairness by equalizing distributions for their 

beneficiaries to take into account differing amounts previously received by 

the beneficiaries. Before drafting this type of provision, you should 

explore with the client the following issues: 

a. Does fairness mean exactly equal amounts to each beneficiary, or 

should you acknowledge that different beneficiaries have different 

needs and circumstances? 

b. Does it matter what the purpose of prior gifts or distributions was? 

For example, if a beneficiary received a gift or trust distribution for 

a medical emergency should that be treated the same as if the 

gifted property was used for a vacation? Is paying for college the 

same thing as an outright gift of money? 

c. If you are charging back for distributions from a trust for multiple 

beneficiaries, might it be appropriate to establish multiple separate 

trusts in the first place? 

d. How will the exact amounts of prior gifts or distributions be 

determined? 

(1) Does “gifts” include all gifts down to birthday presents and 

going out to dinner? 

(2) Does it include only taxable gifts reported on a gift tax 

return? What if the gift tax is repealed? What if there are 

unreported gifts? What about the fact that paying $100,000 

to send a child to college is completely excluded from gift 

tax but paying $100,000 to help a child start a business (or 

- 13 -

to allow the beneficiary to pay off his student loans) is 

taxable to the extent it exceeds the annual exclusion 

($14,000 in 2013)? 

(3) Should trust distributions only be charged back if they are 

from principal or should income and principal distributions 

be taken into account? 

e. Do you want to take into account the time value of money, or 

should a gift of $10,000 in 2013 result in a $10,000 charge back 

many years later, regardless of the rate of inflation and the 

appreciation (or depreciation) of the estate, the trust or the overall 

market? 

Once you have determined the client’s desires, it is time to draft language implementing 

it. Simply providing that “each beneficiary’s share shall be adjusted to reflect the amount 

of [gifts] [distributions] received by the beneficiary” could lead to interpretation 

problems. There are several ways to charge back for prior gifts. 

Charge-back Example. Assume the following facts: A received $1,000 of gifts, B 

received $2,000 of gifts and C received no gifts. The estate or trust is worth $96,000. All 

three options should result in each beneficiary receiving a total of $33,000 when gifts and 

the trust distribution are added together. 

Consider the following options, all of which lead to the same result: 

“The remaining assets shall be 

divided equally among A, B and C; 

provided, however, the share for 

each such person shall be reduced by 

the amount of gifts made by me to 

such person prior to my death, and 

the amount of such reductions shall 

be allocated equally among A, B and 

C.” 

Step 1: $96,000 divided among all 

three = $32,000 each. 

Step 2: A’s share is reduced $1,000 

to $31,000 and B’s share is reduced 

$2,000 to $30,000. 

Step 3: The $3,000 reduction is 

allocated equally $1,000 each: A 

gets $32,000, B gets $31,000 and C 

gets $33,000. 

“There shall be added to the 

remaining assets, for computation 

purposes only, the total amount of 

gifts I made to any one or more of 

A, B and C prior to my death. The 

remaining assets, plus such amounts 

so added for computation purposes, 

shall be allocated equally among A, 

B and C. Each share so allocated to 

any such person shall then be 

reduced by the amounts added for 

computation purposes with respect 

to gift(s) to such person.” 

Step 1: $3,000 added for 

computation purposes, resulting in 

$99,000. 

Step 2: $99,000 divided by three = 

$33,000 each. 

Step 3: A’s share is reduced $1,000 

to $32,000, B’s share is reduced 

$2,000 to $31,000 and C’s share is 

not reduced – it stays at $33,000. 

“If the aggregate value of all gifts I 

made to any of A, B or C is greater 

than the aggregate value of all gifts I 

made to any other of them, then I 

give to each such person who 

survives me (the “Beneficiary”) an 

amount equal to the positive 

difference, if any, between: (1) the 

aggregate value of all gifts I made to 

the person who received the largest 

amount of gifts, and (2) the 

aggregate value of all such gifts I 

made to the Beneficiary. The 

remaining assets shall be allocated 

equally among A, B and C.” 

Step 1: A gets $1,000 for shortfall 

of his gift vs. B’s gift and C gets 

$2,000 for shortfall of his gifts vs. 

B’s gift. 

Step 2: The remaining assets 

($93,000) are divided equally 

($31,000 each) so A ends up with 

$32,000 ($1,000 + $31,000), B ends 

up with $31,000 (0 + $31,000) and C 

ends up with $33,000 ($2,000 + 

$31,000). 

- 14 -

These simplified examples do not address a host of potential complications. 

a. First, as noted above, it may not be clear what “gifts” are to be taken 

into account. “Gifts” should be a defined term. It could be defined to 

include taxable gifts reported on a gift tax return, or gifts reflected in 

the records of the testator or the testator’s accountant. For maximum 

certainty, the document could refer to a written exhibit and define 

gifts as including only amounts listed on the exhibit. Note – such an 

exhibit attached to a will would not be valid as to amounts written on 

the list after the will is signed, unless the list is signed with the 

formalities of a will. 

b. The language used in the examples also fails to address what to do 

with shares for beneficiaries who predecease the testator, and how to 

handle gifts made to the spouse, descendants or ancestors of a 

beneficiary. 

c. The language also does not resolve the issue of what to do if an 

adjustment would reduce a beneficiary’s share below zero. It is 

unlikely the beneficiary could be found to owe the estate money in 

that situation. If, however, the beneficiary is the recipient of 

distributions under other provisions of the document, other 

beneficiaries may claim the charge should be made against those 

distributions. 

Here is an example of charge back language at the back end of a “pot trust” for multiple 

children that attempts to address these issues: 

Sample Language 

Any payment of principal made under the preceding provisions 

to or for the benefit of any child of mine who is under the age 

of 25 at the time of such payment shall be charged against the 

trust as a whole and not against the share or prospective share 

of such child or his or her issue, either at or after the time such 

payment is made. Any other such payment to any person shall 

be taken into account upon the subsequent division of the 

FAMILY TRUST as hereinafter provided. 

Upon the earliest date upon which no child of mine under the 

age of 25 is living, the remaining principal and any accrued or 

undistributed income of the trust shall be allocated and 

distributed as follows: 

There shall be added, for computation purposes only, the total 

amount of any principal distributions made to or for the benefit 

of any issue of mine under the preceding provisions of this 

Article which are to be taken into account upon division of the 

FAMILY TRUST, except no addition shall be made for any 

such distribution made to or for the benefit of any issue of mine 

who is deceased and who (a) has no issue then living, (b) has 

no ancestor (who is among my issue) then living and (c) has no 

deceased ancestor (who is among my issue) who has issue then 

living. 

- 15 - 

 

 

 

 

 

Comments 

Distributions of income are not charged 

back. 

Distributions for children under the age 

of 25 are not charged back. 

You could also indicate that distributions 

for certain purposes will or will not be 

subject to a charge back. For example, 

educational and medical expenses vs. 

distributions to establish a business or by 

a car. 

In this example the age that triggers 

splitting of the pot trust happens to be 

the same age used to determine whether 

principal distributions are charged back. 

A different age could be used. 

This eliminates additions that cannot be 

charged back because the beneficiary 

who would be charged is not living.

The remaining principal and any accrued or undistributed 

income of the trust, plus any amount so added for computation 

purposes, shall be allocated to my then living issue, by right of 

representation. Each share so allocated to any person shall be 

reduced (but not below zero) by (a) the total amount added for 

computation purposes attributable to principal distributions 

made to or for the benefit of such person or such person’s 

issue, and (b) such person’s portion (determined by right of 

representation) of any amount added for computation purposes 

attributable to such person’s ancestors or such ancestors’ issue 

who are not living and have no living issue. 

 

 

The language “(but not below zero)” 

addresses the potential ambiguity that 

could arise if a charge-back exceeded the 

beneficiary’s share. 

The language in part (b) attempts to 

address distributions made to a 

beneficiary who later dies and whose 

share is then allocated among his or her 

issue. 

Here is an example of an equalization clause that caused problems: 

In Estate of Presetegaard, the will provided that certain property should be 

distributed in equal shares to the decedent’s three children, but that each child’s 

share should be “reduced by the amount of any emergency or exceptional 

education payments I made to any institution for such child, or the descendants of 

such child.” The will provided further that any reduction would then be divided 

among all the children (including the child whose share was so reduced). One of 

the children challenged the personal representative’s interpretation of the formula 

language, claiming that educational distributions charged against his share were 

not “emergency or exceptional” and therefore should not have been included in 

the chargeback. The Court of Appeals held that the personal representative 

correctly interpreted the formula to provide that “exceptional educational 

payments” meant payments other than from certain educational funds the 

decedent had established. In re the Estate of Presetegaard, A07-1713 (Minn. Ct. 

App. June 17, 2008). 

The obvious problem with this provision is its lack of clarity – reasonable minds will 

differ as to what constitutes an “exceptional” distribution. Similarly, in a recent 

Hennepin County District Court case, various beneficiaries disputed the meaning of the 

following language regarding division of a trust upon the death of the testator’s daughter 

(the trust authorized distributions during the daughter’s life to her, and to the testator’s 

grandchildren and more remote descendants): 

“I recognize that certain beneficiaries may, at different times and for different reasons, need more 

financial help than others, and for this reason I have expressly authorized unequal distributions to 

beneficiaries hereunder. However, I want each grandchild of mine ultimately to share as equally 

as is feasible in my estate, and I want the issue of any deceased grandchild of mine to receive 

benefit from their parent’s share by right of representation. Therefore, on division and distribution 

of the trust estate, the trustees should make such adjustments in the shares of the individual 

beneficiaries as the trustees in their sole discretion consider proper to effectuate the purposes 

hereinabove stated.” 

The beneficiaries disagreed on whether distributions to descendants of grandchildren 

should be charged back at all. They also disagreed as to which distributions to 

grandchildren should be charged back. In the end, the case was settled. Had it gone to 

trial, the trustee likely would have been given broad discretion to determine an 

- 16 -

appropriate charge-back scheme. This case illustrates clearly both the pros and cons of 

broad, flexible charge-back language. The benefit is that the trustee was not tied to any 

particular charge-back method and could determine what was best based on 

circumstances many decades after the trust was created. The downside was that the 

beneficiaries’ disagreement cost them money and strained relationships that would have 

been avoided if the trust had a clear-cut formula. 

2. Taking into Account Loans to Heirs and Beneficiaries. As noted above, loans to 

trust and estate beneficiaries are generally treated as assets of the trust or estate. 

Often, the client wishes to forgive such loans, but to equalize the amounts left to 

the beneficiaries to take into account the loan forgiveness. Such provisions must 

be drafted with great care to address the following issues: 

a. If the document refers to debt of beneficiaries outstanding at the 

applicable date, it may exclude debt that has been discharged in 

bankruptcy, or that has become unenforceable because of a limitations 

period. But see In Re Marjorie Q. Ward Rev Trust, 265 P.3d 1260 (Mt. 

2011) holding that a discharge of a debt in a Chapter 7 bankruptcy did not 

take precedence over a trust provision providing for a reduction in the 

borrower’s equal share of a residuary trust distribution of any indebtedness 

owed to the grantor at the time of her death. A cause of action against the 

maker of a demand note accrues on the date of the note unless a contrary 

intention is shown on the face of the note and an action on the note is 

barred unless brought within six years of its date. Troup v. Rozman, 

286 Minn. 88, 90, 174 N.W.2d 694, 696 (1970); Minn. Stat. §541.05, 

subd. 1(1). An acknowledgement of a debt tolls the statute of limitations 

on the debt and starts it running anew on the date of the acknowledgement. 

Windschitl v. Windschitl, 579 N.W.2d 499, 501 (Minn. Ct. App. 1998). 

b. Even an enforceable loan may have a value for estate tax purposes that is 

well below the face amount. In the case of a note that is worthless because 

of the obligor’s insolvency, the obligor’s receipt of an inheritance because 

of the holder’s death is not to be considered in determining the note’s 

estate tax value. Estate of Harper v. Commissioner, 11 T.C. 717 (1948), 

(acq., 1949-1 C.B. 2); PLR 9240003 (6/17/1992). 

c. The Minnesota Court of Appeals in In Re Rev. Trust of Polly F. Shank, 

A10-0045 (2010) held that the following trust language was ambiguous in 

reversing and remanding a district court grant of summary judgment: 

“ Allocation of remaining trust assets – The 

remaining trust assets both principal and income not 

effectively disposed of under the preceding 

provisions of this instrument (such remaining trust 

assets being hereinafter referred to as the “trust 

fund”) shall be distributed in equal shares to my 

sons, John M. Shank, Jr., and Lawrence C. Shank, 

- 17 -

outright and free of trust. If either son does not 

survive me, his share shall be held in trust and 

administered in accordance with the provisions of 

Section 9 and subsequent sections. Notwithstanding 

the forgoing, I intend my children to be treated 

essentially equally as to advancements and loans 

received during my lifetime or assets of my estate 

received at my death. If, at my death, either child of 

mine is indebted to me on a Promissory Note or 

Mortgage, I direct that the outstanding principal 

balance and accrued interest of the indebtedness be 

considered an advancement to such child from my 

estate and be deducted from the share of the residue 

due my child (or any share for the then living 

descendant or descendants, collectively, by right of 

representation, of my child if he is then dead 

leaving a descendant or descendants then living), 

thus reducing his share of other assets of my estate 

accordingly. The amount of said outstanding 

principal balance and accrued interest shall be 

determined by my trustees based upon my records 

or the trustees’ records. Such indebtedness is to be 

considered an asset of my estate for the purposes of 

computing the value of said estate.” (Emphasis 

added.) 

The court determined that while promissory notes and mortgages were 

expressly to be treated as advancements under the terms of this provision, 

it was not certain from this language that the grantor intended that only 

promissory note and mortgages were to be considered advancements. 

d. Determining exactly what a loan is can also be the cause of significant 

disagreement. Intra family “loans” are frequently not documented with 

formal promissory notes. In a case not involving an equalization clause but 

rather simply whether sums shown in a notebook as loans as well as noted 

as loans on the checks given to a child, the Nebraska Supreme Court found 

this to be sufficient to hold that sums so advanced to the child were loans 

for trust administration purposes. In re Margaret Mastny Revocable Trust, 

744 N.W. 2d 700 (Neb. 2011). Here the fact that the amounts in issue were 

not reported as gifts on tax returns was also considered by the court. 

Here is an example of a definition of “Loans” that was used in a document which 

provided that all “Loans” included among the assets of a trust would be allocated to the 

obligor: 

“It is hereby provided that the value of the Loans, for purposes of division of the residue of the 

trust estate, shall be the outstanding principal and interest with respect to the Loans, up to and 

- 18 -

including the date of division of such residue, as determined by Trustee in its absolute discretion, 

and not the actual fair market value of the Loans. Specifically, it is hereby provided that the Loans 

shall be so valued even if they are then legally unenforceable or if they are uncollectable for any 

other reason, including the lapse of any applicable limitation or claim period, or the insolvency or 

bankruptcy of the obligor.” 

3. Addressing Valuation Discounts. Particularly when it comes to family 

businesses, there is often a large difference between the estate tax value of 

property and its true value to the family. Many funding formulas require that 

interests in a business be used to fund the share of the estate for a family member 

involved in the business. If the family business stock is valued at its estate tax 

inclusion value for funding purposes, the shares for the beneficiaries who are to 

receive the business may be over-funded. On the other hand, if the undiscounted 

value is used, the plan may favor the beneficiaries who are not involved in the 

business at the expense of the beneficiaries who inherit the business. 

One case where this was addressed is Estate of King, 668 N.W.2d 6 (Minn. Ct. 

App. 2003). In this case, the decedent’s will provided that the residue of her 

estate would be divided between her two nephews. Among the assets of the 

residue was the decedent’s minority interest in a closely held corporation. The 

nephews owned the rest of the stock of the corporation. The will provided that 

the share for one nephew should be funded with stock, and that stock would only 

pass to the other nephew if other assets were insufficient to fund his share. 

Because the stock was a minority interest, the decedent’s estate tax return 

reflected combined minority and lack of marketability discounts of 45%. The 

trustee decided to use this value for purposes of funding the nephews’ shares. 

The nephew who received the assets other than stock objected because after 

distribution of the residue, the other nephew owned a majority interest in the 

corporation and the stock was therefore worth much more to him than it was 

worth in the estate. The end result was that the nephew who received the stock 

ended up much better off financially even though the will provided for equal 

distribution between the nephews. The trial court and the Minnesota Court of 

Appeals both held that it was within the trustee’s discretion to use the estate tax 

value (the fair market value). 

There is no right or wrong way to address this issue, but it is better to address it 

specifically to avoid disputes. Here are two alternative provisions: 

Estate Tax Value 

For purposes of funding the shares so allocated to my 

issue, the value of property included in my estate shall 

be its value as finally determined for estate tax purposes, 

and the value of property not included in my estate shall 

be determined in the same manner that its estate tax 

value would be determined if it were so included. 

Undiscounted Value 

Notwithstanding the foregoing, the value of any interest 

in [describe family business interest] for allocation 

purposes shall be the fair market value of such interest, 

determined by the Trustee as the Trustee deems 

appropriate, without applying any discount for lack of 

marketability, lack of control, or similar features. 

- 19 -

D. Incentive Trusts 

1. Encouraging Thrift and Hard Work. Many clients worry about leaving 

“too much” to their children. They feel good about being able to provide 

for their beneficiaries, but they do not like the idea of creating “idle rich” 

within their family. As with most drafting tasks, creating a trust provision 

that motivates good behavior is subject to the tension between the desire to 

avoid disputes and to provide clear guidance to the trustee, and the desire 

to give the trustee flexibility to address changing circumstances. The 

following examples illustrate this: 

Certain 

On or before January 31 of each year, the Trustee shall 

pay to my daughter, Mary, from income, and to the 

extent income is insufficient, from principal, an amount 

equal to Mary’s earned income for the immediately 

preceding year, as evidenced by W-2 forms or other 

documentation acceptable to the Trustee. 

 

 

 

The amount distributable from this trust is 

fairly easy to determine, and the beneficiary 

will not have the opportunity to live a lavish 

lifestyle without working. 

The trust provides the beneficiary with a 

significant incentive to work hard – her earned 

income will be doubled each year. 

On the other hand, this discourages the 

beneficiary from working in a profession that 

does not pay well, from taking time from work 

to care for children, etc. 

Flexible 

The Trustee shall pay to my daughter, Mary, such 

amounts from principal or income as the Trustee in its 

sole discretion shall from time to time deem 

appropriate. Because I believe that the greatest rewards 

in life come from having a sense of achievement, it is 

my hope that the resources of the trust be viewed and 

used primarily to provide Mary with the opportunity to 

achieve her full potential rather than as a fund that 

permits her to maintain a high lifestyle with only a 

limited effort on her part. I request that the Trustee 

administer this trust accordingly but recognize that the 

Trustee must ultimately have the flexibility to determine 

the appropriate amount of distributions in the future. 

This gives the Trustee discretion to withhold 

distributions if the beneficiary does not need or 

want them, and also to make distributions 

when the beneficiary is not earning income for 

reasons unrelated to the beneficiary’s desire to 

“live off the trust.” 

 

As with all flexible provisions, it also creates 

the greatest risk that the trustee will distribute 

more or less than the testator would have 

wanted and creates a greater risk of 

disagreement and litigation. 

 

 

This provision has the perverse result of 

requiring large distributions in years when the 

beneficiary needs them least, and of 

eliminating distributions in years when the 

beneficiary may need them most. 

At a minimum, the provision should address 

Mary’s disability. 

2. Discouraging Bad Behavior. While motivating a beneficiary to become a 

productive member of society is a good thing, many clients are equally 

concerned (or more concerned) about avoiding bad behavior on the part of 

- 20 -

the beneficiary. In the past, testators attempted to use trusts to discourage 

marriage outside of the testator’s religion or other similar acts. There are 

several cases discussing the public policy implications of such provisions, 

but their popularity is waning so we will skip ahead to a popular modern 

form of behavior clients would like to discourage: the abuse of alcohol and 

mood-altering drugs. 

Here are two provisions attempting to address this issue: 

Certain 

The trustee shall distribute all of the income and 

principal remaining in the trust to the beneficiary upon 

the latest to occur of (a) the initial funding of the trust, 

(b) the date the beneficiary attains the age of 35 and (c) 

the date that is five years after the beneficiary’s last 

conviction of a criminal offense involving alcohol or 

narcotics or other drugs. 

 

This provides an objective and publicly 

available yardstick for determining whether the 

beneficiary has an alcohol or drug problem. 

Flexible 

It is my expectation, but not my direction, that the 

trustee shall distribute all of the income and principal 

remaining in the trust to the beneficiary upon the later 

of (a) the initial funding of the trust and (b) the date the 

beneficiary attains the age of 35. Notwithstanding the 

foregoing, the trustee may withhold this distribution, up 

to and including for the beneficiary’s entire lifetime, if 

the trustee determines there is a compelling reason to do 

so. Reasons that might justify withholding a 

distribution pursuant to this provision may include, but 

shall not be limited to, the beneficiary’s alcoholism or 

chemical dependency, as determined by the trustee in 

the trustee’s absolute discretion. The trustee shall be 

absolutely exculpated and held harmless from and 

against any liability for exercising or not exercising the 

trustee’s discretion under this paragraph. 

This provides a trustee with more discretion in 

the event the trustee knows the beneficiary has 

a problem but is not in a position to prove it. 

 

 

Obviously, a beneficiary could have a severe 

problem without ever being convicted of a 

crime. 

Also, it is sometimes difficult to tell from a 

publicly available criminal conviction whether 

the conviction involved drugs or alcohol. 

 

Corporate trustees are often very reluctant to 

take on this discretion, even with the 

exculpation language. Consider naming an 

individual trustee, co-trustee, or “trust 

protector” who can make this determination. 

 

One alternative is to require drug or alcohol 

testing before a beneficiary can receive a 

distribution, but this is very difficult to 

administer. 

E. Getting Burned by the Boilerplate – Apportionment and Payment of Taxes. 

1. Minnesota Law. Equitable Apportionment. Minnesota law provides that 

in the absence of contrary provisions in the will or other written 

instrument, estate taxes are to be apportioned fully among the persons 

interested in the estate. Minn. Stat. § 524.3-916(b)(1). In “special 

circumstances” a court may direct apportionment of interest and penalties 

in a manner different from that set forth in § 524.3-916(b) as it deems 

equitable. Minn. Stat. § 524.3-916(c). Minnesota law provides further 

- 21 -

that exemptions or deductions allowed by reason of the relationship of a 

person to the decedent (e.g. the marital deduction) inure to the benefit of 

the person bearing such relationship. Minn. Stat. § 524.3-916(e)(2); 

Estate of Shapiro, 380 N.W.2d 796, 799 (Minn. 1986); Estate of Shannon, 

T.C. Memo 1990-614, 60 T.C.M. 1361 (applying Minnesota law). Under 

Minnesota law, “there is a strong policy in favor of the equitable 

allocation of the tax burden provided in the statute prescribing 

apportionment, and . . . a direction to the contrary in a will or other 

governing instrument must be expressed in terms that are specific, clear, 

and not susceptible of reasonably contrary interpretation.” Estate of 

Kapala, 402 N.W.2d 150, 153 (Minn. Ct. App. 1987); Estate of Shannon, 

T.C. Memo 1990-614 (quoting Kapala). 

2. Conflict in Documents. Minnesota Favors Equitable Apportionment. 

Courts have dealt with conflicting provisions in governing documents 

(e.g., conflicting provisions in a pour-over will and revocable trust) in 

various ways. The only Minnesota case on the issue is an unpublished 

decision in which it was held that where two governing documents 

conflict, the default (equitable apportionment) statute applies. Trust 

Agreement of Robert G. Sudheimer, (Minn. Ct. App. Jan. 9, 2007) 

(unpublished). 

a. Cases Holding Will Controls. In the following cases, it was held 

that a direction in a will to pay estate taxes from the probate estate 

trumped a provision in a revocable trust allowing payment of estate 

taxes from the trust: Estate of Harry Fagan, Jr. v. Commissioner, 

TCM 1999-46, 77 TCM 1427 (CCH); Estate of Miller v. 

Commissioner, TCM 1998-416, 76 TCM 892 (CCH), aff’d per 

curiam, 209 F.3d 720 (5 th Cir. 2000); Estate of Lewis v. 

Commissioner, TCM 1995-168, 69 TCM 2396 (CCH). These 

cases have limited applicability in Minnesota, because they 

involved apportionment statutes that provided they could only be 

altered by a “will.” 

b. Cases Holding Revocable Trust Controls. In the following cases, it 

was held that the provisions of the revocable trust controlled: 

Estate of Pickrell, 806 P.2d 1007 (Kan. 1991) (holding that the 

trust controlled because it was signed later); Estate of Meyer, 702 

N.E.2d 1078 (Ind. App. 1998) (holding that the trust controlled 

because it was the “primary” document); Patterson v. U.S., 181 

F.3d 927, 929 (8 th Cir. 1999) (holding that where the trustee had 

the discretion to pay the tax from the trust and did so, the tax 

consequences would follow payment on that basis). These cases 

are more relevant in Minnesota, subject to Minnesota’s common 

law preference for equitable apportionment (i.e., a Minnesota court 

is likely to resolve a conflict in favor of equitable apportionment, 

- 22 -

egardless of which document is the primary document or was 

signed later). 

c. Practice Pointer. It is almost never a good idea to have tax 

apportionment provisions in both the will and the revocable trust. 

The best approach is for a pourover will to provide that estate taxes 

will be apportioned and paid in the manner set forth in the 

revocable trust, and to include carefully drafted apportionment 

language in that document. In some cases a client will have a 

separate revocable trust to hold a particular piece of property. 

When using such a trust, you must be careful not to include 

conflicting tax apportionment language. 

3. Apportionment Case Study: Client A has a $9,000,000 estate, made up of 

$3,000,000 in life insurance and retirement plan assets, a painting that has 

been in his family for 100 years and that is worth $1,000,000 and 

$5,000,000 of other (probate) assets. Pursuant to his antenuptial 

agreement, he can leave up to half of his estate to his children from a prior 

marriage. Client A makes a specific gift of the $1,000,000 painting to one 

child who is an artist and has no money and does not want any, names his 

other two children as beneficiaries of the $3,000,000 insurance and 

retirement plan assets and leaves the rest of his assets to his spouse. Who 

gets what will vary depending on the apportionment clause: 

Equitable Apportionment No Apportionment Hybrid 

“All estate taxes occasioned by my 

death shall be paid in accordance 

with Minnesota law.” 

“All estate taxes occasioned by my 

death shall be paid from the residue 

of my estate without 

apportionment.” 

“All estate taxes attributable to 

property passing under my will shall 

be paid from the residue of my estate 

without apportionment. All other 

estate taxes occasioned by my death 

shall be paid in accordance with 

Minnesota law.” 

 

 

 

The wife gets $5,000,000, free 

of tax, maximizing the marital 

deduction and minimizing the 

tax paid. 

The child receiving the 

$1,000,000 painting will also 

receive an obligation to pay 

tax (about $95,000). He will 

probably have to sell the 

painting (or the personal 

representative may sell it). 

It will be difficult for the 

personal representative to get 

the tax from the children 

receiving non-probate assets, 

possibly leading to litigation. 

The personal representative does 

not have to worry about 

collecting tax from the children. 

The estate tax triggered by the 

gifts to the children will be paid 

from the spouse’s share. This 

will reduce the marital deduction 

below $5,000,000, triggering 

additional Minnesota and federal 

tax.. 

If the net amount to the spouse 

goes below 50% of the estate, 

there may be litigation regarding 

the obligation under the 

antenuptial agreement. 

The artist gets the painting free 

of tax. 

The other children bear the tax 

on their inheritance. 

The personal representative still 

will have to come after the other 

children for the tax. 

There is still an increase in the 

tax paid because the residue 

distributable to the spouse is 

reduced, but the increase is not 

as large as under the second 

option. 

- 23 -

F. Family Business Succession. The drafter of a will or trust agreement for a 

family business owner faces an additional set of issues, including the following: 

1. Personal Representative and Trustee Selection. A family business owner 

must be careful in selecting the personal representative of her estate and 

the successor trustee of her revocable trust (or trusts under the will). In 

addition to the normal estate and trust administration duties, the appointed 

fiduciary will hold legal title to the client’s family business interests, and 

may have voting control over the entity. The person selected should be 

one who will be capable of stepping into the deceased (or disabled) 

owner’s shoes and helping to manage the business in what may be a time 

of crisis. It may be appropriate to appoint a different fiduciary to perform 

this function during the period of administration of the client’s estate or 

trust immediately after the client’s death, as compared to the person or 

institution who will manage continuing trusts for children or other 


2. Trustee Powers Provisions. If a trust under a client’s will or revocable 

trust instrument is likely to be funded with family business interests, it is a 

good idea to include provisions in the trust altering the duties of the trustee 

with respect to diversification and prudent investment of trust assets. If no 

such provisions are included, a trustee may feel (and may be) obligated to 

liquidate the business rather than maintaining it as an asset of the trust. 

a. Duty of Diversification. A trustee is normally under a duty to 

diversify the investments of the trust so as to distribute the risk of 

loss. III Scott, the Law of Trusts, §§ 228, 230.3; Restatement 

(Third) of Trusts, § 227, § 229, comment d.; Minn. Stat. § 

501B.151. The duty to diversify requires that the trustee not invest 

an unreasonable proportion of the trust estate in a single security, 

or even in a single type of security. Scott, § 228. 

b. Prudent Investment. In addition to the duty to diversify, a trustee 

has duties to invest and manage the trust assets as a prudent 

investor would, in light of the purposes, terms distribution 

requirements, and other circumstances of the trust, and to exercise 

reasonable care, skill and caution. Restatement (Third) of Trusts, § 

227; Minn. Stat. § 501B.151. In determining whether a particular 

investment is appropriate, a trustee may consider “an asset’s 

special relationship or special value, if any, to the purposes of the 

trust or to one or more beneficiaries if consistent with the trustee’s 

duty of impartiality.” Minn. Stat. § 501B.151, subd. 2(c)(8). In 

many cases this would arguably provide authorization to retain a 

family business interest, but the duty of impartiality may require at 

- 24 -

least a partial sale of the interest where one or more beneficiaries is 

not benefited by its retention. 

c. Waiver of Duties. If there is no waiver or limitation in the trust 

instrument regarding the trustee’s duties of diversification and 

prudent investment, a conservative trustee might feel obligated to 

dispose of the family business interest. The most commonly used 

method to prevent an unintended sale of a family business is to 

include language eliminating these duties. Some estate planners 

use this language in their forms regardless of whether a family 

business interest is likely to be an asset of the trust. A blanket 

elimination of the duties of diversification and prudent investment 

can, however, have adverse consequences. Such a provision may 

foreclose a legitimate claim of the trust beneficiaries against a 

negligent trustee for a failure to diversify or prudently manage a 

portfolio of publicly traded stocks. A careful drafter should 

consider focusing any waiver of diversification and prudent 

investment so that it applies only to family-owned or closely held 

business interests. 

d. Sample Provision. The following provision is intended to 

maximize the authority of a trustee to hold stock of a family 

business without risking liability for failure to diversify or for 

failure to invest prudently, but without a general release of the 

trustee’s investment duties with respect to other assets that may be 

held in the trust: 

“The financial well-being of my family is directly attributable to 

the performance of [NAME OF FAMILY BUSINESS] stock over 

an extended period of time and it is my expectation that the 

continued holding of such stock will continue to serve my family 

well. As a result, I direct that holding [NAME OF FAMILY 

BUSINESS] stock is a primary purpose of the trusts under this 

instrument and I specifically authorize the Trustee of each trust 

hereunder to continue to hold [NAME OF FAMILY BUSINESS] 

stock without regard to general fiduciary principles, including, but 

not limited to, those relating to diversification and prudence and 

the Trustee shall be held harmless for doing so to the absolute 

maximum extent permitted by law. Without limiting the generality 

of the foregoing, I specifically direct that my family’s experience 

with respect to [NAME OF FAMILY BUSINESS] stock and my 

desire for the Trustee to hold [NAME OF FAMILY BUSINESS] 

stock are special circumstances under which the purposes of the 

trusts hereunder and the interests of the beneficiaries are better 

served without diversifying.” 

- 25 -

3. Problems with Allocation of Family Business Interests. It is unusual (but 

not unheard of) for all of a business founder’s children to have the desire 

and capability of taking over the family business after the founder’s 

death, disability or retirement. More often, there is one child who is the 

“heir-apparent” with respect to the business, and one or more other 

children who would prefer not to be involved in the business (but do 

expect to inherit their fair share of its value). In this situation, a simple 

estate plan that directs for the distribution of assets equally among the 

children can be problematic. A simple solution that occurs to many clients 

is to make a specific gift of the business to the child who will run it, and to 

leave other assets to the other children. This can be very problematic for a 

variety of reasons: 

a. Often the value of the business is much larger than one sibling’s 

equal share of the estate. Most clients wish to treat their children 

relatively equally. For example, if a client has three children and 

the business is worth 90% of the entire estate, leaving the entire 

business to one child is often unacceptable to the client. 

b. Clients often fail to take into account that the assets they have now 

will likely change significantly in value prior to their death. Even 

if today a client’s business is worth 50% of the total value of his 

estate (and therefore the client believes it would be fair to leave the 

business to one of two children and to leave other assets to the 

other child), at the time of the client’s death the business could be 

worth 10% of the total value or 80% of the total value. 

4. Allocation Formulas. In order to avoid the problems described above, it 

may be appropriate to provide for an equal allocation of assets among the 

children, but to provide that the share for the sibling(s) involved in the 

business will be funded to the maximum extent possible with the business 

interest (or to give that child(ren) the option to direct that the stock be 

allocated to his, her or their share). The following issues should be 

considered when using such a formula: 

a. If there are voting and non-voting shares, the document can 

provide that the voting shares will pass to the sibling who is 

involved in the business. 

b. If the other siblings are likely to receive interests in the business to 

fund their shares, the sibling who runs the business can be given an 

option to buy their shares, either directly from the trust or estate or 

from the siblings over time. 

c. It is important to specify how the shares will be valued for 

allocation purposes and for purposes of any purchase option. See 

- 26 -

the discussion on this issue at Paragraph II(C)(3) of this outline 

(“Addressing Valuation Discounts”). 

5. Trust Provisions for S Corporations. While the income tax benefits of 

flow-through reporting make S corporations attractive to many family 

business owners, the various eligibility limitations add a layer of 

complexity when drafting and administering trusts that will hold S 

corporation stock. Only certain trusts are authorized to hold S corporation 

stock. The most commonly used category is grantor trusts for income tax 

purposes (e.g., revocable trusts). IRC § 1361(c)(2)(A)(i). Revocable 

trusts and trusts under wills can also be S corporation shareholders for two 

years after the death of the grantor. IRC § 1361(c)(2)(A)(ii), (iii). If these 

provisions do not apply, then a trust may only hold S corporation stock if 

it is a qualified subchapter S trust (QSST) or an electing small business 

trust (ESBT). 

a. QSST Trusts. Qualified subchapter S trust (QSST) provisions in a 

trust can prevent an unintentional termination of S status, but they 

can cause problems of their own. Among the requirements of a 

QSST are that there may be only one income beneficiary and that 

all the fiduciary accounting income of the trust must be distributed 

each year. Further, any corpus distributed during the life of the 

income beneficiary must be distributed to that beneficiary. If the 

trust terminates during the life of the income beneficiary, all of the 

trust's assets must be distributed to such beneficiary. These 

limitations are usually contrary to the provisions clients would like 

to see in their trusts – especially for young beneficiaries. 

b. ESBT Trusts. Under IRC 1361(e)(1), a trust can qualify to hold S 

stock as an electing small business trust (ESBT) even though it has 

multiple beneficiaries and permits discretionary distributions of 

income or corpus, as long as all the current beneficiaries of the 

trust are permissible S corporation beneficiaries; no interest in the 

trust was acquired by purchase; and the trust is not a QSST, a taxexempt 

trust, or a charitable remainder trust. In determining 

whether a trust may qualify as an ESBT, each potential current 

beneficiary of the trust is treated as a shareholder, including for 

counting purposes (i.e., the 75-shareholder limitation). A potential 

current beneficiary includes any person who is entitled to, or at the 

discretion of any person may receive, a distribution of trust 

principal or income. Thus, for example, if any potential current 

beneficiary of a trust is a nonresident alien, the trust will not 

qualify as an ESBT. Appointees under powers of appointment are 

considered potential current beneficiaries only if the power is 

currently exercisable. 

- 27 -

SECTION 3 

Unlimited Duration Trusts – Why, When, 

Where and How? Your Client Will Not Live 

Forever But Their Family Values Will 

Al W. King 

South Dakota Trust Co 




I. RULE AGAINST PERPETUITY/TRUST DURATION........................................................... 3 

1. INTRODUCTION ..................................................................................................................... 3 

2. APPROACH TO REPEALING OR MODIFYING THE RAP ............................................................. 4 

3. CHANGE OF SITUS – CONSTRUCTIVE ADDITION .................................................................... 9 

4. CONCLUSION ....................................................................................................................... 10 

II. DIRECTED AND DELEGATED TRUSTS ........................................................................... 11 

1. INTRODUCTION ................................................................................................................... 11 

2. PRUDENT INVESTOR ACT .................................................................................................... 11 

3. DIRECTED TRUSTS .............................................................................................................. 12 

4. TRUST PROTECTOR ............................................................................................................. 14 

5. SPECIAL PURPOSE ENTITIES ................................................................................................ 15 

6. THE TRUST INSTRUMENT .................................................................................................... 16 

7. DELEGATED TRUSTS ........................................................................................................... 17 

8. CONCLUSION ....................................................................................................................... 18 

III. MODIFICATION/REFORMATION OF TRUSTS .............................................................. 19 

1. INTRODUCTION ................................................................................................................... 19 

2. MODIFICATION/REFORMATION ........................................................................................... 19 

3. SELECTED STATE STATUTES: .............................................................................................. 19 

5. INVESTMENT FLEXIBILITY .................................................................................................. 20 

6. OLD DISTRIBUTION STANDARDS (I.E., 33% AGE 25, 33% AGE 30, AND 33% AGE 35) ......... 20 

7. GRANDFATHERED GENERATION-SKIPPING TRANSFER (GST) TAX TRUSTS ........................ 21 

8. CONCLUSION ....................................................................................................................... 21 

IV. DECANTING ........................................................................................................................ 22 

1. INTRODUCTION ................................................................................................................... 22 

2. DECANTING PROCESS ......................................................................................................... 22 

3. STATE STATUTES ................................................................................................................ 23 

4. COMMON REASONS TO DECANT: ........................................................................................ 25 

5. CONCLUSION ....................................................................................................................... 25 

V. VIRTUAL REPRESENTATION ........................................................................................... 26 

1. INTRODUCTION ................................................................................................................... 26 

2. VIRTUAL REPRESENTATION STATUTES ............................................................................... 26 

© South Dakota Trust Company LLC – All Rights Reserved 

Page | 1

3. CONCLUSION ....................................................................................................................... 29 

VI. PRIVACY OF COURT RECORDS ...................................................................................... 30 

1. INTRODUCTION ................................................................................................................... 30 

2. STATES ............................................................................................................................... 30 

3. CONCLUSION ....................................................................................................................... 33 

VII. DOMESTIC ASSET PROTECTION AND SELF-SETTLED TRUSTS ............................ 34 

1. INTRODUCTION ................................................................................................................... 34 

2. STATES WITH DAPT STATUTES........................................................................................... 34 

3. KEY FACTORS TO ASSET PROTECTION/SELF-SETTLED TRUST SITUS .................................. 34 

4. THREE KEY REQUIREMENTS ............................................................................................... 35 

5. DISCRETIONARY SUPPORT STATUTE ................................................................................... 35 

6. LLC AND LP STATUTES ...................................................................................................... 36 

7. SPECIAL PURPOSE ENTITY .................................................................................................. 36 

8. PRIVACY ............................................................................................................................. 37 

9. COURT AWARD OF ATTORNEYS’ FEES IN A TRUST CONTEST .............................................. 37 

10. BENEFICIARY NOTICE ..................................................................................................... 37 

11. EXTINGUISHMENT OF CREDITORS’ CLAIMS (“FRAUDULENT CONVEYANCE PERIOD” OR 

STATUTE OF LIMITATIONS) ......................................................................................................... 38 

12. EXCEPTION CREDITORS ................................................................................................... 39 

13. SPENDTHRIFT TRUSTS ..................................................................................................... 40 

14. MISCELLANEOUS ............................................................................................................. 40 


Page | 2

I. RULE AGAINST PERPETUITY/TRUST DURATION 

1. INTRODUCTION 

Since 1948 thirty states and the District of Columbia have abolished or modified their rule against 

perpetuities (RAP) in whole or in part so that the trust can last forever or for a very long duration. 

Most of these RAP abolishment and modifications took place after 1986, generally 1995 and 

beyond. 1 These states are listed and categorized below: 

Unlimited Duration States: 

Alaska 

Arizona 

Colorado 

Delaware* 

District of Columbia 

Hawaii 

Idaho (pre-1986) 

Illinois 

Kentucky 

Maine 

Maryland 

Michigan 

Missouri 

Nebraska 

New Hampshire 

New Jersey 

North Carolina 

Ohio 

Pennsylvania 

Rhode Island 

South Dakota (pre-1986) 

Virginia 

Wisconsin (pre-1986) 

Long-Term Duration States: 

Alabama (360 years) 

Colorado (1,000 years) 

Florida (360 years) 

Nevada (365 years) 

Tennessee (360 years) 

Utah (1,000 years) 

Washington (150 years) 

Wyoming (1,000 years) 

1 Unlimited Duration States: Alaska (ALASKA STAT. §§ 34.27.100, 34.27.051); Arizona (ARIZ. REV. STAT. §§ 14- 

2901A, 33-261); Delaware (DEL. CODE ANN. tit. 25, § 503); District of Columbia (D.C. CODE §§ 19-904(a)(10), 19- 

901); Hawaii (HAW. REV. STAT. §§ 525-1, 554G); Idaho (IDAHO CODE ANN. § 55-111); Illinois (765 ILL. COMP 

STAT. §§ 305/1-305/6); Kentucky (KY. REV. STAT. ANN. §§ 381.224; 381.225); Maine (ME. REV. STAT. ANN. tit. 33, 

§ 101-A); Maryland (MD. CODE ANN., EST. & TRUSTS §§ 11-102 – 11.103); Michigan (MICH. COMP. LAWS §§ 

554.71 – 554.78, 554.91 – 554.94); Missouri (MO. REV. STAT. § 456.025); Nebraska (NEB. REV. STAT. §§ 76-2001 

– 76-2008); New Hampshire (N.H. REV. STAT. ANN. §§ 564:24, 547:3-k); New Jersey (N.J. STAT. ANN. §§ 46:2F-9 

– 46:2F-11); North Carolina (N.C. GEN. STAT. §§ 41-15 – 41-27); Ohio (OHIO REV. CODE ANN. §§ 2131.08, 

2131.09); Pennsylvania (20 PA. CONS. STAT. §§ 6104, 6107.1); Rhode Island (R.I. GEN. LAWS § 34-11-38); South 

Dakota (S.D. CODIFIED LAWS §§ 43-5-1 – 43-5-9, 55-1-20); Virginia (VA. CODE ANN. §§ 55-12.1 – 55-12.6, 55- 

13.3); Wisconsin (WIS. STAT. § 700.16). 

Long Duration States: Alabama (360 years, ALA. CODE §§ 35-4A-1 – 35-4A-8); Colorado (1,000 years, COLO. REV. 

STAT. § 15-11-1102.5); Florida (360 years, FLA. STAT. § 689.225); Nevada (365 years, NEV. REV. STAT. §§ 111.103 

– 111.1039); Tennessee (360 years, TENN. CODE ANN. §§ 66-1-202 – 66-1-208); Utah (1,000 years, UTAH CODE 

ANN. §§ 75-2-1201 – 75-2-1209); Washington (150 years, WASH. REV. CODE § 11.98.130); Wyoming (1,000 years, 

WYO. STAT. ANN. §§ 34-1-139). 


Page | 3

*In 1995, Delaware enacted legislation that permits stocks, bonds, and other personal 

property to remain in trust forever. 2 Real property is limited to only 110 years in trust. 3 

This 110 real property limitation can be avoided by putting the property in a limited 

liability company or a family limited partnership because, under Delaware law, interests 

in these entities are personal property. 4 

Please See: Daniel G. Worthington, Perpetual Trust States – The Latest Rankings, 

TRUSTS & ESTATES, Jan. 2007; 

2. APPROACH TO REPEALING OR MODIFYING THE RAP 

There has been no one dominant approach to repealing or modifying the RAP. Several 

approaches have been utilized to create perpetual and long-term trusts. 5 

a. RAP Approach #1: Suspension of the Power to Alienate 

Several states shift the perpetuities inquiry from remoteness of vesting to suspension of 

the power to alienate. Consequently, if the trustee has an explicit or implied power to sell, 

the trust jumps outside the rule of suspension of alienation, which limits the duration of a 

trust. These states have also generally abrogated their rule against perpetuities, which 

addresses the timing issue. Consequently, these states address both the “timing” and 

“vesting” issues associated with doing away with their RAP. These states are further 

categorized as: 

i. Pre-1986 States: Idaho, 6 South Dakota, 7 Wisconsin 8 

Please note: These states are sometimes referred to as the “bellwether” states 

because they made changes to their applicable law before the generation-skipping 

transfer (GST) tax was imposed in 1986, and therefore their statutory purpose 

could not have been to circumvent the Internal Revenue Code (IRC). Congress 

passed the GST tax in 1986, imposing a tax on property transfers to skip 

persons. 9 

2 DEL. CODE ANN. tit. 25, § 503. 

3 Id. 

4 Id. 

5 The various methods of repealing or modifying the Rule Against Perpetuities are outlined in the following articles: 

Garrett Moritz, Note, Dynasty Trusts and the Rule against Perpetuities, 116 HARV. L. REV. 2588 (2003); Jesse 

Dukeminier & James E. Krier, The Rise of the Perpetual Trust, 50 UCLA L. REV. 1303 (2003); Stewart E. Sterk, 

Jurisdictional Competition to Abolish the Rule Against Perpetuities: R.I.P. for the R.A.P., 24 CARDOZO L. REV. 

2097 (2003); Daniel G. Worthington, The Problems and Promise of Perpetual Trust Laws, TRUSTS & ESTATES, Dec. 

2004; Charles D. Fox IV & Michael J. Huft, Asset Protection and Dynasty Trusts, 37 REAL PROP. PROB. & TR. J. 

287 (2002); Richard W. Nenno, Relieving Your Situs Headache: Choosing and Rechoosing the Jurisdiction for a 

Trust, 2006 Miami Tax Institute; Daniel G. Worthington, Is Florida’s New Rule Against Perpetuities a Generation- 

Skipping Transfer Tax Trap for the Unwary?, TRUSTS & ESTATES, Dec. 2000. 

6 IDAHO CODE ANN. § 55-111. 

7 S.D. CODIFIED LAWS §§ 43-5-1 – 43-5-9, 55-1-20. 

8 WIS. STAT. § 700.16. 

9 See supra note 5. 


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ii. Post-1986 States: Alaska, 10 Delaware, 11 Kentucky, 12 New Jersey, 13 Missouri, 14 

New Hampshire, 15 and North Carolina. 16 

iii. Rhode Island: Rhode Island has completely abrogated its rule without any rule 

against alienation, thereby addressing the “timing” issue but not the “vesting” 

issue. 17 

b. Limited Powers of Appointment/Delaware Tax Trap 

i. Introduction: The Delaware Tax Trap may be a concern for a trust that is 

created in a state in which the trust might last beyond the common law RAP or 

the Uniform Statutory Rule Against Perpetuity (USRAP). This is not just an issue 

for Delaware trusts. Pursuant to Delaware statute, the exercise of a limited or 

general power of appointment usually begins a new perpetuities period. 18 Prior to 

this, Delaware statutes provided the opportunity through the exercise of 

successively limited powers of appointments over successive generations, thus 

allowing for a perpetual trust without federal transfer taxes. 19 IRC § 2514(d) was 

enacted in 1951 to prevent this from happening. The current IRC section dealing 

with this issue is IRC § 2041(a)(3). 

ii. History – IRC § 2041(a)(3): The legislative history of this statute makes clear 

that the Delaware power of appointment statute was Congress’ intended target (S. 

Rep. No. 82-382)(1951). 

iii. Current – IRC § 2041(a)(3): Pursuant to IRC § 2041(a)(3), a trust will be 

subject to federal estate tax at the death of a beneficiary who has a limited power 

of appointment over the trust if the beneficiary: 

[E]xercises a power of appointment created after October 21, 1942, by creating 

another power of appointment which under the applicable local law can be validly 

exercised so as to postpone the vesting of any estate or interest in such property, or 

suspend the absolute ownership or power of alienation of such property, for a period 

ascertainable without regard to the date of the creation of the first power. 

iv. Summary: 20 For a trust to be includable in the gross estate of the donee of a 

limited power of appointment created after October 21, 1942, the donee must: 

1. Exercise the power of appointment; 

10 ALASKA STAT. §§ 34.27.100, 34.27.051. 


12 KY. REV. STAT. ANN. §§ 381.224; 381.225. 

13 N.J. STAT. ANN. §§ 46:2F-9 – 46:2F-11. 

14 MO. REV. STAT. § 456.025. 

15 N.H. REV. STAT. ANN. §§ 564:24, 547:3-k. 

16 N.C. GEN. STAT. §§ 41-15 – 41-27. 

17 R.I. GEN. LAWS § 34-11-38. 


19 38 Del. Laws 198 (1933). 

20 Treas. Reg. § 20-8041-3(e). 


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2. Exercise the power of appointment to create another limited power of 

appointment; and 

3. Exercise the power of appointment to create another limited power of 

appointment that, under the applicable local law, can be validly exercised 

to do one of the following for a period ascertainable without regard to the 

date of the creation of the first power: 

c. Estate of Murphy v. Commissioner 

a. Postpone the vesting of any estate or interest in such property; or 

b. Suspend the absolute ownership or power of alienation of such 

property. 

The determination as to whether the donee springs the Delaware 

Tax Trap is based on: 

1. The instrument creating the power of appointment; 

2. The instrument exercising the power of appointment; 

and 

3. Applicable local law. 21 

The only reported case involving IRC § 2041(a)(3) is Estate of Murphy v. 

Commissioner, 22 in which the Tax Court held that the exercise of a limited power of 

appointment to create another limited power of appointment did not spring the Delaware 

Tax Trap because, under applicable Wisconsin law, the exercise of a limited power of 

appointment did not commence a new perpetuities period. Consequently, the Delaware 

Tax Trap was not violated in Wisconsin, which had a perpetuities statute expressed in 

terms of a rule against suspension of the power of alienation rather than a rule based on 

the remoteness of vesting. The IRS acquiesced in Murphy. 

Please Note: The Murphy case was relied upon by both Idaho 23 and South 

Dakota 24 in the creation of their RAP laws prior to 1986 and the imposition of the 

GST tax. Alaska 25 and Delaware 26 have since amended their RAP laws to rely on 

the Murphy case. Missouri, 27 New Hampshire, 28 New Jersey, 29 and North 

Carolina 30 are other states that relied on the Murphy case in designing their RAP 

modifications. 

21 Nenno, supra note 5. 

22 Estate of Murphy v. Comm’r, 71 T.C. 671 (1979), acq., 1997-2 C.B.2. 

23 IDAHO CODE ANN. § 55-111. 

24 S.D. CODIFIED LAWS §§ 43-5-1 – 43-5-9, 55-1-20. 

25 ALASKA STAT. §§ 34.27.100, 34.27.051. 


27 MO. REV. STAT. § 456.025. 

28 N.H. REV. STAT. ANN. §§ 564:24, 547:3-k. 

29 N.J. STAT. ANN. §§ 46:2F-9 – 46:2F-11. 

30 N.C. GEN. STAT. §§ 41-15 – 41-27. 


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d. RAP Approach #2: Abolish the Rule as applied to trusts, but retain it in other 

situations 31 

i. Introduction: As previously discussed, this approach was first embraced by 

Alaska, but was later abandoned in 2000 (see ALASKA STAT. §§ 34.27.100, 

34.27.051). Many of these states retain the RAP for all interests, unless those 

interests are exempt, for instance where the trustee has certain powers (power to 

sell, distribute or terminate the trust). 32 

ii. States (all post-1986): 

1. Arizona 33 (retains in Common Law RAP) – Arizona keeps the common 

law RAP, but also allows nonvested interests that violate the RAP to 

persist for a 500-year wait-and-see period, 34 and also permits nonvested 

interests under a trust to last forever, so long as the trustee is empowered 

to sell the assets and the trust includes certain termination powers. 35 

Instead of directly repealing or abolishing its RAP, Arizona preferred to 

maintain it in name while supplementing it. 

2. Colorado 36 

3. District of Columbia 37 

4. Hawaii 38 

5. Michigan 39 

6. Nebraska 40 

Please See: Daniel G. Worthington, The Problems and Promise of 

Perpetual Trust Laws, TRUSTS & ESTATES, Dec. 2004. 41 

e. RAP Approach #3: The “term of years” approach which merely extends the perpetuity 

period 42 

i. Introduction: The USRAP is 90 years. Despite the RAP, several states have 

extended well beyond the 90 years. 

31 Moritz, supra note 5. 

32 ALASKA STAT. §§ 34.27.100, 34.27.051; Stephen E. Greer, The Alaska Dynasty Trust, 18 ALASKA L. REV. 253, 

276 (2001); Stephen E. Greer, The Delaware Tax Trap and the Abolition of the Rule Against Perpetuities, 28 EST. 

PLAN. 68 (2001). 

33 ARIZ. REV. STAT. §§ 14-2901A, 33-261. 

34 Id. § 14-2901(A)(2). 

35 Id. § 14-2901(A)(3). 

36 COLO. REV. STAT. § 15-11-1102.5. 

37 D.C. CODE §§ 19-904(a)(10), 19-901. 

38 HAW. REV. STAT. §§ 525-1, 554G. 

39 MICH. COMP. LAWS §§ 554.71 – 554.78, 554.91 – 554.94. 

40 NEB. REV. STAT. §§ 76-2001 – 76-2008. 

41 See supra note 5; see also Daniel G. Worthington and Mark Merric, Which Situs is Best?, TRUSTS & ESTATES, 

Jan. 1, 2010; Daniel G. Worthington and Mark Merric, Which Situs is Best in 2012, TRUSTS & ESTATES, Jan. 1, 

2012. 

42 Moritz and Worthington “Problems and Promise,” supra note 5. 


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ii. States: 

1. Alaska 43 – 1,000 years (if limited power of appointment utilized) 

2. Alabama 44 – 360 years 

3. Colorado 45 – 1,000 years 

4. Delaware 46 – 110 years with real estate 

5. Florida 47 – 360 years 

6. Nevada 48 – 365 years 

7. Tennessee 49 – 360 years 

8. Utah 50 – 1,000 years 

9. Washington 51 – 150 years 

10. Wyoming 52 – 1,000 years 

f. RAP Approach #4: Makes RAP a default but allows drafters to opt out in trust 

instrument (hybrid of approach #1) 

i. Introduction: Most of the states utilizing this RAP approach have not abrogated 

their RAP. Consequently, these states’ choice of a default rule, either common 

law or USRAP, probably controls for GST tax exemption allocation purposes. 53 

ii. States: 

1. Illinois 54 

2. Maine 55 

3. Maryland 56 

4. Michigan 57 

5. Ohio 58 

6. Virginia 59 

Please note: Illinois keeps the common law RAP, with some alterations, 

as a default rule, but permits those seeking to create perpetual trusts to 

opt out. 60 Would-be dynasty trust settlers can create a “qualified 

43 ALASKA STAT. §§ 34.27.100, 34.27.051. 

44 ALA. CODE §§ 35-4A-1 – 35-4A-8. 

45 COLO. REV. STAT. § 15-11-1102.5. 

DEL. CODE ANN. tit. 25, § 503. 

47 FLA. STAT. § 689.225. 

48 NEV. REV. STAT. §§ 111.103 – 111.1039. 

49 TENN. CODE ANN. §§ 66-1-202 – 66-1-208. 

50 UTAH CODE ANN. §§ 75-2-1201 – 75-2-1209. 

51 WASH. REV. CODE § 11.98.130. 

52 WYO. STAT. ANN. §§ 34-1-139. 

53 Moritz and Worthington “Problems and Promise,” supra note 5. 

54 765 ILL. COMP STAT. §§ 305/1-305/6. 

55 ME. REV. STAT. ANN. tit. 33, § 101-A. 

56 MD. CODE ANN., EST. & TRUSTS §§ 11-102 – 11.103. 

57 MICH. COMP. LAWS §§ 554.71 – 554.78, 554.91 – 554.94. 

58 OHIO REV. CODE ANN. §§ 2131.08, 2131.09. 

59 VA. CODE ANN. §§ 55-12.1 – 55-12.6, 55-13.3. 

60 765 ILL. COMP STAT. §§ 305/1-305/6. 


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g. RAP Approach #5: Rhode Island 

perpetual trust,” which is exempt from the RAP, 61 simply by designating 

in the trust instrument that the RAP does not apply and making sure that 

the power of alienation is not suspended beyond the common law 

perpetuities period. 62 Thus Illinois effectively emphasizes alienability 

instead of remoteness of vesting, but leaves the common law RAP as a 

default rule that can be easily waived. Illinois does not address the 

alienability concern behind the RAP. 63 

Please Note: Maine 64 takes a similar opt-out approach. It has a modified 

wait-and-see rule, but so long as the trust instrument’s language opts out 

of the RAP and the power to alienate the trust property is not suspended 

beyond the perpetuities period, the RAP will not apply. 65 Maryland 66 

and Ohio 67 also take this approach. 

Rhode Island has a unique approach to its RAP. 68 It had completely abrogated its RAP 

without leaving any rule against alienation as a stopgap. This seems to deal with the 

“timing” issue but leaves the “vesting” issue unanswered. Many states have handled the 

vesting issue statutorily (see Approach #1 in outline section 2.a.). 

Pennsylvania abolished its RAP for interests created after December 21, 2006 but did not 

leave the leave the rule against alienation as a stopgap. Pennsylvania retains its wait-andsee 

approach to RAP for interests created before January 1, 2007. 69 

3. CHANGE OF SITUS – CONSTRUCTIVE ADDITION 

a. Introduction: Once GST tax exemption has been allocated to a trust, any material 

change to the nature of the beneficial interest might trigger a constructive addition, 

thereby eroding the GST tax inclusion ratio. 70 

b. States: Several of the dynasty jurisdictions have somewhat different perpetuities rules 

except for the approach #1 suspension of alienation states: 

i. Alaska (with exceptions) 

ii. Delaware 

iii. Idaho 

iv. Kentucky 

v. Missouri 

vi. New Hampshire 

61 Id. 305/4(a)(8). 

62 Id. 305/3(a-5). 

63 Moritz, supra note 5. 

64 ME. REV. STAT. ANN. tit. 33, § 101-A. 

65 Id. 

66 MD. CODE ANN., EST. & TRUSTS §§ 11-102 – 11.103. 

67 OHIO REV. CODE ANN. §§ 2131.08, 2131.09. 

68 R.I. GEN. LAWS § 34-11-38, see also Worthington “Problems and Promise,” supra note 5. 

69 20 PA. CONS. STAT. §§ 6104, 6107.1. 

70 Worthington “Problems and Promise,” supra note 5. 


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4. CONCLUSION 

vii. New Jersey 

viii. North Carolina 

ix. South Dakota 

x. Wisconsin 

Consequently, a change of trust situs should be able to take place between these states 

without a constructive addition issue. 71 

Please note: Rhode Island and Pennsylvania have no RAP, but also have no 

vesting statute so the change of situs constructive addition issue is unclear. 72 

In selecting an unlimited or long RAP jurisdiction state, the approach that the state took to abolish 

or modify its rule against perpetuity is only one of the key factors, although it may be the most 

important factor. Other factors include: 

a. Availability of directed trust statutes 

b. Trust protector statutes 

c. State income taxation of trusts 

d. Asset protection/self-settled trust laws 

e. State insurance laws and premium taxes 

f. Privacy statutes 

g. Reformation, modification and decanting statutes 

h. Virtual representation statutes 

These are just a few of the additional factors that are part of a decision in selecting an unlimited 

or long RAP jurisdiction state. 

71 Id. 

72 Id. 


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II. DIRECTED AND DELEGATED TRUSTS 


Directed Trusts provide a family with maximum flexibility and control regarding a trust’s asset 

allocation, diversification, investment management and distributions. Nearly all states have 

“delegated” trust statutes, but only a few select states, have “directed” trust statutes. 73 A directed 

trust allows individuals, who establish a trust with an administrative trustee in the directed trust 

state, to appoint a trust advisor, an investment trustee/committee, who in turn can select an 

outside investment advisor(s) and/or manager(s) to manage the trust’s investments. Multiple 

advisors may be chosen based upon different asset classes/diversification. This allows a family to 

utilize a Harvard or Yale Endowment-type asset allocation, which they might not otherwise be 

able to do with a delegated trust as a result of laws, risks, time and costs. 

2. PRUDENT INVESTOR ACT 

Many individuals use the terms “directed trust” and “delegated trust” interchangeably when they 

are actually very different. Both terms and concepts have gained immense popularity with the 

advent of the Prudent Investor Act, and thus have changed the trustee’s traditional role regarding 

trust investment management and in some instances trust distributions. A trustee’s duties and 

flexibility regarding investment responsibilities within a trust typically vary depending upon 

several factors: 

Prudent Investor Act; 

Whether the trust is directed or delegated; 

The state statutes; 

The trust instrument; and 

Whether the trustee is a nationally chartered bank or trust company subject to 

Office of Comptroller of the Currency regulation. 

a. The Prudent Investor Act, adopted in 1994 reflects a modern portfolio theory and total 

return approach to the exercise of fiduciary investment and discretion. 74 Most states 75 

have adopted some form of the Prudent Investor Act which allows the trustee to acquire 

most types of investments and measures investment performance based upon an 

assessment of the entire portfolio versus an asset by asset analysis, which its predecessor 

73 Selected directed trust statutes: Alaska (ALASKA STAT. § 13.36.375); Colorado (COLO. REV. STAT. § 15-1-307); 

Delaware (DEL. CODE ANN. tit. 12, § 3313); District of Columbia (D.C. CODE § 19-1308.08); Florida (FLA. STAT. § 

736.0703); Nevada (NEV. REV. STAT. §§ 163.553 - 556); New Hampshire (N.H. REV. STAT. ANN. §§ 564-B:12-1201 

- 1206); South Dakota (S.D. CODIFIED LAWS §§ 55-1B-1 – 55-1B-11); Virginia (VA. CODE ANN. § 64.2-770); 

Wyoming (WY. STAT. ANN. §§ 4-10-710 – 4-10-718). 

Selected Delegated Trust States: Arizona (ARIZ. REV. STAT. § 14.10807); California (CAL. PROB. CODE § 16052); 

Colorado (COLO. REV. STAT. § 15-1.1-109); Florida (FLA. STAT. § 736.0807); Illinois (760 ILL. COMP. STAT. § 

5/4.10); Nevada (NEV. REV. STAT. § 164.770); New Hampshire (N.H. REV. STAT. ANN. § 564-B:8-807); New Jersey 

(N.J. STAT. ANN. § 3B:20-11.10); New York (N.Y. EST. POWERS & TRUSTS LAW § 11-2.3). 

74 RESTATEMENT (THIRD) OF TRUSTS § 227 (Prudent Investor Rule). The Uniform Prudent Investor Act is available 

on the internet at http://www.uniformlaws.org/shared/docs 

/prudent%20investor/upia_final_94.pdf. See also Bogert, TRUSTS AND TRUSTEES § 613. 

75 To determine which states have enacted the Uniform Prudent Investor Act, please go to 

http://uniformlaws.org/Act.aspx?title=Prudent%20Investor%20Act. 


Page | 11

the “prudent man rule” required. 76 Because the new law mandates that a fiduciary 

exercise the “care, skill and caution to make and implement investment and management 

decisions as a prudent investor would,” a trustee may even be required to delegate 

investment authority, if the trustee is not sufficiently expert to perform that function for a 

particular trust. Even a fiduciary with investment skill may delegate certain investment 

functions. For example, a corporate trustee not expert in a specific investment area—such 

as foreign securities, venture capital, etc., may properly delegate that particular 

responsibility. 77 Consequently, a trust with situs and law in a state that has adopted some 

form of the Prudent Investor Act can be very beneficial. 

3. DIRECTED TRUSTS 

A directed trust combines flexibility and control, as well as, the favorable trust, asset protection 

and tax laws of the directed trust state with the skills of a client's own investment advisors. This 

combination allows the client to maintain their trusted investment advisors. 

Any type of trust can be established as a directed trust, including both revocable and irrevocable 

trusts. The trust instrument vests control over investment discretion with an outside advisor and 

exonerates the administrative trustee. This is also supported by the directed trust statute. 

a. Directed Trust Structure 

The typical directed trust has an administrative trustee and/or custodian, but an outside 

investment advisor/manager of the client’s choice is responsible for the trust’s investment 

management. There are many different ways of structuring each scenario based upon the 

client's desires and needs. 

A directed trust is generally drafted so that a trustee’s duties and discretion as to 

distributions and/or investments are removed by a provision in the trust agreement and/or 

by state statute, and given to an investment committee/advisor, a distribution 

committee/advisor, a trust advisor, and/or trust protector. The general structure of a 

modern trust using a directed trustee is as follows: 78 

i. The Administrative Trustee 

An administrative trustee is typically based in a directed trust state and/or is 

drafted into such a role in the trust document and exonerated from acting in a 

directed capacity. 79 However, drafting a directed trust structure without a directed 

trust statute may not be as strong. The administrative trustee is not responsible 

for the trust’s investment management, but instead takes direction from the 

Investment Committee/Advisor. The administrative trustee’s typical duties are to 

title and take ownership of the trust assets, establish and maintain a trust bank 

76 29 C.F.R. § 2550.404(a)-1 (1974); Bogert, TRUSTS AND TRUSTEES § 612 n.20. 

77 RESTATEMENT (THIRD) OF TRUSTS § 227 (Prudent Investor Rule); Lyman W. Welch, How the Prudent Investor 

Rule May Affect Trustees, TRUSTS & ESTATES, Dec. 1991. 

78 Al W. King, Pierce H. McDowell & Daniel G. Worthington, Dynasty Trusts: What the Future Holds for Today’s 

Technique, TRUSTS & ESTATES, Apr. 1996; Al W. King, The Modern Dynasty Trust: Flexibility is More Important 

than Ever, TRUSTS & ESTATES, Jan. 1998; Iris J. Goodwin & Pierce H. McDowell III, Delegating Responsibility: 

Trustees Explore the Once Taboo, TRUSTS & ESTATES, Mar. 1999. 



Page | 12

account, prepare and/or sign the trust tax returns, prepare and send trust 

statements, make distributions and receive contributions, etc. Additionally, the 

administrative trustee ensures that the trust document is followed (i.e., if the 

investment managers are investing in hedge funds and the trust document 

prohibits hedge fund investing). 

ii. The Investment Advisor or Committee 

An Investment Advisor or Committee, which is typically comprised of the 

client’s family members, selects who will be responsible for the investment 

management of the trust assets. The trust advisor, investment advisor/committee 

and selected investment manager(s) then directs the administrative trustee as to 

how the trust will be invested and generally invests pursuant to an Investment 

Policy Statement. The Investment Committee/Advisor may direct the 

administrative trustee as to insurance, closely-held stock, partnerships, LLCs, 

real estate, art, and other illiquid assets held by the trust. Committee members 

may be chosen based upon their experience and expertise with a particular asset 

class. 

iii. The Distribution Advisor or Committee 

A Distribution Advisor or Committee is often established to determine when 

discretionary trust distributions should be made. This committee is typically 

comprised of both family and independent members to accommodate both tax 

and non-tax sensitive distributions. Family members may serve on these 

distribution committees and determine all distributions of income and principal 

for "health, education, maintenance and support" (HEMS). Any additional 

distributions may be tax sensitive and require an independent trustee. The 

administrative trustee may also play a role on this committee as an independent 

committee member for tax sensitive distribution purposes. 

b. State Statute Protection: Generally advisors draft directed trusts for investment 

management purposes with both situs and governing law provisions in states with 

directed trust statutory protection. Examples of states that authorize directed trusts states 

are: Alaska, 80 Colorado, 81 Delaware, 82 District of Columbia, 83 Florida, 84 Nevada, 85 New 

Hampshire, 86 South Dakota, 87 Virginia, 88 and Wyoming. 89 

Additionally, many states allow an administrative trustee to take direction from a 

Distribution Committee regarding distributions such as Delaware 90 and South Dakota. 91 

80 ALASKA STAT. § 13.36.375. 

81 COLO. REV. STAT. § 15-1-307. 


83 D.C. CODE § 19-1308.08. 

84 FLA. STAT. § 736.0703. 

85 NEV. REV. STAT. §§ 163.553 – 556. 

86 N.H. REV. STAT. ANN. §§ 564-B:12-1201 – 1206. 

87 S.D. CODIFIED LAWS §§ 55-1B-1 – 55-1B-11. 

88 VA. CODE ANN. § 64.2-770. 

89 WY. STAT. ANN. §§ 4-10-710 – 4-10-718. 

DEL. CODE ANN. tit. 12, § 3313. 


Page | 13

Additionally, many advisors are drafting “directed” trusts in states without directed trust 

statutes, and exonerating the administrative trustee in the trust document, or in some 

instances by separate agreement. The exoneration clauses and agreements vary and are 

oftentimes limited to only inter vivos trusts. In certain states, these exoneration 

agreements are void against public policy. 92 Typically, with or without state statutes, 

documents are drafted with flexibility so that all committees and administrative functions 

can be combined into one “full trustee” function at any time, then possibly revert back to 

committee status at some point in the future (for instance, as a result of the death, 

disability and/or retirement of committee members). 

4. TRUST PROTECTOR 

a. Introduction: Although commonly used in offshore trusts, the use of trust protectors is 

just starting to become popular in domestic estate planning. The typical purpose of a trust 

protector is to provide flexibility to an irrevocable trust. A trust protector is generally an 

individual (or a committee of individuals, or an entity) with specified powers over the 

trust. The trust protector is not a trustee and never holds or administers trust property. 

The exact role of the trust protector and the ability of the trust protector to direct a trustee 

will vary depending on the specific terms of the trust and state statutes. 93 

b. The Trust Protector is also being utilized more and more with domestic trusts to 

supplement the investment and distribution committees of many directed trusts. 94 South 

Dakota adopted the first trust protector statute in the United States in 1997, several states 

now have them. 95 Advisors are drafting the trust protector functions into the trust 

documents even in states without specific statutes; however, this may not be as strong as 

drafting trust protector functions pursuant to a specific statute. 96 

c. Some of the common powers given to a trust protector are as follows: 97 

i. Modify or amend the trust instrument to achieve favorable tax status or respond 

to changes in the Internal Revenue Code, state law, or the rulings and regulations 

there under; 

ii. Increase or decrease the interest of any beneficiaries to the trust; 

iii. Modify the terms of any power of appointment granted by the trust. However, a 

modification or amendment may not grant a beneficial interest to any individual 

or class of individuals not specifically provided for under the trust instrument; 

91 S.D. CODIFIED LAWS §§ 55-1B-1 – 55-1B-11. 

92 Ted R. Ridlehuber, How Effective are Exculpatory Provisions in Wills and Trusts, Cannon Financial, Aug. 2002; 

Roy M. Adams, Use of Exculpatory Provisons, 21st Century Estate Planning Practical Applications, Ed. 2005. 

93 Alexander A. Bove Jr., Trust Protectors: Are They Friends of Fiduciaries? And Should Every Trust Have One?, 

TRUSTS & ESTATES, Nov. 2005; Alexander A. Bove Jr., The Trust Protector: Trust Watchdog or Expensive Exotic 

Pet?, 30 ESTATE PLANNING JOURNAL 390 (Aug. 2003). 

94 Alexander A. Bove Jr., Trust Protectors: Are They Friends of Fiduciaries? And Should Every Trust Have One?, 

TRUSTS & ESTATES, Nov. 2005; Alexander A. Bove Jr., The Trust Protector: Trust Watchdog or Expensive Exotic 

Pet?, 30 ESTATE PLANNING JOURNAL 390 (Aug. 2003). 

95 S.D. CODIFIED LAWS § 55-1B-6; ALASKA STAT. § 13.36.370; DEL. CODE ANN. tit. 12, § 3313; IDAHO CODE ANN. 

§ 15-7-501; WYO. STAT. ANN. §§ 4-10-710 – 11. 

96 Information based upon the authors’ previous experience and informal discussions with advisors. 

97 See supra note 93; S.D. CODIFIED LAWS § 55-1B-6. 


Page | 14

iv. Remove and appoint a trustee, trust advisor, investment committee member, or 

distribution committee member; 

v. Terminate the trust; 

vi. Veto or direct trust distributions; 

vii. Change situs or governing law of the trust, or both; 

viii. Appoint a successor trust protector; 

ix. Interpret terms of the trust instrument at the request of the trustee; 

x. Advise the trustee on matters concerning a beneficiary; and 

xi. Amend or modify the trust instrument to take advantage of laws governing 

restraints on alienation, distribution of trust property, or the administration of the 

trust. 

d. State Statutes 

The first trust protector statute in the United States was passed by South Dakota in 1997 

(S.D. CODIFIED LAWS § 55-1B-6). Idaho passed their trust protector law in 1999 (IDAHO 

CODE ANN. § 15-7-501). Pursuant to South Dakota law, a trust protector is defined as 

“any disinterested third party whose appointment is provided for the trust instrument.” 

i. Some of the states that have a statutory acknowledgement of the role of trust 

protector include: 

5. SPECIAL PURPOSE ENTITIES 

Alaska (ALASKA STAT. § 13.36.370) 

Arizona (ARIZ. REV. STAT. § 14-10818) 

Delaware (DEL. CODE ANN. tit. 12, § 3313) 

Idaho (IDAHO CODE ANN. § 15-7-501) 

Nevada (NEV. REV. STAT. §163.5553) 

New Hampshire (N.H. REV. STAT. ANN. § 564-B:12-1201 - 1208) 

South Dakota (S.D. CODIFIED LAWS § 55-1B-6) 

Tennessee (TENN. CODE ANN. § 35-16-108) 

Vermont (VT. STAT. ANN. tit. 14A, §§ 1101-1105) 

Wyoming (WYO. STAT. ANN. §§ 4-10-710 – 11) 

Special Purpose Entities are gaining in popularity; however, only a few states currently allow for 

these types of entities. South Dakota is the only state that recognizes these entities by statute. 98 

Special Purpose Entities are typically an LLC or some other corporate entity that houses the trust 

protector, as well as the investment and distribution committees or advisors. It is not a trust 

company. The sole purpose of the Special Purpose Entity is to direct the administrative trustee as 

to the trust investments, distributions and/or trust protector functions. 

a. Liability Coverage 

The Special Purpose Entity alternative must generally be used in combination with the 

directed trust structure previously discussed. The Special Purpose Entity places a liability 

umbrella over the heads of the individuals filling the roles of the trust protector, 

98 S.D. CODIFIED LAWS § 51A-6A-66. 


Page | 15

investment committee and/or distribution committee. These individuals are employed by 

the Special Purpose Entity to carry out the functions of the Special Purpose Entity. 

i. It is very difficult, if not improbable, to acquire liability insurance coverage for 

individuals serving as co-trustees, members of the investment or distribution 

committee or trust protector. Most of these roles are subject to a gross negligence 

standard; however, some insurance companies will provide coverage on a caseby-case 

basis to a Special Purpose Entity established specifically for these 

purposes, thus further protecting the trust protector and committee members. 

Such an entity would also provide legal continuity of its corporate existence by 

continuing without regard to any single individual’s death, disability, or 

resignation. The entity typically has by-laws that allow for additional members to 

be added or removed so that the entity can continue along with the trust. 99 These 

entities have to be properly structured so as to avoid estate tax inclusion issues. 100 

b. Many states do not have specific state statutes, such as Alaska, Nevada and Wyoming. 

However, these states may allow families to establish Special Purpose Entities on a caseby-case 

basis. 101 These entities must generally be exempt from regulated Private Trust 

Company status and are typically special purpose type entities with limited defined 

duties. 102 

6. THE TRUST INSTRUMENT 

a. New trusts are very easily drafted as directed trusts. Additionally, older trusts may be 

converted to directed trusts as a result of state modification and reformation statutes. 103 

This generally takes place if circumstances, which were not anticipated by the trust’s 

grantor, have arisen and the modification would substantially further the trust or its 

purpose, such as the desire for directed trust status regarding the administration. 

i. In addition to reformation and modification statutes, several states have 

privacy 104 and virtual representation statutes 105 to protect a family’s privacy and 

provide sign-off by the future vested and/or contingent beneficiaries as part of the 

modification or reformation. 

b. Another strategy involves older non-directed Irrevocable Life Insurance Trusts (ILITs). 

An insurance policy can generally be sold from the old ILIT to a newly drafted ILIT with 

directed trust provisions. If properly structured, there should be no “transfer for value” 


100 Same analogy as Private Family Trust Company Private Letter Rulings, see I.R.S. Priv. Ltr. Rul. 20053003, 

200546055, and 200548035, see also I.R.C. §§ 2036, 2038, 2041 and 2514. 


102 Id. 

103 Alaska (ALASKA STAT. §§ 13.36.340 - 13.36.360); Delaware (DEL. CODE ANN. tit. 12, § 3313(f)); South Dakota 

(S.D. CODIFIED LAWS § 55-3-24); Tennessee (TENN CODE ANN. §§ 35-15-410 – 35-15-416); Wyoming (WYO. 

STAT. ANN. §§ 4-10-411 – 4-10-416). 

104 Delaware Court of Chancery Rule 5(g); South Dakota (S.D. CODIFIED LAWS § 21-22-28). 

105 Alaska (ALASKA STAT. § 13.06.120); Delaware (DEL. CODE ANN. tit. 12, § 3547); D.C. (D.C. CODE § 19- 

1303.01 -.03); Illinois (760 ILL. COMP. STAT. 5/16.1); Nevada (NEV. REV. STAT. § 155.140); New York (N.Y. SURR. 

CT. PROC. ACT § 315); South Dakota (S.D. CODIFIED LAWS §§ 55-3-31 – 55-3-38); Wyoming (Wyo. Stat. Ann. §§ 

4-10-301 – 4-10-305). 


Page | 16

problem or any tax issues. Although there may be tax issues with this strategy, if the 

policy is being sold from a non-grantor trust and the fair market value of the policy being 

sold is more than the cost basis of the policy. 106 

7. DELEGATED TRUSTS 

a. As previously discussed, only a few states have true directed trust statutes, however most 

states have some form of delegated trust statues, particularly with the advent of the 

Prudent Investment Act. 107 The trustee of a delegated trust is generally allowed to 

delegate its investment responsibility to one or more qualified investment managers’ 

consultants and/or advisors, pursuant to the trust document and/or outside agreement. 

Delegated trusts are generally invested pursuant to the provisions of the trust document as 

well as an agreed upon Investment Policy Statement, which is periodically reviewed by 

the investment professionals, trustee and the family, to ensure compliance. 

b. Generally, most delegation standards no longer require the trustee to pre-approve all 

transactions or to analyze each trade. 108 Many advisors suggest that a clause regarding 

trading or brokerage commissions should be inserted into the trust document to protect 

the trustee regarding the possible range of trading commissions. 109 The trustee of a 

delegated trust generally has a much greater degree of responsibility than a directed 

trustee. Consequently, a delegated trustee may desire exoneration language within the 

trust document and/or by separate agreement. 110 In certain states, these exoneration 

agreements are void against public policy in certain situations (for example, New York 

Estates, Powers and Trusts Law Section 11-1.7 makes such exoneration void against 

public policy for testamentary trusts, but not inter vivos trusts). 111 

c. The trustee is generally involved in the selection of the investment manager to delegate 

investment responsibility. Records regarding the investment manager selection due 

diligence must usually be kept by the trustee (for example, the investment managers 

experience, track record and the ADV). Additionally, the terms of the delegation 

(compensation, duration, procedural safeguards) will generally be determined and 

negotiated by both the delegating trustee and the family. 

d. The delegating trustee works with the investment manager and the family in formulating 

an investment policy statement and providing an annual review to ensure that the 

investment objectives are in accordance with the trust document. 

i. If one or more factors are triggered in the review, a more in-depth analysis will 

be conducted to determine whether corrective action should be taken. The trustee 

may utilize agents/experts to assist them with this process. Some of the typical 

trigger points may be: 

106 I.R.S. Priv. Ltr. Rul. 200518061, 200228019. Please note that if a policy is being sold from a non-grantor trust to 

a grantor trust these need to be evaluated on a case-by-case basis. Generally, the fair market value of a normal policy 

will generally exceed cost basis around the 7th year of its existence. 

107 See supra notes 73, 77. 

108 Iris J. Goodwin & Pierce H. McDowell III, Delegating Responsibility: Trustees Explore the Once Taboo, 

TRUSTS & ESTATES, Mar. 1999; Roy M. Adams, Delegating, TRUSTS & ESTATES, June 2003. 

109 Id. 

110 Id. 



Page | 17

1. Significant change in asset allocation; 

2. Significant drop in portfolio value; 

3. Large concentration of investments in one or a limited number of 

investments or in one market sector; 

4. Significant change in account activity (whether “churning” or no 

activity); and 

5. Significant deviation from the investment policy statement. 112 

e. None of these responsibilities typically apply to directed trusts. 113 

8. CONCLUSION 

The Prudent Investor Act, directed trust statutes, and/or the drafting of the modern trust document 

combined with the opportunity to jurisdiction shop for trust situs and law all result in a family 

having maximum flexibility regarding their trust investments allowing them to promote the intent 

behind the Prudent Investor Act to its maximum extent via the directed trust thus resulting in a 

best of class investment management model for a family. 

112 See Goodwin, supra note 108; 12 C.F.R. 9; CHARLES E. ROUNDS JR., LORING TRUSTEE HANDBOOK § 3.2.6 (ed. 

2006). 

113 RESTATEMENT (SECOND) OF TRUSTS § 185; UNIF. TRUST CODE § 808; Richard Nenno, Relieving Your Situs 

Headache: Choosing and Rechoosing the Jurisdiction for a Trust, 40th Annual Heckerling Institute on Estate 

Planning, Jan. 9-13, 2006; see supra note 73. 


Page | 18

III. MODIFICATION/REFORMATION OF TRUSTS 


It may be helpful to reform, modify and thus modernize many existing, older irrevocable trusts. 

Modification, reformation and decanting of trusts have all gained popularity as a result of modern 

trust laws, the Uniform Principal and Income Act, the Uniform Prudent Investor Act, directed 

trust laws, changes in family circumstances and/or a desire to change trust administration. 

2. MODIFICATION/REFORMATION 

The ability to modify/reform the trust can generally be inserted into a trust document at its 

creation. Reformations/modifications may also take place without language in the trust document, 

if state law permits. 

3. SELECTED STATE STATUTES: 

Alabama (ALA. CODE § 19-3B-411); 

Alaska (ALASKA STAT. § 13.36.360); 

Arizona (ARIZ. REV. STAT. § 14-10411); 

Arkansas (ARK. CODE ANN. § 28-73-411); 

California (CAL. PROB. CODE § 15403-15404); 

Delaware (DEL. CODE ANN. tit. 12, § 3313); 

District of Columbia (D.C. CODE § 19-1304.11); 

Florida (FLA. STAT. § 736.0412(1)); 

Iowa (IOWA CODE § 633A.2203); 

Kansas (KAN. STAT. ANN. § 58a-411); 

Maine (ME. REV. STAT. ANN. tit. 18-B, § 411); 

Missouri (MO. REV. STAT. § 456.4A-411); 

Montana (MONT. CODE ANN. § 72-33-406); 

Nebraska (NEB. REV. STAT. ANN. § 30-3837(a)); 

Nevada (Nev. Rev. Stat. § 163.5553); 

New Hampshire (N.H. REV. STAT. ANN. § 564- 

B:4-411(a)); 

New Mexico (N.M. STAT. ANN. § 46A-4-411); 

North Carolina (N.C. GEN. STAT. § 36C-4-411); 

North Dakota (N.D. CENT. CODE § 59-12-11); 

Ohio (OHIO REV. CODE ANN. § 5804.11); 

Oregon (OR. REV. STAT. § 130.200(1)); 

Pennsylvania (20 PA. CONS. STAT. § 7740.1); 

South Carolina (S.C. CODE ANN. § 62-7-411); 

South Dakota (S.D. CODIFIED LAWS § 55-3-24); 

Tennessee (TENN. CODE ANN. § 35-15-411); 

Texas (TEX. PROP. CODE ANN. § 112.054); 

Utah (UTAH CODE ANN. § 757-411); 

Vermont (VT. STAT. ANN. tit. 14A, § 411); 

Wyoming (WYO. STAT. ANN. § 4-10-412). 

Reformations and modifications are generally easiest when both the grantor and the beneficiaries 

are alive and all agree with the reformation/modification. Unborn beneficiaries can be represented 

pursuant to a state’s virtual representation statutes. 114 

Some states, including South Dakota, permit a trustee or beneficiary to petition the court to 

modify or reform the administrative or dispositive terms of the trust. 115 This can be done if 

circumstances, which were not anticipated by the grantor, have arisen and if the modification of 

the trust would substantially further the trust or the purpose for creating the trust. 116 Additionally, 

the reformation can generally be accomplished in order to conform the terms due to a mistake of 

fact or law and the grantor’s intent can be established. 117 In order to achieve the grantor’s tax 

objectives, the terms of a trust instrument may be construed or modified in a manner which will 

not violate the grantor’s probable intention. 118 

114 See Virtual Representation, Section V. 

115 S.D. CODIFIED LAWS § 55-3-26. 


S.D. CODIFIED LAWS § 55-3-28. 



Page | 19

Please see example below of a typical trust reformation/modification: 

Existing Trust 

Delegated 

Trust 

Original State Law 

for Construction, 

Validity and 

Administration 

1. Change Situs to South Dakota by 

naming a South Dakota Trustee; 

2. Upon change of situs and 

appointment of South Dakota 

Trustee, reform/modify to SD law 

for administration 

Existing Trust Modified 

Reformed/Modified Trust 

Original State 

Law for 

Interpretation, 

Construction, 

and 

Validity 

South Dakota 

Law for 

Administration, 

for instance, 

Directed Trust, 

Trust Protector 

4. Some common reasons why a trust would be reformed/modified are: 

a. Change the administrative terms of the trust from a delegated to add directed trust 

structure with investment and distribution committees/ advisors; 

b. Add trust protector; 

c. Change the governing law applicable to the trust; 

d. Add flexibility regarding appointment of trustees and other fiduciaries; 

e. Improve the trust’s governance structure; 

f. Modernize an outdated trust agreement; 

g. Improve tax provisions; 

h. Save state income taxes; 

i. Change dispositive provisions: 

i. Change term; for instance, remove term stating 1/3 of principal at age 25, 1/3 at 

age 30, and 1/3 at age 35, and make discretionary for asset protection purposes 

(family as distribution committee directs SDTC as to distributions); 

ii. However, may not be able to change trust duration (i.e., the applicable R.A.P.). 

5. INVESTMENT FLEXIBILITY 

Many states do not have directed trust statutes, and are only delegated trust states. Consequently, 

whether a family or an institutional trustee is involved, due diligence and ongoing monitoring of 

the trust assets are required in these delegated trust states. 

The family member trustees may not be in compliance and risk individual liability in the event of 

a future lawsuit by a beneficiary as a result of improper diversification, asset allocation, a bad 

investment or bad performance. Additionally, a heavy concentration in one asset or asset class is 

generally not an issue with a directed trust, but can pose major issues for a delegated trust. As a 

result, many people choose to reform/modify an existing delegated trust to a directed trust to 

alleviate these issues. 

6. OLD DISTRIBUTION STANDARDS (I.E., 33% AGE 25, 33% AGE 30, AND 33% AGE 35) 

Older trust distribution standards requiring principal distributions at various ages may no longer 

be desired. For instance, with the older distribution standards, once distributed, the principal is no 

longer asset protected and is subject to estate, generation-skipping transfer, and income taxes. 


Page | 20

Consequently, amending the trust to a purely discretionary standard versus mandatory principal 

distributions at various ages may be desired. These old standards can be modified to a purely 

discretionary standard with the family members controlling most of the distributions from the 

trust for “health, education, maintenance, and support” in the modern directed trust structure. 

7. GRANDFATHERED GENERATION-SKIPPING TRANSFER (GST) TAX TRUSTS 

a. The GST tax was enacted by Congress in 1986; however, trusts that were irrevocable and 

in existence on September 25, 1986 (the date on which the 1986 legislation was first 

introduced in Congress) are exempt. 119 Trusts in existence before this date are generally 

referred to as “grandfathered” GST trusts and are generally not subject to the GST tax. 120 

b. Trust Modification Safe Harbors for Grandfathered GST Trusts 

A modification of a grandfathered GST trust may cause it to lose its grandfathered status. 

The rules for preserving the grandfathered status when a modification is made to such a 

trust are found in Treasury Regulation section 26.2601-1(b)(4). The regulations provide 

safe harbors for: 

i. Certain distributions of trust principal from a GST grandfathered trust to a new 

trust or retention of the trust principal in a continuing trust; 121 

ii. Certain court approved settlements of issues regarding the administration of the 

GST grandfathered trust or the construction of the terms in the trust; 122 

iii. Certain judicial constructions of the GST grandfathered trust to resolve 

ambiguities in the terms of the trust or to a correct scrivener’s error; 123 

iv. Certain modifications of the GST grandfathered trust (including a trustee 

distribution, conversion to a unitrust), and other matters of judicial settlement and 

non-judicial reformations that are valid under state law; 

1. Provided, the modification does NOT shift a beneficial interest in the 

trust to any beneficiary who occupies a lower generation than the 

person(s) who held the beneficial interest prior to the modification; 

AND 

2. Provided the modification does not extend the vesting of any 

beneficial interest in the trust beyond the period provided for in the 

original trust. 124 

8. CONCLUSION 

Flexibility to modify/reform trusts as trust laws and family situations change is extremely 

important in the future, as clients continue to shop trust jurisdictions and as more and more states 

improve their trust laws. 

119 Treas. Reg. § 26.2601-1(b). 

120 Treas. Reg. § 26.2601-1(b). 

121 Treas. Reg. § 26.2601-1(b)(A). 

122 Treas. Reg. § 26.2601-1(b)(B). 

123 Treas. Reg. § 26.2601-1(b)(i)(C). 

124 Treas. Reg. §26.2601-1(b)(4)(i)(D)(1). 


Page | 21

IV. DECANTING 


Decanting is the process of appointing trust property in favor of another trust. Some trusts provide 

the trustees the power to decant in a trust documents. A few states, like South Dakota, have also 

enacted favorable decanting statutes. 125 A trust generally permits trustees to pay trust principal 

over to one or more beneficiaries, which is called the power to invade the trust. For instance, if 

the trustee has any discretion over income or principal, South Dakota’s decanting statute permits 

a South Dakota trustee to pay property to another trust for a beneficiary/beneficiaries. 126 

a. One alternative to decanting is to reform and modify the trust, as previously discussed, 

and at the same time restate the trust. Consequently, the resulting trust could utilize the 

state law of the restated trust for interpretation, construction, validity and administration. 

i. Decanting does not require court involvement, whereas reformation/modification 

and restatement generally does involve a court. 

2. DECANTING PROCESS 

a. Reformation and modification both result in keeping the original trust, whereas 

“decanting” results in the transfer of assets from an existing trust to a newly created trust. 

For example, a South Dakota trustee may be appointment to an existing trust, then the 

South Dakota trustee would decant (i.e., distribute trust assets) to a newly drafted South 

Dakota trust. 

i. South Dakota’s top rated decanting statute provides a lot of flexibility for trust 

remodeling. 127 

Existing Trust 

Original State Law 

for Interpretation, 

Construction, 

Validity and 

Administration 

Trustee Decants 

Trustee Power to 

Distribute Assets 

Appoint a South 

Dakota Trustee 

New South Dakota Law Trust 

with South Dakota Trustee 

South Dakota Law for 

Interpretation, Construction, 

Validity and Administration 

125 Alaska (ALASKA STAT. § 13.36.157); Arizona (ARIZ. REV. STAT. § 14-10819); Delaware (DEL. CODE ANN. tit. 

12, § 3528); Florida (FLA. STAT. § 736.04117); Illinois (760 ILL. COMP. STAT. ANN. 5/16.4); Indiana (IND. CODE 

ANN. § 30-4-3-36); Kentucky (KY. REV. STAT. ANN. § 386.175); Missouri (MO. REV. STAT. § 456.4-419); Nevada 

(NEV. REV. STAT. § 163.556); New Hampshire (N.H. REV. STAT. ANN. § 564-B:4-418); New York (N.Y. EST. 

POWERS & TRUSTS LAW § 10.6.6(b)); North Carolina (N.C. GEN. STAT. § 36C-8-816.1); Ohio (OHIO REV. CODE 

ANN. § 5808.18); Rhode Island (R.I. GEN. LAWS § 18-4-31); South Dakota (S.D. CODIFIED LAWS § 55-2-15); 

Tennessee (TENN. CODE ANN. § 35-15-816(b)(27)); Virginia (VA. CODE ANN. § 64.2-778.1). 




Page | 22

3. STATE STATUTES 

a. Degree of Discretionary Authority Trustee Must Possess to Decant 

With 15 states having decanting statutes, choosing the most appropriate jurisdiction 

depends on the nature of the trustee’s discretion in the trust instrument. The degree of 

discretionary authority that the trustee must possess in order to exercise the decanting 

authority differs among the various states. Under all of the state’s decanting statutes, a 

trustee with absolute discretion to distribute principal and income may decant. 128 The 

states differ in permitting a trustee to decant under a more restrictive distribution 

standard. For example: 

Absolute discretion to invade principal only: Florida, 129 Illinois, 130 Indiana, 131 

Ohio, 132 Rhode Island; 133 

Any discretion to invade principal: Alaska, 134 Delaware, 135 New York 

(unlimited discretion), 136 Tennessee; 137 

Any discretion over principal or income: Arizona, 138 Kentucky, 139 

Missouri, 140 Nevada, 141 North Carolina, 142 South Dakota. 143 Virginia, 144 

Silent: New Hampshire 145 

i. HEMS Standard? 

Some state’s statutes expressly allow a trustee to decant whether or not it’s 

limited by a standard, such as a HEMS standard: Alaska, 146 Arizona, 147 

Kentucky, 148 Missouri, 149 North Carolina, 150 Ohio, 151 and South Dakota. 152 


129 FLA. STAT. § 736.04117. 

130 760 ILL. COMP. STAT. ANN. 5/16.4. 

131 IND. CODE ANN. § 30-4-3-36. 

132 OHIO REV. CODE ANN. § 5808.18. 

133 R.I. GEN. LAWS § 18-4-31. 

134 ALASKA STAT. § 13.36.157. 


136 N.Y. EST. POWERS & TRUSTS LAW § 10.6.6(b). 

137 TENN. CODE ANN. § 35-15-816(b)(27). 

138 ARIZ. REV. STAT. § 14-10819. 

139 KY. REV. STAT. ANN. § 386.175. 

140 MO. REV. STAT. § 456.4-419. 

141 NEV. REV. STAT. § 163.556. 

142 N.C. GEN. STAT. § 36C-8-816.1. 


144 VA. CODE ANN. § 64.2-778.1. 

145 N.H. REV. STAT. ANN. § 564-B:4-418. 

146 ALASKA STAT. § 13.36.157 

147 ARIZ. REV. STAT. § 14-10819 

148 KY. REV. STAT. ANN. § 386.175. 

149 MO. REV. STAT. § 456.4-419. 

150 N.C. GEN. STAT. § 36C-8-816.1. 

151 OHIO REV. CODE ANN. § 5808.18(A)(2)(b) (“A power to make distributions of principal for purposes that 

include best interests, welfare, comfort or happiness, or words of similar import, if not otherwise limited by 

reasonably definite standards or ascertainable standards, constitutes an absolute power not limited by reasonably 


Page | 23

. States May Limit Trustee’s Authority to Alter Beneficial Interests 

i. One or more of the beneficiaries of the first trust (primary and/or contingent 

beneficiaries): Kentucky, 153 Missouri, 154 South Dakota, 155 Virginia 156 

ii. For the benefit of one, more than one, or all of the current beneficiaries of the 

first trust and for the benefit of one, more than one, or all of the successor and 

remainder beneficiaries of the first trust: Illinois 157 

iii. Proper object of trustee’s discretion: Delaware, 158 Tennessee 159 – only primary 

beneficiaries 

iv. One or more current beneficiaries: Nevada, 160 New York, 161 North Carolina, 162 

Ohio 163 

v. The beneficiaries of the second trust are the same as the beneficiaries of the first 

trust: Indiana 164 

vi. One or more of those beneficiaries (the "second trust"): New Hampshire 165 

vii. The beneficiaries of the trust: Arizona 166 

viii. The beneficiaries of the invaded trust: Alaska 167 

ix. One or more persons (“The beneficiaries of the second trust may include only 

beneficiaries of the first trust”): Rhode Island 168 

x. Beneficiaries of the second trust may include only beneficiaries of the first trust: 

Florida 169 

c. No state statute prohibits granting of powers of appointment to beneficiaries of new trust. 

i. Some state decanting statutes specifically allow for powers of appointment, for 

instance, South Dakota. 170 

definite standards or ascertainable standards, regardless of any requirement to take into account other resources of 

the current beneficiary or beneficiaries to whom those distributions may be made”). 


153 KY. REV. STAT. ANN. § 386.175. 

154 MO. REV. STAT. § 456.4-419. 


156 VA. CODE ANN. § 64.2-778.1. 

157 760 ILL. COMP. STAT. ANN. 5/16.4. 

158 DEL. CODE ANN. tit. 12, § 3528; 

159 TENN. CODE ANN. § 35-15-816(b)(27). 

160 NEV. REV. STAT. § 163.556. 

161 N.Y. EST. POWERS & TRUSTS LAW § 10.6.6(b). 

162 N.C. GEN. STAT. § 36C-8-816.1. 


164 IND. CODE ANN. § 30-4-3-36. 

165 N.H. REV. STAT. ANN. § 564-B:4-418. 

166 ARIZ. REV. STAT. § 14-10819. 

167 ALASKA STAT. § 13.36.157. 

168 R.I. GEN. LAWS § 18-4-31. 

169 FLA. STAT. § 736.04117. 



Page | 24

4. COMMON REASONS TO DECANT: 

a. Modifying powers of appointment; 

b. Amending administrative provisions of a trust; 

c. Adding spendthrift protections; 

d. Adding (or removing) grantor trust provisions; 

e. Qualifying a trust as a qualified subchapter S trust, a QDOT, an IRA conduit trust, etc.; 

f. Combining trusts for greater efficiencies; 

g. Separating trusts to allow investment philosophies to be "fine-tuned" for beneficiaries; 

h. Segregating higher risk assets; 

i. Avoiding state and local taxes; 

j. Reducing distribution rights for Medicaid eligibility planning purposes; 

k. Amending trustee succession provisions, removing or replacing a trustee; 

l. Extending the term of a trust; 

m. Changing the governing law provisions of a trust; 

n. Correcting a scrivener's error or ambiguity; 

o. Decanting a beneficiary's share of a trust to a supplemental needs trust in order to 

preserve or obtain eligibility for public benefits; 

p. Combing, segregating or otherwise improving irrevocable life insurance trusts (ILITs) 

and credit shelter trusts; 

q. Dynasty trusts, although less common, are also excellent candidates for decanting. 171 

5. CONCLUSION 

Modern trust laws, such as directed trust structures and asset protection, have made decanting an 

appealing option for many clients. 

171 Thomas E. Simmons, Decanting and Its Alternatives: Remodeling and Revamping Irrevocable Trusts, 55 S.D. L. 

REV. 253 (2010). 

Page | 25 

© South Dakota Trust Company LLC – All Rights Reserved

V. VIRTUAL REPRESENTATION 


Virtual representation is a common law doctrine providing that the interests of future vested 

and/or contingent beneficiaries may be represented by current beneficiaries in a like position or 

by other representatives. Currently, many states have adopted virtual representation statutes. 

These statutes are typically designed to facilitate the administration and/or court supervision of 

trusts where there are contingent, unborn, or unascertainable beneficiaries. The virtual 

representation statutes may provide for a non-judicial method to bind such beneficiaries, which 

may serve to protect against future beneficiaries objecting to and/or re-litigating an issue that was 

addressed by predecessor beneficiaries. 172 Further, virtual representation may allow for the 

resolution of trust administrative issues and for the resolution of interpretation or construction 

issues with the terms of the trust. 

In a court reformation, modification and/or restatement, virtual representation may allow 

contingent, unborn, or unascertainable beneficiaries to be represented by a person with the same 

or similar interests. Also, these statutes may be used with a trust decanting; however, generally 

consent of the beneficiaries is not recommended with a trust decanting as there may be gift tax 

issues. Virtual representation statutes may be utilized in a trust decanting to represent 

beneficiaries in a beneficiary release. 

2. VIRTUAL REPRESENTATION STATUTES 

Many states have adopted a series of statutes which are designed to facilitate the administration 

and/or court supervision of those trusts where there are contingent, unborn or unascertainable 


a. Uniform Trust Code 

Many of the states that have adopted the Uniform Trust Code (UTC) have a version of a 

virtual representation statute (UTC § 301 to 305). 173 Regarding court proceedings in these 

states, service of process is generally limited to service on persons in being and parties to 

the proceeding. The court is typically required to appoint a guardian ad litem to protect 

persons if there is no person in being or ascertained having the same interest as such 

unborn or unascertained persons. Service of process via a guardian ad litem is not 

generally necessary. Some of the states that adopted the UTC have expanded versions of 

the virtual representation statute, for instance see District of Columbia. 

b. District of Columbia 

Washington D.C. has modified the UTC statute to make it more broad. 3 D.C. Code 

section 19-1303.03 Representation by fiduciaries and parents: 

172 CHARLES E. ROUNDS, JR. & CHARLES E. ROUNDS III, LORING AND ROUNDS: A TRUSTEE’S HANDBOOK § 814, 

2013 ed. 

173 See Alabama, Arizona, Arkansas, D.C., Florida, Illinois, Iowa, Kansas, Maine, Michigan, Missouri, Nebraska, 

New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Carolina, Tennessee, Utah, 

Vermont, Virginia, Wyoming. 


Page | 26

To the extent there is no conflict of interest between the representative 

and the person represented or among those being represented with 

respect to a particular question or dispute: 

(1) A conservator may represent and bind the estate that the conservator 

controls; 

(2) A guardian may represent and bind the ward if a conservator of the 

ward's estate has not been appointed; 

(3) An agent having authority to act with respect to the particular 

question or dispute may represent and bind the principal; 

(4) A trustee may represent and bind the beneficiaries of the trust; 

(5) A personal representative of a decedent's estate may represent and 

bind persons interested in the estate; 

(6) A parent may represent and bind the parent's minor or unborn child 

if a conservator or guardian for the child has not been appointed; 

(7) An individual may represent a grandchild or a more remote 

descendent, whether born or unborn, whom a parent may not represent 

and bind under paragraph (6) of this subsection; and 

(8) A qualified beneficiary may represent and bind any beneficiary who 

may succeed to the qualified beneficiary's interest under the terms of 

the trust or pursuant to the exercise of a power of appointment. 174 

Please note that subsections (7) and (8) are not in the UTC. In addition DC Code section 

19-1303.02 is broader than the UTC 303.02 because it applies to special powers of 

attorney as well as general powers. 

c. New York 

Surrogate’s Court Procedure Act (SCPA) section 315 permits an individual to represent 

either a class of individuals with similar interests or another individual with a more 

contingent interest. 175 

d. South Dakota 

Many non-UTC states, like South Dakota, have virtual representation statutes. South 

Dakota’s virtual representation statutes allow for the administration and court supervision 

of trusts where there are contingent, unborn or unascertainable beneficiaries. 176 

In regard to interests in a trust, it may not be necessary to serve any other person than 

those provided in South Dakota Codified Laws section 55-3-32. 177 Generally, service of 

process is limited to persons in being and parties to the proceeding. 178 The court shall 

appoint a guardian ad litem to represent or protect the persons who may eventually 

174 D.C. CODE § 19-1303.03. 

175 N.Y. SURR. CT. PROC. ACT LAW § 315. 

176 S.D. CODIFIED LAWS § 55-3-31 to 38. 

177 “(1) In any contingency to the persons who shall compose a certain class upon the happening of a future event, 

then on the persons in being who would constitute the class if such event had happened immediately before the 

commencement of the proceeding; (2) To a person who is a party to the proceeding and the same interest has been 

further limited upon the happening of a future event to a class of persons described in terms of their relationship to 

such party, then on the party to the proceeding; (3) To unborn or unascertained persons, none of such persons, but if 

it appears that there is no person in being or ascertained, having the same interest, the court shall appoint a guardian 

ad litem to represent or protect the persons who eventually may become entitled to the interest” S.D. CODIFIED 

LAWS § 55-3-32. 



Page | 27

ecome entitled to an interest, if it does not appear that there is a person in being or 

ascertained having the same interest. 179 Further, it may not be necessary to serve the 

potential appointees of a power of appointment nor the takers in default of the exercise of 

a general power of appointment. 180 

In regard to trust modifications/reformations, all interested parties may enter into a 

modification or termination agreement without court approval via virtual 

representation. 181 Please note, while court approval is generally not required, it may be 

obtained upon a petition. 182 

South Dakota’s virtual representation statutes also provide for representation of 

contingent interests, 183 interests in a testamentary instrument, 184 and interests of persons 

under disability. 185 

e. Other States 

Some states that have virtual representation statutes are: 

Alabama, ALA. CODE § 19-3B-301 to 305 

Alaska, ALASKA STAT. § 13.06.120 

Arizona, ARIZ. REV. STAT. § 14-1407 to 1408 

Arkansas, ARK. CODE ANN. § 28-73-301 to 305 

Colorado, COLO. REV. STAT. § 15-10-403 

Connecticut, CONN. GEN. STAT. § 45a-487a to 487f 

Delaware, DEL. CODE ANN. tit. 12, § 3547 

District of Columbia, D.C. CODE § 19-1303.01 to .05 

Florida, FLA. STAT. ANN. § 736.0301 to .0306 

Hawaii, HAW. REV. STAT. ANN. § 560:1-403 

Idaho, IDAHO CODE ANN. § 15-8-205 

Illinois, 760 ILL. COMP. STAT. ANN. 5/16.1 

Indiana, IND. CODE ANN. § 30-4-6-10 

Iowa, IOWA CODE § 633A.6304 

Kansas, KAN. STAT. ANN. § 58a-301 to 305 

Maine, ME. REV. STAT. ANN. tit. 18-B, § 301 to 305 

Massachusetts, MASS. ANN. LAWS ch. 203E, § 301 to 305 

Michigan, MICH. COMP. LAWS § 700.7301 to 7305 

Minnesota, MINN. STAT. § 501B.155 

Missouri, MO. REV. STAT. § 456.3-301 to 305 

Montana, MONT. CODE ANN. § 72-1-303 

Nebraska, NEB. REV. STAT. ANN. § 30-3822 to 3826 

Nevada, NEV. REV. STAT. ANN. § 164.038 

New Hampshire, N.H. REV. STAT. ANN. § 564-B:3-301 to 305 

New Mexico, N.M. STAT. ANN. § 46A-3-304 to 305 

New York, N.Y. SURR. CT. PROC. ACT LAW § 315 

North Carolina, N.C. GEN. STAT. § 36C-3-301 to 305 

North Dakota, N.D. CENT. CODE § 59-11-01 to 05 



181 S.D. CODIFIED LAWS §§ 55-3-32 to 55-3-38; 55-3-24. 






Page | 28

Ohio, OHIO REV. CODE ANN. § 5803.01 to .05 

Oregon, OR. REV. STAT. § 130.100 to .120 

Pennsylvania, 20 PA. CONS. STAT. § 7721 to 7726 

Rhode Island, R.I. GEN. LAWS § 18-4-30 

South Carolina, S.C. CODE ANN. § 62-7-301 to 305 

South Dakota, S.D. CODIFIED LAWS § 55-3-31 to 38 

Tennessee, TENN. CODE ANN. § 35-15-301 to 305 

Texas, TEX. PROP. CODE ANN. § 115-013 

Utah, UTAH CODE ANN. § 75-7-301 to 305 

Vermont, VT. STAT. ANN. tit. 14A, § 301 to 305 

Virginia, VA. CODE ANN. § 64.2-714 to 718 

Washington, WASH. REV. CODE ANN. § 11.96A.120 

Wisconsin, WIS. STAT. ANN. §§ 701.15; 879.23(5) 

Wyoming, WYO. STAT. ANN. § 4-10-301 to 304 

3. CONCLUSION 

The virtual representation statutes are very helpful for representing unborn descendants of long 

term or unlimited duration dynasty trusts, particularly for purposes of trust modification/ 

reformation or decant. 


Page | 29

VI. PRIVACY OF COURT RECORDS 


Privacy may be a high priority for clients and an important concern in regard to asset protection 

planning. South Dakota has a comprehensive privacy statute. As a general rule both federal and 

state court records are available to the public. 186 

2. STATES 

Many states have exceptions that allow for the sealing of records. 

a. New York 

New York follows the general rule that court records are available to the public. 187 New 

York recognizes this right under its state constitution, statutes and cases. 188 

N.Y. COMP. CODES R. & REGS. tit. 22, section 216.1 provides that a court shall not enter 

an order in a civil action, sealing any court records in whole or in part “except upon 

written finding of good cause, which shall specify the grounds.” 189 

Not the parties’ decision: The New York rule is designed to end the parties’ control over 

the sealing decision. The court must weigh the interests of the public’s “right to know” 

against the parties’ privacy interests. 190 This is done on a case-by-case basis. The court 

must set forth their reason for sealing the documents in writing and limit the sealing only 

to those particular documents or groups of documents, and to refrain from sealing entire 

files unless absolutely necessary. 191 Consequently, confidentiality is the exception and 

not the rule. 

i. Two Step Process for Motion to Seal: 192 

1. Motion must show “good cause” to seal; 

2. After “good cause” is shown court must weigh this against the public 

interest to access the court documents; 

Please Note: Desire to avoid embarrassment is not sufficient to 

overcome the presumption of openness. 

a. Factors for Court to Consider: 

i. Extent: Information relied on by court in making their 

decision; 

186 First Amendment to the U.S. Constitution, the public’s qualified right of access to court records and proceedings. 

See Press-Enter Co. v. Super. CT. of Cal for the County of Riverside, 478 U.S. 1 (1986); Richmond Newspapers 

Inc. v. Virginia, 448 U.S. 555 (1980); Westmoreland v. Columbia Broad Sys. Inc., 752 F. 2d 16 (2d Cir. 1984); 

Craig v. Harvey, 331 U.S. 367 (1945); United States v. Amodeo, 44 F. 3d 145 (2nd Cir. 1995). 

187 N.Y. COMP. CODES R. & REGS. tit. 22, § 216.1. 

188 N.Y. COMP. CODES R. & REGS. tit. 22, § 216.1; New York Constitution Article 1 Section 8, supra. 




N.Y. COMP. CODES R. & REGS. tit. 22, § 216.1. 


Page | 30

ii. Whether information is traditionally considered private 

in nature: 

1. Relates to interest of minors; 

2. Intimate details of marriage; 

3. Personal medical records; 

4. Trade secrets; 

5. Confidential business information; 

iii. Legitimate public interest or just curiosity; 

iv. Tactical purposes to coerce settlement; 

v. If derogatory information, has it been proven; 

vi. Information produced with reliance upon confidentiality. 

b. California 

California seems to abide by the general rule that unless confidentiality is required by 

law, the trial court records are presumed to be open. 

i. Case law 

In 1977, the issue of sealing court records was considered in Estate of Hearst, 67 

Cal. App. 3d 777 (1977). In this case, the trustees wanted to seal the records of 

the probate file in order to protect the families. 193 The court ultimately left the file 

unsealed. 194 The California rules for sealed court documents follow the court’s 

decision in NBC Subsidiary (KNBC-TV), Inc. v. Superior Court, 20 Cal. 4th 1178 

(1999). That decision held that the right of public access to trials applies to civil 

as well as well as criminal proceedings. 195 It also provided guidance on the 

proper standards for courts to apply in deciding whether to seal documents filed 

in court as the basis for adjudication. 

ii. General Rule 

The general rule is that trial court records are presumed to be open, unless 

confidentiality is required by law. The rules incorporate the standard set out in 

the NBC Subsidiary case, providing that trial courts may not seal records unless 

the court expressly finds: 

1. There exists an overriding interest that overcomes the right of public 

access to the record; 

2. The overriding interest supports sealing the record; 

3. A substantial probability exists that the overriding interest will be 

prejudiced if the record is not sealed; 

4. The proposed sealing is narrowly tailored; and 

5. No less restrictive means exist to achieve the overriding interest. 

193 Estate of Hearst, 67 Cal. App. 3d 777 (1977) 

194 Estate of Hearst, 67 Cal. App. 3d 777 (1977); see Mitchell J. Langberg, Practice and Procedure, Rules for 

Sealing Evidence, MCLE Self Study. 

195 NBC Subsidiary (KNBC-TV), Inc. v. Superior Court, 20 Cal. 4th 1178 (1999). 


Page | 31

iii. Statutes 

c. South Dakota 

Procedures to request sealing records: 196 

1. The rules provide some factors a court may consider when ruling to seal 

a part of the court file which are based upon those in NBC Subsidiary. 

2. The factors set out in Rule 2.550: 

“The court may order that a record be filed under seal only if it expressly 

finds facts that establish: 

(1) There exists an overriding interest that overcomes the right 

of public access to the record; 

(2) The overriding interest supports sealing the record; 

(3) A substantial probability exists that the overriding interest 

will be prejudiced if the record is not sealed; 

(4) The proposed sealing is narrowly tailored; and 

(5) No less restrictive means exist to achieve the overriding 

interest.” 197 

South Dakota Codified Laws section 21-22-28 allows a petition to have court records 

sealed upon the request of the settlor, trustee, or any beneficiary. In South Dakota, by 

statute, it is possible to protect the privacy of those persons who have established a court 

supervised trust or non-court supervised trust with regard to any court proceeding 

concerning the administration of a trust: 

d. Delaware 

The privacy of those who have established a court trust or other trust shall be 

protected in any court proceeding concerning the trust if the acting trustee, the 

trustor (if living), or any beneficiary so petition the court. Upon the filing of 

such a petition, the instrument on which the trust is based, inventory, statement 

filed by any trustee, annual verified report of trustee, final report of trustee, and 

all petitions relevant to trust administration and all court orders thereon shall be 

sealed upon filing and may not be made a part of the public record of the 

proceeding, but shall be available to the court, to the trustor, to the trustee, to 

any beneficiary, to their attorneys, and to such other interested persons as the 

court may order upon a showing of the need. 198 

Many advisors have stated that in other states, such as Delaware, most trust agreements 

do not need to be filed or recorded, and if they are subject to litigation, the courts can be 

petitioned and have been willing to place the court order under seal. The seal in the 

Delaware Chancery Court, which handles probate matters, generally expires three years 

after the disposition of the case. 199 

196 CAL. RULES OF COURT, Rules 2.550 and 2.551. 

197 CAL. RULES OF COURT, Rule 2.550. 

198 SOUTH DAKOTA CODIFIED LAWS § 21-22-28. 

DEL. CH. CT. R. 5.1. 


Page | 32

e. Alaska 

3. CONCLUSION 

All public records of the Alaska court systems shall be open to the public; however, 

certain matters are required to be kept sealed or confidential. 200 

The issue of privacy of court documents is important to many families because court cases often 

involve family disputes, wealth, and/or other issues that a family does not want publicized. Not 

only is this important with disputes, but also with any modifications, reformations or decanting of 

trusts. 

200 ALASKA R. OF ADMIN. 37.5. 


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VII. DOMESTIC ASSET PROTECTION AND SELF-SETTLED TRUSTS 


Trusts generally provide excellent asset protection. A self-settled trust is one of the more 

frequently used types of domestic asset protection trusts (DAPT). It is generally a discretionary 

irrevocable trust where the grantor or settlor is a permissible beneficiary. If properly structured, 

creditors cannot reach the assets in a self-settled trust to satisfy certain creditor claims against the 

settlor. A self-settled trust can be drafted to either keep trust assets within the settlor’s estate or 

remove them, which allows a wealthy individual to establish a self-settled trust even though that 

individual’s gift tax exemption has been fully utilized. However, advisors generally suggest 

structuring the DAPT as a self-settled trust included in the grantor’s gross estate. 

Generally, the settlor would place 10% to 40% of their financial assets into a DAPT to protect 

those assets from possible future creditors. The settlor is a permissible discretionary beneficiary 

of the DAPT, but does not generally use the trust for everyday living expenses, as this could 

weaken the asset protection. 

a. Offshore Scrutiny 

Offshore asset protection has lost momentum as a result of increased scrutiny and 

reporting requirements by the United States government. Consequently, DAPTs are quite 

popular, and can provide significant advantages for clients. 

2. STATES WITH DAPT STATUTES 

Alaska, ALASKA STAT. § 34.40.110. 

Delaware, DEL. CODE ANN. tit. 12, §§ 3570 to 3576. 

Hawaii, HAW. REV. STAT. §§ 554G-1 to -11. 

Missouri, MO. REV. STAT. § 456.5-505. 

Nevada, NEV. REV. STAT. ANN. §§ 166.010 to 166.180. 

New Hampshire, N.H. REV. STAT. ANN. §§ 564-D:1 to 564-D:18. 

Ohio, OHIO REV. CODE ANN. §§ 5816.01 to .14. 

Oklahoma, OKLA. STAT. tit. 31, §§ 10 to 18. 

Rhode Island, R.I. GEN. LAWS §§ 18-9.2-1 to -7. 

South Dakota, SOUTH DAKOTA CODIFIED LAWS §§ 55-16-1 to -16. 

Tennessee, TENN. CODE ANN. §§ 35-16-101 to -112. 

Utah, UTAH CODE ANN. § 25-6-14. 

Virginia, VA. CODE ANN. § 64.2-745.1. 

Wyoming, WYO. STAT. ANN. §§ 4-10-501 to -523. 

3. KEY FACTORS TO ASSET PROTECTION/SELF-SETTLED TRUST SITUS 

An important consideration in regard to setting up DAPTs is the application of the DAPT state’s 

laws. Generally, a court in a non-DAPT state may be more likely to apply the laws of the DAPT 

state if most of the trust contacts are with the DAPT state. Some key factors that a non-DAPT 

court may consider are: 

a. Governing law in the trust instrument; 

i. Governing law of a DAPT state; 

b. Location of trustee/where the trust is administered; 

i. Same as governing law of trust (DAPT state); 


Page | 34

ii. Location of Trust Protector, Distribution Committee, and Investment Committee; 

best if not in grantor’s resident state. Consider a Special Purpose Entity for 

added contact with DAPT state if located in grantor’s resident state; 

iii. Please note, in regard to private trust companies (PTC), if the PTC is in a DAPT 

state, but administers a DAPT in another state, there may be some issues for the 

DAPT; 

c. Location of the trust property; 

i. In addition to the trust, it may be better to hold the trust property in an LLC in the 

DAPT state; 

ii. For situs purposes, generally best if grantor does not use an LLC or LP in the 

grantor’s resident state; 

d. Residence of the grantor; 

e. Residence of the beneficiaries; and 

f. Other relevant factors depending on circumstances. 201 

A similar list of factors was used by the Kansas Appellate Court in Commerce Bank v. Bolander 

and Whittet, 2007 WL 1041760 (Kann. App. 2007) to determine the most the “significant 

relationship” for the purpose of a conflict of laws analysis. 

Please note factors 4 and 5 usually cannot be changed. Similarly, factors 1 and 2 can easily be 

tied to the DAPT state. If the trust property is titled to an LLC in the DAPT state, factor 3 can 

also be met. This would further tie the trust to the DAPT state. Please note these are just 

informational guidelines. 

4. THREE KEY GENERAL REQUIREMENTS 202 

Generally the requirements for a DAPT: 

No pre-existing understanding or arrangement between the settlor and the trustee; 

Creditors of settlor are unable to access trust property interests as defined by state law; 

and 

The assets were not transferred fraudulently. 

5. DISCRETIONARY SUPPORT STATUTE 

South Dakota was the first state in the U.S. with a “Discretionary Support Statute.” 203 According 

to many advisors, the Restatement (Third) of Trusts may have blurred the line, allowing for a 

fully discretionary trust to possibly be attached by a beneficiary’s creditors as a property interest. 

South Dakota was the first state to codify the common law and Restatement (Second), which 

defines the types of interests a beneficiary has in a trust and therefore the rights of a beneficiary’s 

creditors. 204 Consequently, a discretionary interest in a trust is not a property interest in South 

Dakota. 205 Additionally, limited powers of appointment and remainder interests are also not 

201 Commerce Bank v. Bolander and Whittet, 2007 WL 1041760 (Kann. App. 2007). 

202 See SOUTH DAKOTA CODIFIED LAWS §§ 55-16-1 to -16. 



SOUTH DAKOTA CODIFIED LAWS § 55-1-43. 


Page | 35

property interests. 206 This can be advantageous from an asset protection standpoint. Delaware, 

Nevada, and Wyoming have much more limited versions of this statute. 207 

6. LLC AND LP STATUTES 

As previously discussed, the location of trust property is an important consideration from an asset 

protection standpoint. Consequently, many individuals title assets located in other states to an 

LLC or LP in the DAPT state, which in turn is titled to the DAPT. Using the DAPT’s state 

LLC/LP laws further ties the trust property to the jurisdiction of the self-settled trust, allowing for 

increased asset protection. The asset protection afforded by LLC and LP statutes varies by state. 

Some states, such as South Dakota, have “sole remedy charging order” protection which is 

generally considered the most desirable. 208 A charging order only gives a creditor the rights of a 

partnership or LLC interest, and it does not give a creditor any voting rights. A charging order is 

simply a right to a distribution, if and when one is ever made, and it leaves a creditor without any 

means to force a distribution. This results in a waiting game between the client and the creditor, 

which usually forces the creditor to settle for significantly less than the original judgment amount. 

Many states have judicial foreclosure sale statutes, which allow a creditor to obtain a charging 

order but no voting rights. 209 A creditor will then typically complain to the court that no 

distributions have been made from the partnership or LLC. As an additional remedy, the court 

may then order a judicial foreclosure sale of the limited partnership interest or LLC, which may 

or may not completely pay off the judgment debt. These statutes generally do not provide great 

asset protection. A DAPT in a state without a sole remedy charging order statute drastically 

weakens the asset protection planning. 

7. SPECIAL PURPOSE ENTITY 

To add situs connections to the DAPT state, some advisors suggest the use of a Special Purpose 

Entity (SPE); however, only a few states currently allow for these types of entities. South Dakota 

is the only state that recognizes these entities by statute, which has established South Dakota one 

of the more popular states for SPEs. 210 SPEs are typically LLCs or some other form of corporate 

entity that can function as the investment advisor, distribution advisor and/or trust protector in a 

directed trust structure. However, please note that the SPEs are not a trust company. The sole 

purpose of the SPE is to direct the administrative trustee as to the trust investments, distributions 

and/or trust protector functions. Many advisors suggest that the SPE may further add to the situs 

connection with the DAPT state by creating an entity in the DAPT state that serves in the directed 

trust roles instead of having fiduciaries of the trust in the grantor’s resident state. 


207 DEL. CODE ANN. tit. 12, § 3315; NEV. REV. STAT. ANN. §§ 163.417, 163.4185, 163.4189; WYO. STAT. ANN. § 4- 

10-504. 

208 See SOUTH DAKOTA CODIFIED LAWS §§ 47-34A-504, 48-7-703; ALASKA STAT. §§ 32.11.340, 10.50.380; DEL. 

CODE ANN. tit. 6, §§ 17-703, 18-703; NEV. REV. STAT. §§ 88.535, 86.401; OKLA. STAT. tit. 18, § 2034; TENN. CODE 

ANN. § 48-218-105; VA. CODE ANN. §§ 50-73-46:1, 13.1-1041.1; WYO. STAT. ANN. § 17-15-145. 

209 Mark Merric, The Asset Protection Behind a Charging Order, Merric Law Firm LLC; see HAW. REV. STAT. §§ 

425D-703, 428-504; UTAH CODE ANN. § 48-2c-1103. 

210 SOUTH DAKOTA CODIFIED LAWS § 51A-6A-66. 


Page | 36

8. PRIVACY 

Privacy is a high priority for clients and an important consideration for asset protection 

planning. 211 Most states keep trust matters public with few exceptions. South Dakota has a 

comprehensive privacy statute for trust matters, i.e., total seal forever. 212 Delaware will seal trust 

information for three years in select cases, then open it to the public. 213 

9. COURT AWARD OF ATTORNEYS’ FEES IN A TRUST CONTEST 

Some state statutes will award attorneys’ fees in a trust contest. The trust statutes of South Dakota 

and Delaware provide that a court may award attorneys’ fees and costs to any prevailing party. 214 

Consequently, the trustee can be reimbursed for attorney fees if the plaintiff loses in South 

Dakota. 215 Nevada is slightly different in that only if the petitioner wins, then the court may 

award attorneys’ fees. 216 The Nevada statute appears to only permit a court to award attorneys’ 

fees and costs to a prevailing petitioner, thus if the trust was sued by a beneficiary or a creditor, 

and the trust prevailed, permissible attorneys’ fees under this section may not apply. 217 In Alaska, 

if a trust is voided or set aside, the court may award attorney fees (with reference to civil code 

award of attorney fees). 218 Thus, somewhat similar to Nevada, an Alaska court may award 

attorney fees only if the petitioner wins and the trust is voided or set aside. 219 This would 

presumably apply to a creditor. Please note these apply to the trust statutes and not the states’ 

civil procedure. 

10. BENEFICIARY NOTICE 

Many families do not want the trust beneficiaries to know of the existence of a trust or the trust 

assets. Consequently, many state’s statutes allow the grantor to modify the notice requirements or 

for the beneficiaries to waive notice. For example, Alaska allows a grantor to exempt the trustee 

from the notice requirements, but only for the life of the grantor or until the grantor’s incapacity, 

whichever is shorter. 220 South Dakota allows for beneficiary waiver of notice, but also provides 

that the grantor, trust advisor or trust protector, by the terms of the governing instrument, may 

expand, restrict, eliminate, or otherwise modify the rights of beneficiaries to information relating 

to a trust. 221 Nevada and Delaware are not as broad; neither expressly allow for a trust advisor or 

protector to modify notice to beneficiaries. 222 

211 See Privacy of Court Records, Section VI. 


213 DEL. CH. CT. R. 5.1. 

214 S.D. CODIFIED LAWS § 55-16-13; DEL. CODE ANN. tit. 12, § 3584. 


216 NEV. REV. STAT. § 153.031. 

217 NEV. REV. STAT. § 153.031. 

218 ALASKA STAT. § 13.36.310; ALASKA STAT. § 09.60.010. 

219 ALASKA STAT. § 13.36.310; ALASKA STAT. § 09.60.010. 

220 ALASKA STAT. § 13.36.080. 


NEV. REV. STAT. § 155.010; DEL. CODE ANN. tit. 12, § 3534. 


Page | 37

11. EXTINGUISHMENT OF CREDITORS’ CLAIMS (“FRAUDULENT CONVEYANCE PERIOD” OR 

STATUTE OF LIMITATIONS) 

The period of time after which a cause of action or claim for relief with respect to a transfer of a 

grantor’s assets to a DAPT is extinguished (i.e., creditor will not be able to reach the assets). 

a. States: 

18 Months: Ohio 223 

2 Years: South Dakota, 224 Nevada, 225 Hawaii, 226 and Utah (120 days with mail or 

publication option) 227 

4 Years: Alaska, 228 Delaware, 229 and all other self-settled DAPT states 230 

5 Years: Virginia 231 

Please Note: Generally, all one year discovery except South Dakota, Nevada and Ohio: 

Both 6 months 

b. South Dakota 

Under South Dakota statute, 232 if the creditor becomes a creditor of the settlor before the 

settlor transfers the assets to the trust, the action must be brought within the later of: 

1. 2 years after the transfer is made; or 

2. 6 months after the transfer is or reasonably could have been discovered by 

the creditor. 

a. If the time period under (2) (the 6 month period) is applicable, the 

creditor must either: 

i. Demonstrate that the creditor asserted a specific claim 

against the settlor before the transfer occurred; or 

ii. Files another action, within 2 years after the transfer to the 

trust, that asserts a claim based upon an act or omission of 

the settlor that occurred before the transfer. 

If not brought within this period, the claim is extinguished. 

If the creditor becomes a creditor of the settlor after the settlor transfers the assets to the 

trust, the action must be brought within 2 years after the transfer is made. 

If not brought within this period, the claim is extinguished. 



225 NEV. REV. STAT. § 166.170. 

226 HAW. REV. STAT. §§ 554G-8. 

227 UTAH CODE ANN. § 25-6-14. 

228 ALASKA STAT. § 34.40.110. 


230 See N.H. REV. STAT. ANN. § 545-A:9; MO. REV. STAT. § 428.049; OKLA. STAT. tit. 24, § 121; R.I. GEN. LAWS § 

18-9.2-4; TENN. CODE ANN. § 35-16-104; WYO. STAT. ANN. § 34-14-210. 

231 VA. CODE ANN. § 64.2-745.1. 



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12. EXCEPTION CREDITORS 

Many DAPT state statutes provide for exception creditors. As stated previously, generally the 

DAPT statutes allow a grantor to be a permissible discretionary beneficiary. If structured 

properly, creditors of the settlor cannot reach the trust assets. However, many states provide 

exceptions for certain types of creditors, known as “exception creditors.” If the creditor fits 

within the type/class of creditor proscribed by the statute, then the creditor may be able to reach 

the trust’s assets. 

a. State Exception Creditors: 

Alaska: None 233 

Delaware: Child support, alimony/maintenance, division/distribution of property incident 

to divorce, tort creditors 234 

Hawaii: Child support, alimony/maintenance, division/distribution of property incident to 

divorce, tort creditors, security/loan on the trust, tax liabilities 235 

Missouri: Child support, alimony/maintenance, judgment creditor who provided services 

for the protection of beneficiaries interests in the trust, government claims 236 

Nevada: Creditor where transfer violates legal obligation under contract or valid court 

order 237 

New Hampshire: Child support, alimony/maintenance, division/distribution of property 

incident to divorce, tort creditors 238 

Ohio: Child support, alimony/maintenance, division/distribution of property incident to 

divorce 239 

Oklahoma: Child support, only protects trust property under $1 million 240 

Rhode Island: Child support, alimony/maintenance, division/distribution of property 

incident to divorce, tort creditors 241 

South Dakota: Child support, alimony/maintenance, division/distribution of property 

incident to divorce 242 

Tennessee: Child support, alimony/maintenance, division/distribution of property 

incident to divorce 243 

Utah: Child support 244 

Virginia: Child support, alimony/maintenance, judgment creditor who provided services 

for the protection of beneficiaries interests in the trust 245 

Wyoming: Child support, alimony/maintenance, claims on property used to obtain 

credit 246 

233 But see exception for spousal claims for transfers 30 days prior to marriage, ALASKA STAT. § 34.40.110. 


235 HAW. REV. STAT. § 554G-9. 

236 MO. REV. STAT. § 456.5-503. 

237 NEV. REV. STAT. ANN. § 166.170(3). 

238 N.H. REV. STAT. ANN. § 564-D:15. 


240 OKLA. STAT. tit. 31, § 12. 

241 R.I. GEN. LAWS § 18-9.2-5. 


243 TENN. CODE ANN. § 35-16-104. 

244 UTAH CODE ANN. § 25-6-14. 

VA. CODE ANN. § 64.2-744. 

246 WYO. STAT. ANN. §§ 4-10-503, -520. 


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13. SPENDTHRIFT TRUSTS 

As previously discussed, only a few trust jurisdictions have self-settled domestic asset protection 

statutes. However, most jurisdictions, also including South Dakota, offer some asset protection 

through incorporation of spendthrift provisions into a trust. 247 A spendthrift clause prevents all 

but exception creditors from attaching a trust. A beneficiary, however, may still have an 

enforceable right to a distribution, which could remain unprotected by the spendthrift clause. 

South Dakota has uniquely addressed these potential issues by enacting a discretionary support 

statute, which is a codification of the Restatement (Second) and the common law. 248 

14. MISCELLANEOUS 

Many of the DAPT statutes also have a provision stating that the court of the DAPT state has 

exclusive jurisdiction over DAPT actions, for instance Alaska, 249 Delaware, 250 Nevada, 251 and 

South Dakota. 252 Additionally, if an action is not brought within South Dakota, South Dakota 

provides for the automatic removal of a non-South Dakota trustee, if the foreign court does not 

follow South Dakota’s laws. 253 A successor trustee will then be appointed under the South Dakota 

statute. Further, some DAPT statutes protect advisors who create the DAPT, such as Delaware, 254 

Nevada, 255 and South Dakota. 256 These laws coupled with those previously discussed all create 

major hurdles for creditors. 

247 See SOUTH DAKOTA CODIFIED LAWS § 55-1-43. 

248 See SOUTH DAKOTA CODIFIED LAWS § 55-1-43. 

249 ALASKA STAT. § 34.40.110. 


251 NEV. REV. STAT. § 166.120. 




255 NEV. REV. STAT. § 166.170. 

SOUTH DAKOTA CODIFIED LAWS § 55-16-12. 


Page | 40

COMPARISON CHART OF SELECTED DAPT STATE JURISDICTIONS 

DAPT 

State 

Fraudulent 

Conveyance 

Exception Creditors 

Tort 

Preexisting 

Creditor 

Alaska 4 Years No 

Delaware 

4 Years 

Yes, Preexisting 

Torts 

(Problem) 

Divorcing 

Spouse 

No Problem, 

unless 

DAPT set up 

within 30 

days before 

marriage or 

after 

marriage 

No Problem, 

except if 

DAPT set up 

after 

marriage 

Nevada 2 Years No Silent 

South 

Dakota 

2 Years No 

Alimony 

& Child 

support 

Silent, but 

possible 

issue if 

transfer 

occurs after 

marriage or 

within 30 

days before 

marriage* 

Yes 

Silent, but 

possible 

issue if 

transfer 

violates “a 

contract or 

a valid 

court order” 

No 

Problem, if 

No Problem, 

not 

except if 

awarded 

DAPT set up 

prior to 

after 

setup of 

marriage 

trust 

(7/2013) 

Statutory 

Award – 

Lawsuit 

Attorney 

Privacy 

Fees to 

Trustees 

No (only if 

trust voided) 

Yes (any 

prevailing 

party) 

No (only 

prevailing 

petitioner) 

Yes (any 

prevailing 

party) 

Open 

(left to 

courts) 

Yes, but 

limited to 

3 years 

Open 

(left to 

courts) 

Yes, 

Perpetual 

Total Seal 

Discretionary 

Interest Not 

Property 

LLC & 

LP Sole 

Remedy 

Charging 

Order 

Special 

Purpose 

Entity 

No Yes - 

Yes 

(Limited 

- 1 Level) 

Yes 

(Limited 

- 2 Level) 

Yes 

(Powerful – 

4 Levels) 

Disclaimer: 

These informational materials are intended to provide and advise clients, prospects and advisors with guidance in 

estate planning. The materials do not constitute, and should not be treated as, legal and/or tax advice regarding the 

use of any particular tax, trust or estate planning technique. South Dakota Trust Company, LLC and South Dakota 

Planning Company, LLC and any of their related entities and/or Holding Company do not assume responsibility for 

any individual’s reliance on the written or oral information disseminated. Current strategies and techniques should 

be independently verified by the client and/or prospect’s legal and/or tax advisors before applying them to a 

particular fact situation and should be independently verified to determine both the tax and non-tax consequences of 

using any particular tax, trust or estate planning technique. 

Yes 

Yes 

Yes ? 

Yes 

Yes 

(Statute) 

For additional information on this or any topic, please contact us: 

South Dakota Trust Company, LLC 

201 South Phillips Avenue – Suite 200 

Sioux Falls, SD 57104 

Phone: (605) 338-9170 

Fax: (605) 274-9200 

piercemcdowell@sdtrustco.com 

www.sdtrustco.com 

South Dakota Planning Company LLC 

51 East 42 nd Street – Suite 701 

New York, NY 10017 

Phone: (212) 642-8377 

Fax: (212) 642-8376 

alking@sdplanco.com 


Page | 41

SECTION 4 

Drafting and Administering Supplemental 

and Special Needs Trusts 

Jeffrey W. Schmidt 

Schmitz & Schmidt, P.A. 

Saint Paul 



1. Supplemental & Special Needs Trust Basics ‐ Introduction .......................................................................... 2 

2. Statutory Authority .................................................................................................................................... 2 

a. Supplemental Needs Trust Authority ................................................................................................................ 2 

b. Special Needs and Pooled Special Needs Trust Authority ................................................................................. 2 

3. Special & Supplemental: The Same But Different ....................................................................................... 2 

4. Alternatives to a Trust ............................................................................................................................... 3 

a. Alternatives to a Supplemental Needs Trust .................................................................................................... 3 

b. Alternatives to a Special Needs Trust ............................................................................................................... 5 

5. At The Beginning ........................................................................................................................................ 7 

a. Special Needs Trust Establishment ................................................................................................................... 7 

b. Supplemental Needs Trust Establishment ........................................................................................................ 8 

c. Established for a Person with a Disability ......................................................................................................... 9 

d. A Person Under Age 65 (Or Not) ..................................................................................................................... 10 

e. Testamentary or Inter Vivos? ......................................................................................................................... 12 

f. Established and Administered for the Sole Benefit of the beneficiary ............................................................ 13 

g. Choosing the Trustee ...................................................................................................................................... 14 

h. Revocable vs. Irrevocable ............................................................................................................................... 16 

i. Short vs. Long ................................................................................................................................................. 17 

6. In the Middle ............................................................................................................................................ 17 

a. Taxes ............................................................................................................................................................... 17 

b. Supplemental Purpose .................................................................................................................................... 18 

c. Vendor Payment Requirements (No $$$ to beneficiary) ................................................................................ 18 

d. Sole Benefit of the beneficiary ........................................................................................................................ 18 

e. Food & Shelter Under SSI ................................................................................................................................ 19 

f. Accountings .................................................................................................................................................... 19 

g. Court Supervision ............................................................................................................................................ 20 

7. At the End ................................................................................................................................................. 21 

a. Termination Clauses ....................................................................................................................................... 21 

b. Payback Provisions ......................................................................................................................................... 21 

1 Supplemental & Special Needs Trust Basics | Jeffrey W. Schmidt

1. Supplemental&SpecialNeedsTrust Basics ‐ Introduction 

There isn’t much that’s “basic” about Supplemental and SpecialNeedsTrusts; you have to know 

more than just what words to include on the form. You have to look beyond the law of Trusts 

to understand how to set up, administer and close these odd creatures of estate and special 

needs planning. These materials will get at the shifting policies and regulations that manipulate 

the drafting and (especially) the administration of these invaluable tools for people with 

disabilities and explore when and how to use them. 

The drafting and administration of Supplemental and Special Needs Trusts is intimately 

intertwined with the eligibility and benefit rules of the public assistance programs they are 

implemented to maintain. Practitioners must, absolutely must, have a solid understanding of 

Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), Medical 

Assistance (in all its forms) and Medical Assistance waiver programs to be successful special and 

supplemental needs planners. You cannot simply plug names into a form and even hope to 

provide a successful outcome for your client without being able to assess the availability of 

programs and provide detailed advice about how one qualifies for those programs. 

2. Statutory Authority 

Both Supplemental and SpecialNeedsTrusts are creatures of Statute so the first and most 

important rule for drafting and administration must be, comply with the Statute. We therefore 

start with the Statutes: 

a. SupplementalNeedsTrust Authority 

"SupplementalNeedsTrusts" in Minnesota generally refer to Trusts created by third parties for 

the benefit of an individual with a disability as set forth in Minn.Stat. 501B.89, subd 2 and 

arising out of the long practice of creating such Trusts that were ultimately approved by the 

decision in Carlisle. Leona Carlisle Trust, 498 N.W. 2d 260 (Minn.Ct.App 1993). 

b. SpecialNeeds and Pooled SpecialNeedsTrust Authority 

"SpecialNeedsTrusts" in Minnesota generally refer to Trusts created with assets that belong to 

the individual with a disability under the authority of 42 U.S.C. 1396p(d)(4)(A) or (C). In other 

jurisdictions and even in Minnesota, the names Supplemental and Special are often used 

interchangeably to the great confusion of practitioners and clients. 

3. Special&Supplemental: The Same But Different 

Supplemental and SpecialNeedsTrusts are different at the beginning, nearly identical in the 

middle and then different at the end. In other words, the drafting and methods to open and 


close these similar tools are distinct from each other, but the administration of these Trusts for 

the beneficiary with a disability are almost indistinguishable. 

The SupplementalNeedsTrust is an Estate Planning tool. Trust settlors use it to provide a gift or 

benefit to a person with a disability in a manner that will allow for use of the assets for the 

benefit of that individual without jeopardizing eligibility for assistance programs. 

The SpecialNeedsTrust is an asset preservation tool used by an individual with a disability to 

preserve the use and enjoyment of assets during the individual's own lifetime without 

jeopardizing eligibility for assistance programs. 

4. Alternatives to a Trust 

As with all estate planning or asset preservation planning the first task is to determine the 

planning strategies and tools that best meet the client's needs and goals. A Supplemental or 

SpecialNeedsTrust may not be the best tool for a given situation. 

a. Alternatives to a SupplementalNeedsTrust 

For an estate planning client who might consider a SupplementalNeedsTrust for a loved one 

with a disability, alternatives might include: 

i. Informal Support 

Many parents provide informal financial support to adult children. This is more common when 

the child has a disability. A possible, if unreliable, estate plan could be to leave resources to a 

child or children without a disability and create a moral expectation on that child or children to 

continue providing informal financial support to the sibling with a disability. This does not 

create a legal obligation on the inheriting child who can ignore the parents' request with 

impunity and even a sibling with every intention of providing the informal support can become 

incapacitated, disabled, financially insolvent or dead and be rendered unable to fulfill this 

obligation. 

ii. 

Disinheriting 

Many parents simply leave a child with a disability out of the estate planning altogether. This is 

an effective way to retain eligibility for public assistance, but it misses the opportunity to 

include the child with the disability as an equal member of the family and provide opportunities 

for that child that would not otherwise be available. 


iii. 

Discretionary Trust 

Trusts created with assets of someone other than the recipient or someone with a financial 

obligation to that person, are not considered available if the recipient as “restricted access” to 

the Trust funds. Restricted access means that only a Trustee can withdraw funds, or in other 

words, the Trustee has broad and absolute discretion to make distributions or not. Health Care 

Programs Manuel (HCPM) §19.25.35.30, see also, In re Horton, 668 N.W.2d 208 (Minn.App. 

2003); In re Flygare, 725 N.W. 2d 114 (Minn.App. 2007); and Irrevocable Trust Agreement of 

Craig C. Wilcox, (Minn.App 2009 – UNPUBLISHED OPINION)(This is a line of cases that stands for the 

proposition that any standards for distribution beyond a pure statement of Trustee discretion 

will render the Trust corpus available to the beneficiary for purposes of Medical Assistance 

eligibility). The applicant for or recipient of Medical Assistance may be required to ask the 

Trustee for distributions, but the Trustee’s refusal to make distributions will not disqualify the 

beneficiary from receiving Medical Assistance. A third party can, as a result, establish a 

“restricted access Trust” for the benefit of a disabled individual without jeopardizing that 

person’s eligibility for Medical Assistance with language that provides the Trustee with the 

“sole and absolute discretion to distribute some, none or all of the trust income and principal 

for the benefit of the beneficiary” and notes that “the beneficiary shall have no recourse to 

force the trustee to make distributions for his or her benefit.” The advantages of this type of 

Trust over a SupplementalNeedsTrust include: 

• Certification of disability is not required at the time the Trust is established. 

• Avoid the loss of enforceability if the beneficiary is 65 or older and a permanent resident 

of a nursing home or state facility. 

• Reduce the need for required vendor payments. 

• Less frustrating management for a beneficiary who overcomes the disability, no longer 

needs public assistance and would prefer to manage financial affairs on his or her own. 

A purely discretionary trust is less attractive because: 

 

 

The trustee has absolute discretion leaving the beneficiary without recourse if the 

trustee is lazy or vindictive. 

The availability of trust resources is based only the statutory interpretation of the 

Minnesota Court of Appeals in decisions where it found trusts to be available because 

the trust language included distribution standards. No appellate court has held that 

purely discretionary trusts are unavailable so the concept could be undone with one bad 

case. 

iv. 

Pooled SupplementalNeedsTrust 

Lutheran Social Service of Minnesota administers a Pooled SupplementalNeedsTrust along with 

its Pooled SpecialNeedsTrusts. This can be a convenient, lower cost alternative to the 


traditional SupplementalNeedsTrust. Contact Kimberly Bahl for more information: 

Kimberly.Bahl@lssmn.org | 651.310.9420. 

b. Alternatives to a SpecialNeedsTrust 

For a person with a disability who finds that he or she has excess assets who might consider a 

SpecialNeedsTrust the alternatives might include: 

i. Temporary Loss of Public Assistance 

In the right and rare case, the potentialTrustbeneficiary might be fine if she loses her eligibility 

for public assistance for a period of time. When assets are once again reduced to qualification 

levels, the person can reapply. This possibility must be approached with caution because in 

many cases the loss of benefits could be catastrophic to health and/or safety. Some programs 

may have limited availability and the temporary loss of benefit could turn into a long waiting list 

to get back on. Completing an application for Medical Assistance and other programs is a time 

consuming and stressful task that the individual may not want to experience for a second time. 

ii. 

Reimburse and Remain on Benefits 

For an individual with a relatively small amount of excess assets who does not have and does 

not anticipate a need for resources to pay for items outside of the basic needs to be met with 

the assistance programs, it might be worth considering payment of the excess assets to the 

County or State as a reimbursement for Medical Assistance benefits already paid. The 

individual remains eligible for programs but no longer has the excess assets to pay for extra 

items that might arise in the future. 

iii. 

AssetReduction 

For an individual with a relatively small amount of excess assets who sees value in spending the 

funds in short order on items that will add to his or her quality of life, the excess assets can be 

reduced by spending them, typically on items considered exempt for purposes of financial 

eligibility determinations or on services.Each of the following asset reduction ideas is fraught 

with its own set of rules and considerations related to public assistance eligibility so each must 

be approached with care: 

iv. 

Prefunded Funeral 

The value of a properly structured pre‐planned, pre‐funded funeral is an exempt asset under 

the Medical Assistance and SSI programs. The services of a savvy funeral director are invaluable 

to implement this successfully. 


v. Vehicle 

One vehicle used to transport the Medical Assistance or SSI recipient is exempt for purposes of 

determining financial eligibility. Excess assets can be reduced purchasing or making repairs to a 

vehicle the recipient will use. 

vi. 

House 

The homestead of a Medical Assistance or SSI recipient is exempt so long as he or she lives in 

the house. Assets can be reduced purchasing, maintaining or improving a house in which the 

recipient will live. 

vii. 

Household and Personal Items 

Furniture, appliances, electronics, recreational equipment, household supplies and personal 

items are exempt for purposes of Medical Assistance and SSI eligibility. Assets can be reduced 

purchasing such items for use by the recipient. 

viii. 

Debt Reduction 

The obligation to repay credit card or personal debt, car loans and mortgages makes reduction 

of debt a penalty‐free method to reduce excess assets. Sometimes the best use of excess 

assets is the elimination of the stress and anxiety caused by outstanding debt. With a mortgage 

against the homestead, reducing the excess assets will have the added benefit of increasing the 

equity value of an exempt asset. 

ix. 

Gifts 

Excess assets can be reduced by giving them away. This option requires the exercise of extreme 

caution because the Medical Assistance program has a penalty or "period of ineligibility" that 

can arise if asset transfers are completed. Minn.Stat. § 256B.0595. 

• At the time of a Medical Assistance application, all gifts or transfers completed during 

the 60 months immediately before the month of application must be reported. Failure 

to report transfers within this time period can constitute fraud. If application is made 

beyond this "look‐back" period, the transfer does not need to be reported on the 

application and no period of ineligibility is assessed. 

• All reported transfers, except those where an exception applies, create a period of time 

when Medical Assistance is not allowed to pay for long term care costs. This “period of 

ineligibility” is calculated by dividing the amount of the transfer by the average monthly 

cost for nursing home care in Minnesota. As of July 1, 2012, the monthly average is 

$5,372.00. 


• The period of ineligibility only begins with the month after the submission of a Medical 

Assistance Application where the applicant can show eligibility. This means the 

applicant must have assets at or below the appropriate asset limit and he or she must 

be receiving nursing home, assisted living or home and community‐based long term care 

services that Medical Assistance would be authorized to pay for 

• The period of ineligibility can only be eliminated if all assets are returned by the 

recipient to the transferor. No credit is given for a partial return of assets. 

The SSI program also imposes a period of ineligibility for transfers for less than fair market 

value. The look‐back (or transfer reporting) period for SSI is 36 months prior to the initial filing 

for a claim and any time after SSI eligibility has been establish. The period of ineligibility begins 

on the first day of the month after the month of the transfer. The period of ineligibility can be 

from 1 month to 36 months and is calculated by dividing the total uncompensated transfers by 

federal benefit rate (currently $710.00). 

5. At The Beginning 

a. SpecialNeedsTrustEstablishment 

The federal statute authorizing SpecialNeedsTrusts says they must be "established ... by a 

parent, grandparent, legal guardian of the individual, or a court[.]" 42 U.S.C. 1396p(d)(4)(A). 

i. Parent or Grandparent 

The concept that a parent or grandparent of a SpecialNeedsTrustbeneficiary should have the 

authority to "establish" a Trust based purely on an ancestral relationship, when he or she may 

have no interest in the beneficiary’s legal or financial matters, is odd. With no contractual, 

fiduciary or personal obligation or even commitment to the child or grandchild, why should a 

parent or grandparent have the ability to create an express Trust for someone else? Because 

federal law says so. As a result, a parent or grandparent can sign a SpecialNeedsTrust 

agreement and "seed" it (see the next paragraph), have no more involvement in its creation or 

administration, and the Trust can be valid. This does not include any other relative of the 

beneficiary; only parents or grandparents, not siblings or children or uncles or aunts or cousins. 

The Social Security Administration has issued guidelines in its Programs Operation Manual 

(POMS) requiring strict compliance with the statutory requirements for a SpecialNeedsTrust in 

order to preserve eligibility for SSI benefits. POMS PS 01825.026. For a SpecialNeedsTrust to 

be "established" by a parent or grandparent, that parent or grandparent not only needs to sign 

the Trust agreement and name the Trustee, but he or she must also make the first contribution 

to the Trust property. This can be accomplished with an initial small deposit (as little as $10) to 

fulfill the form over substance act of "seeding" the Trust. This action completes the three basic 

requirements for a Trust: an agreement, a Trustee and a Trustres. 


ii. 

Legal Guardian 

It is generally accepted that a legal guardian includes a Guardian or a Conservator appointed by 

the Court. In Minnesota, Conservators have the authority to "create a revocable or irrevocable 

Trust of property of the estate, whether or not the Trust extends beyond the duration of the 

conservatorship." Minn.Stat. 524.5‐411(a)(4). Even with this raw power in statute it is also 

generally accepted that the significant decision to establish a Trust for the Protected Person 

and then move the Protected Person's resources under the ownership of the Trust (and out of 

the Conservatorship estate) should be pre‐approved by the Court. 

iii. 

Court 

The authority of a Court to establish a SpecialNeedsTrust appears to be unlimited. Federal or 

State Courts, the Civil, Family or Probate Divisions, Worker's Compensation Courts, any Court 

may establish a SpecialNeedsTrust. In general, this is accomplished with an Order of the Court 

stating simply that the Trust is established and, for good measure, requiring that a copy of the 

Order accompany the Trust document. Minnesota has provided clear statutory guidance to the 

Courts in this regard. Minn.Stat. 501B.89, Subd. 3. 

iv. 

Individual with a Disability 

The individual with the disability can join a Pooled SpecialNeedsTrust on his or her own. This 

possibility extends to an agent with authority to act for the individual, such as an Attorney‐in‐ 

Fact, Guardian or Conservator. This is only a possibility with Pooled SpecialNeedsTrusts 

because federal law says so. Compare 42 U.S.C. 1396p(d)(4)(A) with (d)(4)(C). The Pooled 

Trusts available in Minnesota include: 

Center for Special Needs Trust Administration 

David Fitch 

763.213.0714 

dpfitch@gmail.com 

Guardian & Protective Services (GAPS) 

Kelly Qualey 

701.297.8988 

gapsfargo@gapsinc.org 

Lutheran Social Service of Minnesota 

Kimberly Bahl 

651.310.9420 

Kimberly.Bahl@lssmn.org 

ARC Minnesota 

Dennis Collins 

651.523.0823 ext 111 

DennisC@ARcMN.org 

b. SupplementalNeedsTrust Establishment 

A SupplementalNeedsTrust may be established and funded by anyone other than the 

Trustbeneficiary, his or her spouse, or “anyone obligated to pay any sum for damages or any 

other purpose to or for the benefit of the Trustbeneficiary under the terms of a settlement 

agreement or judgment.” Minn.Stat. § 501B.89, subd. 2(b). An individual with a disability 


cannot establish a SupplementalNeedsTrust for himself or herself. A spouse is similarly 

prohibited from establishing a SupplementalNeedsTrust for a spouse with a disability. A 

SupplementalNeedsTrust is, after all, a third party Trust so the person with the disability and his 

or her spouse, who is legally obligated to pay for the medical expenses of the spouse with a 

disability (see, Minn.Stat. § 519.05(a)), are not allowed to establish such a Trust. In addition, 

the statute intentionally prohibits anyone with a tort or other liability responsibility to be 

treated as a third party. This avoids, for example, a defendant in a personal injury action 

(ostensibly a “third party”) from establishing a SupplementalNeedsTrust and avoiding the 

requirement to repay the State for Medical Assistance benefits required for a valid 

SpecialNeedsTrust. Note, however, that this “anyone obligated to pay any sum for damages or 

any other purpose” language is qualified by the fact that this obligation must arise “under the 

terms of a settlement agreement or judgment.” As a result, this limitation on who may 

establish a SupplementalNeedsTrust does not reach parents of minor children with an 

obligation of support. 

c. Established for a Person with a Disability 

A common feature for all Supplemental and SpecialNeedsTrusts is a beneficiary who meets the 

definition of a person with a disability. If the person does not meet this definition, the 

Supplemental or SpecialNeedsTrust will not provide for the exclusion of assets for Medical 

Assistance or SSI. 

i. Certified vs. Certifiable 

For a SupplementalNeedsTrust, the person must be certified as a person with a disability “prior 

to” creation of the Trust. In general, a Trust is created in the eyes of Medical Assistance based 

on the date appearing on the written instrument but is a testamentary Trust is “created” when 

the Will is drafted of when the testator dies? A testamentary Supplemental Needs Trust runs 

the risk of finding that itsbeneficiary is not certified as disabled at the time of its “creation” and 

that it is not a valid Supplemental Needs Trust. Better practice is to establishinter vivos, rather 

than testamentary, SupplementalNeedsTrusts when the disability status of the beneficiary is 

known and the trust will remain grandfathered if the statutory authority for Supplemental 

Needs Trusts is amended or repealed. 

For a SpecialNeedsTrust, the person must be disabled, as defined by the Social Security Act, at 

the time the Trust is created. The individual need not be certified as disabled at the moment of 

creation, but they must be found to have been disabled as of that date or earlier. When the 

Social Security Administration makes a determination of disability, it will always set a date for 

the onset of that disability. As a result, it is possible to create a SpecialNeedsTrust before the 

individual is certified by Social Security but there needs to be a great deal of certainty that the 

disability definition will be met and that when the certification is finally received, it will set the 

onset of the disability prior to the date of the Trust. 


ii. 

SSA Determination 

Anyone receiving Supplemental Security Income (SSI) or Social Security Disability Insurance 

(SSDI) is a person with a disability. The determination of disability is made based upon the 

following definition: “An individual shall be considered to be disabled for purposes of this 

subchapter if he is unable to engage in any substantial gainful activity by reason of any 

medically determinable physical or mental impairment which can be expected to result in death 

or which has lasted or can be expected to last for a continuous period of not less than twelve 

months.” 42 U.S.C. § 1382c(a)(3)(A). Whether an individual meets this definition is determined in 

a five‐part test found in a complex set of Social Security regulations. 20 C.F.R. Parts 400 to 499. 

iii. 

State Medical Review Team (SMRT) 

Disability may also be established by a State Medical Review Team using the Social Security 

criteria. This is available through County Human Services agencies at the time of application for 

a program with a disability basis of eligibility.See,Minnesota Department of Human Services, 

Health Care Programs Manual 12.10. 

iv. 

Two Letters Method 

Disability may also be established, ONLYfor purposes of a SupplementalNeedsTrust under 

501B.89, subdivision 2, with the written opinion of a licensed professional who is qualified to 

diagnose the illness or condition that causes the disability, confirmed by the written opinion of 

a second licensed professional who is qualified to diagnose the illness or condition. The 

standard to measure disability in this instance is lighter than the Social Security standards 

because the licensed professionals need only find that the beneficiary “has a physical or 

mental illness or condition which, in the expected natural course of the illness or condition, 

either prior to or following creation of the Trust, to a reasonable degree of medical certainty, is 

expected to: (i) last for a continuous period of 12 months or more; and (ii) substantially 

impair the person's ability to provide for the person's care or custody.” 

d. A Person Under Age 65 (Or Not) 

Supplemental, Special and Pooled SpecialNeedsTrusts all have an issue with the beneficiary’s 

age. At 65 something has the potential to happen, but with each type of Trust the consequence 

of reaching age 65 is different. 

i. SpecialNeedsTrust Has An Age Limit: 65 

The beneficiary of a SpecialNeedsTrust established under 42 U.S.C. 1396p(d)(4)(A) must be 

under the age of 65 at the time the Trust is created. The Trust can continue as a 

SpecialNeedsTrust after the beneficiary reaches 65, but any additions made after 65 will be 

treated as assets available for the determination of SSI eligibility or the transfer of assets for 

less than fair market value subject to a period of ineligibility for Medical Assistance. 


ii. 

Pooled SpecialNeedsTrust Has An Age Limit (65) But Not Really 

The beneficiary of a Pooled SpecialNeedsTrust can be any age at the time of its creation. The 

federal statutory provisions that allow for the establishment of a Pooled SpecialNeedsTrusthave 

no age limit while the provisions for a standard SpecialNeedsTrust include a specific reference 

limiting establishment to a beneficiary who is under the age of 65. Federal law also creates an 

exception to the penalties imposed for a transfer of assets for less than fair market value for 

the funding of SpecialNeedsTrusts with a specific limitation to transfers before age 65. 42 U.S.C. 

1396p(c). Questions have always lingered and continue to linger about whether this exception 

applies to contributions to Pooled SpecialNeedsTrusts after the beneficiary turns 65. 

Minnesota did not penalized over 65 funding of a Pooled SpecialNeedsTrust for many years. 

New concerns arose when the Regional Director of the Centers for Medicare and Medicaid 

Services for Region I (New England) issued a Memorandum to State Medicaid Directors in 

Region I stating that transfers to a Pooled SpecialNeedsTrust by a beneficiary over the age of 65 

should be subject to asset transfer penalties. 

Based on the information contained in the CMS Regional Director memo described above, and 

memos like it which have been issued by other CMS Regional Directors, the Minnesota 

Department of Human Services declared that it has always been its policy to treat contributions 

to a Pooled Special Needs Trust after the beneficiary turns age 65 as transfers of assets for less 

than fair market value subject to a period of ineligibility. In a December 2006 HealthQuest 

System answer, however, the Department stated that so long as all the criteria for a valid 

pooled special needs trust are met, including reimbursement to the state at death, “[t]here is 

no improper transfer.” MDHS HealthQuest #6046 (December 22, 2006). The Department 

followed up on this “non‐change” in policy by successfully asking the legislature to codifying 

this treatment of transfers to Pooled Trust Accounts after age 65. The section imposing a 

period of ineligibility for transfers for less than fair market value (Minn.Stat. § 256B.0595, subd. 

1) was augmented with a new paragraph (k) as follows: 

(k) 

This section [imposing a period of ineligibility] applies to transfers into a pooled Trust 

that qualifies under United States Code, title 42, section 1396p(d)(4)(C), by: 

(1) A person age 65 or older or the person's spouse; or 

(2) Any person, court, or administrative body with legal authority to act in place of, 

on behalf of, at the direction of, or upon the request of a person age 65 or older 

or the person's spouse. 

Experience with Pooled Special Needs Trusts following the passage of these provisions has not 

prevented the creation of Pooled Trust accounts for individuals over the age of 65. While the 

addition of funds to a Pooled Trust after 65 must be analyzed as a transfer potentially subject to 

the imposition of a period of ineligibility, the transfer must also be analyzed to determine if it 

was made for less than fair market value. Since the funds placed into the Pooled Trust account 

can only be used for the sole benefit of the Trust beneficiary and since any remaining funds will 


eimburse the State following the beneficiary’s death, the beneficiary or the State will receive 

the full value of the contributions to the Trust. The transfers into the Trust, as a result, are 

made for value. Only transfers made for less than fair market value will be subject to the 

imposition of a period of ineligibility. Your results may vary; however, as this “new” policy has 

only been in place for short time and individual County agencies may be treating Pooled Trust 

contributions after 65 inconsistently. 

A recent, Douglas County Minnesota case found that a fair market analysis is required to 

determine whether a transfer into a pooled Special Needs Trust should be subject to a period of 

ineligibility. Dziuk vs. DHS, 21‐CV‐09‐1074 (Douglas County District Court, February 7, 2012). 

The 8 th Circuit Court of Appeals recently decided transfers into a pooled Special Needs Trust 

must be analyzed to determine whether an asset transfer penalty applies but did not address 

the issue of whether fair market value is received when the trust account is funded. Center for 

Special Needs Trust Administration v. Olson, 11‐2158 (8 th Cir. April 16, 2012). The 3rd Circuit 

said “Congress intended that special needs trusts be defined by a specific set of criteria that is 

set for and no others[,]” and then went on to find that Pennsylvania laws attempting to, among 

other thing, prohibit individuals over age 65 from establishing pooled special needs trusts 

preempted by federal law. Lewis v. Alexander, No. 11‐3439 (3 rd Circuit, June 20, 2012). The 

Lewis Court did not address whether a transfer to a special needs trust is for fair market value 

but disappointingly concluded that “Congress could have rationally concluded that the benefits 

of making special needs trust available to elderly individuals outweighed the burden of the 

penalty.” The South Dakota Supreme Court also issued a decision on the same issue, drawing 

the same conclusions, but also finding that the transfer into the Trust was not for fair value. In 

Re: Pooled Advocate Trust, 2012 S.D. 24 (March 28, 2012). The South Dakota Court made this 

fair market value conclusion, however, without the benefit of facts or analysis to support it. 

iii. 

SupplementalNeedsTrust has No Age Limit 

The beneficiary of a SupplementalNeedsTrust can be any age. However, if the beneficiary is age 

65 or older and is a permanent resident of a nursing home or state facility, the Supplemental 

nature of the Trust is no longer enforceable. In other words, the assets in the Trust will be 

deemed available to pay for the beneficiary’s long‐term care Needs if these conditions apply. It 

is possible to have a SupplementalNeedsTrustbeneficiary in a nursing facility and over age 65 

and maintain the unavailability of trust assets if the attending physician certifies that there is a 

reasonable expectation that the individual will return to the community. 

e. Testamentary or Inter Vivos? 

A SpecialNeedsTrust is always a "living Trust." The Trust should only be established with the 

assets of the individual with a disability. The purpose of the Trust is to allow use of those assets 

during the lifetime of the beneficiary. A testamentary SpecialNeedsTrust, as a result, could 

never be funded or used because the sole beneficiary will already be dead. 


A SupplementalNeedsTrust can be either a testamentary or living trust. Best practice suggests 

the establishment of a living trust, complete with a drafted and signed Trust Agreement, the 

appointment of a Trustee, and the seeding of a small account owned by the Trust. The settlors 

then designate the Trust as the recipient of the disabled individual’s share of their estate in any 

testamentary planning they undertake. Using an inter vivosSupplementalNeedsTrust has the 

following advantages: 

 

 

 

 

 

 

SupplementalNeedsTrusts exist at the whim of the legislature. An existing Trust will be 

grandfathered if there is a change in the law, while a testamentary Trust may not be 

protected against changes in the statutes. 

The beneficiary must be certified as disabled at the time the Trust is created. Using a 

living Trust means that evidence of disability can clearly and easily be presented on a 

date certain when the Trust is executed and funded. With a testamentary Trust, there 

will be no way to know the beneficiary’s disability status at the time of the testator’s 

death. 

Using a living Trust provides others with an opportunity to contribute to the 

beneficiary’s wellbeing without jeopardizing eligibility for public assistance programs. 

Relatives and friends can give to the SupplementalNeedsTrust created by the parents 

(for example) as lifetime gifts or in testamentary planning. A testamentary Trust is not 

available to help with planning until the testator’s death. 

The settlors of a living SupplementalNeedsTrust will have a way to gift funds for the 

benefit of the beneficiary during their lives for tax planning, general support or to plan 

for their own potential long term care needs. For example, if the settlors find 

themselves in a position to need extensive long term care and the Medical Assistance 

benefits that could help pay for that care, they could transfer to a Trust for the benefit 

of a child with a disability (i.e. the inter vivosSupplementalNeedsTrust) and avoid the 

imposition of a period of ineligibility for Medical Assistance. With a testamentary Trust, 

the testators will not have a ready tool to shelter assets for the benefit of a child with a 

disability. 

A living SupplementalNeedsTrust will carry out any probate avoidance the family wants 

to preserve while a testamentary Trust will necessitate the commencement of a probate 

proceeding to establish the Trust imbedded in the Will. 

A Supplemental Needs Trust which is imbedded in a standard revocable living trust 

could be a good middle ground for these considerations. It would certainly be a trust in 

existence to address concerns about law changes and disability certification, but it 

would not provide a convenient repository for life time gifts from the settlors or others. 

f. Established and Administered for the Sole Benefit of the beneficiary 

A SpecialNeedsTrust must be drafted and administered for the sole benefit of the disabled 

beneficiary. As a result, contemplated distributions must primarily, if not exclusively, provide a 

Supplemental benefit to the disabled beneficiary. If the Trust is used to purchase a computer 

the beneficiary uses, that purchase should meet the sole benefit requirement, even if someone 


else uses the computer from time to time. If, on the other hand, the beneficiary’s use of the 

computer is infrequent, and others use it as well, questions can arise about whether that 

purchase meets the sole benefit requirement. Perhaps the computer is never used by the 

beneficiary, but her caregivers use it on a daily basis to monitor medications and provide 

information to each other about the cares that were completed and the important observations 

that were made; in that case the computer probably would be for the beneficiary’s sole benefit. 

A common question that arises is whether travel costs can be paid for a family member to 

travel with the disabled beneficiary. It is likely that the answer turns on whether the 

beneficiary’s illness or condition requires a traveling companion and whether the family 

member is qualified to act in that capacity. These questions have not been addressed in the law 

with any detail, but in another area of Medical Assistance law, some definition has been given 

for this sole benefit analysis. See, Minn. Stat. § 256B.059, subd. 1(g)(For purposes of 

determining if a transfer is for the “sole benefit” of a Community Spouse under Medical 

Assistance, “no other individual or entity can benefit in any way from the assets or income at 

the time of a transfer or at any time in the future.”) 

g. Choosing the Trustee 

The choice of Trustee is perhaps the most important factor for the successful administration of 

the Trust. It is a uniquely difficult position because it calls for the Trustee to assume all of the 

traditional duties of a Trustee, but because the beneficiary of a Specialor Supplemental 

NeedsTrust has specialneeds, is likely receiving, or could be receiving, government assistance 

and may need the resources of the Trust to meet day‐to‐day items not covered through 

assistance programs, the Trustee of a SpecialNeedsTrust has extra duties. 

i. Benefit Analysis 

Specialand Supplemental NeedsTrusts generally direct the Trustee to assist the beneficiary to 

find any government assistance that might be available. Even without this directive, successful 

administration of the Trust is dependent on an understanding of the eligibility rules for the 

beneficiary’s programs. This requires the Trustee to become familiar with the beneficiary’s 

illness or condition and to learn about that person’s individual needs. In addition, the Trustee 

should gather information about government assistance programs, available benefits and 

eligibility criteria, or associate with a professional who can make these assessments. This is 

important not only for the well‐being of the beneficiary, but also because the supplemental 

nature of the Trust requires the Trustee to refrain from distributing Trust resources for anything 

that could be covered through a government assistance program. 

ii. 

Nature of Distributions 

The broad nature of distributions allowed by Specialand Supplemental NeedsTrusts can place a 

Trustee in the position of analyzing and making distributions once a day or once a year, 

depending on the size of the Trust and the beneficiary’s life circumstances. The Trustee can be 


called upon to purchase groceries once a week based on the beneficiary’s need, or may not be 

called upon to make any distributions for extended periods because the beneficiary is able to 

manage day‐to‐day finances on his or her own, or the beneficiary may be so disabled and 

unable to participate in extra life activities that it is difficult to identify any expenditures that 

will provide a supplemental benefit. It is incumbent upon the Trustee to become familiar with 

the beneficiary’s life circumstances to identify where the resources of the Trust can be put to 

best use, supplementing the assistance he or she receives for daily needs while, whenever 

possible, providing life enriching opportunities that the resources of the Trust can afford. 

iii. 

Loss of "Goodwill" With Family Members 

Trustees for Supplemental and Special Needs Trusts include family, friends, spouses, 

professional fiduciaries, accountants, attorneys, financial planners, corporate trustees and nonprofit 

organizations for Pooled Trusts. Professional, neutral, third parties with a commitment 

to close personal service serve best. The inevitable frustration of a beneficiary who views the 

Trustee as standing in the way of “my money” can more easily be deflected by an objective 

professional. Of course, professional trustees create additional administrative expenses and 

cannot, under any circumstance, have the kind of intimate understanding of a beneficiary’s 

needs that family and friends carry with them as a natural byproduct of associating with the 

beneficiary for a lifetime. Family members can serve as Trustees and do it well, but the risk of 

marring a long‐standing relationship over the necessary control of the beneficiary’s funds is 

high. Many family member Trustees quickly loose the goodwill of the beneficiary because they 

carefully administer the Trust to maintain eligibility for public assistance. The Trustee has to 

say no to direct distributions to the beneficiary, no to items that a government program might 

provide at a lower quality or quantity than desired, no to gifts of any kind being given from the 

Trust, no to support of any kind for other family members, including spouses and children, and 

no to a whole host of other possibilities. Family members need to understand the risks of 

taking on this responsibility and pledge to put preservation of eligibility above the desires of the 

beneficiary. Family members need to understand that they lose some of their ability to be just 

a sister, or uncle or niece when they also choose to wear the Trustee hat. 

The typical exception to this family‐member‐as‐trustee conundrum is parents serving as 

Trustees for a Supplemental Needs Trust that they create. Parents of a child with a disability 

often have a lifetime of experience providing for the child in supplemental ways and the 

Supplemental Needs Trust simply caries that practice forward in a formal manner. The 

selection of a successor Trustee for the Supplemental Needs Trust, however, comes with all of 

the concerns and pitfalls inherent any time a family member considers taking on the role of 

Trustee. 


h. Revocable vs. Irrevocable 

i. SpecialNeedsTrust= Irrevocable 

A Special Needs Trust needs to be irrevocable. If the beneficiary has the right to revoke the 

Trust, its assets will be considered available merely because the possibility of revocation exists. 

If someone other than the beneficiary has the ability to revoke the Trust, the resources of the 

Trust should not be considered available. If someone else has the authority to revoke, 

however, the County agency could easily take the position that it should be revoked, 

necessitating the additional time and expense needed to demonstrate that revocation is not 

required by law. In addition, the recent trouble that has arisen with termination clauses (see 

below) would apply with full force to any consideration of a third‐party revocation for a Special 

Needs Trust. 

The revocability of a Special Needs Trust is critical to the determination of whether its corpus is 

available for purposes of determining SSI eligibility. In Region V (including Minnesota) a Special 

Needs Trust is deemed to be revocable, even if the Trust language specifically prohibits 

revocation, if the mutual consent of the grantor and all beneficiaries can be obtained. Where 

the grantor and the sole beneficiary of the Trust are the same person and that person is the SSI 

applicant or recipient, the Trust is considered revocable by SSI and the entire Trust corpus is 

available unless there is a residual beneficiary. 

The designation of a "residual beneficiary" (someone other than the SSI applicant or recipient) 

to receive the Trust property at the death of the primary beneficiary is enough to keep an 

irrevocable trust irrevocable. A residual beneficiary can include a named individual or a class 

such as parents, siblings, children, descendants or issue (provided the beneficiary actually has 

living people who fall into the class named). Making a post‐mortem distribution to the person's 

estate, executor, heirs, or next of kin, or making reference to any governing state law 

concerning distribution or intestacy is not sufficient to establish a residual beneficiary. It is also 

apparent that including a pay‐back provision requiring reimbursement to the State for any 

Medical Assistance benefits paid does not create a residual beneficiary. 

ii. 

SupplementalNeedsTrust = Irrevocable or Revocable 

The settlors of a Supplemental Needs Trust can retain the right to revoke the Trust or designate 

it as irrevocable. Younger parents of a child with a disability might consider a revocable 

Supplemental Needs Trust to easily manage a change in circumstances. Older parents might 

lean toward an irrevocable Trust, anticipating the use of the Trust as a repository for transfers 

they might make to protect assets from their own long term care costs and avoid the 

imposition of a period of ineligibility. If the Supplemental Needs Trust is revocable, then the 

settlors could in theory, revoke the Trust and use its resources to pay for care before Medical 

Assistance benefits could be available. Of course, a Supplemental Needs Trust can always start 

out as revocable with the settlors amending it to make it irrevocable as the need arises. 


i. Short vs. Long 

A series of policy interpretations by the Social Security Administration in the past several years 

has launched a debate over the advisability of including details, especially specific standards 

and suggestions for distributions, in Special Needs Trusts. Most recently, the Social Security 

Administration issued a change to its Policy Operations Manual System (POMS), the detailed 

directions provided to case workers concerning eligibility for SSI. The change included a 

suggestion that a Special Needs Trust could not pay for the travel expenses of family members 

who might travel to or with the Beneficiary. 

It has long been considered safe to use Special Needs Trust funds to pay family to travel with a 

Beneficiary who could not otherwise travel alone and, in some cases, to pay for visit by a family 

member who would not otherwise be able to see the Beneficiary. This policy clarification, in 

itself, is at least understandable; the SSA is interested in curbing unauthorized use a Special 

Needs Trust funds for items not for the sole benefit of the beneficiary. Local units of the SSA, 

however, interpreted this change to invalidate Special Needs Trusts that allow the Trustee to 

make distributions for “companion services” because it creates the possibility of paying family 

travel expenses. Silly, but true. 

To avoid such unpredictable and unsupported attacks on the validity of Special Needs Trusts, 

practitioners have proposed creating “short” trusts which grant discretion to the Trustee 

without any specific guidance as to the nature or extent of possible distribution. One Florida 

Special Needs Planner now claims to have a one page Special Needs Trust. I suspect we can 

find a good middle ground that provides assistance and assurance to the Trustee without 

offending the Social Security Administration’s (overly?) sensitive concerns about Special Needs 

Trust administration. 

6. In the Middle 

The administration of Supplemental and SpecialNeedsTrusts, once establish, are nearly 

identical. They are Trusts, so all of the legal and practical implications of trust administration 

apply.Where Supplemental and SpecialNeedsTrust differ from the norm are in the following 

areas: 

a. Taxes 

A Supplemental or SpecialNeedsTrust can be a complex Trust or a grantor Trust for income tax 

purposes. The choice between the two hinges on whether the tax liability will be better placed 

with the disabled beneficiary, the settlors (of a Supplemental Needs Trust) or the Trust. It 

would seem obvious that the disabled beneficiary is likely to have a more favorable tax 

situation, but if the Trust corpus is relatively small it may be easier to have the Trust pay its own 

taxes, especially if the annual income will fall within the $3,800.00 (2012) threshold for a 


Qualified Disability Trust (QDT) exemption. IRC 642(b)(2(C). A QDT is any Trust that meets the 

criteria under 42 U.S.C. § 1396p(c)(2)(b)(iv), where the Trust is not a grantor trust, irrevocable, 

and established for the sole benefit of a beneficiary under the age of 65 who is all disabled. If a 

Grantor Trust format is chosen (perhaps by allowing the replacement of assets of equivalent 

value) the income tax liability will pass through to the beneficiary,a fiduciary filing may not be 

needed and the QDT exemption will be irrelevant. If the Trust remains a non‐Grantor Trust and 

a 1041 is filed, the net distributable income can be passed through to the beneficiary, but once 

again the QDT exemption is not helpful. Where a non‐Grantor SpecialNeedsTrust files a 1041 

and will elect to pay the tax, the QDT exemption will apply so for Supplemental and 

SpecialNeedsTruststhat will produce less than $3,800.00 of income, a non‐Grantor QDT may be 

the best tax choice. Many practitioners argue that a Special Needs Trust, regardless of whether 

specific provisions are included to make it an intentionally defective Grantor Trust, will always 

be a Grantor Trust since the Beneficiary is the funding source and sole beneficiary. If that is 

true, QDT treatment would never be available for a Special Needs Trust. Nevertheless, the 

decision to create a Grantor Trust may produce the same result from an income tax standpoint 

(because beneficiaries of SpecialNeedsTrust often have little taxable income) without the need 

to file a 1041. 

b. Supplemental Purpose 

A clearly stated, Supplemental purpose – one which fits the disabled person’s Needs – is also 

required. Without language in the Trust that restricts distributions so as to maintain eligibility 

for government benefits, the funds contained within the Trust would still be considered 

available to pay for medical and other expenses. In other words, unless a Trust which meets all 

of the necessary criteria for a Supplemental or SpecialNeedsTrust, specifically states that it is 

intended to supplement, rather than supplant, government benefits, it will not do so. The Trust 

must then carefully follow this direction by asking, with each and every distribution, whether 

some government program that is available to the beneficiary at that time, could pay for the 

item instead. 

c. Vendor Payment Requirements (No $$$ to beneficiary) 

Supplemental andSpecialNeedsTrusts must be drafted so that payments are never made 

directly to the beneficiary. Payments made directly to the beneficiary will be considered 

available income. The Trustee may only make payments to the providers of goods and services 

on behalf of the beneficiary. This can be particularly frustrating for a beneficiary who may be 

physically disabled, but quite capable of managing his or her own financial affairs. 

d. Sole Benefit of the beneficiary 

No gifts! Distributions from a Supplemental or SpecialNeedsTrust must be for the "sole 

benefit" of the beneficiary with a disability. This means the Trust resources cannot be used to 

make gifts or purchase gifts for any other person or entity. 


e. Food & Shelter Under SSI 

It is clear that any distributions from a Trust directly to an SSI recipient will be treated as 

available income. The provisions of a SNT generally restrict distributions for the benefit of the 

beneficiary, instructing the Trustee to make payments directly to the providers of goods or 

services. These are called "vendor payments" as noted above. Vendor payments are not 

treated as income for purposes of SSI (where they refer to such payments as “in‐kind income”) 

except when the payments are made for the person's food or shelter. If the Trustee makes inkind 

payments for food or shelter, those payments will be treated as income and the 

beneficiary’s SSI benefits will be reduced accordingly. Regardless of how much is actually 

distributed in‐kind, however, the reduction in benefits is capped at one‐third of the maximum 

SSI benefit. If the SSI recipient is living in a house where there is equitable ownership under a 

Trust for that person's benefit, the Trust's ownership will not be treated as in‐kind shelter 

income. Programs Operation Manual, SI 01120.200H. 

f. Accountings 

Trustees have a duty to account. Special and Supplemental Needs Trusts are no exception. 

With Supplemental Needs Trust (private estate planning tools) the accounting duty in enforced 

only to the extent the Trustee undertakes the duty or if the beneficiary or someone looking out 

for the beneficiary’s interests demands an accounting. 

For Special Needs Trusts the duty to account is often enforced through outside forces. A 

Special Needs Trust might be Court supervised, as described below, and accountings will be 

filled with the Court each year. If the individual is receiving government assistance, the body 

administering any of those programs could request an accounting of Trust activity. And for 

Special Needs Trust beneficiaries who are receiving Medical Assistance benefits, an accounting 

must be filed with the Department of Human Services each year. 

For all applications or renewals for Medical Assistance benefits submitted on or after July 1, 

2009, Minnesota Statutes, section 501B.89, subdivision 4 requires the Trustee of any 

SpecialNeedsTrust to submit the following items to the Minnesota Department of Human 

Services, Special Recovery Unit: 

(1) A copy of the Trust instrument; and 

(2) An inventory of the beneficiary’sTrust account assets and the value of those assets. 

The Trustee will then be required to file an accounting with the Special Recovery Unit at least 

annually until the beneficiary’s interest in the Trust terminates. The suggested scheduling for 

these accountings is the anniversary date of the Trust’s execution. The presumed accounting 

period is 12 months. The accounting must include the following information for the accounting 

period: 


(1) An inventory of Trust assets and the value of those assets at the beginning of the 

accounting period; 

(2) Additions to the Trust during the accounting period and the source of those additions; 

(3) Itemized distributions from the Trust during the accounting period, including the 

purpose of the distributions and to whom the distributions were made; 

(4) An inventory of Trust assets and the value of those assets at the end of the accounting 

period; and 

(5) Changes to the Trust instrument during the accounting period. 

This information can be submitted directly to: 

Minnesota Department of Human Services 

Special Recovery Unit 

P.O. Box 64995 

St. Paul, MN 55164 

The Special Recovery Unit has indicated that written verification of individual transactions will 

not be required. Instead, an affidavit affirming the accuracy of the accounting will be sufficient. 

Note: Filing a copy of the SpecialNeedsTrust and an inventory with the Department of Human 

Services may not satisfy the County Human Service Agency processing the Medical Assistance 

application. The County Agency may request a copy of the Trust and an Inventory to submit to 

the County Attorney for review to determine whether the Trust has any impact on the 

beneficiary’s eligibility. 

g. Court Supervision 

Court supervision of Supplemental and Special Needs Trust is not required. Special Needs Trust 

established by or through the Courts generally, but do not always, remain under Court 

supervision. The Hennepin and Ramsey County Courts have a standing policy to require 

ongoing Court supervision for all Special Needs Trusts established within those venues. 

Trustees, beneficiaries and their attorneys might choose to seek Court supervision for a Special 

Needs Trust. In all cases, the supervision is best maintained under a separate Court file held 

open for the specific purpose of accepting and reviewing accountings and hearing Petitions for 

action to be taken with the Trust. An ex parte Order confirming the Trustee can be obtained 

under Minnesota Statutes, section 501B.22. Once confirmed, the Trustee is required to provide 

the Court with an Inventory and Annual Accountings as described in Minnesota Statutes, 

section 501B.23. 

Supervision by the Court adds an additional layer of administration to the operation of the 

Trust. The annual accountings must be filed with the Court in proper form and periodically 

(usually every 5 years) the Trustee is required to appear on a Petition to approve the accounts. 


But Court supervision provides the Trustee and the professionals representing him or her with 

incentive to maintain excellent records and give careful consideration to all distributions. 

Having an open Court file also provides a ready place to seek the Court’s approval for large or 

unusual distributions. In many Counties, the Trustee will be required to secure and hold a bond 

for the full value of the Trust principal. 

7. At the End 

a. Termination Clauses 

Beginning October 1, 2010, for all SpecialNeedsTrusts established on or after January 1, 2000, 

and only with regard to eligibility for SSI, any early termination clause (i.e. language that 

provides for criteria to terminate the Trust other than the death of the beneficiary) must 

provide: 

1. That the State, or States, that provided medical assistance benefits will be reimbursed 

from any remaining portion of the Trust Estate. 

2. That if Trust resources remain after the reimbursement to the States, only the 

beneficiary can benefit from the SpecialNeedsTrust during his or her life and, therefore, 

only the beneficiary can be named to receive what remains, subject to specifically 

allowed administration expenses. 

3. That someone other than the Trustbeneficiary must have the power to terminate. 

See, SSI Programs Operation Manual, SI 01120.199D.1. Note the Pooled SpecialNeedsTrusts 

have their own rules with regard to early termination clauses. SI 01120.199D.2. This 

requirement is a direct contradiction to the federal statute which only requires repayment of 

Medical Assistance benefits at the death of the beneficiary. In addition, the Social Security 

Administration is imposing an improper policy on a portion of Special Needs Trusts that is 

irrelevant to the rules and operation of the SSI program. The Social Security Administration, 

after all, does not receive any reimbursement from Special Needs Trust, only the States for 

Medical Assistance benefits paid on behalf of the beneficiary. Nevertheless, it is always easier 

to do as Social Security asks, even if it is irrelevant or ridiculous, because a fight with Social 

Security is a bottomless morass with no certainty of the outcome. This may not be a concern 

with beneficiaries who are not receiving SSI benefits, but the Medical Assistance eligibility rules 

are modeled on the SSI eligibility rules so it would not be unusual to have Medical Assistance 

policy follow suit at some point. Perhaps the best solution is no termination clause at all. 

b. Payback Provisions 

i. SpecialNeedsTrust Payback 

A valid SpecialNeedsTrust must contain a provision that provides the State will receive all 

amounts remaining in the Trust at the death of the beneficiary up to the amount of Medical 


Assistance benefits paid on behalf of the individual beneficiary. 42 U.S.C. § 1396p(d)(4)(A). The 

Minnesota Department of Human Services allows for the payment of administrative expenses 

provided they are reasonable and approved by the Department of Human Services, or by a 

Court with advance Notice to the Department of Human Services. HCPM § 19.25.35.20. 

The Social Security Administration now requires that the reimbursement language in a 

SpecialNeedsTrust provide for all States that might pay Medical Assistance benefits, not just the 

State where the Trust was created. POMS PS 01825.026. The Social Security Administration 

only considers two types of administrative expenses as valid for purposes of complying with the 

reimbursement requirement for SpecialNeedsTrust. The Trust can only provide for payment of 

taxes due from the Trust to the state(s) or federal government because of the death of the 

Trustbeneficiary and reasonable fees for administration of the Trust estate such as an 

accounting of the Trust to a court, completion and filing of documents, or other required 

actions associated with termination and wrapping up of the Trust. POMS SI 01120.203(B)(3)(a). 

All of these items, for both the Department of Human Services and the Social Security 

Administration must be clearly stated in the Trust agreement to qualify as a SpecialNeedsTrust. 

ii. 

Pooled SpecialNeedsTrust Payback 

Pooled SpecialNeedsTrusts have traditionally been allowed to operate as SpecialNeedsTrusts 

with the possibility that the Trust itself will retain all of the assets in an individual beneficiary’s 

account upon that beneficiary’s death. The federal law giving Pooled Trusts their existence 

provides that only amounts not retained by the Pooled Trust are subject to the 

SpecialNeedsTrust reimbursement provision. 42 U.S.C. § 1396p(d)(4)(C). Effective for all Pooled 

SpecialNeedsTrust accounts created on or after January 1, 2011, however, new provisions in 

Minnesota Statutes, section 256B.056, subdivision 3b provide: 

(c) 

(d) 

For purposes of paragraph (d), a pooled Trust means a Trust established under United 

States Code, title 42, section 1396p(d)(4)(C). 

A beneficiary’s interest in a pooled Trust is considered an available asset unless the 

Trust provides that upon the death of the beneficiary or termination of the Trust during 

the beneficiary’s lifetime, whichever is sooner, the department receives any amount, up 

to the amount of medical assistance benefits paid on behalf of the beneficiary, 

remaining in the beneficiary’sTrust account after a deduction for reasonable 

administrative fees and expenses, and an additional remainder amount. The retained 

remainder amount of the subaccount must not exceed ten percent of the account value 

at the time of the beneficiary’s death or termination of the Trust, and must only be used 

for the benefit of disabled individuals who have a beneficiary interest in the pooled 

Trust. 


iii. 

SupplementalNeedsTrust Payback 

A Supplemental Needs Trust, because it is funded with assets of someone who is not the 

beneficiary or someone with the obligations to the beneficiary specified in Minnesota Statutes, 

section 501B.89, subdivision 2, does not need a payback provision to be recognized as a valid 

Supplemental Needs Trust. The statutory provisions that describe a valid Supplemental Needs 

Trust do not include a requirement that the State be reimbursed upon the death of the 

beneficiary. 

However, in some jurisdictions (not Minnesota so far) the requirement that the Trust be 

maintained for the “sole benefit” of the beneficiary has been interpreted to mean that no one 

but the beneficiary can benefit from the Trust at any time, including the time following that 

beneficiary’s death. In those States, Supplemental Needs Trusts must include a payback 

provision in order to shelter assets from consideration for Medical Assistance eligibility. 

Further concern arises when we look at the Supplemental Needs Trust as a repository for asset 

transfers that will not result in a period of ineligibility against the settlors of the Trust because 

the gifts are being made in compliance with the transfer penalty exception to a trust for the 

benefit of a person with a disability. That exception specifically requires that the transfers be 

made to a trust for the sole benefit of a person with a disability. If “sole benefit” is interpreted 

to mean that the trust must not contain a beneficial interest for anyone other than the 

beneficiary, even following that beneficiary’s death, then perhaps the transfer exemption is 

only available with a Supplemental Needs Trust that contains a payback. As noted, the Medical 

Assistance program in Minnesota does not have a policy that requires a payback provision in 

Supplemental Needs Trust, but practitioners should be aware of this issue and stay informed 

about changes that could arise. 


SECTION 5 

Notable North Dakota Nuances: Mineral 

Interests 

Susan E. Johnson-Drenth 

JD Legal Planning PLLC 

Fargo, ND 



I. North Dakota Real Property .............................................................................1 

A. North Dakota Mineral Interests – in general ...............................................1 

B. Keeping Your Mineral Interests ..................................................................2 

C. North Dakota Real Property – in general ....................................................3 

II. North Dakota Estate Planning and Probate ......................................................6 

A. Health Care Directive.................................................................................6 

B. Power of Attorney. N.D.C.C. Chapter 30.1-30 ..........................................7 

C. Wills and Probate. N.D.C.C. Chapter 30.1-08 ..........................................7 

D. Trusts and Special Needs Trusts ................................................................9 

E. Guardianship and Conservatorship Differences .........................................13 

III. North Dakota Medicaid ....................................................................................13 

IV. 

Preparing North Dakota deeds requires a license to practice law in 

North Dakota ....................................................................................................22

I. North Dakota Real Property 

A. North Dakota Mineral Interests – in general. 

1. North Dakota Century Code Chapter 47-10 governs real property 

transfers. 

2. North Dakota Century Code § 47-10-24 provides that: 

 

 

All conveyances of mineral rights or royalties in North Dakota real 

property, excluding leases, are construed to convey to the grantee 

ALL minerals (including compounds and by-products) of any 

nature, except those specifically excluded by name, but shall not 

convey interest in gravel, clay or scoria unless specifically 

included. 

A lease of mineral rights is construed to pass interests only in 

minerals specifically named in the lease. However, oil and gas 

leases include all associated hydrocarbons provided in a liquid or 

gaseous form so named and are deemed to be included in the 

mineral named. 

3. North Dakota Century Code § 47-10-25 provides that any mineral 

reservation or exception in a deed executed on or after July 1, 1983, 

includes ALL minerals of any nature, except those specifically excluded 

by name. Gravel, clay and scoria are transferred with the surface rights 

unless specifically reserved in the deed. 

4. Gas and oil production laws are at North Dakota Century Code Chapter 

38-01. 

5. Mineral interests are the ownership rights in title to minerals under the 

surface, and the rights to reasonable use of the surface above to allow for 

the exploration and production of the minerals. Mineral interests may be 

created by grant or reservation. 

6. Surface interests are all rights not included in the mineral interests. 

7. Royalty interests may be created by grant or reservation too, but a royalty 

interest does not enjoy the full right of a mineral interest because there is 

no right to the use of the surface for exploration with royalty interests. 

Therefore, royalty interests are just a share in the ultimate production, free 

of the costs of exploration and production. 

1

8. Leases usually pay the lessor the rent and royalties based on the net 

mineral acres owned. Net mineral acres are the total acres multiplied by 

the percent of ownership in the minerals interests. For example, 10% of 

the mineral interests in a 160 acre parcel is 16 net mineral acres. 

The creation of Spacing Units is allowed by N.D.C.C. § 38-08-07 

under the North Dakota Industrial Commission, which provides the 

size and shape definition for the efficient and economical 

development of a pool or underground reservoir containing a 

common accumulation of oil or gas, or both. It brings together 

small tracts for the drilling of a single well. 

 

Unitization is the combination of spacing units over a producing 

reservoir (usually after the primary recovery of oil and/or gas). 

9. A royalty interest owner cannot sign an oil and gas lease as a lessor. Only 

a mineral interest owner can sign the lease. Therefore, the royalty interest 

owner doesnot enjoy the lease bonus payment. 

10. Royalty interests are usually referred to as a percentage or fraction of the 

production. 

11. It has been my experience that oil companies will have a purported heir 

sign a lease and will pay a lease bonus payment when there are mineral 

interests that must still be probated. However, royalty payments are held 

by the oil company until full ownership is perfected through probate, or 

other relevant proceeding. 

12. Mineral interests are commonly held in life estate, revocable living trusts, 

family trusts, limited liability companies and partnerships (including LLPs 

and LLLPs). Transfer-on-death (TOD) deeds may be used with mineral 

interests too. 

B. Keeping Your Mineral Interests. 

1. North Dakota Century Code Chapter 38-18.1 provides the laws for 

dormant mineral interests. 

 

 

Pertains to oil, gas, coal, clay, gravel, uranium and all other 

minerals of any nature owned by a person other than the surface 

owner. 

If any mineral interests are “unused” for 20 years preceding the 

publication of the notice to take the mineral interests by the surface 

owner, those mineral interests are deemed to be abandoned, unless 

2

a Statement of Claim is recorded by the mineral interest owner 

prior to the end of the 20 year period. 

 

A mineral interest is “used” during the 20 year period if during the 

period: 

o 

o 

o 

o 

o 

o 

Minerals are produced. 

Mineral operations are being conducted. 

The mineral interest is subject to a recorded lease, 

mortgage, assignment or conveyance, including a lease 

given by a trustee. 

The mineral interest is subject to a recorded pool or 

unitization order or agreement. 

Taxes are paid on the mineral interest by the owner. 

A proper Statement of Claim is recorded. 

However, the payment of royalties, bonus payments or other 

payment to an account on behalf of someone who cannot be 

located doesnot satisfy the requirements of the mineral interests 

being “used.” 

2. The legal action to perfect title in the surface owner after the mineral 

interests are deemed abandoned is much like a quiet title action. See 

N.D.C.C. § 38-18.1-06.1. 

C. North Dakota Real Property –in general. 

1. North Dakota property tax statements include a “true and full value.” The 

County Assessor is responsible for valuing all taxable property by its 

value on February 1 of each year. For residential and commercial 

property, the “true and full value” is supposed to equal market value. For 

agricultural property, the “true and full value” equals its productivity value 

as defined by N.D.C.C. § 57-02-27.2, which is the capitalized average 

annual gross return. Therefore, the “true and full” value on residential and 

commercial property is fairly accurate to fair market value and, for 

example, the tax statement value may be used for Medicaid valuing 

purposes. However, the agricultural “true and full” value is nowhere near 

fair market value, and for Medicaid valuing purposes, an appraisal is 

usually required. 

2. North Dakota property tax is paid in arrearage. Therefore, your 2013 

property tax payment is for property tax incurred in 2012. Therefore, 

Minnesota and North Dakota real property purchase agreements will 

usually differ. Minnesota sales commonly prorate property taxes to date 

of closing between seller and buyer. North Dakota sales commonly 

dictate the seller pays all of the property tax incurred in the previous year. 

3

3. North Dakota deeds cannot be recorded when property tax is owing. For 

example, if a deed is attempted to be recorded on January 2, 2013, it will 

not be recorded until the property tax payment is made (which otherwise 

would not be due until March 1 (if you pay in full before February 15, you 

get a 5% discount)). 

4. North Dakota deed drafting issues (North Dakota Title Standards): 

No well disclosure statement needed. 

No state deed tax. 

Recording fee is based on the number of pages recorded. 

Marital status of grantor required on all deeds. 

Specifically, in regards to homestead property, N.D.C.C. § 47-18- 

05 requires: 

* * * * * * * * * * 

47.18-05. Homestead – How conveyed. 

The homestead of a married person, without regard to the value thereof, 

cannot be conveyed or encumbered unless the instrument by which it is 

conveyed or encumbered is executed and acknowledged by both the 

husband and wife. 

* * * * * * * * * * 

o 

o 

Per North Dakota Title Standards 2-07, a spousal attorneyin-fact 

may sign a deed for a spouse, if the Power of 

Attorney specifically authorizes the conveyance of the 

homestead. 

If the real property was not homestead property, then an 

Affidavit of Non-Homestead may be recorded in lieu of the 

spousal signature on the deed. 

 

Every deed must contain a Statement of Full Consideration (except 

mineral interest deeds), or an explanation of why such a statement 

is not required. 

* * * * * * * * * * 

11-18-02.2. Statements of full consideration to be filed with state board 

of equalization or recorder – Procedure – Secrecy of information – 

Penalty. 

4

1. Any grantee or grantee’s authorized agent who presents a deed in 

the office of the county recorder shall certify on the face of the 

deed any one of the following: 

a. A statement that the grantee has filed a report of the full 

consideration paid for the property conveyed with the state 

board of equalization. 

b. A statement that the grantee has filed a report of the full 

consideration paid for the property conveyed with the 

recorder. 

c. A statement of the full consideration paid for the property 

conveyed. 

d. A statement designating one of the exemptions in 

subsection 7 which the grantee believes applies to the 

transaction. 

. . . . . . 

7. This section does not apply to deeds transferring title to the 

following types of property, or to deeds relating to the following 

transactions: 

a. Property owned or used by public utilities. 

b. Property classified as personal property. 

c. A sale when the grantor and the grantee are of the same 

family or corporate affiliate, if known. 

d. A sale that resulted as a settlement of an estate. 

e. All sales to or from a government or governmental agency. 

f. All forced sales, mortgage foreclosures, and tax sales. 

g. All sales to or from religious, charitable, or nonprofit 

organizations. 

h. All sales when there is an indicated change of use by the 

new owners. 

i. All transfer of ownership of property for which is given a 

quitclaim deed. 

j. Sales of property not assessable by law. 

k. Agricultural lands of less than eighty acres [32.37 

hectares]. 

l. A transfer that is pursuant to a judgment. 

* * * * * * * * * * 

 

 

A transfer-on-death deed must also include a Statement of Full 

Consideration, but usually exception “7.c” applies. 

When an attorney-in-fact signs a deed, an “Affidavit of Non- 

Termination and Non-Revocation of Attorney-in-Fact” is not 

necessary. 

5

When a trustee signs a deed, there is no affidavit of trustee or 

certificate of trust required by the North Dakota Title Standards 

(but these are increasingly requested by the closing agent). 

When property is deeded to a trust, it may be deeded to the trust 

itself, or the trustee of the trust. 

You may include a statement of after-acquired title in your deeds. 

5. Most real property in North Dakota is still abstracted property. Title 

insurance is becoming more popular. I have never experienced Torren’s 

property in North Dakota. 

6. The North Dakota Recorders Information Network (NDRIN) is an 

incredibly helpful and inexpensive resource in which all North Dakota 

counties are providing access to real estate records for review and 

purchase to subscribers for a fee. The participation in some counties is 

less than others at this point. 

7. Twelve North Dakota counties have begun electronic recording of 

documents, in which a statement is made that the electronically 

transmitted document is the originally signed document. This has greatly 

sped up the processing time. 

8. Life estates are a viable and common estate planning and Medicaid 

planning tool in North Dakotafor real property and mineral interests, since 

there is no life estate lien law or estate recovery against life estate 

interests. 

II. 

North Dakota Estate Planning and Probate 

A. Health Care Directive. 

1. N.D.C.C. Chapter 23-06.5. 

2. In effect when physician certifies in writing and files in medical records 

that principal lacks capacity to make health care decisions. N.D.C.C. § 

23-06.5-03(3). 

3. Principal may authorize agent to make decisions despite principal 

retaining capacity. N.D.C.C. § 23-06.5-03(4). 

4. To be effective, the agent must accept the appointment in writing. 

5. Form sample at N.D.C.C. § 23-06.5-17. 

6. Health care record registry: 

6

By North Dakota Information Technology Department. 

Each registration receives unique file number to be used on 

website with password. 

Fee is expected to be around $20. 

Estimated date when available is September 2013. 

May be available to Minnesota residents that use North Dakota 

health care facilities. 

B. Power of Attorney. N.D.C.C. Chapter 30.1-30. 

1. Based on Uniform Durable Power of Attorney Act. No statutory short 

form power of attorney exists in North Dakota. 

2. May see springing powers of attorney in North Dakota: “this power of 

attorney becomes effective upon the disability or incapacity of the 

principal.” This is problematic because of the proof necessary for the 

attorney-in-fact. Always check the document to determine when the 

authority granted becomes effective. 

3. A guardianship/conservatorship order will usually revoke all prior powers 

of attorney but, if not, the guardian/conservator has the power to revoke 

the power of attorney. N.D.C.C. § 30.1-30-03(1). 

4. Principal may nominate guardian/conservator by a power of attorney. 

5. Power of attorney implicitly authorizes gifting in any amount to any 

individual or organization if the writing merely authorizes an attorney-infact 

to perform any act the principal might or could do, or evidences the 

intent to give the attorney-in-fact full power to deal with the principal’s 

property. However, gifting by an attorney-in-fact in North Dakota is 

problematic for Medicaid eligibility purposes. (See Section III. M of these 

materials.) 

C. Wills and Probate. N.D.C.C. Chapter 30.1-08. 

1. North Dakota is a Uniform Probate Code state. 

2. A will is valid as a holographic will if the signature and material (i.e., 

dispositive) portions of the will are in the testator’s handwriting, whether 

or not witnessed. 

3. North Dakota is one of two states that provide for an ante-mortem probate 

of will. N.D.C.C. Chapter 30.1-08.1. 

7

A person who executes a will may institute a declaratory judgment 

proceeding for the validity of the will as to: the signature; required 

number of witnesses and their signatures; testamentary capacity; 

and, freedom from undue influence. 

Interested parties to be served are beneficiaries named in will and 

all present intestate successors since they are deemed possessed of 

inchoate property rights. 

If Court finds the will was properly executed, free of undue 

influence and made with the requisite testamentary capacity, the 

Court declares the will valid and orders it placed on file with the 

Court. This finding of validity constitutes an adjudication of 

probate. 

This will is then binding in North Dakota unless the testator 

executes a new will. 

4. Elective Share of Surviving Spouse and Allowances. N.D.C.C. Chapter 

30.1-05. 

Fifty (50%) percent of augmented estate. 

Right of election may be exercised by surviving spouse, guardian, 

conservator or attorney-in-fact. 

If surviving spouse is incapacitated, Court appoints a trustee to 

administer the elective share with distributions of income and 

principal for support, with regard to other sources of support, 

income and property of surviving spouse, but exclusive of medical 

assistance benefits. Upon the death of the surviving spouse, the 

trustee transfers the remaining trust property to the residuary 


Homestead Allowance. N.D.C.C. §§ 30-16-02 and 47-18-01 

(defined as dwelling and contiguous land, not to exceed $100,000 

over and above liens and encumbrances). 

o To the surviving spouse for life or until remarriage, or for 

minors until 18 years old. 

o Court decree sets apart homestead estate. 

Exempt Property Allowance. N.D.C.C. § 30.1-07-01, for 

surviving spouse or, if none, for minor children the decedent was 

obligated to support. Consists of $15,000 in tangible personal 

property or equivalent cash. 

Family Allowance. N.D.C.C. § 30.1-07-02, for surviving spouse 

and minor children the decedent was obligated to support for the 

entire period of estate administration, but limited to one year for 

8

insolvent estates. Has priority over all claims except homestead 

allowance. Amount is subjective and is based on the previous 

standard of living and the nature of resources available, but not to 

exceed $27,000. 

5. Deposit of Wills. N.D.C.C. § 30.1-11-01. 

An original will may be deposited with a county recorder during 

the testator’s lifetime, or even at the death of the testator when 

there is no probate. Usual fee is $10. 

6. Probate nuances in North Dakota: 

Notice is published once a week for three (3) consecutive weeks. 

Notice of creditor period is three (3) months after the date of first 

publication or mailed notice. 

North Dakota Department of Human Services has a separate 

priority of claims, including new legislation regarding the priority 

for the payment of Medicaid recipient liability. 

Western North Dakota probate rules (See Exhibit “A”). Due to all 

of the “stale” mineral interest probates needed in Western North 

Dakota, the judges in those counties developed these local rules 

for: whenit has been more than 3 years since date of death; 

ancillary probate; and, determination of heirship. 

Bond is rarely required. 

No-appearance hearings are most common. 

Inventory and Final Account can usually be waived by consent. 

Ancillary probates (foreign personal representative) require that 

authenticated or certified copies of the appointment of the personal 

representative and any bond be filed with a North Dakota Court, 

and the Court will enter an Order acknowledging the filing. 

7. North Dakota Estate Tax. The estate tax in North Dakota is perpetually 

federalized and the taxable estate definition is identical to the federal 

definition. 

D. Trusts and Special Needs Trusts. 

1. North Dakota Uniform Trust Code, N.D.C.C. Chapter 59-09 enacted in 

2007. 

9

2. A noncharitable irrevocable trust may be modified or terminated upon 

consent of all “beneficiaries” if Court concludes the continuance of the 

trust is not necessary to achieve any material purpose of the trust. 

N.D.C.C. § 59-12-11(1). 

3. The Court may modify the administrative or dispositive terms of a trust, or 

terminate the trust if, because of circumstances not anticipated by the 

settlor, the modification or termination will further the purposes of the 

trust. N.D.C.C. § 59-12-12. 

4. After notice to “qualified beneficiaries,” the trustee may terminate and 

distribute a trust with a value under $100,000 if the trustee concludes the 

value is insufficient to justify the costs of administration. N.D.C.C. § 59- 

12-14. 

5. The Court may remove the trustee and appoint a successor trustee if the 

Court determines the value is insufficient to justify the costs of 

administration. N.D.C.C. § 59-12-14(2). 

6. “Beneficiary” is different than a “qualified beneficiary”: 

59.09-03. (103) Definitions. 

. . . . 

* * * * * * * * * * * * * * 

3. “Beneficiary” means a person that: 

a. Has a present or future beneficial interest in a trust, vested or 

contingent, including the owner of an interest by assignment or 

transfer; or 

b. In a capacity other than that of a trustee, holds a power of 

appointment over trust property. 

. . . 

16. “Qualified beneficiary”: 

a. Means a beneficiary who, on the date the beneficiary’s 

qualification is determined: 

(1) Is a permissible distributee of trust income or principal; 

10

(2) Would be a permissible distributee of trust income or 

principal if the interests of the distributees described in 

paragraph 1 terminated on that date without causing the 

trust to terminate; or 

(3) Would be a permissible distributee of trust income or 

principal if the trust terminated on that date. 

b. Does not include a contingent distributee or a contingent 

permissible distributee of trust income or principal whose interest 

in the trust is not reasonably expected to vest. 

* * * * * * * * * * * * * * 

7. The Court may modify the trust terms to achieve the settlor’s tax 

objectives. N.D.C.C. § 59-12-16. 

8. Pet trusts are allowed per N.D.C.C. § 59-12-08, but the Court may 

determine the value of the trust property exceeds the amount required for 

the intended use. 

9. A conservator of the settlor may exercise a settlor’s power to revoke, 

amend or distribute trust property only with the approval of the 

conservatorship court. N.D.C.C. § 59-14-02(6). 

10. Co-trustees may serve separately unless the trust terms require joint 

action. N.D.C.C. § 59-15-03. 

11. A trustee may be removed if all “qualified beneficiaries” request the 

removal to the Court and the Court finds the removal is not inconsistent 

with the material purpose of the trust. N.D.C.C. § 59-15-06(2). 

12. Special Needs Trusts in North Dakota. N.D.C.C. Chapter 59-08 enacted 

in 2003: 

Self-settled special needs trust is the same as a Minnesota special 

needs trust or a 42 U.S.C. 1396p(d)(4) trust: 

o Funded with the assets of the individual with a disability. 

o Federal law allows for the creation of a non-pooled selfsettled 

special needs trust by a parent, grandparent, 

guardian or the Court. However, North Dakota has unique 

requirements (these are from my experience only, and are 

not required by any written rule): 

11

• An attorney-in-fact may not create a self-settled 

special needs trust. 

• If the guardian/conservator has full legal authority 

granted, then the guardian/conservator may create 

any self-settled special needs trust without Court 

involvement, unless the guardian/conservator will 

be trustee and is a corporate guardian/conservator. 

• If a corporate guardian/conservator creates a selfsettled 

special needs trust, then a Court Order is 

required if the corporate guardian/conservator will 

also serve as trustee. 

• There is no state inventory and accounting 

requirement for any special needs trusts in North 

Dakota. 

• North Dakota has two (2) pooled self-settled special 

needs trusts offered: 

Guardian, Fiduciary & Advocacy Services, 

Inc. 

Guardian & Protective Services, Inc. 

Third party special needs trusts: 

o The parent of a child with a disability under age 18 may not 

sign the third party special needs trust as settlor because it 

is the position of the North Dakota Department of Human 

Services that the parent owes the child a duty of support. 

Such a parent may not fund a third party special needs trust 

when the child with a disability is under age 18, unless the 

parent has died. To get around this for the estate planning 

of such a parent, an aunt/uncle/grandparent or friend may 

serve as settlor and nominally fund (seed) the third party 

special needs trust with $100 of their funds. 

o Common practice is to create a nominally funded (seed) 

third party special needs trust with pourover language in 

the parent’s will or revocable living trust. The seeded third 

party special needs trust is then reported to the North 

Dakota Department of Human Services to become 

“grandfathered.” 

o Pre-2003 non-conforming third party special needs trusts 

may be successfully reformed by Court action. N.D.C.C. § 

59-08-04. 

12

o 

North Dakota has two (2) pooled third-party special needs 

trusts offered (both offer a waiver of fees with a $100 

seeded subaccount): 

• Guardian, Fiduciary & Advocacy Services, Inc. 

• Guardian & Protective Services, Inc. 

E. Guardianship and Conservatorship Differences. 

1. The Court-appointed attorney is only a guardian ad litem, and cannot act 

as an advocate for the proposed ward/conservatee. If the proposed 

ward/conservatee wants an attorney advocate, he or she needs to hire one. 

2. A physician’s report is required, in addition to the visitor’s report. 

3. There is no requirement for a guardian to give notice of intent to dispose 

of personal property. 

4. Despite N.D.C.C. § 30.1-29-11 stating “. . .the court shall require a 

conservator to furnish a bond . . . ,” in reality bond is rarely ordered. 

5. No requirement for fingerprinting or background checks. 

6. No requirements to petition for the sale of property, to report the sale or to 

obtain an order for sale. 

7. North Dakota adopted the Uniform Adult Guardianship and Protective 

Proceedings Jurisdiction Act. 

III. 

North Dakota Medicaid 

A. North Dakota Medicaid (MA) Manual Section 510-05-35-85(8) explains the two 

(2) year residency reciprocity agreement between North Dakota and Minnesota 

for Medicaid coverage. 

B. Community spouse asset allowance figures are at North Dakota MA Manual 

Section 510-05-65-20. 

2013 community spouseasset allowance: not less than $23,184 

not more than $115,920 

13

C. The community spouse income allowance is not needs-based like Minnesota. 

Instead, the community spouse is allowed all of his or her own income, plus a 

monthly income shift from the institutionalized spouse, to provide the community 

spouse with $2,267 total monthly income. 

D. Pre-need funeral contracts are very peculiar in North Dakota and are not unlimited 

such as in Minnesota (with proper irrevocable insurance or annuity policies or 

assignments). North Dakota MA Manual Section 510-05-70-30(8) provides that 

$6,000 or less may be set aside in a pre-need funeral contract. Pre-purchased 

markers, headstones and vaults are countable assets for Medicaid, unless they are 

part of the pre-need funeral contract. If the marker has been engraved, it is still a 

countable asset, but will have a reduced value for the cost to resurface the marker 

for public sale. If it is a shared pre-engraved marker with a predeceased spouse 

buried under it, the manual provides that it has no resale value. 

E. A vendor’s interest in a contract for deed in North Dakota is scrutinized under 

North Dakota MA Manual Section 510-05-70-40 to determine: 

 

 

 

 

 

Whether the sales price was for fair market value. 

If there is a fair market interest rate. 

Whether the North Dakota Department of Human Services life expectancy 

for the vendor is shorter than the term of the contract (if so, it is deemed a 

disqualifying transfer for Medicaid eligibility). 

If the payments are current. 

Whether the vendor may assign the contract. 

There is a presumption that the vendor can sell the contract or the contract 

payments by public advertisement. 

F. A single premium immediate annuity may be purchased for the community 

spouse to increase the community spouse’s income to $2,267 per month, even 

after the date of the asset assessment and after the institutionalized spouse enters 

the nursing home, per North Dakota MA Manual Section 510-05-70-45-30. 

However, the annuity term must be within the life expectancy as published in the 

North Dakota MA Manual at 510-05-100-75 (not the life expectancy set forth by 

the annuity company). Additionally, the North Dakota Department of Human 

Services must be irrevocably named as the primary beneficiary (as its interest may 

appear for payment of Medicaid). North Dakota Department of Human Services 

has a Notice to Insurer of Annuity (05-100-96) that must be sent to the company 

that issued the annuity. 

14

G. The value of currently owned mineral interests are an exempt asset for Medicaid. 

The income produced from mineral interests is applied to the recipient 

liability/client share, or if owned by the community spouse, then for the 

community spouse income allowance calculation. For Medicaid purposes, 

mineral interests are valued in a specific manner unique to the North Dakota 

Department of Human Services. At North Dakota MA Manual Section 510-05- 

70-60(3): 

* * * * * * * * * * * * * * 

3. Real property: 

a. With respect to mineral interests: 

i. If determining current value (for sale or pending transfer): 

(1) Fair market value is the value established by good 

faith effort to sell. The best offer received 

establishes the value. 

(2) A good faith effort to sell means offering the 

mineral interests to at least three companies 

purchasing mineral rights in the area, or by 

offering for bids through public advertisement. 

ii. 

If determining a previous value for mineral rights sold or 

transferred in the past, fair market value is: 

(1) If producing, three times the annual royalty income. 

(a) Based on actual royalty income from the 36 

months following the transfer; or 

(b) 

If 36 months have not yet passed, based on 

actual royalty income for the months that 

have already passed, and an estimate for the 

remainder of the 36 month period. 

(2) If not producing, but mineral rights are leased, two 

times the lease amount (based on the actual lease 

15

and not the yearly lease amount) that was in place 

at the time of the transfer. 

Example: John Oilslick leased his mineral 

acres in 2008 for $3000. He transferred his 

mineral rights to his adult children in 

January 2010. The children have a new 

lease on these acres effective January 2011 

for $10,000. The disqualifying transfer is 

equal to two times the $3,000 lease that was 

in place at the time of the transfer. 

(3) If not leased, the greater of two times the estimated 

lease amount, or the potential sale value of the 

mineral rights, as determined by a geologist, 

mineral broker, or mineral appraiser at the time of 

the transfer, whichever is greater. 

Example: Don Goldmine had his mineral 

acres valued at $50,000 in 2010 when he 

transferred them to his children. Today 

those minerals are valued at $20,000. The 

amount of the disqualifying transfer would 

be $50,000, the value at the time of the 

transfer. 

iii. 

In determining current or previous value, an applicant or 

recipient may provide persuasive evidence that the value 

established using the above process is not accurate. 

Likewise, if an established value is questionable, the 

Department may require additional evidence be provided 

to establish estimated fair market value. 

Example: Mary Golddigger leased her mineral 

acres in June 2008 for $5,000 under a 3-year lease. 

Two months before the lease expired – April 2011, 

she transferred those acres to her daughter, Nugget 

Golddigger. Nugget then leased those acres for 

$20,000. In this situation, at the time of transfer, 

Mary probably reasonably would be aware of the 

16

* * * * * * * * * * * * * * 

lease renewal amounts. Even if she didn’t know, it 

is likely that the value was closer to the $20,000 

than $5,000. The eligibility worker must get 

information of the estimated value as of the date of 

the transfer. The value of the disqualifying transfer 

at 2 X the newer lease amount of $20,000 equals 

$40,000. 

H. For Medicaid purposes, agricultural land must be valued as follows per North 

Dakota MA Manual 510-05-70-60(3): 

* * * * * * * * * * * * * * 

b. With respect to agricultural lands: appraisers, real estate agents dealing 

in the area, loan officers in local agricultural lending institutions, and 

other persons known to be knowledgeable of land sales in the area in 

which the lands are located, but not the “true and full” value from tax 

records. 

* * * * * * * * * * * * * * 

I. However, any real property other than mineral interests and agricultural lands 

may be valued as follows per North Dakota MA Manual Section 510-05-70- 

60(3): 

* * * * * * * * * * * * * * 

c. With respect to real property other than mineral interests and agricultural 

lands: market value or “true and full” value from tax records, whichever 

represents a reasonable approximation of market value; real estate agents 

dealing in the area; and loan officers in local lending institutions. If a 

valuation from a source offered by the applicant or recipient is greatly 

different from the true and full value established by tax records, an 

explanation for the difference must be made, particularly if the applicant 

or recipient may be able to influence the person furnishing the valuation. 

* * * * * * * * * * * * * * 

J. There is no estate recovery against life estate interests and there are no life estate 

liens. 

17

K. The North Dakota MA Manual at 510-05-75-10 states that property enrolled in 

the Conservation Reserve Program (CRP) is considered property essential to 

earning a livelihood and is excluded as an asset. 

L. The North Dakota MA Manual has a separate Section at 510-05-75-15 for the 

treatment of asset ownership for individuals that live in communal colonies 

(Hutterites, Mennonites, Amish, etc.) 

M. Disqualifying transfers in North Dakota are treated the same as Minnesota with 

one substantial difference: those transfers involving “someone in a confidential 

relationship.” North Dakota MA Manual Section 510-05-80-05(4) provides: 

* * * * * * * * * * * * * * 

4. “Someone in a confidential relationship” includes an applicant or 

recipient’s power of attorney, guardian, conservator, legal custodian, 

caretaker, trustee, attorney, accountant, or agent, and may include a 

relative or other person with a close and trusted relationship to the 

individual. 

North Dakota state law provides that any transaction between an 

applicant or recipient and someone who has a confidential relationship 

with that individual in which the individual who has a confidential 

relationship gains any advantage over the applicant or recipient is 

presumed to be entered into without sufficient consideration and under 

undue influence. 

Someone with a confidential relationship who can exercise control over an 

applicant’s or recipient’s income or assets has a duty to act in the highest 

good faith and not obtain any advantage over the applicant or recipient; 

to not use or deal with an applicant or recipient’s property for their own 

profit; to refrain from transactions adverse to the applicant or recipient; 

and to refrain from using undue influence to obtain any advantage from 

the applicant or recipient. 

Accordingly, transfers of an applicant or recipient’s real or personal 

property made by an applicant or recipient to the person with the 

confidential relationship must be at 100% of estimated fair market value. 

Transfers for less than 100% of fair market value may be subject to the 

disqualifying transfer provisions. 

Transfers of an applicant or recipient’s property made by someone with a 

confidential relationship, for which 100% of fair market value was not 

18

eceived, are not considered to be transfers without adequate 

compensation when an applicant or recipient is not competent, or if 

competent, does not approve. In these situations the uncompensated value 

is considered to be available to the applicant or recipient because the 

person who made the transfer must account for and replace any amounts 

lost by the applicant or recipient. The individual may require return of the 

assets, which may include legal proceedings if necessary. There is no time 

limit that applies to these transfers (i.e. the disqualifying transfer look 

back date is not applicable). 

For example: Ms. Smith has a power of attorney to act on behalf 

of her mother who is incompetent. She transfers property owned 

by her mother, and valued at $60,000, to herself and her two 

siblings. Medicaid will still consider $60,000 as available to Ms. 

Smith’s mother as Ms. Smith did not act in the best interest of her 

mother. Ms. Smith’s mother has the legal ability to make the funds 

available, or to affect the return of the property. 

The confidential relationship issue is closely tied to fair market value. 

When dealing with personal or real property, the fair market value of the 

property is an estimate of the property’s value. “True” fair market value 

is established when such property sells for the highest amount possible. 

When selling such property to someone who has a confidential 

relationship with the seller, the property may not be sold for the highest 

amount possible, and therefore, the “true” fair market value is not 

established. The value of the property, for Medicaid purposes, is still an 

estimate. When selling such property to someone who does not have a 

confidential relationship with the seller, the property is more likely to be 

sold for the highest amount possible, which will establish “true” fair 

market value, and which may be more or less than the estimated fair 

market value. 

* * * * * * * * * * * * * * 

Therefore, you cannot have an attorney-in-fact sign a deed or for any other 

gift. If you do, the Medicaid applicant will be disqualified from Medicaid 

eligibility permanently, until the assets arefully returned. The Medicaid 

applicant will be forever treated as still owning the asset transferred by the 

attorney-in-fact. 

N. For purposes of determining the period of ineligibility for Medicaid in North 

Dakota, the monthly average cost of nursing facility care can be found at North 

19

Dakota MA Manual Section 510-05-80-05(9) and is usually updated January 1 of 

every year. 

2013 North Dakota monthly average cost of care = $6,792 

O. North Dakota has a hardship provision at North Dakota MA Manual Section 510- 

05-80-20, but I do not know of any hardship waiver ever granted in North Dakota. 

P. A relative may be paid for services provided to a future Medicaid applicant per 

North Dakota MA Manual Section 510-05-80-35. However, the payment must be 

made pursuant to a valid written contract entered into prior to rendering the 

services, and it is best practice to have the future Medicaid applicant sign himself 

or herself (if legally capable to do so) or have a non-caregiver attorney-in-fact 

sign. 

Q. The personal needs allowance in North Dakota is $50 monthly. 

R. Recipient liability is called client share in North Dakota. 

S. The Basic Care Program is North Dakota’s unique level of long-term care 

between assisted living and skilled care. 

A Basic Care Facility is defined as: 

* * * * * * * * * * * * * * 

“Basic Care Facility” means a residence, not licensed under NDCC § 23- 

16 by the Department, that provides room and board to five or more 

individuals who are not related by blood or marriage to the owner or 

manager of the residence and who, because of impaired capacity for 

independent living, require health, social, or personal care services, but 

do not require regular twenty-four hour medical or nursing services and 

a. Makes response staff available at all times to meet the twenty-four 

hour per day scheduled and unscheduled needs of the individual; 

or, 

b. Is kept, used, maintained, advertised, or held out to the public as 

an Alzheimer’s, dementia, or special memory care facility. 

* * * * * * * * * * * * * * 

It is my experience that most North Dakota long-term care facilities will have a 

few “Basic Care MA” beds. So, it is important to understand the differences for 

20

disqualifying transfer provisions if someone enters Basic Care and needs 

Medicaid: 

* * * * * * * * * * * * * * 

1. A person is ineligible for benefits if the person or the spouse of the person 

disposes of assets or income for less than fair market value on or after the 

look-back date of thirty-six months (Example of assets or income: Home, 

cash, life estates, trust, property, etc.). 

2. The look-back date is the date that is thirty-six months before the date of 

application; or in the case of payments from a trust or portions of a trust, 

that are treated as income or assets disposed of by a person, sixty months 

before the date of application. 

3. . .. . 

d. The individual shows that the total cumulative uncompensated 

value of all income and assets transferred for less than fair market 

value by the individual or the individual’s spouse is less than the 

actual cost of services of a type provided under this program, 

provided after the transfer was made, for which payment has not 

been made and which is not subject to payment by a third-party, 

provided that such a showing may only be made with respect to 

periods when the person is otherwise eligible for benefits under 

this program. (Example: Mr. Smith transferred his home to his 

children two years ago. The fair market value of the home was 

$20,000. Mr. Smith is ineligible for this program until Mr. Smith 

incurs $20,000 of expenses during periods in which he was 

otherwise eligible, for which payment has not been made, and 

which are not subject to payments by any third party (such as a 

long term care insurance policy.) 

4. There is a presumption that a transfer for less than fair market value was 

made for purposes of qualifying for benefits under this program when: 

. . . . . 

c. A transfer was made, on behalf of the person or the person’s 

spouse, by a guardian, conservator, or attorney in fact: 

* * * * * * * * * * * * * * 

21

IV. 

Preparing North Dakota deeds requires a license to practice law in North Dakota 

A. North Dakota Rule 5.5 Unauthorized Practice of Law provides: 

. . . . 

* * * * * * * * * * * * * * 

(d) 

A lawyer who is not admitted to practice in this jurisdiction shall not represent or 

hold out to the public that the lawyer is admitted to practice law in this 

jurisdiction. A lawyer who practices law in this jurisdiction under paragraph (b) 

or (c) shall disclose in writing to the client that the lawyer is not licensed in this 

jurisdiction. 

* * * * * * * * * * * * * * 

B. According to my recent emails with retired North Dakota Supreme Court Justice 

William A. Neumann, who is now the Executive Director of the State Bar 

Association of North Dakota, non-North Dakota licensed attorneys may not 

prepare deeds regarding North Dakota real property or mineral interests because 

doing so violates Rule 5.5 and is the unauthorized practice of law. 

C. According to my recent emails with Attorney Brent J. Edison, Assistant 

Disciplinary Counsel for the Disciplinary Board of the North Dakota Supreme 

Court, when he is asked about whether something constitutes the unauthorized 

practice of law and Rule 5.5, his usual response is to refer lawyers to the safe 

harbor exceptions set forth in 5.5(a) and 5.5(b). If the contemplated conduct does 

not fit within one of these safe harbors, there may be an issue of the unauthorized 

practice of law. 

22

ONLINE NORTH DAKOTA RESOURCES 

Title 

Administrative Code 

Basic Care Program rules 

Ethics opinions on Rule 5.5 

Gavel (SBAND publication) 

Guardian & Protective Services, Inc. 

Guardian, Fiduciary & Advocacy Services, Inc. 

Industrial Commission 

Medicaid Manual 

Mineral title standards order form 

(not currently available for ordering, so call before 

sending payment) 

North Dakota Century Code 

North Dakota Recorders Information Network 

Secretary of State 

State Bar Association of North Dakota (SBAND) 

Supreme Court 

Title Standards order form 

Website 

www.legis.nd.gov/agency-rules/ 

north-dakota-administrative-code 

www.nd.gov/dhs/policymanuals/ 

40029/default.htm 

www.sband.org/ethics 

www.sband.org/Gavel/ 

www.gapsinc.org/ 

www.gfaservices.org 

www.dmr.nd.gov/ 

www.nd.gov/dhs/policymanuals 

/home/financialhelp.htm 

www.sband.org/userfiles/files/pdfs/ 

forms/mineraltitlestandards.pdf 

www.legis.nd.gov/generalinformation/north-dakota-centurycode 

www.ndrin.com 

www.nd.gov/sos/ 

www.sband.org 

www.ndcourts.gov 

www.sband.org/userfiles/files/pdfs/ 

forms/titlestandards.pdf 

EXHIBIT “B”

SECTION 6 

I Want What’s Mine – Now! Practical 

Solutions for Avoiding the Pitfalls and 

Problems of Working with Trust 

Beneficiaries 

Kathleen L. Kuehl 

Elizabeth Schlueter 


Minneapolis 



The Beauty and Burden of Trusts ..............................................................................1 

Factors Leading to Disputes .......................................................................................1 

Common Areas of Trust Disputes..............................................................................2 

Education – The Critical Component ........................................................................3 

Duties of the Trustee ..................................................................................................4 

Communication – an Often Under-Utilized Strategy ................................................7 

Delegation and Divided Duties ..................................................................................9 

Trust Protectors ..........................................................................................................10 

Directed Trusts ...........................................................................................................11 

Certain Instances Where Delegation or a Directed Trust May Make Sense ..............11 

Decanting ...................................................................................................................12 

Statements of Intent ...................................................................................................12 

Conclusion .................................................................................................................13

The Beauty and Burden of Trusts 

It is widely recognized that we are entering the largest inter-generational transfer of 

wealth in this nation’s history. While much of that wealth will undoubtedly be distributed 

outright to beneficiaries and younger generations, a very significant amount will be 

transferred through the use of trusts and other estate planning entities. 

There is perhaps no entity more recognized and, in many situations, more needed, yet 

less understood and more confusing than the trust, a basic concept to nearly all estate 

planning attorneys, but often foreign to grantors, beneficiaries and, in many cases, even 

those that are named to serve as trustees. What began with a fairly simple definition of 

a trust as an entity where its creator (the grantor) appoints one party (the trustee) to 

hold property for the benefit of another party (the beneficiary) has now morphed into a 

complex structure with many additional interested parties named to serve in a variety of 

newly created roles. Indeed, it could be argued that modern trust law, while trying to 

build in flexibility with tools such as bifurcation, directed trusts, trust protectors and 

decanting, has significantly complicated the understanding of trusts. Some would argue 

that the result has been more confusion and increased adversity among trust parties, 

consequently leading to an exponential growth in trust litigation. To avoid these 

negative repercussions, professionals in this field, whether it be attorneys, professional 

trustees or other financial advisers, should take the time to educate their clients on the 

purpose of the trust and the specific roles of each party integral to the operation of the 

trust. This may help to establish reasonable expectations from inception and eliminate 

or, at a minimum, mitigate disputes, among the parties and minimize potential fiduciary 

liability. This outline is not designed to be an in-depth white paper on all the issues 

arising over the life of a trust, but rather as an overview to highlight some of the more 

common contentious issues and strategies that might be employed to address them. 

Factors Leading to Disputes 

The following list is by no means comprehensive, but these are some of the more 

common factors contributing to disputes involving trusts and the parties thereto: 

--an aging baby-boomer population, where advanced medical technologies have 

increased longevity, and with along with it, a widened exposure to dementia and 

potential elder abuse, resulting in more claims of incapacity and undue influence; 

--the evolving nature of the family unit: more second marriages with children and stepchildren 

who often have competing interests; 

--more financial distress on the part of individual beneficiaries: as a result of the Great 

Recession, the housing meltdown, increased unemployment, chemical dependency and 

other financial stressors; 

1

--volatility in the financial markets, leading to below-market investment returns which 

places stress on the long-term financial viability of trusts and increased scrutiny of 

investment decisions on the part of the trustee; 

--failure to carefully consider the nomination and appointment of trustees, resulting in 

inexperienced or incompetent individuals serving in that role; 

--growing litigiousness where people are less reluctant to sue experienced individuals or 

professional fiduciaries serving as trustees; 

--old-fashioned greed! A growing sense of entitlement and a lack of patience to delay 

receipt of financial benefits. 

Common Areas of Trust Disputes 

Disputes can arise in a variety of situations. There are, however, some common issues 

which seem to consistently surface in situations involving the use of trusts. These 

include the following: 

--Issues surrounding the validity of the trust itself, including whether the grantor had the 

requisite capacity to establish the trust in the first place, whether the document was 

appropriately signed and executed, or whether the grantor was unduly influenced in 

setting up the trust. 

--Fiduciary issues addressing whether the trustee breached any of their duties to the 

detriment of the trust beneficiaries, including such questions as whether the trust assets 

were invested appropriately, whether distributions were inappropriately made, whether 

the trustee engaged in self-dealing, or whether the trustee failed to follow the terms of 

the trust document or committed fraud. 

--Disputes among beneficiaries, including whether the interests of contingent 

beneficiaries are being taken into consideration, whether spouses from subsequent 

marriages are given preference over beneficiaries from a prior relationship, and whether 

children are depleting trust assets to the detriment of later generations. Family 

businesses often generate disputes where some of the trust beneficiaries are actively 

involved in the business and others are not. 

A good example of a situation that, if not handled appropriately early on, may lead to 

disputes among beneficiaries is the use of “pot” trusts. This type of trust holds assets 

for a number of different beneficiaries, but instead of dividing into separate shares for 

each of the respective beneficiaries, the assets are held in one “pot” accessible by 

multiple parties. Pot trusts can be useful where the beneficiaries are similarly situated, 

close in age and/or where the trust’s benefit is the same for all the parties, such as for 

educational expenses. However, where the trust is intended to continue for a long time, 

it may be more beneficial to split the trust into separate shares for each beneficiary. 

2

Failing to do so may lead to resentment among beneficiaries, where one or more 

beneficiary feels they are not being treated equally or fairly in relation to the others. 

Alternatively, residual or remainder beneficiaries may feel that their interests are not 

being protected and may question distributions to current beneficiaries or investment 

decisions that appear to favor the short-term rather than the long-term. Failure to 

adequately address these concerns in the estate planning process can lead to family 

dysfunction, disputes and even outright litigation. 

Another common source of disputes involves “special assets.” While each family’s 

situation is unique and may have its own “special assets”, a couple of the more 

common ones include family businesses or specific real estate, like cabins and 

vacation homes. Family businesses require special planning specifically around 

succession issues. Questions like who will own the business, who will run the business, 

and who will benefit from the success of the business are critical, as the answers may 

be different for each question. Will the business be able to generate enough income to 

not only support itself but also the lifestyle and financial needs of those who will benefit 

from it? Planning is crucial not only to avoid potential disputes, but to guarantee the 

sustainability and success of the business. 

Cabins, vacation homes and family “compounds” also require specific planning. 

Maintenance and upkeep, management, time and use allocation, expense sharing and 

buy-sell provisions are just some of the many issues that should be addressed early in 

the planning process. Trusts are often used as the entity that holds these assets for the 

common use and benefit of the beneficiaries, but often the specific day-to-day 

management and operational issues are set forth in a separate management 

agreement, allowing for easier amendment and reformation if necessary in the future. 

Education--The Critical Component 

For professional advisers working with parties to a trust, whether it be representing the 

grantor, the trustee or the beneficiaries, taking time to explain and educate the parties is 

crucial to the success of any working arrangement. Investing in education time upfront 

can ensure that all the parties are not only informed and knowledgeable, but also 

engaged and held accountable. The specific educational content may vary depending 

upon what party to the trust the advisor is representing. 

For the grantor: Has the grantor fully and completely disclosed his or her objectives? 

Does the advisor have a clear understanding of the grantor’s intent in establishing the 

trust? Will the trust meet the family’s unique and often complex needs? Does the 

grantor fully understand the role of the trustee and what is required of that person? Has 

the advisor discussed with the grantor the different types of trustees (i.e., individual, 

professional, private trust companies or some combination thereof) and the advantages 

and disadvantages associated with each of them? Poor trustee selection is a precursor 

to trust disputes, many of which may have been avoided or minimized if greater care 

had been exercised initially in the nomination and appointment of the trustees. 

3

For the trustee: If an individual trustee has been selected, has someone, whether it be 

the grantor, or perhaps more appropriately, an advisor, explained to the trustee his or 

her role and the duties and powers he or she is assuming? Has there been an 

assessment of whether this person is willing, and more importantly, able to fulfill that 

role? Who will be responsible for helping the individual trustee develop a strategy and 

process for carrying out the trustee’s duties and responsibilities? This may include 

delegating certain responsibilities to other individuals or professional entities. Has there 

been guidelines established for interacting with the beneficiaries? This should include 

methods and frequency of communications. This may be one of the most important 

and often overlooked roles that an adviser to a trustee can have. A substantial 

number of disputes that arise between beneficiaries and trustees are a result of 

miscommunications or no communications, and if expectations can be set forth and 

agreed upon at the beginning of the relationship, it is quite possible that many of these 

disputes could be avoided. 

For the beneficiary: Does the beneficiary understand the concept of the trust and have 

a basic understanding of why the trust was established? Does the beneficiary 

appreciate the differences in certain classes of beneficiaries (i.e., income v. principal, 

current v. remainder)? Does the beneficiary understand the role of the trustee and the 

responsibilities that the trustee has to ALL the beneficiaries, as well as the trustee’s 

responsibility to the grantor? Have the ground rules and expectations for the trustee’s 

relationship with the beneficiary, including communications and meetings, been fully 

disclosed and agreed to? An overriding goal of the trustee should be to help with the 

financial education of the trust beneficiaries, particularly if the trust is designed to 

terminate and distribute outright to the beneficiaries at some point in the future. 

Beneficiaries must also be held accountable to prepare themselves to manage these 

assets in the future. They should be meeting with the trustee periodically and actively 

participating in these meetings. At some point, they need to also accept the 

responsibility for holding the trustee accountable by monitoring the trustee’s 

performance. These are vitally important issues, often overlooked by the family’s 

professional and financial advisers. 

Duties of the Trustee 

The individual or entity accepting the role of trustee has the following duties: 

I. Duty to administer the trust in accordance with the trust terms and applicable law. 

This duty encompasses a number of responsibilities, including, but not limited to, 

maintaining and managing trust property, appropriately accounting for trust income 

and principal during the administration of the trust, filing necessary tax returns, and 

distributing trust assets to beneficiaries during administration and at termination. The 

trustee must fulfill these duties with care and skill while acting for the benefit of the 

trust beneficiaries. The trustee has the duty to become familiar and knowledgeable 

4

with the terms and purposes of the trust and cannot claim ignorance of such issues to 

absolve him or herself from liability. 

II. Duty of prudence. This means that the trustee must exercise reasonable care, skill 

and caution in administering the trust, being mindful of the grantor’s objectives in 

establishing the trust and the interests of the beneficiaries. In those cases where the 

trustee has exceptional or extraordinary skills as compared to an ordinary trustee, he 

or she must utilize those skills in the exercise of his or her fiduciary duty. 

III. Duty to act personally, and the related duties with respect to delegation. It is 

generally accepted that fulfilling all the duties of a trustee often requires advice and 

assistance from outside sources. One area in particular where outside resources 

may be accessed is in the area of investing trust assets, and while a trustee may 

delegate such responsibilities, the trustee must exercise his or her fiduciary or 

prudent discretion, along with reasonable care and skill, in delegating these duties to 

qualified and competent advisors. In those situations where the trustee delegates 

certain duties, the trustee acquires the additional responsibility of supervising the 

agents he or she chooses. In addition to delegating certain duties to qualified 

agents, the trustee may frequently seek legal advice or representation in the 

administration of a trust. It should be noted, however, that the trustee remains liable 

for his or her actions or inactions even where counsel has been consulted or 

retained. 

IV. Duty of loyalty. The trustee owes the trust beneficiaries a strict duty of loyalty, 

essentially requiring the trustee to administer the trust and manage the trust assets 

solely in the interests of the beneficiaries. This duty of loyalty prohibits the trustee 

from self-dealing, or putting his or her interests above those of the beneficiaries. A 

potential source of conflict occurs where the named trustee is also a beneficiary of 

the trust. In these cases, the grantor of the trust must be aware of the potential 

conflict of interest, and the trust document may need to be drafted to include 

provisions addressing such potential issues. 

V. Duty of impartiality. The trustee must administer the trust in a manner that is 

impartial to all the beneficiaries. This includes requirements that the trustee invest, 

protect and distribute the assets in an impartial manner, and also that the trustee 

communicate with all the beneficiaries equally. The trustee must act with loyalty to all 

the beneficiaries and balance their interests equally, as well as act with recognition of 

the needs and interests of future beneficiaries. 

VI. Duty to furnish information to the beneficiaries. The trustee must communicate with 

the beneficiaries and keep them informed of all material facts related to the trust 

which would assist them in protecting their interests, including, but not limited to, 

changes in the trust or trusteeship, or transactions which significantly affect the trust 

estate. At a minimum, information like annual schedule K-1s and trust accountings 

should be provided to the beneficiaries. 

5

VII. Duty to keep records and provide reports. The trustee is required to keep accurate 

records and, as previously mentioned, provide beneficiaries with trust accountings 

which show, among other things, additions, deductions, and the value of trust 

assets. 

VIII. Duty to identify and segregate trust property. This duty charges the trustee with 

keeping trust property separate from the trustee’s own property, as well as from 

property not subject to the trust. This may require setting up separate accounts or 

physically keeping the assets separate and distinct, and this prohibition against 

commingling also applies if more than one trust is being administered. The trustee 

is also required to title trust assets appropriately to avoid any ownership disputes. 

Given all of the duties that the trustee assumes, careful consideration must be given to 

who serves in that role. In theory, the trustee is someone who will be responsible for 

the management of trust assets and the formal administrative duties which go along 

with the day-to-day operation of the trust. However, in reality, the trustee is also 

responsible for managing the complex relationships and interactions among family 

members and others. 

Clients will often want to name family members or trusted advisers as their trustee. 

Sometimes they may want to name such individuals to serve along with a professional 

fiduciary. By dividing the role between individuals and professional trustees, the roles 

and responsibilities can be divided based upon the experience, time, knowledge and 

capabilities of the individuals named. More trustees, however, may result in more 

complexity. Where family involvement through the use of individual trustees is being 

considered, the education of family members and their advisers is a crucial factor in the 

process and ultimate success of the arrangement. 

Where more than one trustee is named, the trust instrument should specify how the 

trustees will work together, and some of the more important issues to address include: 

--how decisions get made, whether by unanimity, by majority or with control in one of 

the trustees; 

--delegation of responsibility and authority among co-trustees; 

--exoneration of “nonparticipating” trustees and other limitations on trustee liability; 

--trustee resignation, removal and incapacity and transition on change of trustees; 

--appointment of trustees for newly created trusts; 

--responsibility for assets (particularly special assets, like closely-held businesses, etc.), 

records and reports; and 

--compensation of trustees and their agents. 

6

Communication--an Often Under-Utilized Strategy 

Simple, direct communication between the trustee and the trust beneficiaries can go a 

long way to developing solid working relationships, building trust and avoiding problems 

down the road. While legal requirements concerning notice to beneficiaries must be 

followed, practical strategies for effective communication should not be overlooked. 

Trustees should provide current adult beneficiaries with a written summary of their rights 

and interests under the trust document. This allows the beneficiaries to understand the 

extent of their interests and allows the trustee to set forth and manage the beneficiaries’ 

expectations going forward. Some of the most important issues to summarize include: 

--general statement about the purpose of the trust or the intent, if known, of the grantor 

in establishing the trust; 

--standards, whether mandatory or discretionary, for the distribution of income and 

principal and the timing of such distributions, including ages for partial or terminating 

distributions; 

--the specific process used to review and approve or deny any requested distributions 

from the trust, including the expected timeframe between the beneficiary’s request and 

final determination by the trustee (including whether a distribution committee is involved 

in these decisions); 

--explanation of the investment policy the trustee must follow, including any guidance or 

restrictions that might have been set forth in the trust document; 

--the frequency of trust accountings and whether court approval is required; 

--special tax planning objectives of the trust; 

--successor trustee provisions, including issues involving the removal and replacement 

of the trustee and who holds those powers; 

--any powers of appointment and rights of withdrawal designated to the beneficiaries; 

--trustee compensation issues; and 

--the subject matter, manner and timing of future and on-going communications that the 

beneficiaries can expect to receive from the trustee. This, of course, may be dependent 

upon the size and complexity of the trust, as well as the ages, desires other specific 

characteristics of the beneficiaries. 

Certainly, the trustee will want to get specific information from the beneficiaries, 

including basic information like their full names, ages and addresses, as well as more 

7

specific information like their financial needs and current circumstances relevant to their 

status as a beneficiary of the trust. The trustee should have an understanding of the 

family history and the familial relationships among the beneficiaries. Depending upon 

the overall purpose and terms of the trust, other specific information may be required 

(i.e., proof of other income sources, tax returns, or even results of chemical dependency 

tests!) 

There is no greater potential source of disputes, not only between trustees and 

beneficiaries, but among beneficiaries themselves, than the matter of discretionary 

distributions. These disputes frequently involve issues surrounding the amounts and 

frequency of distributions. However, they may also involve whether the distributions 

that are in fact made are appropriate to the beneficiary’s needs. Trusts drafted today 

often include “spray” provisions which allow the trustee greater latitude as to the timing 

and amount of distributions among several beneficiaries. Instead of the older 

arguments of income v. capital appreciation, which have largely been addressed 

through the application of modern portfolio theory and the use of the Uniform Principal 

and Income Act, the claims of today’s beneficiaries are more nebulous and in many 

cases more difficult to quantify. 

In addition to the communication issues referenced above and the need for the trustee 

to obtain as much information about the beneficiaries as possible, the trustee should 

also employ the following “best practices”: 

--complete a comprehensive review of the trust documents to fully comprehend the 

duties and scope of discretion given to the trustee; 

--document fiduciary decisions, keeping records of the analysis, supporting 

documentation, minutes of committee meetings, and other materials that may be 

appropriate; 

--stay attentive to the needs of the beneficiaries, conducting periodic meetings to review 

investments and discuss upcoming distributions; and 

--don’t assume the trust can operate on “autopilot.” Trustees can be held liable for their 

inaction, and no decision can be just as problematic as a bad decision. 

--establish a set format for gathering financial and family information from the 

beneficiaries. This format should be utilized to gather information necessary in the 

evaluation of a distribution request. This procedure needs to be communicated to the 

beneficiaries, along with advance notice that this data will be required before the trustee 

can make a discretionary distribution. 

--finally, the beneficiaries should be asked to periodically update their information, 

including their short-term and long-term needs. This might be accomplished through 

the use of written request forms for discretionary distributions. 

8

Through good planning and good practices, in addition to upfront communication which 

sets forth expectations, the chances for misunderstandings and disputes with 

beneficiaries can hopefully be avoided, or in the very least, minimized. 

In addition to educating the parties to the trust and establishing good ground rules and 

practices for communications among the parties, several planning strategies may be 

available to provide flexibility and address potential issues which may arise, particularly 

with the use of irrevocable dynasty trusts designed with a long “shelf life.” Among those 

available are the following: 

Delegation and Divided Duties: 

Can dividing traditional trust duties among different individuals protect trustees and 

minimize disputes among beneficiaries? The most obvious division of duties is 

separating trust administration from investment management. Historically, a trustee 

could not delegate the duties assumed under the trust without explicit authorization in 

the trust document. Modern trust law, however, now allows for broad delegation of a 

trustee’s duties. Most jurisdictions now permit trustees to delegate certain 

responsibilities to third parties, and trust documents often include such delegation 

provisions. For example, the trust document may allow for the appointment of specific 

individuals or committees to address investments and discretionary distributions. 

Drafting considerations must take into account the appropriate parties who can serve on 

such committees, and even when exercising delegation powers, a trustee still has 

responsibility to find the appropriate person to whom the delegation is made, in addition 

to consistently monitoring the agent to avoid liability. (See Minn. Stat. 501B.152 Agents 

of Trustee). Therefore, the trustee must (1) ensure that the agent is fully capable of 

performing the delegated duties, (2) provide sufficient information to him or her to carry 

out these duties on a continuing basis, and (3) clearly define the terms and scope of the 

delegation. 

Some other issues to consider in situations where delegation is being considered or 

utilized: 

--the trustee may want to memorialize the reasons for delegating certain duties, 

including the trustee’s own abilities and limitations to perform certain functions; 

--the scope and terms of the agent’s duties should be set forth and understood by all 

parties; 

--the agent’s compensation and how that might affect the compensation of the trustee; 

--the trustee’s expectations for the agent’s performance, and the respective rights and 

responsibilities of both parties; and 

--the agent’s accounting and reporting responsibilities. 

9

An alternative structure might be the utilization of a bifurcated trust which explicitly 

divides the trustee’s fiduciary duties among different individuals. This structure allows 

the grantor to determine who is best suited to fulfill each role and often splits duties 

among investment committees, distribution advisers and trust protectors. The Uniform 

Trust Code (UTC) and the Restatement (Second) of Trusts recognize the power of 

grantors to divide a trustee’s traditional duties among a number of individuals. 

Trust Protectors 

Can the appointment of a trust protector protect a trustee and avoid potential disputes 

with beneficiaries? In its most basic terms, a trust protector is someone who has 

powers over a trust, but does not serve in the capacity of a trustee. In many situations, 

the involvement of a trust protector can avoid the substantial time, expense and 

publicity of court actions involving the reformation of a trust or removal of trustees. In 

such situations, the trust protector is the party empowered to amend the trust or remove 

and replace the trustee, and, with the exception of unusual circumstances, this can be 

done in a relatively simple and straightforward manner. The trust protector role is very 

important, and therefore, great care and consideration must be undertaken when 

selecting someone to serve in this capacity. Some of the most important factors to 

consider include: 

--experience. Does the individual have a basic understanding of trusts and their 

operations? If it’s a professional entity being considered, do the firm members who will 

be involved have sufficient experience in serving in this capacity? It is important to 

ensure that the party named as trust protector has the skills and ability to carry out the 

specific powers you intend to give them. 

--liability insurance. Is the individual or entity appropriately covered in the event 

of liability and significant loss of trust assets? 

--responsiveness. Particularly in the case of an individual, is he or she generally 

accessible, and will they be timely in their ability to deal with time-sensitive trust issues? 

Is there a support person or staff that would be available and competent to act in the 

absence of the named individual? 

--fees. What fees will be incurred in utilizing a trust protector? Professional 

entities will charge fees for their services, and many individuals may charge for their 

time as well. 

--tax issues. Any powers given to the trust protector should not be exercisable 

for his or her personal benefit to avoid creating a general power of appointment 

resulting in inclusion in the trust protector’s estate. 

10

Currently, Minnesota does not have specific statutory authority for trust protectors. 

Alaska, Arizona, Delaware, Hawaii, Idaho, Nevada, New Hampshire, South Dakota and 

Wyoming all have specific statutes which authorize the use of trust protectors. 

Directed Trusts 

Directed trusts may be utilized as an option, or in addition, to the use of a trust 

protector. A directed trust is one where the grantor, in the trust document, gives one or 

more of the trustee’s responsibilities to a third party/trust adviser. This trust adviser has 

the authority to direct the trustee with regard to the specific responsibility under the trust 

adviser’s control, and generally the trustee has no discretion over that particular area of 

administration. Certain jurisdictions allow for the appointment of trust advisers who 

have the ability to direct trustees in certain situations. These jurisdictions currently 

include Alaska, Arizona, Colorado, Delaware, Florida, Hawaii, Maine, Nebraska, 

Nevada, New Hampshire, North Carolina, Ohio, South Dakota, Tennessee, Texas, 

Virginia, Washington and Wyoming. Two areas where trust advisers are commonly 

utilized to direct the trustee are in connection with investments and discretionary 

distributions. The trust document may appoint individuals or establish committees to 

advise the trustee with regard to these decisions. While family members may be named 

as investment advisers or serve on investment committees, care must be taken with 

regard to naming such individuals as distribution advisers or as members of distribution 

committees. It is generally advisable to avoid naming persons who are related or 

subordinated to a trust beneficiary. 

The directed trust arrangement is different from that of a delegated trust, which allows 

the trustee to contract with a third party to perform certain fiduciary acts on behalf of the 

trust. In the delegated trust situation, the third party acts as an agent of the trustee, 

subject to the terms of the contractual relationship. In the directed trust situation, the 

third party may act as a co-fiduciary with the trustee. 

Certain Instances Where Delegation or a Directed Trust May Make Sense 

--Real estate, including rental properties, operating farms or timber interests where 

specific management expertise may be required; 

--Closely held business interests, where the trustee does not have specific expertise in 

running the business or determining whether, when and how to sell the business; 

--Oil, gas and mineral interests where on-going monitoring and management is 

essential; 

--Art, antiques, and other collectibles, particularly where the safeguarding and 

disposition of the property may be at issue; 

11

--Intellectual property which may involve determining the extent of legal ownership and 

rights, valuing interests, entering into contracts involving the property and enforcing 

legal rights against infringement; and 

--Trust-owned life insurance which requires monitoring existing policies for performance 

and efficiency, in addition to being aware of newer products that may offer better 

coverage options and be more cost efficient. It may be especially vital to delegate this 

role where the trust holds a portfolio of policies. 

Decanting 

Trustees and beneficiaries are often challenged with the existing terms and provisions 

in irrevocable trusts. Sometimes drafting errors or ambiguities make it difficult or costly 

for trustees to fulfill their duties to the beneficiaries. Some trusts lack the provisions 

necessary to best fulfill the objectives of the grantor, while others unknowingly contain 

provisions that impede or frustrate those objectives. Finally unanticipated changes in 

the law or circumstances that inevitably arise often require the need for flexibility. A 

potential solution to these types of situations may be the use of decanting. 

Decanting is a statutory process whereby a trustee may modify the terms and 

conditions of an irrevocable trust by “pouring over” the assets from one trust to another, 

usually having different terms than the initial trust. The resulting change may include 

limiting or changing the trust beneficiaries, changing distribution standards, and 

extending the length of the trust. The changes permitted will vary according to the 

various jurisdictional statutes, and some changes are specifically authorized by statute 

while others are not specifically addressed. New York was the first state to adopt a 

decanting statute, and currently there are 13 states that have enacted statutes (these 

include Alaska, Arizona, Delaware, Florida, Indiana, Missouri, Nevada, New Hampshire, 

New York, North Carolina, Ohio, South Dakota and Tennessee). 

Decanting statutes have been enacted in response to a need, or perceived need, to 

provide flexibility, and again, are just another potential strategy for estate planners to 

consider in the design and implementation of trusts. 

Statements of Intent 

There is no question that throughout the planning process much focus gets placed on 

the various strategies and structures available to provide flexibility in trust situations and 

mitigate disagreements among beneficiaries and between trustees and beneficiaries. 

However, among all these sophisticated planning options, one technique that is often 

overlooked is the statement of intent. The statement of intent in its simplest form is a 

personalized statement of the grantor’s purpose in establishing the trust which can be 

12

used to assist the drafting attorney, beneficiaries, trustees and even the courts against 

unreasonable and unwarranted interpretations of trust provisions. 

This is not the same as precatory language, such as the following which is often used in 

making a discretionary distribution, “the trustee may, but is not required to, consider 

other income sources and financial resources of a beneficiary.” Does such language 

really provide the trustee with a solid understanding of the grantor’s intent? Instead the 

statement of intent should answer the questions “why did the grantor establish this 

trust?” and “how does he or she really want the trust to benefit the named 

beneficiaries?” Often times, the statement of intent might be drafted into the trust 

agreement itself, possibly early in the document or before the distribution provisions. 

However, in many cases it might be more appropriate for the statement of intent to be 

an extemporaneous document that is merely referenced in the agreement, much like a 

letter of instruction attached as an appendix or exhibit to the trust document itself. 

Either way, consideration of using a statement of intent may go a long way in preventing 

family disharmony and disputes over the trust after the grantor’s death. 

Conclusion 

It’s probably safe to say that trusts are not going away any time soon, and with the 

historic amount of wealth expected to be transferred over the next few years, it could be 

argued that their use will actually increase. This will require attorneys, fiduciaries and 

other professional advisers to not only keep apprised of all the legal requirements and 

available design strategies, but also to be more attuned to the “softer” more practical 

issues that are present when working with trust beneficiaries, agents, trust protectors 

and all the other potential parties involved in the trust arrangement. Having knowledge 

of these issues and putting into place some “best practices” for educating and 

communicating with these parties will hopefully go a long way to ensuring family 

harmony, solidifying the trusted adviser relationship, and avoiding potential 

disagreements or disputes in the future. After all, happy clients tend to be long-term 

clients! 

13

SECTION 7 

“Bleak House” Revisted or How Much 

Justice Can Your Client Afford? 


Peterson Law Office LLC 

Bloomington 



Introduction: The Incredible Shrinking Estate………………………………………… 1 

Tip One: Use Attorney Fee Priority among Claims………………………………… 1 

Tip Two: 

Fiduciaries have Personal and Potential Exemplary Liability 

for Misappropriation of Assets………………………………………………. 2 

Tip Three: For Really Bad Fiduciaries,have County Attorney Prosecute 

and Ask for Restitution…………………………………………………………. 3 

Tip Four: 

Tip Five: 

Tip Six: 

In a Case of a Delinquent PR, a Petition for Removal and 

Successor PR can Qualify for Expenses and Attorney’s fees……… 4 

If Homestead is the Major Asset, Ask Heirs to Waive 

Homestead Exemption(But Very Carefully)…………………………... 4 

Attorney Fees are Available for Personal Representative 

Nominated in Present or Previous Will - Even If You Lose……….. 5 

Tip Seven: Attorney’s Fees are Available for Challenging the Will – 

But Only if You Win………………………………………………………………. 6 

Tip Eight: 

Tip Nine: 

Tip Ten: 

Attorney Fees are Available for Conducting Legal Proceeding 

of Benefit to Estate………………………………………………………………… 7 

Spouse or Descendant May Waive Claim to Other Exempt 

Property for Attorney Fees…………………………………………………….. 8 

Partition of Real Estate Provides Asset Availability and 

Attorney Fees and Expenses…………………………………………………… 8 

Tip 10.5: Attorney Lien Can Be Sought on Client’s Interest in the Estate….. 9 

i

PROBATE INSTITUTE 2013 

HARD TIMES: 

TEN-AND-A-HALF TIPS TO GET THE ATTORNEY 

PAIDEVEN WHEN THE ESTATE IS BUST 

“It is known, to the force of a single pound 

weight, what the engine will do; but, not all the 

calculators of the National Debt can tell me the 

capacity for good or evil, for love or hatred, for 

patriotism or discontent, for the decomposition 

of virtue into vice, or the reverse.” 

– Charles Dickens, Hard Times 

INTRODUCTION: THE INCREDIBLE SHRINKING ESTATE 

A. Declining Value of Assets 

B. Longevity of Testator 

C. Health Insurance Costs 

D. Aggressive Public Assistance Recapture 

E. Inter Vivos Gifting 

F. Misappropriation by Fiduciaries or Others 

TIP ONE: USE ATTORNEY FEE PRIORITY 

AMONG CLAIMS 

A. Minn. Stat. § 524.3-805 prioritizes “costs and expenses of 

administration” (which includes attorney’s fees) above all other 

debts or distributions. 

B. Taxes, public assistance claims and funeral expenses are all 

subordinate to administrative expenses. 

1

C. Fairness and reasonableness of attorney fees are subject to the 

criteria of Minn. Stat. § 525.515. 

TIP TWO: FIDUCIARIES HAVE PERSONAL AND 

POTENTIALEXEMPLARY LIABILITY FOR 

MISAPPROPRIATION OF ASSETS 

A. Most people don’t have any idea what are the duties of a Fiduciary. 

B. Sixteen duties of Fiduciary. 

C. Pre-mortem Misappropriation 

1. Attorney in Fact [AIF] under Power of Attorney is a 

Fiduciary.Minn. Stat. § 523.21. 

2. AIF may not gift more than $10,000 per year to AIF or any 

dependent of AIF – Minn. Stat. § 523.24, subd. 8 (2). 

3. Use of Power of Attorney when AIF knows principal is dead 

or Power of Attorney is revoked - treble damages. Minn. 

Stat. § 523.22. 

D. Post-mortem Misappropriation 

1. Prior to appointment of personal representative – double 

damages. Minn. Stat. § 525.392. 

2. Surcharge or indemnification by personal representative. 

Minn. Stat. § 524.3-808 (d). 

3. Note: PR’s demand on heir or devisee for return of property 

is “conclusive evidence” of right of possession. Minn. 

Stat.§524.3-709 

2

TIP THREE: FOR REALLY BAD FIDUCIARIES, 

HAVE COUNTY ATTORNEY PROSECUTE AND ASK FOR 

RESTITUTION 

A. Often clients whose family members misappropriate estate assets 

will say “Isn’t that illegal? Can’t we put the executor in jail?” 

B. As a general matter, the prosecuting authority will decline the case 

on the basis that the probate theft is “a civil matter.” 

C. However, if the theft is sufficiently serious or if the dissatisfied 

family member has the ear of the county attorney, a prosecution is 

possible. 

D. See State v. Schmitz, copy in Appendix. 

E. Victim (the estate by the personal representative or the special 

administrator) may request restitution from the district court 

handling the criminal case. Minn. Stat. § 611A.04. 

F. While we don’t have Debtor’s Prison anymore, revocation of stayed 

jail or prison time for unpaid restitution can be an extremely 

effective collection device. 

3

TIP FOUR: IN A CASE OF A DELINQUENT PR, A PETITION 

FOR REMOVAL AND SUCCESSOR PRCAN QUALIFY FOR 

EXPENSES AND ATTORNEY’S FEES 

A. Minn. Stat. § 524.3-611 authorizes a Petition to remove a personal 

representative when that is in “the best interests of the estate.” 

B. Usually the Petition for Removal is combined with a Petition to 

appoint the Petitioner or another suitable person to become 

Personal Representative. Minn. Stat. § 524.3-613. 

C. Note that the successor personal representative may ratify her prior 

acts or those of another (such as expending reimbursable funds for 

the reasonable fees of an attorney). Minn. Stat. § 524.3-701. 

TIPFIVE: IF HOMESTEAD IS THE MAJOR ASSET, 

ASK HEIRS TO WAIVE HOMESTEAD EXEMPTION 

(BUT VERY CAREFULLY) 

A. Minn. Stat. § 524.2-402 exempts the “family residence” for the 

surviving spouse and descendants and makes it generally exempt 

from claims which “were not valid charges on it at the time of 

decedent’s death.” 

B. Attorney’s fees generally do not attach to the homestead. 

Northwestern National Bank v. Kroll, 306 N.W.2d 104 (Minn. 

1981). 

C. Note that the homestead is a constitutionally protected right 

(Minn.Constitution Article I, § 12) and the courts generally look 

4

with disfavor on attempts to deprive the family of its benefits. 

Estate of Riggle, 654 N.W. 710 (Minn. App. 2002) 

D. Be sure to identifythe real estate (preferably be address and legal 

description) and make sure spouse and all descendants sign the 

homestead waiver. See Estate of Van Den Boom, 590 N.W.2d 

350 (Minn. App. 1999) where spouse but not children signed a 

waiver. 

TIP SIX: ATTORNEY FEES ARE AVAILABLE FOR 

PERSONAL REPRESENTATIVE NOMINATED 

IN PRESENT OR PREVIOUS WILL - EVEN IF YOU LOSE 

A. Minn. Stat. § 524.3-720 provides that a person who is appointed 

or nominated as personal representative is entitled to recover 

expenses and attorney’s fees from the estate when the nominee 

prosecutes or defends any probate or collateral proceedings. 

B. The personal representative need not win the case in order to be 

entitled to reimbursement but simply must act in good faith. 

C. The personal representative need not have been appointed by the 

probate court nor does the appointing will need to have been 

probated. 

D. Entitlement to recovery of these fees and expenses is not dependent 

on whether the result sought benefited anyone other than the 

personal representative. 

5

E. See generally Estate of Torgersen, 711 N.W.2d 545 (Minn. App. 

2006). 

TIP SEVEN: ATTORNEY’S FEES ARE AVAILABLE FOR 

CHALLENGING THE WILL – BUT ONLY IF YOU WIN 

A. Minn. Stat. § 524.3-720 provides “any interested person who 

successfully opposes the allowance of a will, is entitled to receive 

from the estate necessary expenses and disbursements including 

reasonable attorneys’ fees incurred.” 

B. Be prepared for an uphill fight. 

C. Formal requirements: 

1. Elements 

a. In writing 

b. Signature of testator 

c. Witness signatures 

2. Presence of Self-Proving Clause creates a conclusive 

presumption of regularity of execution. Estate of Zeno, 

672 N.W.2d 574 (Minn. App. 2003). 

D. Competency of testator 

1. Note: Testamentary competency requirement is less than 

contracting competency standard. 

2. Tests: Awareness of assets and Natural Objects of Bounty. 

6

E. Undue influence 

1. Must prove testator was “mere puppet” of influencer. 

Estate of Torgersen, 711 N.W.2d 545 (Minn. App. 2006). 

TIP EIGHT: ATTORNEY FEES ARE AVAILABLE FOR 

CONDUCTING LEGAL PROCEEDING 

OF BENEFIT TO THE ESTATE 

A. Minn. Stat. § 524.3-720 provides that “any interested party” who 

retains an attorney who pursues a claim from which the estate 

benefits, “such attorney shall be paid such [reasonable] 

compensation from the estate. . .” 

B. Note: The language of this statue is somewhat convoluted but it 

indicates that such a proceeding can be pursued with a demand 

upon the personal representative or apparently without a demand 

to the personal representative. The test is “benefit to the estate” 

which implies success in the action. 

C. The statute embraces any proceeding whether it is a probate 

proceeding or is a civil proceeding in another court as long as it 

benefits the estate. Gellert v. Eginton, 770 N.W.2d 190 (Minn. 

App. 2009). 

D. The criterion of whether the proceeding benefits the estate is 

whether any interested person other than the moving party receives 

a benefit. Gellert v. Eginton, supra. In Gellert, the court ruled 

out benefit to the estate only when the advantage obtained 

7

“contribute[d] solely to the benefit of the interested person.” 770 

N.W.2d at 198 [Emphasis added]. 

TIP NINE: SPOUSE OR DESCENDANT MAY WAIVE 

CLAIM TO OTHER EXEMPT PROPERTY FOR 

ATTORNEY FEES 

A. Minn. Stat. § 524.2-403 provides exempt property to the surviving 

spouse and minor children including $10,000 of selected assets and 

an automobile regardless of value. 

B. There appears no impediment to the surviving spouse waiving his 

or her exemption on this property in the same way as the spouse 

could waive a homestead exemption discussed previously as to the 

waiver of the homestead exemption. 

C. This is an area that could be controversial and any practitioner who 

considers it should do so with full disclosure and perhaps 

independent counsel for the spouse. 

TIP TEN: PARTITION OF REAL ESTATE PROVIDES ASSET 

AVAILABILITY AND ATTORNEY FEES AND EXPENSES 

A. Probate Court has jurisdiction to partition real estate or other 

property – Minn. Stat. § 524.3-911. 

1. Partition petition may be brought by personal representative, 

heir or devisee. 

2. Minn. Stat. § 524.3-911 incorporates Minnesota’s 

traditional partition act. Minn. Stat. chapter 558. 

8

3. The Partition statute allows administrative costs including 

attorney’s fees to petitioner. Minn. Stat. § 558.10. Kuller 

v. Kuller, 250 Minn. 256, 109 N.W.2d 561 (1961). 

B. District Court has jurisdiction over partition subsequent to probate 

proceeding or for nonprobate real estate. See Minn. Stat. chapter 

558. 

1. Co-tenant has an “absolute right to compel a partition or 

sale.” Hunt v. Meeker County Abstract Co., 128 Minn. 

207, 211, 150 N.W. 798, 799 (1915). 

2. Again under Minn. Stat. § 558.10, administrative expenses 

including attorney’s fees may be imposed. 

3. Caveat: If action had another other purpose (such as a title 

issue), attorney’s fees can be denied. See Hunt v. Meeker 

County Abstract Co., 128 Minn. 538, 151 N.W. 1102 

(1915). 

TIP 10.5: ATTORNEY LIEN CAN BE SOUGHT ON CLIENT’S 

INTEREST IN THE ESTATE 

A. Minn. Stat. § 525.491 allows an attorney for an heir or devisee to 

serve a lien upon the personal representative which the attorney 

can perfect in the manner set forth in Minn. Stat. § 481.13. 

B. The statute addresses not merely an inheritance or devise but 

indicates the heir’s or devisee’s “interest in the estate.” The broad 

language of this would seem to include administrative 

9

compensation or exempt property as well as an inheritance or 

devise that may be due to the client. 

C. Estates have a remarkable ability of sometimes turning flush or 

becoming insolvent so a practitioner who has not been paid in full 

may wish to filea lien to protect the attorney’s potential 

compensation and reimbursement. 

D. The law of liens is statutory and generally requires strict compliance 

or the lien may be lost. See Thomas B. Olson & Associates, 

P.A. v. Leffert, Jay &Polglaze, 756 N.W.2d 709 (Minn. App. 

2008). Careful compliance with the lien statutes and filing of a 

Rule 119 Affidavit (Minnesota General Rules of Practice) is 

advisable. 

10

APPENDIX 

524.3-720 EXPENSES IN ESTATE LITIGATION. 

Any personal representative or person nominated as personal representative who 

defends or prosecutes any proceeding in good faith, whether successful or not, or any 

interested person who successfully opposes the allowance of a will, is entitled to receive 

from the estate necessary expenses and disbursements including reasonable attorneys' fees 

incurred. When after demand the personal representative refuses to prosecute or pursue a 

claim or asset of the estate or a claim is made against the personal representative on behalf 

of the estate and any interested person shall then by a separate attorney prosecute or 

pursue and recover such fund or asset for the benefit of the estate, or when, and to the 

extent that, the services of an attorney for any interested person contribute to the benefit 

of the estate, as such, as distinguished from the personal benefit of such person, such 

attorney shall be paid such compensation from the estate as the court shall deem just and 

reasonable and commensurate with the benefit to the estate from the recovery so made or 

from such services. 

History: 1974 c 442 art 3 s 524.3-720; 1975 c 347 s 57; 1986 c 444 

525.515 BASIS FOR ATTORNEY'S FEES. 

(a) Notwithstanding any law to the contrary, an attorney performing services for the 

estate at the instance of the personal representative, guardian or conservator shall have 

such compensation therefor out of the estate as shall be just and reasonable. This section 

shall apply to all probate proceedings. 

(b) In determining what is a fair and reasonable attorney's fee effect shall be given to 

a prior agreement in writing by a testator concerning attorney fees. Where there is no prior 

agreement in writing with the testator consideration shall be given to the following factors 

in determining what is a fair and reasonable attorney's fee: 

(1) the time and labor required; 

(2) the experience and knowledge of the attorney; 

(3) the complexity and novelty of problems involved; 

(4) the extent of the responsibilities assumed and the results obtained; and 

(5) the sufficiency of assets properly available to pay for the services. 

(c) An interested person who desires that the court review attorney fees shall seek 

review of attorney fees in the manner provided in section 524.3-721. In determining the 

reasonableness of the attorney fees, consideration shall be given to all the factors listed in 

clause (b) and the value of the estate shall not be the controlling factor. 

History: 1971 c 497 s 8; Ex1971 c 48 s 50; 1974 c 442 art 9 s 3; 1975 c 347 s 111; 1976 

c 2 s 146 

A.1

525.491 ATTORNEY'S LIEN. 

When any attorney at law has been retained to appear for any heir or devisee, such 

attorney may perfect a lien upon the client's interest in the estate for compensation for 

such services as may have been rendered respecting such interest, by serving upon the 

personal representative before distribution is made, a notice of intent to claim a lien for 

agreed compensation, or the reasonable value of services. The perfecting of such a lien, as 

herein provided, shall have the same effect as the perfecting of a lien as provided in 

section 481.13, and such lien may be enforced and the amount thereupon determined in 

the manner therein provided. 

History: 1961 c 265 s 2; 1975 c 347 s 108; 1986 c 444 

Subdivision 1.Generally. 

481.13 LIEN FOR ATTORNEYS' FEES. 

(a) An attorney has a lien for compensation whether the agreement for compensation 

is expressed or implied (1) upon the cause of action from the time of the service of the 

summons in the action, or the commencement of the proceeding, and (2) upon the interest 

of the attorney's client in any money or property involved in or affected by any action or 

proceeding in which the attorney may have been employed, from the commencement of 

the action or proceeding, and, as against third parties, from the time of filing the notice of 

the lien claim, as provided in this section. 

(b) An attorney has a lien for compensation upon a judgment, whether there is a 

special express or implied agreement as to compensation, or whether a lien is claimed for 

the reasonable value of the services. The lien extends to the amount of the judgment from 

the time of giving notice of the claim to the judgment debtor. The lien under this 

paragraph is subordinate to the rights existing between the parties to the action or 

proceeding. 

(c) A lien provided by paragraphs (a) and (b) may be established, and the amount of 

the lien may be determined, summarily by the court under this paragraph on the 

application of the lien claimant or of any person or party interested in the property subject 

to the lien. 

Judgment shall be entered under the direction of the court, adjudging the amount due. 

Subd.2.Perfection of lien. 

(a) If the lien is claimed on the client's interest in real property involved in or affected 

by the action or proceeding, a notice of intention to claim a lien on the property must be 

filed in the office of the county recorder or registrar of titles, where appropriate, and noted 

on the certificate or certificates of title affected, in and for the county where the real 

property is located. Within 30 days of filing a lien on real property, the claimant must 

prepare and deliver a written notice of the filing personally or by certified mail to the 

A.2

owner of the real property or the owner's authorized agent. A person who fails to provide 

the required notice shall not have the lien and remedy provided by this section. Upon 

receipt of payment in full of the debt which gave rise to the lien, the lienholder shall 

deliver within 30 days a recordable satisfaction and release of lien to the owner of the real 

property or the owner's authorized agent. No notice of intent to claim a lien may be filed 

more than 120 days after the last item of claim. 

(b) If the lien is claimed on the client's interest in personal property involved in or 

affected by the action or proceeding, the notice must be filed in the same manner as 

provided by law for the filing of a security interest. 

Subd.3.One-year limitation. 

No lien against real property shall be enforced unless the lienholder, by filing either a 

complaint or an answer with the court administrator, asserts a lien within one year after 

the filing of the notice of intention to claim a lien, unless within the one-year time period 

the owner has agreed to a longer time period to assert the lien. This agreement must be in 

a written instrument signed by the owner containing the legal description of the affected 

real property and a description of the recording information of the filed lien and the 

written instrument must be recorded in the same office as the lien within one year after the 

filing of the notice of intention to claim a lien. In no event may the lien be asserted more 

than three years after filing. No person is bound by any judgment in the action unless 

made a party to the action within the time limit. The absence from the record in the Office 

of the County Recorder or the registrar of titles, where appropriate, of a notice of 

lispendens of an action after the expiration of the time limit in which the lien could be so 

asserted is conclusive evidence that the lien may no longer be enforced as to a bona fide 

purchaser, mortgagee, or encumbrancer without notice. In the case of registered land, the 

registrar of titles shall refrain from carrying forward to new certificates of title the 

memorials of lien statements when no notice of lispendens has been registered within the 

time limit. 

History: (5695) RL s 2288; 1917 c 98; 1939 c 394; 1976 c 181 s 2; 1976 c 304 s 2; 1986 

c 444; 2002 c 403 s 2; 2003 c 5 art 2 s 1 

524.3-712 IMPROPER EXERCISE OF POWER; BREACH OF 

FIDUCIARY DUTY. 

If the exercise of power concerning the estate is improper, the personal representative 

is liable to interested persons for damage or loss resulting from breach of fiduciary duty to 

the same extent as a trustee of an express trust. The rights of purchasers and others dealing 

with a personal representative shall be determined as provided in sections 524.3-713 and 

524.3-714. 

History: 1974 c 442 art 3 s 524.3-712; 1986 c 444 

A.3

524.3-805CLASSIFICATION OF CLAIMS. 

(a) If the applicable assets of the estate are insufficient to pay all claims in full, the personal 

representative shall make payment in the following order: 

(1) costs and expenses of administration; 

(2) reasonable funeral expenses; 

(3) debts and taxes with preference under federal law; 

(4) reasonable and necessary medical, hospital, or nursing home expenses of the last illness 

of the decedent, including compensation of persons attending the decedent, a claim filed under 

section 256B.15 for recovery of expenditures for alternative care for nonmedical assistance 

recipients under section 256B.0913, and including a claim filed pursuant to section 256B.15; 

(5) reasonable and necessary medical, hospital, and nursing home expenses for the care of 

the decedent during the year immediately preceding death; 

(6) debts with preference under other laws of this state, and state taxes; 

(7) all other claims. 

(b) No preference shall be given in the payment of any claim over any other claim of the 

same class, and a claim due and payable shall not be entitled to a preference over claims not due, 

except that if claims for expenses of the last illness involve only claims filed under section 

256B.15 for recovery of expenditures for alternative care for nonmedical assistance recipients 

under section 256B.0913, section 246.53 for costs of state hospital care and claims filed under 

section 256B.15, claims filed to recover expenditures for alternative care for nonmedical 

assistance recipients under section 256B.0913 shall have preference over claims filed under both 

sections 246.53 and other claims filed under section 256B.15, and claims filed under section 

246.53 have preference over claims filed under section 256B.15 for recovery of amounts other 

than those for expenditures for alternative care for nonmedical assistance recipients under section 

256B.0913. 

History: 1975 c 347 s 58; 1982 c 621 s 2; 1982 c 641 art 1 s 19; 1983 c 180 s 19; 1986 c 444; 

1987 c 325 s 2; 1Sp2003 c 14 art 2 s 52 

525.392PROPERTY CONVERTED. 

If any person embezzles, alienates, or converts to personal use any of the personal estate of 

a decedent or ward before the appointment of a representative, such person shall be liable for 

double the value of the property so embezzled, alienated, or converted. 

History:(8992-96) 1935 c 72 s 96; 1986 c 444 

A.4

524.3-911PARTITION FOR PURPOSE OF DISTRIBUTION. 

When two or more heirs or devisees are entitled to distribution of undivided interests in any 

real or personal property of the estate, the personal representative or one or more of the heirs or 

devisees may petition the court prior to the formal or informal closing of the estate, to make 

partition. After notice to the interested heirs or devisees, the court shall partition the property in 

the same manner as provided by the law for civil actions of partition. The court may direct the 

personal representative to sell any property which cannot be partitioned without prejudice to the 

owners and which cannot conveniently be allotted to any one party. 

History: 1974 c 442 art 3 s 524.3-911 

A.5

FIDUCIARY’S DUTIES 

1. Duty to comply with Trust/POA/Will’s Terms (Restatement of Trusts Second 

(ROT164) 

2. Duty of Loyalty to Beneficiaries (ROT170) 

3. Duty to Avoid Conflicts of Interest (ROT170) 

4. Duty to Act Impartially (ROT183) 

5. Duty of Disclosure (ROT173) 

6. Duty Not to Delegate (ROT171) 

7. Duty to Keep Assets Separate (ROT179) 

8. Duty to Enforce Claims (ROT177) 

9. Duty to Manage Prudently(ROT174) 

10. Duty to Invest Prudently (diversify) (MSA501B.151) 

11. Duty to Account (ROT172) 

12. Duty regarding Co-Trustees (ROT184) 

13. Miscellaneous Duties 

a. To preserve estate from loss or damage (ROT176) 

b. To make estate property productive (ROT181) 

c. To defend lawsuits that may result in loss to estate (ROT178) 

d. To comply with government regulations 

Adapted from Robert Collins, “Claims Against Fiduciaries” Estate and Trust Litigation, 

MCLE, December, 2002. “ROT” refers to the Restatement of the Law of Trusts, Second Edition 

A.6

STATE OF MINNESOTA 

COUNTY OF MCLEOD 

DISTRICT COURT 

FIRST JUDICIAL DISTRICT COURT 

PROBATE DIVISION 

File No. 27-PA-PR-11-000 

In Re: Estate of 

JANE M. DOE, 

Deceased 

AFFIDAVIT OF 

WILLIAM G. PETERSON 

William G. Peterson first duly sworn deposes and says. 

1) Affiant is an attorney duly authorized to practice law in the State of Minnesota. 

2) On or about August 29, 2011, affiant was retained by Sally Doe, an heir or 

devisee of the above estate. 

3) Based on the foregoing engagement of services, affiant performed the services 

indicated on the billing for services attached hereto and incorporated herein. 

4) Affiant provided certain legal services and incurred certain expenses which are set 

forth on Exhibit A hereto which affiant believes were of benefit to the foregoing Estate. 

5) Affiant provided not only services for the benefit of the Estate, but also of benefit 

to client Sally Doe. 

6) Exhibit B attached hereto fairly and accurately reflects the cumulative services 

rendered and expenses incurred. 

7) Exhibit B includes the contents of the billings for services and expenses for the 

benefit of the Estate as listed in Exhibit A. 

8) The agreed-upon rate for attorney services was $300.00 per hour and for paralegal 

services was $125.00 per hour. 

9) Sally Doe paid a retainer of fee of $3,000. 

A.7

10) The attorney indicated was affiant William G. Peterson and the paralegal was Sue 

Johnson who acted under my control and supervision. 

11) The expenses indicated on said billing represent the actual disbursements sought. 

12) Pursuant to Rule 119 of the General Rules of Practice, Affiant has reviewed the 

work in progress and hereby verifies that the work was actually performed for the benefit of the 

client and was necessary for the proper representation of the client and that charges for any 

unnecessary or duplicative work have been eliminated from the application to the court. 

13) On or about March 9, 2011, affiant caused a Notice of Attorney’s Lien to be 

served by mail upon Albert Attorney, the attorney for John Doe, the personal representative in 

this estate of Jane M. Doe, a copy which is attached and incorporated herein as Exhibit C. 

14) Affiant has been unable to contact his client Sally Doe by telephone or mail 

because her telephone has been disconnected and she had moved from the last known address 

she had provided to Affiant. 

15) Affiant has inquired of her family members, but they have indicated they do not 

know the whereabouts of Sally Doe in the event that she has subsequently submitted forwarding 

instructions to the post office. 

16) Affiant has caused these moving papers, affidavit and exhibits to be sent to 222 

Main Street, Minneapolis, Minnesota, the last known address of Sally Doe. 

Dated: ________________ 

______________________________ 


Peterson Law Office, LLC 

Subscribed and sworn to before me 3601 Minnesota Drive, Suite 835 

this 1 st day of May, 2013 Bloomington, MN 55435 

Attorney License No: 86435 

__________________________ Telephone: (952) 921-5818 

Notary Public FAX: (952) 831-2550 

email: wgp@petersonlawoffice.com 

A.8




FIRST JUDICIAL DISTRICT 

CIVIL COURT DIVISION 

______________________________________________________________________________ 

Sally Doe, 

Court File Number: _________________ 

Plaintiff, 

v. VERIFIED COMPLAINT TO 

PARTITION REAL PROPERTY 

John Doe, Mary Doe and Jane Doe, 

Defendants. 

______________________________________________________________________________ 

Plaintiff, for her Complaint against the Defendants, states and alleges as follows: 

I. 

Plaintiff Sally Doe, commences this action for partition of real property pursuant to 

Minnesota Statutes § 558.01, et. seq. Plaintiff Sally Doe resides at 222 Pine Street, Anytown, 

Minnesota. 

II. 

Defendants John Doe, Mary Doe and Jane Doe are the siblings of the Plaintiff Sally Doe. 

John Doe resides at 333 First Street, Anytown, Minnesota. Mary Doe resides at 444 Main Street, 

Anytown, Minnesota and Jane Doe resides at 555 Oak Street, Anytown, Minnesota. 

III. 

Plaintiff Sally Doe and Defendants John Doe, Mary Doe and Jane Doe are tenants in 

common of real estate located at 666 River View Drive, City of Anytown, County of McLeod, 

State of Minnesota, and legally described as follows, to wit: 

River Estates 4 th Addition, Lot 4, Block 13, and Interest Attributable to 

Common Area Known as Outlot A 4 13 in McLeod County, Minnesota 

A.9

hereinafter called the “subject property.” 

IV. 

Plaintiff Sally Doe and her sibling defendants each own an undivided one-fourth (1/4) 

interest in the fee of the subject property. 

V. 

The subject property is improved with a residence homestead. 

VI. 

The subject property is encumbered by a mortgage with Wells Fargo of approximately 

$40,000. 

VII. 

That the approximate cash value of the subject property is $200,000. 

VIII. 

The subject property is so situated that partition cannot be had without great prejudice to 

the owner. 

WHEREFORE, plaintiff prays as follows: 

1. That this court order partition of said property. 

2. That this court appoint three disinterested and judicious citizens of the County as 

referees. 

3. That the subject property of the parties be sold and the net equity be divided 

equally between the sibling parties. 

4. That the court ascertain administrative costs and award such costs and attorney’s 

fees to Plaintiff Sally Doe. 

A.10

5. For such other and further relief as the court deems just and proper. 

Dated: _______________________ 

____________________________________ 




3601 Minnesota Drive, Suite 835 

Bloomington, MN 55435 

Phone: (952) 921-5818; Fax: (952) 831-2550 

Atty. Reg. No.: 86435 

Attorney for Plaintiff Sally Doe 

ACKNOWLEDGMENT 

The undersigned hereby acknowledges that costs, disbursements, and reasonable attorney 

and witness fees may be awarded pursuant to Minnesota Statutes Section 549.211, if, in the 

discretion of the Court, the attached Complaint is found to be in bad faith or frivolous. 

____________________________________ 


STATE OF MINNESOTA ) 

) ss. 

COUNTY OF MCLEOD ) 

VERIFICATION 

Sally Doe, having been duly sworn upon oath, deposes and says: That I am the plaintiff 

in the above captioned matter; that I have read the hereto attached Complaint and the same is 

true and correct of my own knowledge except as to matters therein stated on information and 

belief, and as to such, I verily believe it to be true. 

Subscribed and sworn to before me 

this 1 st day of May, 2013. 

____________________________________ 

Sally Doe, Plaintiff 

_____________________________ 

Notary Public 

A.11








JANE M. DOE, 

Deceased 

NOTICE OF LIEN TO 

PERSONAL REPRESENTATIVE 

TO: Mary Doe, Personal Representative of the Estate of Jane M. Doe, by Albert Attorney, 100 

North First Street, Anytown, MN 55555 his attorney. 

NOTICE IS HEREBY GIVEN pursuant to Minn. Stat. § 525.491 and other applicable 

law that Peterson Law Office, LLC and William G. Peterson, attorney at law, have performed 

legal services on behalf of Sally Doe an heir or devisee and do hereby assert a lien upon the 

inheritance, bequests, legacies or distribution due to Sally Doe from the aforementioned estate. 

Pursuant to Minn. Stat. §525.491, said lien is hereby perfected. The reasonable value of services 

provided or to be provided and expenses incurred is $10,000 of which $3,000 was previously 

paid. Lien holder requests that the personal representative reserve sufficient assets due said heir 

or devisee to satisfy said lien. Said lien amount may be increased in the event further legal 

action or expenses are incurred. 

Dated this 1 st day of May, 2013 

______________________________ 






Telephone: (952) 921-5818 

FAX: (952) 831-2550 


A.12








JANE M. DOE, 

Deceased 

NOTICE OF MOTIONS 

AND MOTIONS 

TO: 

District Court Administration, McLeod County Government Center,; Personal 

Representative Mary Doe by Albert Attorney, Attorney at Law, 100 North First 

Street, Anytown, Minnesota 55555; Stacy Doe by Peter Attorney, Attorney at Law, 

300 Tenth Street, Anytown, MN 55402 

NOTICE IS HEREWITH GIVEN that Peterson Law Office, LLC by William G. Peterson 

will submit the following motion to the court at the McLeod County Courthouse, on June 15, 

2011 at 8:30 in the forenoon or as soon thereafter as the matter can be heard. 

MOTIONS 

Comes now Peterson Law Office, LLC by William G. Peterson, Attorney at Law, does 

hereby move the court as follows: 

(1) Grant the award of $5,320.20 to Peterson Law Office, LLC for legal fees and 

expenses payable to the Estate for legal services and expenses that were of benefit to the Estate 

pursuant to Minn. Stat. §524.3-720. 

(2) Grant to Peterson Law Office, LLC $8,764.68 for legal fees and expenses less 

$3,000.00 retainer and such award pursuant to First Motion from distribution due to Sally Doe in 

the matter of the above Estate pursuant to Minn. Stat. § 525.491. 

Said motions are based on the attached Affidavit of William G. Peterson, Memorandum 

of Law and all of the files and records in this matter. 

A.13

Dated: May 1, 2013 

______________________________ 






Telephone: (952) 921-5818 

FAX: (952) 831-2550 


A.14








JANE M. DOE, 

Deceased 

LIMITED WAIVER OF 

HOMESTEAD EXEMPTION 

I, John Doe, am an heir or devisee in the above estate; and 

I understand that a primary asset of the estate is the homestead of the decedent at 111 

Main Street, Anytown, Minnesota, that has a legal description of Lot 1, Block 2, Green Acres 

Subdivision of the City of Anytown, Minnesota. 

I further understand that under Minnesota law, the homestead that passes to spouse or 

descendants is generally exempt from the payment of most debts and expenses of the decedent in 

the administration of the decedent’s estate; and 

Mary Doe has been nominated to be the personal representative of the above estate, and 

intends to hire Lawrence Lawyer, Attorney at Law, to provide the necessary and required legal 

services. 

IT IS THEREFORE AGREED: 

1. That as an inducement for Lawrence Lawyer to act as the attorney for the personal 

representative, I hereby agree to waive my right to exempt the homestead, or the proceeds from 

the sale thereof, for the limited purpose of paying for attorney’s fees and any costs of 

administering the estate. 

2. I have had the opportunity to review this agreement and obtain the advice of 

counsel, if desired. 

Dated: May 1, 2013 

/ S / John Doe 

____________________________________ 

John Doe 

ACCEPTANCE 

Dated: _____________________ 

____________________________________ 

Lawrence Lawyer 

A.15

STATE OF MINNESOTA, RESPONDENT, 

V. 

JOHN ALBERT SCHMITZ, APPELLANT. 

A09-2325 


IN COURT OF APPEALS 

Filed December 28, 2010 

This opinion will be unpublished and may 

not be cited except as provided by Minn. Stat. 

§480A.08, subd. 3 (2010). 

Affirmed in part, reversed in part, 

and remanded Kalitowski, Judge 

Dakota County District CourtFile No. 19HA- 

CR-08-1148 

Lori Swanson, Attorney General, St. Paul, 

Minnesota; and 

James C. Backstrom, Dakota County 

Attorney, Amy A. Schaffer, Assistant County 

Attorney, Hastings, Minnesota (for respondent) 

David W. Merchant, Chief Appellate Public 

Defender, Jodie L. Carlson, Assistant Public 

Defender, St. Paul, Minnesota (for appellant) 

Considered and decided by Worke, 

Presiding Judge; Kalitowski, Judge; and Minge, 

Judge. 

UNPUBLISHED OPINION 

KALITOWSKI, Judge 

Appellant John Schmitz argues that his 

theft convictions should be reversed because (1) 

there was insufficient evidence to sustain the 

convictions; (2) he did not 

Page 2 

effectively waive his right to counsel; and (3) 

the district court abused its discretion by 

denying his application for a public defender. 

Appellant also argues that he is entitled to a 

restitution hearing. We affirm in part in part, 

reverse in part, and remand for a restitution 

hearing. 

DECISION 

I. 

Appellant argues that the state did not 

present sufficient evidence to sustain his 

convictions of theft. We disagree. 

Appellant was appointed as the personal 

representative of his uncle's estate when his 

uncle died in November 2002. The estimated 

value of the estate was $199,000. Other heirs 

hired an attorney in November or December 

2003 to challenge the probate proceedings. The 

district court determined that appellant had been 

reimbursing himself with funds from the estate 

for excessive hours and at an unreasonable rate 

of pay for his services as personal 

representative. The district court ordered that 

"[u]nless and until the court approves the 

amended final account," appellant "shall not 

distribute any further estate funds to anyone, 

including himself." 

Appellant, pro se, appealed the district 

court's order. In re Estate of Schmitz, No. A05- 

1175, 2006 WL 1460690 (Minn. App. May 30, 

2006). By notice of review, the heirs challenged 

the district court's denial of their petition to 

remove appellant as personal representative. Id. 

at *2. This court affirmed the district court's 

determination that appellant had reimbursed 

himself in excess, and remanded to the district 

court to reconsider whether appellant should 

remain as personal representative. Id. at *1-2. In 

Page 3 

November 2006, on remand, the district 

court removed appellant as personal 

representative and appointed two of the heirs as 

co-personal representatives. At that time, $65.07 

remained in the estate account. One of the new 

A.16

personal representatives determined that 

appellant, without authorization, had paid 

himself $24,995 from the estate from April 2005 

to April 2006, during the appeal of the April 

2005 order. 

The payments that appellant made to 

himself from the estate between April 2005 and 

April 2006 formed the basis of appellant's 

criminal charges and his subsequent convictions 

of two counts of theft following a jury trial. 

In considering a claim of insufficient 

evidence, review by this court is "limited to a 

painstaking analysis of the record to determine 

whether the evidence, when viewed in a light 

most favorable to the conviction, was sufficient 

to permit the jurors to reach the verdict which 

they did." State v. Webb, 440 N.W.2d 426, 430 

(Minn. 1989). Appellate courts cannot retry the 

facts but must take the view of the evidence 

most favorable to the state. State v. Merrill, 274 

N.W.2d 99, 111 (Minn. 1978). The appellate 

court must assume that the jury believed the 

state's witnesses and disbelieved any 

contradictory evidence. State v. Moore, 438 

N.W.2d 101, 108 (Minn. 1989). The reviewing 

court will not disturb the verdict if the jury, 

acting with due regard for the presumption of 

innocence and the requirement of proof beyond 

a reasonable doubt, could reasonably conclude 

that the defendant was guilty of the charged 

offense. Bernhardt v. State, 684 N.W.2d 465, 

476-77 (Minn. 2004). The jury is in the best 

position to weigh the evidence and evaluate the 

credibility of witnesses; therefore, its verdict 

must be given due deference. State v. Brocks, 

587 N.W.2d 37, 42 (Minn. 1998). 

Page 4 

For a defendant to be found guilty of theft, 

the state must prove that the defendant: 

[I]ntentionally and without claim of right takes, 

uses, transfers, conceals or retains possession of 

movable property of another without the other's 

consent and with intent to deprive the owner 

permanently of possession of the property.... 

A.17 

Minn. Stat. § 609.52, subd.2(1) (2004). 

Claim of Right 

Appellant argues that the state did not 

prove he committed theft because he had a claim 

of right under Minnesota probate law to 

compensation in his role as the personal 

representative. We disagree. Although appellant 

had a statutory right to compensation for his 

services as personal representative, he did not 

have a right to unreasonable compensation or 

"overpayment" for those services. See Minn. 

Stat. § 524.3-719(a) (2004) ("A personal 

representative is entitled to reasonable 

compensation for services."); Minn. Stat. § 

524.3-720 (2004) ("Any personal 

representative... who defends or prosecutes any 

proceeding in good faith... is entitled to receive 

from the estate necessary expenses and 

disbursements including reasonable attorneys' 

fees incurred."). 

The state presented evidence at the criminal 

trial that the district court in the probate matter 

determined that $50 per hour, the amount 

appellant was paying himself, was unreasonable, 

and that $25 per hour was more appropriate. 

This court affirmed. Schmitz, 2006 WL 

1460690, at *1. The state also presented 

evidence that appellant continued to bill the 

estate at $50 per hour for his alleged work on the 

appeal. Expert testimony indicated that the 

amount appellant billed the estate was excessive, 

both in the amount of hours required to complete 

the work and the dollar amount charged. The 

jury 

Page 5 

was entitled to believe the evidence. See 

Rainforest Cafe, Inc. v. State of Wis. Inv. Bd., 

677 N.W.2d 443, 451 (Minn. App. 2004) 

(stating that the fact-finder determines weight 

and credibility of evidence, including expert 

testimony). 

Appellant argues that he did not commit 

theft because he had a claim of right to 

reasonable compensation as a personal 

representative. Appellant cites State v. Dahl, 498

N.W.2d 258 (Minn. 1993), to support his 

assertion that "a claim of right defeats a theft 

charge." Appellant asserts that "[t]he fact that 

the probate court found that [he] overpaid 

himself as the personal representative doesn't 

mean that [he] committed a crime." But Dahl 

does not support this point, and the facts of Dahl 

are distinguishable. In Dahl, the supreme court 

reversed a sheriff's deputy's conviction of 

misdemeanor theft by false representation. 498 

N.W.2d at 260. The deputy claimed that he was 

entitled to two hours of overtime pay for a 5-to- 

15-minute conversation he had with a city police 

officer and an undercover officer. Id. at 259. The 

supreme court determined that the deputy did 

not overpay himself; he was entitled to overtime 

pay according to his union contract and the 

established practices of the office for which he 

worked. Id. at 259-60. Conversely, although 

appellant was statutorily entitled to 

compensation as personal representative of the 

estate, he was not entitled to overpayment or 

unreasonable payment. Thus, he did not have a 

claim of right to money the jury deemed he 

overpaid himself. 

We conclude that there was sufficient 

evidence to support the jury's determination that 

appellant did not have a claim of right to the 

money he overbilled the estate. 

Page 6 

Intent 

Appellant argues that he lacked the 

requisite intent to commit the theft offenses. 

"With intent to" means that the actor "either has 

a purpose to do the thing or cause the result 

specified or believes that the act, if successful, 

will cause that result."Minn. Stat. § 609.02, 

subd.9(4) (2004). Intent is inferred by the jury 

from the totality of the circumstances. State v. 

Raymond, 440 N.W.2d 425, 426 (Minn. 1989). 

Generally, intent is proven as the only 

reasonable inference that the jury could draw 

from all the evidence, and the jury may infer that 

a person intends the natural and probable 

consequences of his actions. State v. Cooper, 

561 N.W.2d 175, 179 (Minn. 1997). 

Appellant contends that his "good faith 

reliance" on the statute that allows reasonable 

compensation for the work done by a personal 

representative "negates his criminal intent." He 

asserts that even if he was "mistaken in his 

interpretation of the law," he can still use the 

defense of "mistake" because it negates the 

element of intent. See State v. Jacobson, 697 

N.W.2d 610, 615-16 (Minn. 2005) (stating that a 

defendant's mistake of law may be relevant to 

negating an element of the crime charged, intent 

in particular). We disagree that the record 

supports appellant's contention that he relied on 

the statute in good faith. Appellant continued to 

bill his time at $50 per hour after the district 

court specifically determined that $50 per hour 

constituted an unreasonable rate of 

compensation. 

Appellant also argues that reimbursement 

for his services, even if unreasonable, cannot be 

considered theft because "[t]here is no evidence 

that the work was not done, only that it took 

appellant too long, in a probate attorney's 

opinion, to do it." We 

Page 7 

disagree. The state presented evidence at the 

criminal trial that although the brief appellant 

wrote for the probate appeal was "two and a half 

typewritten pages, double spaced, with no 

citation of law," appellant billed the estate for 28 

hours of work at $50 per hour. The state also 

presented evidence that appellant billed the 

estate for 289 hours of work at $50 per hour 

during a time period in which, according to the 

state's expert witness, appellant would have been 

"sitting and waiting for the Appellate Court to 

get back to [him] with the order." The jury could 

reasonably infer from this evidence that 

appellant was billing the estate for hours that he 

was not performing work related to the appeal or 

the estate. 

Finally, appellant argues that "[t]he state 

cannot prove that appellant committed a theft 

because nothing he did was concealed from the 

heirs." Appellant asserts that because he "turned 

over the bank records, and all of the checks had 

A.18

notations in the memo portion indicating how 

the money was spent," he did not conceal 

anything. But most of the checks had only 

general descriptions written in the memo line: 

"for estate services"; "appellate costs/fees"; or 

"appellate admin. costs." Appellant provided no 

evidence of the specific tasks he accomplished 

or how much time it took him to do each task. 

Furthermore, the theft statute is not limited to 

persons who "conceal" something; it is enough 

that the defendant "takes, uses, transfers, 

conceals or retains possession" of another's 

property without the other's consent. See Minn. 

Stat. § 609.52, subd. 2(1) (emphasis added). The 

new personal representatives appointed by the 

district court did not authorize, affirm, or 

otherwise consent to any of the payments from 

the estate that appellant made to himself 

between April 2005 and April 2006. 

Page 8 

We conclude that the state presented 

sufficient evidence of appellant's actions from 

which the only reasonable inference the jury 

could make was that, given the work he was 

performing, appellant took excessive amounts of 

money from the estate with the intent to 

wrongfully deprive the rightful owners of the 

money. See Cooper, 561 N.W.2d at 179. Thus, 

the jury's verdicts were supported by sufficient 

evidence. 

II. 

In the alternative, appellant argues that his 

convictions should be reversed because he did 

not effectively waive his right to counsel. We 

disagree. 

A written waiver of the right to counsel is 

required in felony cases unless the defendant 

refuses to sign such a waiver. Minn. Stat. § 

611.19 (2004); Minn. R. Crim. P. 5.04, 

subd.1(4). But an oral, factual inquiry into 

whether a knowing, voluntary, and intelligent 

waiver of counsel has been made is permissible 

even if the statute and rule are not satisfied. See 

In re Welfare of G.L.H., 614 N.W.2d 718, 723 

(Minn. 2000) (stating that a district court's 

failure to follow "a particular procedure" does 

not automatically invalidate a waiver). 

Additionally, waiver of counsel by forfeiture can 

occur when the defendant exhibits "extremely 

dilatory" conduct, even where the defendant has 

not received a full waiver colloquy. State v. 

Jones, 772 N.W.2d 496, 504-06 (Minn. 2009), 

cert. denied, 130 S. Ct. 3275 (2010). "[A] 

balance must exist between a defendant's right to 

counsel of his choice [and] the public interest of 

maintaining an efficient and effective judicial 

system," and the ability of district courts to 

conduct trials must be preserved. Id. at 505-06 

(quotation omitted). 

Page 9 

The record indicates that there was neither 

a written waiver nor a full waiver colloquy made 

on the record. Thus, the issue here is whether 

appellant's conduct constituted waiver by 

forfeiture. 

At his first appearance on August 22, 2008, 

one year before trial, appellant responded 

affirmatively when asked if he was going to hire 

an attorney. Appellant was then advised that he 

had the right to be represented by an attorney 

and that if he could not hire one, the district 

court would appoint one for him. The district 

court asked appellant if he understood the basic 

constitutional rights that had just been stated to 

him. Appellant responded in the affirmative and 

stated that on the "advice of [his] attorney" he 

was "going to use [his] Fifth Amendment 

rights." When the district court asked appellant 

why he had failed to make a first appearance in 

court that was initially scheduled for an earlier 

date, appellant answered, "I'm going to use my 

Fifth Amendment rights, as per my attorney." 

During a discussion about scheduling a speedy 

omnibus hearing, appellant said, "Can my 

attorney let you know?" 

At an omnibus hearing on November 10, 

2008, nearly three months after the first 

appearance, the prosecutor explained to 

appellant that he had the right to an attorney. 

Appellant told the prosecutor that "he may or 

may not be hiring one in the future." Noting that 

A.19

appellant had asked for a continuance of his 

omnibus hearing so that he could try to hire 

counsel, the district court informed appellant 

that it "would be a good idea for [him] to hire an 

attorney." Appellant then indicated that he 

planned to obtain an application for a public 

defender, "just... to see if [he] qualif[ied]," and 

that he was "not saying [he'd] hire one." 

Page 10 

At the contested omnibus hearing on June 

12, 2009, appellant again appeared without an 

attorney, knowing at that point that he did not 

qualify for a public defender. The district court 

suggested that appellant "consider a change of 

approach" because he was facing "the maximum 

sentence available to the court under the law." 

Appellant replied that he had consulted several 

attorneys, felt that he had an "excellent" case, 

and planned to go to trial. On August 25, 2009, 

appellant appeared pro se for jury trial. When 

advised about his right to make an opening 

statement, appellant said, "I feel my 

constitutional rights have been violated by not 

having a defender provided.... [T]hat would be 

something for the appellate court to look at." 

The district court denied appellant's 

application for a public defender on November 

10, 2008. The earliest trial date was set for April 

21, 2009, giving appellant more than five 

months to obtain counsel before trial. Appellant 

was told by the district court and the prosecutor 

that he had a right to an attorney, and the district 

court told him several times that it would be in 

his interests to hire one. At each appearance 

before trial, appellant told the district court that 

he was consulting with counsel or that he may 

hire counsel, yet he continued to attend court 

without an attorney. 

A written consent form is the preferred 

method of waiving the right to an attorney, and 

its absence cannot be dismissed lightly in a 

felony criminal proceeding. But there is a strong 

competing interest in maintaining an efficient 

and effective judicial system and in not 

rewarding a defendant for manipulating the 

system. Here, appellant's demeanor, attitude, and 

A.20 

representations throughout the course of the 

criminal proceedings regarding his retention of 

an attorney resulted in a waiver of his right to 

counsel by forfeiture. 

Page 11 

Thus, we conclude that the district court did 

not abuse its discretion in proceeding without 

appellant having explicitly waived his right to 

counsel in accordance with the statute and the 

rule of criminal procedure. 

III. 

Appellant argues that the district court 

abused its discretion by denying his application 

for a public defender. We disagree. 

A district court's decision whether to 

appoint a public defender is reviewed for an 

abuse of discretion. In re Stuart, 646 N.W.2d 

520, 523 (Minn. 2002). But issues involving 

statutory construction and construction of rules 

of criminal procedure are reviewed de novo. 

State v. Stevenson, 656 N.W.2d 235, 238 (Minn. 

2003); State v. Nerz, 587 N.W.2d 23, 24 (Minn. 

1998). 

A person charged with a felony, gross 

misdemeanor, or misdemeanor is entitled to 

representation by a public defender only if he or 

she is unable to afford or obtain counsel. Minn. 

Stat. § 611.15 (2004); Minn. R. Crim. P. 5.04, 

subd.1(2). And the burden is on the defendant to 

show that he or she is financially unable to 

afford counsel. Jones, 772 N.W.2d at 502. 

Moreover, although indigent criminal defendants 

have a right to appointed counsel, the courts 

jealously guard public-defender resources to 

ensure that these limited resources "are not 

unnecessarily depleted by people who, in their 

own right, can obtain legal counsel with their 

own resources." Stuart, 646 N.W.2d at 525. 

A defendant is "financially unable to obtain 

counsel" if (1) anyone in defendant's household 

receives "means-tested governmental benefits," 

or (2) the defendant, "through any combination 

of liquid assets and current income," is unable to 

pay the reasonable

Page 12 

costs charged by private defense counsel. Minn. 

Stat. § 611.17 (2004). The district court must 

determine the financial eligibility of the 

defendant for the appointment of a public 

defender, and the inquiry must include (1) the 

value of defendant's real-estate assets, including 

the homestead, and (2) any other assets that can 

be readily converted to cash or used to secure a 

debt. Minn. Stat. § 611.17(b). The applicant 

must submit a financial statement under oath or 

affirmation "setting forth the applicant's assets 

and liabilities, including the value of any real 

property owned by the applicant, whether 

homestead or otherwise, less the amount of any 

encumbrances on the real property, the source or 

sources of income, and any other information 

required by the court." Id. 

Here, appellant indicates that he has income 

from a part-time job, for which he earns $40 per 

day, and his wife works 30 hours per week, 

earning $10-$12 per hour. In making his 

argument, appellant references the federal 

poverty guideline for a family of two in 2008, 

which was $14,000 per year. See Annual Update 

of the HHS Poverty Guidelines, 73 Fed. Reg. 3, 

971 (Jan. 17, 2008). But appellant's disclosures 

show that the income of appellant and his wife is 

well above the federal poverty guidelines. 

Moreover, appellant owns two major assets 

unencumbered, a house and a car, that he could 

use to secure debt. 

Finally, we reject appellant's contentions 

that, under section 611.17, the district court 

cannot examine the income and liabilities of an 

applicant's spouse, and that the disclosure form 

relied on by the district court did not adequately 

reveal appellant's financial situation. 

At appellant's sentencing hearing on 

December 3, 2009, the district court ordered 

restitution in the amount of $108,695. Appellant 

filed a challenge to the restitution amount on 

December 23, 2009, within the statutory 

deadline to challenge restitution. See Minn. Stat. 

§ 611A.045, subd. 3(b) (2004) (stating that an 

offender may challenge restitution by requesting 

a hearing within 30 days of sentencing). A 

hearing has not been held. Appellant argues that 

if this court does not reverse his convictions, he 

is entitled to a remand for a hearing on his 

restitution challenge. We agree. Therefore we 

reverse the restitution order and remand for a 

hearing. 

V. 

Appellant submitted a pro se supplemental 

brief that raises some of the same issues that his 

public defender addressed in the principal brief, 

as well as additional issues. Appellant does not 

cite any authority to support his claims of error. 

Rather, his arguments are based on mere 

assertions composed of personal notes. Thus, we 

decline to address these issues and conclude that 

they are waived. See State v. Modern Recycling, 

Inc., 558 N.W.2d 770, 772 (Minn. App. 1997) 

(stating that an assignment of error in a brief 

based on a mere assertion that is not supported 

by argument or authority is waived unless 

prejudicial error is obvious on mere inspection). 

Affirmed in part, reversed in part, and 

remanded. 

Page 13 

On this record, we conclude that the district 

court did not abuse its discretion by denying 

appellant's application for a public defender. 

IV. 

A.21

SECTION 8 

Estate Planning for Executives – Personal 

Wealth Preservation Strategies 

Robert K. Barbetti 

JP Morgan 

New York, NY 


The Well-Prepared Executive: Personal Wealth Preservation Strategies 


I. INTRODUCTION 1 

III. STOCK OPTION PLANS 3 

A. Description 3 

B. Incentive Stock Options 3 

1. Executive’s Income Tax Consequences 3 

a. Grant 4 

b. Exercise 4 

c. Sale of Stock 4 

2. Example of ISO Income/Capital Gains Tax Consequences 4 

3. Holding Period Requirement and Disqualified Dispositions 4 

4. Alternative Minimum Tax Issues 5 

a. AMT Adjustment 5 

b. AMT Credit 5 

c. Avoiding the AMT Issue: ISOs Immediately Exercisable 5 

d. Minimizing AMT by Periodic ISO Exercises 5 

e. Equalizing Regular Tax and AMT Liability 5 

f. Drop in Stock Price: Exercising Before Year-End 5 

5. ISO Requirements 6 

a. Employees of Granting Corporation or Affiliated Corporation 6 

(1) Employees Only 6 

(2) Termination of Employment 6 

(3) Death of ISO Holder 6 

(4) No Nondiscrimination or Coverage Rules 6 

(5) Employer Corporations Only 6 

b. Fair Market Value Exercise Price 6 

(1) Greater than 10% Shareholders 6 

(2) Determination of Fair Market Value 7 

(3) Effect of Restrictions on Stock 7 

(4) Grant Date 7 

(5) Conditional Grants 7 

i 

PAGE 

II. RESTRICTED STOCK PLANS 1 


B. Executive’s Income Tax Consequences 1 

1. Grant 1 

a. Purchase of Unvested Stock for Fair Market Value 1 

2. Disposition Prior to Vesting 1 

3. Vesting 1 

a. Stock Restrictions are Ignored in Determining Value 1 

b. Minority and Lack of Marketability Discounts 2 

4. Sale of Stock 2 

5. IRC § 83 (b) Election 2 

6. Imposing Vesting Provisions on Previously Owned Stock Protective IRC § 83 (b) 

Election 

2 

C. Summary of Restricted Stock Advantages 3 

D. Summary of Restricted Stock Disadvantages 3



PAGE 

c. 10-Year Grant Period 7 

d. 10-Year Exercise Period 7 

e. Non-transferable 7 

f. $100,000 Per Year Limitation 7 

6. Methods of Exercise 8 

a. Stock 8 

(1) Mature ISO shares for ISOs 8 

(2) Immature ISO shares for ISOs 8 

b. Reload Provisions 8 

c. Net Exercise 8 

d. Cashless Exercise 8 

7. Modifications and Repricing of ISOs 8 

a. Deemed Grant of a New ISO 8 

b. Change in Exercise Price and Shares 8 

c. Change in Payment Terms 9 

d. Acceleration of Exercise 9 

e. Administrative and Legal Changes 9 

8. Mergers and Acquisitions 9 

a. ISOs for ISOs 9 

b. ISOs for NQOs 9 

9. Summary of ISO Advantages 9 

10. Summary of ISO Disadvantages 9 

C. Nonqualified Stock Options 9 

1. Employee’s Tax Consequences 9 

a. Grant 9 

(1) NQOs with Readily Ascertainable Fair Market Value 9 

(2) Deeply Discounted NQOs 10 

(3) No IRC § 83 (b) Election 10 

b. Transfer of NQO 10 

(1) Gift Tax Issues 10 

(2) Estate Tax Issues 11 

c. Exercise 11 

(1) Stock Restrictions are Ignored in Determining Value 11 

(2) Receipt of Restricted Stock 11 

d. Sale of Stock 11 

2. Example of Tax Consequences 11 

3. Methods to Exercise 11 

a. Use of Employer Stock to Exercise 11 

(1) Use of ISO Shares to Exercise NQOs 11 

b. Net Exercise 12 

c. Cashless Exercise 12 

4. Mergers and Acquisitions 12 

5. Summary of NQO Advantages 12 

6. Summary of NQO Disadvantages 12 

ii



PAGE 

IV. STOCK APPRECIATION RIGHTS AND OTHER PHANTOM EQUITY PLANS 12 


B. Executive’s Tax Consequences 12 

1. Grant 12 

2. Payment 

12 

C. Advantages 12 

D. Disadvantages 13 

V. EMPLOYEE STOCK PURCHASE PLAN 13 


1. Example 13 

2. Executive’s Income Tax Consequences 13 

a. Grant 13 

b. Exercise 13 

3. Sale of Stock Acquired Through ESPP 13 

4. Holding Period Requirement and Disqualified Dispositions 13 

5. ESPP Requirements 

13 

VI. EMPLOYER SECURITIES DISTRIBUTED FROM QUALIFIED PLAN 14 

A. Background 14 

B. Definition of Net Unrealized Appreciation 14 

C. Tax Treatment of In-Kind Distribution of Company Stock from Qualified Plan 14 

D. Comparison to Roll-over to IRA 15 

E. Partial Distribution is Permitted 15 

F. Who Should Consider an In-Kind Distribution of Company Stock from a Qualified Plan 15 

VII. SEC CONSIDERATIONS- COMMON INSIDER RESTRICTIONS 15 

A. Section 16 15 

1. Section 16(a) Reporting Requirement 15 

2. Section 16(b) Short Swing Profit Rule 15 

B. Rule 144 15 

iii


I. INTRODUCTION 

In today’s competitive job market, companies 

usually find that hiring and retaining qualified 

executives requires some type of equity 

compensation plan. Valuable employees fully 

expect to share in the future appreciation in the 

value of the company. 

Equity compensation plans can be broadly 

divided into three categories: (1) actual equity 

ownership, such as restricted stock plans; (2) 

potential equity ownership plans, such as stock 

options; and (3) those plans which do not result in 

actual or potential equity ownership but give a 

contractual right to a cash payment based on 

appreciation in the company’s value, such as stock 

appreciation rights. Each of these equity 

compensation plans aligns the executive’s interest 

with the interest of the shareholders by rewarding 

the executive for increases in stock value. Most 

plans are subject to vesting provisions that are tied 

to continued employment, company performance 

goals, or more specific performance goals tailored to 

the individual executive or the executive’s division. 

This outline focuses on basictax considerations 

related to equity compensation plans. With the 

current spread between the 20% long-term capital 

gains rate and the 39.6% ordinary income tax rate, 

and the 40% top marginal gift tax and estate tax 

rate, the executive’s tax considerations have become 

particularly important. An executive typically has 

three tax goals: (1) minimize taxes owed upon grant 

of the equity compensation; (2) minimize 

“phantom” income (i.e., taxable income without 

cash); and (3) maximize capital gains. 

More particularly, this outline focuses on basic 

tax considerations associated with common forms of 

equity compensation for executives, including (1) 

restricted stock plans, (2) incentive stock options, 

(3) non-qualified stock options, (4) stock 

appreciation rights, (5) employee stock purchase 

program, (6) distributions of company stock from a 

qualified plan, and (7) basic SEC considerations 

related to insiders. 

II. 

RESTRICTED STOCK PLANS 

A. Description 

A restricted stock award is the grant of 

stock or sale of stock at market value or 

discounted value to the executive, subject to a 

vesting schedule. Unvested shares typically are 

subject to forfeiture or resale to the company at 

the original purchase price upon the executive’s 

termination of employment or resignation. 

1 

B. Executive ’s Income Tax Consequences 

1. Grant The executive recognizes no 

income tax upon receipt of unvested restricted 

stock, unless the executive make the Internal 

Revenue Code (“IRC”) § 83(b) election as 

discussed below. IRC § 83(a). 

a. Purchase of Unvested Stock for Fair 

Market 

Value 

IRC § 83 applies to a transfer of 

property “in connection with the performance 

of services.” If an executive purchases stock at 

fair market value that is subject to a “substantial 

risk of forfeiture” (i.e., vesting), the stock is 

subject to IRC § 83 even though the executive 

paid fair market value. Alves v. Commissioner, 

79 T.C. 864 (1982), aff’d., 734 F.2d 478 (9 th 

Cir. 1984). 

2. Disposition Prior to Vesting 

An arm’s-length disposition of restricted 

stock will trigger compensation income to the 

executive equal to the value of the stock as of the 

date of the disposition less any amount paid for the 

stock. Treas. Reg. § 1.83-1(b)(1). A non-arm’slength 

disposition such as a gift or contribution to a 

related entity does not close the compensation 

element and the executive is still subject to income 

tax when the stock becomes vested even though the 

executive no longer owns the stock. Treas. Reg. § 

1.83-1(c). 

3. Vesting 

The executive recognizes compensation 

income (i.e., ordinary income) when restricted stock 

is transferable or no longer subject to substantial 

risk of forfeiture (i.e., upon vesting). IRC § 83(a). 

The amount of income recognized at the time of 

vesting equals the difference between fair market 

value of the stock at that time less any amount paid 

for the stock. IRC § 83(a). The executive’s holding 

period begins at the time of vesting for purposes of 

the one-year requirement for long-term capital gains 

and the five-year requirement for the 50% exclusion 

under Section 1202. IRC § 83(f). 

a. Stock Restrictions are Ignored in 

Determining 

Value 

For purposes of determining fair market 

value, restrictions on the stock such as securities 

law, lock-up, and similar restrictions are ignored. 

IRC § 83(a). For example, assume at the time of 

vesting that the stock is trading at $20 per share but


the executive may not sell the stock under the 

securities law for 6 months. Although the actual 

value of the stock should be discounted from the 

$20 trading value to reflect the 6 month lock-up, the 

6 month lock-up is ignored for purposes of valuing 

the stock under Section 83, resulting in the 

executive being taxed on the full $20 trading value. 

See Pledger v. Commissioner, 641 F.2d 287 (5th 

Cir. 1981); Sakol v. Commissioner, 574 F.2d 694 

(2d Cir. 1978). The only restriction that is taken 

into account in determining value is one that by its 

terms will never lapse, such as a buy-sell agreement. 

IRC § 83(a). 

b. Minority and Lack of Marketability 

Discounts 

Although restrictions on stock must be 

ignored under IRC § 83, appropriate discounts for 

minority interests and lack of marketability are 

permitted in determining value for purposes of IRC 

§ 83. See Theophilos v. Commissioner, 85 F.3d 440 

(9th Cir. 1996)(remanding to Tax Court to 

determine an appropriate minority discount). cf. 

Morrow v. Commissioner, T.C. Memo 1995-18. 

4. Sale of Stock 

Appreciation in the stock that occurs after 

the restricted stock vests is taxed as capital gain 

when the executive sells the stock. If the executive 

held the stock for at least one year from the vesting 

date, then the 20% long-term capital gains rate will 

apply. 

5. 

IRC § 83(b) election 

a. The value of restricted stock may increase 

substantially prior to vesting, resulting in a large 

ordinary tax liability for the executive upon vesting. 

Moreover, at the time the restricted stock becomes 

vested it may still be illiquid, resulting in phantom 

income to the executive (i.e., taxable income 

b. An executive can avoid paying ordinary 

income tax on appreciation that occurs between 

grant of the restricted stock and vesting of the 

restricted stock by making an election under IRC § 

83(b) to recognize compensation income at the time 

the restricted stock is granted. The amount of 

compensation income is the difference between fair 

market value of stock at time of grant less any 

amount paid for stock. Fair market value is 

determined without regard to any restrictions other 

than restrictions which by their terms will never 

lapse. An IRC § 83(b) election also starts the 

executive’s holding period for capital gains and 

§1202 purposes. IRC § 83(f). 

c. If the §83(b) election is made when the 

restricted stock is granted, any future appreciation in 

stock value from grant date is taxed as capital gain 

when the executive sells the stock. If the executive 

holds the stock for one year from the original grant, 

then the 15% long-term capital gains rate will apply. 

d. The IRC § 83(b) election must be filed with 

the applicable IRS Service Center within 30 days 

after the executive receives the restricted shares. 

This is an absolute deadline with no exceptions. In 

TAM 199910010, the taxpayer failed to file the IRC 

§ 83(b) election within 30 days of receipt of 

restricted stock. The company canceled the original 

shares and issued new shares under the same terms. 

The taxpayer then made the IRC § 83(b) election for 

the new shares within 30 days of receipt of the new 

shares. The IRS ruled that the cancellation and 

reissuance of the shares was a sham transaction and 

thus the taxpayer had not made a timely IRC § 83(b) 

election. 

e. The IRC § 83(b) election can provide the 

executive substantial tax benefits under the right 

circumstances. The election is usually made when 

the stock has little value when received, or when the 

executive paid close to fair market value for the 

stock, and the executive anticipates the stock value 

will appreciate substantially during the vesting 

period. 

6. Imposing Vesting Provisions on Previously 

Owned Stock Protective IRC § 83(b) Election 

In many cases, founders and senior 

executives of companies that are obtaining venture 

capital funding are required to subject their existing 

stock holdings to new vesting provisions. Because 

the founder or executive continues to own the same 

shares that he has always owned, there should be no 

“transfer” of property that would trigger a taxable 

event under IRC § 83. Some commentators have 

raised the question whether the IRS would assert 

that the founder or executive made a constructive 

exchange of his old unrestricted stock for new 

restricted stock that constitutes a transfer of property 

for IRC § 83 purposes. When the restricted stock 

becomes vested, the founder or senior executive 

would have ordinary income equal to the value of 

the stock at such time. To avoid this risk, tax 

advisors recommend that the founder or executive 

make a “protective” IRC § 83(b) election within 30 

days of the imposition of the new vesting 

2


provisions. Thus, if the IRS took the position that a 

constructive exchange took place, the taxable event 

is the time of the constructive exchange. 

Presumably, the value of the unrestricted shares is at 

least equal to the restricted shares. Thus, the 

founder or senior executive would recognize no 

income upon making the protective IRC § 83(b) 

election. Moreover, under IRC § 1036, no gain 

would be recognized on any appreciation in the 

unrestricted shares deemed exchanged for the 

restricted shares. Any future appreciation in the 

stock would be taxed as capital gains when sold. It 

now appears that the IRS will not take the position 

that a subsequent imposition of vesting constitutes a 

“transfer” under IRC § 83. In PLR 200204005, the 

IRS ruled that placing vesting provisions on LLC 

interests already owned does not constitute a 

transfer under IRC § 83. 

C. Summary of Restricted Stock Advantages 

1. Substantial tax benefits to the executive if 

the restricted stock is issued when the value is low. 

The executive can make the IRC § 83(b) election 

and thereby preserve capital gains treatment on all 

future appreciation in the value of the stock. Thus, 

restricted stock plans are especially popular for 

founders and other senior executives in start-up 

companies. 

2. Gives the executive an immediate 

ownership interest in company (psychic satisfaction 

of being an “owner”). 

D. Summary of Restricted Stock 

Disadvantages 

1. Potential for substantial phantom ordinary 

income. If the stock value is high when the 

restricted stock grant is issued, the executive likely 

would not make the IRC § 83(b) election. Instead, 

the executive would be taxed when the stock 

became vested, potentially resulting in substantial 

phantom ordinary income if the executive cannot 

immediately sell a portion of the stock. Thus, 

restricted stock plans are usually not a viable choice 

for private companies with substantial current value, 

unless the company expects to be public when the 

restricted stock becomes vested and the executive 

would be able to sell portion of his stock to avoid 

phantom income. 

2. An executive’s immediate ownership at less 

than fair market value may not provide as much 

incentive for the executive to work to increase the 

value of the company (since the executive has 

3 

received an immediate benefit regardless of the 

subsequent increase in the company’s value). 

3. Shareholders (including executives who are 

shareholders) have certain state law rights such as 

right to: 

a. Receive notice of meetings; 

b. Inspect company’s books and 

records; and 

c. Hold the company and its 

controlling shareholders accountable for fiduciary 

duties. 

4. Issuance of restricted stock to executives 

may make the employer less attractive to venture 

capitalists or other financiers who do not wish to see 

such dilution without a corresponding cash inflow at 

the stock’s fair market value. 

III. 

STOCK OPTION PLANS 


Stock options are the most common equity 

compensation plan. A stock option is a right to buy 

stock at the exercise price at some point in the 

future. The exercise of a stock option is typically 

subject to vesting provisions. Generally, unvested 

options are forfeited upon the executive’s 

termination or resignation. There are two types of 

stock options: incentive stock options (“ISOs”) and 

nonqualified stock options (“NQOs”). ISOs are 

options that provide employees favorable tax 

consequences under IRC § 421. ISOs must meet the 

rigid requirements set forth in IRC § 422. Any 

option that does not meet the ISO requirements is an 

NQO. 

B. Incentive Stock Options 

1. 

Executive’s Income Tax Consequences 

a. Grant 

No tax to the executive upon the grant of an 

ISO. IRC § 421(a). 

b. Exercise 

No tax to the executive upon the exercise of 

an ISO, except may be subject to alternative 

minimum tax (“AMT”) as discussed below. IRC § 

421(a). An executive exercises an ISO by 

purchasing the stock at the exercise price stated in 

the grant.


i. The exercise of an ISO and the receipt of 

the stock occurs when substantially all of the rights 

to the stock have been transferred. Treas. Reg. § 

1.421-7(g). A transfer may take place for tax 

purposes before the transfer is evidenced on the 

corporation’s books so long as the transfer is 

evidenced within a reasonable time. Id. For 

example, the IRS ruled that an ISO exercise and 

transfer of ISO stock took place when an employee 

delivered the notice of exercise and full payment, 

even though the stock certificate is not issued until 

later. Rev. Rul. 70-335, 1970-1 C.B. 111; see also, 

Becker v. Commissioner, 378 F.2d 767 (3 rd Cir. 

1967). 

c. Sale of Stock 

When the executive sells the stock acquired 

by exercising an ISO, the full appreciation in value 

of the stock since exercise of the ISO is subject to 

tax as capital gains. Thus, ISOs provide two 

benefits: (i) the executive generally defers tax until 

the underlying stock is sold; and (ii) all of the gain 

from the time of exercise of the ISO is treated as 

capital gains. 

2. Example of ISO Income/Capital Gains Tax 

Consequences 

Facts 

Year 1: ISOs for 10,000 shares granted at $10 

exercise price when fair market value of stock is 

$10. 

Year 3: ISOs are exercised when fair market value 

of stock is $15. 

Year 5: Executive sells stock for $20. 

Tax Consequences to Executive 

Year 1 Grant: 

Executive recognizes no income. 

Year 3 Exercise: 

Executive recognizes no income (except for 

potential AMT) 

Year 5 Sale: 

Executive has $100,000 capital gain ($200,000 - 

$100,000 exercise price) resulting in $20,000 tax (at 

20% capital gains rate). 

Cash Flow Consequences: 

Executive nets $80,000 ($200,000 - $100,000 

exercise price - $20,000 capital gains tax) 

(excluding AMT considerations). 

4 

3. Holding Period Requirement and 

Disqualified Dispositions 

a. To obtain the favorable ISO tax 

consequences, the executive must not dispose of the 

stock received on the exercise of an ISO before the 

later of (i) 2 years from the grant of the ISO or (ii) 1 

year from the exercise of the ISO. IRC § 422(a)(1). 

Thus, both holding periods must be satisfied. 

i. A disposition of ISO stock generally 

means any sale, exchange, gift or other transfer. 

IRC § 424(c) allows the following exceptions: (a) A 

transfer of ISO stock by a deceased employee to an 

estate or a transfer by bequest or inheritance; (b) An 

exchange of ISO stock in a tax-free exchange under 

IRC §§ 354, 355, 356 or 1036; (c) A pledge of ISO 

stock; (d) A transfer of ISO stock between spouses 

or incident to divorce within the meaning of IRC § 

1041; (e) An acquisition of ISO stock in joint 

ownership with right of survivorship or the 

subsequent transfer of ISO stock into such joint 

ownership; and (f) A transfer of ISO stock by an 

insolvent employee in bankruptcy to a bankruptcy 

trustee or subsequent creditor. 

b. Failure to satisfy the holding period 

requirement does not disqualify the ISO but rather 

results in a disqualifying disposition. Any gain 

recognized by the executive on a disqualifying 

disposition will first be treated as ordinary income 

to the extent of the difference between the stock’s 

fair market value on the date the ISO was exercised 

and the exercise price. IRC § 421(b). Any 

remaining gain will be treated as long-term capital 

gain if the executive held the stock after the exercise 

of the ISO for at least one year or short-term capital 

gain if the executive did not hold the stock for a 

year. 

c. In many cases, the executive will not satisfy 

the requirement that they hold the stock for one year 

from the exercise date. This is especially true for 

executives who hold ISOs in a start-up company 

that goes public or a company that is sold. 

4. 

Alternative Minimum Tax Issues 

a. AMT Adjustment 

Although the exercise of an ISO does not 

result in a regular tax liability, the exercise may 

result in AMT. The difference between the fair 

market value of the ISO stock on the exercise date 

and the exercise price is treated as an adjustment for 

AMT purposes. IRC § 56(b)(3). The starting point 

in calculating AMT is the taxpayer’s regular taxable


income. The taxable income is then adjusted 

upwards and downwards for the AMT adjustments 

such as the ISO adjustment and the AMT exemption 

amount to arrive at alternative minimum taxable 

income (“AMTI”). AMTI is then multiplied by the 

AMT rate. If the resulting amount exceeds the 

taxpayer’s regular tax liability, the excess amount is 

the taxpayer’s AMT. 

b. AMT Credit 

In general, taxpayers can carry forward the 

AMT as a credit to offset future regular tax liability. 

IRC § 53(a). Thus, the AMT is in effect a 

prepayment of the executive’s future regular tax 

liability. 

c. Avoiding the AMT Issue: ISOs 

Immediately 

Exercisable. 

ISOs have historically been granted where 

the exercise is subject to a vesting schedule. If the 

value of the stock is higher at the time of exercise 

(which presumably will always be the case or else 

the executive would not exercise), the executive 

may have a large AMT liability upon exercise. This 

result can be avoided by granting the executive ISOs 

that are immediately exercisable into stock that is 

subject to a vesting schedule. The executive can 

then choose to immediately exercise the ISO and 

make an IRC § 83(b) election to include the value of 

the ISO stock into income for AMT purposes at the 

time of exercise. Because the ISO exercise price 

must equal the fair market value of the ISO stock on 

the grant date, the executive should have no AMT 

upon the immediate exercise of the ISO. Another 

benefit of granting ISOs that are immediately 

exercisable is that the executive’s holding period 

starts to immediately run. This same strategy works 

for NQOs with a fair market value exercise price. 

The ability to grant immediately exercisable ISOs 

may be limited by the $100,000 per year limitation 

discussed below. A disadvantage of immediately 

exercising an ISO is that the executive must pay the 

exercise price and therefore lose the benefit of not 

having to risk his capital and being able to invest 

those funds in other investments. 

d. Minimizing AMT by Periodic ISO 

Exercises 

Whether a taxpayer is subject to AMT 

depends on several factors, including the number of 

AMT adjustments, the taxpayer’s regular tax rate, 

and the AMT exemption amount. The only way to 

determine the AMT exposure is to simply “run the 

numbers.” One ISO planning strategy is to exercise 

just enough ISOs during each year to not be subject 

to AMT. By doing so, the ISOs exercised are not 

5 

subject to the AMT and the holding period begins to 

run on the underlying ISO stock. In deciding 

whether to employ this strategy, taxpayer’s must 

consider the disadvantage of having to pay the ISO 

exercise price and therefore lose the benefit of not 

having to risk his capital and the ability to invest 

such funds in other investments. 

e. Equalizing Regular Tax and AMT Liability. 

A taxpayer who is subject to AMT should 

consider increasing his regular tax liability to equal 

his AMT liability. For example, a taxpayer with 

ISOs and NQOs could exercise enough NQOs to 

equalize the regular tax and AMT liabilities. This 

strategy results in the taxpayer exercising NQOs 

without having to pay any additional current tax 

liability. 

f. Drop in Stock Price: Exercising Before 

Year-End. 

If the stock value falls, the taxpayer who 

previously exercised ISOs will now own the stock 

with a much lower value. The AMT liability 

triggered from the prior ISO exercise may even be 

more than the current value of the stock. For those 

taxpayers who exercise ISOs for stock that has 

declined in value, their AMT liability can be 

minimized by selling the stock before the end of the 

year. Under IRC § 56(b)(3), the AMT liability is 

based on the lower sales price if the ISO stock is 

sold in the same year that the ISO was exercised. 

For those taxpayers who exercised ISOs in earlier 

years and now face an insurmountable AMT 

liability, they should consider negotiating an Offer 

in Compromise or Installment Plan with the IRS. 

While there have been some legislative proposals to 

retroactively change the AMT rules for ISOs, it does 

not appear that this proposed legislation will pass. 

5. ISO Requirements 

ISOs must meet each of the statutory 

requirements set forth in IRC § 422. Failure to 

satisfy any requirement will result in the ISO being 

treated as an NQO. 

a. Employees of Granting Corporation or 

Affiliated 

Corporation. 

ISOs can be granted only to employees of 

the corporation granting the ISOs or a parent or 

subsidiary corporation of the granting corporation. 

IRC § 422(a)(2). 

(1) Employees Only 

ISOs may be granted only to employees. 

Whether an individual is an employee is determined 

under the withholding tax rules of IRC § 3401(c),


which generally follow the common law factors. 

Treas. Reg. § 1.421-7(h)(1); Ellison v. 

Commissioner, 55 T.C. 142 (1970), acq. 1971-1 

C.B. 2. Thus, ISOs may not be granted to directors 

or independent contractors. 

(2) Termination of Employment 

If the recipient of an ISO leaves 

employment for any reason other than death, then 

the employee must exercise the ISO within 3 

months in order to preserve the ISO treatment. The 

only exception is if the employee leaves due to a 

disability, in which case the 3-month period is 

extended to one year. IRC § 422(c)(6). Leaves of 

absences of less than 90 days for whatever reason 

are not considered leaving employment. Treas. Reg. 

§ 1.421-7(h)(2). If the leave extends beyond 90 

days, however, employment will be considered 

terminated at the end of the 90-day period and the 

employee has 30 days from that date to exercise the 

ISO. If these time limits are not met, the option 

converts to a non-qualified option, discussed below. 

(3) Death of ISO Holder 

Upon the death of an ISO holder, the ISO 

plan may allow the executive of the deceased 

employee’s estate or any person who acquired the 

ISO by bequest or inheritance to exercise the ISO. 

Treas. Reg. § 1.421-8(c)(i); Prop. Treas. Reg. § 

1.421-8(c)(i). If the employee was employed on the 

date of death, the ISO does not have to be exercised 

within 3 months of death. The employee must, 

however, have been employed for at least 3 months 

prior to death. The ISO holding periods are waived, 

but the stock will still need to be held for 1 year 

after exercise to get long-term capital gain 

treatment. IRC § 1.421-8(c). This same rule applies 

if the employee dies holding stock obtained by 

exercising an ISO. Treas. Reg. § 1.421-8(d); Prop. 

Treas. Reg. § 1.421-8(d). The favorable ISO tax 

treatment will carryover to the estate or the heirs. 

Thus, no tax will be triggered upon exercise of the 

ISO (other than potential AMT). Instead, the 

executor, beneficiary, or heir will be subject to tax 

when the stock is sold. ISOs receive a complete 

step-up in basis equal to fair market value of the 

option on the date of the holder’s death (except in 

2010). 

(4) No Nondiscrimination or Coverage Rules 

There are no nondiscrimination or coverage 

requirements like there are for qualified plans. 

Thus, ISOs can be granted to whichever employees 

the employer desires, including only to highly 

compensated employees. 

6 

(5) Employer Corporations Only. 

ISOs can be granted only to employees of 

the granting corporation or a parent corporation or 

subsidiary corporation of the granting corporation. 

A parent or subsidiary corporation means at least 

50% ownership. IRC § 422(e) and (f). ISOs may 

not be granted to an employee of an affiliated 

partnership of the granting corporation. This creates 

an issue in implementing a common strategy to 

minimize the corporate Texas franchise tax by 

operating a corporate business through a lower-tier 

partnership. ISOs may not be granted to employees 

of the lower-tier partnership. This issue can be 

avoided by having the partnership elect to be taxed 

as a corporation for federal tax purposes under the 

“check the box” regulations. Treas. Reg. § 

301.7701-3. Alternatively, the individuals could be 

employed by a corporate subsidiary rather than the 

partnership. The corporate subsidiary could then 

enter into a services agreement with the partnership. 

b. Fair Market Value Exercise Price. 

Exercise price of ISO must not be less than 

the fair market value of the stock at the time of 

grant. IRC § 422(b)(4). 

(1) Greater than 10% Shareholders. 

Exercise price on ISOs granted to a 10% or 

greater shareholder by vote, at the time the ISO is 

granted, must not be less than 110% of fair market 

value on the date of grant. IRC § 422(c)(5). Certain 

attribution rules apply in determining whether a 

person is a 10% shareholder. IRC §§ 424(d)(1) and 

(2). 

(2) Determination of Fair Market Value. 

The Board of Director’s good faith 

determination of fair market value is sufficient in 

this instance. Treas. Reg. § 422(c)(1); Treas. Reg. § 

14a.422A-1T (Q&A 2(c)(4)); Prop. Treas. Reg. § 

1.422A-2(e). Thus, the Board will not later be 

second guessed if the determination, in hindsight, 

appears to be wrong. The Board must, however, 

establish that it made a good faith determination of 

fair market value given all the facts and 

circumstances at such time. The Board should 

memorialize its fair market value determination in 

the Board minutes. See Keogh v. Commissioner, 

T.C. Memo 1992-131, aff’d by unpublished op., 95- 

2 U.S.T.C. 1995 (2d Cir. 1995), cert. denied No. 

95-1014 (U.S. 1/22/96)(denying ISO treatment 

where no evidence that the option price was 

intended to be the stock’s fair market value). 

(3) Effect of Restrictions on Stock. 

In making its good faith determination of


value, the Board must ignore any restrictions (e.g., 

securities law restrictions) other than those which, 

by their terms, will never lapse. IRC § 422(c)(7). 

This is the same rule under IRC § 83 discussed 

above. 

(4) Grant Date. 

Because the exercise price must equal fair 

market value on the grant date, it is important to 

determine the grant date. In general, the grant date is 

the date when the corporation completes all 

corporate action constituting an offer to sell stock 

under the ISO. Treas. Reg. § 1.421-7(c)(1). 

(5) Conditional Grants. 

A conditional grant is not a grant for ISO 

purposes. For example, if an individual is granted 

an ISO on the condition that he become an 

employee, the grant date will not be until the first 

date of employment. Treas. Reg. § 1.421-7(c)(2). It 

is crucial to distinguish between conditions to the 

grant (i.e., conditions precedent) and conditions to 

the exercise of the option. For example, the grant 

date for an executive who is hired and granted ISOs 

conditioned on continued employment for 6 months 

would likely be treated as the six-month anniversary 

date. If the value of the stock increased during this 

6-month period and the executive was given an 

exercise price based on the value as of the hire date, 

then the option would fail to qualify as an ISO 

because the exercise price would not equal the stock 

value on the grant date six months later. To avoid 

this issue, employers should make clear that the 

grant of the ISO is unconditional but that the 

employee has to remain employed for six months to 

exercise the ISO subject to any other vesting 

provisions. One exception is that the grant of an 

ISO conditioned on subsequent shareholder 

approval will not be viewed as a conditional grant 

for ISO purposes so that the grant date is when the 

ISO is granted. Treas. Reg. § 1.421-7(c)(2). 

c. 10-Year Grant Period. 

ISOs must be granted within 10 years from 

the date that the plan is adopted by the Board or 

approved by the shareholders (whichever is later). 

IRC § 422(b)(3). 

d. 10-Year Exercise Period. 

ISO agreement must state that the ISO may 

not be exercised more than 10 years from date of 

grant, but if the employee owns more than 10% of 

the voting stock of the employer, the ISO by its 

terms must not be exercisable more than 5 years 

from the grant date. IRC § 422(b)(3). 

7 

e. Non-transferable. 

ISO agreement must state that the ISO may 

not be transferred except by will or by laws of 

descent. IRC § 422(b)(5). The ISO agreement may 

permit the employee to designate a beneficiary. The 

employer can amend the ISO plan to provide ISO 

holders with this alternative without the amendment 

resulting in a modification of the ISO for tax 

purposes. Rev. Rul. 69-648, 1969-2 C.B. 103. 

f. $100,000 Per Year Limitation. 

Aggregate fair market value (determined as of the 

grant date) of stock that can be purchased by the 

executive pursuant to ISOs exercisable for the first 

time during any one calendar year (under all plans 

of the employer corporation and its parent and 

subsidiary corporations) may not exceed $100,000. 

IRC § 422(d). In applying the $100,000 limitations, 

multiple grants of ISOs are taken into account in the 

order granted. IRC § 422(d)(2). 

(1) For example, assume an executive is 

granted 60,000 shares with a fair market value 

executive price of $10 with the ISOs vesting 1/6 per 

year over 6 years. In any given year, the maximum 

that the employee could exercise, based on the grant 

date value, is $100,000, thereby satisfying the 

$100,000 per year limitation. By contrast, if the 

executive vested over 3 years, the employee could 

exercise, based on the grant date value, $200,000 

per year, thereby failing the $100,000 per year 

limitation. 

(2) The ISO plan may permit more than 

$100,000 per year so long as it specifies that the 

excess over $100,000 will be treated as NQOs. 

Notice 87-49, 1987-2 C.B. 355. The company can 

designate which options are ISOs and which are 

NQOs and when an ISO is exercised it can 

designate the stock as ISO stock. If this is not done, 

then a pro rata share of each option will be an ISO 

and a pro rata share of each stock will be ISO stock. 

(3) Oftentimes, the vesting and exercisability of 

an ISO will accelerate upon a change in control. 

The acceleration of unvested ISOs may result in 

some of the ISOs being recharacterized as NQOs 

under the $100,000 test. Assume in the example 

above where the executive receives 60,000 ISOs at 

$10 per share vesting over 6 years that the employer 

is acquired at the beginning of year 3. If the 

unvested 40,000 ISOs became vested on the change 

of control, the employee would now have the right 

to exercise $400,000 of ISOs in year 3, resulting in 

$300,000 (or 30,000 ISOs) failing to qualify under 

the $100,000 rule.


6. 

Methods to Exercise 

a. Stock. 

ISO plans can allow employees to exercise 

ISOs with stock of the employer corporation rather 

than cash. IRC § 422(c)(4)(A). The employee will 

recognize no gain on the use of the appreciated 

employer stock to pay the exercise price. IRC § 

1036. 

(1) Mature ISO shares for ISOs. 

When ISOs are exercised with stock 

acquired pursuant to another ISO that satisfies the 

ISO holding period (“Mature ISO shares”), no 

disqualifying disposition occurs. The new ISO 

shares are divided into two groups: (1) New ISO 

shares that match the number of exchanged Mature 

ISO shares will have carryover basis and holding 

period, and (2) remaining new ISO shares will have 

basis equal to the cash paid at exercise (likely zero). 

PLR 9736040; IRC § 1036 

(2) Immature ISO shares for ISOs. 

Disqualifying disposition and recognition of 

compensation income occur when ISOs are 

exercised with previously acquired ISO shares that 

do not satisfy the ISO holding periods (“Immature 

ISO shares”). IRC § 424(c)(3). New ISOs are 

divided into two groups: (1) New ISO shares that 

equal the number of Immature ISO shares 

exchanged will have carryover basis, increased by 

compensation from disqualifying disposition, and 

(2) remaining new ISO shares will have basis equal 

to the cash paid at exercise (likely zero). PLR 

9736040; IRC § 1036 

b. Reload Provisions. 

ISO plans may provide a reload provision 

under which an executive who uses employer stock 

to exercise an ISO will automatically be granted a 

new ISO for the same number of shares used to 

exercise the ISO. 

c. Net Exercise. 

Under a net exercise, the executive does not 

pay the exercise price and receives shares with a fair 

market value equal to the excess of the value of the 

stock over the exercise price. A net exercise is 

treated as if the employee paid the exercise price 

and then sold stock with a value equal to the 

exercise price resulting in a taxable deemed 

disqualifying disposition of such stock. 

d. Cashless Exercise. 

Under a cashless exercise, the executive’s 

broker will typically pay the cash exercise price and 

8 

receive the ISO shares. The broker will then sell 

enough shares to reimburse it for the exercise price 

and transfer the remaining shares to the employee. 

The downside to a cashless exercise for ISOs is that 

the sale of some of the shares will be a disqualified 

disposition. 

7. 

Modifications and Repricing of ISOs 

a. Deemed Grant of a New ISO. 

If the terms of an ISO are modified to give 

the executive additional benefits, the modification 

will be treated as the grant of a new ISO and all of 

the ISO requirements must be met as of the 

modification date. IRC § 422(h). Most importantly, 

the exercise price must equal the fair market value 

on the modification date. If the value of the stock 

has gone up since the original grant and the exercise 

price is not changed to reflect the higher value, the 

modified ISO will no longer qualify as an ISO. 

b. Change in Exercise Price and Shares. 

A change in the exercise price and the 

number of shares to reflect a decrease in stock value 

is a modification. Rev. Rul. 69-535, 1969-2 C.B. 

90. By contrast, a change in exercise price and 

number of shares to reflect a stock split is not a 

modification. Treas. Reg. § 1.425-1(e)(5)(ii)(a). 

c. Change in Payment Terms. 

A favorable change in payment terms such 

as allowing the employee to pay with stock rather 

than cash constitutes a modification. Treas. Reg. § 

1.425-1(e)(5)(i). 

d. Acceleration of Exercise. 

Acceleration of the time within which the 

ISO may be exercised does not constitute a 

modification. IRC § 424(h). For example, 

accelerating the vesting of an employee’s options 

upon termination without cause does not constitute a 

modification. PLR 8308062. Similarly, 

acceleration of vesting on a change of control is not 

a modification. Acceleration of vesting may, 

however, cause a portion of the accelerated ISOs to 

fail the $100,000 requirement. See Part 

III(B)(6)(g)(iii). 

e. Administrative and Legal Changes. 

Administrative changes such as the method 

for designating beneficiaries are not treated as a 

modification. Rev. Rul. 69-648, 1969-2 C.B. 103. 

Similarly, changes made by the employer to satisfy 

securities law or other laws are not modifications. 

Rev. Rul. 71-166, 1971-1 C.B. 135; Rev. Rul. 74-


144, 1974-1 C.B. 105; Rev. Rul. 69-328, 1969-1 

C.B. 136. 

it is easier to grant ISOs to senior management due 

to lower valuations. 

8. 

Mergers and Acquisitions 

e. Lack of transferability by employee. 

a. ISOs for ISOs. 

Employees of a target corporation may have 

their ISOs in the target corporation substituted for 

ISOs in the acquiring corporation so long as (i) the 

terms of the substitute ISO (expiration date, vesting 

provisions, etc.) are not more favorable to the 

employee than the terms of the old ISO, (ii) the 

difference between the share value and the exercise 

price in the substitute ISOs immediately after the 

assumption does not exceed the spread in the old 

ISOs immediately before the assumption; and (iii) 

the fair market value of the substitute ISO shares 

immediately after the assumption does not exceed 

the fair market value of the old ISO shares 

immediately before the assumption. IRC § 

424(a)(1); Treas. Reg. § 1.425-1(a)(4)(ii). 

b. ISOs for NQOs. 

If the IRC § 424(a) requirements for a 

substituted ISO are not met, then the substituted 

option will be treated as an NQO. As discussed 

below, the grant of an NQO is generally not subject 

to tax. Instead, the executive will have ordinary 

income upon exercising the substituted NQO. 

9. 

Summary of ISO Advantages 

a. Allows executive to defer tax until stock is 

sold, and then pay only a 20% capital gains rate on 

the full amount of the appreciation in the stock if 

they hold the stock for one year; this favorable tax 

treatment makes ISOs very popular with employees. 

b. Holding period requirements encourage 

employee to remain with employer for a longer 

term. 

10. 

Summary of ISO Disadvantages 

a. Strict ISO requirements. 

b. Available only for employees of 

corporations (or a partnership or LLC electing to be 

taxed as a corporation). 

c. Must be granted “at-the-money.” 

d. The $100,000 rule limits the usefulness of 

ISOs for senior executives of established companies 

and makes them especially popular for “rank and 

file” employees. For start-up companies, however, 

9 

f. Potential AMT issues. 

C. Nonqualified Stock Options 

1. 

Employee’s Tax Consequences 

a. Grant. 

The grant of an NQO is generally not 

subject to tax. IRC § 83(e)(3). 

(1) NQOs With Readily Ascertainable Fair 

Market 

Value. 

The grant of an NQO with a readily 

ascertainable fair market value is subject to tax. 

IRC § 83(e)(4). An NQO will have a readily 

ascertainable fair market value if it is actively traded 

on an established market. Treas. Reg. § 1.83- 

7(b)(1). If the NQO is not actively traded, it will 

have a readily ascertainable fair market value only if 

(i) the NQO is transferable; (ii) the NQO is 

immediately exercisable; (iii) the NQO is not 

subject to restrictions that have a significant effect 

on value; and (iv) the value of the option privilege 

can be readily ascertained. Treas. Reg. § 1.83- 

7(b)(2). The practical effect of the regulations is 

that the grant of an NQO will not be subject to tax 

except in the rare case where it is traded on an 

established market. 

(2) Deeply Discounted NQOs. 

In general, NQOs can be granted with an 

exercise price below fair market value. The grant of 

an NQO with an exercise price substantially below 

the stock’s fair market may be treated as a taxable 

grant of the underlying stock. The IRS has 

informally raised concerns about deeply discounted 

options and has announced that it is going to study 

deeply discounted options. Rev. Proc. 89-22, 1989- 

1 C.B. 843, as corrected by Announcement 89-42, 

1989-13, I.R.B. 53. Unfortunately, the IRS has yet 

to issue guidance on what it considers an 

excessively low exercise price. The only IRS 

authority is in the foreign personal holding company 

context where the IRS applied the substance-overform 

doctrine and ruled that an option to buy stock 

for a price equal to 30% of the stock’s value should 

be treated as ownership of the underlying stock. 

Rev. Rul. 82-150, 1982-2 C.B. 110. Despite the 

IRS’s apparent opposition to deeply discounted 

options, case law supports treating discounted 

options as options for tax purposes. See


Commissioner v. LoBue, 351 U.S. 243 (1956) 

(holding that options with a 75% discount should be 

taxed at exercise and not a grant); Victorson v. 

Commissioner, 326 F.2d 264 (2d Cir. 1964) 

(treating an option granted to an underwriter with an 

exercise price equal to .2% of the stock value as a 

grant of an option); Simmons v. Commissioner, 23 

T.C.M. 1423 (1964) (same where exercise price was 

equal to .1% of the underlying stock value); but see 

Morrison v. Commissioner, 59 T.C. 248, 260 

(1972), acq., 1973-2 C.B. 3 (holding that the grant 

of an NQO with an exercise price of $1 to purchase 

stock with a value of $300 that was “the substantial 

equivalent of the stock itself”). Notwithstanding the 

favorable case law, prudence dictates that deeply 

discounted options should be avoided if the taxpayer 

wants to avoid the risk of immediate taxation. A 

prominent treatise suggests that a 90% discount 

creates a high risk; a 75% to 90% discount creates 

moderate risk; and a 50% or less discount creates 

very little risk. Martin D. Ginsburg and Jack S. 

Levin, Mergers, Acquisitions, and Buyouts 

1314.1.2 (1999); see also Keith A. Mong, 

Discounted Options as an Alternative to Deferred 

Compensation, 39 Tax Mgmt. Memo 167 (1998) 

(concluding that only discounts in excess of 75% 

would likely be challenged by the IRS). If the grant 

of a deeply discounted NQO is treated as the 

issuance of the underlying stock, the executive will 

be taxed under the restricted stock rules discussed in 

Part III(A) above. 

(3) No IRC § 83(b) Election. 

Executives may not make an IRC § 83(b) 

with respect to NQOs. This is one of the potential 

disadvantages of NQOs over restricted stock. If the 

NQO is to be granted “at the money,” the employer 

should consider allowing the executive to 

immediately exercise the NQO into restricted stock 

subject to the desired vesting provision. The 

executive could then exercise the NQO and make 

the IRC § 83(b) election with respect to the 

restricted stock received. Because the exercise price 

is equal to the value, no income would be reported 

with respect to the IRC § 83(b) election. Thus, all 

future appreciation would be capital gains when the 

executive sold the stock. See Part III(B)(5)(c) 

above. 

b. Transfer of NQO. 

An arm’s-length disposition of an NQO will 

trigger compensation income equal to the amount 

realized on the sale less the tax basis in the NQO 

(which will usually be zero). Treas. Reg. § 1.83- 

1(b)(1). A non-arm’s-length disposition such as a 

10 

gift or contribution to a related entity does not close 

the compensation element and the executive is still 

subject to tax when the NQO is exercised by the 

transferee even though the executive no longer owns 

the NQO. Treas. Reg. § 1.83-1(c). 

(1) Gift Tax Issues. 

Transfer of NQO is treated as a completed 

gift when the donee’s right to exercise the option is 

no longer conditioned on the donor’s future 

services. Rev. Rul. 98-21, 1998-18 IRB 7. Thus, if 

the NQO is not vested, the gift will be when the 

NQO becomes vested, at which time the value of the 

stock may be higher. In valuing the gift of an NQO, 

Rev. Proc. 98-34 sets forth a methodology that 

requires valuing the option privilege. 

(2) Estate Tax Issues. 

An NQO that is gifted prior to death will 

not be included in the executive’s estate upon his 

death, so long as he does not retain any rights or 

powers associated with the transferred NQO. If the 

executive dies owning NQOs, the compensation 

element remains open, even though the option 

passes to the estate or to beneficiaries. When the 

estate or beneficiaries exercise the option, the 

compensation income is triggered. There is no step 

up in basis of the NQO’s value to date of death 

value. 

c. Exercise. 

Executive recognizes ordinary 

compensation income upon exercise of the NQO in 

an amount equal to the value of the stock at exercise 

less the exercise price. IRC § 83(a). 

(1) Stock Restrictions are Ignored in 

Determining 

Value. 

For purposes of determining fair market 

value upon exercise of the NQO, restrictions on the 

stock such as securities law, lock-up, and similar 

restrictions are ignored. IRC § 83(a). The only 

restrictions that are not ignored are those which by 

their terms will never lapse. See Part II(B)(3)(a) 

above. 

(2) Receipt of Restricted Stock. 

If the stock received upon exercise of the 

NQO is subject to a substantial risk of forfeiture 

(i.e., not vested), then the executive will not be 

taxed on exercise of the NQO. Instead, the rules for 

restricted stock discussed in Part II above will apply 

to the receipt of the restricted stock. In general, the 

executive would be taxed when the stock became 

vested. Alternatively, the executive could make an 

IRC § 83(b) election to be taxed on the restricted


stock as of the exercise date. 

d. Sale of Stock. 

Any future appreciation in the stock after 

exercise of the NQO is taxed as capital gains when 

the executive sells the stock. IRC §§ 1001, 1221 

and 1222. If the executive holds the stock for at 

least one year after exercising the NQO, the capital 

gain will be long term subject to the 20% 

preferential long-term capital gains rate. The 

holding period does not begin to run until the 

executive exercises the NQO. IRC § 83(f). 

2. 

Example of Tax Consequences 

Facts 

Year 1 NQOs for 10,000 shares granted at exercise 

price of $10 when fair market value of stock is $10. 

Year 3 NQOs are exercised when fair market value 

of stock is $15. 

Year 5 Executive sells stock for $20. 

Tax Consequences 

Year 1 Grant: 

Executive has no income 

Year 3 Exercise: 

Executive has $50,000 in ordinary income 

($150,000 FMV - $100,000 exercise price); results 

in $19,800 tax to Executive (using 39.6% rate). 

Year 5 Sale: 

Executive has $50,000 capital gain ($200,000 - 

$50,000 ordinary income - $100,000 option price) 

resulting in $10,000 tax (using 20% rate). 

Cash Flow Consequences: 

Executive receives $70,200 ($200,000 - $100,000 

exercise price - $19,800 ordinary tax - $10,000 

capital gains tax). 

Comparison to ISO Cash Flow Consequences 

Executive receives $80,000. 

3. 

Methods to Exercise 

a. Use of Employer Stock to Exercise. 

The NQO agreement may allow the 

executive to pay the exercise price with stock of the 

employer. Under IRC § 1036, the executive will not 

recognize gain on the exchange of the employer 

stock. Rev. Rul. 80-224, 1980-2 C.B. 234. 

11 

(1) Use of ISO Shares to Exercise NQOs. 

An executive may choose to exercise NQOs 

using ISO shares. The tax consequences are the 

same regardless of whether Mature ISO shares or 

Immature ISO shares are used. The use of the ISO 

shares will not be a “disqualifying disposition,” 

even if Immature ISO shares are used. IRC § 

424(c)(1)(B). The basis and holding period of the 

ISO shares exchanged will carryover to an equal 

number of NQO shares. The remaining NQO shares 

will be treated as compensation. For example, if 25 

ISO shares are used to exercise 100 NQOs, then 

basis and holding period will transfer as to the first 

25 NQO shares, the remaining 75 NQO shares are 

treated as compensation at their FMV. PLR 

9629028; Rev. Rul 80-244; IRC §1036. 

b. Net Exercise. 

Under a net exercise, the executive does not 

pay the exercise price and receives shares with a fair 

market value equal to the excess of the value of the 

stock over the exercise price. A net exercise is 

treated as if the executive paid the exercise price 

and then sold stock with a value equal to the 

exercise price. 

c. Cashless Exercise. 

Under a cashless exercise, the executive’s 

broker will typically pay the cash exercise price and 

receive the shares. The broker will then sell enough 

shares to reimburse it for the exercise price and 

transfer the remaining shares to the executive. 

4. Mergers and Acquisitions. 

NQOs in the target corporation can 

generally be substituted with NQOs of the acquiring 

corporation without creating a taxable event. 

Moreover, there is no requirement that the terms of 

the substituted NQOs be the same as the old NQOs. 

Indeed, the new NQOs can provide more favorable 

terms than the old NQOs. 

5. 

Summary of NQO Advantages 

a. Due to lack of statutory requirements, 

NQOs offer maximum flexibility in establishing 

their terms. 

b. Useful when designing plan for senior 

management because NQOs are not subject to 

$100,000/year cap as are ISOs and the exercise 

price can be set below fair market value at time of 

issuance in order to create immediate benefit for 

executive.


c. Can be issued by wide range of business 

entities (not just corporations). 

d. Can be issued to non-employees (such as 

directors and consultants). 

6. 

Summary of NQO Disadvantages 

a. Executive has tax liability at ordinary rates 

at time of exercise. This can result in significant tax 

liability if stock has appreciated in value since the 

time the NQO was granted. 

b. The IRC § 83(b) election is not available for 

NQOs. 

1. Useful in closely-held company where 

management does not want to give actual or 

potential equity ownership in the company to 

executives and wants to avoid minority shareholder 

issues. 

2. Permits executive to realize the appreciation 

inherent in stock without payment of the option 

price upon exercise. 

3. SARs are often issued in conjunction with 

NQOs in order to alleviate executive’s cash flow 

problems at the time of the exercise of the NQO. 

SARs are designed to provide sufficient liquidity to 

allow the executive to pay the tax due at exercise. 

IV. STOCK APPRECIATION RIGHTS 

AND OTHER PHANTOM EQUITY PLANS 

A. Description. 

A stock appreciation right (SAR) is a 

contractual right to receive a cash payment based on 

the value or increase in value in the company’s 

stock. The SAR payment can be tied to: (a) a fixed 

settlement date; (b) the executive’s exercise of the 

SAR; or (c) upon certain events (such as sale of the 

company). A phantom equity plan is where the 

executive is granted an “interest” in a phantom 

ownership account. Employer promises to pay the 

value of all vested fictional interests in the executive 

account at a specified future date. A performance 

unit plan uses a more specific performance 

measurement (e.g., performance of a division) in 

lieu of overall company performance when 

determining amount of reward to be received by the 

executive. SARs and other phantom equity plans 

may be subject to a vesting schedule. The tax 

consequences of SARs and other phantom equity 

plans are the same. 

B. Executive’s Tax Consequences 

1. Grant. 

Executive is not subject to tax on grant of 

award. The grant is treated as an unfunded, 

unsecured promise to pay that is not “property” for 

purposes of IRC § 83. Treas. Reg. § 1.83-3(e); PLR 

8230147. 

2. Payment. 

Executive recognizes compensation income 

when he receives payment pursuant to the award. 

C. Advantages 

12 

D. Disadvantages 

1. Least favorable to executive because entire 

amount received by executive is treated as ordinary 

compensation income. 

2. Executive may prefer a “true equity” 

interest to a SAR. 

V. Employee Stock Purchase Plan 


An employee stock purchase plan (“ESPP”) 

is a type of stock option plan that permits an 

employee to purchase company stock at a discount 

compared to the market value on the date of 

exercise of the option. The employee elects whether 

to contribute from his after-tax compensation to the 

purchase of the company stock at the ESPP price. If 

the employee so elects, the option automatically 

exercises at the end of the specified period. 

1. Example 

A typical ESPP offers semi-annual 

purchase periods. All eligible employees have 

the option to buy company stock on the last 

business day of each purchase period at a price 

that is 85% of the average of the market value 

of the stock on the lower of (i) the first day of 

the period and (ii) the last day of the period. 

Before the purchase period starts, the employee 

elects whether or not to participate. If the 

employee participates then after tax funds are 

withheld from each pay period and the amount 

accumulated at the end of the period 

automatically is applied to purchase company 

stock. In contrast to a 401(k) plan, the funds


applied to the ESPP are after tax funds, not pretax. 

2. 

Executive’s Income Tax Consequences 

a. Grant 

The executive recognizes no income tax 

when the company grants the option to participate in 

the ESPP. 

b. Exercise 

The executive also recognizes no income 

tax when the employee is deemed to have exercised 

the option (i.e. when shares are purchased on behalf 

of the employee at the end of the purchase period). 

3. Sale of Stock Acquired Through ESPP 

Assuming the holding period requirements 

(described below) are met, the executive recognizes 

capital gain when the stock acquired through the 

ESPP is sold. Thus, just like with ISOs, (i) the 

executive defers any tax until the stock is sold, and 

(ii) all of the gain from the time of purchase under 

the ESPP is treated as capital gain. 

4. Holding Period Requirement and 

Disqualified Dispositions 

a. To obtain the favorable ESPP tax 

consequences, the executive must not dispose of the 

stock received through the ESPP before the later of 

(i) 2 years from the grant of the purchase right or (ii) 

1 year from the date of exercise or purchase. IRC § 

423(a)(1). Thus, both holding periods must be 

satisfied. 

b. Failure to satisfy the holding period 

requirement does not disqualify the ESPP but rather 

results in a disqualifying disposition. Any gain 

recognized by the executive on a disqualifying 

disposition will first be treated as ordinary income 

to the extent of the difference between the stock’s 

fair market value on the date the purchase right was 

exercised and the purchase price. Treas. Reg. 

1.421-6(d). Any remaining gain will be treated as 

long-term capital gain if the executive held the stock 

after the exercise of the purchase right for at least 

one year or short-term capital gain if the executive 

did not hold the stock for a year. 

c. In the event of the employee’s death, the 

transfer of a purchase right to an estate is not a 

disqualifying disposition. Assuming the plan allows 

it, an estate may exercise a purchase right held by 

the decedent. IRC 421(c)(1) 

13 

5. ESPP Requirements 

Just like ISOs, there are several 

requirements that an ESPP must meet to qualify for 

this favorable tax treatment. IRC 423, 421. 

a. Shareholder Approval 

The company’s shareholders must approve 

the ESPP. 

b. All Employees Eligible 

Although stock options and restricted stock 

awards often are given only to top executives or key 

employees, all employees (with few exceptions) 

must be eligible to participate in the ESPP. Five 

percent owners, however, cannot participate. The 

participation rights and options under the ESPP 

must be identical for all employees. 

c. Non-transferable 

The purchase rights are not transferable, 

except upon the death of the employee. 

d. Offering Period Limit 

If the purchase price is a percentage of fair 

market value, then the maximum offering period is 

five years from the date of grant. If the purchase 

price is determined in any other manner, then the 

maximum offering period is 27 months from date of 

grant of the option. 

e. Limit on Grants 

An employee cannot accrue a right to 

purchase stock at a rate that exceeds $25,000 of fair 

market value for each calendar year. Assuming the 

ESPP allows for purchase at 85% of fair market 

value, this limitation means that an employee cannot 

invest more than $21,250 ($25,000 x .85) in the 

ESPP each year. 

f. Limit on Purchase Price Discount 

The purchase price cannot be less than 85% 

of the fair market value of the stock on (i) the first 

day of the purchase period, or the grant date, and (ii) 

the lat day of the purchase period, or exercise date. 

VI. EMPLOYER SECURITIES 

DISTRIBUTED FROM QUALIFIED PLAN 

A. Background 

1. An executive often will own company stock 

in a qualified plan, such as a 401(k) plan. When the 

time comes to take a distribution from the plan or to 

consider whether to roll-over the 401(k) into an


IRA, the presence of company stock in the 401(k) 

account raises planning issues. As discussed below, 

an in-kind distribution of company stock from the 

qualified plan qualifies for special tax treatment of 

the net unrealized appreciation in the company 

stock. 

B. Definition of Net Unrealized 

Appreciation 

Net unrealized appreciation is the difference 

between the fair market value of the company stock 

at the time of distribution of the stock from the 

qualified plan and the cost or other basis of the 

company stock within the plan. For example, if the 

executive bought company stock within the 401(k) 

account for $10 per share and the stock is now 

worth $25, the net unrealized appreciation is $15 per 

share. 

C. Tax Treatment of In-Kind Distribution of 

Company Stock from Qualified Plan 

If the executive takes an in-kind distribution 

of company stock from the qualified plan, the 

executive will recognize ordinary income at the time 

of distribution on the cost basis of the shares (i.e. the 

$10 in the example above), but will not recognize 

ordinary income on the net unrealized appreciation 

(i.e. the $15 in the example above) at the time of 

distribution. If the distribution is part of a lump sum 

distribution, then there also is no recognition of 

income for net unrealized appreciation on company 

stock attributable to employer contributions to the 

plan. If the distribution is not part of a lump sum 

distribution then the special tax treatment applies 

only to company stock attributable to the 

employee’s contributions to the plan. 

1. The executive can opt-out of this special tax 

treatment if he is receiving a lump sum distribution. 

That is, the executive can chose to recognize 

ordinary income on the full value of the in-kind 

distribution of company stock. 

2. The net unrealized appreciation is taxable as 

long term capital gain once the gain is realized in a 

subsequent disposition of the company stock. This 

is true even if the company stock is sold less than 

one year after it is distributed out of the qualified 

plan. 

3. Realized gain in excess of the net unrealized 

appreciation is taxable either as short term or long 

term gain, depending on whether the one-year long 

term capital gain holding period is met. The holding 

period begins on the date of distribution of the 

company stock from the qualified plan. 

14 

4. If the executive dies still owning the 

company stock that was distributed from the 

qualified plan, then the capital gains tax will still be 

owed by the beneficiaries on the net unrealized 

appreciation at the time the beneficiaries sell the 

shares. There is no step-up in basis on the net 

unrealized appreciation. Any further increase in 

value above the net unrealized appreciation qualifies 

for a step-up in basis. 

5. Beware the 10% early distribution penalty, 

though. A 10% early distribution penalty applies to 

distributions from an employer’s qualified plan 

taken before age 59 ½. This penalty is applicable to 

in-kind distributions of company stock. If the 

penalty applies it substantially reduces the possible 

tax benefits from taking an in-kind distribution of 

company stock. 

D. Comparison to Roll-over to IRA 

If the executive decides not to take an inkind 

distribution of the company stock, and instead 

rolls the company stock out of the qualified plan 

into an IRA, then the executive avoids any current 

taxation. However, the entire amount would be 

taxed as ordinary income when distributed from the 

IRA – whether the distribution is to the executive, or 

to the beneficiary of the IRA after the executive’s 

death. 

E. Partial Distribution is Permitted 

An executive can decide to take some 

company stock out as an in-kind distribution, and 

can roll-over the rest to an IRA. 

F. Who Should Consider an In-Kind 

Distribution of Company Stock From a Qualified 

Plan 

1. those with highly appreciated company 

stock in the qualified plan 

2. those in the top income tax bracket, where 

the spread between the 20% long term capital gains 

rate and the 39.6% top marginal ordinary income 

tax rate is greatest 

3. those who can afford to pay the current 

income tax that will be owed on the basis of the 

company stock that is distributed from the qualified 

plan 

4. those who otherwise have a diversified 

portfolio – an executive who wants to diversify out 

of the company stock may prefer to do that inside a 

401(k) or an IRA to defer any taxation


VII. SEC CONSIDERATIONS- COMMON 

INSIDER 

RESTRICTIONS 

Many executives are corporate “insiders” of 

the SEC rules. Insiders are officers, directors, 10% 

shareholders, and may include certain other 

employees designated by the company. Insiders are 

subject to Section 16 and to Rule 144. Both are 

described briefly below. This discussion is intended 

only to provide sufficient awareness of SEC issues 

to trigger further inquiry. This is not intended as a 

comprehensive discussion of these SEC 

requirements. 

A. Section 16 

1. Section 16(a) Reporting Requirement 

Section 16(a) of the 1934 Act requires all 

persons who are directors, officers, or certain large 

shareholders of public companies to file periodic 

reports with the SEC, the company, and the 

exchange on which the company stock trades. The 

report discloses the holdings of and any transactions 

in company securities, including transactions of the 

executive, certain family members, trusts, and 

employee benefit plans. 

2. Section 16(b) Short Swing Profit Rule 

Section 16(b) of the 1934 Act requires that 

any insider who realized profit from the purchase 

and sale, or sale and purchase, of company stock 

within any period of less than 6 months to disgorge 

such “short-swing” profits to the company. The 

short-swing profit rue applies automatically. It is 

not a matter of the intent of the insider. Certain 

types of indirect ownership, such as through trusts, 

also trigger the short-swing profits rule. 

B. Rule 144 

Rule 144 of the 1933 Act requires all 

persons who are affiliates (including officers, 

directors, and large shareholders) to follow 

certain restrictions on re-sale of their company 

stock. Rule 144 imposes a volume limitation 

on the affiliate that limits transactions in any 3- 

month period to the greater of (i) 1% of the 

outstanding shares of the class, or (ii) the 

average weekly trading volume of the class 

during the previous 4 calendar weeks preceding 

the date of the sale. 

15

Stock Options: Sales, Gifts, & 

Transfers

Stock Options: Sales, Gifts, & 

Transfers 

This outline covers planning for stock 

options, including income, estate and gift tax 

planning, from the perspective of the employee or 

option holder. It does not delve into the 

considerations for the issuing corporation, nor does 

it attempt to address the issues arising in other legal 

disciplines like securities law. From a tax 

standpoint, options can be divided into two broad 

groupings – compensatory and non-compensatory 

options. Unless you’re involved with active 

sophisticated investors, the first group is usually the 

more significant for advisors. 

A. Introduction 

Compensatory options are those granted “in 

connection with the performance of services.” They 

are generally governed by Section 83, 1 with the 

exception of incentive stock options, which are 

governed by Sections 421 and 422 generally. 

Compensatory options are limited to “call” options, 

which grant the holder the right to purchase stock 

from the issuing corporation. A call option permits 

the holder to purchase stock from the company at a 

fixed price (the “strike price” or “strike”) usually at 

any time during a fixed period of time specified in 

the option grant. 

Non-compensatory options include both 

“put” and “call” options purchased in the 

marketplace or in a private transaction unconnected 

with the provision of services. They comprise a 

separate world commonly referred to as 

“derivatives” that focuses on hedging, speculation 

and income enhancement. Non-compensatory 

options occupy a parallel universe with totally 

different rules not addressed in this paper. 

Compensatory options can be divided into 

two subgroups – incentive stock options (ISOs), 

sometimes referred to as qualified or statutory stock 

options, and all other compensatory options, which 

are usually referred to as non-qualified or nonstatutory 

stock options (NQSOs). These two 

subgroups and the related planning for holding, 

1 All section references are to the Internal Revenue Code 

of 1986, as amended, unless otherwise indicated. Any 

reference to the “Code” shall mean the Internal Revenue 

Code of 1986, as amended. 

exercising and transferring them are the subject of 

this paper. 2 

B. Lifetime Gifts of NQSOs 

When advising a client concerning the 

various strategies that can be employed for options, 

particularly for estate planning purposes, it is critical 

to determine whether the particular options are 

transferable. If they are ISOs, they cannot be 

transferable except at death. If the options are 

NQSOs, they may not be transferable during life as 

a matter of company policy. 3 Even when NQSOs 

are transferable during life, the transfer privilege is 

often limited to members of the employee’s family, 

family-controlled entities and sometimes charities. 

There are a number of strategies that can 

yield significant transfer tax savings, but they all 

involve lifetime transfers. Hence, it is important to 

review the particular grant instrument(s), and the 

plan(s) under which the options were issued, in 

order to determine the nature of any transfer 

restrictions. In the ensuing discussion, it is assumed 

that the particular options are transferable to family 

members, family-controlled entities and charities. 

1. Gifts to Charity. When a client wants to 

provide financial support to a charity, advisors often 

advise that such support should be funded by 

transferring low-basis assets. Stock of publiclytraded 

companies is particularly useful for this 

purpose. Transferring public stock is relatively 

easy, and it can be quickly and cheaply converted 

into cash by the charity, without the payment of any 

tax. 

From the donor’s perspective, donating lowbasis 

stock is more tax-efficient than funding the 

contribution with cash. The deduction amount is 

usually the same in both cases, but transferring lowbasis 

stock affords the additional advantage of 

eliminating any tax on the unrealized gain, at least if 

2 The ensuing discussion will focus on common stock 

options issued by public companies, but it is generally 

applicable to private company common stock options as 

well. 

3 Tax considerations also influence this decision 

somewhat. Where NQSOs are freely transferable, they 

can be treated as having readily ascertainable FMV, thus 

exposing them to immediate taxation upon grant. See 

Regs. Section 1.83-7(b).

the stock has been held for more than 1 year. 4 So, in 

addition to whatever tax savings the deduction 

generates vis-à-vis the income it shelters, the donor 

also saves the potential capital gains tax that he/she 

would have paid had the stock been sold. 

Since NQSOs carry a significant embedded 

tax burden (when they are in the money), does it 

make sense to use them to fund charitable 

contributions? Since the taxable income embedded 

in NQSOs can be taxed more severely than the 

unrealized stock gains, on the surface NQSOs 

appear to be even better fodder for charitable 

contributions than appreciated stock. 

However, when you look below the surface, 

you quickly learn that this is not a winning strategy. 

First, Section 170(e) reduces the deduction allowed 

for a charitable contribution by the amount of any 

unrealized income or gain embedded in the 

contribution that is not long-term capital gain. Since 

the sale (or exercise) of NQSOs produces 

compensation income, any charitable deduction 

triggered by the contribution is effectively limited to 

the donor’s basis. Since in most cases the basis of 

compensatory options is zero, this means that a 

donor of NQSOs is unlikely to enjoy any charitable 

deduction at all. 

But it gets worse. Where NQSOs are 

disposed of in a non-arm’s-length transfer, it is true 

that any income inclusion is limited to the 

consideration received (which in this case should be 

zero). However, the options remain subject to the 

rules of Section 83 after the donation. This means 

that when the charity exercises the options, the 

employee will be treated as having received 

compensation income equal to the option spread at 

exercise. As a result, not only will the donor be 

denied a charitable deduction, but he will also liable 

for ordinary income taxes on the option spread later 

realized by the charity. This is perhaps the worst of 

all possible worlds. 5 

4 Taxpayers must be careful when contributing property 

to charities. Section 170(e) reduces the deduction amount 

allowed for a contribution of appreciated property in 

some cases. Suffice it to say that a gift of publicly-traded 

stock to a charity will qualify for a full FMV deduction 

only if the stock has been held been held by the donor for 

more than 1 year. See Section 170(e)(1)(A). 

5 That is not to say that a similar strategy at death is not 

workable. Of course, no income tax deduction is 

available at that time, though. See discussion of bequests 

of options later in this paper. 

– 2 – 

2. Gifts to Descendants. NQSOs seem to 

be good candidates for lifetime gifting to noncharitable 

heirs, however. The initial issue of 

course is transferability. 6 However, if we can get 

over this hurdle, NQSOs offer significant wealth 

transfer potential. At this time, the estate tax rate is 

40%. Lifetime gifts should be made to reduce the 

ultimate size of the donor’s estate at death and the 

associated tax liability triggered by that event. 

Where NQSOs form a substantial part of the client’s 

wealth, lifetime gifts still make sense. But, what are 

the consequences of such gifts to, say, children? 

From a gift tax perspective, the main issue 

is valuation. As mentioned above, the IRS created a 

safe harbor, but it tends to overvalue compensatory 

options because it relies upon a valuation method 

that is not specifically adapted to NQSOs. More 

specifically, the safe harbor prohibits any discounts. 

Nevertheless, there are a number of appraisal 

professionals who are quite skilled at valuing these 

instruments in a manner that can withstand IRS 

scrutiny. Whatever value is reported, however, the 

direct gift of NQSOs creates a potential gift tax 

liability, subject to the donor’s available exclusions 

and credits. 

There are some unusual income tax 

consequences for the donor as well. Under the 

Section 83 regulations, the transfer of options in a 

non-arm’s-length transaction can trigger 

compensation income. But, that income is limited 

to the consideration received. In the case of a bona 

fide gift, the consideration is zero. Hence, the gift 

itself produces no adverse income tax consequences 

to the donor (or to the donee for that matter, in view 

of Section 102). 

However, when NQSOs are exercised by 

the donee, Section 83 triggers the same 

compensation income for the donor as if the donor 

had retained and exercised the NQSOs. While this 

presents the donor with some liquidity issues, it also 

represents an additional wealth transfer advantage. 

In effect, the donor retains the tax burden associated 

with the unrealized compensation income embedded 

6 Unless otherwise stated, it is assumed in this paper that 

NQSOs are vested when they are transferred. At least for 

gift tax purposes, the IRS believes that transfers of 

unvested NQSOs cannot be complete until they vest. See 

Rev. Rul. 98-21, 1998-1 C.B. 975. However, this 

position has been severely criticized by a wide range of 

commentators.

in the transferred NQSOs. As a result, at least 

through the point of exercise, a gift of NQSOs 

delivers the entire option spread to the donee, unlike 

gifts of other appreciating assets, where the tax 

liability on unrealized gain shifts to the donee. 

Once the options are in the hands of the 

donee, it is the donee who decides when the options 

will be exercised. This can be problematic for the 

donor, especially where the donor is a senior 

executive of the issuing company. This is one of the 

reasons why option gift strategies often involve 

intervening trusts. 

3. Gifts to Irrevocable Trusts. Just as gifts 

of other assets are often made to trusts instead of 

directly to the intended beneficiaries, gifts of 

NQSOs often follow a similar pattern. The impetus 

for such a decision is the desire to place the ongoing 

control and management of the transferred assets in 

the hands of a trusted individual or institution. This 

issue is particularly sensitive where NQSOs are 

involved and the donor has a significant presence in 

the issuing company. Placing control over the 

exercise of the NQSOs in a trustee often gives the 

donor more comfort – e.g., that the options won’t be 

exercised at an inappropriate time or manner and 

that any sale of the resulting stock will be handled 

with appropriate sensitivity. 

The gift and income tax consequences of a 

gift of NQSOs to an irrevocable trust are similar to 

those described in the preceding section. The one 

exception is where the trust is created as a grantor 

trust (i.e., where the grantor is treated as the owner 

of the trust for income tax purposes). Since Section 

83 attributes to the grantor any compensation 

income triggered by the exercise of the NQSOs, 

grantor status for the trust has little practical effect 

until after the option exercise. 7 Of course, having 

grantor status can enhance the transfer tax benefits 

7 Note that the 2004 final ISO regulations provide that 

ISO status is not forfeited if the employee transfers an 

ISO to a grantor trust and is considered the “sole 

beneficial owner of the option while it is held in the trust” 

under the Code and applicable state law. While the 

meaning of this provision is not entirely clear, it probably 

applies only to grantor trusts where the grantor is the sole 

current beneficiary of the trust, not just the owner for 

income tax purposes. Such a trust would not yield the 

kind of transfer tax benefits usually sought when donor’s 

transfer options during life. However, it would provide 

certain probate avoidance benefits in jurisdictions, such 

as California, where revocable trusts are used for that 

purpose. 

– 3 – 

of the transfer plan, since the donor’s ultimate estate 

will be reduced not only by the value of the 

resulting stock, but also by the taxes that are 

incurred on any sale thereof. 

4. Gifts to GRATs. 8 Gifts to grantor 

retained annuity trusts (GRATs) offer significant 

transfer tax benefits with little or no gift tax 

exposure. The idea is to transfer NQSOs to an 

irrevocable trust bestowing an annuity on the donor, 

which constitutes a “qualifying interest” under 

Section 2702(b). After the donor’s annuity is paid 

in full, any remaining trust assets usually pass to the 

donor’s descendants or to a trust for them. If 

properly planned and executed, the transfer shifts to 

remaindermen that portion of the overall investment 

return that exceeds Section 7520 rate in effect at the 

time the GRAT is created. Of course, options can 

actually drop in value (and even become worthless) 

during the option term. In such event, the 

remaindermen receive nothing, but the donor is in 

no worse position (except for transaction costs) than 

if the GRAT were never established. Moreover, 

since there is little or no gift tax on the transfer to 

the GRAT, the donor retains his/her remaining 

unified credit even if the investment results don’t 

pan out. 

Because the GRAT is a grantor trust, the 

initial transfer of NQSOs in exchange for a stream 

of annuity payments is ignored for income tax 

purposes. Moreover, using the NQSOs to fund 

annuity payments is similarly ignored. 9 

Consequently, no income tax liability results from 

the funding of the trust or the payment of the 

annuity with NQSOs. Each time an annuity amount 

is paid with NQSOs an additional appraisal is 

required. However, it may be possible to arrange 

these additional appraisals for a reduced cost when 

8 Funding GRATs with stock options may be a patented 

method protected by U.S. Patent No. 6,567,790, assigned 

to WEALTH TRANSFER GROUP, LLC of Altamonte 

Springs, Florida. Please refer to the U.S. Patent and 

Trademark Office website at “www.uspto.gov” and/or 

consult your attorney for more information. 

JPMORGAN CHASE BANK is in no way affiliated with 

WEALTH TRANSFER GROUP, LLC. This notice is 

being provided for informational purposes only and does 

NOT constitute an endorsement of WEALTH 

TRANSFER GROUP, LLC or any of WEALTH 

TRANSFER GROUP, LLC's services or products. 

9 Under the rationale of Rev. Rul. 85-13, 1985-1 C.B. 

184, any transaction between the grantor and a grantor 

trust (which generally includes a GRAT) is ignored for 

income tax purposes.

the initial appraisal is arranged for the initial gift of 

the NQSOs to the GRAT. 

With the IRS’ acquiescence in the result of 

the Walton case, donors are now free to select a 

fixed payout term, which can be valued without 

regard to the possibility that the donor will die 

during the annuity term. 10 This in turn allows the 

GRAT to be “zeroed out” so that little or no gift tax 

is imposed on the transfer of NQSOs to the GRAT. 

Moreover, because the Section 2702 regulations 

allow for adjustments to be made to annuity 

payments to take account of incorrect valuations, 

there is little risk that a transfer to a GRAT will 

trigger an inadvertent gift tax. 

Of course, the estate tax benefits of a GRAT 

are completely secured only after the annuity has 

been paid in full. If the donor dies during the 

annuity term, then the remaining trust corpus is 

included in the donor’s estate for estate tax 

purposes. However, this provides one practical 

benefit to the donor. Since the trust is already 

subject to estate tax inclusion during the annuity 

term, the donor can act as the trustee of the GRAT 

during this period without adding to the adverse tax 

consequences. Acting as trustee during this period 

allows the donor to control the exercise of the 

options during the annuity term. This can be 

particularly important to corporate executive, whose 

stock and option transactions are subject to close 

scrutiny under the securities laws and by the 

marketplace. Nevertheless, the donor must 

relinquish the trustee position when the annuity term 

ends, or the GRAT will not achieve the desired 

transfer tax benefits. 

C. Sales and Other Lifetime Transfers of NQSOs 

Except for the GRAT strategy mentioned 

above, each of the gift strategies involves one 

serious problem – the potential for gift tax liability. 

The donor may, of course, mitigate this liability by 

using available exclusions and credits. However, 

the annual exclusion provides only minor relief, 

while the $5.25 million gift tax exemption can be 

exhausted where the client has significant option 

wealth. Hence, it is not unusual for any significant 

transfer strategy to involve serious gift tax 

questions. 

10 See IRS Notice 2003-72, 2003-44 I.R.B. 964. 

– 4 – 

Consequently, as with other assets, a 

number of transfer strategies have developed for 

transferring NQSOs 11 via sale transactions, 

primarily as a means of avoiding gift tax exposure. 

As noted earlier, the income tax consequences of a 

sale depend upon whether the transaction is 

considered an arm’s-length disposition. If it is, then 

the employee is required to include in gross income 

as compensation the full value received in the 

exchange. 12 For example, if an employee holding 

an NQSO with a strike price of $50 sells it to a third 

party in an arm’s-length sale for $60, then the 

employee immediately recognizes $60 of 

compensation income. 

Thereafter, Section 83 has no application to 

the option. Therefore, the buyer recognizes no 

income on the later exercise of the option. The 

stock received upon exercise is a capital asset, 

having a basis equal to the sum ($110) of the strike 

price ($50) plus the amount paid for the option 

($60). Further, any capital gain or loss recognized 

upon the subsequent sale of the stock will be longterm 

if the buyer holds the stock for more than 1 

year after exercise, and short-term in any other case. 

Continuing the above example, if the buyer 

exercises the NQSO at a time when the FMV of the 

stock is $120, he recognizes no income or gain at 

that time for tax purposes. If he later sells the stock 

for $150, he will then recognize capital gain equal to 

the $40, the excess of the $150 sale price over his 

basis of $110. Such gain will be long-term capital 

gain if the sale occurs more than 1 year after the 

option was exercised. 

The tax consequences of a non-arm’s-length 

disposition are radically different. In such cases, the 

NQSOs remain subject to Section 83 after the sale, 

even though Section 83 applies to the consideration 

received in the sale. As a result, the employee is 

potentially required to recognize compensation 

income in two tranches – first, at the time of sale 

(determined in the manner similar to an arm’slength 

sale) and again when the buyer exercises the 

options. The compensation income on exercise 

equals the excess of the FMV of the stock at that 

time over the sum of the strike price plus the amount 

11 The discussion of these transactions is generally 

limited to NQSOs since ISOs are non-transferable. 

12 Technically, the employee should be able to deduct the 

adjusted basis of the options, but this is usually zero, at 

least where the transferor is the employee.

taxed to the employee in the prior non-arm’s-length 

sale. 

To illustrate, let’s change the facts in the 

above example and assume that it is not at arm’slength 

because the sale price is $50 ($10 less than 

FMV). In that case, the employee realizes 

compensation income equal to the $50 received in 

the sale. However, when the options are exercised, 

he is charged with an additional $20 of 

compensation (i.e., the excess of the $120 FMV of 

the stock at exercise over the sum of the employee’s 

prior compensation income of $50 plus the $50 

strike price paid by the buyer). On the buyer’s side, 

the transaction resembles the original example, 

except that the buyer paid $10 less for the NQSO. 

This means that the buyer’s basis for the stock 

should be only $100 (rather than $110), and that his 

capital gain on sale of the stock will be $50 (rather 

than $40). 

Note that only $100 of net income and gain 

was realized by the employee and the seller 

combined (i.e., $150 sales proceeds less the $50 

strike price). Nevertheless, the employee was 

charged with $60 of compensation, while the buyer 

paid tax on $50 of gain. The difference is the 

additional compensation recognized by the 

employee when the NQSO was exercised by the 

buyer. If the employee had retained the NQSO and 

exercised under the same circumstances, then the 

total income would have been only $100. However, 

in transferring it to another in a non-arm’s-length 

transaction, he exposed the parties to double 

taxation on a portion of the income stream. While 

from an equity standpoint one can argue that the 

buyer should be allowed to offset the additional 

compensation taxed to the employee at exercise 

against the sales proceeds, support for that notion in 

the Code or the regulations is hard to find. 

With these general rules in mind, let’s now 

apply them to some specific transactions that have 

been popular recently. 

1. Sales to Descendants. For the client 

with a substantial estate, one tax-efficient strategy to 

reduce potential estate tax liability is to shift some 

growth in the estate to heirs without paying gift 

taxes. In addition to GRATs mentioned above, sales 

for current FMV are the most common method of 

achieving this objective. The idea is to exchange a 

potentially high-performing asset with another that 

is likely to yield considerably less. As a result of 

– 5 – 

this exchange, the arbitrage between the two returns 

is shifted to the heirs, reducing the ultimate estate 

tax burden of the transferor. 

Applying these principles to NQSOs 

(assuming of course that they are transferable) 

sometimes involves a sale by the employee to his 

children. The most significant threshold issue of 

course is valuation. Failure to assess the true FMV 

at the outset exposes the transfer to potential gift 

taxes that the transferor is trying to avoid. Prudence 

dictates that a formal appraisal be obtained. For 

reasons mentioned earlier, it is likely that the 

appraisers will not use the IRS safe harbor valuation 

method. 

However, assuming that the options’ value 

has been properly determined, the sale can proceed. 

The usual assumption is that the options will be held 

for some period after purchase (in order to take 

advantage of their growth potential). As a result, the 

value represented by the options themselves cannot 

directly be tapped as a source of payment in the sale. 

Usually, the heirs do not have the cash to pay the 

purchase price either. So, the consideration is often 

an installment note, which allows the buyers to pay 

over time. 

However, any installment note must be 

planned with care. In order to avoid gift tax 

exposure, the note must have a FMV equal to the 

FMV of the NQSOs. Fortunately, Section 7872 

provides a safe harbor. As a result, the note should 

have the requisite FMV, if it has a face amount 

equal to the FMV of the options and bears an 

interest rate equal to the applicable federal rate 

appropriate for the specific term of the note. 13 

As mentioned above, the Section 83 

regulations ordinarily require the seller to recognize 

compensation income equal to the amount of the 

sales proceeds. Does the receipt of an installment 

note change the timing of that income recognition? 

Some would say (or, more correctly, would until 

recently have said) that it should. These advisors 

would contend that an unsecured installment note is 

13 Cf. PLR 9535026. To be safe, the note should also 

contain other terms customarily found in instruments of 

this type between unrelated parties. Moreover, many 

advisors counsel that interest should be paid at least 

annually.

not property for purposes of Section 83. 14 If the 

note is not property for that purpose, then arguably 

any tax consequence to the recipient is deferred until 

payments are received under the note. 

One problem with this analysis is that the 

term property as used in Section 83 primarily relates 

to the “thing” which when received by the employee 

from the employer the will trigger tax consequences. 

The regulations seem to be distinguishing this thing 

from a promise that is insufficient to trigger those 

consequences. Every day that an employee works 

creates an inherent obligation on the employer to 

pay the employee. Yet, the tax law does not exact 

its punishment until the employee is actually paid 

that obligation. It seems likely that the regulations 

were directed to unfunded promises of this kind. An 

actual sale for a note is clearly distinguishable. 

Some proponents have also been tempted to 

argue that the installment sale rules of Section 453 

should apply to an option sale. However, there are 

clear technical problems with this argument. Not 

the least of these is the characterization of the 

income triggered by Section 83 as compensation 

income, which is not eligible for deferral under 

Section 453. 

Regardless of the rationale, however, the 

IRS recently clamped down on this position. IRS 

Notice 2003-47, 2003-30 I.R.B. 132, warns that the 

IRS will challenge any assertion that income is 

deferred because the purchase consideration is a 

deferred payment obligation. Furthermore, the IRS 

has added such transactions to the roster of “listed 

transactions” for purposes of the reporting and list 

maintenance requirements applicable to tax shelters. 

Moreover, Notice 2003-47 and 

accompanying changes to the Section 83 regulations 

take the position that a transfer of NQSOs to a 

related buyer is considered a non-arm’s-length 

transfer. For this purpose, the buyer is treated as 

related to the seller under the expanded versions of 

the Section 267(b) and Section 707(b)(1) attribution 

rules. Hence, regardless of the nature or amount of 

the consideration, sales of NQSOs to family 

members do not cut off Section 83 exposure, at least 

in the IRS’ opinion. Such exposure continues 

through the date of exercise or sale to a party 

unrelated to the employee, at which time the 

14 Regs. Section 1.83-3(e) provides that “property” does 

not include an “unfunded and unsecured promise to pay 

money or property in the future.” 

– 6 – 

employee is potentially liable for additional tax. As 

shown by the example above, this approach can 

cause some of the economic gain to be taxed twice. 

The IRS’ approach is clearly overkill. First, 

it treats as a listed transaction any sale for a deferred 

payment obligation. This goes too far. The Notice 

should have been limited to deferred payment 

transactions where the seller claims an income 

deferral. If the seller reports all the sale gain in the 

year of the sale, where is the abuse? From a tax 

perspective, the transaction is no different than a 

cash sale, which is not a listed transaction. Second, 

the Notice draws a line between arm’s-length and 

non-arm’s-length sales based solely upon the 

relationship of the parties. This approach 

completely ignores abundant authority that arm’slength 

transactions can be effected between related 

parties. Moreover, the Notice ignores provisions 

like Section 7872 that establish specific criteria for 

securing arm’s-length treatment for transactions 

between related parties. 

Nevertheless, the Notice and new 

regulations cast a pall over all related party sales of 

NQSOs and sales where installment or other 

deferred payment obligations are involved. Clearly, 

sales of NQSOs have significant potential benefits 

for estate planning purposes, even where there is an 

immediate income tax levied on the note amount. 

However, effecting such transactions is now more 

problematic because of the heightened scrutiny 

inherent in their “listed transaction” status 15 and 

because such sales are now considered to be nonarm’s-length 

for purposes of Section 83. 

Any sale inevitably involves a certain 

amount of risk. In particular, if the underlying stock 

fails to perform as expected, then the amount 

ultimately realized by the buyer from exercising the 

options and selling the resulting stock may not be 

sufficient to satisfy the note. As a consequence, the 

buyer’s other assets may have to be tapped to satisfy 

the remaining obligations. 16 If the buyer is the 

15 It would appear that “listed” status could be avoided by 

having an unrelated party, such as a bank, finance the 

transaction. However, such financing would undoubtedly 

be more burdensome and perhaps more expensive than an 

internally-financed transaction. 

16 It is true that the seller’s remedies could be limited to 

the options by making the note nonrecourse. However, 

this may raise serious questions as to whether the 

transaction is a bona fide sale, which in turn would raise 

gift tax exposure.

employee’s descendant, this would clearly be 

undesirable from an estate tax standpoint, since 

would amount to a “reverse wealth transfer.” 

2. Sales to Irrevocable Non-Grantor Trusts. 

The tax considerations for sales to non-grantor trusts 

are largely the same as those discussed in the 

immediately preceding section. Any such trust is 

likely to be treated as a related party to the grantor 

under the amended Section 83 regulations and 

therefore will not be at arm’s-length for Section 83 

purposes. 

However, using a trust as the buyer provides 

potential non-tax advantages. First, if the 

employee’s descendants are minors or their 

decisions are otherwise suspect, the sale to a trustee 

shifts control over exercise, sale and reinvestment 

decisions to a person who should be more reliable. 

Second, assuming that the trust contains a 

spendthrift clause, the trust will act as a shield 

against the claims of creditors. Third, the trust 

addresses “reverse wealth transfer” problem 

mentioned above. Interposing the trust between the 

descendant and the purchase obligations should 

insulate the beneficiary’s assets from exposure to 

those obligations. 

However, interposing a trust also introduces 

another issue – namely, whether the transaction will 

be viewed as a bona fide sale. Where NQSOs are 

sold to an individual for a recourse note, that 

individual’s other assets implicitly back the 

purchase obligation. But, where the options are sold 

to an irrevocable trust, in most cases the lender’s 

remedies are is limited to the trust’s assets. As a 

result, in order to give the loan credence, it is 

necessary to provide some additional credit support 

separate and apart from the NQSOs. 

The most straight-forward way to provide 

this support is to “seed” the trust with additional 

assets by gift prior to the sale. While there is no 

published guideline on the amount of additional 

assets needed for this purpose, most practitioners 

require a gift of at least 10% of the sale price. It is 

also possible to bolster the transaction by having the 

beneficiary guarantee the note, but this exposes the 

beneficiary to the reverse wealth transfer problem 

mentioned above and also raises questions about the 

level of consideration, if any, that should be paid for 

this guaranty and the associated taxation of that 

consideration. 

– 7 – 

3. Sales to Grantor Trusts. From a 

structural perspective, a sale to a trust treated as a 

grantor trust is similar to a sale to a non-grantor 

trust. The primary difference is the addition of 

provisions in the instrument that cause the trust to be 

treated as a grantor trust for income tax purposes 

(without exposing the trust to estate inclusion at the 

grantor’s death). 17 However, the income tax 

consequences are radically different, at least at the 

outset. Importantly, under the rationale of Rev. Rul. 

85-13, any transaction between the grantor and the 

trust is effectively ignored for income tax purposes. 

This should include the initial sale of the NQSOs to 

the trust. In addition, if the buyer gives an 

installment note as consideration, any debt service 

payments should also be ignored. Finally, no 

income should be triggered if the trustee uses 

NQSOs to satisfy the note obligations. 

Nevertheless, all of these aspects will be 

given due effect for estate and gift tax purposes. 

This is important because the primary purpose of the 

transaction is to shift some of the future gains from 

the NQSOs and any resulting stock to the 

beneficiaries of the trust free of gift taxes. As noted 

above, this is achieved if the note has a FMV equal 

to the FMV of the NQSOs. The note arrangement 

should have the requisite FMV if it has a face 

amount equal to the FMV of the NQSOs, bears 

interest at the applicable federal rate and otherwise 

has conventional terms and conditions (including 

some additional credit support as discussed above). 

Moreover, it appears that the IRS has finally 

conceded that the payment of income taxes imposed 

on the grantor as a result of Section 671 is not a gift 

to the trust beneficiaries for gift tax purposes. 18 

If the assets other than NQSOs were sold to 

the grantor trust, then the income tax analysis would 

be relatively simple, at least while grantor status 

prevailed. The sale and note transactions would be 

ignored, and the grantor would in effect report all 

income, gain and deductions attributable to the trust 

property. There seems to be no reason why these 

conclusions would not also obtain in the sale of 

NQSOs by the grantor to a grantor trust. Section 

671 provides that the grantor of the options is still 

their owner for income tax purposes. If the grantor 

17 The most popular provisions used for this purpose are 

the powers to reacquire trust assets by substituting assets 

of equivalent value and to add beneficiaries other than 

after-born children. See Sections 675(4)(D) and 674(c), 

respectively. 

18 See Rev. Rul. 2004-64, 2004-27 I.R.B. 7.

emains the owner for income tax purposes, it is 

difficult to see how he can be considered to have 

transferred them for purposes of Section 83, since 

that provision is an income tax provision. 

Hence, the transfer of the NQSOs to the 

grantor trust should be ignored, as well as any 

payments made on the note. In addition, the basis of 

the NQSOs in the trust should remain the same as it 

was before the transfer (most likely zero). 

Moreover, the options should remain subject to 

Section 83, since they would be treated as owned by 

the employee under the rationale of Rev. Rul. 85-13 

in any event. As a result, any compensation income 

triggered by the exercise or disposition of the 

options after the sale should be treated as the income 

of the grantor under Section 671. 19 

Despite many years of experience with sales 

to “intentionally defective” grantor trusts, one 

significant question remains unresolved – what 

happens when the grantor dies or grantor trust status 

otherwise terminates? The commentators have 

argued for a number of different results ranging 

from the immediate income taxation of all the 

income that was deferred to the complete exemption 

of that income from tax. And, the consequences 

may differ depending upon whether grantor status is 

terminated by death or by some other event like the 

renunciation of the power causing grantor trust 

status. The IRS apparently believes that the loss of 

grantor trust status completes the transfer that was 

ignored under the rationale of Rev. Rul. 85-13. 20 

The author believes a balanced approach is 

the likely outcome. That is, any remaining income 

embedded in the installment note at the time grantor 

status ends becomes taxable, but the taxation of that 

income is subject to the normal accounting rules 

governing the recognition of income, including the 

installment sale rules if they are otherwise 

applicable. However, as noted above, it is highly 

questionable that the sale of NQSOs qualifies for the 

installment method, and other arguments for deferral 

are similarly suspect. 

As a result, it seems likely that any income 

embedded in the installment note will be 

immediately recognized and taxed as compensation 

income when grantor status is lost. In addition, the 

19 Moreover, this latter result seems to be dictated by 

Section 83 as well, since the transfer is probably not an 

arm’s-length transfer in any event. 

20 Cf. Regs. Section 1.1001-2(c) Example (5). 

– 8 – 

grantor or his estate should have a basis in the note 

at least equal to the income recognized when grantor 

status is lost. If, however, the options have been 

exercised prior to the loss of grantor trust status, 

then the grantor will have already recognized all the 

Section 83 income embedded in the options prior to 

the loss of grantor status. Accordingly, there is 

some question as to how the note would be treated 

in that instance. In general, the note should have the 

same basis as the property transferred (which will 

usually be zero). However, when the NQSOs are 

exercised, the resulting stock should receive a new 

basis equal to its FMV on the date of exercise. The 

question is whether this basis increase will also 

carry through to the note. While this is the logical 

result, it is difficult to see how you get there under 

the existing authorities. 

D. Gifts and Sales Involving Partnerships and 

LLCs 

As with other assets that are the subject of 

wealth transfer strategies, the use of an intervening 

partnership-type entity promises some advantages. 

In addition to allowing the transferor to maintain 

control over the gifted assets, the intervening limited 

partnership (LP) or limited liability company (LLC) 

also makes transfers of partial interests in assets far 

easier. And, of course, interposing such an entity 

also offers the prospect of lower transfer tax values, 

through discounts generally available for interests 

that are not marketable or controlling. 

It is true that such strategies are 

controversial, certainly in the eyes of the tax 

authorities. This is especially true where the 

underlying assets are securities. Nevertheless, as the 

recent Fifth Circuit decision in the Kimball case 

illustrates, courts often provide such a sympathetic 

ear that even conservative clients and their advisors 

must take note. Injecting a family LP or LLC into a 

transfer strategy involving NQSOs thus offers 

potential additional benefits. 

Normally, the idea would be to transfer the 

NQSOs to an LP or LLC followed by a gift or sale 

of interests in the particular entity to family 

members or trusts. Theoretically, this should create 

a lower gift tax value or lower sale price, which in 

turn should allow more wealth to be transferred for a 

given tax liability than would be possible with direct 

transfers of the options. However, transfers of 

NQSOs are not like other transfers. They present 

unique challenges.

Recall that Section 83 triggers the 

recognition of compensation income upon the 

disposition of NQSOs whether or not the transfer is 

at arm’s-length. 21 If the employee is the sole 

participant in the LP or LLC, there is little doubt 

that the interests she takes back in the exchange 

equal the FMV of the NQSOs contributed. No 

discounts should apply because immediately after 

the transfer she can withdraw the contributed assets 

and receive back full value. However, the question 

of value becomes somewhat more murky if others 

participate in the formation of the LP or LLC, since 

in that case the value of LP or LLC interest may be 

eligible for the discounts. 

Nevertheless, transferring NQSOs to an LP 

or LLC represents an exchange for value. While 

Section 721(a) offers non-recognition treatment 

upon a transfer of “property” to a partnership in 

exchange for a partnership interest, the rules of 

Section 83 should override this safe harbor. The 

income generated by any transfer of the options is 

compensation income and not the proceeds of the 

sale or exchange of an asset, capital or otherwise. 

However, if the employee takes back all the LP or 

LLC interests at formation, the check-the-box 

regulations provide that the entity will be 

disregarded. Instead, the employee will be treated 

as the continuing owner of the transferred NQSOs 

and their tax attributes. 22 As a consequence, the 

transfer of the NQSOs to an LP or LLC owned 

entirely by the employee should be ignored until the 

LP or LLC acquires another equity owner. 

When the employee transfers an interest in 

the LP or LLC, then the LP or LLC should spring 

into existence for tax purposes. The 100%-owner 

should be treated as transferring the NQSOs to the 

LP or LLC in exchange for the interests the owner 

holds at that time. 23 This deemed transfer should be 

subject to Section 83. Therefore, the employee 

should be treated as receiving compensation income 

equal to the FMV of the LP or LLC interests 

received when he transfers interests to his heirs or to 

trusts for them. As noted above, at that time the 

interests should not qualify for discounts, so the 

21 The question of arm’s-length status seems to affect 

only whether Section 83 continues to apply to the future 

exercise or disposition of options by the transferee, not 

the amount or timing of the income generated in the 

initial transfer. 

22 See Reg. Section 301.7701-2(a). 

23 Cf. PLR 200222026. 

– 9 – 

compensation income should equal the FMV of the 

NQSOs. However, because of the relationship of 

the employee to the LP or LLC, the deemed transfer 

should be treated as a non-arm’s-length transfer, 

even though he is deemed to have received full 

FMV for the NQSOs. As a result, the employee will 

be exposed to additional tax upon the exercise of the 

options by the LP or LLC. 

The result is a bit different if the LP or LLC 

admits additional partners at formation. However, 

the tax consequences should be similar. 24 Upon 

formation, the employee should be treated as 

making a non-arm’s length transfer of the NQSOs to 

the LP or LLC, causing the employee to recognize 

income equal to the FMV of the interests he receives 

at formation. So, the exercise of the options by the 

LP or LLC will expose the employee to a second 

incidence of tax under Section 83. However, since 

partnership status exists from the outset, there is the 

possibility that the measure of the income at 

formation could be less, if discounts are justified by 

the lack of marketability and control. Nevertheless, 

the adverse income tax consequences certainly make 

this strategy problematic. 25 

24 The following analysis assumes that the other 

participants contribute assets in exchange for their 

interests. If they do not, then the transaction is likely to 

be treated as a gift of the requisite portion of the NQSOs 

by the employee to the other participants, followed by 

their exchange of those NQSOs for their ownership 

interests. Cf. TAM 200432015. These deemed gifts, of 

course, would be non-arm’s-length transfers (as would 

the deemed transfers to the LP or LLC), meaning that the 

employee would remain exposed to Section 83 for 

subsequent events. Hence, the deemed transfers by the 

donees to the LP or LLC should trigger compensation 

income to the employee, as should the later exercise of 

the options by the partnership. The author is aware that 

some commentators cite 2 private letter rulings for the 

proposition that a donative transfer to a partnership does 

not trigger recognition under Section 83. See PLRs 

199927002 and 199952012. However, it is doubtful that 

these rulings can be read that way. In characterizing 

donative transfers as non-arm’s-length, the rulings 

specifically refer only to gifts to individuals and trusts, 

not partnerships. This indicates that the rulings did not 

actually address the tax issues arising from a donative 

transfer to partnerships. 

25 Note that non-arm’s-length treatment probably applies 

in these situations regardless of the percentage ownership 

actually obtained by the employee at formation. A 

partnership is related to the employee if the employee 

holds as much as 20% of the LP or LLC. Even if the 

employee actually holds less (which is unlikely if the LP 

or LLC is being used as a wealth transfer device), he/she

will also be treated as owning interests held by family 

members. See Regs. Sections 1.83-7(a)(1) and 1.707- 

1(b)(3). 

– 10 –

E. Transfers in Divorce 

The IRS first addressed the tax 

consequences of the transfer of options incident to a 

divorce in a field service advice. 26 Its holding, 

which was particularly harsh on the transferor, 

engendered howls of protest. While the rationale of 

the holding was a bit fuzzy, the bottom line was that 

the Section 83 overrode the protections of Section 

1041, with result that the employee-spouse was 

treated as making a transfer to the ex-spouse. This 

of course triggered recognition of compensation 

income to the employee, which Section 1041 was 

expressly enacted to prevent. 

Ultimately, the IRS reversed course in Rev. 

Rul. 2002-22, 2002-1 C.B. 849, which holds that 

Section 1041 takes precedence over Section 83. As 

a result, its seems settled now that the division of 

options pursuant to a divorce proceeding does not 

trigger compensation income to either party, 

provided the requirements of Section 1041 are met. 

The critical point highlighted by the IRS in its u-turn 

was the congressional intent to put divorcing 

couples on equal footing regardless of the property 

law that governed their marital relations. In effect, 

Section 1041’s purpose is to harmonize the tax 

consequences of marital property settlements in 

separate property states with those in community 

property states. The net effect of the ruling is to 

treat the transferee spouse as the original owner of 

the options. 

This distinction is very important. Under 

Rev. Rul. 2002-22, when the non-employee-spouse 

later exercises or disposes of the options, any 

income triggered under Section 83 is the nonemployee-spouse’s 

income. Had the ruling merely 

held that the transfer is a gift, as Section 1041 

literally provides, then the transfer would have been 

a non-arm’s-length transfer. This would have 

protected the employee-spouse from immediate 

income recognition under Section 83. However, 

Section 83 would have continued to apply to the 

options after the transfer, leaving the employeespouse 

exposed to tax on compensation income 

triggered by any subsequent exercise or sale of the 

options by the non-employee-spouse. 

The ruling also addressed the special issues 

pertaining ISOs. The prior FSA had held that the 

transfer of ISOs incident to a divorce was a 

prohibited transfer, causing the ISOs to become 

NQSOs from that point forward. The later public 

ruling reconfirmed that holding. In doing so, the 

IRS pointed to Section 424(c)(4), which specifically 

exempts divorce-related transfers of ISO stock from 

the disqualifying disposition rules. That there is no 

similar provision applicable to the ISOs themselves 

seems to be the basis for this holding. 

Oddly, the IRS paints this latter holding as 

the “same conclusion” it reached for NQSOs earlier 

in the ruling. This is a real head-scratcher. The IRS 

contends that a primary objective of Section 1041 is 

to put similarly-situated couples on an equal federal 

tax footing, regardless of state property law. As 

noted above, under this rationale, it treats the 

transferee spouse as if she were the employee with 

respect to the NQSOs she receives in a divorce. If 

this logic truly applies to ISOs (and there is nothing 

that says otherwise), the transferred ISOs should 

also retain their status as such in the hands of the 

non-employee-spouse. 

The end result of the contrary holding for 

ISOs is that divorcing spouses will have a serious 

conflict with respect to the division of ISOs. Those 

retained by the employee-spouse will continue to be 

ISOs (because they aren’t transferred), while the 

ones transferred to the non-employee spouse will 

lose their status as such. This hardly seems fair, and 

it certainly departs from the congressional policy the 

IRS so carefully articulated in its holdings 

concerning NQSOs. But, until the IRS comes to its 

senses, this anomalous result appears to govern the 

division of ISOs. 

F. Transfers at Death 

There can be no doubt that vested 

compensatory options owned by a decedent are 

includable in the decedent’s gross estate. The value 

of the inclusion is has been confusing, however. 

Long ago, the IRS issued a ruling that held that the 

estate tax value of a compensatory option at death 

was its equity value (i.e., the excess of the FMV of 

the underlying stock over the strike price). 27 Taken 

to its logical extreme, this policy would mean that 

out-of-the-money options are worthless, something 

that is patently incorrect. 

Today, it is clear that the methodology for 

valuing options for other purposes also apply in the 

26 See FSA 200005006. 

– 11 – 

27 See Rev. Rul. 196, 1955-2 C.B. 178.

ealm of the estate tax. This is confirmed by Rev. 

Proc. 98-34, which sets forth a safe harbor method 

for valuing options for all transfer tax purposes, 

including the estate tax. As mentioned earlier, this 

method is based upon the popular Black-Scholes 

method, which was developed to value relatively 

short-dated options bought and sold in the 

marketplace. While this method may overstate the 

value of options in the context of gifts and other 

lifetime transfers, particularly where the option term 

has several years to run, that may not be true for 

valuing options held by decedents at death. 

When the holder of compensatory options 

dies, it is common for the remaining option term to 

be truncated, even where the options are fully vested 

before that time. For example, it is not uncommon 

for the estate to have only a year or two after death 

to exercise any vested options (including those that 

might vest at death). As a consequence, the safe 

harbor method of Rev. Proc. 98-34 may in fact be 

more favorable for valuing the decedent’s options 

than other methods favored in lifetime transfers. 

Moreover, because it is a safe harbor method, using 

it will remove one element of potential controversy 

with the IRS in the event the decedent’s return is 

selected for audit. Finally, if the options pass to the 

surviving spouse under the protection of the marital 

deduction, a higher valuation under the safe harbor 

method could be quite valuable for basis purposes, 

at least if the options are ISOs. 

1. Bequests of NQSOs. The Section 83 

regulations make it clear that NQSOs are treated as 

income in respect of a decedent (IRD) and remain 

subject to the rules of Section 83 after the 

decedent’s death. 28 Consequently, they receive no 

step-up in basis, and any income triggered upon the 

exercise or disposition of the NQSOs after death is 

taxable to the estate or the beneficiaries thereof, as 

the case may be. 29 However, the taxpayer is entitled 

to an income tax deduction under Section 691(c) for 

the federal estate taxes paid with respect to the 

NQSOs. 

In effect, the estate or beneficiary, as the 

case may be, stands in the place of the employee for 

purposes of applying the Section 83 rules after the 

employee’s death. Thus, when the estate or 

beneficiary exercises NQSOs, the exercising party 

realizes compensation income similar to that which 

the employee would have realized had she survived 

28 See Regs. Section 1.83-1(d). 

29 See generally Sections 1014(c) and 691(a). 

– 12 – 

and exercised the options under similar 

circumstances. The estate or beneficiary is taxed at 

ordinary rates on the option spread at exercise, and 

the sale of the resulting stock is treated as the sale of 

a capital asset, whose basis equals the FMV of the 

stock at exercise. Any capital gain or loss on the 

sale of the resulting stock is long or short-term, 

depending upon the period the stock was held by the 

estate or the beneficiary after exercise. 

In most cases, the distribution of NQSOs to 

estate beneficiaries should be a non-taxable event. 30 

The future tax consequences of the options under 

Section 83 should shift to the distributee. A likely 

exception is where the distribution satisfies a 

pecuniary bequest. In that case, the use of the 

appreciated NQSOs to satisfy a dollar obligation 

should probably be analyzed as a deemed sale by the 

estate of the NQSOs for income tax purposes. 

One interesting question is whether or not 

this deemed sale is treated as an arm’s-length sale 

under the Section 83 regulations. The precise 

question is whether the pecuniary beneficiary is a 

related party for this purpose. Section 267(b)(13) 

treats the beneficiary of the estate as a related party, 

except in the case of “a sale or exchange in 

satisfaction of a pecuniary bequest.” Hence, it can 

be argued that the deemed sale should be treated as 

an arm’s-length sale. As a result, the tax 

consequences of the subsequent exercise of the 

NQSO by the pecuniary beneficiary may not be 

governed by Section 83. 

As mentioned above, the lifetime gift of 

NQSOs to a charity is not a particularly tax-efficient 

strategy. However, that is not true of a charitable 

bequest. A bequest of NQSOs to charity qualifies 

for the estate tax charitable deduction. So, it 

insulates the bequest from estate tax. Moreover, the 

IRS has ruled that the IRD income triggered by the 

exercise or disposal of the options by the charity is 

the charity’s income, not the estate’s. 31 As a result, 

the IRD income should escape income tax as well. 

The bottom line is that a charitable legatee 

of NQSOs will be able to realize 100% of the 

economic value attributable to NQSOs, whereas a 

non-charitable beneficiary is doing well to realize 

30 Technically, this may be a non-arm’s-length transfer. 

But, if there is no consideration, no income will be 

triggered. However, the options remain subject to 

Section 83 in the hands of the beneficiary. 

31 See PLR 200002011.

even 30% of that value because of the double-tax 

hit. Stated another way, the charity is indifferent 

whether it receives the NQSOs or non-IRD assets, 

whereas the non-charitable beneficiaries are better 

off with the non-IRD assets because of the step-up 

in basis. Hence, clients should consider funding any 

charitable bequests out of NQSOs (and similar 

assets such as IRAs) before using other assets that 

are more valuable to the non-charitable heirs. 

2. Bequests of ISOs and ISO Stock. 

Where the decedent dies holding ISOs or ISO stock, 

the analysis is generally more favorable, but quite a 

bit more involved, because of the peculiar tax 

aspects of these instruments. The ISOs themselves 

should qualify for a step-up in basis, since unlike 

NQSOs they are not considered to be IRD assets in 

the hands of the estate or beneficiary. Moreover, the 

regulations indicate that the tax-favored treatment 

accorded ISOs in the hands of the decedent carry 

over to the estate and the beneficiaries. 32 

In addition, Section 422(c)(1) specifically 

provides that the ISO holding period requirement 

does not apply to ISO stock acquired by the 

decedent’s estate or beneficiaries through the 

exercise of inherited ISOs. Similarly, if the estate or 

a beneficiary inherits ISO stock, they are not 

required to hold the ISO stock for the balance of any 

unexpired ISO holding period existing at the 

decedent’s death. 33 Essentially, the special holding 

periods for ISO stock cease to apply after the 

employee dies. As a result, the estate and 

beneficiaries are free to dispose of ISO stock 

immediately after acquiring it without fear of being 

hit with compensation income. 

However, they are subject to the normal 

capital gains holding period rules for the ISO stock. 

For example, if the estate exercises the decedent’s 

ISOs, the resulting stock will be a capital asset. But, 

a subsequent sale of that stock produces short-term 

gain or loss, unless the estate holds the ISO stock for 

more than 1 year after exercise. On the other hand, 

immediate long-term capital gain treatment is 

accorded any ISO stock held by the decedent at 

death, because Section 1223(11) accelerates longterm 

status for ISO stock held by the decedent. 

As mentioned above, ISOs receive a step-up 

in basis at the employee’s death. This has a 

consequence when the ISOs are exercised by the 

32 See generally Regs. Section 1.421-2(c). 

33 Regs. Section 1-421-2(d). 

– 13 – 

estate or a beneficiary. The basis of the ISO is 

tacked on to the strike price paid under the ISO in 

order to determine the basis of the ISO stock. For 

example, assume that the decedent held ISOs having 

a strike price of $10 each and that on the date of 

death each ISO had a FMV of $5. If the estate 

exercises the ISOs, the resulting ISO stock will have 

a basis of $15 per share. 

If instead of exercising the ISOs the estate 

or beneficiary sells the ISOs, then favorable tax 

treatment is lost. The regulations specifically 

provide that the ISOs lose their tax-favored 

treatment if they are exercised by a successor owner 

other than the employee’s estate or beneficiary. 34 

This means that the exercise of the inherited ISOs 

by anyone else (e.g., a purchaser from the estate or 

beneficiary or the donee of the beneficiary 35 ) 

triggers compensation income. Consistent with 

Section 421(b), this income tax consequence should 

occur in the year of exercise. The regulations also 

provide that the ISOs are to be considered IRD 

assets if they are exercised by any successor owner 

other than the estate or a beneficiary. 36 The 

apparent consequences of this treatment are the 

triggering of compensation income on the exercise 

of the options and the denial of any step-up in basis 

or long-term capital asset treatment for the ISOs. 

Unfortunately, the regulations do not 

synthesize these rules into a cogent statement about 

the tax consequences to the estate or beneficiary, on 

the one hand, and the transferee, on the other. 

Section 691(a) imposes income tax on IRD items, 

but limits its reach to the estate and beneficiaries. 

Accordingly, it is unlikely that a purchaser or donee 

would be liable for tax on any income triggered by 

Section 691. This should mean that the estate or 

34 Regs. Section 1.421-2(c)(1). While there is no 

authority on the specific issue, it would appear that a 

pecuniary beneficiary would fall into this trap. As noted 

earlier in the discussion of NQSOs held by the estate, the 

funding of a pecuniary bequest with property is the 

equivalent of a sale of that property. If ISOs are used to 

fund a pecuniary bequest, then arguably the beneficiary 

acquires them not in his capacity as such, but through a 

deemed purchase. 

35 Literally, the limitation on lifetime transfers of ISOs 

applies only to the employee, not anyone else. Hence, it 

may be that ISOs could be transferred by the estate or a 

beneficiary. However, the stock option plan and grant 

instrument may restrict any such transfer. 

36 Reg. Section 1.421-2(c)(4)(ii).

eneficiary, as the case may be, will be responsible 

for that tax. 37 

If this interpretation is correct, then the sale 

of the ISOs should produce compensation income to 

the selling estate or beneficiary equal to the sales 

proceeds. 38 But what if the ISOs are gifted by the 

beneficiary to another person? 39 Consistent with the 

characterization of the ISOs as IRD assets in that 

case, it would appear that the gift triggers 

recognition of the IRD income to the donee in an 

amount equal to the ISOs’ FMV at that point. 40 

Since it appears that all compensation income will 

have been recognized at the point of transfer 

(whether sale or gift), the ISOs may not be 

compensatory options in the hands of the transferee 

after the transfer. Accordingly, Sections 83 and 421 

may no longer apply. On the other hand, since the 

options would be treated in the same manner as 

NQSOs, it is possible the non-arm’s-length transfer 

rules could apply by analogy. 

The foregoing discussion of inherited ISOs 

and ISO stock focuses upon the regular tax 

consequences. No mention has been made yet of 

the AMT consequences to the successor owners of 

the decedent’s ISOs. Nor do the regulations provide 

any guidance at all. The following discussion of the 

apparent AMT consequences proceeds from the 

rules laid out previously. 

Section 56(b)(3) essentially treats ISOs as 

NQSOs for AMT purposes. Since ISOs retain their 

status as such in the hands of the estate and the 

decedent’s heirs, it is reasonable to assume that 

AMT treatment follows from that status as well. 

Hence, the exercise of the ISOs by the estate or 

beneficiary should trigger an adjustment to the 

holder’s AMT income equal to the option spread, 

37 Actually, this makes sense if you view the estate or 

beneficiary as standing in the shoes of the decedent. If 

the decedent had transferred the ISOs, the compensation 

income triggered by the transfer or a later exercise would 

have been taxed to him. 

38 Remember, because the ISOs would be IRD assets, 

there would be no basis to deduct in the computation of 

the compensation income in this case. 

39 This is only relevant for a beneficiary. The transfer of 

the options by the estate to the beneficiary under the 

estate plan of the decedent is not a disposition for this 

purpose. See Section 424(c)(1)(A). The beneficiary 

merely steps into the shoes of the estate for purposes of 

these rules. See Regs. Section 1.421-2(c)(1). 

40 See Regs. Section 1.691(a)-4(a). 

– 14 – 

much as it would if the decedent had lived to 

exercise the ISOs at the same point. 

What is different is that the ISOs will have 

received a step-up in basis as a result of the 

decedent’s death. Is this basis allowed as an offset 

in the computation of the AMT adjustment? 

Logically, it should not be, even though the author is 

aware that some commentators feel otherwise. For 

purposes of the AMT, Section 421 does not apply. 

This means that Section 83 applies in computing the 

AMT. This should mean that the ISOs are treated as 

IRD assets for purposes of the AMT and therefore 

not entitled to a step-up in basis for this purpose. 

However, where an estate or beneficiary is 

required to include an IRD item in gross income, 

that taxpayer is entitled to an income tax deduction 

under Section 691(c) equal to the federal estate 

taxes attributable to that item. And, this deduction 

should be allowable in computing the AMT. The 

deduction under Section 691(c) is specifically 

excluded from the group of miscellaneous itemized 

deductions that cannot be deducted in computing the 

AMT. 41 As a consequence, while the AMT 

adjustment attributable to the exercise of inherited 

ISOs does not seem to allow for a basis deduction, a 

deduction for the estate taxes attributable to the 

ISOs is surely defensible. 

G. Final Observations 

The demands put on an executor are great 

enough without burdening him or her with the 

responsibility of being a sophisticate about 

complicated financial instruments such as options. 

Increasingly, we are seeing executors put in the new 

and uncomfortable position of having to deal with 

this type of instrument, which are not just assets but 

can be liabilities – and, worse, can transform from 

assets into liabilities during the administration of the 

estate. Furthermore, any attempt by the executor to 

evade the problem by selling the asset could create 

adverse tax consequences that can easily be secondguessed 

by unhappy beneficiaries. 

It is too easy, and unrealistic, to say, therefore, 

that decedents should simply die without these 

assets in their estates. Instead, under the theory that 

an ounce of prevention is worth a pound of cure, 

consider the following: 

41 See Sections 56(b)(1)(A)(i) and 67(b)(7).

1. A decedent’s dispositive documents should grant 

the executor sufficient powers to deal with 

options and to compensate for the liquidity 

demands that may be created by the need to 

exercise options after death. 

2. The executor should be granted specific authority 

to exercise stock options, to borrow funds 

necessary to exercise these options, and to 

pledge the stock as collateral, or to hire a 

financial advisor to assist the executor in these 

matters. 

3. The client should be aware that he or she may 

bequeath options to charity. 

4. Finally, the dispositive documents should 

protect the executor, to the fullest extent 

possible under state law, from liability for his, 

her or its actions in dealing with this type of 

sophisticated financial instrument. If the 

executor is a financial institution, it would be 

appropriate to permit self-dealing in the terms of 

the Will so that, where appropriate, the executor 

could deal with itself in setting the estate. 

– 15 –

CONFIDENTIAL 

Appendix

Summary of Option Strategies 

Strategy Description Purpose(s) Income Tax Effects Transfer Tax Effects Issues/Comments 

1. Early exercise Exercise of options before Conversion of ordinary income 

None 

expiration 

into capital gain 

2. Gift to descendants Holder gives options to 

descendants; typically limited to 

vested options; gifts of unvested 

options possible with tax risks 

3. Gift to trust for 

descendants 

4. Gift to family 

limited partnership or 

LLC 

Same as 2, except that donee is 

trust for descendants, preferably 

administered by independent 

trustee 

Same as 2, except that donee is a 

partnership/LLC composed of 

family members and entities 

Transfer of wealth to next 

generation in a manner that 

reduces potential estate tax 

burden if option position (or 

resulting stock) were held until 

death 

Same as 2, except resulting 

wealth will be held and 

administered by independent 

trustee 

Same as 2, except resulting 


administered by managing 

partner or member of 

partnership/LLC 

Triggers ordinary tax on option 

exercise; future gains taxed as 

capital gains 

None at gift; donor pays ordinary 

tax on option spread when 

options exercised by donees; 

donees pay capital gains tax on 

gains beyond fair market value 

(FMV) of stock at exercise 

Same as 2, except trust pays 

capital gains tax on gains 

accruing after exercise; if trust is 

“grantor” trust, taxation of gains 

(and other income) is shifted to 

donor 

Same as 2, except 

partners/members pay capital 

gains tax directly on gains 

accruing to partnership/LLC after 

exercise 

Gift taxes imposed, subject to 

applicable exclusions and credits, 

on FMV of options at gift; 

options removed from estate tax 

exposure at value lower than that 

projected at death; estate tax also 

reduced by ordinary tax paid by 

donor at exercise, plus foregone 

growth thereon; options’ FMV 

includes spread and time (e.g., 

Black-Scholes) value, but 

discounts from this value should 

be available if confirmed by 

appraisal 

Same as 2; but if trust is 

“grantor” trust, holder’s retention 

of income tax obligation 

produces additional estate tax 

savings (by reducing ultimate 

taxable estate) 

Same as 2 

“Conversion” is really an 

illusion; initial tax burden 

reduces future increases by 

similar amount, but future 

increases also subject to capital 

gains tax; can work 

if taxes and costs are borrowed 

and rate of increase is high 

enough to overcome extra capital 

tax burden; otherwise, holding 

options should be superior on 

after-tax basis 

Option plan must allow gifts; 

control over exercise shifts to 

donees, but income tax burden 

remains with donor – good estate 

tax planning, but donor’s 

liquidity and lack of control must 

be addressed; gifts of unvested 

options risky since IRS ruled that 

gift tax is deferred until options 

vest (at FMV then existing); 

valuation of options and 

associated discounts subject to 

IRS challenge; if stock does not 

perform, credits applied to gift 

tax could be lost 

Same as 2, but control over 

option exercise and resulting 

stock held by independent trustee 

Same as 2, but control over 

option exercise and resulting 

stock held by managing 

partner/member of 

partnership/LLC; if donor retains 

an interest in partnership/LLC, 

possible ordinary tax measured 

by value of retained interest at 

contribution 

CONFIDENTIAL 

1


5. to descendants for 

cash 

6. to descendants for 

note 

Holder sells options to 

descendants in exchange for cash; 

can be used for vested options 

and perhaps unvested options as 

well 

Same as 5, except buyers deliver 

note instead of cash 

Removes ordinary income taint 

from options at discounted value; 

also transfers growth in value of 

options (or resulting stock) value 

to next generation in a manner 

that reduces potential estate tax 

burden if options were to be 

retained until death 

Same as 5, but net wealth transfer 

is limited to growth beyond 

interest charged on note 

Sale triggers immediate ordinary 

tax to seller equal to sale price 

(which must equal FMV of 

options at transfer – i.e., option 

spread plus time value, less any 

applicable discounts); company 

receives deduction equal to 

seller’s ordinary income at sale; 

subsequent exercise of options by 

buyers is tax-free; at sale of stock, 

buyers subject to capital gains tax 

on excess of stock value over 

amount paid to seller 

Same as 5, except for argument 

that installment method of 

accounting may apply, thus 

deferring ordinary tax on sale 

until seller receives principal 

payments on note; if installment 

method applies, then ordinary tax 

will apply to untaxed gain 

embedded in note as note 

principal is collected or cancelled 

at or after death of seller (in 

addition to any estate tax 

exposure on value of note at 

death) 

No gift taxes imposed on sale, 

provided consideration equals 

FMV of options at sale; growth in 

value of options (or resulting 

stock) beyond amount paid to 

seller received by buyers free of 

future gift or estate tax; 

consideration received by seller 

will be taxed in seller’s estate 

Same as 5; but note must have 

FMV, not just face amount, that 

equals FMV of options – 

common belief is that note paying 

applicable federal rate, with 

reasonable security and term, has 

FMV equal to face amount 

Option plan must allow sales for 

consideration; control over option 

exercise and resulting stock shifts 

to donees; if purchase price is 

questioned, then transaction may 

be treated as partial gift and 

partial sale; buyers must have 

cash to pay purchase price at 

outset; valuation of options and 


IRS challenge; IRS ruling on 

unvested options technically not 

applicable to sales, so sales of 

unvested options are feasible (and 

rewarding because of additional 

discount to recognize possibility 

of non-vesting), but somewhat 

risky tax-wise; if stock does not 

perform, buyers forfeit security 

(which may exceed value of 

options purchased) 

Same as 5, except that buyers’ 

cash need at closing alleviated by 

note; principal can be deferred 

until maturity, but bona fide loan 

must be created – requires 

adequate security, adequate 

interest (equal to applicable 

federal rate (AFR)) must be paid 

at least annually, note FMV must 

equal FMV of options; value of 

note and options and associated 

discounts subject to IRS 

challenge; buyers must have cash 

flow to meet annual interest 

obligations and to repay principal 

at maturity; reliance on 

installment method is extremely 

risky, since there is adverse 

precedent but virtually no 

supporting authority 

CONFIDENTIAL 

2


7. for note to family 

partnership or LLC 

8. for note to grantor 

trust for descendants 

Same as 6, except that buyer is a 

partnership/LLC composed of 

family members and entities 

Same as 7, except that the 

purchaser is a “defective” 

grantor trust – i.e., a trust whose 

income, deductions and assets are 

treated as owned by grantor; one 

or more powers added to create 

grantor trust status; possibilities 

include donor’s power to 

substitute assets of equivalent 

value for trust assets and power 

of independent party or trustee to 

add beneficiaries to trust (e.g., 

charities); grantor status can be 

terminated by renunciation of 

tainted powers 

Same as 6, except that resulting 


administered by managing 

partner or member of 


Same as 7, except that ordinary 

taint is not removed from options 

Same as 6, except that 

partners/members pay taxes 

directly on ordinary income and 

gains accruing to 


Same as 7, except that sale is 

ignored for tax purposes, 

meaning that ordinary income is 

deferred and taxed to seller when 

options later exercised by trustee; 

ordinary tax can be accelerated 

by death of seller or loss of 

grantor status before options are 

exercised; income and gains 

accruing to trust after option 

exercise will be taxed directly to 

grantor until grantor status ends 

Same as 6 

Same as 7, except that additional 

estate tax savings should accrue 

because ordinary taxes (and lost 

income on same) paid by seller 

on exercise of options and future 

trust investment income and 

gains will reduce seller’s taxable 

estate; “seed” gift to trust is 

needed to create adequate 

security for note; usually, gift 

equal to 10% of sale price is 

advised, thus triggering gift tax 

liability or use of credits on this 

amount 

Same as 6, except that control 

over option exercise and resulting 

stock held by managing 

partner/member of 


Same as 7, except that no reliance 

is placed on installment method 

to defer ordinary tax; note merely 

eliminates buyers’ need for cash 

to close sale; control over option 

exercise and resulting stock held 

by independent trustee 

9. Transfer to grantor 

retained annuity trust 

(GRAT) 

Holder transfers options to 

GRAT – i.e., trust providing for 

fixed annuity payments to donor 

for specified period (usually 2 to 

5 years), with any remaining 

value passing to descendants or 

trust for them; annuity usually 

paid in kind (i.e., by transferring 

requisite number of options back 

to holder); holder can be trustee 

during annuity term, but must 

relinquish position in favor of 

independent trustee at the end of 

annuity term 

Excess growth (i.e., growth 

beyond statutory discount rate 

used in valuing annuity stream) 

in value of options (or resulting 

stock) transferred to next 

generation in a manner that 

reduces potential estate tax 

burden imposed if options were 

to be retained until death 

No income tax imposed on 

transfer or on annuity payments, 

since GRAT is grantor trust; 

ordinary tax impose on donor 

when options later exercised; 

gains and income on other trust 

assets (if any) taxed to donor 

until annuity term ends, and 

thereafter if trust continues to be 

grantor trust 

Taxable gift limited to excess of 

FMV of options upon 

contribution to GRAT over 

actuarial value of annuity stream 

(excess is usually less than 1% of 

option FMV), subject to gift tax 

exclusions and credits; growth in 

value of options (and resulting 

stock) beyond “7520 rate” (120% 

of AFR) passes to descendants or 

trust for their benefit free of gift 

tax; annuity returned to grantor 

(usually in kind) subject to future 

gift and estate taxes 

Option plan must permit transfer 

to GRAT; control over option 

exercise and resulting stock can 

be retained by donor as trustee 

until annuity term ends, but then 

must shift to independent trustee; 

death of donor before end of 

annuity term causes remaining 

trust assets to be subjected to 

estate taxes; no cash payments 

required; valuation of options and 


IRS challenge, but GRAT usually 

has self-correcting mechanism 

that adjusts annuity in that event, 

reducing risk of gift tax exposure 

on revaluation; if options or 

resulting stock fail to perform, 

holder gets options/stock back 

tax-free 

CONFIDENTIAL 

3


10. Conversion to 

nonqualified deferred 

compensation 

(NQDC) plan 

Holder exercises options using 

stock to pay exercise price but 

declines to accept stock; 

company agrees to establish 

NQDC plan (or account under 

existing plan) to be “funded” with 

credits equal to holder’s option 

value in the form of company 

stock; payout equal to company 

stock plus reinvested dividends 

(if any), and payable over period 

elected by holder; payout can be 

“secured” by contributions of 

stock to “rabbi” trust, but assets 

of rabbi trust subject to rights of 

company creditors in event of 

company insolvency 

Solves option expiration 

problem; instead of being forced 

to exercise by expiration date and 

lose almost 50% of option value 

to taxes, conversion allows holder 

to keep entire option value 

working for him and perhaps his 

heirs 

If election made far enough in 

advance of option expiration 

(usually 6 months or more) , no 

tax on conversion; ordinary tax 

levied on payments from plan to 

holder or heirs, as and when 

received; no step-up in basis at 

death, meaning that estate or 

heirs pay ordinary taxes on full 

amount of post-death 

distributions (in addition to estate 

tax on value of NQDC account at 

death) 

No gift tax issues; no wealth 

transfer benefits; estate taxes 

imposed on value of NQDC 

account at death 

Credits are generally limited to 

company stock in order to 

preserve GAAP fixed accounting 

for plan (diversification in NQDC 

account would likely convert plan 

to GAAP variable, thus causing 

reporting headaches for 

company); double-tax problem at 

death can be eliminated by 

naming charity as successor 

beneficiary, assuming holder is 

other charitably inclined 

11. Gift to charity Holder transfers options 

remaining at death to charity 

12. Option exchange 

fund 

J.P. Morgan proprietary product 

due for release soon; contribution 

of options to LLC simultaneously 

with similar contributions of 

options on stock of other public 

companies by other executives; 

LLC holds options and exercises 

them at expiration; termination of 

LLC after 7 years with 

distribution diversified portfolio 

of options and stock pro rata to 

participants; estate freeze 

Where holder is charitably 

inclined, use of options to fund 

charitable endeavors is more 

beneficial than using other assets 

– contribution to charity removes 

not only estate tax but also 

ordinary tax that would be 

imposed on full amount of 

distributions paid to estate or 

heirs; non-charitable heirs get 

more after tax (from lesser-taxed 

assets that would have gone to 

charity), while charity realizes 

same amount 

Allows diversification out of 

concentration option position; 

removes ordinary income taint 

from options at discounted value 

Estate and heirs suffer no income 

tax liability upon transfer or 

exercise of options 

Contribution to LLC triggers 

immediate ordinary tax to each 

participant on value of LLC 

interest received (heavily 

discounted); company deducts 

amount equal to seller’s income 

at contribution; exercise of 

options by LLC is tax-free; no tax 

on liquidation of LLC; at sale of 

stock, capital gains tax on excess 

of stock value over initial value 

of LLC interest 

Bequest to charity is exempt from 

estate taxes 

Estate freeze feature can shift 

growth to heirs or trust for heirs; 

if elected, initial interest is 

bifurcated into common and 

preferred interests; common 

interest gifted; if performance 

exceeds preference return, excess 

return passes to common holders 

tax-free; low gift tax exposure on 

gift of common interest due to 

discounts and subordination to 

preferred interest 


to charity; control over option 

exercise and resulting stock shifts 

to charity; strategy cannot be 

implemented during life, because 

exercise of options after 

contribution triggers ordinary tax 

imposed on donor and no income 

tax deduction is allowed for 

option contribution 


to LLC for consideration; control 

over option exercise and resulting 

stock shifts to LLC; holder’s 

options could outperform rest of 

portfolio; limited liquidity for 7- 

year term of LLC; holder must 

raise cash to pay initial ordinary 

tax on contribution 

CONFIDENTIAL 

4

Economic flows of GRAT 

Example 

Number of shares of stock transferred to GRAT 200,000 

Price per share at transfer $5.00 

Value of initial transfer to GRAT $1,000,000 

IRS discount rate 

Present value of retained gift 

1.40% 

$1,000,000 

Reported gift $0 

Term of trust 5 Years 

First year annuity (14.078%) $140,779 

Escalating annuity percentage 20.00% 

Note: Assumes grantor survives term 

Note: Model does not include income taxes; the ongoing income taxes generated by the 

trust are paid by the grantor, income tax implications should be carefully considered 

Year 

Total Return 

(%) 

End of year 

stock price 

Annual annuity 

GRAT 

From yield # of shares Shares $ value # of shares $ value 

0 200,000 1,000,000 

1 * 10% $5.40 20,000 22,366 120,779 ** 177,634 959,221 

2 * 10% $5.83 19,184 25,677 149,750 ** 151,956 886,209 

3 * 10% $6.30 17,724 29,371 184,997 ** 122,585 772,108 

4 * 10% $6.80 15,442 33,491 227,824 ** 89,093 606,053 

5 * 10% $7.35 12,121 38,085 279,798 ** 51,008 374,739 

Return to grantor (nominal) * ** ** 84,472 148,992 963,148 ** ** ** 

Net trust amount * ** ** ** ** ** ** 51,008 374,739 

CONFIDENTIAL 

Above examples are for illustrative purposes. Numbers have been rounded for convenience, are only estimates for illustrative purposes and should not be relied upon. 

Assumptions may not reflect current market conditions. Corporate insiders should consult with securities counsel as to any reporting issues under Section 16 of the Securities 

Exchange Act of 1934 associated with receiving shares in kind, and any applicable laws. 

Note: GRATs involve complex tax and, in the case of insiders, securities laws issues that should be discussed with your own advisors and company counsel. Annuity will be 

paid for full term to the grantor or, in case of the grantor’s death, to the grantor’s estate. Calculation is based on 2000 Tax Court ruling in Walton v. Commissioner (115 

T.C. No. 41 (Dec. 22, 2000)). 

Note: This presentation is for educational purposes only. This is not for distribution outside of this seminar. 

5

Transferring an asset via a GRAT results in greater value for your beneficiaries than if 

you held the assets outright 

Cash flow example: $1,000,000 asset 

Scenario 1 

Scenario 2: Use GRAT 

Year Hold asset Grantor GRAT 

0 Assets held/gifted to GRAT $1,000,000 $1,000,000 

Gift tax incurred at transfer $0 

5 Value of asset 1,610,510 1,235,771 374,739 

Estate tax (798,813) (612,943) - 

Net wealth to beneficiaries 811,697 622,829 374,739 

Total value to beneficiaries $811,697 $997,567 

Value added by GRAT $185,870 

*Assets in GRAT do not receive a step up in basis upon death, if assets are sold after death the total amount to beneficiaries may be lower. For instance, assuming 

a zero basis a capital gains tax at 23.8% would result in the value being $89,188 lower than what is shown 

Hypothetical average return = 10%. 

Assumptions: Initial price per share = $5; IRS discount rate = 1.4%; first year annuity rate = 14.08% valuation discount: 0%; 

effective transfer tax rate (for transfers at the end of year 5) = 49.6%. Annuity escalation rate = 20%. Assumes grantor survives term. 

Numbers have been rounded for convenience, are only estimates for illustrative purposes and should not be relied upon. Corporate insiders 

should consult with securities counsel as to any reporting issues under SEC Section 16 of the Securities Exchange Act of 1934 associated 

with receiving shares in-kind. 

Note: Above example is for illustrative purposes only. These materials should not be construed as providing legal, tax, or accounting advice. 

GRATs involve complex tax and, in the case of insiders, securities laws issues that should be discussed with your own advisors and company 

counsel. Annuity will be paid for full term to the grantor or, in case of the grantor’s death, to the grantor’s estate. Calculation is based on 2000 

Tax Court ruling in Walton v. Commissioner (115 T.C. No. 41 (Dec. 22, 2000)). 

CONFIDENTIAL 


6

Stock Swap for Cash Freezes Appreciation – Example: 

Client 2012 GRAT I 

Funding Date: June 2010 

Initial Funding Value: $5,000,000 

IRS Discount Rate: 3.2% 

Annuities 

Client 

Approximately $1.5MM in 

appreciation 

- Decide to swap stock for cash to 

freeze appreciation 

Stock 

• Stock dividends accrue on 

the Client’s balance sheet 

• Interest charges borne by the Client 

- Interest expense may be deductible 

Potential 

re-GRAT 

of shares 

Stock 

Client 2013 GRAT II 

Post-swap goal: target a 5% annual 

return with little volatility 

Cash 

Annuities 

Pledge 

collateral 

Loan 

Collateral 

JPMorgan 

CONFIDENTIAL 

Note: This presentation is for 

educational purposes only. This is not 

for distribution outside of this seminar. 

Note: For illustrative purposes only. 

7

A CRT can result in greater total value than selling assets outright 

Cash flow example = $5,000,000 asset, annual pre-tax CRUT payment = 5% 

Selling outright 

Year Grantor Trust/Charity Grantor Year $ % 

0 Net proceeds of sale $3,810,824 $5,000,000 1 $164,642 3.3% 

Benefit of charitable deduction* $1,145,871 2 $166,939 3.3% 

3 $169,268 3.4% 

15 Account balance 7,119,275 6,154,986 5,763,666 4 $171,630 3.4% 

Estate tax on account balance (3,531,160) 0 (2,858,778) 5 $174,024 3.5% 

6 $176,452 3.5% 

Total wealth to family 3,588,115 2,904,888 7 $178,914 3.6% 

Amount to charity 0 6,154,986 8 $181,410 3.6% 

9 $183,941 3.7% 

Total wealth 3,588,115 $9,059,873 

10 $186,507 3.7% 

Value added by CRT $5,471,759 

11 $189,109 3.8% 

* Charitable deduction may be subject to AGI limitations. 

Key assumptions: Expected trust term = 15 years; market value of asset = $5,000,000; tax basis of asset = $1,000,000; unrealized capital gain = $4,000,000; charitable deduction =$2,322,896 

Total arithmetic return = 7%; and volatility = 11.2%; resulting in a geometric return of 6.4% of which yield = 2.4%; IRS discount rate for charitable deduction = 1.4%; 

Effective income tax rate = 49.3%; effective capital gains tax rate = 29.7%; effective tax rates include a federal income tax rate of 39.6%, federal 

capital gains tax rate of 20%, Medicare surtax of 3.8%, Minnesota tax rate of 7.9%. Effective tax rates adjusted for deductibility and the Pease limitation where applicable. 

Tax rates quoted are those used in a majority of years. Taxes on trust income are not subject to Pease adjustments. 

Assumptions may not reflect current market conditions. Actual results may be expected to vary from assumptions, which are made for discussion purposes only and may note be relied 

on for tax return purposes. 

The expected arithmetic return is simply the average of all returns, whereas the geometric return represents an estimate of how volatility impacts the arithmetic return; 

Analysis assumes that total deductions excluding charitable gift from this CRT are greater than 3% of total AGI in year 1 

CRT 

After-Tax Annuity Payments 

12 $191,748 3.8% 

13 $194,423 3.9% 

14 $197,135 3.9% 

15 $199,886 4.0% 

- - - 

CONFIDENTIAL 


8

Charitable Bequest of Stock Options 

Transfer at Death 

Strategy 

Purpose 

Executor transfers options remaining at death to charity 

Use of options to fund charitable endeavors 

Removes estate and ordinary income 

Non-charitable heirs get more after-tax from other 

assets, while charity realizes same amount 

Income Tax Effects 

No income tax liability upon transfer or exercise of 

options 

Transfer Tax Effects 

Bequest to charity is exempt from estate taxes 

Issues 

Option plan must permit transfer to charity 

CONFIDENTIAL 


9

IRA Rollback Strategy 

Pension Rescue Still Has Leverage 

Client Situation: • Needs life insurance for estate planning 

• Has significant IRA assets 

• Continues to receive earned income 

Strategy: 

• Roll IRA assets back into self-directed profit-sharing plan, since IRAs 

can’t purchase insurance 

• Profit-sharing plan purchases insurance on client's life 

• Because policy will be owned by plan, premiums each year paid on 

before-tax basis 

• Fund premiums on single premium basis 

• Policy distributed to client within few years of policy's initial 

purchase 

• Client pays taxes due on FMV of policy (under safe harbor valuation - 

- Rev. Proc. 2005-25) 

• Under Rev. Proc. 2005-25, FMV of contract is greater of: Interpolated 

Terminal Reserve (ITR) or PERC (Premiums, Earnings less Reasonable 

Charges) 

• Policy then transferred into ILIT 

CONFIDENTIAL 


10

IRA Rollback Strategy: Additional Advantage 

Creditor Protection and qualified plan assets 

• ERISA Qualified Plans 

– Exempt from claims of general creditors under both state law and federal bankruptcy proceedings 

• Non-ERISA Qualified Plan 

– The Bankruptcy Abuse Prevention and Consumer Protection Act exempts IRAs up to $1MM 

• This limitation does not apply to rollover IRAs 

• States may opt out of the Federal exemption 

CONFIDENTIAL 


11

Use Interest Rate Swaps to Lock in Lump Sum Benefit 

Mechanics of a rate lock 

Lump sum election date 

• SERP Participant agrees to have lump sum calculated using fixed 

interest rate on determination date 

• In order to create more certainty to the lump sum amount 

today, individual will separately enter into a rate lock hedge 

position with JPMorgan to lock-in a specific interest rate level 

• This position will create an offsetting gain if rates increase and 

a loss if rates decrease 

Lump sum determination date 

• SERP participant will unwind the rate lock coincidental with the 

lump sum calculation 

• Rate lock settlement amount JPMorgan receives or pays will be 

determined by prevailing rates on that date 

• If rates have risen, the Participant will receive an unwind 

payment that will increase the lower lump sum 

• SERP administrator will make a single payment to the 

Participant reflecting the settlement value of the hedge 

The rate lock will offset any changes in the lump sum 

At inception – election date 

Rates increase 

Positive 

value 

Negative 

value 

T-lock is worth 

more (“in-themoney”) 

Plan lump sum 

decreases in 

value 

JPMorgan 

Rate lock agreement 

SERP 

Participant 

Unwind – determination date 

Rates decrease 

Positive 

value 

Plan lump sum 

increases in 

value 

SERP 

Administrator 

Net lump sum payment 

adjusted for hedge gain or 

loss 

SERP 

Participant 

CONFIDENTIAL 

Negative 

value 

T-lock is worth 

less (“out-ofthe-money”) 

Hedge gain 

or loss 

JPMorgan 

Note: This materials is presented for educational purposes only and may not be forwarded or otherwise distributed, in part or total, 

without the permission of J.P. Morgan 

12

What is a 10b5-1 Trading plan? 

Plan to allow 

insiders to buy or 

sell Company Stock 

+ 

Provides an affirmative 

defense against insider 

trading liability 

Situation 

• Client is an insider of a public 

company and would like to transact 

in their own stock 

• Client is subject to company trading 

windows and blackout periods 

• Client would like to increase their 

trading flexibility 

Solution 

• Before becoming aware of material 

nonpublic information and in good 

faith, the insider: 

– enters into a binding contract to 

buy or sell, or 

– gives instructions to another 

person to buy or sell for the 

insider’s account, or 

– adopts a written plan for buying 

or selling securities 

Rule 10b-5 prohibits trading on the basis of material nonpublic information (if aware of 

the information at the time trade is made). Rule 10b5-1 addresses challenges associated 

with Rule 10b-5 limitations by offering timing flexibility in restricted stock trading. 

CONFIDENTIAL 

13

How does a 10b5-1 plan work? 

1 

2 3 

Insider makes buy or 

sell decision 

Insider sets up plan with 

financial institution 

Financial institution 

executes on behalf of the 

insider 

Company approval 

Insider must not be in 

possession of material 

non-public information 

Company reviews plan 

Specialized 10b5-1 team 

to enforce separation 

between Insider and 

execution of the Plan 

STRICTLY PRIVATE AND CONFIDENTIAL 

• JPM 10b5-1 team confirms with 

company counsel that insider may 

enter into a 10b5-1 trading plan 

• After board approval, insider transfers 

all or a portion of company stock or 

cash into J.P. Morgan Securities LLC 

brokerage account 

• Develop a phased, pre-planned 

program to be executed at either 

market or specified prices 

• Insider signs contract while not in 

possession of material non-public 

information 

• No influence by Insider over 

transactions under the Plan 

• Pre-clearance review of Plan by 

company’s legal counsel 

• JPM 10b5-1 Group is responsible for: 

– Drafting and negotiation of the Plan 

– Implementation of the Plan 

– Ongoing monitoring and execution of 

the Plan 

– Filing Form 144s 

– Notifying company and client of 

trade executions 

JPMorgan does not provide either legal or tax advice. We can, however, work with your legal advisors and issuers counsel 

to identify solutions and alternatives. You should consult your attorney and accountant regarding the appropriateness of 

this strategy in light of your own circumstances. 

14

Things to keep in mind regarding 10b5-1 

Regulatory Considerations 

• Rule 10b5-1 only provides an “affirmative defense” against 10b-5 liability 

– Section 16 matching liability can still apply 

– Insiders must still comply with Rule 144 

– State laws still apply 

– Schedule 13D/G amendments still apply 

• The insider has the burden to prove compliance with the rule 

• Enter into a plan only when insider is not aware of material nonpublic information 

• This SEC rule has and may generate ongoing rule interpretations 

Company Approvals 

• Corporation must acknowledge the selling program by signing the sales plan 

• Corporation should review their insider trading policy 

– a trading program will probably need relief from the blackout period policy 

– corporations may need to amend their policies accordingly 

CONFIDENTIAL 

The views and strategies described herein may not be suitable for all investors. There may be significant regulatory 

restrictions on certain products. 

15

SECTION 9 

Spousal Elections Under Minnesota Statutes 

Chapter 524.2-201 through 524.2-215 – 

Spousal Elections: “The Good, the Bad and 

the Ugly” 

Jacqueline M. Schuh 


Minneapolis 

Ivory S. Umanah 

Engelmeier & Umanah, P.A. 

Minneapolis 



INTRODUCTION………………………………………………………………………………………….1 

HISTORICAL PERSPECTIVE…………………………………………….…………………………….2 

MODERN VERSIONS……………………………………………………………..…………………….2 

THE ELECTIVE SHARE………………………………………………………………..……………….5 

PRACTICAL CONSIDERATIONS………………………………………………………..…………….6 

MAKING THE ELECTION………………………………………….……………..…………………….7 

PAYMENT OF THE ELECTIVE SHARE…………………………………………………………...….8 

EXAMPLES TO ILLUSTRATE……………………………………………………………………..…..9 

ELECTIVE SHARE AND ESTATE TAXES………………………………………………………….11 

ELECTIVE SHARE AND SPOUSAL CONSENTS AND WAIVERS……………………………...12


Minnesota, as in many other states, has adopted various versions of a law designed 

primarily to protect surviving spouses from being disinherited by the deceased spouse. In 

Minnesota, these protective statutes have evolved over the years starting with provisions in 

place prior to 1985 to provisions enacted after 1985. The common thread in all the iterations of 

the spousal protective statutes is the protection of the surviving spouse by guaranteeing that the 

surviving spouse inherits some portion of the deceased spouse’s assets. Minnesota’s various 

versions of these statutes either expand the classes of assets that the surviving spouse can 

have access to or prevents the overreaching of the surviving spouse vis-à-vis other 

beneficiaries of the deceased spouse. 

Historically, surviving spouses’ interests in each other’s property rested largely in real 

property rights protected under the common law concepts of dower and curtsey which 

preserved for widows an interest in any realty seized or possessed by their husbands during 

their marriage. 1 

This preservation of rights in realty however provided no comfort for surviving 

spouses whose deceased spouses elected to hold or convert real property interests to personal 

property interests during their lifetime. 2 

Statutory schemes designed to further protect the surviving spouse from complete 

disinheritance grew out of the recognition that the primary source of wealth in society had 

shifted from real property to personal property. These new schemes or forced shares included 

both real and personal property. 

1 Andrew E. Tanick and Pamela L. Johnson; The Probate Reform: The New Minnesota Elective Share 

Statutes, 70 Minn. Law Review, 241, 247 (1985) 

2 See Peterson and Wolfson, Election Against the Wills; The Elective Share of Surviving Spouse, The 

Bench & Bar of Minnesota, October 1986/15 citing, In re Estate of Washburn, 20 N.W. 324, 325-26 

(1984) 

1

2. HISTORICAL PERSPECTIVE 

a. Pre – 1985 

The law of dower as practiced at common law controlled the rights of a wife in 

most circumstances with respect to real property of the deceased husband. 

b. Post - 1875 

In 1875 an act to abolish estates in dower and by curtsey, and provide for estates 

of inheritance or otherwise in lien thereof, was enacted abolishing estates in 

dower. The 1875 act enacted after making provisions regarding homestead 

rights, provide that a surviving husband or widow shall be entitled to an undivided 

one-third interest in all lands of which the decedent possessed, free of any 

testamentary disposition to which the survivor had not assented to in writing. 3 

a. Pre – 1985 

3. MODERN VERSIONS 

In a 1961 statutory scheme, a surviving spouse was entitled to one-third of the 

real and personal property interest of the decedent, subject to payments for 

administration expenses, funeral expenses, expenses of last illness, taxes and 

debts. This right was free of any other testamentary disposition to which the 

survivor had not consented to in writing. 4 

Note that under the 1961 statute, if the spouse and only one child of the 

decedent survive, the spousal share was increased to one-half of the real and 

personal property interests. 5 

3 See Washburn Supra at 326 

4 Minn. Stat. § 525.16 (3) 1961, Repealed 

5 Minn. Stat. § 525.16 (3) 1961, Repealed 

2

. 1969 Version 

In the 1969 statutory scheme, any conveyance of assets by a person who retains 

a power of appointment by Will, or a power of revocation or consumption over the 

principal thereof, was treated as a testamentary disposition so far as the 

surviving spouse was concerned such that the surviving spouse was allowed to 

elect against any such conveyance subject to the vested rights of any income 

beneficiary whose interest became vested prior to the death of the conveyor. 

The surviving spouse was entitled to one-third of the conveyance if the conveyor 

is survived by more than one child, or by one or more children and the issue of a 

deceased child or children, or by the issue of more than one deceased child, and 

in all other circumstances one half thereof. 6 

In addition, the surviving spouse 

was entitled to personal property selection and maintenance if there were 

sufficient probate assets to pay the same. 7 

The 1969 law had a lot of loopholes which still resulted in the ability of a 

decedent to avoid the spouse receiving assets. i.e. life insurance proceeds were 

treated as non-testamentary and therefore not subject to the election. 8 

It was 

also unclear whether the elective share could include property that the decedent 

had transferred into joint tenancy and Minnesota law did not specifically state that 

joint tenancy property was subject to the election. Minnesota Courts held that 

joint tenancy property was not subject to the election and therefore passed to the 

surviving joint tenant—a possible loophole.. 9 

6 Minn. Stat. § 525.213 [1969 c 1003 s 2] 

7 Minn. Stat. § 525.215 [1969 c 1003 s 2] 

8 Minn. Stat. § 525.213 [1969 c 1003 s 1] 

9 See Tanick and Johnson Supra at 247n 30 citing Pappas v. Pappas, 177 N.W. 2nd 401, 403 (1970) 

3

The 1969 law also highlighted the problem of unjust enrichment of the spouse 

where the spouse would receive all joint tenancy property and then elect against 

a Will that allowed for assets to go to other beneficiaries. 

Lack of abatement—determination of whether the spousal elective share would 

be taken from which property…specific or general devisees, was yet another 

problem. 

c. Pre December 31, 1986 

Prior to December 31, 1986, Minnesota law on spousal rights to decedent 

spouse’s estate continued to be limited in some ways by the exclusions of certain 

forms of ownership interests from the reach of electing spouses. On the other 

hand, the law as existed then also allowed an electing surviving spouse to 

“double dip” by electing against transfers to others and also keeping any property 

transferred to the survivor by the decedent. The need for reform of the then 

existing laws on surviving spouses’ elective shares became apparent when 

courts were left to decide whether to honor the intent of decedents who left 

property, outside probate, to others or whether the surviving spouse should be 

entitled to some equitable relief in such circumstances. 10 

d. Post December 31, 1986 

As part of its effort to reform the laws on spousal rights, the Minnesota 

Legislature embraced some aspects of the UPC and opted to determine a 

spousal elective share by utilizing an “augmented estate” format whereby the 

surviving spouse may elect to take an elective share amount equal to the value 

of the elective share percentage of the augmented estate, taking into 

consideration the length of time the spouse and the decedent were married to 

10 See generally In re Jeruzal’s Estate, 130 N.W. 2nd 474 (1964) 

4

each other. 11 

The statutory notes define the augmented estate to mean the 

estate reduced by funeral and administration expenses, the homestead, family 

allowances and exemptions, liens, mortgages, and enforceable claims, to which 

is added a whole host of purported transfers by the decedent. Minn. Stat. 

§524.2-203 indicates that the value of the augmented estate consists of the sum 

of the values of all property, whether real or personal, moveable or immovable, 

tangible or intangible, wherever situated, that constitute the decedent’s net 

probate estate, the decedent’s non-probate transfers to others, the decedent’s 

non-probate transfers to the surviving spouse, and the surviving spouse’s 

property and non-probate transfers to others. 

4. THE ELECTIVE SHARE 

The statute recognizes the spouse’s right to elective share of the assets of a decedent 

who dies domiciled in Minnesota. The surviving spouse’s elective share percentages are broken 

down in the following schedule according to the amount of time the couples were married to 

each other: 

If the decedent and spouse 

were married to each other 

for: 

_______________________ 

Less than one yr 

One but less than two yrs 

Two but less than three yrs 

Three but less than four yrs 

Four but less than five yrs 

Five but less than six yrs 

Then elective share 

percentage is: 

__________________ 

Supplemental amount only 

3% of augmented estate 





11 Minn. Stat. § 524.2-202(a). 

5

Six, but less than seven yrs 

Seven but less than eight yrs 

Eight but less than nine yrs 

Nine, but less than ten yrs 

Ten but less than eleven yrs 

Eleven but less than twelve yrs 

Twelve but less than thirteen yrs 

Thirteen but less than fourteen 

Fourteen but less than fifteen 

Fifteen or more years 











Note: The calculation is the augmented estate as defined in Minn. Stat. §524.2-202 which 

includes different categories of property, including property transferred by the decedent within 2 

years of the date of death. See Minn. Stat. §524.2-202 (1) (iv). 

Note: The surviving spouse is entitled to no less than $50,000 in supplemental share. 12 

5. PRACTICAL CONSIDERATIONS 

As you consider whether your client should elect against the Will of a deceased spouse, 

keep in mind that the surviving spouse is already endowed with other statutory rights which are 

not taken into consideration when calculating the elective share amount. In other words, the 

surviving spouse receives these statutorily exempt properties in addition to the elective share 

amount. The exempt properties are: 

(a) Homestead – Minn. Stat. 524.2-402. Surviving spouse gets all if decedent has no 

surviving descendants. If there are surviving descendants, surviving spouse gets a 

life estate with remainder to descendants of decedent by representation. 

12 Minn. Stat. § 524.2-202(b) 

6

(b) Personal property not exceeding $10,000 value – Minn. Stat. §524.2-403(a)(i). 

(c) One automobile of any value – Minn. Stat. §524.2-403(a)(2). 

You should also pay particular attention to actions that may constitute waivers of the 

right to elective share. The statute recognizes that the rights endowed upon the surviving 

spouse may be waived partially or in whole, after marriage, by a written contract, agreement, or 

waiver signed by the party waiving after fair disclosure. 13 

Waivers can also be in the form of an antenuptial/prenuptial agreement pursuant to 

sections 519.11 of the Minnesota Statutes. 

Note: Waiver of “All Rights” or equivalent language, in the property or estate of a 

spouse is a waiver only of the right to elective share. Minn. Stat. § 524.2-213. 

If the surviving spouse is receiving medical assistance, the state is particularly interested 

in affording the medical assistance recipient the right to elective share even if the surviving 

spouse had previously waived rights either orally or by written contract. This reprieve though is 

not applicable to a validly executed antenuptial agreement. 14 

In the payment of elective share amounts, protection is given to other third parties who 

purchased property subject to election for value. These third parties are not liable to the 

surviving spouse unless, of course, they received notice of intention to file by the surviving 

spouse. 15 

6. MAKING THE ELECTION 

If you have decided after careful analysis that your client, the surviving spouse, should 

proceed with an election against the decedent’s will, you must now decide when and how to 

make the election. 

13 Minn. Stat. § 524.2-213. 

14 Minn. Stat. § 524.2-215(f). 

15 Minn. Stat. § 524.2-214. 

7

When - Minn. Stat. § 524.2-211(a). 

- Must be made within nine months after the date of the decedent’s death, or written 

six months after the probate of the decedent’s will, whichever is later. 

How - Minn. Stat. § 524.2-211. 

- By filing a petition in the Court and mailing or delivering a copy to the personal 

representative, if any. 

- Give notice of the time and place for hearing to interested persons and to the 

distributees and recipients of portions of the augmented estate whose interest will 

be adversely affected by the elective share: 

NOTE: If petition is filed more than 9 months after the decedent’s death, the 

decedent’s non-probate transfers to others are not included in computing the 

elective share. 

NOTE ALSO: If after filing, your client determines that she is better off without the 

elective share, she can withdraw her petition at any time prior to the Court making 

a final determination on the petition. Minn. Stat. § 524.2-211(c). 

7. PAYMENT OF THE ELECTIVE SHARE 

After going through all pertinent procedural steps and obtaining a favorable 

determination by the Court, the statute provides a roadmap on where the funds will be coming 

from to satisfy the spouse’s elective share. Under Minn. Stat. § 524.2-209, the elective share is 

paid in order from three buckets of available funds: 

(1) amounts which pass or have passed to the surviving spouse, whether testate or 

intestate and amounts of decedent’s non-probate transfer to the surviving spouse; 

(2) amounts which would have passed to the spouse but were disclaimed; and 

(3) surviving spouse’s property and non-probate transfer to others up to the applicable 

percentage thereof (the applicable percentage is twice the elective share percentage 

appropriate to the length of the marriage). 

If not satisfied with the above assets, then the surviving spouse’s share can be satisfied from 

the decedent’s probate estate and non-probate transfers to others. 

If the share is still not satisfied after applying the above, then the unsatisfied balance is 

paid from the remaining portion of the decedent’s non-probate transfers to others. This 

8

category includes properly gifted to others in excess of $10,000 in either of the two years prior 

to decedent’s death. Minn. Stat. § 524.2-205 (3)(iii). 

8. EXAMPLES TO ILLUSTRATE 

The best way to show how to compute the share is by examples. These examples of 

the computation of the elective shares have been re-printed with permission from the author, 

Robert A. McLeod’s The Spousal Elective Share, previously presented to the Ramsey County 

Bar Association Probate and Trust Law Section. 

In each example the surviving spouse gets the house, 1 car of any value, $10,000 of 

personal property and an allowance of $1,500 a month for 18 months. After the surviving 

spouse receives the exempt property the elective share is computed as follows: 

A. Husband dies with $1,000,000. They were married 20 years. Wife has no money. 

$500,000 is in joint tenancy with the spouse and $500,000 is devised to the children. In this 

case the election does not help. The spouse gets $500,000 under the election and $500,000 by 

joint tenancy anyway, so the election gives the spouse no more money. 

B. Husband dies with $800,000. They were married 20 years. Wife has $200,000. 

Husband devises $100,000 to wife and $700,000 to the kids. In this case, wife takes the 

elective share. She is entitled to $500,000 (50% of combined assets of $1,000,000). To pay 

her $500,000, M.S. § 2-209 provides that wife’s own assets of $200,000 plus the $100,000 

devised to her leaves $200,000 to be paid from the devise to the kids (M.S. § 2-209(b)). 

C. Husband dies owning $800,000. They were married 20 years. Wife has $200,000. 

Husband devised $100,000 to wife. $50,000 passes to wife in joint tenancy. Husband has 

$650,000 in joint tenancy with his brother. In this case the $500,000 is paid first from the wife’s 

$200,000, then $100,000 from the probate devise, then $50,000 from the joint tenancy assets 

and the last $150,000 from the decedent’s brother. 

D. Husband died with $400,000. Husband gave away $610,000 to his brother last year. 

Husband and wife were married 20 years. His estate is devised to his brother. In this case wife 

is entitled to $500,000 because the augmented estate is $1,000,000 ($4,000,000 + gifts in 

excess of $10,000) x 50%. To pay the wife $500,000, the first $400,000 is paid from the 

probate estate, 2-20-9(b), and then $100,000 must be paid from brother because the gift he 

received, 2-209(c) and brother is liable for the amount under 2-21(a). 

E. Husband died after being married to his wife 10.5 years (30%) with no kids and a will 

devising his estate to his brother, with the following financial facts: 

Husband: 

Exempt Assets 

9

House worth $400,000 and $220,000 mortgage 

Car worth $60,000 

$10,000 of tangible personal property 

$27,000 in cash 

Other Assets 

Stocks in his name totaling $50,000 

An IRA worth $100,000 naming his wife as beneficiary 

Real estate worth $450,000 and a mortgage of $150,000 

Line of credit debt balance owing of $50,000 

Life insurance totaling $50,000 

Husband gave his brother $385,000 one year ago 

Wife 

Wife has life estate in her parent’s home worth $50,000 

Wife has an income interest in a trust from her parents worth $100,000 

Wife has an IRA worth $100,000 

1.) Wife gets the exempt property of the house (including the debt thereon), the car, the 

personal property and an allowance of $1,500 a month for 18 months ($27,000) for a net total of 

$277,000 as the exempt property claim. 

2.) Compute the augmented estate: 

Husband’s assets total 

Stocks $50,000 

IRA $100,000 

Real Estate $450,000 

Life Insurance $50,000 

Gifts in excess of $10K $375,000 

Subtotal $1,025,000 

Wife’s assets total 

Life estate in other RE $25,000 (note only ½ is in estate 2-208(c)(2) 

Trust income interest $50,000 (same ½ restriction) 

IRA $100,000 

Subtotal $175,000 

Gross Augmented Estate $1,200,000 

Less debts: 

Mortgage ($150,000) 

Line of credit ($50,000) 

Net Augmented Estate $1,000,000 

Applicable fraction 30% 

ELECTIVE SHARE: $300,000 

3.) Now we pay the elective share of $300,000 

a.) The share is first paid from probate assets devised to the wife and from the nonprobate 

assets to the wife. M.S. § 2-209(a). In this case, nothing is devised to her but $100,000 

passes under the IRA to the wife so that is applied first. 

10

.) Next, assets owned by the spouse are counted. (It is not clear if assets are paid 

proportionally from these groups listed in M.S. § 2-209(a) or successively.) Note under M.S. § 

2-209(a)(3) the assets available to pay the elective share from M.S. § 2-207 assets is limited to 

assets up to the applicable percentage, which under this statute is twice the elective share 

percentage, which in this case is 60% of the assets. In other words, 60% of wife’s assets is 

counted, which is 60% of $175,000 or $105,000. 

c.) So far, $205,000 of the $300,000 elective share has been paid. Next, probate 

assets not devised to the spouse are used to pay the elective share. See 2-209(b). In this 

case, $50,000 of probate assets were devised to the husband’s brother so that is paid next. 

d.) Now, $225,000 of the elective share has been paid. The final $45,000 is paid 

from the gifts made to the brother under M.S. § 2-209(c). The brother is personally liable if this 

election is made within 9 months of death and if he has notice. See M.S. § 2-210, 211. 

4.) All total the wife gets $722,000 computed as follows: 

Exempt Property $277,000 

Elective Share $300,000 

Wife’s property not used to compute the elective 

$70,000 

share under 2-209(a)(3) 

Wife’s property not in Aug. Est. $75,000 

Total to Wife $722,000 

Recomputed another way: 

Wife’s total assets $250,000 

Exempt assets $277,000 

Husband’s IRA paid to her $100,000 

Elective share from brother’s assets $95,000 

Total to Wife $722,000 

9. ELECTIVE SHARE AND ESTATE TAXES 

H died last year survived by wife. Couple had no children. Will provided for all taxes to 

be paid from the residuary estate before distribution. H left house and personal belongings to W 

but left some cash to friends and relative. Residue of estate is divided equally between marital 

trust (Trust A) for W and family trust (Trust B) for other relatives. 

Assume W elects to take against the will and therefore Trust A was not established and 

the personal representative filed a federal estate tax return reflecting the elective share amount 

as a marital deduction. 

Assume also that after the full elective share based on length of marriage is exercised, 

the estate still owes $1,000,000 in federal estate taxes. 

11

- Should the surviving spouse’s elective share be calculated before federal estate 

taxes are deducted? 

- Should the tax payment clause in the will affect the amount of statutory elective 

share? 

- Is there relieve under the apportionment statute for the surviving spouse? 

Courts’ Position – Elective share of surviving spouse should be calculated before federal 

estate taxes are deducted and should not be charged with any part of tax if share was 

fully deducted in computing tax. See Matter of Shapiro, 362 N.W. 2d 390 (Minn. App. 1985) 

10. ELECTIVE SHARE AND SPOUSAL CONSENTS AND WAIVERS. 

If you use or routinely use consent clauses in your will for married couples, you should 

review Minn. Stat. §524.2-213 carefully to be sure you cover all the property intended by such 

waiver. A waiver of “all rights” or equivalent language only waives the right to elective share, 

not the right to homestead, exempt property, or family allowance. 

A properly drafted antenuptial/prenuptial agreement (complying with statutory 

requirements) can be used to waive statutory rights to claim elective share. 16 

Note, however, that prenuptial agreements executed by a fiancé can “not effectively 

waive her rights within ERISA. 17 

So when dealing with ERISA plans, special care must be taken 

to secure valid waivers, after the marriage, to the designation of a specified non-spousal 

beneficiary. 

In summary, four reasons for “Spousal Elective Share” 

1. The spouse has contributed to the family assets and therefore should be 

entitled to a share of the assets; 

2. Provides the surviving spouse with a share to continue to live and raise 

children of the relationship; 

3. The “forced share” is considered an extension of the decedent’s duty to 

support h/his spouse during h/his lifetime; 

16 Affiliated Bank Group, Ltd. v. Zehringer, 527 N.W.2d 585 (Minn. App. 1995). Note that this case 

appears to suggest that if a spouse agrees to accept a specific bequest in an antenuptial agreement in 

lien exercising her statutory rights, if there are insufficient assets in the estate to satisfy the bequest, the 

survivor has assumed the risk of such insufficiency of assets. Id. At 588. 

17 Zinn v. Donaldson Co., Inc., 799 F. Supp. 69 (D. Minn. 1992). 

12

4. Unspoken fourth: The spouse and children should not become wards of the 

State simple because the decedent decided to disinherit them. 

How To Avoid Spousal Election Claims 

o 

o 

o 

o 

o 

If marital issues, discuss issue early in process. 

If intent of client is to omit, discuss the spouses elective share right 

and the impact. 

Counsel client against omission or at least providing an amount equal 

to that which the spouse could elect. 

Do the best you can to provide candid advice and counsel and 

document your file to reflect that you addressed the issue with the 

client. 

Be sure to discuss the election and claw back and liability with 

Attorney-in-Fact who has control of a parent’s assets, particularly if 

there is a second marriage. 

13

SECTION 10 

Large Estates Panel – Dealing with 

Dasterdly Drafting Dilemmas: Solving 

Problems in Advance 

John R. Bedosky 


Plymouth 

E. Burke Hinds 

Hindsight FBS 

New Brighton 

Darryl L. Meyers 

Wells Fargo 

Vadnais Heights 

Charles T. “Chip” Parks 


Minneapolis 

Alan J. Yanowitz 

Yanowitz Law Firm, PLLC 

Rochester 

Kristine J. Merta 

Oxford Fianncial Group, Ltd. 

Edina 



Crummey Power Provisions (Hinds) ......................................................................1 

Trustee Appointment, Succession and Substitution Provisions (Bedosky) ........9 

Trust Asset Diversification and Concentration–Potential Solutions (Meyers) ..24 

Granting and Exercising Powers of Appointment (Parks) ..................................30 

Single Fund QTIP Marital Trust Incorporating The Delaware Tax Trap 

(Yanowitz) .................................................................................................................34

2013 Probate and Trust Law Conference 

Dealing with Dastardly Drafting Dilemmas: 

Solving Problems in Advance 

Crummey Power Provisions (Hinds) 

Crummey power provisions can be troublesome, although we rarely consider them once they are 

infused into our forms. The complexity of issues that need to be addressed is substantial. These 

include (1) establishing the amount subject to withdrawal and “hanging powers” to prevent 

unintended gifts; (2) identifying the contributor for gift and GST purposes, especially split-gift 

allocations for married couples and by future contributors who were not the original settlor of the 

trust; (3) gifts to multiple trusts in a particular year and deciding which gifts are subject to the 

power or not; (4) identifying who is granted a power and how the powers are allocated (e.g., 

children, grandchildren, spouse, etc.); (5) dealing with “indirect gifts” such as premium 

payments on insurance policies owned by the trust; (6) how to deal with powers that continue to 

hang or contributions to a “successor trust” after the initial trust has been terminated and divided 

into separate trusts; (7) properly lapsing the power that is hanging, especially when there are 

multiple trusts with hanging powers from different eras; (8) the manner in which notice may be 

given in a way to permit application of the annual exclusion but also not to create liability for 

trustees who fail to give written notice (including to minors or those under disability); (9) trustee 

options for satisfying a withdrawal request, if one is received; (10) whether discretionary 

distributions from the trust reduce the withdrawal power, as if requested by a beneficiary-powerholder; 

(11) excluding beneficiaries from being granted a power to withdraw for future gifts; 

(12) protecting against forced exercise in bankruptcy, divorce or otherwise, to the extent 

possible; (13) whether a power should be granted to the spouse of the contributor; and 

(14) whether the power can be amended by the trustees at a later date. 

The greatest fear, however, is whether the power is effective if a Crummey letter is not sent to 

the beneficiary. The IRS position on the notice that is sufficient to allow the annual exclusion 

may not, in fact, be the law. If you mandate written notice in the trust agreement but it is not 

given and the power lapses before notice if given may result in disallowance of the annual 

exclusion. Therefore, this form essentially permits ANY type of notice, in written or oral form 

and by any method to be sufficient. That permits evidence that sufficient notice of contributions 

was given, even in the first year to qualify. Also note that a power does not lapse until actual 

notice is received by the beneficiary and continues to hang. 

ARTICLE 1. POWERS OF WITHDRAWAL 

1.1 Powers Of Withdrawal. The following shall apply to all powers of withdrawal 

with respect to any trust established by this Agreement: 

Generally, No Spousal Power of Withdrawal Should be included 

(1) Grant Of Power Of Withdrawal To My Spouse. If my Spouse is living at the time 

of a Contribution, my Spouse shall have the power to withdraw property from the 

Trust Estate of such trust (including the contributed property) in an amount equal to 

the value of the contributed property (as of the date of such Contribution); provided 

1

however, that my Spouse’s power to withdraw with respect to Contributions made 

by each Contributor (other than my Spouse) during a calendar year shall be limited 

to an amount equal to the federal gift tax annual exclusion as defined by Code 

Section 2503(b). Notwithstanding the provision of paragraph 1.1(6), I shall be 

considered to be the sole “Contributor” with respect to any contribution I may 

make, notwithstanding any split gift election that may otherwise be made by my 

Spouse and me with respect to gifts in any tax year, and, therefore, my Spouse’s 

power of withdrawal shall be limited to a single gift tax annual exclusion as defined 

by Code Section 2503(b). 

(2) Grant Of Power Of Withdrawal To Children. Each of my Children living at the 

time of a Contribution shall have the power to withdraw property from the Trust 

Estate of such trust (including the contributed property) in an amount equal to the 

value of the contributed property (as of the date of such Contribution) divided by 

the number of such living Children; provided however, that each Child's power to 

withdraw with respect to Contributions made by each Contributor during a calendar 

year shall be limited to an amount equal to the federal gift tax annual exclusion as 

defined by Code Section 2503(b) and further reduced by gifts by any particular 

Contributor directly to or for the benefit of a Child of mine or to any other trust for 

the benefit of a Child of mine qualifying for the federal gift tax annual exclusion 

under Code Section 2503(b) on a date during any calendar year prior to the 

Contribution to this Trust. 

(3) Grant Of Power Of Withdrawal To Grandchildren. If the cumulative value of the 

Contributions by any Contributor during a calendar year exceeds the amount of the 

powers of withdrawal granted to my Children by paragraph 0, each of my 

Grandchildren living at the time of a Contribution shall have the power to withdraw 

property from the Trust Estate of such trust (including the contributed property) in 

an amount equal to the value of the contributed property (as of the date of such 

Contribution) divided by the number of such living Grandchildren; provided 

however, that each Grandchild's power to withdraw with respect to Contributions 

made by each Contributor during a calendar year shall be limited to an amount 

equal to the federal gift tax annual exclusion as defined by Code Section 2503(b) 

and further reduced by gifts by any Contributor directly to or for the benefit of a 

Grandchild of mine or to any other trust for the benefit of a Grandchild of mine 

qualifying for the federal gift tax annual exclusion under Code Section 2503(b) on a 

date during any calendar year prior to the Contribution to this Trust. 

(4) Grant Of Power Of Withdrawal To Descendants Of Grandchildren. If the value of 

the Contribution by any Contributor during a calendar year exceeds the powers of 

withdrawal granted to my Children and Grandchildren by paragraphs 0 and 1.1(3), 

each Descendant of my Grandchildren living at the time of a Contribution shall 

have the power to withdraw property from the Trust Estate of such trust (including 

the contributed property) in an amount equal to the value of the contributed 

property (as of the date of such Contribution) divided by the number of such living 

Descendants; provided however, that each Descendant's power to withdraw with 

respect to Contributions made by each Contributor during a calendar year shall be 

limited to an amount equal to the federal gift tax annual exclusion as defined by 

2

Code Section 2503(b) and further reduced by gifts by any Contributor directly to or 

for the benefit of a Descendant of a Grandchild of mine or to any other trust for the 

benefit of a Descendant of a Grandchild of mine qualifying for the federal gift tax 

annual exclusion under Code Section 2503(b) on a date during any calendar year 

prior to the Contribution to this Trust. 

(5) Contribution Defined. For purposes of this paragraph 1.1, the term "Contribution" 

means a non-testamentary transfer (direct or indirect, actual or imputed to the 

transferor) to the Trustee of any property to be held as part of the Trust Estate, 

which would be treated under Chapter 12 of the Code as a taxable gift of the 

Grantor (before taking into account the exclusion allowed by Code section 2503(b)), 

and also includes any premiums on policies of life insurance owned by the trust 

paid directly to any insurance company rather than first being transferred to the 

Trustees. "Grantor" is defined in paragraph [grantor definition paragraph]. In the 

case of any premium which is paid directly to an insurance company, the date of the 

contribution to the trust shall be deemed to be the date on which the premium 

payment is transmitted to the insurance company issuing the policy. The amount of 

any Contribution is its federal gift tax value, as finally determined for federal gift 

tax purposes. Contributions made by a Grantor's attorney-in-fact pursuant to a 

power of attorney shall be considered as made by the Grantor. 

(6) Contributor Defined. For purposes of this paragraph 1.1, the term "Contributor" 

means the person treated as having made the gift to the trust for federal gift tax 

purposes. If the Grantor is unmarried at the time of such contribution, the Grantor 

shall be the Contributor. If the Grantor is married at the time of the Contribution 

and informs the Trustee that the Grantor shall be treated as the Contributor of onehalf 

(½) of such contribution, and the spouse of the Grantor shall be treated as the 

Contributor of one-half (½) of such contribution (a “Split Gift”), then the Grantor 

and the Grantor’s spouse shall be treated by the Trustee as the Contributor of half 

of the value of assets transferred by the Transferor, except with respect to Powers 

of Withdrawal granted to a Grantor’s spouse that may not be split between spouses 

under Code Section 2513(a)(1). The Trustee may rely upon any election by the 

Grantor to treat all future transfers as “Split Gifts” until notified differently by the 

Transferor or the Transferor’s agent. With respect to premiums paid on insurance 

owned by the trust or other indirect contribution by an entity or another person on 

behalf of me or some other person, such as by an employer, the Grantor shall be 

deemed to be the person on whose behalf the premiums or other Contributions are 

made and the Contributor shall be determined with respect to such Contribution as 

provided in the foregoing provisions of this paragraph. 

(7) Term Of Power To Withdraw; Lapse. Each Power Holder shall have from the date 

of Contribution until thirty (30) days after the receipt of actual or written notice of 

such Contribution as described above to exercise the power by a written instrument 

delivered to the Trustees. If upon the termination of such thirty (30) day period the 

Power Holder has not exercised such power to withdraw, such power shall lapse, 

provided, however, if the cumulative lapse of such powers with respect to any 

calendar year would otherwise exceed the greater of (a) Five Thousand Dollars 

($5,000) or (b) Five Percent (5%) of the aggregate value of the assets of the Trust 

3

Estate or the proceeds of such assets out of which such power of withdrawal could 

be satisfied (the "Permitted Lapse Amount"), such powers shall not lapse but shall 

continue to be exercisable into the subsequent calendar year ("Carryover Powers"). 

All powers shall lapse to the extent of the Permitted Lapse Amount until all such 

powers have either been exercised by the Power Holder or lapsed pursuant to this 

paragraph 1.1(7). To the extent not previously utilized during any calendar year, 

any Permitted Lapse Amount shall lapse on December 31, of each year, except to 

the extent that the thirty (30) day lapse period for a particular Contribution has not 

yet ended. Consequently, it is my intention that such powers shall continue in 

existence with respect to any amount that would be a taxable gift by the Power 

Holder in the absence of such limitation upon the lapse of such powers. I am 

aware, however, that the application of this paragraph 1.1(7) may change as a result 

of amendments to Code Section 2514(e) or successor provisions, promulgation of 

Regulations or rulings by courts. If there is any such change in applicable law, 

then this paragraph 1.1(7) shall be construed with my primary intention that such 

power of withdrawal shall terminate as soon as possible but only to the extent that 

such termination shall not result in a taxable gift by the Power Holder and the 

Independent Trustee is authorized to make any amendments to this Article as may 

be necessary to satisfy such intention. 

(8) Notice of Withdrawal Right. Each eligible Power Holder (or the person designated 

by the Trustee or Power Holder to exercise an eligible Power Holder’s withdrawal 

right) shall be kept reasonably informed by the Grantor, Contributor or Trustee (or 

its agent or delegate) of all Contributions that are made or are anticipated to be 

made from which the Power Holder has or may have a power of withdrawal. 

Notice may be given orally or in writing, and such notice may include, by way of 

example (and without limitation), annually informing each Power Holder of 

Contributions and withdrawal rights, by providing the Power Holder with a single 

notice sufficient to apprise the Power Holder of current and expected future 

withdrawal rights, or any other means determined by the Contributor or Trustee to 

provide each eligible Power Holder (or the person who would exercise an eligible 

Power Holder’s withdrawal right) with reasonable notice and opportunity to 

exercise the power. The Trustees may rely upon information regarding the name, 

age, address and capacity of any Power Holder and the marital status provided by 

me or any other Grantor or Contributor. The primary responsibility for providing 

such notice shall be the Trustees, or whomever they may designate as their agent 

for the purpose of giving notice. Unless and until changed by the Trustees, 

[Grantor] shall be primarily responsible for providing such notice. 

(a) 

Designation Of Agent By Power Holder. Each Power Holder may 

designate an agent to receive notice of Contributions and rights of 

withdrawal. Such agent(s) may be Trustees or such other persons as the 

Power Holder may designate. If the Power Holder is under a legal 

disability, the Trustee may designate an agent for such Power Holder, as 

provided in paragraph 1.1(13). The Trustee may rely upon instructions 

given by such agent for the giving of notice when supplied with the 

designation of an agent signed by the Power Holder. If notice is given to 

4

(b) 

(c) 

(d) 

the designated agent, the Trustee may treat such notice as if given directly 

to the Power Holder. 

Evidence of Notice. I recommend, but do not require, that the Trustees (or 

an agent for the Trustees) notify each Power Holder (or designated agent) of 

(a) a Contribution to the Trust Estate and (b) such Power Holder's right of 

withdrawal related to such contribution within a reasonable time after a 

Contribution is made. Any such notice for a Power Holder under a legal 

disability should be given to the Powers Holder's designated representative 

as provided in paragraph 1.1(13) below. Notice may be given in any 

form—orally, in writing or by any form of electronic notice, including but 

not limited to email, voice mail or message machine, instant message, text 

message or in any other manner. 

Failure To Provide Or Delay In Providing Notice. A Power Holder's right 

of withdrawal is not contingent upon receipt of notice. Only the term of the 

power to withdraw and lapse of such power are dependent upon the Power 

Holder’s receipt of notice and the date upon which the Power Holder 

receives such notice. If notice is delayed or is not received by the Power 

Holder or designated agent, the power of withdrawal shall commence upon 

Contribution and continue until either exercised or lapsed as provided in 

paragraph 1.1(7). 

Written Request For Information. The existence or amount of property 

subject to a power of withdrawal will vary from time to time and the 

Trustees shall provide information requested by a Power Holder with 

respect to any rights of withdrawal by such Power Holder. 

(9) Withdrawal Right to be Exercised by Written Request. Each Power Holder shall 

exercise a withdrawal right by a written request delivered to a Trustee (or the 

Trustee’s designee) indicating the amount the Power Holder elects to withdraw. 

(10) Satisfaction Of Exercise Of Power To Withdraw; Excess Distributions. Satisfaction 

of any exercise of a power to withdraw shall be made by the Trustees within thirty 

(30) days after receipt of the writing exercising such power. The Trustees may 

satisfy any withdrawal rights under this Article by distributing cash, other trust 

property, fractional interests in trust property, or a split-dollar interest in a life 

insurance policy, as the Trustees deem appropriate. The Trustees are specifically 

authorized to borrow money from any source, including but not limited to the cash 

surrender values of any life insurance policies transferred to or held by the trust, to 

sell trust property, to surrender or otherwise dispose of any life insurance polices or 

other property transferred to or held by the trust, and to take any other action that 

may be necessary and appropriate to assure that withdrawal rights will be satisfied 

in a timely and expedient manner. Without limiting the Trustee's broad 

discretionary power to select trust property to satisfy a withdrawal right, I prefer 

that cash or tangible property be distributed before life insurance policies and other 

intangible property (especially as concerns Power Holders who are skip persons), 

unless the Trustees decide that another selection is warranted. If any Power Holder 

receives a distribution with respect to exercised powers in excess of the amount 

5

such Power Holder is entitled to withdraw, the Trustees shall immediately notify 

the Power Holder and require the prompt repayment of such excess amount. 

(11) Discretionary Distributions Reduce Amount Subject to Power. If the Trustees make 

a discretionary distribution to or on behalf of a Power Holder from any trust while 

a Power Holder has a presently exercisable power of withdrawal in such trust 

property, such discretionary distribution shall reduce the amount of such power in 

the same manner as if the Power Holder exercised such power at the time of such 

distribution. 

(12) Special Rule Regarding Multiple Withdrawal Rights. If (a) general powers of 

appointment (including powers of withdrawal) are conferred on the same person 

under this Agreement and one or more other trust agreements, (b) the lapses of such 

general powers of appointment or powers of withdrawal are to any extent measured 

by the amount that will not result in a taxable gift, and (c) such powers would 

otherwise appear to lapse in whole or in part at the same time, then, for purposes of 

taking such other lapses into account under this Agreement, the lapses under all 

such trust agreements (including this Agreement) shall be deemed to occur in the 

same order as the dates of execution of the trust agreements under which such 

powers were conferred beginning with the earliest. For purposes of interpretation 

and construction of this paragraph 1.1(12), as of the date of this Agreement, this 

paragraph 1.1(12) shall be considered to limit the termination of all powers of 

withdrawal by each Power Holder with respect to any calendar year pursuant to 

Code Section 2514(e) and Gift Tax Regulations promulgated thereunder in a 

manner in which the lapse of any powers vested in any Power Holder would not 

result in the Power Holder being deemed to have made a taxable gift for federal gift 

tax purposes. 

(13) Incapacity or Disability of Power Holder. If any Power Holder is legally unable to 

exercise the right of withdrawal granted under this paragraph 1.1, the Trustees shall 

designate an appropriate adult individual (who may be the Trustee, the Power 

Holder's parent, legally authorized representative, including, but not limited to a 

legal or natural guardian, committee, conservator, or attorney-in-fact under a 

durable power of attorney, or any other person) to receive the notification provided 

above and who may make the withdrawal on the Power Holder' behalf. However, 

in no event can I (or any other Contributor) make the withdrawal for any Power 

Holder regardless of relationship to such Power Holder. Any property received 

pursuant to the withdrawal right shall be held for the use and benefit of the Power 

Holder and shall not be used by the person who exercised the withdrawal right on 

behalf of the Power Holder to discharge that person’s legal obligation of support for 

that Power Holder. 

(14) Continuation of Withdrawal Right Upon Termination Of A Trust. Each Power of 

Withdrawal existing at the termination of the Initial or any other trust under this 

Agreement shall continue in effect after such termination, except that the power 

shall be exercisable out of any subsequent trust in which the Power Holder is a 

Primary Beneficiary, or, if none, any subsequent trusts in which the Power Holder 

is a Beneficiary. If a Power Holder is not a Beneficiary of any successor trust, the 

Trustees may in their discretion delay the funding of any subsequent trust for a 

6

easonable period of time, in order to permit sufficient time for the withdrawal 

rights of such Power Holders to be exercised or lapse, except that such delay may 

not reduce the amount allocable to the Marital Trust in a manner in which the estate 

tax marital deduction would be disallowed. With respect to any Powers of 

Withdrawal held by my Spouse (or another Grantor’s Spouse), such Power may not 

be applied to the Marital Trust if such application would result in the 

disqualification of the estate tax marital deduction (if so elected). 

(15) Restriction of a Withdrawal Right. Any Grantor (or a duly authorized agent) may, 

by a written instrument delivered to the Trustees at the time of a Contribution and 

with respect solely to such Contribution (and with respect to future Contributions to 

be made by the Grantor, if the instrument so provides), do any of the following: 

(a) 

(b) 

(c) 

(d) 

Exclude any person who would otherwise have a withdrawal right from 

exercising that withdrawal right as to such Contribution(s); 

Increase or decrease the amount subject to any Power Holder's withdrawal 

right as to such Contribution(s), except that the amount subject to the 

withdrawal right shall not exceed the amount of the Contribution; 

Change the period during which any Power Holder's withdrawal right as to 

such Contribution(s) may be exercised; and/or 

Change the manner and period during which any Power Holder's 

withdrawal right as to such Contribution(s) shall lapse. 

No such direction may in any way alter, amend or change any Power Holder's 

withdrawal right with respect to any prior Contributions or with respect to future 

Contributions by any Grantor. 

(16) Withdrawal Rights Personal To Power Holder; Lapse Upon Transfer. All Powers 

of Withdrawal shall be personal to the Power Holder and such powers shall not be 

transferable to any other person, including to the Power Holder’s estate. Except 

with respect to a withdrawal right that has been outstanding for fewer than thirty 

(30) days from the date of a Contribution, all Powers of Withdrawal shall 

immediately lapse upon a Power Holder’s assignment for the benefit of the Power 

Holder’s creditors, filing a voluntary petition in bankruptcy, being adjudicated 

bankrupt or insolvent, or consenting to or acquiescing in the appointment of a 

trustee in bankruptcy or a receiver in bankruptcy for all or any substantial part of 

the Power Holder’s assets or properties. Notwithstanding the foregoing, the 

applicable trust shall be liable for and subject to apportionment of death taxes 

related to such Power as may be applicable to the Power Holder’s estate. 

(17) Power to Amend. The Independent Trustees may amend this paragraph 1.1 in the 

manner provided by Article 8 [power to amend] to assure that Contributions qualify 

for the gift tax annual exclusion for federal gift tax purposes, except that no 

amendment may be made that would (a) cause any portion of any trust to be 

included in the gross estate of me or any other Contributor to a greater extent than 

before such amendment and (b) alter the rights of a Power Holder in any thenexercisable 

power of withdrawal before such amendment. 

7

1.2 Discretionary Payments From Initial Trust. To the extent possible, the Trustees 

shall maintain assets in the Trust Estate sufficient to satisfy the Powers of Withdrawal under 

paragraph 1.1. 

Form of Letter to Trustee re Split Gifts and Exclusion of Beneficiary from Grant of Power 

[CrumTee], Trustee 

[CrumAdd] 

Re: Contributions to [Grantorlc] [Year] IRREVOCABLE GRANTOR Trust Under Agreement 

Dated [Date] 

Dear [CrumTee]: 

Today, or within the next few days, I will be making a contribution to the trust referred to above. 

With respect to this contribution, and with respect to each and every contribution I make from this 

time forward until I inform you otherwise: 

Alt 1: Election to split gifts 

1. I am married and I hereby inform you that my spouse and I will be gift-splitting on our gift 

tax returns, and, therefore, you should consider that ½ of each gift is made by each of us as a 

"Contributor" as provided by paragraph 1.1(6) of the Trust Agreement. 

Alt 2: Election not to split gifts 

1. I am married and I hereby inform you that my spouse and I will not be gift-splitting on our 

gift tax returns, and, therefore, you should consider that the entirety of each gift is made solely by me 

as a "Contributor" as provided by paragraph 1.1(6) of the Trust Agreement. 

2. I hereby exclude from having a withdrawal right under paragraph 1.1( 

) of the Trust Agreement, as permitted by paragraph 1.1(15). 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 

8

Trustee Appointment, Succession and Substitution Provisions (Bedosky) 

The following materials contain two sets of sample trustee appointment, succession and distribution 

provisions. They represent a composite of provisions drafted for different documents at different 

times and for clients with different objectives. Some of the provisions contain alternative language. 

We did not include all of the possible alternatives but we did include a sufficient variety to highlight 

the nature of the choices they represent. 

We do not intend that any of the accompanying sample form provisions be used “out of the box.” As 

we will repeatedly stress, these are not boilerplate provisions. They must be read, studied, 

understood and coordinated with the remaining provisions of the trust instrument, as well as with the 

purpose and structure of a client family’s overall estate, business succession and financial plan. 

We have found that we spend a not inconsiderable amount of time addressing these issues with 

clients and drafting around our client’s tax and non-tax objectives. While the sophisticated tax and 

business succession strategies may appear to provide a sexier intellectual challenge (at least to us), 

fiduciary designation and succession is the stuff we deal with nearly every day. No one will 

appreciate the tax benefits produced by our meticulous attention to the technical details of the plan if 

there is conflict, litigation or improper administration resulting from poor fiduciary choices and the 

lack of foresight in planning for fiduciary succession. 

The approach we have NOT taken is to treat these provisions as boilerplate or to refrain from 

discussing the designation of fiduciaries with our clients. We believe the designation and succession 

of fiduciaries are among the most important decisions an estate planning client will consider. In our 

experience, we find that most clients do not understand the long-term implications of their fiduciary 

choices. We also find that our own prejudices, preferences and predispositions have a significant 

effect on our client’s fiduciary choices and the proper methods of planning for future succession. 

For example, many clients (and their advisors who for various reasons encourage this point of view) 

adopt a default position that excludes corporate and other professional fiduciaries, except as a last 

resort. These clients may focus on the anticipated “costs” and their preference not to admit 

“outsiders” into family financial affairs. They prefer, therefore, to name family members, and often 

the son or daughter who appears to have the most financial or business experience. Of course, the 

family fiduciary is also a beneficiary, and it’s right here that problems can arise. Our clients’ 

preferences are reinforced by a general distrust of large financial institutions (who appear to clients to 

place a larger emphasis on accumulating assets under management than they do to providing the 

promised extraordinary service once those assets are on the books), the lack of wisdom of so-called 

“financial experts” as reflected in their failure to avoid the same heuristic biases to which their clients 

are subject, and a failure on the part of the client’s attorneys to explain the duties and responsibilities 

imposed on non-professional fiduciaries and the possible consequences to both the client’s family 

and the fiduciary personally of such a deficiency in understanding. A matter of fiduciary liability, 

our forms generally permit certain conflicts of interest to exist and we exonerate trustees from 

liability for engaging in transactions that might otherwise be called “self-dealing.” We also take 

steps to minimize the potential tax problems that may arise when a beneficiary is also a trustee. What 

we need to discuss with clients, however, is how the appointment of a family member may affect the 

nature and balance of family relationships, often long after the client is gone. 

For example, how will the trustee-beneficiary react when faced with a choice that favors him at the 

expense of other beneficiaries—or favors other beneficiaries at his expense? What are the intrafamily 

dynamics in play? Are there latent family disputes going back to events that occurred (or 

9

didn’t occur) a long time ago? 1 Can the trustee-beneficiary say no to a distribution requested by 

certain other family members (assuming denying the distribution is the proper decision)? Will a 

trustee-beneficiary risk alienating one family member or family group by denying a distribution, if 

the trustee-beneficiary desires to retain their favor for other business or personal reasons? Or will the 

trustee-beneficiary want to ingratiate himself to another by being liberal in his policy of making 

distributions? Can the trustee and the other beneficiaries maintain a clear mental and emotional 

distinction between the legal role assumed by a fiduciary and the family role played by a father or 

mother, brother or sister? A trustee who is also a family member and beneficiary may be forced by 

conscience or by duty to make choices injurious to both his own rational self-interest and to longterm 

family harmony. 

Theoretically, an independent professional trustee is not subject to such conflicts. One of the 

responsibilities of a trustee is to be able to say no to a distributions request that is not in accordance 

with the settlor’s intention. If a professional fiduciary is capable of exercising greater impartiality 

and objectivity, then clients should be encouraged to consider that fiduciary as a viable alternative. 

One caveat, however, is that for many years, professional fiduciaries gave less attention to the 

fiduciary nature of their “client relationships” and more to providing the same kind of personal 

service that was standard practice in top professional service firms, all encouraged by a “sales” focus 

driven by upper management as the sure road to Wall Street favor. Coupled with the prospect of 

increased turnover, fueled by the accelerating use of trustee removal and replacement provisions, 

either by statutory authority or by express provision in a trust instrument, this shift in focus caused 

professional fiduciaries to treat trust beneficiaries as “clients,” for whom nothing was out of the 

question, at least during the sales process. More accommodating trust companies replaced 

professional trustees who did not toe the line. Salespeople (called “business development officers” 

or “financial advisors” in a laughably transparent attempt to fool the marketplace) were paid large 

bonuses relative to those paid to those who were charged to fulfill on the impossible promises made 

to bring business in the door. 

In response to market demands for increased fiduciary independence, a number of smaller, more 

boutique trust companies are being formed for the purpose of filling the gap. As a result, the large 

financial institutions are slowly coming around to refocusing on the long-term nature of their 

fiduciary responsibilities. 

In spite of this, we believe that there exist a large number of trust administration professionals who 

have consistently held to their values, in spite of financial incentives to the contrary, and provide 

value to families that far outweighs the fees they charge. Client perception of the fees charged by 

professional fiduciaries is often the primary driver of a decision to use family members or friends as 

trustees rather than a professional fiduciary. There are certainly many situations in which it is 

appropriate to use certain individuals as trustees; however, the clients should consider the risks and 

burdens they are placing on those individuals and whether those individuals can truly act 

independently, as well as the overall, long-term effects on family relationships, as having higher 

priority than a fiduciary’s fee schedule. In many cases, the fees charged by professional fiduciaries 

1 “Mom always liked you best.” Tommy Smothers to brother, Dickie Smothers. For those who do not remember (or 

were alive during) the 60’s and 70’s, the Smothers Brothers were one of the most popular and enduring comedy 

teams in history and built their act built around the tensions of sibling rivalry; they combined irreverent musical 

humor with subtle political satire, poking fun at institutions ranging from motherhood to the government and 

organized religion. They attracted a large devoted following from the burgeoning youth culture and drew 

considerable ire from more conservative quarters. 

10

do not significantly exceed (if at all) the fees charged by other professionals who provide money 

management services only, and represent a real bargain. 

Appointment of Initial Trustee 2 

Trustee Succession 

I appoint _________________ and ________________ [myself and my spouse], to serve as the 

initial trustees hereunder (sometimes collectively referred to in this instrument as “trustee” or the 

“initial trustee”). 

Resignation of a Trustee 

A trustee may resign by giving notice to me. If I am deceased on incapacitated, a resigning trustee 

shall give notice to the income beneficiaries of the trust and to any other trustee then serving. 

Option To the extent not prohibited by applicable law, any trustee may resign at any time without 

court approval, whether or not a successor has been appointed, provided the resigning trustee 

complies with any applicable state law governing the resignation of the trustee that may not be 

waived by a governing instrument. Such resignation shall be by [acknowledged] instrument 

executed by the resigning trustee and delivered to me, or if I am deceased on incapacitated, to any 

other fiduciary (and any Trust Advisor) acting hereunder, or if none, to my eldest living descendant 

(who, if a trustee is resigning, is a beneficiary of the trust of which such trustee is resigning), or if 

none, then to the guardian of my eldest living descendant (who, if a trustee is resigning, is a 

beneficiary of the trust of which such trustee is resigning), or, if such descendant is a minor and no 

guardian for such minor has been appointed and is acting, then to the parent of such descendant or 

other individual with whom such minor resides.] 

Trustee Succession Before My Incapacity or Death 

I may remove any trustee with or without cause at any time. If a trustee is removed, resigns or 

cannot continue to serve for any reason, I may serve as sole trustee, appoint a trustee to serve with 

me or appoint a successor trustee. 

Trustee Succession After My Incapacity or Death 

This Section and the following Sections of this Article shall govern the removal and replacement of 

my trustees upon my incapacity or death. 

*Option 1 – Spouse may serve alone and name additional and successors who take priority over 

Settlor’s named successors 


My spouse shall serve as my trustee and may act alone. My spouse may appoint additional 

and successor trustees (including a trustee whose appointment is designated for future effect), 

including my spouse, if my spouse is not then serving as a trustee. If my spouse at any time, 

or from time to time, is unable or unwilling to serve, my spouse may when able and willing 

assume or (as the case may be) resume office in lieu of any trustee for which this Section 

prescribes a tenure consisting of any period of inability or unwillingness. 

2 This Section may not be necessary, if the trustee or trustees are named or defined in a separate article or in the 

portion identifying the parties to the trust agreement. It is included here for completeness. 

11

Upon my spouse's incapacity or death, all of my individual trustees acting together shall have 

the power to appoint any additional or successor trustee. 

The appointment of any successor trustee for future effect may be revoked before such 

appointment becomes effective. 

*Option 1 a – 1 designated successor 

If my spouse fails or is unable to appoint a successor trustee, and no trustee (including a 

trustee whose appointment was designated for future effect) is willing or able to serve, then 

*[Name of Successor Trustee 1] shall serve as my successor trustee. 

*Option 1 b – list of designated successors 


trustee whose appointment was designated for future effect) is willing or able to serve, then, I 

appoint the following trustees, in the order named: 

*[Name of Successor Trustee 1], *[jointly, or either of them if one of them fails or 

ceases to serve,] then 

*[Name of Successor Trustee 2]*[, jointly, or either of them if one of them fails or 

ceases to serve]. 

*Option 1 c –designated successors appointed by majority of children. 


trustee whose appointment was designated for future effect) is willing or able to serve, then, 

my adult children, by majority vote, may appoint additional or successor trustees, including a 

descendant of mine. 

Trustee May Appoint Additional and Successor Trustees 

An additional trustee may be appointed by a then serving trustee (the “appointing trustee”) at 

any time (including a trustee whose appointment is designated for future effect), regardless of 

how many trustees are serving. An additional trustee appointed hereunder shall serve while 

the appointing trustee serves, and shall continue to serve if the appointing trustee fails or 

ceases to serve in lieu of any successor trustee named or identified in or pursuant to this 

Article by me, and any successor trustee named or identified herein by me shall serve only 

after the additional trustee so appointed is no longer serving. 

A trustee (the “appointing trustee”) may appoint successor trustees in accordance with the 

following: 

1. Any trustee serving at any time may appoint a successor trustee to serve when 

the appointing trustee fails or ceases to serve as trustee (including a trustee whose 

appointment was designated for future effect). 

2. If an appointing trustee names a successor trustee (including a trustee whose 

appointment was designated for future effect), and if I have also named or provided 

for the appointment of one or more successor trustees in or pursuant to this Article, 

the appointments I have made shall take priority, unless the appointing trustee 

12

provides otherwise in the instrument by which the appointing trustee appoints the 

successor trustee. 3 

*Option 2 – Settlor’s designated successors take priority over additional or successor trustees named 

by appointing trustees 


If both my spouse and I are unable or unwilling to serve or to continue to serve as trustee, 

then I appoint the following successor trustees, in the order named: 

*[Name of Successor Trustee 1], *[ jointly, or either of them if one of them fails or 

ceases to serve,] then 

*[Name of Successor Trustee 2]*[, jointly, or either of them if one of them fails or 

ceases to serve]. 

The appointment of any successor trustee for future effect may be revoked before such 

appointment becomes effective. 

Trustee May Appoint Additional and Successor Trustees 

*Option 3 a – All individual trustees acting together may appoint additional or successor trustees. 

Upon my spouse's incapacity or death, all of my individual trustees acting together shall have 

the power to appoint any additional or successor trustee. 

*Option 3 b – Each trustee can name an additional and successor trustees. 

An additional trustee may be appointed by a then serving trustee (the “appointing trustee”) at 

any time (including a trustee whose appointment is designated for future effect), regardless of 

how many trustees are serving. An additional trustee so appointed shall serve while the 

appointing trustee serves, and shall continue to serve if the appointing trustee fails or ceases 

to serve if the appointing trustee fails or ceases to serve only if no successor has been named 

or identified by me in or pursuant to this Article or all successors named or identified by me 

are unable or unwilling to serve. 

A trustee (the “appointing trustee”) may appoint successor trustees in accordance with the 

following: 

Any trustee serving at any time may appoint a successor trustee to serve when the 

appointing trustee fails or ceases to serve as trustee (including a trustee whose 

appointment was designated for future effect). 

If an appointing trustee names a successor trustee, and if I have also named or 

provided for the appointment of one or more successor trustees in or pursuant 

to this Article, the appointments I have made shall take priority. 4 

3 Successors named by acting trustees take priority over trustees named or designated by Settlor. Compare this to the 

text accompanying footnote 2. 

4 Successors named or designated by Settlor take priority over successors designated by acting trustees. 

13

Trustees of the Separate Trusts 

*Opt 3 The primary beneficiary of a separate trust created under this agreement may, upon attaining 

the age of *____, appoint himself or herself as a [(n) additional] trustee of his or her separate trust [to 

serve with the then serving successor trustee]. 

*Opt 3a 

At any time a beneficiary is serving as a trustee of his or her trust, there must be at least one 

other trustee serving with the beneficiary. 

*Opt 3a (i) - other trustee - individual or corporate fiduciary 

It is provided however, that the other trustee must be a person or a corporate fiduciary who 

qualifies to serve as an independent trustee. 

*Opt 3a (ii) - other trustee - attny, CPA or corporate fiduciary 

It is provided however, that the other trustee must be an attorney, a certified public 

accountant or a corporate fiduciary who qualifies to serve as an independent trustee. 

*Opt 3a (iii) - - corporate fiduciary only 

*Opt 3 b 

It is provided however, that the other trustee must be a corporate fiduciary who qualifies to 

serve as an independent trustee. 

At any time a beneficiary is serving as the sole trustee of his or her separate trust, the trustee may 

appoint, but shall not be required to appoint, an additional trustee as provided herein. A beneficiary's 

interest shall not be merged or converted into a legal life estate or estate for years because the 

beneficiary is the sole trustee. If this would still happen under applicable law, then an additional 

trustee shall be appointed in preference to such merger or conversion. 

Same *Opt 3a (i), (ii) and (iii) 

Separate trusts held under this Agreement may have different trustees. 

Trustee Substitution 

An independent trustee may be removed at any time, but only if, on or before the effective date of 

removal, 

*Opt1- Replacement Trustee - individual or corporate fiduciary 

a person who qualifies to serve as an independent trustee or a corporate fiduciary has been appointed 

and commenced service as an independent trustee. 

*Opt2- Replacement Trustee attny, cpa or corporate fiduciary 

an attorney, a CPA or a corporate fiduciary, each of which must qualify to serve as an independent 

trustee has been appointed and commenced service as independent trustee. 

*Opt3- Replacement Trustee - corporate fiduciary 

a corporate fiduciary has been appointed and commenced service as independent trustee. 

The independent trustee or corporate fiduciary so appointed shall not be a person who is related or 

subordinate as those terms are defined under Internal Revenue Code Section 672 (c) to the person 

authorized to substitute trustees. The trustee substitution power may be exercised by the first of the 

14

following who is then able to act and does not refuse to consider whether a trustee should be 

substituted: 

My spouse, then 

*Opt[Name of Successor Trustee Substitutor], then 

The primary beneficiary of the Trust if age 25 or older, then 

If the trust has no primary beneficiary who is age 25 or older, or if the primary beneficiary is 

unable to act, then by a majority of the beneficiaries then eligible to receive a distribution 

from the trust who are at least 25 years old, and if none of such beneficiaries are at least 25 

years old, then by a majority of the class consisting of (1) the persons serving as Guardians 

for minor Beneficiaries then eligible to receive a distribution from the Trust, (2) and the last 

person who then has capacity to act who served as guardian for any beneficiary over age 18 

and less than 25 years old (and, if such child had more than one guardian, all of such 

guardians acting together). 

A person having a removal power has the right to review Trust records and accountings. No person 

shall be liable for the exercise or failure to exercise the removal power. No person shall have the duty 

to monitor the performance of a trustee or take any action with respect to a Trust by reason of having 

a removal power. Each person having the power to remove the trustee of a Trust shall be held 

harmless and indemnified from the assets of the Trust for any claim or cause of action threatened or 

filed for exercising or failing to exercise the removal power. 

The right to remove a trustee under this subsection shall not be deemed to grant to the person holding 

that right any of the powers of that trustee. 

*Optional Provision-Insert If Trust Advisor Is Selected [Nothing in this subsection shall limit the 

authority of a Trust Advisor to remove a trustee under the provisions of Section ____ of this Article.] 

Alternate 1.05 Trustee Substitution 

[The primary beneficiary] [A majority of the group consisting of the beneficiaries] of the trust (other 

than the trustee that such group proposes to remove) who are then living and competent to act shall 

have the right to remove any trustee hereunder, whether that trustee is currently serving or has been 

named or designated to serve in the future, for any reason or no reason at all, but only if, on or before 

the effective date of removal, a person who qualifies to serve as an independent trustee has been 

appointed and commenced service the person or group exercising the right to remove. If any trustee 

is removed under this Section, any successor trustee appointed by the removed trustee shall not take 

office. 

The independent trustee so appointed shall not be a person who is related or subordinate as those 

terms are defined under Section 672 (c) of the Internal Revenue Code to the person or persons who 

are authorized to remove trustees. A person having a removal power has the right to review trust 

records and accountings. No person shall be liable for the exercise or failure to exercise the removal 

power. No person shall have the duty to monitor the performance of a trustee or take any action with 

respect to a trust by reason of having a removal power. Each person having the power to remove the 

trustee of a trust shall be held harmless and indemnified from the assets of the trust for any claim or 

cause of action threatened or filed for exercising or failing to exercise the removal power. 

The right to remove a Trustee under this subsection shall not be deemed to grant to the person 

holding that right any of the powers of that trustee. 

15

Unfilled Trustee Vacancy 

If the office of trustee of a trust is vacant and no designated successor trustee is able and willing to 

serve, then the following persons, in the order named shall appoint a successor *individual or 

corporate fiduciary as successor trustee. 

My spouse, then 

*Optional [Name of Successor Trustee Substitutor], then 

The primary beneficiary of the Trust, then 

If the trust has no primary beneficiary or if the primary beneficiary is unable to act, then by a 

majority of the beneficiaries then eligible to receive a distribution from the trust who are at 

least 25 years old, and if none of such beneficiaries are at least 25 years old, then by a 

majority of the class consisting of (1) the persons serving as Guardians for minor 

Beneficiaries then eligible to receive a distribution from the Trust, and (2) the last person 

who then has capacity to act who served as guardian for any beneficiary over age 18 and less 

than 25 years old (and, if such child had more than one guardian, all of such guardians acting 

together). 

Any beneficiary may petition a court of competent jurisdiction to appoint a successor trustee 

to fill any vacancy remaining unfilled after a period of 30 days. By making such 

appointment, the court shall not thereby acquire any jurisdiction over the trust, except to the 

extent necessary for making the appointment. If a beneficiary is a minor or is incapacitated, 

the parent or legal representative of the beneficiary may act on behalf of the beneficiary. 

Notice of Removal and Appointment 

Notice of removal shall be in writing and shall be delivered to the trustee being removed, along with 

any other trustees then serving. The notice of removal shall be effective in accordance with its 

provisions. 

Notice of appointment shall be in writing and shall be delivered to the successor trustee and any other 

trustees then serving. The appointment shall become effective at the time of acceptance by the 

successor trustee. A copy of the notice shall be attached to this agreement. 

*Optional [Any action taken pursuant to this Section shall be evidenced by an acknowledged, written 

instrument, delivered to the trustee so removed and/or appointed, as the case may be, and to any and 

all other trustees who may then be serving, and in the case of an appointment which shall be effective 

upon acceptance thereof by execution of an acknowledged, written instrument by the Trustee so 

appointed. A copy of each written instrument shall be attached to this agreement.] 

Minimum Number of Trustees After My Death 

Following my death, there shall at all times be a minimum of _________ trustees serving under this 

agreement for each trust created under this agreement unless an individual trustee is specifically 

authorized to serve as sole trustee or unless a corporate fiduciary is serving as trustee. 

If at any time there is only one individual trustee serving as trustee of a trust created under this 

agreement and no successor trustee is designated in this agreement, or the successor so designated is 

unwilling or unable to serve, the remaining trustee shall notify the primary beneficiary of the trust in 

writing that he or she must name an individual or corporate fiduciary to serve as an additional trustee. 

If a beneficiary is a minor or is incapacitated, the parent or legal representative of the beneficiary 

may act on behalf of the beneficiary. 

16

Option [In the event that the sole trustee of any trust is a beneficiary of the trust, the trustee [shall 

appoint an additional trustee as provided in this instrument]. 

Option [In the event that the sole trustee of any trust is a beneficiary of the trust, the trustee may 

appoint, but shall not be required to appoint, an additional trustee as provided in this instrument. A 

beneficiary’s interest shall not be merged or converted into a legal life estate or estate for years 

because the beneficiary is the sole trustee. If this would still happen under applicable law, then an 

additional trustee shall be appointed in preference to such merger or conversion.] 

Corporate Fiduciaries 

Any corporate fiduciary serving under this agreement as a trustee must be a bank, trust company, or 

public charity that is qualified to act as a fiduciary under applicable federal and state law and that is 

not related or subordinate to any beneficiary within the meaning of Section 672I of the Internal 

Revenue Code, and shall not include any trustee that has less than $100,000,000 under its 

management. 

Incapacity of a Trustee 

If any individual trustee becomes incapacitated, it shall not be necessary for the incapacitated trustee 

to resign as trustee. For trustees other than me, a written declaration of incapacity by the Cotrustee, 

if any, or, if none, by the party designated to succeed the incapacitated trustee, if made in good faith 

and if supported by a written opinion of incapacity by a physician who has examined the 

incapacitated trustee, will terminate the trusteeship. 

Appointment of Independent Special Trustee 

No individual trustee shall participate in any decision with respect to any tax election or option, 

under Federal, state or local law that could enlarge, diminish or shift his or her beneficial interest 

hereunder from or to the beneficial interest hereunder of another person. Any such tax election or 

option shall be made only by a trustee or trustees that do not have a beneficial interest hereunder or 

whose beneficial interest could not be enlarged, diminished or shifted by the election or option. If 

the only trustee or trustees who otherwise could exercise such tax election or option hold beneficial 

interests hereunder that could be so enlarged, diminished or shifted, another individual or a bank or 

trust company (but not an individual, bank or trust company that is related or subordinate within the 

meaning of Code Sec. 672I to any acting trustee) shall be appointed by the trustee or trustees to serve 

as an independent special trustee as to such property or with respect to such provision by an 

[acknowledged] instrument delivered to the person so appointed and the trustee so appointed shall 

alone exercise any such election or option. 

If for any other reason the trustee of any trust created under this agreement is unwilling or unable to 

act with respect to any trust property or any provision of this agreement, another individual or a bank 

or trust company (but not an individual, bank or trust company that is related or subordinate within 

the meaning of Section 672I of the Internal Revenue Code to any acting trustee) shall be appointed 

by the trustee or trustees as an independent special trustee as to such property or with respect to such 

provision by an [acknowledged] instrument delivered to the person so appointed and the trustee so 

appointed shall alone exercise any and all powers, rights or interests of the trustees over such 

property or with respect to such provision. The independent special trustee appointed shall not be 

related or subordinate to any beneficiary of the trust within the meaning of Section 672I of the 

Internal Revenue Code. 

An independent special trustee shall exercise all fiduciary powers granted by this agreement unless 

expressly limited elsewhere in this agreement or by my Trust Advisor in the instrument appointing 

17

the independent special trustee. An independent special trustee may resign at any time by delivering 

written notice of resignation to my trustee. Notice of resignation shall be effective in accordance 

with the terms of the notice. 

Rights and Obligations of Successor Trustees 

Each successor trustee serving under this agreement, whether corporate or individual, shall have all 

of the title, rights, powers and privileges granted to the initial trustees named under this agreement. 

In addition, each successor trustee shall be subject to all of the restrictions imposed upon, as well as 

all obligations and duties, given to the initial trustees named under this agreement. 

Additional General Provisions Regarding Trustees 

If the trustee is given discretion concerning distributions of income or principal, that discretion shall 

be absolute and uncontrolled and subject to correction by a court only if the trustee should act utterly 

without reason, in bad faith, or in violation of specific provisions of this Agreement. If the I have set 

forth general guidelines (as opposed to directions or dollar limits) for the trustee in making 

distributions, those guidelines shall be merely suggestive and shall not create an enforceable standard 

whereby a distribution could be criticized or compelled. It is my strong belief that the trustee will be 

in the best position to interpret and carry out the intentions expressed herein under changing 

circumstances. This Section shall not, however, apply to any standards framed in terms of health, 

education, maintenance or support (including support in an accustomed manner of living), as those 

words shall create an ascertainable standard for Federal tax purposes under Section 2041(b) of the 

Internal Revenue Code, when applied to a trustee’s power or a power held individually, although 

even in those cases the holder of the power shall have as much discretion as is consistent therewith. 

An interested trustee who is otherwise authorized to make distributions to himself or herself subject 

to an ascertainable standard may exercise such discretion, notwithstanding any contrary rule of law, 

unless such authorization would cause the trust property to be subject to the claims of the creditors of 

such tnterested trustee. 

Option 1 [Notwithstanding any other provision of this Agreement, each trustee is prohibited from 

making, voting on or otherwise participating in any discretionary distribution of income or principal 

from a trust that would discharge or substitute for a legal obligation of that trustee, including the 

obligation to support a beneficiary of the trust. Further, notwithstanding any other provision of this 

Agreement, any trustee authorized to distribute income or principal for his or her own health, 

education, maintenance or support in his or her accustomed manner of living, as those words shall 

create an ascertainable standard for Federal tax purposes under Section 2041(b) of the Internal 

Revenue Code, shall consider all resources reasonably available to himself or herself. Subject to 

that, in exercising discretion over distributions, the trustee may consider or disregard other resources 

available to any beneficiary.] 

Option 2 [Notwithstanding any other provision of this Agreement (including, but without limitation, 

any power specifically conferred upon a trustee hereunder), no trustee who is a beneficiary of any 

trust created hereunder shall ever participate as trustee of that trust in (i) the exercise, or decision not 

to exercise, any discretion over payments, distributions, applications, uses or accumulations of 

income or principal to or for the benefit of a beneficiary by the trustee, (ii) the exercise or decision 

not to exercise any power conferred on the trustees under subparagraphs (15) through (29) of Article 

FIFTH hereof, (iii) the exercise or decision not to exercise any powers, (iv) any decision about 

whether or not to change the situs of the trust, (v) the exercise or decision not to exercise any power 

as trustee to disclaim any property or power, or (vi) the exercise of any general power of appointment 

described in Section 2041 or 2514 of the Internal Revenue Code. If any trustee is under a duty to 

support a beneficiary or is acting as a guardian, conservator or committee of any person who is a 

18

eneficiary, such trustee shall not participate in the exercise, or decision not to exercise, any 

discretion over payments, distributions, applications or uses of trust property to or for the benefit of a 

beneficiary in discharge of any obligation of support. No trustee shall participate in the exercise of 

any discretion (including, but without limitation, any discretion which would constitute an “incident 

of ownership” within the meaning of Section 2042(2) of the Internal Revenue Code) with respect to 

any insurance policy on his or her life held hereunder. In each case, the determination of the 

remaining trustees or trustee shall be final and binding upon the beneficiaries of such trust. In 

addition, no individual shall serve as trustee of any trust which holds property with respect to which 

such individual has made a qualified disclaimer within the meaning of Section 2518 of the Internal 

Revenue Code.] 

Except to the extent, if any, specifically provided otherwise in this Agreement, references to the 

trustee shall, in their application to a trust hereunder, refer to all those from time to time acting as 

trustee and, if two trustees are eligible to act on any given matter, they shall act unanimously, and if 

more than two trustees are eligible to act on a given matter, they shall act by majority. In the 

exercise of discretion over distributions, if this Agreement provides that certain trustees may 

participate in distributions limited by an ascertainable standard while a different set of trustees may 

participate in distributions for any purpose, if the two sets of trustees (each acting by its own 

majority) want to distribute the same item of income or principal to different recipients, the 

distribution desired by the set of trustees participating in distributions for any purpose shall prevail. 

*Optional Section 1.14 

Provisions for Trust Advisor 5 

The function of the Trust Advisor is to direct my trustee in matters concerning the trust, and to assist, 

if needed, in achieving my objectives as manifested by the other provisions of my estate plan. 

Any Trust Advisor named or appointed under this Section must be a corporate fiduciary or an 

individual who is not related or subordinate to a transferor or any beneficiary within the meaning of 

Section 672I of the Internal Revenue Code. 

Designation of Trust Advisor 

I appoint *________________________ to serve as Trust Advisor of each trust created under 

this agreement. 

Resignation of Trust Advisor 

A Trust Advisor may resign by giving notice to me. If I am deceased, a resigning Trust 

Advisor must give notice to the income beneficiaries of the trust and to the trustee then 

serving. 

A Trust Advisor’s resignation takes effect on the date set forth in the notice, but in any event 

no earlier than thirty (30) days after the date of delivery of the notice of resignation, unless an 

earlier effective date is agreed to by me or by the trustee. A resigning Trust Advisor shall not 

be liable or responsible for the act of any successor Trust Advisor. 

5 A Trust Advisor can also be called a “Trust Protector.” Note that the Trust Advisor is given certain powers here 

and not others. 

19

Removal and Replacement of Trust Advisor 

I may remove any Trust Advisor with or without cause at any time. If a Trust Advisor is 

removed, resigns or cannot continue to serve for any reason, I may appoint a successor Trust 

Advisor. 

Authority of My Trust Advisor to Appoint a Successor Trust Advisor 

Any Trust Advisor (including successor Trust Advisors) may appoint a successor Trust 

Advisor in writing. The appointment of a successor will take effect upon the death, 

resignation or incapacity of the appointing Trust Advisor. If I have named a successor Trust 

Advisor, the appointment of a successor Trust Advisor under this subsection shall take effect 

only if all Trust Advisors that I have named fail to qualify or cease to act. 

Default of a Designated Trust Advisor 

If the office of Trust Advisor for a trust is vacant and there is no effectively named successor 

Trust Advisor, any beneficiary may petition a court of competent jurisdiction to appoint a 

successor Trust Advisor to fill any vacancy remaining unfilled after a period of 30 days. The 

court making the appointment will not acquire any jurisdiction over the trust except to the 

extent necessary for making the appointment. 

If a beneficiary is a minor or is incapacitated, the parent or legal representative of the 

beneficiary may act on behalf of the beneficiary. 

Rights of Successor Trust Advisors 

A successor Trust Advisor has all of the authority of any predecessor Trust Advisor, but will 

not be responsible for the acts or omissions of its predecessor. 

Power to Remove and Appoint Trustees 

During any time I am incapacitated and following my death, my Trust Advisor may remove 

any trustee of a trust created under this agreement other than my spouse or any of my 

descendants. 

If the office of trustee of a trust is vacant and no successor trustee is designated, my Trust 

Advisor may appoint an individual or a corporate fiduciary to serve as trustee. 

A Trust Advisor may not appoint itself as a trustee. A Trust Advisor may simultaneously 

serve as both Trust Advisor and trustee. 

Good Faith Standard Imposed 

The authority of my Trust Advisor is conferred in a nonfiduciary capacity, and my Trust 

Advisor is not liable for any action taken in good faith. My Trust Advisor is not liable for 

any act or omission to act. My Trust Advisor must be reimbursed promptly for any costs 

incurred in defending or settling any claim brought against it in its capacity as Trust Advisor 

unless it is conclusively established that the act or omission to act was motivated by an actual 

intent to harm the beneficiaries of the trust or was an act of self-dealing for personal benefit. 

Power to Amend Trust Agreement 

During any time I am incapacitated and following my death, my Trust Advisor may amend 

any provision of this agreement as it applies to any trust to which the Trust Advisor is serving 

as Trust Advisor to: 

Alter the administrative and investment powers of my trustee; 

20

Reflect tax or other legal changes that affect trust administration; 

Correct ambiguities, including scrivener errors, that might otherwise require court 

construction or reformation; 

Grant a beneficiary of any trust created under this agreement the testamentary power 

to appoint all or part of the beneficiary’s trust or trust share to the creditors of the 

beneficiary’s estate. My Trust Advisor may require, as a condition for the 

beneficiary’s exercise of such power, that the beneficiary first obtain the consent of 

my Trust Advisor. Any testamentary power of appointment granted by my Trust 

Advisor must be in writing and may be revoked by my Trust Advisor at any time 

during the lifetime of the beneficiary to whom the power was given. I suggest, but do 

not require, that my Trust Advisor exercise this authority to subject trust property to 

estate tax instead of the generation-skipping transfer tax when it appears that it may 

reduce overall taxes. 

My Trust Advisor may not amend this agreement in any manner that would result in a 

reduction in the estate tax marital deduction under Section 2056 of the Internal 

Revenue Code or the estate tax charitable deduction under Section 2055 to which my 

estate would otherwise be entitled. Further, my Trust Advisor may not limit or alter 

the rights of a beneficiary in any trust assets held by the trust before the amendment. 

Any amendment made by my Trust Advisor in good faith is conclusive on all persons 

interested in the trust and my Trust Advisor is not liable for the consequences of any 

amendment or for not having amended the trust. Any amendment to this agreement 

made by my Trust Advisor must be made in a written instrument signed by my Trust 

Advisor. My Trust Advisor must deliver a copy of the amendment to the income 

beneficiaries and to my trustee. 

Not a General Power of Appointment 

My Trust Advisor may not participate in the exercise of a power or a discretion conferred 

under this agreement that would cause my Trust Advisor to possess a general power of 

appointment within the meaning of Sections 2041 and 2514 of the Internal Revenue Code. 

Specifically, my Trust Advisor may not use such powers for his or her personal benefit, nor 

for the discharge of his or her financial obligations. 

Release of Powers 

My Trust Advisor, acting on its own behalf and on behalf of all successor Trust Advisors, 

may at any time, by a written instrument delivered to my trustee, irrevocably release, 

renounce, suspend or reduce any or all powers and discretions conferred on my Trust Advisor 

by this agreement. 

No Duty to Monitor 

My Trust Advisor has no duty to monitor any trust created under this agreement in order to 

determine whether any of the powers and discretions conferred by this agreement on my 

Trust Advisor should be exercised. Further, my Trust Advisor has no duty to be informed as 

to the acts or omissions of others or to take any action to prevent or minimize loss. Any 

exercise or non-exercise of the powers and discretions granted to my Trust Advisor is in the 

sole and absolute discretion of my Trust Advisor, and will be binding and conclusive on all 

persons. My Trust Advisor is not required to exercise any power or discretion granted under 

this agreement. 

21

Definitions 6 

Compensation 

Any Trust Advisor serving under this agreement is entitled to receive (but is not required to 

accept) reasonable compensation for services as determined by my trustee. My Trust 

Advisor is entitled to reimbursement for all expenses incurred in the performance of its duties 

as Trust Advisor, including travel expenses. 

Serving in the capacity of Trust Advisor does not prevent my Trust Advisor from also 

providing legal, investment or accounting services on behalf of the trust or the trust 

beneficiaries. If my Trust Advisor is providing professional services, my Trust Advisor may 

charge its typical fees for professional services, and may also be compensated for its services 

as Trust Advisor. 

Right to Examine 

The books and records of each trust created under this agreement, including all 

documentation, inventories and accountings, must be open and available for inspection by my 

Trust Advisor at all reasonable times. 

For purposes of this agreement, the following terms have the following meanings: 

Independent Trustee 

The term “independent trustee” means a trustee who is not an interested trustee as defined in 

subsection 0(b). Whenever (1) a power is granted exclusively to an independent trustee 

(including an independent special trustee) or (2) the phrase “other than an interested trustee” 

is used, then the power or discretion may be exercised only by an independent trustee. 

Whenever my will specifically prohibits an Interested trustee from exercising discretion or 

performing an act, then only an independent trustee may exercise that discretion or perform 

that act. 

Interested Trustee 

The term “interested trustee” means a trustee who (1) is a transferor of any property to the 

trust or a beneficiary of the trust; (2) is related or subordinate to a transferor or beneficiary; 

(3) can be removed and replaced by a transferor with either the transferor or a party who is 

related or subordinate to the transferor; or (4) can be removed and replaced by a beneficiary 

with either the beneficiary or a party who is related or subordinate to the beneficiary. 

For purposes of this subsection, (1) “transferor” means a person who transferred property to 

the trust, including a person whose disclaimer resulted in property passing to the trust, but 

only with respect to the transferred property (including income and gain on, and reinvestment 

of, such property); (2) “beneficiary” means a person who is or in the future may be eligible to 

receive income or principal from the trust pursuant to the terms of the trust, even if such 

person has only a remote contingent remainder interest in the trust, but not if the person’s 

only interest is as a potential appointee under a power of appointment, such as a testamentary 

power held by a living person; and (3) “related or subordinate” means related or subordinate 

within the meaning of Section 672I of the Internal Revenue Code. 

6 Included are only definitions of terms that bear on trustee appointment, removal and selection. There will likely be 

other terms to define. Some terms defined here may need to be eliminated as unnecessary depending upon the 

draftsperson’s approach to trustee succession. 

22

Optional Provision requiring additional and successor Trustees to possess certain 

qualifications. 

The Grantor appoints ____________________ to serve as Trustee hereunder. 

__________ may appoint additional and successor Trustees (including a Trustee whose 

appointment is designated for future effect), including ____________, if 

______________ is not then serving as a Trustee, so long as the additional or successor 

Trustees so appointed possess the following qualifications: (1) a bank or trust company 

which has a combined capital and surplus in excess of $1,000,000 (no substantial portion 

of which is directly or indirectly owned by any beneficiary of the trust with respect to 

which the appointment is made) or (2) an individual who is experienced in business, 

finance, or investments or who is an attorney experienced in the trust or tax fields and 

who is not (a) a transferor of property to the trust, including a person whose qualified 

disclaimer resulted in property passing to the trust; (b) a person who is, or in the future 

may be, eligible to receive income or principal pursuant to the terms of the trust, 

including a remote contingent remainder interest, but not if such person’s only interest is 

as a potential appointee under a non-fiduciary power of appointment held by another 

person, the exercise of which will take effect only in the future, such as a testamentary 

power held by a living person; or (c) any person who is related or subordinate within the 

meaning of Section 672(c) of the Internal Revenue Code with respect to either of the 

individuals described in (a) and (b). 

23

Trust Asset Diversification and Concentration–Potential Solutions (Meyers) 

A. “Navigating the Middle” under the UPIA 

1. Start Early with Fiduciary. 

If a client wishes to modify the traditional duty of diversification, start work early 

with the corporate fiduciary. Not all corporate fiduciaries have the same risk 

appetite or resources to monitor investment recommendations, private 

investments, and so on. Often, understanding the “deal” is as important as 

drafting the appropriate language. 

2. Hit all Factors 

a. Scope of Waiver 

The UPIA §1(b) 7 allows the grantor to expand, restrict or eliminate provisions 

of the UPIA. There seems little reason not to refer specifically to this grant of 

statutory authority and to explicitly call out whether an elimination or more 

moderate restriction is intended. 

b. Statement of Purpose 

UPIA §3 requires mandatory diversification absent special circumstances in 

which non-diversification would better serve the purpose of the trust. While 

§3 seems not be perfectly in accord with §1(b), stating the purpose of the trust 

and its impact on the diversification default rule may assist in reconciling the 

two provisions. 

GRAT—GRATs concentrate the trust assets in an effort to maximize 

the “free option” to the remainder beneficiary. Like any option, the 

value increases with increases in volatility (at least in theory). 

Minimizing volatility would decrease the value of the free option, 

thus running counter to a central purpose of the trust. 

Appreciated Assets—Tax on embedded gains is specifically called 

out in the comments to §3 as a reason that would militate against 

diversification as a strategy. Drafting a trigger is simple (“diversify if 

portfolio value drops by 20% but not until then”) but one wonders 

how effective. (What if the portfolio drops 20% while the broad 

market drops 40%? How fast must sales occur?) More sophisticated 

specification of diversification mechanics, ex ante, in the document 

can easily lead to unintended consequences. 

Family Business—Retention of a family businesses is also called out 

in the comments to §3 as a reason that militates against 

diversification. From the fiduciary’s standpoint, statement of this 

purpose will help, but the real test will come in specifying the 

mechanics of retention—that is, when over the course of time might 

the business no longer count as a “family business,” should it be 

retained regardless of financial condition, what duty of evaluation is 

imposed on the fiduciary in evaluating the status of the business? 

7 Again, we are citing UPIA provisions. Minn. Stat. §501B.151 follows the UPIA with the insertion of “subdivision” for 

“section” (e.g., section 1(b) would be subdivision 1(b)). 

24

How specific should you be?—Good question. While vagueness in 

statement of purpose may give little comfort to the fiduciary, overspecification 

of purpose may lead to unproductive future sparing over 

the scope of the purpose statement. Consider a clear, simple 

statement of purpose. Impose specific conditions as part of a 

statement of administration to meet that purpose. 

c. Address §2(b) factors 

Even though you have expressly stated an intent to restrict the standard and 

stated how that restriction serves the purpose of the trust, address all relevant 

§2(b) facts. 

d. Substitute Standard 

If you restrict, expand or eliminate the §3 duty, failure to specify a substitute 

standard does little to ensure that the action will be respected. The standard 

may be simple (“don’t sell”) or more nuanced, but it should be clear. Ask 

yourself whether a court could enforce the standard. For longer trusts, 

assuming a fiduciary will accept, chances are that a court will eventually be 

called upon to review. 

e. Exculpation 

Exculpate the fiduciary for following the directive. Absent specific statutory 

authority respecting a broad release of liability, “good faith” is probably the 

baseline duty that the fiduciary must follow to avail itself of the exculpation 

provision. UTC §801 is a fair statement of the common law in this regard. 

3. Short-term Estate Planning Trusts 

a. Rationale for Negating: Seeking arbitrage advantage not merely compensated 

market risk 

b. Direct Retention 

i. Always. Grantor can substitute if desired 

ii. Sell if. Longer GRAT/IDGT 

c. Sample Clause 

i. Short-term GRAT—Two to Three Year GRAT 

Provision 

UPIA Reference 

The Grantor hereby specifically exercises 

all rights that he may have to limit, restrict 

or eliminate Trustee duties under 

Minnesota Statutes §510B.15, the 

Uniform Prudent Investor Act, by 

eliminating the duty to diversify the assets 

of the Trust in light of the special 

circumstances of this trust. 

Calls forth the source of 

authority (§1(b)) and 

states the intent is to 

eliminate a UPIA 

provision 

25

As a Grantor Retained Annuity Trust, 

diversification is inconsistent with the 

special purpose of the Trust, and the 

potential gains to be derived from asset 

concentration dominate any 

considerations related to economic factors 

and inflation (or deflation) during the term 

of the Trust. Further, such concentration 

is not inconsistent with tax considerations 

applicable to the trust and beneficiaries, 

liquidity demands of the Trust, or the 

objectives of the Trust regarding 

distributions to either the annuity or 

remainder beneficiaries. 

The Grantor therefore specifically directs 

the Trustee to retain as a part of the Trust 

[the funding asset], including any 

successor entity or organization, without 

regard to the value of such [funding asset] 

in relation to the value of the Trust until 

the expiration of the Fixed Term, and the 

Grantor hereby exonerates the Trustee 

from liability for continuing to retain [the 

funding asset] during the Fixed Term 

ii. Longer-term GRAT or IDGT 

Provision 

Indicates purpose of trust 

(here simply asserted 

without more) as 

inconsistent with 

diversification (§3) and 

then aligns §2(b) factors 

to support that assertion. 

Substitute Rule: Here, 

very simple—“keep 

asset” 

Exculpation: Direct and 

complete (good faith 

assumed in acceptance of 

trust mandate) 


The Grantor hereby specifically exercises 

all rights that he may have to limit, restrict 

or eliminate Trustee duties under 

Minnesota Statutes §510B.15, the 

Uniform Prudent Investor Act, by limiting 

the duty to diversify the assets of the Trust 

in light of the special circumstances of 

this trust. 

Diversification is not a dominant need of 

this Grantor Retained Annuity Trust but 

may become so over the term of the Trust. 

This Trust is intended to support the 

annuity payment to the current beneficiary 

and any interest of the remainder 

beneficiary derives solely from excess 

gains that may derive from asset 

concentration. Economic factors, 

inflation (or deflation), taxes and liquidity 

are not of importance to the purpose of the 




limiting a UPIA 

provision 

Indicates purpose of 

trust. As trust term 

increases, purpose 

elaboration increases as 

does the elaboration of 

how the purpose aligns 

with the §2(b) factors. 

26

Trust. The value of the Trust and total 

return over time is of importance. 

The Grantor therefore specifically directs 

the Trustee to retain as a part of the Trust 

[the funding asset], including any 

successor entity or organization, without 

regard to the value of such [funding asset] 

in relation to the value of the Trust until 

such time that the per-unit value of [the 

funding asset], adjusted for any splits or 

other relevant corporate actions, shall be 

less than 30% of the initial funding value 

of [the funding asset]. At that time, the 

Trustee shall begin a program of 

diversification under customary standards 

utilized by the Trustee, and according to a 

reasonable implementation schedule 

determined by the Trustee. 

The Grantor hereby exonerates the 

Trustee from liability for continuing to 

retain [the funding asset] upon the 

conditions set forth and further exonerates 

the Trustee for its actions, undertaken in 

good faith, in diversifying the asset, 

should such diversification occur upon the 

conditions stated. 

Substitute Rule: Rule 

clarity obtained here by 

specifying two 

regimes—stock less than 

30% of initial value, all 

else. There is no 

ambiguity as to what 

regime applies. Action 

in each regime is clearly 

stated. 


complete during retention 

phase and premised on 

good faith during 

diversification phase. 

4. Long-Term Trusts. Weaker likelihood of success 

a. Purpose: Strength of critical and strength of substitute standard 

i. “Mixed Economic/Non-Economic Purpose” 

To the extent that a trust is merely a financial asset pool generating a 

financial return for beneficiaries, diversification will almost always be the 

prudent course. There are times, however, when another purpose may 

dominate; e.g., the desire to retain a family business noted in the 

comments to UPIA §3. A family business supports both economic and 

non-economic components of benefit. It may be possible to frame a longterm 

trust as a wrapper for a family business in such a way that the basic 

diversification requirement can be limited. 

ii. Substitute Standard: Can a Court Approve it? 

A. Statement of Future State: Poor option 

Any statement of future state inevitably suffers from too much 

rigidity or too little. For example, a client may insist upon a clause to 

never diversify: “My trustee shall continue to hold the contributed 

common shares of Coca Cola for all time, up to and including the 

27

ultimate burning out of the sun and destruction of our solar system. It 

is way better than Pepsi.” Any direction to hold a single asset as a 

pure investment under any and all conditions is as foolish as our 

hypothetical clause suggests, and both drafters and trustees should 

avoid such an obvious trap. 

Alternatively, specifying a future state can lead to little real help for 

the fiduciary: “My trustee shall continue to hold the contributed 

common shares in Coca Cola as an asset of the trust but may sell 

such shares as they, in their absolute discretion, shall deem prudent 

based upon the trustee’s evaluation of market conditions, consumer 

tastes and preference and other relevant macroeconomic factors.” 

Unfortunately, “may sell” is as good as “shall sell.” Even if a trustee 

sought to hold the asset, the expense of evaluating and documenting 

their evaluation of market conditions, etc., may render trust 

administration uneconomical. 

B. Statement of Governance Method and Oversight? 

b. Cost Savings? 

If a long-term trust relaxes the basic obligation to diversify, can a 

trustee obtain comfort from a clear statement of governance 

obligations on the part of the trustee? This will often be an uncertain 

undertaking and requires early and detailed work with the proposed 

trustee to determine what level of detail will provide sufficient 

comfort to the trustee while meeting the needs of the grantor. 

A direction to retain may actually result in greater expense of administration 

that ordinary trust administration if the trustee is obligated to evaluate 

multiple factors in making the decision to sell or retain. This will typically 

not square with the expectations of many grantors. 

c. Sample Clause: Family Business 

Provision 


The Grantor hereby specifically exercises all 

rights that he may have to limit, restrict or 

eliminate Trustee duties under Minnesota 

Statutes §510B.15, the Uniform Prudent 

Investor Act, by severely limiting the duty to 

diversify the assets of the Trust in light of the 

special circumstances of this Trust. 

Diversification is not a significant purpose of 

this Trust. The Trust will initially hold a 

majority stake in the XYZ company, a family 

business, and it is my firm intention that the 

Trustee shall continue to hold its interest in 

XYZ, including any successor entity or 

organization, during the Trust term unless the 




limiting a UPIA 

provision 

Indicates purpose of trust. 

As trust term increases, 

purpose elaboration 

increases as does the 

elaboration of how the 

purpose aligns with the 

§2(b) factors. 

28

terms of this Trust expressly and 

unambiguously require the Trustee to 

diversify the trust assets. The dominant 

purpose of this Trust is to hold the shares of 

XYZ as a family company so that my 

beneficiaries may have the opportunity, 

whether some or all, to experience 

entrepreneurial reward and risk, including the 

loss of all assets held by XYZ or the Trust. 

The benefit that a beneficiary may draw from 

this Trust is primarily one of entrepreneurial 

competence and, secondarily, one of financial 

benefit. Any benefit that a remainder 

beneficiary may derive is secondary to that of 

any current beneficiary and derives solely 

from the opportunity of being involved in the 

family business. Economic factors, inflation 

(or deflation), taxes and liquidity are not of 

importance to the purpose of the trust, nor is 

the value of the trust or total return over time. 

The Trustee shall, however, divest itself of its 

interest in XYZ at the earliest of such time as 

1) no current or remainder beneficiary is 

employed as an officer of XYZ or 2) a 

majority of the then current beneficiaries of 

the trust request in writing that the Trustee 

divest its interest in XYZ. At that time, the 

Trustee shall begin a program of 

diversification under customary standards 

utilized by the Trustee, and according to a 

reasonable implementation schedule 

determined by the Trustee. 

The Grantor hereby exonerates the Trustee 

fully from liability for continuing to retain 

XYZ upon the conditions set forth. The 

Trustee shall not be obligated to inquire into 

the financial or administrative operations of 

XYZ and, to the extent that it should ever 

have occasion to inquire of the company for 

any purpose, shall conclusively rely upon the 

averments made by the duly authorized 

officers or agents of XYZ. The Grantor 

further exonerates the Trustee for its actions, 

undertaken in good faith, in diversifying the 

asset, should such diversification occur upon 

the conditions stated. 

Substitute Rule: Rule 

clarity obtained here by 

specifying that fiduciary 

should diversify upon 

lack of family 

involvement or interest. 


complete during retention 

phase and premised on 

good faith during 

diversification phase. 

29

Granting and Exercising Powers of Appointment (Parks) 

GRANT OF TESTAMENTARY SPECIAL POWER OF APPOINTMENT 

Upon the death of the Beneficiary, subject to paragraph X.XX, the Trustee shall 

distribute whatever then constitutes such separate trust, including principal and all undistributed 

income, in accordance with the exercise by the Beneficiary of a special power of appointment 

granted to the Beneficiary, to, or for the benefit of, any one or more members of the group consisting 

of [the Beneficiary’s spouse, subject to the provisions of paragraph Y.YY,] the Settlor’s issue [and 

any one or more Charitable Organizations]. If and to the extent that the Beneficiary shall fail to 

exercise the power of appointment herein granted, whatever constitutes such separate trust at his or 

her death shall be distributed to . . . . 

* * * 

A special power of appointment shall be exercised only by a valid will specifically 

referring to the power of appointment and may be exercised in such amounts and proportions and for 

such estates and interests and outright or upon such terms, trusts, conditions and limitations as the 

person exercising such power may direct. A special power of appointment (1) may not be exercised 

in favor of the holder of such power, the creditors of the holder of such power, the estate of the 

holder of such power or the creditors of the estate of the holder of such power, (2) may not be 

exercised in a manner that could postpone the vesting of the property subject to such power beyond 

the period described in [perpetuities savings clause], and (3) may not be exercised over any policy 

of insurance which insures the life of the holder of such power or the proceeds of any such policy. If 

a special power of appointment is exercised to appoint such property in trust, then such power shall 

be deemed to have been exercised solely in favor of the members of the class of persons in whose 

favor such power may be exercised so long as no portion of the income or principal of such trust may 

be distributed to any person who is not a member of the class of persons in whose favor such power 

may be exercised while any member of such class is living and at no time may any portion of the 

income or principal of such trust be distributed to the holder of the power, the estate of the holder of 

such power, the creditors of the holder of such power, or the creditors of the estate of the holder of 

such power. 

Comments 

Basic terms allow exercise in favor of Settlor’s issue only, in trust or outright. Options include 

allowing exercise in favor of the Beneficiary’s spouse (subject to restrictions) or to charities. 

This language allows exercise only by will. The language may be modified to allow the power to be 

exercised by a written document delivered to the Trustee during life. 

The restrictions in the second section are designed to avoid adverse tax consequences. If the power 

is granted in an instrument governed by law which has no rule against perpetuities, the estate and 

GST tax issues become complicated. See I.R.C. § 2041(a)(3)(the “Delaware tax trap”); Estate of 

Murphy v. Commissioner, 71 T.C. 671 (1979); Reg. § 26.2601-1(b)(1)(v)(B). 

30

LIMITATIONS ON EXERCISING POWER IN FAVOR OF SPOUSE 

Any exercise of a power of appointment granted to a person under this Agreement in 

favor of said person’s spouse shall be exercised only by appointing assets subject to such power to a 

trustee to be held in trust for the benefit of said person’s spouse, and the terms of such trust shall 

provide that, during the lifetime of said person’s spouse: 

Comments 

(1) The trustee of said trust shall not be required by the terms of such trust to 

make distributions to said person’s spouse in any calendar year that exceed 

the entire net income from said trust. 

(2) The trustee may be authorized, but shall not be required, to make 

discretionary distributions of the principal of said trust to said person’s spouse 

only if such discretionary distributions to said person’s spouse are limited to 

amounts necessary to provide for the proper support, maintenance and health 

of said person’s spouse, taking into consideration other sources of financial 

assistance which may be or become available to said person’s spouse. 

(3) The trustee may be authorized to make discretionary distributions of the net 

income from or the principal of said trust to any one or more members of the 

group consisting of the Settlor’s issue on such terms as said person may 

provide. 

(4) The Trust shall require that at all times at least one Family Trustee and/or a 

Corporate Trustee be acting as a trustee of said trust and distributions shall be 

made only as determined by such Family Trustee and/or such Corporate 

Trustee as are then acting. The term “Family Trustee” shall mean any adult 

issue of the Settlor. 

(5) Upon the death of said person’s spouse, all assets remaining in said trust shall 

continue to be administered for the benefit of, or distributed outright to, any 

one or more members of the group consisting of the persons in whose favor 

such power could have been exercised, as directed by said person in 

accordance with the exercise of the power of appointment herein granted. 

(6) For purposes of this paragraph, “said person’s spouse” shall mean the person 

legally married to said person at the death of said person. 

This provision may be particularly important where the trust includes family business interests or 

other family property. The provision allows the surviving spouse to benefit from the property but 

restricts the spouse from obtaining ownership of the principal asset itself unless the family or 

corporate trustee consents. In the case of a family business interest, the restriction may go further 

and specifically prohibit distributions of the family business interest to the spouse. 

31

POWER TO CHANGE LIMITED POWER INTO A TAXABLE GENERAL POWER 

To minimize or eliminate the combined impact of all taxes imposed on any trust 

created hereunder or on a beneficiary thereof, or for such other purpose the Trustee deems 

appropriate, the Trustee may convert any limited testamentary power of appointment granted to any 

beneficiary under this Agreement to a general testamentary power of appointment by permitting the 

exercise of such power in favor of such beneficiary’s estate in addition to the permissible appointees 

under the provisions of this Agreement granting such power. Such conversion may be made with 

respect to the power of appointment over all or any portion of such beneficiary’s interest in any trust 

created hereunder. Such conversion, once made, shall be irrevocable and shall be final and binding 

upon all beneficiaries of any trust created hereunder. The Trustee shall have no duty to inquire into 

the financial situation of any beneficiary to determine whether to exercise this power, and shall be 

relieved of all liability to any person for the failure to consider a conversion unless requested to do so 

in writing by a beneficiary. 

Comments 

For tax reasons it may be desirable for a beneficiary to have a taxable general power of appointment. 

For example, if the trust is subject to GST tax and the beneficiary has unused unified credit, the 

general power can reduce the transfer tax. Likewise the general power can result in a basis step up 

that would not otherwise be available. 

The Trustee should be prohibited from exercising this power to convert any power that the Trustee 

himself or herself holds. 

A trustee may be concerned that the existence of the power to convert imposes a duty to continually 

monitor the beneficiary’s situation (and potential liability for failing to do so). The final sentence 

relieves the trustee from this duty. A trustee determining to exercise (or not to exercise) the power to 

convert may seek protection for its action or inaction by court proceedings or releases. 

32

EXERCISING LIMITED TESTAMENTARY POWER OF APPOINTMENT TO APPOINT 

IN TRUST 

I have a limited testamentary power of appointment over the principal and all 

accumulated income of the trust created for my benefit by under a certain Trust Agreement dated 

January 1, 19XX, by and between JOHN A. DOE, as Settlor, and JANE S. DOE, as Trustee. In 

specific exercise of such limited testamentary power of appointment, I hereby appoint all of the 

principal and accumulated income remaining in such trust at my death to JAMES W. DOE, IN 

TRUST, to be held, administered and distributed as provided in Article A of this Will; provided, 

however, that any trust established and held pursuant to Article A (including any trust created 

pursuant to the exercise of a power of appointment granted under Article A) shall terminate, if it has 

not previously terminated, twenty-one (21) years after the death of the survivor of the issue of JOHN 

A. DOE living on January 1, 19XX, and shall thereupon be distributed outright to such of the persons 

to whom the Trustee is authorized to distribute the income from or the principal of the trust estate 

immediately prior to the time specified in this paragraph and in the proportions as the Trustee, in the 

exercise of the Trustee’s discretion, deems appropriate. 

Comments 

The specific reference to the trust instrument that granted the power is intended to comply with the 

requirements of many grants of limited powers. (The requirement is usually included to avoid 

controversy over whether a general residuary devise is intended to be an exercise of a power. Cf. 

Minn. Stat. § 524.2-608). 

The limitation on the duration of any trust created by the exercise of the power avoids inadvertently 

triggering the Delaware tax trap. 

33

Single Fund QTIP Marital Trust Incorporating The Delaware Tax Trap 

(Yanowitz) 

Warning: 

Nothing in this sample form should be considered the rendering of advice: legal, tax or otherwise. 

No one should rely upon it. Period. No warranty is given, whether express or implied, that this 

sample form, the comments or the endnote are accurate, complete or free of errors. Readers must 

apply their own legal judgment before using this form. 

******************************************* 

ARTICLE FOUR 

ALLOCATION OF REMAINING TRUST ASSETS 

4. The Trust assets, including all property that becomes distributable to the Trustee at my death, not 

effectively distributed under the preceding provisions of this agreement shall be allocated and 

distributed as follows: 

4.1 Spouse Survives Me. If my Spouse survives me, the remaining Trust assets shall be allocated 

to the Marital Trust as provided in Article Five. If my Spouse disclaims any portion of the 

property that would otherwise be allocated to the Marital Trust, the Trustee shall allocate the 

disclaimed property to the Family Trust and shall administer the disclaimed property as provided 

in Article Six. If my Spouse disclaims any interest my Spouse has in any portion of the Family 

Trust, the Trustee shall dispose of the disclaimed interest as provided in Article Seven. 

4.2 Spouse Does Not Survive Me. If my Spouse does not survive me, the remaining Trust assets 

shall be allocated as provided in Article Seven. 

ARTICLE FIVE 

MARITAL TRUST 

The Marital Trust to be administered and disposed of as follows: 

5.1 Statement Of Intent. The Marital Trust is for the primary benefit of my Spouse. If I did not 

believe that the potential advantages of inheriting in Trust outweighed the disadvantages, I would 

have left the assets passing into this Trust outright to my Spouse. I recognize that the advantages and 

disadvantages of inheriting in Trust will change over time. In light of the foregoing, I would approve, 

but do not direct, the exercise of each power to the maximum extent in favor of my Spouse, and I 

would approve but do not direct the termination of the Trust in favor of my Spouse if the 

disadvantages of maintaining the Trust outweigh its advantages. 

I further intend that the Marital Trust property constitute Qualified Terminable Interest Property 

(QTIP) for federal and state death tax purposes if and to the extent my Personal Representative 

makes the necessary elections. This instrument should be interpreted to accomplish this intent. 

5.2. Distribution Of Income. The Trustee shall, from the date of my death, distribute the income to 

my Spouse on a quarter-annual or more frequent basis. Nothing contained in this instrument limits 

the right of my Spouse to receive the entire net income of the Marital Trust. 

34

5.3 Distribution Of Principal. The Trustee shall distribute so much or all, if any, of the principal of 

the Marital Trust to my Spouse as the Trustee determines necessary or advisable, considering 

resources otherwise available, for my Spouse’s health, education, maintenance or support. In 

addition, if an Independent Trustee is then serving, the Trustee may pay to my Spouse so much or all, 

if any, of the balance of the principal of the Marital Trust as the Independent Trustee determines 

advisable, considering or not considering resources otherwise available, for any purpose, including 

termination of the Trust. 

[5.4 - Optional Provision – 15 Month Withdrawal Power] 

5.4 Power Of Withdrawal By Spouse. If my Spouse survives me by 15 months, the Trustee shall 

distribute so much, or all, if any of the principal of the Marital Trust to my Spouse as my Spouse 

requests in writing at any time, or from time to time. 

[5.5 – Optional Provision – 5% Withdrawal Power] 

5.5 Spouse’s Five Percent Withdrawal Right. My Spouse has the right, exercisable by written request 

delivered to the Trustee before the close of each calendar year, to make a cash or in-kind outright 

withdrawal from the principal of the Marital Trust of an amount not exceeding the amount referred to 

in Internal Revenue Code Section 2514(e)(1) (currently $5,000). The amount referenced by Section 

2514(e)(1) must be determined by taking into account all other powers of withdrawal exercised by 

my Spouse that must be aggregated under Section 2514(e)(1) in determining the largest lapse that can 

occur without being treated as a release. This right of withdrawal is noncumulative and lapses if not 

exercised during the calendar year. 

5.6 Right To Make Property Productive. The Trustee shall convert any nonproductive property held 

in the Marital Trust to productive property upon receipt of a request by my Spouse. 

5.7 Qualified Terminable Interest Property Deduction. The Trustee may elect to have any Trust 

property qualify for the federal estate tax marital deduction as qualified terminable interest property 

under Internal Revenue Code Section 2056(b)(7) (the QTIP election) and for any state death tax 

marital deduction under any state’s law (the state QTIP election). The Trustee is not required to 

make the same election for both federal estate tax purposes and for state death tax purposes. 

If the Trustee makes a partial QTIP election, the Trustee may divide the Trust on the basis of the fair 

market value of the Trust assets at the time of the division. 

[Optional Paragraph – Rolling Fraction] 

If the Trustee makes a partial QTIP election but does not divide the Trust as described in the 

preceding paragraph, the fraction of the Marital Trust which is included in my Spouse’s estate (the 

“marital portion”) shall be adjusted at the time of each payment of principal to my Spouse, first by 

restating it so that the numerator and the denominator are the value of the marital portion and of the 

Trust estate, respectively, immediately prior to the payment, and then by subtracting the amount of 

the payment from each of the numerator and the denominator, except that the numerator shall not be 

reduced below zero. 

The Trustee shall be indemnified and held harmless from any loss, claim, or damage incurred as a 

result of any action taken by a beneficiary against the Trustee arising out of the Trustee’s decision 

regarding the QTIP election for any portion of the Trust property. The Trustee is specifically 

authorized to use Trust property to pay directly or to reimburse himself or herself for any expenses 

incurred to defend any threatened or actual legal action arising under this provision. 

35

5.8 Reverse QTIP Election. The Trustee may make the special election under Internal Revenue Code 

Section 2652(a)(3) to treat all of the property of a Trust created under this Trust for which the QTIP 

election is made as if that election had not been made, making me the transferor of the property for 

purposes of the generation-skipping transfer tax. I desire that the Trustee set apart the property to 

which the election has been made as a separate Trust, so that the inclusion ratio of the separate 

qualified Trust, as defined in the Internal Revenue Code, is zero. 

5.9 Payment Of Death Taxes. Upon my Spouse’s death, if my Spouse’s Will or Revocable Trust 

directs that no estate taxes occasioned by my Spouse’s death that are paid from this Trust shall be 

recovered by my Spouse’s estate from any person under Internal Revenue Code section 2207A or 

otherwise, and if, or to the extent that my Spouse does not otherwise direct in my Spouse’s Will or 

Revocable Trust, the Trustee shall pay from the remaining Trust principal that portion of the estate 

taxes occasioned by my Spouse’s death equal to the excess of (a) the total of all such taxes so 

payable, over (b) the total of all such taxes that would have been so payable if the assets of this Trust 

had not been taxable in my Spouse’s estate. Such taxes shall not be apportioned to or recovered from 

any person. The Trustee shall pay expenses incurred in determining and paying such taxes. 

5.10 Spouse’s Power Of Appointment. Any remaining assets of the Marital Trust shall be distributed 

in accordance with the exercise by my Spouse of a power of appointment that I hereby give to my 

Spouse to appoint outright or in further Trust to any one or more of my descendants, their Spouses 

and charities qualified under Internal Revenue Code Section 2055 who survive my Spouse. 

My Spouse may not exercise this power of appointment to appoint Trust property to my Spouse, my 

Spouse’s estate, my Spouse’s creditors, or the creditors of my Spouse’s estate. 

My Spouse may exercise this power of appointment to grant in Trust further powers of appointment 

to any person to whom principal may be appointed, but my Spouse may grant a presently exercisable 

general power of appointment only in an exercise that makes specific reference to the Delaware Tax 

Trap, or Internal Revenue Code Section 2041(a)(3) or 2514(d) i . 

Any unappointed principal shall be distributed as provided in Article Seven, as if I died immediately 

before my Spouse. 

[Other Provisions To Revise If Delaware Tax Trap Provision Is Included] 

_._ Special Power of Appointment. Any special power of appointment may be exercised by 

appointment, outright or in Trust, in favor of one or more of the permissible appointees [or their 

estates] in such portions as the donee of the power may appoint; provided, the power (a) shall not be 

exercisable in favor of the donee, the donee’s estate, the donee’s creditors or the creditors of the 

donee’s estate, and (b) shall not, unless the exercise makes specific reference to the Delaware Tax 

Trap, or Internal Revenue Code Sections 2041(a)(3) and 2514(d), include the power to create another 

power of appointment that, under the applicable local law, can be exercised so as to postpone the 

vesting of any estate or interest in the Trust property or suspend the absolute ownership or power of 

alienation of such Trust property for a period ascertainable without regard to the date of creation of 

this power. 

_._ Rule Against Perpetuities. Except with respect to an exercise that specifically refers to Internal 

Revenue Code Section 2014(a)(3) or the “Delaware Tax Trap,” but notwithstanding any contrary 

provisions, each Trust, if not sooner terminated pursuant to other provisions, shall terminate twentyone 

(21) years after the death of the survivor of my Spouse and all my descendants who are living on 

36

the date of my death. In the event of termination of a Trust under this provision, the assets shall be 

distributed per stirpes to my descendants who were permissible recipients of the Trust income 

immediately prior to such termination. 

i Delaware Tax Trap- IRC Sec. 2041(a)(3) and Sec. 2514(d). 

IRC Section 2041(a)(3) and the corresponding gift tax provision, IRC Section 2514(d) 

provides that a the exercise of a limited power of appointment which extends the perpetuities period 

of the appointed trust beyond the perpetuities period of the appointing trust causes the exercise of the 

power to be taxed as a general power of appointment. 

The Delaware Tax Trap can be triggered if the beneficiary exercises a limited power of appointment 

through the creation of an appointed trust in which the beneficiary of the appointed trust has a 

presently exercisable general power of appointment. For example: if under Trust No. 1, beneficiary 

A has a presently exercisable (inter vivos) limited power of appointment that permits A to appoint 

property of Trust No. 1 among one or more members of a certain class of other beneficiaries, 

including beneficiary B, and beneficiary A exercises the power and appoints property of Trust No. 1 

by creating an appointed trust (Trust No. 2) for the benefit of B, and the provisions of Trust No. 2 

give B the power to withdraw any portion of the property of Trust No. 2, then A’s exercise of the 

limited power under Trust No. 1 is treated under either IRC Section 2514(d) as the exercise of a 

general power of appointment, and, therefore, a transfer subject to federal gift tax. The common law 

permitted such an exercise, and it is permitted under Minnesota’s Statutory Rule Against Perpetuities 

by M.S. 501A.04 Subdivision (7). 

Advantages. 

Triggered By Beneficiary, Not The Trustee. The power is triggered through the exercise of the 

power by the beneficiary, and not through the exercise of discretion by the independent trustee. 

No Property Diversion. It does not result in diversion of property from class of recipients 

selected by settlor, and it can be used even when the class of intended beneficiaries is quite restricted. 

No Monitoring. It does not require monitoring by the fiduciary. 

Formula Exercise. Since the power is only taxable to the extent exercised, it can be exercised by 

a formula designed to reduce all wealth transfer taxes to the lowest possible amount. 

37

SECTION 11 

Federal and Minnesota Income Tax 

Developments – Mirror, Mirror on the Wall, 

What Is the Fairest Tax Rate for Us All? 

Paul J. Dinzeo 

Sawmill Trust Company 

Minneapolis 


Federal and Minnesota Individual Tax Update 

I. Federal Legislative Developments 

II. 

Selected Case Law Developments 

III. Affordable Care Act (2010) – Law Becoming Effective 2013 

IV. 

Minnesota Legislative Developments

Federal and Minnesota Individual Tax Update 

A. Federal Legislative Developments 

a. Background. The American Taxpayer Relief Act of 2012 (“ATRA”) was enacted January 

1, 2013 and signed into law January 2, 2013. 

i. Congress essentially repealed the expiration provisions under the 2001, 2003 

and 2010 tax laws, each of which contained a sunset or expiration provision. 

b. Tax Rates. The Bush tax regime of 10%, 15%, 25%, 28%, 33%, and 35% tax brackets was 

made permanent. ATRA added a new 39.6% rate. The IRS recently released the 2013 

federal income tax tables, which included inflation adjustments, as follows 

(www.irs.gov/uac/newsroom/annual-inflation-adjustments-for-2013): 

i. Individual Filer (Single): 

$0 to $8,925 = 10% 

$8,926 to $36,250 = 15% 

$36,251 to $87,850 = 25% 

$87,851 to $183,250 = 28% 

$183,251 to $398,350 = 33% 

$398,351 to $400,000 = 35% 

$400,001 and above = 39.6% 

ii. Married Filing Jointly: 

$0 to $17,850 = 10% 

$17,851 to $72,500 = 15% 

$72,501 to $146,400 = 25% 

$146,401 to $223,050 = 28% 

$223,051 to $398,350 = 33% 

$398,351 to $450,000 = 35% 

$450,001 and above = 39.6% 

iii. Married Filing Separate: 

$0 to $8,925 = 10% 

$8,926 to $36,250 = 15% 

$36,251 to $73,200 = 25% 

$73,201 to $111,525 = 28% 

$111,526 to $199,175 = 33% 

$199,176 to $225,000 = 35% 

$225,001 and above = 39.6% 

c. Capital Gains. 

i. Long-term capital gains rate are dependent upon the tax bracket that the 

taxpayer is in for that particular tax year: 

Taxpayers in the 15% or lower tax brackets = 0% 

Taxpayers in the 25% through 35% tax brackets = 15% 

Taxpayers in the 39.6% tax bracket = 20% 

ii. Unrecaptured Section 1250 gain and collectibles remain unchanged at 25% and 

28%, respectively. 

d. Qualified Dividends. 

i. Continue to be taxed at long-term capital gains rates

e. Alternative Minimum Tax. 

i. ATRA had some good news as it has all but eliminated the need for the AMT 

patch. ATRA made permanent the following exemptions and they are now 

indexed for inflation: 

Single = $51,900 

Married filing Joint = $80,800 

Married filing separate = $40,400 

ii. Nonrefundable personal credits have been permanently made available to 

offset both regular and AMT tax liability. 

f. Itemized Deductions. 

i. ATRA has reinstated the 3% phase out of most itemized deductions. The 3% 

phase out begins when a taxpayer’s AGI exceeds the following: 

Single - Begins at $250,000 and ends at $372,501 

Married Joint – Begins at $300,000 and ends at $422,501 

Married Separate – Begins at $150,000 and ends at $211,251 

g. Personal Exemptions. 

i. ATRA reinstated the reduction of personal exemptions beginning in 2013. 

Personal exemptions are reduced by two percent for every $2,500 (or part 

thereof) of AGI in excess of the same AGI threshold limitations used for the 3% 

itemized deduction phase out (See f above). 

ii. For tax year 2013, the personal exemption is $3,900. 

h. Standard Deduction. 

i. ATRA made no changes to the standard deduction. For tax year 2013, the 

standard deduction was raised to $6,100 for individuals and $12,200 for 

married/joint filers. 

i. Social Security. 

i. In 2012, the taxable wage base was $110,100, resulting in a maximum OASDI of 

$6,826.20 (employer’s share) and $4,624.20 (employee’s share). The Medicare 

portion of the tax remained a combined 2.9% on all earned income. The 6.2% 

OASI, however, only applied to the employer, the employee received a 

preferential 4.2% OASI rate. This was not renewed by ATRA for 2013. 

ii. The 2013 taxable wage base is $113,700 (3.27% increase). 

j. Other Noteworthy Changes under ATRA. 

i. Qualified Tuition for Higher Education Deduction. An individual is allowed an 

above-the-line deduction for qualified tuition and related expenses for higher 

education paid by the individual during the tax year. This was made permanent 

by ATRA. 

ii. Unreimbursed Expenses for Elementary and Secondary School Teachers. 

Eligible educators are allowed an above-the-line deduction of up to $250 for 

unreimbursed amounts paid or incurred in connection with books, certain 

supplies, computer equipment and supplementary materials used in the 

classroom. This was extended to 12/31/13 by ATRA. 

iii. Tax-Free Distributions from IRA Plans for Charitable Purposes. ATRA has 

extended, through December 31, 2013, the ability for a taxpayer to exclude 

from gross income qualified charitable distributions of up to $100,000 per 

taxpayer. Private foundations and donor advised funds are still excluded from

qualifying charities. Distributions are eligible for the exclusion only if made on 

or after the date the IRA owner attains age 70½. 

iv. Deduction for Mortgage Premium Insurance. The amount paid (or accrued) for 

qualified mortgage insurance has been extended for those payments or 

amounts accrued by 12/31/13. Deduction is phased out for taxpayers with AGI 

over $100,000 ($50,000 for married filing separate). 

v. Discharge of Principal Residence Indebtedness. A maximum exclusion from 

gross income of $2,000,000 is provided for any discharge of indebtedness 

income by reason of a discharge (in whole or part) of qualified principal 

residence indebtedness. In general, the discharge indebtedness eligible for the 

exclusion must be indebtedness incurred in the acquisition, construction, or 

substantial improvement of the principal residence of the individual and 

secured by the residence. This has been extended by ATRA through the end of 

2013. 

vi. Education IRA (Coverdell Education Saving Accounts). Education IRAs were 

scheduled to lapse at the end of 2012, but now has been made permanent by 

ATRA: 

Increased annual contribution limit to $2,000 

Expanded the definition of qualified education expenses to include 

qualified elementary school and secondary school expenses 

Increased phase out range to twice that of the range enjoyed by single 

taxpayers 

Allowed contributions to an account on behalf of a special-needs 

beneficiary regardless of whether that beneficiary has reached the age 

of 18 

vii. Student Loan Interest Deduction. Certain individuals may claim an above-theline 

deduction for interest paid on qualified education loans. ATRA increased 

the phase out ranges for eligibility from $50,000 to $65,000 for single taxpayers 

and to $100,000 to $130,000 for married filing joint returns. Additionally, the 

law removed the restrictions that: (i) disallowed the deduction with respect to 

interest paid on a qualified education loan after the first 60 months in which 

interest payments are required; and (ii) disallowed the deduction with respect 

to voluntary payments of interest. These liberalizations are permanent. 

viii. Employer-provided Education Assistance. Certain employer-paid educational 

expenses are excluded from gross income and wages of an employee if provided 

under a Section 127 educational assistance program. Graduate education is 

considered qualifying education. This has been made permanent under ATRA. 

ix. Dependent Care Credit. A taxpayer who maintains a household that includes 

one or more qualifying individuals may claim a nonrefundable credit for a 

limited amount of employment-related expenses. Qualifying individuals are 

generally dependents under the age of 13 or a dependent (or spouse) of the 

taxpayer who is physically or mentally incapable of caring for himself or herself. 

The provision increased the maximum amount of eligible employment-related 

expenses from $2,400 to $3,000 if there is one qualifying individual and from 

$4,800 to $6,000 if there are two or more qualifying individuals. The provision 

also increased the maximum credit from 30 to 35 percent of eligible 

employment-related expenses. Finally, the provision modifies the phase down 

of the credit, such that the 35% credit rate is reduced, but not below 20%, by

one percentage point for each $2,000 (or fraction thereof) of AGI above $15,000 

(increased from $10,000). ATRA made the higher expense levels and credit 

percentages permanent. 

x. Adoption Credit and Adoption Assistance Exclusion. Generally, a taxpayer is 

allowed a nonrefundable credit against tax for qualified adoption expenses paid 

or incurred by a taxpayer subject to a maximum credit amount per eligible child. 

The adoption credit and exclusion have been permanently extended at $12,970 

(phasing out between $194,580 and $234,580) in 2013. The credit can also be 

allowed against the alternative minimum tax. 

xi. Child Tax Credit. The $1,000 child tax credit has been permanently extended 

(without inflation adjustments). 

xii. Expansion of Hope Credit. Taxpayers are allowed to claim a nonrefundable 

credit, the Hope Credit, for qualified tuition and related expenses incurred for 

the first two years of post-secondary education. The expansion was the 

American Opportunity tax credit. The allowable modified credit was increased 

to $2,500 per eligible student per year for qualified tuition and related expenses 

paid for each of the first four years of the student’s post-secondary education in 

a degree or certificate program. The modified credit rate is 100 percent of the 

first $2,000 of qualified tuition and related expenses, and 25 percent on the 

next $2,000 of qualified tuition and related expenses. The credit has been 

extended through 2017. 

xiii. Credit for Employer Provided Child Care. ATRA permanently extended the child 

care tax credit equal to 25% of qualifying expenses for employee child care and 

10% of qualified expenses for child-care resource and referral services. 

B. Selected Case Law Developments 

a. Tax Basis in Stock – Insurance Company Demutualization. 

i. Dorrance v. U.S. 110 AFTR 2d 2012-5167 DC AZ, 2012. The IRS issued Rev. Rul. 

71-233 and Rev. Rul. 74-277 establishing the position that a policyholder 

receives a zero tax basis in the stock they received when a mutual insurance 

company converts to a publicly traded company (“demutualization”). 

ii. Subsequently, the US Court of Federal Claims disagreed with the IRS finding that 

stock received by the taxpayer is based on the fair market value on the date the 

stock was issued. 

iii. The Federal District Court in the Dorrance case denied the IRS’s petition for 

summary judgment since the taxpayer met their burden illustrating that some 

of the insurance premium paid should be allocated to the mutual insurance 

rights that was exchanged for the stock. A future court proceeding will 

determine the proper allocation of insurance premiums to the basis of the 

issued stock. 

b. Like Kind Exchange – Rental Converted to Residence. 

i. Reesink v. Comm. TC Memo 2012-118. Section 1031(a)(1) allows a taxpayer to 

exchange property that is held for productive use in a trade or business or held 

for investment for similar property. However, a taxpayer may not defer gain 

when one of the properties is held for personal or vacation property. 

ii. Rev. Proc. 2008-16 provides certain safe harbor rules related to rental 

properties that has some elements of personal use.

iii. In the Reesink case, taxpayer exchanged an apartment building for a single 

family home in Lake Tahoe. They spent some effort in attempting to rent the 

home. They retained a principal residence in San Francisco and also had 

another rental property in Lake Tahoe. However, eight months after the 

exchange the taxpayer converted the single family rental home to their personal 

residence. The IRS took issue and argued that the Section 1031 deferral should 

be disallowed. 

iv. The Tax Court ruled in favor of the taxpayer, finding that they showed enough 

intent at the time of the exchange to defer the gain under Section 1031. 

c. Attorney Fails to Substantiate Deductions 

i. Gorokhovsky v. Commissioner. TC Memo 2012-206. Taxpayer was a sole 

practioner attorney. He claimed various expenses on his Schedule C including, 

$15,000 in bad debt, $28,600 in books and $10,654 in legal and professional 

services. 

ii. Taxpayer substantiated his expenses using self-generated, handwritten expense 

journals and invoices. He maintained that all expenses were paid via credit card 

although he did not submit credit card statements into evidence. 

iii. Tax Court held that the taxpayer failed to substantiate his expenses and denied 

those deductions for tax years 2003 and 2004. 

d. Mortgage Interest Expense Limitation 

i. Sophy v. Comm. 138 TC No. 8, 2012. Section 163(h)(3)(A) limits qualified 

residence interest for purposes of acquisition debt and home equity debt to $1 

million and $100,000, respectively (or $1.1 million of acquisition debt under 

Rev. Rul. 2010-25). 

ii. Two individuals, unmarried, purchased a principal residence and second home 

as joint tenants. The total outstanding acquisition debt for the properties was 

$2.7 million. Taxpayers each deducted interest related to $1.1 million on their 

separate individual tax returns. 

iii. The IRS, however, only allowed a total of $1.1 million for both taxpayers and the 

Tax Court agreed finding that the limitation was based on the jointly held 

properties versus the individual owner. 

e. Defective Receipt for Charitable Contribution 

i. Durden v. Comm. TC Memo 2012-140. Section 170(f)(8)(A) provides that a 

charitable contribution deduction over $250 is only allowed if the taxpayers 

receives a written acknowledgment from the charity prior to filing their return 

as well as a description of the property, date contributed and whether the 

charity provided any goods or services in consideration for the contribution. 

ii. If a taxpayer fails to obtain a receipt prior to filing their return, they lose the 

deduction (see Gomez v. Comm., TC Summary Opinion 200-93). 

iii. In Durden, the Tax Court disallowed the taxpayer’s $22,500 contribution 

because the receipt from the charity, although received prior to the filing of the 

return, did not include the language “no goods or services were provided…” 

f. Defective Form 8283 and No Independent Appraisal for Charitable Contribution 

i. Mohamed v. Comm. TC Memo 2012-152. Section 170(f)(11)(C) and related 

regulations provide that a taxpayer must properly fill out and attach Form 8283 

to the 1040 filed for that tax year as well as obtaining signatures of the 

appraiser and done organization for gifts, other than publically traded securities, 

over $5,000.

ii. The Tax Court disallowed an approximately $20 million charitable contribution 

because the taxpayer did not properly fill out Form 8283 and failed to obtain a 

qualified appraisal at the time of filing. 

g. Fire Department Training for Charitable Deduction 

i. Patel v. Comm. 138 TC No. 23, 2012. The Tax Court denied a charitable 

contribution deduction for a home donated to the local fire department for 

training purposes. 

ii. The Tax Court found that the couple granted a “license” to the local fire 

department which should be valued as a partial interest in the property. 

iii. Section 170(f)(3) disallows a charitable deduction for a partial interest. 

C. Affordable Care Act (“ACA”) – Law Becoming Effective 2013 

a. 3.8% Tax on Net Investment Income 

i. Beginning in 2013, a 3.8% surtax on net investment income becomes effective 

ii. The surtax applies to the lesser of: 

Net Investment income; or 

The excess over modified AGI (MAGI) set at $200,000 for a single 

taxpayer and $250,000 for married filing jointly taxpayer. 

iii. Net Investment income subject to surtax: 

Taxable interest 

Dividends 

Annuity income 

Rents 

Passive Royalties 

Passive Income 

Net capital gain 

iv. Net investment income not subject to surtax: 

Wages 

Exempt Interest 

Distributions from IRAs or qualified plans 

Self-employment income 

Active Royalties 

Social Security Income 

Material participation in business income 

b. .9% Medicare Tax for High Income Earners 

i. A .9% Medicare tax is tacked on to the employee’s share (not employer’s) for 

wages and self-employment income in excess of $200,000 single and $250,000 

married filing jointly. 

ii. For joint returns, the .9% applies to the combined earnings of both taxpayers. 

So although the .9% may not be withheld from their wages if they individually 

earn less than $250,000, they will ultimately remit the .9% Medicare Tax on 

their Form 1040. 

c. Qualified Medical Expenses Subject to New AGI Limitation 

Beginning in 2013, qualified medical expenses will only be allowable as 

itemized deductions if they exceed a 10% AGI threshold. 

However, if either the taxpayer or spouse reaches age 65 by the end of 

2013, 2014, 2015 or 2016, the 7.5% threshold applies beginning in that 

year.

The 10% threshold applies to all taxpayers, regardless of age, beginning 

in 2017. 

D. Minnesota Legislative Developments – PENDING AT THE TIME OF PUBLICATION

SECTION 12 

Transnational Planning – A Baker’s Dozen 

of Dangerous Assumptions When Planning 

for Transnational Clients 

Jennifer A. Gumbel 

Springer & Gumbel, P.A. 

Preston 


A Baker’s Dozen of Dangerous Assumptions When Planning for Transnational Clients 

Jennifer Gumbel, Springer & Gumbel, PA 


13 Dangerous Assumptions 

1. I need only be concerned with non‐citizen spouses. ..................................................................................................... 2 

2. The law of testator’s domicile will rule ........................................................................................................................... 2 

3. Every country will apply the law of situs to real property .............................................................................................. 4 

4. A Minnesota court will not apply foreign law that is in conflict with Minnesota’s own law .......................................... 4 

5. Only a spouse can take against a will .............................................................................................................................. 5 

6. You cannot inherit debt .................................................................................................................................................. 6 

7. The only will recognized everywhere is an international will under Minn. Stat. 524.2‐1002 and you must do such a 

will in every instance ........................................................................................................................................................... 7 

8. You must do a QDOT, in every circumstance, to avoid estate tax .................................................................................. 8 

9. A Minnesota court will not appoint a foreigner as guardian. ......................................................................................... 9 

10. Appointing a foreigner as trustee of a minor’s trust will not have tax consequences ............................................... 10 

11. A trust established in Minnesota will be recognized everywhere .............................................................................. 11 

12. If I want a document recognized in a foreign country, I need to go to a consulate ................................................... 11 

13. I Don’t Need to Worry About Unauthorized Practice of Foreign Law ........................................................................ 12 

Appendix .......................................................................................................................................................................i 

Protocol 3, A Revised Protocol Amending the 1980 Tax Convention with Canada (1995) ................................................. ii 

IRS Instructions for Form 706 (pages 1 and 9) .................................................................................................................. x 

Foreign Trust Reporting Requirements, International Tax Gap Series .............................................................................. xii 

Treasury Depart. Technical Explanation of the Protocol Between the US of A and the FRG ............................................ xv

13 DANGEROUS ASSUMPTIONS 

1. I need only be concerned with non‐citizen spouses. 

There are far more individuals with international implications to their estates. 

As estate planners, we are trained, either in law school or in practice, to become versed in the 

intricacies of state and federal transfer tax law and state probate code. We learn that our Federal Tax 

Code limits the use of the federal marital deduction to citizens and that QDOTs are a tool to limit the tax 

consequences for non‐citizen surviving spouses. We learn that due diligence requires us to confirm the 

citizenship of our clients. However, there are many more issues facing the estates of those with noncitizen 

spouses and there are far more individuals who have very real international implications to their 

estates. As we’ll explore, the following people have international implications to their estates. 

1. Individuals with foreign citizenship. 

2. Individuals with US citizenship domiciled abroad. 

3. Individuals who may inherit abroad. 

4. Individuals married to any of the above. 

5. Individuals who have descendants having any of the above. 

For purposes of this class, I refer to these individuals as “transnationals”. Few of us have been trained in 

the role of treaties in our domestic law or international law generally. However, when transnationals 

come into your office and you agree to represent them, you are called to practice international law. The 

purpose of this class is to introduce concepts of foreign estate law and international law and to highlight 

common assumptions domestic estate planners can have, which could have dangerous implications for 

the transnational client. 

2. You must only be concerned with the law of testator’s domicile. 

You must look further. 

Minnesota estate planners are used to looking at the domicile of the testator or decedent. Under 

Minnesota Statue 524.1‐301, Minnesota probate law applies, generally, to the “affairs and estate of 

decedents, missing persons, and persons to be protected, [who are] domiciled in this state”. However, 

there are other types of jurisdictional definitions that can play a role for transnationals. 

“domicile” 

Here’s a reminder of domicile from Black’s Law Dictionary: A person’s legal home. That place where a 

man has his true, fixed, and permanent home and principal establishment, and to which whenever he is 

absent he has the intention of returning… Generally, physical presence within a state and the intention 

to make it one’s home are the requisites of establishing a “domicile” therein. 

For federal estate tax purposes, “[a] person acquires a domicile in a place by living there, for even a brief 

period of time, with no definite present intention of later removing therefrom. Residence without the 

requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to 

change domicile effect such a change unless accompanied by actual removal.” Treas. Reg. § 20.0‐1(b). 

2

In short, domicile is the combination of physical presence and at least an intent to not leave. 

However, domicile is already a problematic definition for a transnational. Many people live in various 

jurisdictions , while maintaining an intent to leave. Additionally, other jurisdictions within the United 

States, who have a history of dealing with transnational estates, in some cases allow for application of 

laws that are not based on the domicile of the testator. 

“In times like ours of peripatetic families and multi‐national situses for family property, original 

protective decisions should be left in doubtful cases to the domicile of the living rather than that of the 

deceased (cf. Matter of Goldstein, 34 A.D.2d 764, 310 N.Y.S.2d 602).” In re Brunner's Estate, 339 

N.Y.S.2d 506, 510 (N.Y. Sur., 1973) (affm’ed Matter of Brunner's Estate, 380 N.Y.S.2d 744 (N.Y.A.D. 2 

Dept., 1976)). 

Even non‐domiciliaries can have domestic tax consequences to their estates. Generally, the tangible 

personal property or real property of a nonresident that is actually located in the United States 

is subject to the U.S. federal estate tax. Treas. Reg. § 20.2104‐1(a)(2). 

“nationality” 

Although domicile is a common test in American jurisdictions, estate planners assisting transnationals 

cannot take for granted that other jurisdictions use this test. Most common law countries use the 

nationality test. One such example is Germany, who under Article 25 of the Introductory Act to the Civil 

Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch), generally applies the probate and estate law of 

nationality. 

“habitual residence” 

An evolving jurisdictional test, largely arising from international agreements, such as the Hague 

Convention Concerning the International Administration of the Estates of Deceased Persons and 

European Union Regulation 650/2012, set to take effect August 17, 2015, is habitual residence. This 

definition looks at a variety of factors, including those making up our familiar domicile test, while also 

taking nationality and location of assets into account. 

“situs” 

Situs is yet another jurisdictional test. Here’s a reminder of situs from Black’s Law Dictionary: Situation; 

location… Site; position; the place where a thing is considered, for example with reference to 

jurisdiction over it, or the right or power to tax it. It imports fixedness of location. 

The effect of these differing jurisdictional tests, is that even if a client’s estate would fall under 

Minnesota law under our test, it may also fall under the other law according to their tests. The result of 

this reality is that a possibility exists that an order applying law that is very different to our own could be 

made regarding our client’s estate. 

3

3. Every country will apply the law of situs to real property. 

Not necessarily. 

Article 25 of the Introductory Act to the German Civil Code, states that “succession is governed by the 

law of the country of which the deceased was a national.” But that, “[a]s to immovables located within 

the country, the testator may, in the form of a testamentary disposition, choose German law.” 

In a case with a US national, domiciled and having a habitual residence in Minnesota, having real 

property located in Germany and with no testamentary disposition otherwise, German law would first 

point to Minnesota, who may point back to German law as the situs. Laws like this illustrate renvoi. 

“renvoi doctrine” 

From Black’s Law Dictionary: The “doctrine of renvoi” is a doctrine under which court in resorting to 

foreign law adopts rules of foreign law as to conflict of laws, which rules may in turn refer court back to 

law of forum. 

Recent changes in European Union law will, once fully implemented, allow for a testator to select the 

law of their habitual residence to even real estate located in a member nation, under Regulation (EU) 

No 650/2012. 

As we’ll see below, the ability to get out of foreign law, may be advantageous to our clients. 

4. A Minnesota court will not apply a foreign order that is in conflict with Minnesota’s own law. 


In cases where a judgment arises from a probate action commenced in a foreign jurisdiction, comity 

may call for its enforcement. 

“comity” 

“Comity is ‘[t]he principle in accordance with which the courts of one state or jurisdiction will give effect 

to the laws and judicial decisions of another, not as a matter of obligation, but out of deference and 

respect.’ Black's Law Dictionary 242 (5th ed.1979).” Desjarlait v. Desjarlait, 379 N.W.2d 139, 144 (Minn. 

App., 1985) 

Under the Restatement (Second) of the Conflict of Laws, section 98, a “valid judgment rendered in a 

foreign nation after a fair trial in a contested proceeding will be recognized in the United States so far as 

the immediate parties and the underlying claim are concerned.” Under section 92, a judgment is valid if 

the state in which it is rendered has jurisdiction, employs a reasonable method of notification and 

affords a reasonable opportunity to be heard by affected persons, judgment is rendered by a competent 

court, and there is compliance with such requirements of state of rendition as are necessary for the 

valid exercise of power by the court. 

New York courts have pointed out that the mere fact that the foreign law creates a result different than 

its own law does not preclude its enforcement. “Recognition will not be withheld merely because the 

4

choice of law process in the rendering jurisdiction applies a law at variance with that which would be 

applied under New York choice of law principles”. Watts v. Swiss Bank Corp., 27 N.Y.2d 270, 317 

N.Y.S.2d 315, 265 N.E.2d 739 (1970). 

Florida courts have gone so far to as to apply a foreign probate judgment, which included a forced 

heirship award, to personal property located in Florida. 

“The Dutch court had the power to determine Roebi's domicile and upon doing so, to 

determine the substantive law that would apply to Roebi's estate. We note that it is 

uncontroverted that the Dutch court had jurisdiction in this matter. Glenda had notice 

and opportunity to be heard, in fact she contested the issue to the highest court of the 

land. Where a party has had notice and opportunity to be heard and the foreign court 

has satisfied Florida's jurisdictional and due process requirements their orders will be 

entitled to comity.” Nahar v. Nahar, 656 So.2d 225, 229 ‐ 230 (Fla. App. 3 Dist., 1995). 

In short, we can’t ignore the possible results of applicable foreign probate law under the belief that a 

Minnesota court would never enforce a foreign court order. 

5. Only a spouse can take against a will. 

Scarily, untrue. 

Jurisdictions based in common law, like Minnesota, give great deference to the intent of the Testator. 

While we do acknowledge limited rights to a limited group of “forced heirs”, such as providing for minor 

children and the rights of spouses, we are used to the notion that a Testator is generally free to do as 

they wish and can generally disinherit whomever they wish. 

“forced heirs” 

Black’s Law Definition: Those persons whom the testator or donor cannot deprive of the portion of his 

estate reserved for them by law, except in cases where he has a just cause to disinherit them. 

Other jurisdictions, usually those with laws rooted in Islamic law or Napoleonic Code and civil law, are 

far more interested in protecting the estate for the benefit of biological relatives, usually children or, in 

some cases, the parents of the decedent. This legal regime is called “forced heirship”. 

Domestically, this notion was long a part of Louisiana probate law because of their historic link to the 

Napoleonic Code. This has been abandoned with Louisiana conforming the rights they grant to a take 

against a will to other US jurisdictions rooted in common law. 

However, there continue to be many jurisdictions who continue to forced heirship. Again, these 

countries are usually civil law countries with an historic link to the Napoleanic Code. Some examples 

include Germany, France, and the Netherlands. Countries which include elements of Islamic law are 

likely to have forced heirship provisions. 

5

Germany, for example, in Section 2303 of the German Civil Code (Bürgerliches Gesetzbuch) sets out the 

following forced heirship rights, called Pflichtteil (Pflicht‐ meaning duty, obligatory, or compulsory and teilmeaning 

piece or portion). 

Persons entitled to a compulsory share of the estate; 

(1) If a descendant of the testator is excluded from succession by disposition in the will he may 

demand his compulsory share from the heir. The compulsory share is one‐half of the value of 

the share of the inheritance on intestacy. 

(2) The parents and spouse of the testator have the same right if they have been excluded from 

succession by disposition in the will. The provision of section 1371 (equalization of marital 

estate) remains unaffected. 

In these jurisdictions, forced heirship results in an ability for a wider spectrum of disinherited relatives 

to take against the will than we are used to, which can even result in a decrease of the amount in the 

estate going to a spouse, even spouses who are also a parent to the disinherited child. 

With legal realities of comity, diverse jurisdictional tests, and practical needs to effectively transfer real 

property abroad, the possibility of the application of forced heirship should be evaluated by an estate 

planner. The client should be made aware of the issue, evaluation of the likelihood of its application in 

the particular fact pattern of the client should be made, and mitigation of its effects should be explored. 

This may require including council from the foreign jurisdiction in the planning. 

6. You cannot inherit debt. 

Also, scarily, untrue. 

Common law jurisdictions, like Minnesota, treat an estate almost as if it is a separate person. Debts of 

the estate are dealt with during the probate administration. Heirs and devisees get the good of what’s 

left over. If there isn’t enough to satisfy creditors, then the creditors walk away. We are used to heirs 

and devisees having no duty to the estate’s creditors. However, this view is not held by many other 

countries. 

Some countries, usually civil law jurisdictions, operate under the theory of “universal succession” of the 

decedent’s estate to the heirs. 

“universal succession” 

Black’s Law Definition: In the civil law, succession to the entire estate of another, living or dead, though 

generally the latter, importing succession to the entire property of the predecessor as a juridical 

entirety, that is, to all his active as well as passive legal relations. 

Instead of the estate being a separate person, the estate, in its entirety, constructively goes to the heirs 

and devisees. The legal construction removes the gap in ownership, removing the need for the estate to 

be constructively treated as a separate entity. For purposes of debts, not only does the decedent inherit 

the good of the estate upon decedent’s death, they inherit the bad of decedent’s debts. 

6

Germany is one such example of a country that holds heirs and devisees liable for the debts of 

decedents. Under German law, a devisee does have the option to limit his liability by either disclaiming 

the inheritance entirely or commencing estate bankruptcy proceedings under section 1942 of the 

German Civil Code. Disclaimer of the inheritance must follow specific formalities and must be done 

within a specific period of time. If a disclaimer is not done appropriately or timely, the heir or devisee 

takes the bad with the good. 

For clients who inherit in a foreign country, we cannot let them take for granted that they need only to 

wait for a check. Inquiry into the view of universal succession, inheritance of debts and disclaimer of 

inheritance should be done, which may require inquiry with an attorney licensed in the foreign 

jurisdiction. If the jurisdiction transfers the bad of the estate along with the good, serious evaluation of 

the estate and communication with the personal representative regarding the estate assets and 

liabilities should be made. 

7. The only will recognized everywhere is an international will under Minn. Stat. 524.2‐1002 and 

you must do such a will in every instance. 

Incorrect. 

Just like different US states have different rules about what it takes to make a writing a valid will, 

different countries have different rules regarding what it takes to make a writing a will. For individuals 

who reside in a country other than their country of citizenship or own property in another country, 

these differences can create major headaches when it comes time to probate a will. 

In order to prevent just those headaches, the 1973 Convention providing a Uniform Law on the Form of 

an International Will provides for unified requirements to cause a writing to be valid in any signatory 

country. Following these requirements allows for a one‐document fits all affected jurisdictions 

approach to drafting a will, assuming all the jurisdictions are signatory countries. The convention is a 

great help for those living in an increasingly globalized society and can be found at 

http://www.unidroit.org/english/conventions/1973wills/1973wills‐e.htm 

However, because probate law in the United States is ruled by the states and not the federal 

government, the benefits of this treaty only clearly apply to residents of those states which have 

adopted the provisions of the treaty into their probate code. Luckily for Minnesota residents, our state 

has adopted the provisions in Minnesota Statutes 524.2‐1001 et al. 

Some of the requirements of the international will, which are not present in a standard Minnesota will, 

are for each page to be numbered, for each page to be signed by the testator, and for the will to be 

witnessed by an "authorized person". An "authorized person" in Minnesota is anyone licensed to 

practice law in the state of Minnesota. The will must then be deposited with the Minnesota Secretary of 

State. 

However, not every country has adopted this Convention. If the country you are dealing with is not a 

signatory to the convention, the additional hoops you’ll put your client through that cost time and 

money will probably not be of any additional benefit to them. Not all, but many jurisdictions recognize 

the validity of an out‐of‐state or out‐of‐country wills as long as it meets the requirements of where it 

was executed. The decision whether to draft and execute in conformance with the International Will 

7

equirements under Minnesota Statutes takes further inquiry than merely asking if your client’s estate 

may be involved in a foreign probate. 

8. You must do a QDOT, in every circumstance of a non‐citizen spouse, to avoid estate tax. 

Somewhat controversially, I say no. 

Most estate planners are familiar with QDOTs. When you’re not used to dealing with noncitizen 

spouses, you may have a tendency to draft a QDOT every time a non‐citizen spouse 

comes through your door. However, good estate planners do not take a one‐size fits all 

approach their clients. Just as you would not automatically draft a living trust or disclaimer 

trust for every single client, you should not automatically recommend a QDOT to every client 

married to a non‐citizen. 

As a refresher, estates are generally granted an unlimited marital deduction. However, the most 

important requirement for receiving the marital deduction, in the case of a couple with a non‐citizen, is 

that the surviving spouse must be a citizen. 26 U.S.C. 2056(d) prohibits a marital deduction in cases 

where the transfer is to a non‐citizen spouse. The rationale behind this requirement is that non‐citizens, 

upon the death of their citizen or resident spouse, may return to their country of citizenship. Once the 

surviving spouse leaves the United States, the Internal Revenue Service may lose jurisdiction to tax the 

estate. If the IRS allowed the deferral of estate tax on the original decedent’s estate, they may end up 

losing the ability to tax it at a later date. 

The Code does allow for individuals with non‐citizen spouses to receive a marital deduction benefit in 

limited circumstances. If property passes to the non‐citizen surviving spouse in a qualified domestic 

trust (QDOT), the property is allowed a marital deduction. The qualified domestic trust is required to 

have an “individual citizen of the United States or domestic corporation” as trustee. The trust must 

have the ability to withhold estate tax applicable to distributions from the trust and the trust must 

comply with the collection of such tax. 

Once the gross estate has been reduced by the available deductions to find the taxable estate, the Code 

then applies the unified credit. 

This is particularly important to point out. Not everyone married to a non‐citizen will need a marital 

deduction. If their estate is safely below the unified credit, establishing a QDOT may be an unnecessary 

cost and needlessly tie up the estate in a testamentary trust. Also note that a non‐citizen surviving 

spouse can later disclaim into QDOT, under 26 U.S.C. 25056(d)(2)(B). While obtaining and then 

disclaiming property may have its own drawbacks, a plan that allows for disclaiming into a QDOT 

instead of automatically establishing and funding a QDOT may be preferable depending upon your 

client’s circumstances. 

The preceding discussion lays out the tax rules contained in the Code which are generally applicable to 

non‐citizen spouses. However, the Code is not the only source of tax law applicable to a non‐citizen. 

Tax treaties between the United States and the country of citizenship more offer further benefits to a 

non‐citizen or their spouse that may not be reflected in the tax code. 

8

The US State Department lists the various treaties, conventions and protocols that have the force of law 

in the “Treaties in Force” document. The U.S. Treasury Department also lists and provides electronic 

copies of tax protocols, treaties, and conventions entered into force since 1996, along with any 

technical explanations or joint committee remarks. 

A clearly recognized marital deduction, allowed under treaty, is a limited marital deduction under the 

1995 protocol amending the 1980 United States‐Canada Tax Convention. 

Note paragraph 4, Article 19 of Protocol 3, A Revised Protocol Amending the 1980 Tax Convention with 

Canada (1995). 

4. The amount of the credit allowed under paragraph 3 shall equal the lesser of 

(a) The unified credit allowed under paragraph 2 or under the law of the United 

States (determined without regard to any credit allowed previously with respect to 

any gift made by the individual), and 

(b) The amount of estate tax that would otherwise be imposed by the United States 

on the transfer of qualifying property. 

So does this treaty trump federal statute? The general rule is last in time: whichever is put into 

effect last, trumps the other. Any theoretical controversy regarding whether the treaty 

overrules the tax code is practically resolved by the IRS. In the instructions for the Federal 

Estate Tax Return, the IRS directs filers to report a marital deduction, taken under this treaty, in 

line 15 of the return. 

Although the instructions only reference the Canadian treaty, arguably there are other treaties 

that also create a marital deduction. See, for example, the Treasury Department’s technical 

explanation of the 1998 protocol to the 1980 Convention between the United State of America 

and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to 

Taxes on Estates, Inheritances, and Gifts, which states that it also grants a limited marital 

deduction. 

While a QDOT may be recommended for many clients with a non‐citizen spouse, a good estate 

planner will inquire into the current size of estate, likely increase in estate, presence of marital 

deduction through applicable treaties, and likelihood that the non‐citizen spouse will acquire 

US citizenship before binding your client’s estate to a QDOT plan. 

9. A Minnesota court will not appoint a foreigner as guardian. 

Perhaps they will. 

One of the most common questions I hear from practitioners is whether a Minnesota court would 

consider appointing a non‐resident as a guardian which would have the practical effect of moving the 

children out of the United States. The practical question boils down to, “Is there any point to naming 

the foreign person my clients want to take their place if needed, as guardian?” 

9

Minnesota courts, at least at an appellate level, have not directly addressed the effect of non‐resident 

status on a guardianship determination. To see what they may likely do, let’s go back to the 

guardianship statute. 

524.5‐204 JUDICIAL APPOINTMENT OF GUARDIAN: CONDITIONS FOR APPOINTMENT. 

(a) The court may appoint a guardian for a minor if the court finds the appointment is in the minor's best 

interest, and: 

(i) both parents are deceased; or 

(ii) all parental rights have been terminated by court order. 

If a guardian is appointed by a parent pursuant to section 524.5‐202 and the appointment has not been 

prevented or terminated under section 524.5‐203, that appointee has priority for appointment. 

The statute gives priority to one appointed by the parent and applies a standard well known to family law 

attorneys, the best interest standard. In determining best interest, the court would likely look to the factors laid 

out in Statute 518.17. Two factors in particular may disfavor guardianship by a non‐resident; factor (6), the 

child's adjustment to home, school, and community and factor (7) the length of time the child has lived in a 

stable, satisfactory environment and the desirability of maintaining continuity. 

Practical issues may also interfere with the child moving out of country, the most obvious of which is 

transferring a guardianship order made in Minnesota to the new home country and ensuring the child can 

obtain legal status to reside in that country. The parents, in naming a non‐resident guardian, should also be 

aware that in that choice, they are likely choosing a move to a foreign country for their child. 

The decision to name a foreign guardian takes an evaluation of the particular situation of the family and 

discussion of how to address practical issues. Generally, if the parents feel that the best choice to care for the 

child is a non‐resident, even knowing the child will likely move to a foreign country, they should make that 

desire known. There may be little chance that a court would name a non‐resident as guardian, unless they 

acquire priority through appointment in the will. 

Like many issues, there is an international treaty covering guardianship issues. The Convention of 1961 

Concerning the Powers of Authorities and the Law Applicable in Respect of the Protection of Minors, 

also known as the Hague Protection of Minors Convention also considers the interests of the child. 

However, the United States is not a signatory. 

10. Appointing a foreigner as trustee of a minor’s trust will not have tax consequences. 

So wrong. 

The IRS has very strict rules regarding foreign trusts. It is quite possibly the most significant trap for the 

unwary. 

From the IRS website, a foreign trust is any trust other than a domestic trust. 

A domestic trust is any trust if: A court within the United States is able to exercise primary supervision over 

the administration of the trust and one or more U.S. persons have the authority to control all substantial 

decisions of the trust. 

10

In every other case, a foreign trust is created. If the trust fails to make required filings, the US 

beneficiary can face penalties starting at the greater of $10,000 or 5% of the gross value of the portion 

of the trust's assets treated as owned by the U.S. person and up to 35% of the gross value of the 

distributions received from a foreign trust for failure by a U.S. person to report receipt of the 

distribution. 

While foreign trust rules were enacted mainly to undermine off‐shore tax shelters, the rules catch up to 

benign minor trusts. Consider, for example, a will which names a non‐resident guardian, establishes a 

minor’s trust for the benefit of a US citizen child and names a non‐resident guardian as trustee. This 

minor’s trust will be treated as a foreign trust. Again from the IRS website, “[r]egardless of your 

motivation, failure to meet these reporting and filing requirements can result in very significant 

penalties.” 

If your clients want to name a non‐resident as a trustee, they should be counseled into considering a US 

individual or corporate trustee to serve as a co‐trustee. You should provide a detailed explanation, in 

writing, of the risks of naming a non‐resident trustee under the IRS foreign trust rules. 

11. A trust established in Minnesota will be recognized everywhere. 

Nope. 

The notion of trusts, and the separation of the right to control and the right to benefit from property, is 

a long standing notion in common‐law countries. But, this is not a universal concept. Many civil law 

countries do not recognize trusts. This can be problematic for transferring real property located in such 

a jurisdiction. This can also be problematic for the foreign trustee. For example, if a German national is 

named as a trustee, the German Tax authority has been known to tax the trustee on the income. 

Back in the 1980’s, the Hague Convention on the Law Applicable to Trusts and on Their Recognition 

sought to resolve the issue by making jurisdictions, who do not recognize trusts, at least recognize those 

established in other jurisdictions. This convention can be of assistance in those jurisdictions who are 

signatories. However, not all countries are signatories. Germany, for example, is not one. See the Hauge 

website, http://www.hcch.net/index_en.php?act=conventions.status&cid=59 for signatory status. 

For those of us in Minnesota confronting possible non‐recognition, we should evaluate the need for 

recognition in a foreign jurisdiction, treatment of trusts in foreign jurisdictions, and whether 

alternatives, like business entities, resolves possible issues. Again, conferring with foreign counsel on 

these issues may be necessary depending on the needs of your client. 

12. If I want a document recognized in a foreign country, I need to go to a consulate. 


In order to provide conformity in recognizing and certifying legal documents, the Hague Convention 

Abolishing the Requirement of Legalization for Foreign Public Documents provides an “Apostille” 

system, which gives certain public documents the ability to be recognized in signatory countries. Public 

documents include, “documents emanating from an authority or an official connected with the courts 

or tribunals of the State”, administrative documents, notarial acts, “official certificates which are placed 

11

on documents signed by persons in their private capacity, such as official certificates recording the 

registration of a document or the fact that it was in existence on a certain date and official and notarial 

authentications of signatures”. 

In Minnesota, our Secretary of State provides Apostilles to original or certified copies of documents. The 

first stop may not be trying to get your document in front of a consulate; your first stop should be to 

review the signatories of the convention. 

13. I Don’t Need to Worry About Unauthorized Practice of Foreign Law 

Sorry. You Still Need to Watch Out for That. 

In serving a transnational client, you should explore concepts of international and foreign law. However, 

don’t forget that even if you are convinced you clearly understand the provisions of foreign law and its 

effect on your client, you are not licensed in that jurisdiction. Just as applying another state’s law to 

your client’s situation can open yourself up to unauthorized practice of law claims, so too can applying 

another country’s law to your client’s situation. 

When speaking of foreign law, you should caution your client that the only way to ensure a clear 

understanding is including foreign counsel. That may or may not be feasible. However, best practices 

dictate that you caution your client, in writing, that including foreign counsel is advisable. You should 

clearly explain, in writing, that you are not licensed in the foreign jurisdiction. Failure to do so may open 

you up to unauthorized practice of law claims in the foreign jurisdiction. 

IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this 

communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for 

the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, 

marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other 

transaction addressed herein. 

12

SECTION 13 

Drafting Documents With the Corporate 

Fiduciary in Mind – “It Would Have Been 

Neat If…” 

Donna C. Mohr Kinney 

U.S. Trust, Bank of America Private Wealth Management 

Minneapolis 



Introduction ................................................................................................................1 

Common Issues for the Corporate Trustee ................................................................1 

a. Multiple Amendments and Codicils .................................................................1 

b. No Power to Reject Assets ...............................................................................2 

c. Inadequate Trustees’ Powers ............................................................................2 

d. Inadequate Discretionary Powers ....................................................................3 

e. Ineffective or inadequate Powers of Appointment ...........................................5 

f. Lending Issues for Revocable and Irrevocable Trusts ......................................5 

g. Incomplete or Non-Existent Family Information ............................................7 

h. Majority Rule Clauses......................................................................................7 

i. Clauses Addressing Concentrations..................................................................7 

j. Settlor’s “Letter of Intent” ................................................................................8 

k. Clauses That Help the Trustee Solve Discretionary Issues .............................8 

l. Clauses giving the Beneficiary a 5/5 power .....................................................9 

m. Language Allowing a Change of Situs, Principal place of Administration 

and Governing Law .........................................................................................9 

n. Language Giving the Trustee Power to Request a Budget and Financial 

information .......................................................................................................9 

o. Power to Resign ...............................................................................................10 

p. Power to Terminate ..........................................................................................10 

Conclusion .................................................................................................................10

Drafting With the Corporate Trustee in Mind 

Introduction 

As drafters, you are the architects of the document that someday will be 

put into action. It is important that your document be clear, concise, accurately 

express the intent of the client and have adequate provisions to enable the 

smooth administration of the trusts that result. If you plan to name a corporate 

trustee, they should have input in the drafting of your document. You should 

utilize their resources so you can include the optimal language in your document 

and give the corporate trustee an opportunity to review it. Remember, the 

document you are drafting today will someday result in the permanent terms of a 

trust. It is better to identify and correct issues or ambiguities in the drafting 

process than in the courtroom. Communication is very important. Rely on the 

resources that the corporate trustee can provide because of the scale of what 

they can offer, and the resources they have available. 

Common Issues for the Corporate Trustee. 

a. Multiple Amendments and Codicils. 

1. Unless the amendment or codicil is addressing a simple 

change such as replacing the name of a successor trustee 

or adding a gift, consider the benefit of have one controlling 

document. Executing multiple amendments makes it much 

more likely that some aspect of the blended documents will 

inconsistent. The disadvantages far outweigh the 

advantages and it’s not worth the risk. At the very least it 

makes administration more difficult. 

1

. No Power to Reject Assets. 

1. Corporate trustees like to have the power to reject assets 

because of the inherent risks associated with unusual or 

specialty assets for both the trustee and the beneficiary. 

We strive to work with the client to address the 

management of difficult assets, but without this provision, 

the corporate trustee may not be able to serve or would 

have to simply resign if asked to hold an objectionable 

asset. Accepting appointment is less problematic if the 

power to reject is included in the document. If you know 

that the client holds an asset that requires special 

monitoring and review, discuss your options with the 

corporate trustee ahead of time because they can work 

with you to find a solution. 

c. Inadequate Trustees’ Powers. 

1. Trustees’ powers are referenced in a number of ways in 

estate planning documents. Most often you see the powers 

incorporated by reference to 501B.81 with the addition of 

some expanded powers to the body of the document. 

Sometimes we see the Trustees’ Powers Act incorporated 

by reference as it exists at the time of executing the 

document. This may seem best for the client at the time of 

drafting, but consider what happens when sometime in the 

future a trust is created and you are trying to determine if a 

trustee has the power to do a particular thing. The trustee 

will need to go back and find the powers as they existed on 

the date of execution. That can be cumbersome and if it 

really is the intent to use the powers as they exist on that 

2

date, then include a copy with the document. We also see 

powers incorporated as they exist from time to time. There 

isn’t necessarily a wrong way to include Trustees’ Powers 

but there is a best way. The best way is to include the 

powers in the body of the document so the trustee is 

granted the broadest powers possible when administering 

the document and has the most flexibility. If you wish to 

refer to the statutory powers, do not make the reference 

date specific. 

d. Inadequate Discretionary Powers 

1. Discretionary provisions should be very carefully drafted to 

leave as little as possible open to interpretation. This will 

greatly assist the corporate trustee and the beneficiary to 

know the intent of the settlor and accept the limitations of 

the discretionary powers. If there is a unique family history, 

it is important to understand the effect this will have in 

administration. In the example I will discuss below, the 

settlor wanted to seriously restrict distributions to the 

income beneficiary due to issues of financial irresponsibility 

during lifetime. He used the standard “emergency.” This 

can mean different things to different people and if not 

coupled with a requirement to look at other assets and 

without clear language elaborating on this standard, it can 

result in a situation where the settlor's intent may not be 

carried out and the corporate trustee finds itself in a tug of 

war with the beneficiary. Any discretionary standards 

should be clear and supported by as much guidance as 

possible. 

3

Example of Trust f/b/o ”H.” 

I mentioned the difficulty of working with multiple amendments and 

Trustee’s Powers that are incorporated by reference. I was administering 

a trust created by a document executed in 1982. The document was later 

amended in 1987 and again in 1991. The original document referenced 

the Trustee’s Powers as they existed on the date of execution of the 

document. The 1991 amendment made reference to the Minnesota 

Uniform Principal and Income act (UPAIA) without specifying a date. The 

settlor then died in 1992 and a trust was created. Minnesota law later 

made a change to the Uniform Principal and Income Act that it applied to 

all trusts whether the document was drafted prior to the change in the law 

or not. It altered the interpretation of the provisions in the trust that dealt 

with charging fees to income and principal. The net income was to be paid 

out but the principal discretionary language was very restrictive. When 

trying to make a decision about a discretionary distribution, all of these 

amendments and laws as incorporated by reference had to be reviewed. 

In addition, there was disharmony in the family and the beneficiary was 

estranged from her children who were the remaindermen and received 

statements. She also had a strained relationship with the settlor. 

To further complicate the situation, the lifetime beneficiary was 

granted no power over the remainder. The settlor had included a provision 

making adopted children permissible beneficiaries however. At the same 

time, the settlor wanted to severely restrict access to principal for the 

beneficiary. The beneficiary hadn't spoken to her natural children for 

decades. She had eventually remarried and had adult step children. 

Towards the end of her life, she became close to one of her step 

daughters who cared for her as she aged. At age 83 having no other way 

to benefit the step daughter with assets from the trust, and no way to 

disinherit her natural children as she would have liked, she adopted her 

4

step daughter two months before her death. As a result, the trust was then 

partially redirected outside the family causing her natural children to 

receive one-fourth of the trust and not one-third. One cannot imagine that 

the settlor would have intended for this outcome. I do not know if there 

would have been a way to anticipate what the beneficiary would do with 

the adoption provision, but it does demonstrate how the unexpected can 

happen. The moral of the story is to avoid multiple amendments and 

codicils, include the trustee’s powers in the body of the document and 

consider all the possible outcomes of the language of the trust. The 

adoption provision, for example, could have been limited to the adoption of 

children under a certain age. 

e. Ineffective or inadequate Powers of Appointment 

1. A limited power of appointment can be very helpful to build 

in some flexibility as to the ultimate distribution of the trust. 

Consider including spouses as permissible beneficiaries if 

there are children with long marriages who have children 

together. Otherwise, money may pass to children leaving 

the surviving spouse impoverished. When drafting these 

powers, be sure to coordinate other provisions in your 

document. If you grant a limited power to distribute to 

descendants and the beneficiary is older and you define 

out adopted children, the power may be ineffective. 

f. Lending Issues for Revocable and Irrevocable Trusts. 

1. When the corporate trustee is a bank with lending 

capacity the corporate trustee must be very careful on two 

levels. One concerns the obvious conflict of interest that 

must be disclosed, addressed with the client and formally 

5

acknowledged, the conflict waived and accepted. Once past 

that issue, the corporate trustee may encounter additional 

challenges with respect to the powers granted under the 

document. One common scenario is where a revocable trust 

grantor wishes to use a line of credit to fund a project using 

revocable trust assets as collateral. A revocable trust grantor 

can do whatever they wish with their trust assets, including 

transfer them out, terminate the trust or amend the trust. But 

when they are acting as co-trustee with a corporate trustee 

and wish to borrow, the corporate trustee may not have the 

needed power if the only powers granted are those in the 

statute. Minnesota law does not presume the grantor retains 

an absolute power to direct the co-trustee in order to relieve 

the co-trustee of this duty. This becomes a risk to the 

corporate trustee where the grantor wishes to borrow and 

pledge the revocable trust assets because the decision to 

pledge the assets is a discretionary act. The risk to the 

corporate trustee arises if the borrowed funds are used for 

some purpose that is contrary to the interests of the 

remaindermen of the trust. The following language gives the 

corporate trustee the needed power to borrow without 

making a discretionary decision: 

“ I give my trustees the authority to pledge trust assets for the 

benefit of the grantor and at the grantor's direction.” 

There are other ways to resolve this issue if borrowing is the 

right solution for a client. The corporate trustee could resign, 

or the assets could be placed in an investment account 

outside the trust. But both of these solutions have 

shortcomings. 

6

2. Borrowing in an irrevocable trust is much more difficult 

and requires extensive analysis and the involvement of the 

attorney. I have only had one situation where it was used. In 

that case it was used to obtain funds for the beneficiary of a 

self-settled trust created as the result of a personal injury 

suit. 

g. Incomplete or Non-Existent Family Information. 

1. Prepare a family tree and collect social security numbers 

and get dates of birth and death and determine family 

relationships if at all possible for your clients. Collect dates 

of marriage. Keep addresses up to date. This is helpful 

when you have multiple generations with the same first 

name. 

h. Majority Rule Clauses. 

1. Minnesota law does not provide for majority rule among 

multiple co-trustees, so you need to add this to your 

document if you wish to have that flexibility and a way to 

resolve issues between co-trustees where consensus 

cannot be reached. 

i. Clauses Addressing Concentrations. 

1. Language addressing concentrations must be very strong 

to absolve a corporate trustee of the duty to diversify. 

Simply referring to a concentration and stating that the 

corporate trustee is under no duty to diversify is not strong 

7

enough. A professional fiduciary is held to a very high 

standard and bound by the Prudent Investor Act. Adequate 

language can be drafted using a majority rule clause for 

example and providing for multiple individual co-trustees to 

be serving at all times. 

2. If investment management is going to be an issue and 

create constant friction, you might consider separating the 

administrative function from the investment function of the 

trust. I have never administered a trust where we acted as 

administrative trustee only, but there is no reason why you 

could not split these duties if it makes sense for your client 

and you include the necessary language in your document. 

j. Settlor’s “Letter of Intent.” 

1. A letter of intent expanding on the settlor’s beliefs and 

philosophy about making distributions to the beneficiary 

may help the corporate trustee to carry out and understand 

his or her wishes. I do not know the value of having such a 

letter in a situation of legal challenge. It is always better to 

have any relevant language regarding discretionary 

distributions directly in the document, though a letter of 

intent may be persuasive when making a discretionary 

distribution decision for a beneficiary. 

k. Clauses That Help the Trustee Solve Discretionary Issues 

1. Minnesota is not a unitrust state and the Uniform Principal 

and Income Act is limited in what it can accomplish where 

a document grants no access to principal or has very 

8

estrictive access to principal. Consider the benefit of 

using unitrust language in your document to allow for a 

total return approach in making distributions to the income 

beneficiary. 

l. Clauses giving the Beneficiary a 5/5 power. 

1. This is another very good solution to making sure that 

beneficiary distributions are not too restrictive. These 

powers if granted remove any discussion from the equation 

because the beneficiary has a right to ask for the amount 

granted without giving a reason. This, coupled with a 

distribution of net income is a nice way to achieve some 

impartiality as between the income and principal 

beneficiaries and harmony with the corporate trustee. 

m. Language Allowing a Change of Situs, Principal place of 

Administration and Governing Law. 

1. Including this language gives the trustee the greatest 

flexibility to do what is in the best interests of the 


n. Language Giving the Trustee Power to Request a Budget and 

Financial Information. 

1. It is common to see language requiring the trustee to look 

to the beneficiary’s other resources when making a 

discretionary decision, but if there is a reason to strengthen 

that language due to the family dynamics this will help to 

9

set expectations of the beneficiaries. Include language to 

give clear guidance to the trustee if this is to be the case. 

o. Power to Resign. 

1. Be sure to include a power to resign so if the trustee wants 

to do so, a court proceeding is not necessary. 

p. Power to Terminate 

1. Include language clearly stating the circumstances under 

which termination is permissible. 

Conclusion 

When working with a corporate trustee, be sure to communicate well 

during the drafting process and take advantage of this great resource. Drafting to 

allow for broad powers and flexibility when appropriate will allow the trustee to 

manage through changing times, recognizing that broad powers do not fit in all 

situations. Clear guidance should be included in your documents to make it clear 

how the settlor intended these powers be exercised. To the extent possible, 

anticipate the many things that can transpire during the course of the 

administration of a trust and draft language to address them. 

10

SECTION 14 

The Current Status of Wisconsin Trust Law: 

The Long, Long, Long Road to Reforming 

the Wisconsin Trust Code 

Victor J. Schultz 

BMO Harris Bank NA 

Milwaukee, WI 


Current Status of the Wisconsin Trust Code and the Long, Long, Long Road 

to Reforming the Wisconsin Trust Code 

Victor J. Schultz, 

BMO Harris Bank N.A. 


I. History of the Wisconsin Trust Code 2 

A. Wisconsin Trust Code adopted in 1971 2 

B. Key Provisions 2 

C. Marital Property Act 4 

D. Wisconsin Death Taxes 5 

E. Uniform Laws 5 

II. Uniform Trust Code – Overview – 11 articles 6 

A. Article I – General Provisions and Definitions 6 

B. Article II – Judicial Proceedings 7 

C. Article III – Representation 7 

D. Article IV – Creation, Validity, Modification and Termination 7 

E. Article V – Creditor’s Claims, Spendthrift and Discretionary Trusts 8 

F. Article VI – Revocable Trusts 8 

G. Article VII – Office of Trustee 9 

H. Article VIII – Duties and Powers of a Trustee 9 

I. Article IX – Prudent Investor Act 11 

J. Article X – Liability of a Trustee and Rights of Other Persons 11 

K. Article XI - Miscellaneous Provisions 12 

III. The New Wisconsin Trust Code 12 

A. Status 12 

B. Significant Wisconsin Changes to UTC 13

I. History of the Wisconsin Trust Code. 

A. Current version of Wisconsin Trust Code was initially adopted in 1971 and has 

been amended from time to time. Code is found in Chapter 701 of Wisconsin 

Statutes (Current code is attached as Exhibit A.) 

1. Wills were the predominant estate planning vehicle. 

2. Estates were smaller and estate assets much more basic – bank accounts, 

stocks, bonds, real estate, life insurance, business interests. 

3. Mutual funds, variable annuity and life insurance contracts, universal life 

insurance, S Corporations, LLCs and LPs were not prevalent or did not exist. 

4. Retirement assets were limited – often just a defined benefit plan that 

terminated at death. IRAs were not created until 1976 and 401(k) plans were 

created in 1981. 

5. Unlimited marital deduction did not exist. Wisconsin imposed an inheritance 

tax. The federal estate tax exemption was $60,000 and the estate tax rates 

ranged from 3% to 77% (for estates in excess of $10 million.) 

6. Probate avoidance tools like PODs, TODs and beneficiary designations on 

large retirement plan balances did not exist. 

7. Life expectancies were shorter – females 75 years, now 82 years; males 71 

years, now 79 years. 

8. Today there are higher divorce rates, more second marriages and children 

from mixed marriages. 

B. Key provisions of the current Wisconsin Trust Code. 

1. §701.06 – Spendthrift provisions. 

a. A spendthrift provision protects trust assets from claims of a beneficiary’s 

creditors. 

b. A spendthrift provision is not effective against claims for child support or 

public support. 

c. The settlor cannot establish an asset protection trust - §701.06(6). 

2. §701.065 – Debts of a decedent. 

2

a. A trustee may limit the claims of a deceased settlor’s creditors by 

publishing and providing notice after the death of the settlor. 

b. The statute provides a four month claims period. 

3. §701.07 – Living trusts. 

a. Living trusts are valid. 

b. Creditors may make claims against a settlor’s living trust. 

4. §701.10 – Charitable trusts. 

a. A trust with charitable beneficiaries is valid. 

b. The Wisconsin attorney general may enforce a charitable 

trust. 

5. §§701.12 and 701.13 – Revocation, modification and termination of trusts. 

a. By written consent of the settlor and all of the beneficiaries, a trust may be 

modified, revoked or terminated. 

b. The court has the power to modify, revoke or terminate a trust. 

6. §701.15 – Representation. 

a. Virtual representation is not recognized in Wisconsin. 

b. The court may appoint a guardian ad litem to represent incapacitated, 

unascertained or unborn beneficiaries. 

7. §701.16 – Testamentary trustees. 

a. A testamentary trustee must file an inventory of the property received by 

the trustee from the settlor’s personal representative and from any other 

source. The inventory is filed with the court having jurisdiction to admit 

the will to probate. 

b. Annual accountings are required to be filed by the testamentary trustee by 

April 15 following the end of a calendar year account. 

c. A corporate trustee may waive the annual accounting if the corporate 

trustee files a statement with the court’s register in probate indicating that 

the trustee will provide annual accounts to all persons interested and to 

those who request the accounting. 

3

d. A final accounting is required before a court will discharge a testamentary 

trustee and relieve the trustee from further liability when the trustee 

resigns, is removed or the trust terminates. 

8. §701.19 – Trustee powers. 

a. Joint trustees must act by majority vote. 

b. A trustee cannot make distributions to himself or herself, subject to certain 

exceptions. §701.19(10). 

9. §701.20 – Uniform principal and income act 

10. Chapter 881 – trust investment rules – prudent investor act. 

C. Wisconsin adopts the Marital Property Act – Chapter 766. 

1. Effective January 1, 1986, Wisconsin became the first (and only) state to 

adopt the Marital Property Act. 

2. The Act converted Wisconsin from a common law property state to a 

community property state. 

3. Under the Act, each spouse has an undivided 50% interest in each and every 

item of property. 

4. Wisconsin practitioners have found marital property to be a very flexible 

estate planning law. 

a. Community property offers a double step-up in basis – each item of 

property receives a full step-up in basis upon the death of each spouse. 

b. It is easy to reclassify ownership of property through a marital property 

agreement – no requirement to retitle each and every item of property. 

c. You can avoid probate by including a will substitute provision 

(Washington Will) in the marital property agreement under §766.58(3)(f). 

d. Joint trusts between husband and wife have become the standard. 

e. Division of each and every asset upon the death of the first spouse is 

usually not necessary. §766.31(3)(b) permits marital property assets to be 

divided on aggregate value. 

5. Typical set of estate planning documents in Wisconsin for a married couple. 

4

a. Pourover wills for each spouse. 

b. Joint trust. 

c. Marital property agreement. 

d. Power of attorney forms. 

e. Beneficiary designation forms for retirement assets and life insurance 

contracts. 

6. Since the adoption of the Marital Property Act, Wisconsin has been more 

reluctant to take the lead in enacting new uniform laws. 

D. Wisconsin death taxes – there are none. 

1. Wisconsin used to impose an inheritance tax on amounts received by a 

beneficiary. 

2. The Wisconsin inheritance tax was phased out beginning in 1987 because of 

the change in federal law enacted under the Tax Reform Act of 1986, which 

created the state death tax credit for federal estate tax purposes. 

3. Beginning in 1992, Wisconsin only imposed a pick-up estate tax based on the 

federal state death tax credit. 

4. When the federal estate tax credit was phased out and replaced with a 

deduction under EGTRRA in 2001, Wisconsin enacted a stand-alone estate 

tax with a $675,000 exemption. 

5. The Wisconsin estate tax sunset on January 1, 2008 and no state death tax 

currently applies. 

E. Uniform laws. 

1. Prudent investor act - §881.01. 

a. ULC promulgated the prudent investor act in 1994. It governs how trusts 

should be invested. 

b. Wisconsin became the 48 th state to enact the prudent investor act in 2003. 

2. Uniform principal and income act - §701.20. 

5

a. ULC promulgated the uniform principal and income act in 1997. It 

governs how a trust should account for income and principal. 

b. Wisconsin enacted its version of the uniform principal and income act in 

2005. The Wisconsin law includes: 

i. Power to adjust between principal and income - §701.20(4). 

ii. 

iii. 

iv. 

Power to convert to a unitrust (between 3% - 5%) - §701.20(4g). 

Express unitrusts - §701.20(4j). 

Power to treat capital gains as income - §701.20(4k). 

3. Uniform Trust Code. 

a. ULC promulgated the UTC in 2001 and last revised/amended the UTC in 

2010. 

b. The UTC has been enacted in 25 states plus the District of Columbia. 

c. The UTC is a comprehensive redrafting of the model trust code. It 

primarily provides a set of default rules that can be overridden by the 

terms of the trust. 

d. Wisconsin established joint State Bar / Wisconsin Bankers Association 

committee in 2007 to evaluate how to incorporate the UTC into the 

Wisconsin Trust Code. 

II. 

Uniform Trust Code – Overview – 11 articles. 

A. Article I – general provisions and definitions. 

1. Provides a standard set of definitions. Introduces the definition of 

“qualified beneficiary,” which essentially includes the current 

beneficiaries and the first layer of remainder beneficiaries. 

2. The terms of a trust prevail over the UTC except for certain mandatory 

provisions. These include: 

a. Duty of a trustee to act in good faith, in accordance with the terms and 

purposes of the trust and the interests of the beneficiaries. 

b. Trust must have a lawful purpose. 

c. Power of the court to oversee the administration of a trust. 

6

d. Duty of the trustee to notify the qualified beneficiaries of the existence of 

a trust (this provision has been made optional and most states recently 

enacting the UTC have omitted this section.) 

e. Statutes of limitation. 

3. Provides rules on “governing law” (the law that determines the meaning and 

effect of the trust terms and the validity of the trust) and the “principal place 

of administration” (establishes which state’s laws govern the administration of 

the trust - the duties and powers of the trustee, which courts have jurisdiction 

and sometimes which state taxes the fiduciary income of a trust.) 

4. Authorizes nonjudicial settlement agreements to encourage resolution of trust 

issues outside of court. 

B. Article II – Judicial Proceedings. 

1. Establishes that trusts are not subject to ongoing judicial supervision, but 

gives the court the power and right to intervene to the extent its jurisdiction is 

invoked. 

2. A trustee is subject to the jurisdiction of the courts of the state where the 

principal place of jurisdiction is located. 

C. Article III - Representation. 

1. This section limits the need for courts to appoint guardians ad litem to 

represent the interests of beneficiaries, but continues to allow the court to 

appoint representatives for beneficiaries. 

2. Parents of minor and unborn children may represent the interests of their 

children. 

3. Fiduciaries – conservators, guardians, agents under a financial power of 

attorney, personal representatives – may represent and bind the interest of the 

person that the fiduciary represents. 

4. Virtual representation – representation by a person having a substantially 

identical interest – is authorized under the UTC. 

D. Article IV – Creation, Validity, Modification and Termination of a Trust. 

1. Trusts may be written or may be oral. They must be created by someone who 

has capacity. 

2. The UTC authorizes charitable trusts, trusts for the care of an animal (“pet 

trusts”, and trusts without an ascertainable beneficiary (for a limited period of 

time – 21 years.) 

7

3. Irrevocable trusts may be modified or terminated with the consent of the 

settlor and all of the beneficiaries or by the court with the consent of all the 

beneficiaries. Upon termination, the trustee shall distribute the trust as agreed 

to by all of the beneficiaries or as approved by the court. 

4. Courts have the power to modify a trust because of unanticipated 

circumstances or because continuation of the trust would be impracticable or 

wasteful or impair the trust’s administration. Courts may apply “cy pres” to 

modify a charitable trust that becomes unlawful, impracticable or impossible 

to achieve. Courts may also reform a trust to correct mistakes or to achieve 

the settlor’s tax objectives. 

5. Trustees may terminate an uneconomic trust (defined in the UTC as a trust 

having less than $50,000) with notice to the qualified beneficiaries. Trustees 

may also combine or divide trusts with notice to the qualified beneficiaries. 

6. The UTC does not address decanting – the trustee’s power to appoint assets to 

a new trust. 

E. Article V – Creditor’s Claims, Spendthrift Trusts and Discretionary Trusts. 

1. A beneficiary’s creditor may not reach a beneficiary’s interest in an 

irrevocable trust until a distribution is made, to the extent the beneficiary’s 

interest in the trust is protected by a spendthrift provision. 

2. A spendthrift provision does not protect against certain governmental claims 

(taxes, public support), child support or alimony claims. 

3. During the lifetime of a settlor, the property of a revocable trust is subject to 

the claims of the settlor’s creditors. 

4. With respect to an irrevocable trust, a creditor of the settlor may reach the 

maximum amount that can be distributed to or for the settlor’s benefit. 

5. Creditors may reach a “mandatory” or “overdue” distribution to a beneficiary. 

F. Article VI – Revocable Trusts. 

1. The capacity to create a revocable trust is the same as the capacity to create a 

will. 

2. Trusts are presumed revocable unless the terms of the trust specify otherwise. 

3. While a trust is revocable, the rights of the beneficiaries are attributed to the 

settlor and the duties of the trustee are owed exclusively to the settlor. The 

8

UTC gives the states the discretion to decide if this rule should be altered if 

the settlor becomes incapacitated. 

4. The validity of a revocable trust may be contested within three years of the 

settlor’s death. If the trustee sends a notice of the settlor’s death to any 

interested person, the period to contest the revocable trust is reduced to 120 

days of the date a person is sent a notice of the death of the settlor. 

G. Article VII - Office of Trustee. 

1. Provides rules on how a trustee accepts or declines a trusteeship. In absence 

of a formal declaration of acceptance, a trustee accepts its duties by accepting 

delivery of trust property or beginning take actions as trustee. 

2. The roles of co-trustees are addressed. Co-trustees must act by majority vote. 

3. Default rules are provided for appointing successor trustees. The qualified 

beneficiaries may unanimously appoint a successor or the court can appoint a 

successor. 

4. Trustee has the right to resign. 

5. Trustees can be removed by the court under certain circumstances, including a 

request by all of the qualified beneficiaries. 

6. The trustee is entitled to reasonable compensation and reimbursement of 

expenses, with interest as appropriate. 

H. Article VIII – Duties and Powers of a Trustee. 

1. A trustee has a duty to administer a trust in good faith, in accordance with its 

terms and purposes, in the interests of the beneficiaries and in accordance with 

the UTC. 

2. A trustee has a duty of loyalty to the beneficiaries. 

3. A trustee must act impartially with respect to the interests of multiple 


4. A trustee must act prudently and exercise reasonable care, skill and caution. 

5. The trustee may only incur reasonable costs. 

6. A trustee who has special skills or expertise shall use those skills or expertise. 

9

7. A trustee may delegate its duties and powers, but must exercise reasonable 

care, skill and caution in (a) selecting the agent; (b) establishing the scope and 

terms of the delegation; and (c) monitoring the actions of the agent. 

8. Powers to direct. 

a. While a trust is revocable, the settlor may direct the trustee. 

b. If the terms of the trust give others the power to direct the trustee, the 

trustee shall follow those directions unless manifestly contrary to the terms 

of the trust or the trustee knows the action would constitute a serious 

breach of fiduciary duty. 

c. A person, other than a beneficiary, who holds a power to direct is 

presumptively a fiduciary, who is required to act in good faith with regard 

to the purposes of the trust and the interests of the beneficiaries. The 

holder of a power to direct is liable for a breach of its fiduciary duties. 

9. A trustee must take reasonable steps to take control of and protect trust 

property. 

10. A trustee shall keep adequate records of trust property and shall keep trust 

property separate from the trustee’s other property. 

11. A trustee shall take reasonable steps to enforce claims and defend claims 

against the trust. 

12. A trustee shall take reasonable steps to collect trust property from a former 

trustee or other person. This includes actions to redress a breach of trust 

known to have been committed by a former trustee. 

13. A trustee has a duty to inform and report to the beneficiaries. This includes: 

a. A duty to keep qualified beneficiaries reasonably informed. 

b. A trustee shall provide all beneficiaries with a copy of the trust instrument 

upon request. 

c. A trustee shall notify all qualified beneficiaries of the trustee’s acceptance 

of the duties of trustee within 60 days of acceptance. 

d. Once a trust becomes irrevocable, the trustee shall notify the qualified 

beneficiaries of the existence of the trust, the name of the settlor, the right 

to request a copy of the trust instrument, and the right to request copies of 

trust accountings. 

10

e. A trustee shall notify the qualified beneficiaries in advance of any change 

in trustee compensation. 

f. A trustee shall send an annual accounting to all current beneficiaries and 

to any other beneficiary who requests a copy. 

14. The UTC describes the trustee powers. 

a. Discretionary powers must be exercised in good faith. A tax savings 

provision is included that prohibits a trustee who is also a beneficiary from 

making distributions to himself or herself, unless the distribution is limited 

to an ascertainable standard. 

b. General powers are provided and 26 specific powers are described, 

including the power to make loans to a beneficiary. 

c. The trustee’s power to make distributions upon termination is described 

and the trustee is given an option to send a proposal for distribution before 

making a final distribution. If no one objects to the proposal for 

distribution within 30 days after the proposal is sent, the right to object to 

the payment terminates. The trustee may ask the beneficiaries to sign a 

release of liability, but the release will be invalid if the beneficiary did not 

know the material facts relating to any breach that may have occurred 

prior to the final distribution. 

I. Article IX – Prudent Investor Act – incorporated by reference. 

J. Article X – Liability of a Trustee and Rights of Persons Dealing with a Trustee. 

1. The UTC provides possible court remedies for breach of trust. 

2. Damages for breach of trust and in absence of breach of trust are described. 

3. A trustee’s right to receive attorney’s fees and costs in a judicial proceeding 

involving administration of a trust is described. The court may order fees and 

expenses be paid by a particular party or from the trust, as justice and equity 

may require. 

4. A statute of limitations is provided for actions against a trustee. Claims must 

be made within the earlier of one year from the date of a report that would 

have disclosed the possible breach of trust, or five years from the first to occur 

of the removal of the trustee, termination of the beneficiary’s interest, or the 

termination of the trust. 

5. A term of trust may exculpate the trustee from liability, but it is unenforceable 

if the provision was inserted in bad faith, as the result of an abuse of a 

11

fiduciary or confidential relationship to the settlor, or if the trustee drafted the 

provision and did not adequately communicate it to the settlor. 

6. Beneficiary consent, release or ratification agreements are valid unless the 

agreement was induced by improper conduct or the beneficiaries did not know 

of their rights or of the material facts relating to a breach at the time of the 

signing of the agreement. 

7. Persons who deal with a trustee may rely on the trustee’s assumed powers as 

long as the person acts in good faith. Such person is not required to inquire 

about the extent of the trustee’s powers. Persons who deal with an assumed 

trustee are protected from liability even if the trustee has been removed. 

8. Third parties who request a copy of the trust instrument may be furnished with 

a certificate of trust that summarizes the trust instrument. Persons who 

receive a certificate may rely upon it as if it were the trust instrument. If a 

third party demands a trust instrument in lieu of the certificate, the third party 

may be held liable for damages if a court determines the third party did not act 

in good faith in demanding the trust instrument. 

K. Article XI - Miscellaneous Provisions. 

1. The UTC generally applies to all trusts, including trusts created before and 

after the effective date of the enactment of the Code. 

2. Each state that passes its version of the UTC will insert the effective date of 

its code. 

III. 

The New Wisconsin Trust Code. 

A. Status. 

1. A joint Wisconsin State Bar and Wisconsin Bankers Association committee 

(14 members) was formed in 2007 to study the UTC and Wisconsin Chapter 

701. The State Bar representatives included members of the elder law 

section and the real property, probate and trust section. 

2. We decided to scrap the existing Wisconsin trust code and start over with the 

UTC as the basis for the new trust code. 

3. While the committee is generally supportive of domestic asset protection 

trust legislation, we decided not to make asset protection trusts part of the 

new trust code. Such legislation may follow enactment of the code as 

separate legislation. 

4. We initially assigned study groups to review each article of the UTC and 

compare it to the existing Wisconsin trust code and to the legislation adopted 

12

y other states. The ULC provided us with summaries of the legislation 

adopted by other states showing how each state’s legislation differed from 

the UTC. 

5. Our committee initially met quarterly to review the findings of each separate 

study group. In 2010, we began to meet monthly in preparation to submit our 

recommendations to the Wisconsin Legislative Reference Bureau for 

drafting. Our initial draft was submitted in 2010 and we are currently 

preparing comments on LRB draft #3. We expect draft #4 will be bill ready. 

6. We expect draft #4 will be prepared after the Wisconsin 2013 budget bill is 

enacted. Passage of the budget bill is expected before the start of the next 

Wisconsin fiscal year (July 1, 2013.) This means draft #4 should be 

completed by August 1, 2013. Once completed and reviewed one final time, 

a bill be created and introduced to the Wisconsin legislature during its fall 

session. Committee hearings on the bill will be scheduled for the fall 

session, with a vote by the legislature most likely in the winter/spring 

legislature session in 2014. We anticipate an effective date that will be the 

first day of the seventh month following the date of enactment. 

B. Significant Wisconsin changes to the UTC. 

1. The Wisconsin code will address the concept of a directed trust. 

a. Directing party is a person who is granted a power to direct a trustee’s 

investment or distribution decisions. 

b. Directed trust property is all or a portion of trust property that is invested 

or managed by a directing party and for which the trustee has no 

investment or management responsibility. 

2. We introduce the concept of a trust protector. A trust protector is a person 

who is granted a power over the trust in a capacity other than as a trustee or a 

directing party. 

3. Wisconsin will permit “silent trusts” by removing the mandatory rule that a 

trustee inform a qualified beneficiary of the existence of the trust. 

4. We codified the rule that the law of the principal place of administration 

governs administration matters. Administration matters include the duties and 

powers of a trustee. 

5. We expanded the application of nonjudicial settlement agreements to address 

multiple issues, including the approval of investment actions and the 

appointment of directing parties and trust protectors. 

13

6. The new code will eliminate the existing ongoing Wisconsin court supervision 

of testamentary trusts. This change is consistent with the UTC and the law in 

other states. 

7. We expanded the concept of representation to allow the trustee to appoint a 

representative if no other representation is available or is adequate. 

8. We increased the threshold for termination of an uneconomic trust to 

$100,000, indexed for inflation every five years. 

9. We included a decanting provision. If a trustee has a discretionary 

distribution power, a trustee may appoint assets to a new trust. Depending on 

the distribution standard, the beneficiaries of the new trust may be some or all 

of the beneficiaries of the original trust. 

10. The provisions on creditor claims and spendthrift provisions track existing 

Wisconsin law. Creditors can only make claims against a trust to pay a 

beneficiary’s child support or repay public support. 

11. The new law includes rules that clarify when a creditor can make a claim 

against a trust that is subject to a general power of appointment. 

12. The Wisconsin statute limiting claims of creditors to 4 months from the date 

of a notice of the death of the settlor to creditors of the settlor will be retained. 

13. The rules that apply to a trustee regarding acceptance of the position, 

compensation and reimbursement of expenses will also apply to directing 

parties and trust protectors. 

14. We added a provision that clarifies that trust property should be titled in the 

name of the trustee. If legal title is placed in the name of the trust, that has the 

same legal effect as if title was placed in the name of the trustee of the trust. 

15. We added a section on directed trusts. 

a. A trustee who follows a direction of a directing party is not liable for 

following the direction unless the trustee engaged in willful misconduct. 

b. A trustee has no duty to monitor, advise, or provide information to a 

directing party. A trustee has no duty to prevent a directing party from 

acting, to cause a directing party to act, or to compel a directing party to 

redress a breach of trust. 

c. A directing party is a fiduciary with respect to its powers and has the same 

duties a trustee would have with respect to the powers that are given to the 


14

d. With respect to directed trust property, the directing party shall (i) direct 

the trustee on the retention, sale and purchase of such property; (ii) direct 

the trustee on the management, including voting powers, of such property; 

(iii) determine reasonable compensation for any investment or 

management services rendered with respect to the directed trust property; 

(iv) select any outside investment advisers and delegate investment 

authority to them; and (v) determine the frequency and methodology for 

valuing directed trust property. 

e. With respect to directed trust property, a trustee has no duty to (i) prepare 

or review investment policy statements; (ii) perform investment or 

suitability reviews; (iii) determine or verify the value of directed trust 

property; or (iv) monitor the conduct or investment performance of the 


16. A trustee does not have a duty to examine the accounts of a former trustee, 

and is not liable for the acts or omissions of a former trustee. 

17. We modified the rules on the duty to inform and report. 

a. The duty to inform and report does not apply to trusts accepted before the 

effective date of the Wisconsin trust code. 

b. The trustee’s duty to keep a qualified beneficiary reasonably informed is 

limited to current beneficiaries and qualified beneficiaries who request 

information. 

c. There is no specific duty to inform and report to a beneficiary who is not 

a qualified beneficiary. 

18. Wisconsin added a tax savings provision regarding marital deduction transfers 

to a trust. The provision provides that any transfer for the benefit of a spouse 

is presumed (but not required) to qualify for the marital deduction. 

19. A specific trustee power to fund section 529 accounts or other college savings 

vehicles was added. 

20. Trust protectors. 

a. A trust protector may be appointed by the settlor, the court, or by the 

interested persons in a nonjudicial settlement agreement. The title given 

to the person with the trust protector power – trust protector, adviser, 

director, or no title at all – does not matter. 

15

. The standard of care that applies to the trust protector varies depending on 

the power granted and to whom the power is granted to. 

c. A fiduciary power must be exercised in good faith, with regard to the 

purposes of the trust and the interests of the beneficiaries. (Alternative – 

must be exercised in accordance with the same duties that would apply to 

a trustee who has the same power that is granted to the trust protector.) A 

trust protector who breaches its fiduciary duty is liable for the breach. 

Fiduciary powers include: 

i. Power to interpret or enforce the trust. 

ii. 

iii. 

iv. 

Power to correct errors or ambiguities in the trust instrument. 

Power to review and approve accounts. 

Power to resolve disputes. 

v. Power to consent to or veto distributions. 

vi. 

Power to consent to or veto investment decisions. 

d. A non-fiduciary power must be exercised in good faith. A trust protector 

who breaches this standard is liable for the breach, including any breach 

by a party over whom a trust protector has a power of removal. Nonfiduciary 

powers include: 

i. Power to remove, replace or appoint a trustee, trust protector or 


ii. 

iii. 

iv. 

Power to modify or amend the trust instrument to respond to changes 

in state law or tax law. 

Power to modify or amend the trust to achieve a different tax status 

or to make certain tax elections. 

Power to change the place of administration, governing law or tax 

situs. 

v. Power to modify powers of appointment. 

vi. 

vii. 

Power to terminate the trust or decant the trust to a new trust. 

Power to advise the trustee on matters involving a beneficiary, 

including whether to provide a beneficiary with information 

regarding the trust. 

16

viii. 

Any other power granted to the trust protector, including the power 

to consent to or veto a trustee decision other than a distribution 

decision or investment decision. 

e. A personal power has no standard of care, including an obligation to act in 

good faith. A person with a personal power is not liable for the 

consequences of the exercise or non-exercise of the trust protector power. 

i. Personal powers are those powers given to a qualified beneficiary or 

to a settlor. 

f. A trust protector does not have a duty to exercise its powers, to monitor 

the conduct of the trustee, or to monitor changes in the law or 

circumstances of the beneficiaries. 

g. A settlor may not direct a trust protector, nor bring a cause of action 

against a trust protector. 

h. A trustee or directing party is not liable for any loss that results from the 

exercise or non-exercise of a trust protector power, unless the trustee or 

directing party breaches a duty it owes. A trustee or directing party may 

refuse to follow a direction of a trust protector if the trustee or directing 

party knows the action is contrary to the terms of the trust or would 

constitute a serious breach of duty owed by the trust protector. A trustee 

or directing party does not have a duty to monitor or advise the trust 

protector, or to warn any beneficiary of instances where the trustee or 

directing party would have acted differently than the trust protector. 

i. A trust protector may request information about the trust from the trustee 

and the trustee must provide that information if it relates to the powers 

given to the trust protector. Absent a request, a trustee has no duty to 

provide any information to the trust protector. 

21. The new law will incorporate the prudent investor act provided in Chapter 881 

by reference. Chapter 881 will be amended to apply the prudent investor act 

to directing parties and trust protectors who exercise investment powers. The 

rule on diversification will also be clarified. An asset that was not acquired by 

or purchased by the trustee need not be diversified, but must be reviewed 

periodically to determine when it is advisable to dispose of the asset. 

22. The prudent investor rule does not apply to life insurance contracts owned by 

trusts. If a principal purpose of a trust is to hold a life insurance contract, then 

a trustee has no duty to determine whether the life insurance contract is or 

remains a proper investment. 

17

23. The subchapter dealing with liability of trustees and rights of persons dealing 

with the trustee will also apply to directing parties and trust protectors. 

24. The section regarding payment of attorney fees and costs addresses under 

what circumstances a trustee can use trust assets to pay attorney fees and costs 

to defend or prosecute any proceeding, including an alleged breach of trust by 

the trustee. Attorney fees may be paid to defend an alleged breach if notice is 

provided in advance of the payment to the qualified beneficiaries and the 

qualified beneficiaries do not obtain a court order prohibiting the payment of 

the attorney fees. 

25. The Wisconsin uniform principal and income act is incorporated into the 

Wisconsin trust code as subchapter 11. 

26. The effective date of the new Wisconsin Trust Code will likely be the first day 

of the 7 th month following the date of publication of the new law. 

18

Electronic reproduction of 2011−12 Wis. Stats. database, updated to May 1, 2013. 

1 Updated 11−12 Wis. Stats. Database 

TRUSTS 701.06 

CHAPTER 701 

TRUSTS 

701.01 Definitions. 

701.02 Purposes for which trusts may be created. 

701.03 Passive trusts abolished. 

701.04 Purchase money resulting trusts abolished. 

701.05 Title of trustee; interest of beneficiaries. 

701.06 Spendthrift provisions and rights of creditors of beneficiaries. 

701.065 Debts of decedents. 

701.07 Living trusts. 

701.08 Transfers to living trusts. 

701.09 Transfers to testamentary trusts. 

701.10 Charitable trusts. 

701.105 Private foundations. 

701.11 Honorary trusts; cemetery trusts. 

701.115 Future interests in revocable trusts. 

701.12 Revocation, modification and termination of trusts with consent of settlor. 

701.13 Modification and termination of trusts by court action. 

701.14 Circuit court procedure in trust proceedings. 

701.15 Representation of others. 

701.16 Testamentary trustees. 

701.17 Successor and added trustees. 

701.18 Resignation and removal of trustees. 

701.19 Powers of trustees. 

701.20 Principal and income. 

701.21 Income payments and accumulations. 

701.22 Distributions in kind by trustees; marital bequests. 

701.23 Removal of trusts. 

701.24 Applicability. 

701.25 Applicability of general transfers at death provisions. 

701.26 Disclaimers of nonprobate transfers. 

701.01 Definitions. As used in this chapter, unless the context 

indicates otherwise: 

(1) BENEFICIARY. “Beneficiary” means a person who has a 

beneficial interest in a trust. 

(2) CHARITABLE AND PRIVATE TRUST. To the extent that trust 

income or principal presently or in the future must be used by the 

trustee exclusively for a charitable purpose as defined in s. 701.10 

(1), the trust is a “charitable trust”; any other trust is a “private 

trust”, provided it is for the benefit of a person sufficiently identifiable 

to enforce the trust. 

(3) COURT. “Court” means the court having jurisdiction. 

(4) PROPERTY. “Property” means an interest in real or personal 

property. 

(5) SETTLOR. “Settlor” means a person who directly or indirectly 

creates a living or testamentary trust or adds property to an 

existing trust. 

(6) TESTAMENTARY AND LIVING TRUST. “Testamentary trust” 

means a trust subject to the continuing jurisdiction of the court 

assigned to exercise probate jurisdiction; “living trust” means any 

other trust, including a testamentary trust removed to this state 

from another state. 

(7) TRUST. “Trust” means an express living or testamentary, 

private or charitable trust in property which arises as a result of a 

manifestation of intention to create it. 

(8) TRUSTEE. “Trustee” means a person holding in trust title 

to or holding in trust a power over property. “Trustee” includes an 

original, added or successor trustee. 

History: 1971 c. 66; 1977 c. 187 s. 135; 1977 c. 449; 1983 a. 189. 

701.02 Purposes for which trusts may be created. A 

trust may be created for any lawful purpose. 

History: 1993 a. 16, 437. 

Cross−reference: See s. 701.10 (1) which lists the purposes for which a charitable 

trust may be created. 

Advantages of the revocable trust estate plan. Keydel, 1975 WBB No. 3. 

701.03 Passive trusts abolished. Except as provided in s. 

706.08 (4), every trust, to the extent it is private and passive, vests 

no title or power in the trustee, but the beneficiary takes a title corresponding 

in extent to the beneficial interest given the beneficiary. 

A trust is passive if the title or power given the trustee is 

merely nominal and the creating instrument neither expressly nor 

by implication from its terms imposes active management duties 

on the trustee. 

History: 1989 a. 231. 

When a trustee has the duty of paying taxes and insurance, the trust is an active one. 

Kinzer v. Bidwill, 55 Wis. 2d 749, 201 N.W.2d 9 (1972). 

This statute does not apply to living trusts. Section 701.07, which provides that a 

living trust cannot be deemed passive, controls. McMahon v. Standard Bank & Trust 

Co. 202 Wis. 2d 564, 550 N.W.2d 727 (Ct. App. 1996), 95−1303. 

701.04 Purchase money resulting trusts abolished. 

(1) If title to property is transferred to one person and all or part 

of the purchase price is furnished by another, the latter may not 

enforce a purchase money resulting trust. 

(2) Creditors of the person furnishing all or part of the purchase 

price may enforce a resulting trust, in proportion to the 

amount of purchase price furnished, to the extent necessary to satisfy 

their demands, unless an intent to defraud creditors is disproved. 

(3) Nothing in this section shall affect the right to enforce a 

valid express trust or to establish a constructive trust based on 

fraud, undue influence, breach of confidential relationship or 

other appropriate grounds. 

701.05 Title of trustee; interest of beneficiaries. 

(1) Unless the creating instrument expressly limits the trustee to 

a lesser title or to a power, the trustee takes all title of the settlor 

or other transferor and holds such title subject to the trustee’s fiduciary 

duties as trustee. 

(2) If a trustee of a private trust has title to the trust property, 

a beneficiary has both a right to have the trustee perform the trustee’s 

fiduciary duties and an equitable interest, present or future, in 

the trust property. If a trustee of a private trust holds only a power 

over property, a beneficiary has a right to have such trustee perform 

the trustee’s fiduciary duties. 

(3) In a private or charitable trust where the trustee takes all 

title of the settlor or other transferor and holds such title subject 

to the trustee’s fiduciary duties as trustee, any interest expressly 

retained by the settlor or not effectively disposed of to others 

remains in the settlor, or the settlor’s successors in interest, as an 

equitable reversionary interest and to this extent the settlor, or the 

settlor’s successors, are beneficiaries of the trust. In a private trust 

where the trustee takes all title of the settlor or other transferor and 

holds such title subject to the trustee’s fiduciary duties as trustee, 

any interest, present or future, created by the settlor in any other 

person is an equitable interest and such person is a beneficiary of 

the trust. 

History: 1971 c. 66; 1991 a. 316. 

701.06 Spendthrift provisions and rights of creditors 

of beneficiaries. (1) INCOME BENEFICIARIES. A settlor may 

expressly provide in the creating instrument that the interest in 

income of a beneficiary other than the settlor is not subject to voluntary 

or involuntary alienation. The income interest of such a 

beneficiary cannot be assigned and is exempt from claims against 

the beneficiary until paid over to the beneficiary pursuant to the 

terms of the trust. 

(2) PRINCIPAL BENEFICIARIES. A settlor may expressly provide 

in the creating instrument that the interest in principal of a benefi- 

2011−12 Wis. Stats. database updated though 2013 Wis. Act 10 and all Supreme Court Orders enacted before May 1, 2013. Statutory 

changes effective on or prior to May 1, 2013 are published as currently in effect. Changes effective after May 1, 2013 are 

designated by NOTES. See Are the Statutes on this Website Official? (5−1−13)


701.06 TRUSTS 

ciary other than the settlor is not subject to voluntary or involuntary 

alienation. The interest in principal of such a beneficiary cannot 

be assigned and is exempt from claims against the beneficiary, 

but a judgment creditor, after any payments of principal have 

become due or payable to the beneficiary pursuant to the terms of 

the trust, may apply to the court for an order directing the trustee 

to satisfy the judgment out of any such payments and the court in 

its discretion may issue an order for payment of part or all of the 

judgment. 

(3) DISCLAIMER OR RENUNCIATION NOT AN ASSIGNMENT. A disclaimer 

or renunciation by a beneficiary of part or all of his or her 

interest under a trust shall not be considered an assignment under 

sub. (1) or (2). 

(4) CLAIMS FOR CHILD SUPPORT. Notwithstanding any provision 

in the creating instrument or subs. (1) and (2), upon application 

of a person having a valid order directing a beneficiary to 

make payment for support of the beneficiary’s child, the court 

may: 

(a) If the beneficiary is entitled to receive income or principal 

under the trust, order the trustee to satisfy part or all of the claim 

out of part or all of payments of income or principal as they are 

due, presently or in the future; 

(b) In the case of a beneficiary under a discretionary trust, 

order the trustee to satisfy part or all of the claim out of part or all 

of future payments of income or principal which are to be made 

pursuant to the exercise of the trustee’s discretion in favor of such 

beneficiary. 

(5) CLAIMS FOR PUBLIC SUPPORT. Notwithstanding any provision 

in the creating instrument or subs. (1) and (2), if the settlor is 

legally obligated to pay for the public support of a beneficiary 

under s. 46.10, 49.345, or 301.12 or the beneficiary is legally obligated 

to pay for the beneficiary’s public support or that furnished 

the beneficiary’s spouse or minor child under s. 46.10, 49.345, or 

301.12, upon application by the appropriate state department or 

county official, the court may: 

(a) If such beneficiary is entitled to receive income or principal 

under the trust, order the trustee to satisfy part or all of the liability 

out of part or all of payments of income or principal as they are 

due, presently or in the future; 

(b) Except as otherwise provided in par. (c), in the case of a 

beneficiary under a discretionary trust, order the trustee to satisfy 

part or all of the liability out of part or all of future payments of 

income or principal which are to be made pursuant to the exercise 

of the trustee’s discretion in favor of such beneficiary; 

(c) In the case of a beneficiary under a discretionary trust who 

is a settlor or a spouse or minor child of the settlor, order the trustee 

to satisfy part or all of the liability without regard to whether the 

trustee has then exercised or may thereafter exercise the trustee’s 

discretion in favor of the beneficiary. 

(5m) TRUST FOR DISABLED INDIVIDUAL. Subsection (5) does 

not apply to any trust that is established for the benefit of an individual 

who has a disability which has continued or can be 

expected to continue indefinitely, substantially impairs the individual 

from adequately providing for his or her own care or custody, 

and constitutes a substantial handicap to the afflicted individual 

if the trust does not result in ineligibility for public 

assistance under ch. 49. A trustee of a trust which is exempt from 

claims for public support under this subsection shall notify the 

county department under s. 46.215 or 46.22 in the county where 

the disabled beneficiary resides of the existence of the trust. 

(6) SETTLOR AS BENEFICIARY. (a) Notwithstanding any provision 

in the creating instrument and in addition to the remedies 

available under subs. (4) and (5) where the settlor is a beneficiary, 

upon application of a judgment creditor of the settlor, the court 

may, if the terms of the instrument require or authorize the trustee 

to make payments of income or principal to or for the benefit of 

the settlor, order the trustee to satisfy part or all of the judgment 

out of part or all of the payments of income or principal as they are 

due, presently or in the future, or which are payable in the trustee’s 

Updated 11−12 Wis. Stats. Database 2 

discretion, to the extent in either case of the settlor’s proportionate 

contribution to the trust. 

(b) A beneficiary of a trust may not be considered a settlor 

solely because of a lapse, waiver, or release of any of the following: 

1. A power described under par. (c). 

2. The beneficiary’s right to withdraw part of the trust property, 

to the extent that the value of the property affected by the 

lapse, waiver, or release in any year does not exceed the greater 

of the amount in: 

a. Section 2041 (b) (2) or 2514 (e), Internal Revenue Code of 

1986. 

b. Section 2503 (b), Internal Revenue Code of 1986. 

(c) A beneficiary of a trust is not a settlor, has not made a voluntary 

or involuntary transfer of the beneficiary’s interest in the 

trust, or does not have the power to make a voluntary or involuntary 

transfer of the beneficiary’s interest in the trust solely because 

the beneficiary holds or exercises, in any capacity, any of the following: 

1. A presently exercisable power to consume, invade, appropriate, 

or distribute property to or for the benefit of the beneficiary 

if the power is any of the following: 

a. Exercisable only on consent of another person holding an 

interest adverse to the beneficiary’s interest. 

b. Limited by an ascertainable standard, such as health, 

education, support, or maintenance of the beneficiary. 

2. A presently exercisable power to appoint any property of 

the trust to or for the benefit of a person other than the beneficiary, 

a creditor of the beneficiary, the beneficiary’s estate, or a creditor 

of the beneficiary’s estate. 

3. A testamentary power of appointment. 

4. A presently exercisable right described in par. (b) 2. 

(d) A beneficiary of a trust is not a settlor solely because the 

beneficiary is entitled to nondiscretionary distributions from the 

trust. 

(7) SUBSEQUENT MODIFICATION OF COURT’S ORDER. Any order 

entered by a court under sub. (4), (5) or (6) (a) is subject to modification 

upon application of an interested person. 

(8) EXEMPT ASSETS. Assets of a trust, to the extent they are 

exempt from claims of creditors under other statutes, shall not be 

subject to sub. (4), (5), or (6) (a). 

History: 1971 c. 66; 1977 c. 309, 418; 1985 a. 176; 1991 a. 316; 1997 a. 237; 2005 

a. 216; 2007 a. 20. 

Cross−reference: See s. 701.07 (3) which deals with creditors’ rights where a settlor 

retains powers over a living trust. 

Trust income that is income to the beneficiary under federal tax law is subject to 

a child support order regardless of whether a distribution is made to the beneficiary. 

Grohmann v. Grohmann, 189 Wis. 2d 532, 525 N.W.2d 261 (1995). 

In not revealing that he was a trust beneficiary, a father failed to make proper financial 

disclosure at the time of a divorce as was required by s. 767.127. The rationale 

of Grohmann is applicable to both grantor and nongrantor trusts if there is an obligation 

to report that trust’s income as one’s own because it is the obligation to report the 

income that makes the income reachable for calculations of a child support obligation. 

Stevenson v. Stevenson, 2009 WI App 29, 316 Wis. 2d 442, 765 N.W.2d 811, 

07−2143. 

701.065 Debts of decedents. (1) LIMITATIONS ON CLAIMS. 

(a) 1. A trustee who has a duty or power to pay the debts of a decedent 

may publish in the county in which the decedent resided, as 

a class 3 notice, under ch. 985, a deadline for filing claims with the 

trustee. The deadline shall be the date that is 4 months after the 

date of the first insertion of the notice. 

2. Except as provided in pars. (b) and (c), if the trustee satisfies 

the requirements for the publication of the notice under subd. 

1., all claims, including claims of the state and any subdivision 

thereof, whether due or to become due, absolute or contingent, liquidated 

or unliquidated, are barred against the trustee, the trust 

property and any recipient of trust property unless filed with the 

trustee on or before the date specified in the notice under subd. 1. 

(b) Notwithstanding par. (a) 2., a claim that is not filed on or 

before the date specified in the notice under par. (a) 1. is not barred 

if any of the following apply: 






1. The claim is a claim based on tort, on a marital property 

agreement that is subject to the time limitations under s. 766.58 

(13) (b) or (c), on Wisconsin income, franchise, sales, withholding, 

gift or death taxes, or on unemployment compensation contributions 

due or benefits overpaid; a claim for funeral or administrative 

expenses; a claim of this state under s. 46.27 (7g), 49.496 

or 49.682 or rules promulgated under s. 46.286 (7); or a claim of 

the United States. 

2. All of the following circumstances exist: 

a. On or before the date specified in the notice under par. (a) 

1., the trustee knew, or in the exercise of reasonable diligence 

should have known, of the existence of the potential claim and of 

the identity and mailing address of the potential claimant. 

b. At least 30 days before the date specified in the notice under 

par. (a) 1., the trustee had not given notice to the potential claimant 

of the final day for filing his or her claim. 

c. At least 30 days before the date specified in the notice under 

par. (a) 1., the claimant did not have actual knowledge of the date 

on which the claim would be barred. 

(c) If an action is pending against a decedent at the time of his 

or her death and the action survives, the plaintiff in that action may 

serve a notice of substitution of party defendant on the trustee and 

file proof of service of notice in the court. Filing of proof of service 

on or before the deadline for filing a claim under par. (a) 1. 

gives the plaintiff the same rights against the trust as the filing of 

a claim. A judgment in any such action constitutes an adjudication 

for or against the trust. 

(2) EFFECT OF STATUTE OF LIMITATIONS. A trustee shall not pay 

a claim that was barred by a statute of limitations at the time of the 

decedent’s death. A claim not barred by a statute of limitations at 

the time of the decedent’s death shall not be barred thereafter by 

a statute of limitations if the claim is filed with the trustee on or 

before the deadline for filing a claim under sub. (1) (a) 1. 

(3) CLAIMS OF CREDITORS WITHOUT NOTICE. (a) A claim not 

barred by sub. (1) (a) 2. because of the operation of sub. (1) (b) 2. 

may be enforced against trust property only as provided in this 

subsection. 

(b) The claimant shall file the claim with the trustee within one 

year after the decedent’s death and within 30 days after the earlier 

of the following: 

1. The date that the trustee gives notice to the potential claimant 

of the deadline for filing a claim under sub. (1) (a) 1. 

2. The date that the claimant first acquires actual knowledge 

of the deadline for filing a claim under sub. (1) (a) 1. 

(c) The claimant shall have the burden of establishing by the 

greater weight of the credible evidence that all of the circumstances 

under sub. (1) (b) 2. existed. 

(d) This subsection does not extend the time for commencement 

of a claim beyond the time provided by any statute of limitations 

applicable to that claim. 

(4) SATISFACTION OF CLAIM FROM OTHER PROPERTY. Failure of 

a claimant timely to file a claim as provided in this section does 

not bar the claimant from satisfying the claim, if not otherwise 

barred, from property other than trust property. 

History: 1997 a. 188; 1999 a. 9. 

701.07 Living trusts. (1) VALIDITY. A living trust, otherwise 

valid, shall not be held invalid as an attempted testamentary disposition, 

a passive trust under s. 701.03, or a trust lacking a sufficient 

principal because: 

(a) It contains any or all of the following powers, whether exercisable 

by the settlor, another person or both: 

1. To revoke, modify or terminate the trust in whole or in part; 

2. To exercise a power or option over property in the trust or 

over interests made payable to the trust under an employee benefit 

plan, life insurance policy, or otherwise; 

TRUSTS 701.08 

3. To direct, during the lifetime of the settlor or another, the 

person to whom or on whose behalf the income or principal shall 

be paid or applied; 

4. To control the administration of the trust in whole or in part; 

5. To add property or cause additional employee benefits, life 

insurance, or other interests to be made payable to the trust at any 

time. 

(b) The principal consists of a designation of the trustee as a 

primary or direct, secondary or contingent beneficiary under a 

will, employee benefit plan, life insurance policy or otherwise; or 

(c) The principal consists of assets of nominal value. 

(2) ELIGIBILITY TO RECEIVE ASSETS. A living trust shall be eligible 

to receive property from any source. 

(3) CREDITORS’ RIGHTS. If a settlor retains a power to revoke, 

modify or terminate which is exercisable in the settlor’s favor, 

except when such power is exercisable only in conjunction with 

a person having a substantial adverse interest, the trust property 

to the extent it is subject to such power is also subject to the claim 

of a creditor of the settlor. This subsection shall not apply to trust 

property to the extent it is exempt from claims of creditors under 

other statutes. 

History: 1971 c. 66; 1979 c. 110 s. 60 (4); 1991 a. 316. 

Cross−reference: See s. 701.06 (6) which deals with creditors’ rights where the 

settlor is a beneficiary of the trust. 

Section 701.03, which prohibits passive trusts, does not apply to living trusts. This 

statute, which provides that a living trust cannot be deemed passive, controls. McMahon 

v. Standard Bank & Trust Co. 202 Wis. 2d 564, 550 N.W.2d 727 (Ct. App. 1996), 

95−1303. 

Understanding Living Trusts. Moschella. Wis. Law. March 1992. 

Informing the Public About Living Trusts. Twohig. Wis. Law. March 1992. 

701.08 Transfers to living trusts. (1) VALIDITY AND 

EFFECT. The order of execution of a living trust instrument and a 

will or other instrument purporting to transfer or appoint property 

to the trust evidenced by the trust instrument shall be disregarded 

in determining the validity of the transfer or appointment. No reference 

in any will to a living trust shall cause assets in such trust 

to be included in property administered as part of the testator’s 

estate; nor shall it cause the trust or any portion thereof to be 

treated as a testamentary trust. 

(2) GOVERNING TERMS. Property transferred or appointed by 

a will or by a beneficiary designation under an employee benefit 

plan, life insurance policy or other instrument permitting designation 

of a beneficiary to a living trust, the terms of which the testator 

or designator was the sole holder of a power to modify, shall be 

administered in accordance with the terms of the trust as they may 

have been modified prior to the testator’s or designator’s death, 

even though the will or beneficiary designation was not reexecuted 

or republished after exercise of the power to modify, unless 

the will or beneficiary designation expressly provides otherwise. 

Such property transferred or appointed to a living trust, which is 

subject to a power of modification requiring action or consent of 

a person other than the testator or designator, shall be administered 

in accordance with the terms of the trust instrument as they exist 

at the execution of the will or beneficiary designation, unless 

expressly otherwise provided. If the will or beneficiary designation 

expressly provides that the property shall be administered in 

accordance with the terms of the trust instrument as they may be 

modified thereafter, the will or beneficiary designation need not 

be reexecuted or republished after exercise of the power to 

modify. 

(3) DISPOSITION WHEN NO EXISTING LIVING TRUST. If at the 

death of a testator a living trust has been completely revoked, or 

otherwise terminated, a provision in the testator’s will purporting 

to transfer or appoint property to such trust shall have the following 

effect, unless the will provides otherwise: 

(a) If the testator was a necessary party to the revocation or 

other termination of such trust, the provision in the testator’s will 

shall be invalid; 





701.08 TRUSTS 

(b) If the testator was not a necessary party to the revocation 

or other termination of such trust, the provision in the testator’s 

will shall be deemed to create a testamentary trust upon the terms 

of the living trust instrument at the time the will was executed or 

as otherwise provided where sub. (2) is applicable. 

History: 1971 c. 66; 1991 a. 316. 

701.09 Transfers to testamentary trusts. (1) TESTAMEN- 

TARY TRANSFER TO TRUST OF ANOTHER. A transfer or appointment 

by will shall not be held invalid because it is made to a trust 

created, or to be created, under the will of another person if the will 

of such other person was executed, or was last modified with 

respect to the terms of such trust, prior to the death of the person 

making the transfer or appointment and such other person’s will 

is admitted to probate prior to, or within 2 years after, the death of 

the person making the transfer or appointment. Property included 

in such a transfer or appointment shall not be considered property 

subject to administration as part of the other person’s estate but 

shall pass directly to that other person’s testamentary trustee, be 

added to the designated trust and administered as a part thereof. 

(2) INVALID TESTAMENTARY TRANSFER. If such a transfer or 

appointment by will is not accepted by the testamentary trustee of 

such other person or if no will of such other person which meets 

the conditions specified in sub. (1) is admitted to probate within 

the period therein limited, and if the will containing such transfer 

or appointment by will makes no alternative disposition of the 

assets, the will shall be construed as creating a trust upon the terms 

contained in the documents constituting the will of such other person 

as of the date of death of the person making the transfer or 

appointment by will. 

(3) LIFE INSURANCE PROCEEDS TRANSFERRED TO TRUST OF 

INSURED. A trustee named or to be named in the will of an insured 

person may be designated beneficiary of an insurance policy on 

the life of the insured if the designation is made in accordance with 

the terms of the policy. After admission of the insured’s will to 

probate and issuance of letters to such trustee, the insurance proceeds 

shall be paid to the trustee to be administered in accordance 

with the terms of the trust as they exist at the death of the insured, 

and the proceeds may be commingled with other assets passing to 

the trust. Insurance proceeds paid to a testamentary trustee 

because of his or her designation as life insurance beneficiary 

shall not be subject to death tax to any greater extent than if the 

proceeds were payable to a beneficiary other than the insured’s 

estate. The proceeds shall be inventoried for tax purposes only 

and shall not be subject to taxes, debts or charges enforceable 

against the estate or otherwise considered assets of the insured’s 

estate to any greater extent than if the proceeds were payable to a 

beneficiary other than the insured’s estate. 

(4) EMPLOYEE BENEFITS TRANSFERRED TO TRUST OF EMPLOYEE. 

A trustee named or to be named in the will of an employee covered 

by any employee benefit plan or contract described in s. 815.18 (3) 

(j) or any annuity or insurance contract purchased by an employer 

that is a religious, scientific, educational, benevolent or other corporation 

or association not organized or conducted for pecuniary 

profit may be designated payee of any benefits payable after the 

death of the employee if the designation is made in accordance 

with the terms of the plan or contract. After admission of the 

employee’s will to probate and issuance of letters to the trustee, 

the death benefits shall be paid to the trustee to be administered in 

accordance with the terms of the trust as they exist at the death of 

the employee, and the benefits may be commingled with other 

assets passing to the trust. Death benefits paid to a testamentary 

trustee because of his or her designation as payee are not subject 

to the death tax to any greater extent than if the benefits were payable 

to a beneficiary other than the employee’s estate. The benefits 

shall be inventoried for tax purposes only and are not subject 

to taxes, debts or charges enforceable against the estate or otherwise 

considered assets of the employee’s estate to any greater 

extent than if the benefits were payable to a beneficiary other than 

the employee’s estate. 


(5) TRANSFER OF OTHER PROPERTY. Property other than that 

described in subs. (3) and (4) may be made payable to or transferred 

to a trustee named or to be named in the will of the transferor. 

History: 1971 c. 66; Sup. Ct. Order, 67 Wis. 2d 585, 777 (1975); 1975 c. 218; 1987 

a. 27; 1989 a. 278; 1991 a. 316. 

701.10 Charitable trusts. (1) VALIDITY. A charitable trust 

may be created for any of the following charitable purposes: relief 

of poverty, advancement of education, advancement of religion, 

promotion of health, governmental or municipal purposes or any 

other purpose the accomplishment of which is beneficial to the 

community. No gift to charity, in trust or otherwise, is invalid 

because of indefiniteness. If a particular charitable purpose is not 

indicated and the trustee is not expressly authorized by the creating 

instrument to select such a purpose, the trustee has an implied 

power to select one or more charitable purposes. If a particular 

charitable purpose is not indicated and no trustee is named in the 

creating instrument, the court may appoint a trustee with such an 

implied power to select or may direct that the property be transferred 

outright to one or more established charitable entities. 

(2) MODIFICATION AND TERMINATION. (a) If a purpose of a 

charitable trust is or becomes impractical, unlawful or impossible, 

the court may order the trust continued for one or more other charitable 

purposes designated by the settlor or, in the absence of such 

designation, order the property devoted to one or more other charitable 

purposes either by continuing the trust or by distributing the 

property to one or more established charitable entities. In determining 

the alternative plan for disposition of the property, the 

court shall take into account current and future community needs 

in the general field of charity within which the original charitable 

purpose falls, other charitable interest of the settlor, the amount of 

principal and income available under the trust and other relevant 

factors. The provisions of this subsection do not apply insofar as 

the settlor expressly provides in the creating instrument for an 

alternative disposition if the original trust fails; nor do they apply 

to gifts by several persons to a charitable entity on a subscription 

basis if the court finds that the donors intended their gifts to be limited 

to the original purpose and such purpose fails initially. 

(b) If any administrative provision of a charitable trust or part 

of a plan set forth by the settlor to achieve the settlor’s charitable 

purpose is or becomes impractical, unlawful, inconvenient or 

undesirable, and a modification of such provision or plan will 

enable the trustee to achieve more effectively the basic charitable 

purpose, the court may by appropriate order modify the provision 

or plan. 

(c) If a charitable trust is or becomes uneconomic when principal 

and probable income, cost of administration and other relevant 

factors are considered, or in any event if the trust property is valued 

at less than $50,000, the court may terminate the trust and 

order outright distribution to an established charitable entity in the 

general field of charity within which the charitable purpose falls. 

(d) It is the purpose of this subsection to broaden the power of 

the courts to make charitable gifts more effective. In any situation 

not expressly covered the court shall liberally apply the cy pres 

doctrine. 

(e) The settlor if living, the trustee, the attorney general and an 

established charitable entity to which income or principal must be 

paid under the terms of the trust shall be persons interested in any 

proceeding under this subsection. 

(3) ENFORCEMENT; NOTICE TO ATTORNEY GENERAL. (a) A proceeding 

to enforce a charitable trust may be brought by: 

1. An established charitable entity named in the governing 

instrument to which income or principal must or may be paid 

under the terms of the trust; 

2. The attorney general in the name of the state upon the attorney 

general’s own information or, in the attorney general’s discretion, 

upon complaint of any person; 






3. Any settlor or group of settlors who contributed half or 

more of the principal; or 

4. A cotrustee. 

(b) In a proceeding affecting a charitable trust, notice must be 

given to the attorney general, but, except as provided in sub. (2), 

notice need not be given where the income or principal must be 

paid exclusively to one or more established charitable entities 

named in the governing instrument. 

(4) ESTABLISHED CHARITABLE ENTITY. As used in this section, 

“established charitable entity” means a corporation, unincorporated 

association or trust operated exclusively for a charitable purpose 

defined in sub. (1). 

History: 1971 c. 66; 1991 a. 316; 1993 a. 160. 

Cross−reference: See s. 879.03 (2) (c) on notice to the attorney general of probate 

proceedings affecting a charitable trust. 

A trust for residents of a city cannot be enlarged as to the area only because the 

trustees believe the original restriction has become unfair. In re Charitable Trust, 

Oshkosh Foundation, 61 Wis. 2d 432, 213 N.W.2d 54 (1973). 

Construction of a trust’s terms to allow the majority of the proceeds to be used for 

a college seminar series for clergy was impermissible when that construction would 

increase the class of beneficiaries and divert the trust purpose from one providing living 

facilities for the original beneficiaries into one primarily for the educational benefit 

of clergy. In re Petition of Downer Home, 67 Wis. 2d 55, 226 N.W.2d 444 (1975). 

This section applies only to entities operated exclusively for charitable purposes. 

ABC for Health, Inc. v. Commissioner of Insurance, 2002 WI App 2, 250 Wis. 2d 56, 

640 N.W.2d 510, 00−2944. 

If a trust instrument provides a specified procedure for altering administrative provisions 

of the trust, there is no reason to suppose the legislature intended that sub. (2) 

(b) be used to override such a procedure. League of Women Voters v. Madison Community 

Foundation, 2005 WI App 239, 288 Wis. 2d 128, 707 N.W.2d 285, 04−2036. 

701.105 Private foundations. (1) (a) In the administration 

of any trust which is a private foundation, as defined in section 509 

of the internal revenue code, a charitable trust, as defined in section 

4947 (a) (1) of the internal revenue code, or a split−interest 

trust as defined in section 4947 (a) (2) of the internal revenue code, 

all of the following acts shall be prohibited: 

1. Engaging in any act of self−dealing as defined in section 

4941 (d) of the internal revenue code, which would give rise to any 

liability for the tax imposed by section 4941 (a) of the internal revenue 

code. 

2. Retaining any excess business holdings as defined in section 

4943 (c) of the internal revenue code, which would give rise 

to any liability for the tax imposed by section 4943 (a) of the internal 

revenue code. 

3. Making any investments which would jeopardize the carrying 

out of any of the exempt purposes of the trust, within the meaning 

of section 4944 of the internal revenue code, so as to give rise 

to any liability for the tax imposed by section 4944 (a) of the internal 

revenue code. 

4. Making any taxable expenditures as defined in section 

4945 (d) of the internal revenue code, which would give rise to any 

liability for the tax imposed by section 4945 (a) of the internal revenue 

code. 

(b) This subsection shall not apply either to those split−interest 

trusts or to amounts thereof which are not subject to the prohibitions 

applicable to private foundations by reason of the provisions 

of section 4947 of the internal revenue code. 

(2) In the administration of any trust which is a private foundation 

as defined in section 509 of the internal revenue code, or 

which is a charitable trust as defined in section 4947 (a) (1) of the 

internal revenue code, there shall be distributed, for the purposes 

specified in the trust instrument, for each taxable year, amounts at 

least sufficient to avoid liability for the tax imposed by section 

4942 (a) of the internal revenue code. 

(3) Subsections (1) and (2) shall not apply to any trust to the 

extent that a court of competent jurisdiction shall determine that 

such application would be contrary to the terms of the instrument 

governing such trust and that the same may not properly be 

changed to conform to such subsections. 

TRUSTS 701.12 

(4) Nothing in this section shall impair the rights and powers 

of the courts or the attorney general of this state with respect to any 

trust. 

History: 1971 c. 66; 1991 a. 39. 

701.11 Honorary trusts; cemetery trusts. (1) Except 

under sub. (2), where the owner of property makes a testamentary 

transfer in trust for a specific noncharitable purpose, and there is 

no definite or definitely ascertainable human beneficiary designated, 

no enforceable trust is created; but the transferee has power 

to apply the property to the designated purpose, unless the purpose 

is capricious. If the transferee refuses or neglects to apply the 

property to the designated purpose within a reasonable time and 

the transferor has not manifested an intention to make a beneficial 

gift to the transferee, a resulting trust arises in favor of the transferor’s 

estate and the court is authorized to order the transferee to 

retransfer the property. 

(2) A trust may be created for maintaining, keeping in repair 

and preserving any grave, tomb, monument, gravestone or any 

cemetery. Any cemetery company, association or corporation 

may receive property in trust for any of those purposes and apply 

the income from the trust to the purpose stated in the creating 

instrument. 

(3) (a) A trust described in sub. (2) is invalid to the extent it 

was created for a capricious purpose or the purpose becomes 

capricious. 

(b) If the assets of any trust described in sub. (2) are valued at 

less than $5,000 and the court finds that the cost of operating the 

trust will probably defeat the intent of the settlor or if the trustee, 

including a cemetery company, association or corporation, named 

in the creating instrument is improperly described, the court may 

order distribution of the assets on terms which will as nearly as 

possible carry out the settlor’s intention. 

History: 1989 a. 307. 

701.115 Future interests in revocable trusts. (1) (a) In 

par. (b), “revocable trust” means a trust that the grantor, at the time 

of death, was alone empowered to change or revoke, by law or 

under the instrument creating the trust, regardless of whether the 

grantor then had the capacity to exercise the power. 

(b) Unless a contrary intention is found, if a person has a future 

interest in property under a revocable trust and, under the terms of 

the trust, the person has the right to possession and enjoyment of 

the property at the grantor’s death, the right to possession and 

enjoyment is contingent on the person’s surviving the grantor. 

Extrinsic evidence may be used to show contrary intent. 

(2) Survivorship under sub. (1) (b) is governed by s. 854.03. 

(3) The rights of the issue of a predeceasing beneficiary under 

sub. (1) (b) are governed by s. 854.06. 

History: 1997 a. 188; 2005 a. 216. 

701.12 Revocation, modification and termination of 

trusts with consent of settlor. (1) By written consent of the 

settlor and all beneficiaries of a trust or any part thereof, such trust 

or part thereof may be revoked, modified or terminated, except as 

provided under s. 445.125 (1) (a) 2. to 4. 

(2) For purposes of this section such consent may be given on 

behalf of a legally incapacitated, unascertained or unborn beneficiary 

by the court after a hearing in which the interests of such 

beneficiary are represented by a guardian ad litem. A guardian ad 

litem for such beneficiary may rely on general family benefit 

accruing to living members of the beneficiary’s family as a basis 

for approving a revocation, modification or termination of a trust 

or any part thereof. 

(3) Nothing in this section shall prevent revocation, modification, 

or termination of a trust pursuant to its terms or otherwise in 





701.12 TRUSTS 

accordance with law or prevent conversion of a trust to a unitrust 

under s. 701.20 (4g). 

History: 1971 c. 66; 1977 c. 40; 1979 c. 175 s. 53; 1979 c. 221 s. 2202 (45); 1981 

c. 64; 1995 a. 295; 2005 a. 10. 

That s. 701.18 allows removing a trustee for cause does not prevent removal of a 

trustee under this section with the approval of the settlor and all beneficiaries, without 

showing cause. Weinberger v. Bowen, 2000 WI App 264, 240 Wis. 2d 55, 622 

N.W.2d 471, 00−0903. 

701.13 Modification and termination of trusts by court 

action. (1) ANTICIPATION OF DIRECTED ACCUMULATION OF 

INCOME. When an accumulation of income is directed for the 

benefit of a beneficiary without other sufficient means to support 

or educate himself or herself, the court on the application of the 

beneficiary or the beneficiary’s guardian may direct that a suitable 

sum from the income accumulated or to be accumulated be 

applied for the support or education of such person. 

(2) APPLICATION OF PRINCIPAL TO INCOME BENEFICIARY. Unless 

the creating instrument provides to the contrary, if a beneficiary 

is entitled to income or to have it applied for the beneficiary’s 

benefit, the court may make an allowance from principal to or for 

the benefit of such beneficiary if the beneficiary’s support or 

education is not sufficiently provided for, taking into account all 

other resources available to the beneficiary. 

(3) TERMINATION. In the case of a living trust whose settlor is 

deceased and in the case of any testamentary trust, regardless in 

either case of spendthrift or similar protective provisions, a court 

with the consent of the trustee may order termination of the trust, 

in whole or in part, and the distribution of the assets that it considers 

appropriate if the court is satisfied that because of any substantial 

reason existing at the inception of a testamentary trust or, in 

the case of any trust, arising from a subsequent change in circumstances, 

including but not limited to the amount of principal in the 

trust, income produced by the trust and the cost of administering 

the trust, continuation of the trust, in whole or in part, is impractical. 

In any event, if the trust property is valued at less than 

$50,000, the court may order termination of the trust and the distribution 

of the assets that it considers appropriate. 

(4) MARITAL DEDUCTION TRUSTS. In a trust where the income 

beneficiary also has a general power of appointment as defined in 

s. 702.01 (3) or where all accumulated income and principal are 

payable to such beneficiary’s estate, any termination, in whole or 

in part, of the trust under sub. (3) can only be ordered in favor of 

such beneficiary. 

(5) CHARITABLE TRUSTS. (a) In this subsection, “participate or 

intervene in any political campaign” includes the publishing or 

distributing of statements. 

(b) Subsections (2) and (3) do not apply to a trust under which 

a future interest is indefeasibly vested in any of the following: 

1. The United States or a political subdivision for exclusively 

public purposes. 

2. A corporation that is organized exclusively for religious, 

charitable, scientific, literary or educational purposes, including 

the encouragement of art and the prevention of cruelty to children 

or animals, no part of the net earnings of which inures to the benefit 

of any private shareholder or individual and no substantial part 

of the activities of which is carrying on propaganda or otherwise 

attempting to influence legislation, and that does not participate 

or intervene in any political campaign on behalf of any candidate 

for public office. 

3. A trustee or a fraternal society, order or association operating 

under the lodge system, provided the principal or income of 

such trust is to be used by such trustee or by such fraternal society, 

order or association exclusively for religious, charitable, scientific, 

literary or educational purposes or for the prevention of 

cruelty to children and animals, and no substantial part of the 

activities of such trustee or of such fraternal society, order or association 

is carrying on propaganda or otherwise attempting to influence 

legislation, and such trustee or such fraternal society, order, 

or association does not participate or intervene in any political 

campaign on behalf of any candidate for public office. 


4. Any veteran’s organization incorporated by act of congress, 

or of its departments or local chapters or posts, no part of 

the net earnings of which inures to the benefit of any private shareholder 

or individual. 

(6) OTHER APPLICABLE LAW. Nothing in this section shall prohibit 

modification or termination of any trust pursuant to its terms 

or limit the general equitable power of a court to modify or terminate 

a trust in whole or in part. 

History: 1971 c. 66; 1983 a. 189 s. 329 (26); 1991 a. 316; 1993 a. 143; 1999 a. 

85. 

701.14 Circuit court procedure in trust proceedings. 

(1) GENERALLY. A proceeding in the circuit court involving a living 

or testamentary trust may be commenced by a trustee or other 

person interested in the trust and, except as otherwise provided in 

this chapter, all probate procedure governing circuit courts, so far 

as it may be applicable, shall apply to such proceeding. 

(2) NOTICE. If notice of a trust proceeding to a person interested 

in the trust, to the person’s representative or guardian ad 

litem as provided in s. 701.15 or to other persons, is required by 

law or deemed necessary by the court, the court shall order such 

notice to be given as prescribed in s. 879.05 except that service by 

publication shall not be required unless ordered by the court. The 

court may order both personal service and service by publication 

on designated persons. Proof of service shall be made as provided 

in s. 879.07. Persons interested in the trust, on behalf of themselves, 

or their representatives or guardians ad litem as provided 

in s. 701.15, on behalf of themselves and those whom they represent, 

may in writing waive service of notice and consent to the 

hearing of any matter without notice. Waiver of notice or an 

appearance by any person interested in the trust or the person’s 

representative or guardian ad litem as provided in s. 701.15 is 

equivalent to timely service of notice. 

(3) ATTORNEY FOR PERSON IN MILITARY SERVICE. At the time of 

filing a petition for a trust proceeding, an affidavit shall be filed 

setting forth the name of any person interested in the proceeding 

who is actively engaged in the military service of the United 

States. Whenever it appears by the affidavit or otherwise that any 

person in the active military service of the United States is interested 

in any trust proceeding and is not represented by an attorney, 

or by an attorney−in−fact who is duly authorized to act on the person’s 

behalf in the matter, the court shall appoint an attorney to 

represent the person and protect the person’s interest. 

(4) VENUE. A proceeding involving a living trust shall be governed 

by ss. 801.50 to 801.62 so far as applicable and shall be 

regarded as a civil action for that purpose. 

History: 1971 c. 66; Sup. Ct. Order, 67 Wis. 2d 585, 777 (1975); 1977 c. 449 s. 

497; 1991 a. 220, 316. 

Cross−reference: See s. 701.10 (3), which lists the persons who may start proceedings 

to enforce a charitable trust and requires notice be given to the attorney general 

of any proceeding affecting the trust. 

701.15 Representation of others. Except as otherwise 

provided in ss. 701.12 and 701.13 (1), in a trust proceeding in the 

circuit court: 

(1) POWER TO CREATE OR EXTINGUISH. The sole holder or all 

coholders of a power of revocation or a general power of appointment 

as defined in s. 702.01 (3) may represent any or all persons 

whose interests are subject to such power. 

(2) GUARDIAN AD LITEM; VIRTUAL REPRESENTATION. Subject to 

sub. (1), the court may appoint a guardian ad litem for any person 

interested who is legally incapacitated, unascertained or unborn 

if such person is not already represented by a fiduciary having no 

adverse interest in the proceeding. A guardian ad litem may represent 

2 or more such persons where they have a substantially identical 

interest in the proceeding. The court may dispense with or terminate 

the appointment of a guardian ad litem for such person if 

there is a legally competent person who is a party to the proceeding 

and has a substantially identical interest in it. 

History: 1971 c. 66; 1977 c. 449; 1983 a. 189 s. 329 (26). 

The decision to appoint a guardian ad litem under sub. (2) is discretionary. 

McGuire v. McGuire, 2003 WI App 44, 260 Wis. 2d 815, 660 N.W.2d 308, 02−0390. 






701.16 Testamentary trustees. (1) APPOINTMENT OF ORIG- 

INAL TRUSTEE. (a) Trustee named in will. A trustee who is named 

or whose appointment is provided for in a will derives the authority 

to carry out the trust from the will and assumes the office of 

trustee upon the issuance of letters of trust by the court as provided 

in s. 856.29. A trustee named in a will may renounce the position 

by an instrument filed with the court having jurisdiction to admit 

the will to probate. 

(b) Other original trustee. If a testamentary trust is created 

which fails to name a trustee, or the named trustee refuses to 

accept the position or predeceases the settlor and no alternate 

trustee is named in the will nor effective provision made for 

appointment of an alternate trustee, the court shall appoint a suitable 

person as trustee. Letters of trust shall be issued to such 

trustee as provided in s. 856.29. 

(c) Special trustee. If it appears necessary, the court can 

appoint a special trustee until a regular trustee can be appointed. 

A special trustee may be appointed without notice and may be 

removed whenever the court so orders. Such special trustee shall 

give such bond as the court requires and shall have such powers 

as are conferred by the order of appointment and set forth in any 

letters of trust issued the special trustee. 

(d) Foreign trustee. If a trustee is authorized to carry out a trust 

created by will admitted to probate outside this state, but not also 

admitted to probate in this state, the foreign trustee may have 

recorded in the office of the register of deeds of a county in which 

part of the subject matter of the trust is located a certified copy of 

the letters of trust and filed with the register of probate of the same 

county a statement appointing the register of probate in his or her 

official capacity the trustee’s resident agent for service of process. 

Thereafter the trustee may exercise all powers and have all the 

rights, remedies and defenses that the trustee would have if he or 

she received letters of trust from a circuit court of this state. Service 

of process shall be complete upon delivery of duplicate copies 

to the register of probate, one of which copies the register of 

probate shall promptly forward by registered mail to the foreign 

trustee. 

(2) BOND. Prior to the issuance of letters of trust to an original 

testamentary trustee under sub. (1) or to a successor or added testamentary 

trustee under s. 701.17 (1), the court may require such 

trustee to give a bond in accordance with ch. 878 and conditioned 

on the faithful performance of such trustee’s duties. If a settlor 

directs that a trustee serve without bond, the court shall give effect 

to this direction unless it determines that a bond is required by a 

change in the trustee’s personal circumstances since the execution 

of the settlor’s will. If the court requires a bond, and the trustee 

named in the will fails to furnish the required bond within a reasonable 

period of time after receiving notice of the bond requirement, 

the court may remove the trustee named in the will and 

appoint a successor trustee under s. 701.17. No bond shall be 

required of a trust company bank, state bank or national banking 

association which is authorized to exercise trust powers and which 

has complied with s. 220.09 or 223.02, nor shall a bond be 

required of a religious, charitable or educational corporation or 

society. 

(3) INVENTORY. A testamentary trustee shall make and file a 

verified inventory of all property received from the settlor’s personal 

representative or from any other source. 

(4) ANNUAL ACCOUNTING. (a) A testamentary trustee is 

required to make and file a verified account annually with the 

court, except as provided in pars. (am) and (b). If the trustee is 

accounting on a calendar−year basis, the court may not require the 

trustee to file the annual account prior to April 15. Production of 

securities and other assets for examination is not necessary upon 

the filing of an annual account unless the court determines such 

production is necessary to ascertain the correctness of an account 

filed for a particular trust. In the case of a testamentary charitable 

trust a copy of the annual account filed with the court shall be filed 

with the attorney general. 

TRUSTS 701.17 

(am) The annual accounting requirements under par. (a) do not 

apply to corporate trustees or to corporate cotrustees if those trustees 

or cotrustees agree, in their initial consent to act as trustees or 

cotrustees or in a subsequent filing with the register in probate for 

the county that has jurisdiction over the trust, to provide annual 

accounts to all persons interested, as defined in s. 851.21, who 

request those accounts by writing to the trustee or cotrustee. Each 

request is effective until the requester withdraws it or is no longer 

a person interested. A corporate trustee or cotrustee may withdraw 

its agreement by notifying the appropriate register in probate 

of its intent to do so. 

(b) Except in the case of a testamentary charitable trust, the 

court may dispense with the requirement of an annual accounting 

where, due to the size or nature of the trust property, the duration 

of the trust, the relationship of the trustee to the beneficiaries or 

other relevant factors, compliance with such requirement is 

unnecessary or unduly burdensome on the trustee. Whether or not 

an annual accounting is required a beneficiary may petition the 

court to require an accounting and the trustee may petition for 

approval of the trustee’s accounts on a periodic basis. 

(c) Notwithstanding pars. (a), (am) and (b) the court may 

require an accounting at any time. 

(d) Notwithstanding s. 879.47, trustees and cotrustees may 

submit to courts accounts in the format that they normally use for 

accounts submitted to beneficiaries under this subsection, if all of 

the information required by the court is included. 

(5) FINAL ACCOUNTING. A verified final account is required 

upon the termination of a testamentary trust. Upon the petition of 

a surviving or successor trustee, a beneficiary, a personal representative 

of a deceased trustee or on its own motion, the court may 

order a verified account filed upon the death, resignation or 

removal of a testamentary trustee. The court may require such 

proof of the correctness of a final account as it considers necessary. 

(6) DISCHARGE. No testamentary trustee or personal representative 

of a deceased trustee shall be discharged from further 

responsibility with respect to a testamentary trust until the court 

is satisfied upon notice and hearing that the requirements of this 

section have been met and it has received satisfactory proof that 

the trust property has been turned over to a successor or special 

trustee or, where the trust is terminated, distributed to the beneficiaries 

entitled to such property or turned over to a special trustee 

for distribution. 

History: 1971 c. 66; 1977 c. 449; 1979 c. 32; 1987 a. 220; 1991 a. 316. 

Cross−reference: See s. 223.12 which contains requirements which must be met 

before a foreign corporate trustee is qualified to act in this state. 

See s. 701.23 (1), which provides for the discharge of a trustee when a testamentary 

trust is removed to another state. 

Even during a hearing on discharge, a trustee’s duty to affirmatively represent the 

beneficiaries’ interests by disclosing relevant information remains, and a breach of 

this duty leaves the discharge open to attack. Hammes v. First National Bank & Trust 

Co. 79 Wis. 2d 355, 255 N.W.2d 555 (1977). 

A trustee has a duty to the trust beneficiaries to ensure that the personal representative 

transfers all property to which the trust is entitled. Even when the same person 

acts as trustee and personal representative, the trustee has a duty to enforce claims the 

trust has against the personal representative. Old Republic Surety Co. v. Erlien, 190 

Wis. 2d 400, 527 N.W.2d 389 (Ct. App. 1994). 

701.17 Successor and added trustees. (1) APPOINT- 

MENT OF SUCCESSOR OR ADDED TRUSTEE. If there is a vacancy in the 

office of trustee because of the death, resignation or removal of a 

trustee, the court may appoint a successor trustee unless the creating 

instrument names or provides an effective method for 

appointing a successor. Upon the death of a sole trustee, title to 

the trust property does not pass to the trustee’s personal representative 

but to the successor named in or appointed pursuant to the 

terms of the creating instrument or, in the case of a successor or 

special trustee appointed by the court, as provided in sub. (5). The 

court may in the exercise of a sound discretion appoint an additional 

trustee if necessary for the better administration of the trust, 

unless the creating instrument expressly prohibits such addition or 

provides an effective method for appointing an additional trustee. 





701.17 TRUSTS 

Subject to s. 701.16 (2), a successor or added testamentary trustee 

shall be issued letters of trust, at that trustee’s request. 

(2) APPOINTMENT OF SPECIAL TRUSTEE. If it appears necessary, 

the court may appoint a special trustee until a successor trustee can 

be appointed or, where a trust has terminated, to distribute the 

assets. A special trustee may be appointed without notice and may 

be removed whenever the court so orders. Such special trustee 

shall give such bond as the court requires and shall have the powers 

conferred by the order of appointment and set forth in any letters 

of trust issued the special trustee. 

(3) POWERS OF SUCCESSOR OR ADDED TRUSTEE. Unless 

expressly prohibited in the creating instrument, all powers conferred 

upon the trustee by such instrument attach to the office and 

are exercisable by the trustee holding the office. 

(4) POWERS OF COTRUSTEES. If one of several trustees dies, 

resigns or is removed, the remaining trustees shall have all rights, 

title and powers of all the original trustees. If the creating instrument 

manifests an intent that a successor trustee be appointed to 

fill a vacancy, the remaining trustees may exercise the powers of 

all the original trustees until such time as a successor is appointed. 

(5) VESTING OF TITLE. A special or successor trustee is vested 

with the title of the original trustee and an added trustee becomes 

a joint tenant with the existing trustee in all trust property. The 

court may order a trustee who resigns, is removed or is joined by 

an added trustee to execute such documents transferring title to 

trust property as may be appropriate to facilitate administration of 

the trust or may itself transfer title. 

History: 1971 c. 66; 1991 a. 316. 

701.18 Resignation and removal of trustees. (1) RESIG- 

NATION. A trustee may resign in accordance with the terms of the 

creating instrument or petition the court to accept the trustee’s resignation 

and the court may, upon notice and hearing, discharge the 

trustee from further responsibility for the trust upon such terms 

and conditions as are necessary to protect the rights of the beneficiaries 

and any cotrustee. In no event shall a testamentary trustee 

be discharged from further responsibility except as provided in s. 

701.16 (6). 

(2) REMOVAL. A trustee may be removed in accordance with 

the terms of the creating instrument or the court may, upon its own 

motion or upon a petition by a beneficiary or cotrustee, and upon 

notice and hearing, remove a trustee who fails to comply with the 

requirements of this chapter or a court order, or who is otherwise 

unsuitable to continue in office. In no event shall a testamentary 

trustee be discharged from further responsibility except as provided 

in s. 701.16 (6). 

History: 1971 c. 66; 1991 a. 316. 

Trustees of an employees’ profit−sharing plan who are also beneficiaries may not 

be removed simply because other beneficiaries have lost confidence in them or 

because they personally benefit in a minor way from a denial of benefits to a participant. 

Zimmermann v. Brennan, 56 Wis. 2d 623, 202 N.W.2d 923 (1973). 

Although the will creating the trust provided that the trustee could resign without 

court approval, filing a petition for the appointment of a successor and approval of 

accounts invoked court jurisdiction and required the exercise of discretion regarding 

the trustee’s resignation. Matter of Sherman B. Smith Family Trust, 167 Wis. 2d 196, 

482 N.W.2d 118 (Ct. App. 1992). 

That this section allows removing a trustee for cause does not prevent removal of 

a trustee under s. 701.12 with the approval of the settlor and all beneficiaries, without 

showing cause. Weinberger v. Bowen, 2000 WI App 264, 240 Wis. 2d 55, 622 

N.W.2d 471, 00−0903. 

701.19 Powers of trustees. (1) POWER TO SELL, MORTGAGE 

OR LEASE. In the absence of contrary or limiting provisions in the 

creating instrument, in the court order appointing a trustee or in a 

subsequent order, a trustee has complete power to sell, mortgage 

or lease trust property without notice, hearing or order. A trustee 

has no power to give warranties in a sale, mortgage or lease which 

are binding on the trustee personally. In this section “sale” 

includes an option or agreement to transfer for cash or on credit, 

exchange, partition or settlement of a title dispute; this definition 

is intended to broaden rather than limit the meaning of “sale”. 

“Mortgage” means any agreement or arrangement in which trust 

property is used as security. 


(2) COURT AUTHORIZATION OF ADMINISTRATIVE ACTION. (a) In 

the absence of contrary or limiting provisions in the creating 

instrument, in any case where it is for the best interests of the trust, 

on application of the trustee or other interested person, the court 

may upon notice and hearing authorize or require a trustee to sell, 

mortgage, lease or otherwise dispose of trust property upon such 

terms and conditions as the court deems just and proper. 

(b) Despite contrary or limiting provisions in the creating 

instrument, upon application of a trustee or other interested person, 

a court may upon notice and hearing order the retention, 

investment, reinvestment, sale, mortgage, lease or other disposition 

of trust property if the court is satisfied that the original purpose 

of the settlor cannot be carried out, substantially performed 

or practically achieved for any reason existing at the inception of 

the trust or arising from any subsequent change in circumstances 

and the retention, investment, reinvestment, sale, mortgage, lease 

or other disposition of the property more nearly approximates the 

settlor’s intention. 

(c) Unless authorized in the creating instrument, a trustee may 

not be interested as a purchaser, mortgagee or lessee of trust property 

unless such purchase, mortgage or lease is made with the written 

consent of all beneficiaries or with the approval of the court 

upon notice and hearing. A representative of a beneficiary, under 

s. 701.15, may give written consent for such beneficiary. 

(d) A trustee may not sell individually owned assets to the trust 

unless the sale is authorized in the creating instrument, made with 

the written consent of all beneficiaries or made with the approval 

of the court upon notice and hearing. 

(3) WHEN MANDATORY POWER DEEMED DISCRETIONARY. If a 

creating instrument expressly or by implication directs a trustee 

to sell trust property and such property has not been sold for a 

period of 25 years after the creation of the trust, such direction to 

the trustee shall be deemed a discretionary power of sale. 

(4) CONTINUATION OF BUSINESS BY COURT ORDER. (am) In the 

absence of contrary or limiting provisions in the creating instrument, 

the circuit court may, where it is in the best interests of the 

trust, order the trustee to continue any business of a deceased settlor. 

The order may be issued without notice and hearing, in the 

court’s discretion and, in any case, may provide: 

1. For conduct of the business solely by the trustee, jointly 

with one or more of the settlor’s surviving partners or as a corporation 

or limited liability company to be formed by the trustee; 

2. As between the trust and the trustee, the extent of liability 

of the trust and the extent of the personal liability of the trustee for 

obligations incurred in the continuation of the business; 

3. As between beneficiaries, the extent to which liabilities 

incurred in the continuation of the business are to be chargeable 

solely to a part of the trust property set aside for use in the business 

or to the trust as a whole; and 

4. For the period of time for which the business may be conducted 

and any other conditions, restrictions, regulations, requirements 

and authorizations as the court orders. 

(e) Nothing in this subsection shall be construed as requiring 

a trustee to liquidate a business, including a business operated as 

a closely held corporation, when liquidating the business is not 

required by the creating instrument or other applicable law. 

(4m) CONTINUATION OF BUSINESS BY DIRECTION OF SETTLOR. 

If the settlor directs retention of a business that is among the trust’s 

assets in the trust document or by other written means, a trustee 

may retain that business during the settlor’s lifetime without 

liability. 

(5) FORMATION OF BUSINESS ENTITY. In the absence of contrary 

or limiting provisions in the creating instrument: 

(a) The court may by order authorize a trustee to become a partner 

under ch. 178 or 179 and transfer trust property to the partnership 

in return for a partnership interest. 

(aL) The court may by order authorize a trustee to become a 

member of a limited liability company under ch. 183 and transfer 






trust property to the limited liability company in return for an ownership 

interest. 

(b) The court may by order authorize a trustee to organize a 

corporation for any purpose permitted by ch. 180, subscribe for 

shares of such corporation and transfer trust property to such corporation 

in payment for the shares subscribed. 

(c) The court may by order authorize a trustee to form a corporation 

for any purpose permitted by ch. 181. 

(d) An order under this subsection may in the court’s discretion 

be issued without notice and hearing. 

(6) REGISTRATION OF SECURITIES IN NOMINEE. Unless prohibited 

in the creating instrument, a trustee may register securities in 

the name of a nominee. 

(7) PROXY VOTING OF STOCK. Unless the creating instrument 

contains an express prohibition or specifies the manner in which 

the trustee is to vote stock in a corporation or certificates of beneficial 

interest in an investment trust, the trustee may vote such stock 

or certificates by general or limited proxy, with or without power 

of substitution. 

(8) PLATTING LAND. In the absence of contrary or limiting provisions 

in the creating instrument, the court may by order authorize 

a trustee to plat land which is part of the trust, either alone or 

together with other owners of such real estate. In such platting the 

trustee must comply with the same statutes, ordinances, rules and 

regulations which apply to a person who is platting the person’s 

own land. The order under this subsection may in the court’s discretion 

be issued without notice and hearing. 

(9) JOINT TRUSTEES. (a) In the absence of contrary or limiting 

provisions in the creating instrument, any power vested in 3 or 

more trustees may be exercised by a majority. This paragraph 

shall not apply to living trusts created prior to July 1, 1971, or to 

testamentary trusts contained in wills executed or last republished 

prior to that date. 

(b) A trustee who has not joined in exercising a power is not 

liable to an affected person for the consequences of the exercise 

unless the trustee has failed to discharge the trustee’s duty to participate 

in the administration of the trust. A dissenting trustee is 

not liable for the consequences of an act in which the dissenting 

trustee joins at the direction of the majority of the trustees if the 

dissenting trustee’s dissent is expressed in writing to the other 

trustees at or before the time of the joinder. 

(10) RESTRICTION ON EXERCISE OF POWERS. (a) Except as provided 

in par. (c), a person may not exercise any of the following 

powers conferred upon him or her in his or her capacity as trustee: 

1. The power to make discretionary distributions of trust principal 

or income if the distributions are to himself or herself or for 

the discharge of his or her legal obligations. 

2. The power to make discretionary allocations of receipts or 

expenses as between principal and income if the allocations are in 

his or her favor. 

(b) If a power under par. (a) is conferred upon more than one 

person as trustee, a person who is not disqualified to act under par. 

(a) may exercise the power for the benefit of the person who is disqualified 

to act, unless the creating instrument expressly provides 

otherwise. A special trustee appointed by a court may exercise a 

power under par. (a) for the benefit of the disqualified person if no 

other trustee is qualified to exercise the power. 

(c) Paragraph (a) does not apply if any of the following applies: 

1. The person is also the settlor of the trust, and the trust may 

be revoked or amended by the settlor. 

2. The terms of the creating instrument specifically limit the 

scope of the power to expenditures and distributions of income or 

principal on the basis of an ascertainable standard relating to the 

person’s health, maintenance, support, or education such that the 

person would not be subject to tax under section 2041 or 2514 of 

the Internal Revenue Code as a result of having or exercising the 

power. 

TRUSTS 701.20 

3. The person is the spouse, widow, or widower of the settlor 

of the trust, and a marital deduction has been allowed for federal 

gift or estate tax purposes with respect to the trust property that is 

subject to the power. 

4. The creating instrument negates the application of par. (a) 

with respect to the power or indicates that provisions that are similar 

to par. (a) do not apply. 

(d) Section 701.24 (3) governs the applicability of this statute. 

(11) PROTECTION OF 3RD PARTIES. With respect to a 3rd person 

dealing with a trustee or assisting a trustee in the conduct of a 

transaction, the existence of trust power and its proper exercise by 

the trustee may be assumed without inquiry. The 3rd person is not 

bound to inquire whether the trustee has power to act or is properly 

exercising the power; and a 3rd person, without actual knowledge 

that the trustee is exceeding the trustee’s powers or improperly 

exercising them, is fully protected in dealing with the trustee as if 

the trustee possessed and properly exercised the powers the 

trustee purports to exercise. A 3rd person is not bound to assure 

the proper application of trust property paid or delivered to the 

trustee. 

History: 1971 c. 66; 1979 c. 175 s. 50; 1991 a. 316; 1993 a. 112, 160, 486; 1995 

a. 336; 1999 a. 85; 2005 a. 216, 253. 

Cross−reference: See s. 112.01, the Uniform Fiduciaries Act on protection of 

third parties. 

Cross−reference: See s. 112.02, which provides for suspending powers of a testamentary 

trustee in military service. 

Cross−reference: Chapter 881 and s. 223.055 contain limitations on investments 

by trustees. 

The loss of future profit to an estate through the disposal of a parcel is damage 

chargeable to the trustee or personal representative only if the parcel was not needed 

for liquidity. In re Estate of Meister, 71 Wis. 2d 581, 239 N.W.2d 52 (1976). 

Fiduciary and estate liability in contract and in tort. Dubis, 55 MLR 297. 

701.20 Principal and income. (2) DEFINITIONS. In this section: 

(a) “Accounting period” means a calendar year, unless a fiduciary 

selects another 12−month period, and includes a portion of 

a calendar year or other 12−month period that begins when an 

income interest begins or that ends when an income interest ends. 

(b) “Beneficiary” means a person who has a beneficial interest 

in a trust or an estate and includes, in the case of a decedent’s 

estate, an heir, a legatee, and a devisee and, in the case of a trust, 

an income beneficiary and a remainder beneficiary. 

(c) “Fiduciary” means a personal representative or a trustee 

and includes an executor, administrator, successor personal representative, 

special administrator, and a person performing substantially 

the same function as any of those. 

(d) “Income” means money or property that a fiduciary 

receives as current return from a principal asset. “Income” 

includes a portion of receipts from a sale, exchange, or liquidation 

of a principal asset, to the extent provided in subs. (10) to (24). 

(e) “Income beneficiary” means a person to whom net income 

of a trust is or may be payable. 

(f) “Income interest” means the right of an income beneficiary 

to receive all or part of net income, whether the terms of the trust 

require it to be distributed or authorize it to be distributed in the 

trustee’s discretion. 

(g) “Mandatory income interest” means the right of an income 

beneficiary to receive net income that the terms of the trust require 

the fiduciary to distribute. 

(h) “Net income” means the total receipts allocated to income 

during an accounting period, minus the disbursements made from 

income during the period, plus or minus transfers under this section 

to or from income during the period. 

(i) “Person” means an individual; corporation; business trust; 

estate; trust; partnership; limited liability company; association; 

joint venture; government; governmental subdivision, agency, or 

instrumentality; public corporation; or any other legal or commercial 

entity. 





701.20 TRUSTS 

(j) “Principal” means property held in trust for distribution to 

a remainder beneficiary when the trust terminates or property held 

in trust in perpetuity. 

(k) “Remainder beneficiary” means a person entitled to 

receive principal when an income interest ends. 

(L) “Sui juris beneficiary” means a beneficiary not under a 

legal disability. The term includes all of the following: 

1. A court−appointed guardian of a beneficiary who is adjudicated 

incompetent. 

2. An agent for an incapacitated beneficiary. 

3. A court−appointed guardian of a minor beneficiary’s estate 

or, if there is no court−appointed guardian, the parents of the 

minor beneficiary. 

(m) “Terms of a trust” means the manifestation of the intent of 

a settlor or decedent with respect to a trust, expressed in a manner 

that admits of its proof in a judicial proceeding, whether by written 

or spoken words or by conduct. 

(n) “Trustee” includes an original, additional, or successor 

trustee, whether or not appointed or confirmed by a court. 

(3) FIDUCIARY DUTIES; GENERAL PRINCIPLES. (a) In allocating 

receipts and disbursements to income or principal or between 

income and principal, and with respect to any matter within the 

scope of subs. (5) to (9), a fiduciary: 

1. Shall first administer a trust or estate in accordance with the 

terms of the trust or the will, even if there is a different provision 

in this section. 

2. May administer a trust or estate by the exercise of a discretionary 

power of administration given to the fiduciary by the terms 

of the trust or the will, even if the exercise of the power produces 

a result different from a result required or permitted by this section. 

3. Shall administer a trust or estate in accordance with this 

section if the terms of the trust or the will do not contain a different 

provision or do not give the fiduciary a discretionary power of 

administration. 

4. Shall add a receipt or charge a disbursement to principal to 

the extent that the terms of the trust and this section do not provide 

a rule for allocating the receipt or disbursement to principal or 

income or between principal and income. 

(b) In exercising the power to adjust under sub. (4) (a) or a discretionary 

power of administration regarding a matter within the 

scope of this section, whether granted by the terms of a trust, a 

will, or this section, a fiduciary shall administer a trust or estate 

impartially, based on what is fair and reasonable to all of the beneficiaries, 

except to the extent that the terms of the trust or the will 

clearly manifest an intention that the fiduciary shall or may favor 

one or more of the beneficiaries. A determination in accordance 

with this section is presumed to be fair and reasonable to all of the 


(4) TRUSTEE’S POWER TO ADJUST. (a) A trustee may adjust 

between principal and income to the extent the trustee considers 

necessary if the trustee invests and manages trust assets as a prudent 

investor, the terms of the trust describe the amount that may 

or must be distributed to a beneficiary by referring to the trust’s 

income, and the trustee determines, after applying the rules in sub. 

(3) (a), that the trustee is unable to comply with sub. (3) (b). 

(b) In deciding whether and to what extent to exercise the 

power conferred by par. (a), a trustee shall consider all factors relevant 

to the trust and its beneficiaries, including the following factors 

to the extent they are relevant: 

1. The nature, purpose, and expected duration of the trust. 

2. The intent of the settlor. 

3. The identity and circumstances of the beneficiaries. 

4. The needs for liquidity, regularity of income, and preservation 

and appreciation of capital. 

5. The assets held in the trust; the extent to which they consist 

of financial assets, interests in closely held enterprises, tangible 


and intangible personal property, or real property; the extent to 

which an asset is used by a beneficiary; and whether an asset was 

purchased by the trustee or received from the settlor. 

6. The net amount allocated to income under the other subsections 

of this section and the increase or decrease in the value of the 

principal assets, which the trustee may estimate in the case of 

assets for which market values are not readily available. 

7. Whether and to what extent the terms of the trust give the 

trustee the power to invade principal or accumulate income or prohibit 

the trustee from invading principal or accumulating income, 

and the extent to which the trustee has exercised a power from 

time to time to invade principal or accumulate income. 

8. The actual and anticipated effect of economic conditions 

on principal and income and effects of inflation and deflation. 

9. The anticipated tax consequences of an adjustment. 

(c) A trustee may not make an adjustment: 

1. If possessing or exercising the power to make an adjustment 

would disqualify an estate tax or gift tax marital or charitable 

deduction in whole or in part. 

2. That reduces the actuarial value of the income interest in 

a trust to which a person transfers property with the intent to qualify 

for a gift tax exclusion. 

3. That changes the amount payable to a beneficiary as a fixed 

annuity or a fixed fraction of the value of the trust assets. 

4. From any amount that is permanently set aside for charitable 

purposes under a will or the terms of a trust and for which an 

estate tax or gift tax charitable deduction has been taken unless 

both income and principal are so set aside. 


causes an individual to be treated as the owner of all or part 

of the trust for income tax purposes, and the individual would not 

be treated as the owner if the trustee did not possess the power to 

make an adjustment. 


causes all or part of the trust assets to be included for estate 

tax purposes in the estate of an individual and the assets would not 

be included in the estate of the individual if the trustee did not possess 

the power to make an adjustment. 

7. If the trustee is a beneficiary of the trust. 

8. If the trust has been converted under sub. (4g) to a unitrust. 

9. If the trust is an express unitrust, as defined in sub. (4j) (a). 

(d) If par. (c) 5., 6., or 7. applies to a trustee and there is more 

than one trustee, a cotrustee to whom the provision does not apply 

may make the adjustment unless the terms of the trust do not permit 

the exercise of the power by that cotrustee. 

(e) A trustee may release the entire power conferred by par. (a) 

or may release only the power to adjust from income to principal 

or the power to adjust from principal to income if the trustee is 

uncertain about whether possessing or exercising the power will 

cause a result described in par. (c) 1. to 6. or if the trustee determines 

that possessing or exercising the power will or may deprive 

the trust of a tax benefit or impose a tax burden not described in 

par. (c). The release may be permanent or for a specified period, 

including a period measured by the life of an individual. 

(f) Terms of a trust that limit the power of a trustee to make an 

adjustment between principal and income do not affect the 

application of this subsection unless it is clear from the terms of 

the trust that the terms are intended to deny the trustee the power 

of adjustment conferred by par. (a). 

(4c) NOTICE TO BENEFICIARIES OF PROPOSED ACTION. (b) A 

trustee may, but is not required to, obtain approval of a proposed 

action under sub. (4) (a) by providing a written notice that complies 

with all of the following: 

1. Is given at least 30 days before the proposed effective date 

of the proposed action. 

2. Is given in the manner provided in ch. 879, except that 

notice by publication is not required. 






3. Is given to all sui juris beneficiaries who are any of the following: 

a. Income beneficiaries currently eligible to receive income 

from the trust. 

b. Eligible to receive, if no powers of appointment were exercised, 

income from the trust if the interest of all of those eligible 

to receive income under subd. 3. a. were to terminate immediately 

before the giving of notice. 

c. A recipient, if no powers of appointment were exercised, 

of a distribution of principal if the trust were to terminate immediately 

before the giving of the notice. 

4. States that it is given in accordance with this subsection and 

discloses the following information: 

a. The identification of the trustee. 

b. A description of the proposed action. 

c. The time within which a beneficiary may object to the proposed 

action, which shall be at least 30 days after the giving of the 

notice. 

d. The effective date of the proposed action if no objection is 

received from any beneficiary within the time specified in subd. 

4. c. 

(c) If a trustee gives notice of a proposed action under this subsection, 

the trustee is not required to give notice to a sui juris beneficiary 

who consents to the proposed action in writing at any time 

before or after the proposed action is taken. 

(d) A sui juris beneficiary may object to the proposed action 

by giving a written objection to the trustee within the time specified 

in the notice under par. (b) 4. c. 

(e) A trustee may decide not to take a proposed action after the 

trustee receives a written objection to the proposed action or at any 

other time for any other reason. In that case, the trustee shall give 

written notice to the sui juris beneficiaries of the decision not to 

take the proposed action. 

(f) If a trustee receives a written objection to a proposed action 

within the time specified in the notice under par. (b) 4. c., either 

the trustee or the beneficiary making the written objection may 

petition the court to have the proposed action approved, modified, 

or prohibited. In the court proceeding, the beneficiary objecting 

to the proposed action has the burden of proving that the proposed 

action should be modified or prohibited. A beneficiary who did 

not make the written objection may oppose the proposed action in 

the court proceeding. 

(g) For purposes of this subsection, a proposed action under 

sub. (4) includes a course of action or a decision not to take action 

under sub. (4). 

(4g) CONVERSION TO UNITRUST. (a) Subject to par. (d), a trust 

may be converted to a unitrust in any of the following ways: 

1. By the trustee, at his or her own discretion or at the request 

of a beneficiary, if all of the following apply: 

a. The trustee determines that the conversion will enable the 

trustee to better carry out the purposes of the trust. 

b. The trustee provides notice in the same manner as provided 

in sub. (4c) (b) of the trustee’s intention to convert the trust to a 

unitrust, and the notice advises how the unitrust will operate, 

including the fixed percentage under par. (c) 1. and any other initial 

determinations under par. (c) 4. that the trustee intends to follow. 

c. There is at least one sui juris beneficiary under sub. (4c) (b) 

3. a. and at least one other sui juris beneficiary under sub. (4c) (b) 

3. b. or c. 

d. Every sui juris beneficiary consents to the conversion to a 

unitrust in a writing delivered to the trustee. 

e. The terms of the trust describe the amount that may or must 

be distributed by referring to the trust income. 

2. By a court on the petition of the trustee or a beneficiary, if 

all of the following apply: 

TRUSTS 701.20 

a. The trustee or beneficiary has provided notice under sub. 

(4c) of the intention to request the court to convert the trust to a 

unitrust, and the notice advises how the unitrust will operate, 

including the fixed percentage under par. (c) 1. and any other initial 

determinations under par. (c) 4. that will be requested. 

b. The court determines that the conversion to a unitrust will 

enable the trustee to better carry out the purposes of the trust. 

(b) In deciding whether to convert the trust to a unitrust under 

par. (a) 1., the trustee shall consider all relevant factors under sub. 

(4) (b) 1. to 9. 

(c) 1. If a trust is converted to a unitrust under this subsection 

by the trustee or a court, notwithstanding sub. (3) (a) 1. and 4. and 

s. 701.21 (4) the trustee shall make distributions in accordance 

with the creating instrument, except that any reference in the 

creating instrument to “income” means a fixed percentage of the 

net fair market value of the unitrust’s assets, whether such assets 

otherwise would be considered income or principal under this section, 

averaged over a preceding period determined by the trustee, 

which is at least 3 years but not more than 5 years, or the period 

since the original trust was created, whichever is less. 

2. a. Subject to subd. 2. b., if the trust is converted to a unitrust 

under par. (a) 1., the trustee shall determine the fixed percentage 

to be applied under subd. 1., and the notice under par. (a) 1. b. must 

state the fixed percentage. If the trust is converted to a unitrust 

under par. (a) 2., the court shall determine the fixed percentage to 

be applied under subd. 1. 

b. Any fixed percentage under subd. 1. that is determined by 

a trustee may not be less than 3 percent nor more than 5 percent. 

3. After a trust is converted to a unitrust, the trustee may, subject 

to the notice requirement under sub. (4c) and with the consent 

of every sui juris beneficiary, do any of the following: 

a. Convert the unitrust back to the original trust under the 

creating instrument. 

b. Change the fixed percentage under subd. 1., subject to 

subd. 2. b. 

4. After a trust is converted to a unitrust, a trustee may determine 

or change any of the following: 

a. The frequency of distributions during the year. 

b. Standards for prorating a distribution for a short year in 

which a beneficiary’s right to payments commences or ceases. 

c. The effect on the valuation of the unitrust’s assets of other 

payments from, or contributions to, the unitrust. 

d. How, and how frequently, to value the unitrust’s assets. 

e. The valuation dates to use. 

f. Whether to omit from the calculation of the value of the unitrust’s 

assets unitrust property occupied by or in the possession of 

a beneficiary. 

g. The averaging under subd. 1. to a different preceding 

period, which is at least 3 years but not more than 5 years. 

h. Any other matters necessary for the proper functioning of 

the unitrust. 

5. The trustee may not deduct from a unitrust distribution 

expenses that would be deducted from income if the trust were not 

a unitrust. 

6. Unless otherwise provided by the creating instrument, the 

unitrust distribution is considered to have been paid from the following 

sources in the order of priority: 

a. Net income, determined as if the trust were not a unitrust. 

b. Ordinary income for federal income tax purposes that is not 

net income under subd. 6. a. 

c. Net realized short−term capital gains for federal income tax 

purposes. 

d. Net realized long−term capital gain for federal income tax 

purposes. 

e. Principal. 





701.20 TRUSTS 

7. A court may, on the petition of the trustee or a beneficiary, 

do any of the following: 

a. Change the fixed percentage that was determined under 

subd. 2. by the trustee or by a prior court order. 

b. If necessary to preserve a tax benefit, provide for a distribution 

of net income, determined as if the trust were not a unitrust, 

that exceeds the unitrust distribution. 

c. Average the valuation of the unitrust’s assets over a period 

other than that specified in subd. 1. 

d. Require the unitrust to be converted back to the original 

trust under the creating instrument. 

8. Conversion to a unitrust under this subsection does not 

affect a provision in the creating instrument that directs or authorizes 

the trustee to distribute principal or that authorizes a beneficiary 

to withdraw a portion or all of the principal. 

(d) 1. A trust may not be converted under this subsection to 

a unitrust if any of the following applies: 

a. The creating instrument specifically prohibits the conversion. 

b. Payment of the unitrust distribution will change the amount 

payable to a beneficiary as a fixed annuity or a fixed fraction of 

the value of the trust assets. 

c. The unitrust distribution will be made from any amount that 

is permanently set aside for charitable purposes under the creating 

instrument and for which an estate or gift tax charitable deduction 

has been taken, unless both income and principal are so set aside. 

d. Converting to a unitrust will cause an individual to be 

treated as the owner of all or part of the trust for income tax purposes 

and the individual would not be treated as the owner if the 

trust were not converted. 

e. Converting to a unitrust will cause all or a part of the trust 

assets to be subject to estate or gift tax with respect to an individual 

and the trust assets would not be subject to estate or gift tax with 

respect to the individual if the trust were not converted. 

f. Converting to a unitrust will result in the disallowance of 

an estate or gift tax marital deduction that would be allowed if the 

trust were not converted. 

g. A trustee is a beneficiary of the trust. 

2. Notwithstanding subd. 1., if a trust may not be converted 

to a unitrust solely because subd. 1. g. applies to a trustee, a 

cotrustee, if any, to whom subd. 1. g. does not apply may convert 

the trust to a unitrust under par. (a) 1., unless prohibited by the 

creating instrument, or a court may convert the trust to a unitrust 

under par. (a) 2. on the petition of a trustee or beneficiary. 

(e) A trustee may release the power conferred by par. (a) 1. if 

the trustee is uncertain about whether possessing or exercising the 

power will cause a result described in par. (d) 1. b. to f. or if the 

trustee determines that possessing or exercising the power will or 

may deprive the trust of a tax benefit or impose a tax burden not 

described in par. (d) 1. The release may be permanent or for a specified 

period, including a period measured by the life of an individual. 

(4j) EXPRESS UNITRUSTS. (a) In this subsection “express unitrust” 

means any trust that by its governing instrument requires the 

distribution at least annually of a unitrust amount equal to a fixed 

percentage of the net fair market value of the trust’s assets, valued 

at least annually, other than a trust solely for charitable purposes 

or a charitable split−interest trust under section 664 (d) or 170 (f) 

(2) (B) of the Internal Revenue Code. 

(b) The following apply to an express unitrust: 

1. To the extent not otherwise provided for in the governing 

instrument, the unitrust amount of not less than 3 percent nor more 

than 5 percent may be determined by reference to the net fair market 

value of the trust’s assets averaged over a preceding period 

determined by the trustee, which is at least 3 years but not more 

than 5 years. 


2. Distribution of such a fixed percentage unitrust amount of 

not less than 3 percent nor more than 5 percent is a distribution of 

all of the income of the unitrust and is an income interest. 

3. Such a distribution of a fixed percentage of not less than 3 

percent nor more than 5 percent is a reasonable apportionment of 

the total return of the trust. 

4. A trust that provides for a fixed annual percentage payout 

in excess of 5 percent per year of the net fair market value of the 

trust is considered to be a 5 percent express unitrust, paying out 

all of the income of the unitrust, and to have paid out principal of 

the trust to the extent that the fixed percentage payout exceeds 5 

percent per year. 

5. The governing instrument may grant discretion to the 

trustee to adopt a consistent practice of treating capital gains as 

part of the unitrust distribution, to the extent that the unitrust distribution 

exceeds the income determined as if the trust were not 

a unitrust, or it may specify the ordering of such classes of income. 

6. Unless the terms of the trust specifically provide otherwise, 

a distribution of the unitrust amount is considered to have been 

made from the following sources in the following order of priority: 

a. Net income determined as if the trust were not a unitrust. 

b. Ordinary income for federal income tax purposes that is not 

net income under subd. 6. a. 

c. Net realized short−term capital gains for federal income tax 

purposes. 

d. Net realized long−term capital gains for federal income tax 

purposes. 

e. Principal. 

7. The trust document may provide that assets used by the 

trust beneficiary, such as a residence or tangible personal property, 

may be excluded from the net fair market value for computing the 

unitrust amount. Such use may be considered equivalent to the 

income or unitrust amount. 

8. In the absence of contrary provisions in the governing document 

of an express unitrust, the provisions of sub. (4g) (c) 1., 4., 

and 5. apply. 

(4k) POWER TO TREAT CAPITAL GAINS AS PART OF A DISTRIBU- 

TION. Unless prohibited by the governing instrument, a trustee 

may cause gains from the sale or exchange of trust assets, as determined 

for federal income tax purposes, to be taxed for federal 

income tax purposes as part of a distribution of income that has 

been increased by an adjustment from principal to income under 

sub. (4), of a unitrust distribution, of a fixed annuity distribution, 

or of a principal distribution to a beneficiary. 

(4m) JUDICIAL REVIEW OF DISCRETIONARY POWER. (a) Nothing 

in this section creates a duty to make an adjustment under sub. (4) 

or to convert a trust to a unitrust under sub. (4g). Unless it determines 

that the decision to make an adjustment or to convert to a 

unitrust was an abuse of the fiduciary’s discretion, a court may not 

grant relief from any decision a fiduciary makes regarding the 

exercise of a discretionary power conferred by sub. (4) or (4g). 

(am) An action taken under sub. (4) or (4g) is not an abuse of 

a fiduciary’s discretion if the fiduciary gave written notice of the 

proposed action under sub. (4c) and did not receive a timely written 

objection to the notice. It is not an abuse of discretion not to 

exercise the power to adjust under sub. (4) or to convert under sub. 

(4g). 

(b) A fiduciary’s decision is not an abuse of discretion merely 

because the court would have exercised the power in a different 

manner or would not have exercised the power. 

(c) If the court determines that a fiduciary has abused the fiduciary’s 

discretion, the remedy shall be to restore the income and 

remainder beneficiaries to the positions that they would have 

occupied had the discretion not been abused, according to the following 

rules: 






1. To the extent that the abuse of discretion has resulted in no 

distribution to a beneficiary or in a distribution that is too small, 

the court shall order the fiduciary to distribute from the trust to the 

beneficiary an amount that the court determines will restore the 

beneficiary, in whole or in part, to the beneficiary’s appropriate 

position. 

2. To the extent that the abuse of discretion has resulted in a 

distribution to a beneficiary that is too large, the court shall place 

the beneficiaries, the trust, or both, in whole or in part, in their 

appropriate positions by ordering the fiduciary to withhold an 

amount from one or more future distributions to the beneficiary 

who received the distribution that was too large or by ordering that 

beneficiary to return some or all of the distribution to the trust. 

3. To the extent that the court is unable, after applying subds. 

1. and 2., to place the beneficiaries, the trust, or both in the positions 

that they would have occupied had the discretion not been 

abused, the court may order the fiduciary to pay an appropriate 

amount from its own funds to one or more of the beneficiaries, the 

trust, or both. 

(d) Upon petition by the fiduciary, the court having jurisdiction 

over a trust shall determine whether a proposed exercise or nonexercise 

by the fiduciary of a discretionary power conferred under 

this section will result in an abuse of the fiduciary’s discretion. 

The petition must describe the proposed exercise or nonexercise 

of the power and contain sufficient information to inform the 

beneficiaries of the reasons for the proposal, the facts upon which 

the fiduciary relies, and an explanation of how the income and 

remainder beneficiaries will be affected by the proposed exercise 

or nonexercise of the power. A beneficiary who challenges the 

proposed exercise or nonexercise of the power has the burden of 

establishing that it will result in an abuse of discretion. 

(5) DETERMINATION AND DISTRIBUTION OF NET INCOME. In the 

case of an estate of a decedent or after an income interest in a trust 

ends, the following rules apply: 

(a) A fiduciary of an estate or of a terminating income interest 

shall determine the amount of net income and net principal 

receipts received from property specifically given to a beneficiary 

under the rules in subs. (7) to (30) that apply to trustees and the 

rules in par. (e). The fiduciary shall distribute the net income and 

net principal receipts to the beneficiary who is to receive the specific 

property. 

(b) A fiduciary shall determine the remaining net income of a 

decedent’s estate or a terminating income interest under the rules 

in subs. (7) to (30) that apply to trustees and by: 

1. Including in net income all income from property used to 

discharge liabilities. 

2. Paying from income or principal, in the fiduciary’s discretion, 

fees of attorneys, accountants, and fiduciaries; court costs 

and other expenses of administration; and interest on death taxes, 

but the fiduciary may pay those expenses from income of property 

passing to a trust for which the fiduciary claims an estate tax marital 

or charitable deduction only to the extent that the payment of 

those expenses from income will not cause the reduction or loss 

of the deduction. 

3. Paying from principal all other disbursements made or 

incurred in connection with the settlement of a decedent’s estate 

or the winding up of a terminating income interest, including 

debts, funeral expenses, disposition of remains, family allowances, 

and death taxes and related penalties that are apportioned 

to the estate or terminating income interest by the will, the terms 

of the trust, or applicable law. 

(c) A fiduciary shall distribute to a beneficiary, including a 

trustee, who receives a pecuniary amount not determined by a 

pecuniary formula interest at the legal rate set forth in s. 138.04 on 

any unpaid portion of the pecuniary amount for the period commencing 

one year after the decedent’s death or after the income 

interest in the trust ends. The interest under this paragraph shall 

be distributed from net income determined under par. (b) or from 

TRUSTS 701.20 

principal to the extent that net income is insufficient. For purposes 

of this paragraph, the deferred marital property elective share 

amount elected by a surviving spouse under s. 861.02 (1) is a 

bequest of a specific amount of money not determined by a pecuniary 

formula. 

(d) A fiduciary shall distribute the net income remaining after 

distributions required by par. (c) in the manner described in sub. 

(6) to all other beneficiaries, including a beneficiary who receives 

a pecuniary amount determined by a pecuniary formula. 

(e) A fiduciary may not reduce principal or income receipts 

from property described in par. (a) because of a payment described 

in sub. (25) or (26) to the extent that the will, the terms of the trust, 

or applicable law requires the fiduciary to make the payment from 

assets other than the property or to the extent that the fiduciary 

recovers or expects to recover the payment from a 3rd party. The 

net income and principal receipts from the property are determined 

by including all of the amounts the fiduciary receives or 

pays with respect to the property, whether those amounts accrued 

or became due before, on, or after the date of a decedent’s death 

or an income interest’s terminating event, and by making a reasonable 

provision for amounts that the fiduciary believes the estate or 

terminating income interest may become obligated to pay after the 

property is distributed. 

(6) DISTRIBUTION TO RESIDUARY AND REMAINDER BENEFICIA- 

RIES. (a) Each beneficiary described in sub. (5) (d) is entitled to 

receive a portion of the net income equal to the beneficiary’s fractional 

interest in undistributed principal assets, using values as of 

the distribution date. If a fiduciary makes more than one distribution 

of assets to beneficiaries to whom this subsection applies, 

each beneficiary, including one who does not receive part of the 

distribution, is entitled, as of each distribution date, to the net 

income the fiduciary has received after the date of death or terminating 

event or earlier distribution date but has not distributed as 

of the current distribution date. 

(b) In determining a beneficiary’s share of net income, the following 

rules apply: 

1. The beneficiary is entitled to receive a portion of the net 

income equal to the beneficiary’s fractional interest in the undistributed 

principal assets immediately before the distribution date, 

including assets that later may be sold to meet principal obligations. 

2. The beneficiary’s fractional interest in the undistributed 

principal assets must be calculated without regard to property specifically 

given to a beneficiary and property required to pay pecuniary 

amounts not determined by a pecuniary formula. 

3. The beneficiary’s fractional interest in the undistributed 

principal assets must be calculated on the basis of the aggregate 

value of those assets as of the distribution date without reducing 

the value by any unpaid principal obligation. 

4. The distribution date for purposes of this subsection may 

be the date as of which the fiduciary calculates the value of the 

assets if that date is reasonably near the date on which assets are 

actually distributed. 

(c) If a fiduciary does not distribute all of the collected but 

undistributed net income to each person as of a distribution date, 

the fiduciary shall maintain appropriate records showing the interest 

of each beneficiary in that net income. 

(d) A trustee may apply the rules in this subsection, to the 

extent that the trustee considers it appropriate, to net gain or loss 

realized after the date of death or terminating event or earlier distribution 

date from the disposition of a principal asset if this subsection 

applies to the income from the asset. 

(7) WHEN RIGHT TO INCOME BEGINS AND ENDS. (a) An income 

beneficiary is entitled to net income from the date on which the 

income interest begins. An income interest begins on the date 

specified in the terms of the trust or, if no date is specified, on the 

date an asset becomes subject to a trust or successive income interest. 





701.20 TRUSTS 

(b) An asset becomes subject to a trust: 

1. On the date it is transferred to the trust in the case of an asset 

that is transferred to a trust during the transferor’s life. 

2. On the date of a testator’s death in the case of an asset that 

becomes subject to a trust by reason of a will, even if there is an 

intervening period of administration of the testator’s estate. 

3. On the date of an individual’s death in the case of an asset 

that a 3rd party transfers to a fiduciary because of the individual’s 

death. 

(c) An asset becomes subject to a successive income interest 

on the day after the preceding income interest ends, as determined 

under par. (d), even if there is an intervening period of administration 

to wind up the preceding income interest. 

(d) An income interest ends on the day before an income beneficiary 

dies or another terminating event occurs, or on the last day 

of a period during which there is no beneficiary to whom a trustee 

may distribute income. 

(8) APPORTIONMENT OF RECEIPTS AND DISBURSEMENTS WHEN 

DECEDENT DIES OR INCOME INTEREST BEGINS. (a) A trustee shall 

allocate to principal an income receipt or disbursement other than 

one to which sub. (5) (a) applies if its due date occurs before a 

decedent dies in the case of an estate or before an income interest 

begins in the case of a trust or successive income interest. 

(b) A trustee shall allocate to income an income receipt or disbursement 

if its due date occurs on or after the date on which a 

decedent dies or an income interest begins and it is a periodic due 

date. An income receipt or disbursement must be treated as accruing 

from day to day if its due date is not periodic or it has no due 

date. The portion of the receipt or disbursement accruing before 

the date of death or an income interest begins must be allocated to 

principal and the balance must be allocated to income. 

(c) An item of income or an obligation is due on the date the 

payer is required to make a payment. If a payment date is not 

stated, there is no due date for the purposes of this section. Distributions 

to shareholders or other owners from an entity, as 

defined in sub. (10), are due on the date fixed by the entity for 

determining who is entitled to receive the distribution or, if no date 

is fixed, on the declaration date for the distribution. A due date is 

periodic for receipts or disbursements that must be paid at regular 

intervals under a lease or an obligation to pay interest or if an entity 

customarily makes distributions at regular intervals. 

(9) APPORTIONMENT WHEN INCOME INTEREST ENDS. (a) In this 

subsection, “undistributed income” means net income received 

before the date on which an income interest ends. “Undistributed 

income” does not include an item of income or expense that is due 

or accrued or net income that has been added or is required to be 

added to principal under the terms of the trust. 

(b) When a mandatory income interest ends, the trustee shall 

pay to a mandatory income beneficiary who survives that date, or 

to the estate of a deceased mandatory income beneficiary whose 

death causes the interest to end, the beneficiary’s share of the 

undistributed income that is not disposed of under the terms of the 

trust unless the beneficiary has an unqualified power to revoke 

more than 5 percent of the trust immediately before the income 

interest ends. In the latter case, the undistributed income from the 

portion of the trust that may be revoked must be added to principal. 

(c) When a trustee’s obligation to pay a fixed annuity or a fixed 

fraction of the value of the trust’s assets ends, the trustee shall prorate 

the final payment if and to the extent required by applicable 

law to accomplish a purpose of the trust or its settlor relating to 

income, gift, estate, or other tax requirements. 

(10) CHARACTER OF RECEIPTS. (a) In this subsection, “entity” 

means a corporation, partnership, limited liability company, regulated 

investment company, real estate investment trust, common 

trust fund, or any other organization in which a trustee has an interest 

other than a trust or estate to which sub. (11) applies, a business 

or activity to which sub. (12) applies, or an asset−backed security 

to which sub. (24) applies. 


(b) Except as otherwise provided in this subsection, a trustee 

shall allocate to income money received from an entity. 

(c) A trustee shall allocate the following receipts from an entity 

to principal: 

1. Property other than money. 

2. Money received in one distribution or a series of related 

distributions in exchange for part or all of a trust’s interest in the 

entity. 

3. Money received in total or partial liquidation of the entity. 

4. Money received from an entity that is a regulated investment 

company or a real estate investment trust if the money distributed 

is a capital gain dividend for federal income tax purposes. 

(d) Money is received in partial liquidation: 

1. To the extent that the entity, at or near the time of a distribution, 

indicates that it is a distribution in partial liquidation. 

2. If the total amount of money and property distributed in a 

distribution or series of related distributions is greater than 20 percent 

of the entity’s gross assets, as shown by the entity’s year−end 

financial statements immediately preceding the initial receipt. 

(e) Money is not received in partial liquidation, nor may it be 

taken into account under par. (d) 2., to the extent that it does not 

exceed the amount of income tax that a trustee or beneficiary must 

pay on taxable income of the entity that distributes the money. 

(f) A trustee may rely upon a statement made by an entity about 

the source or character of a distribution if the statement is made 

at or near the time of distribution by the entity’s board of directors 

or other person or group of persons authorized to exercise powers 

to pay money or transfer property comparable to those of a corporation’s 

board of directors. 

(11) DISTRIBUTION FROM TRUST OR ESTATE. A trustee shall allocate 

to income an amount received as a distribution of income 

from a trust or an estate in which the trust has an interest other than 

a purchased interest, and shall allocate to principal an amount 

received as a distribution of principal from such a trust or estate. 

If a trustee purchases an interest in a trust that is an investment 

entity, or a decedent or donor transfers an interest in such a trust 

to a trustee, sub. (10) or (24) applies to a receipt from the trust. 

(12) BUSINESS AND OTHER ACTIVITIES CONDUCTED BY TRUSTEE. 

(a) If a trustee who conducts a business or other activity determines 

that it is in the best interest of all the beneficiaries to account 

separately for the business or activity instead of accounting for it 

as part of the trust’s general accounting records, the trustee may 

maintain separate accounting records for its transactions, whether 

or not its assets are segregated from other trust assets. 

(b) A trustee who accounts separately for a business or other 

activity may determine the extent to which its net cash receipts 

must be retained for working capital, the acquisition or replacement 

of fixed assets, and other reasonably foreseeable needs of the 

business or activity and the extent to which the remaining net cash 

receipts are accounted for as principal or income in the trust’s general 

accounting records. If a trustee sells assets of the business or 

other activity, other than in the ordinary course of the business or 

activity, the trustee shall account for the net amount received as 

principal in the trust’s general accounting records to the extent the 

trustee determines that the amount received is no longer required 

in the conduct of the business. 

(c) Activities for which a trustee may maintain separate 

accounting records include: 

1. Retail, manufacturing, service, and other traditional business 

activities. 

2. Farming. 

3. Raising and selling livestock and other animals. 

4. Management of rental properties. 

5. Extraction of minerals and other natural resources. 

6. Timber operations. 

7. Activities to which sub. (23) applies. 






(13) PRINCIPAL RECEIPTS. A trustee shall allocate to principal: 

(a) To the extent not allocated to income under this section, 

assets received from a transferor during the transferor’s lifetime, 

a decedent’s estate, a trust with a terminating income interest, or 

a payer under a contract naming the trust or its trustee as beneficiary. 

(b) Money or other property received from the sale, exchange, 

liquidation, or change in form of a principal asset, including realized 

profit, subject to subs. (10) to (24). 

(c) Amounts recovered from 3rd parties to reimburse the trust 

because of disbursements described in sub. (26) (a) 7. or for other 

reasons to the extent not based on the loss of income. 

(d) Proceeds of property taken by eminent domain, but a separate 

award made for the loss of income with respect to an accounting 

period during which a current income beneficiary had a mandatory 

income interest is income. 

(e) Net income received in an accounting period during which 

there is no beneficiary to whom a trustee may or must distribute 

income. 

(f) Other receipts as provided in subs. (17) to (24). 

(14) RENTAL PROPERTY. To the extent that a trustee accounts 

for receipts from rental property in accordance with this subsection, 

the trustee shall allocate to income an amount received as 

rent of real or personal property, including an amount received for 

cancellation or renewal of a lease. An amount received as a 

refundable deposit, including a security deposit or a deposit that 

is to be applied as rent for future periods, must be added to principal 

and held subject to the terms of the lease and is not available 

for distribution to a beneficiary until the trustee’s contractual 

obligations have been satisfied with respect to that amount. 

(15) OBLIGATION TO PAY MONEY. (a) An amount received as 

interest, whether determined at a fixed, variable, or floating rate, 

on an obligation to pay money to the trustee, including an amount 

received as consideration for prepaying principal, must be allocated 

to income without any provision for amortization of premium. 

(b) A trustee shall allocate to principal an amount received 

from the sale, redemption, or other disposition of an obligation to 

pay money to the trustee more than one year after it is purchased 

or acquired by the trustee, including an obligation whose purchase 

price or value when it is acquired is less than its value at maturity. 

If the obligation matures within one year after the trustee purchases 

or acquires it, an amount received in excess of its purchase 

price or its value when the trust acquires it must be allocated to 

income. 

(c) This subsection does not apply to an obligation to which 

sub. (18), (19), (20), (21), (23), or (24) applies. 

(16) INSURANCE POLICIES AND SIMILAR CONTRACTS. (a) Except 

as provided in par. (b), a trustee shall allocate to principal the proceeds 

of a life insurance policy or other contract in which the trust 

or its trustee is named as beneficiary, including a contract that 

insures the trust or its trustee against loss for damage to, destruction 

of, or loss of title to, a trust asset. The trustee shall allocate 

dividends on an insurance policy to income if the premiums on the 

policy are paid from income, and to principal if the premiums are 

paid from principal. 

(b) A trustee shall allocate to income proceeds of a contract 

that insures the trustee against loss of occupancy or other use by 

an income beneficiary, loss of income, or, subject to sub. (12), loss 

of profits from a business. 

(c) This subsection does not apply to a contract to which sub. 

(18) applies. 

(17) INSUBSTANTIAL ALLOCATIONS NOT REQUIRED. If a trustee 

determines that an allocation between principal and income 

required by sub. (15) (b), (18), (19), (20), (21), or (24) is insubstantial, 

the trustee may allocate the entire amount to principal 

unless one of the circumstances described in sub. (4) (c) applies 

to the allocation. This power may be exercised by a cotrustee in 

TRUSTS 701.20 

the circumstances described in sub. (4) (d) and may be released for 

the reasons and in the manner described in sub. (4) (e). An allocation 

is presumed to be insubstantial if: 

(a) The amount of the allocation would increase or decrease 

net income in an accounting period, as determined before the 

allocation, by less than 10 percent. 

(b) The value of the asset producing the receipt for which the 

allocation would be made is less than 10 percent of the total value 

of the trust’s assets at the beginning of the accounting period. 

(18) DEFERRED COMPENSATION, ANNUITIES, AND SIMILAR PAY- 

MENTS. (a) In this subsection, “payment” means a payment that 

a trustee may receive over a fixed number of years or during the 

life of one or more individuals because of services rendered or 

property transferred to the payer in exchange for future payments. 

The term includes a payment made in money or property from the 

payer’s general assets or from a separate fund created by the payer, 

including a private or commercial annuity, an individual retirement 

account, and a pension, profit−sharing, stock−bonus, or 

stock−ownership plan. 

(b) To the extent that a payment is characterized as interest or 

a dividend or a payment made in lieu of interest or a dividend, a 

trustee shall allocate it to income. The trustee shall allocate to 

principal the balance of the payment and any other payment 

received in the same accounting period that is not characterized as 

interest, a dividend, or an equivalent payment. 

(c) 1. In this paragraph, “plan income” means any of the following: 

a. With respect to payments received from a plan that maintains 

separate accounts or funds for its participants or account 

holders, such as defined contribution retirement plans, individual 

retirement accounts, Roth individual retirement accounts, and 

some types of deferred compensation plans, either the amount of 

the plan account or fund held for the benefit of the trust that, if the 

plan account or fund were a trust, would be allocated to income 

under pars. (b) and (d) for that accounting period, or 4 percent of 

the value of the plan account or fund on the first day of the 

accounting period. The trustee shall, in his or her discretion, 

choose the method of determining “plan income” under this subd. 

1. a., and may change the method of determining “plan income” 

under this subd. 1. a. for any subsequent accounting period. 

b. With respect to payments received from a plan that does not 

maintain separate accounts or funds for its participants or account 

holders, such as defined benefit retirement plans and some types 

of deferred compensation plans, 4 percent of the total present 

value of the trust’s interest in the plan as of the first day of the 

accounting period, based on reasonable actuarial assumptions as 

determined by the trustee. 

2. For each accounting period of a trust in which the trust 

receives a payment but no part of any payment is allocated to 

income under par. (b), the trustee shall allocate to income that portion 

of the aggregate value of all payments received by the trustee 

in that accounting period that is equal to the amount of plan 

income that is attributable to the trust’s interest in the plan from 

which payment is received for that accounting period. The trustee 

shall allocate the balance of any payments to principal. 

(d) If, to obtain an estate or gift tax marital deduction for an 

interest in a trust, a trustee must allocate more of a payment to 

income than provided for by this subsection, the trustee shall allocate 

to income the additional amount necessary to obtain the marital 

deduction. 

(e) This subsection does not apply to payments to which sub. 

(19) applies. 

(19) LIQUIDATING ASSET. (a) In this subsection, “liquidating 

asset” means an asset whose value will diminish or terminate 

because the asset is expected to produce receipts for a period of 

limited duration. The term includes a leasehold, patent, copyright, 

royalty right, and right to receive payments during a period of 

more than one year under an arrangement that does not provide for 

the payment of interest on the unpaid balance. The term does not 





701.20 TRUSTS 

include a payment subject to sub. (18), resources subject to sub. 

(20), timber subject to sub. (21), an activity subject to sub. (23), 

an asset subject to sub. (24), or any asset for which the trustee 

establishes a reserve for depreciation under sub. (27). 

(b) A trustee shall allocate to income 10 percent of the receipts 

from a liquidating asset and the balance to principal. 

(20) MINERALS, WATER, AND OTHER NATURAL RESOURCES. (a) 

To the extent that a trustee accounts for receipts from an interest 

in minerals or other natural resources in accordance with this subsection, 

the trustee shall allocate them as follows: 

1. If received as nominal delay rental or nominal annual rent 

on a lease, a receipt must be allocated to income. 

2. If received from a production payment, a receipt must be 

allocated to income if and to the extent that the agreement creating 

the production payment provides a factor for interest or its equivalent. 

The balance must be allocated to principal. 

3. If an amount received as a royalty, shut−in−well payment, 

take−or−pay payment, bonus, or delay rental is more than nominal, 

90 percent must be allocated to principal and the balance to 

income. 

4. If an amount is received from a working interest or any 

other interest not provided for in subd. 1., 2., or 3., 90 percent of 

the net amount received must be allocated to principal and the balance 

to income. 

(b) An amount received on account of an interest in water that 

is renewable must be allocated to income. If the water is not 

renewable, 90 percent of the amount must be allocated to principal 

and the balance to income. 

(c) This subsection applies whether or not a decedent or donor 

was extracting minerals, water, or other natural resources before 

the interest became subject to the trust. 

(d) If a trust owns an interest in minerals, water, or other natural 

resources on May 17, 2005, the trustee may allocate receipts from 

the interest as provided in this subsection or in the manner used by 

the trustee before May 17, 2005. If the trust acquires an interest 

in minerals, water, or other natural resources after May 17, 2005, 

the trustee shall allocate receipts from the interest as provided in 

this subsection. 

(21) TIMBER. (a) To the extent that a trustee accounts for 

receipts from the sale of timber and related products in accordance 

with this subsection, the trustee shall allocate the net receipts: 

1. To income to the extent that the amount of timber removed 

from the land does not exceed the rate of growth of the timber during 

the accounting periods in which a beneficiary has a mandatory 

income interest. 

2. To principal to the extent that the amount of timber 

removed from the land exceeds the rate of growth of the timber or 

the net receipts are from the sale of standing timber. 

3. To income or principal or between income and principal if 

the net receipts are from the lease of timberland or from a contract 

to cut timber from land owned by a trust, by determining the 

amount of timber removed from the land under the lease or contract 

and applying the rules in subds. 1. and 2. 

4. To principal to the extent that advance payments, bonuses, 

and other payments are not allocated under subd. 1., 2., or 3. 

(b) In determining net receipts to be allocated under par. (a), 

a trustee shall deduct and transfer to principal a reasonable amount 

for depletion. 

(c) This subsection applies whether or not a decedent or transferor 

was harvesting timber from the property before it became 

subject to the trust. 

(d) If a trust owns an interest in timberland on May 17, 2005, 

the trustee may allocate net receipts from the sale of timber and 

related products as provided in this subsection or in the manner 

used by the trustee before May 17, 2005. If the trust acquires an 

interest in timberland after May 17, 2005, the trustee shall allocate 


net receipts from the sale of timber and related products as provided 

in this subsection. 

(22) PROPERTY NOT PRODUCTIVE OF INCOME. (a) If a marital 

deduction is allowed for all or part of a trust whose assets consist 

substantially of property that does not provide the surviving 

spouse with sufficient income from or use of the trust assets, and 

if the amounts that the trustee transfers from principal to income 

under sub. (4) and distributes to the spouse from principal in 

accordance with the terms of the trust are insufficient to provide 

the spouse with the beneficial enjoyment required to obtain the 

marital deduction, the spouse may require the trustee to make 

property productive of income, convert property within a reasonable 

time, or exercise the power conferred by sub. (4) (a). The 

trustee may decide which action or combination of actions to take. 

(b) In cases not governed by par. (a), proceeds from the sale 

or other disposition of an asset are principal without regard to the 

amount of income the asset produces during any accounting 

period. 

(23) DERIVATIVES AND OPTIONS. (a) In this subsection, “derivative” 

means a contract or financial instrument or a combination 

of contracts and financial instruments that gives a trust the right 

or obligation to participate in some or all changes in the price of 

a tangible or intangible asset or group of assets, or changes in a 

rate, an index of prices or rates, or another market indicator for an 

asset or a group of assets. 

(b) To the extent that a trustee does not account under sub. (12) 

for transactions in derivatives, the trustee shall allocate to principal 

receipts from and disbursements made in connection with 

those transactions. 

(c) If a trustee grants an option to buy property from the trust, 

whether or not the trust owns the property when the option is 

granted, grants an option that permits another person to sell property 

to the trust, or acquires an option to buy property for the trust 

or an option to sell an asset owned by the trust, and the trustee or 

other owner of the asset is required to deliver the asset if the option 

is exercised, an amount received for granting the option must be 

allocated to principal. An amount paid to acquire the option must 

be paid from principal. A gain or loss realized upon the exercise 

of an option, including an option granted to a settlor of the trust for 

services rendered, must be allocated to principal. 

(24) ASSET−BACKED SECURITIES. (a) In this subsection, 

“asset−backed security” means an asset whose value is based 

upon the right it gives the owner to receive distributions from the 

proceeds of financial assets that provide collateral for the security. 

The term includes an asset that gives the owner the right to receive 

from the collateral financial assets only the interest or other current 

return or only the proceeds other than interest or current 

return. The term does not include an asset to which sub. (10) or 

(18) applies. 

(b) If a trust receives a payment from interest or other current 

return and from other proceeds of the collateral financial assets, 

the trustee shall allocate to income the portion of the payment that 

the payer identifies as being from interest or other current return 

and shall allocate the balance of the payment to principal. 

(c) If a trust receives one or more payments in exchange for the 

trust’s entire interest in an asset−backed security in one accounting 

period, the trustee shall allocate the payments to principal. If 

a payment is one of a series of payments that will result in the liquidation 

of the trust’s interest in the security over more than one 

accounting period, the trustee shall allocate 10 percent of the payment 

to income and the balance to principal. 

(25) DISBURSEMENTS FROM INCOME. A trustee shall make the 

following disbursements from income to the extent that they are 

not disbursements specified in sub. (5) (b) 2. or 3.: 

(a) One−half of the regular compensation of the trustee and of 

any person providing investment advisory or custodial services to 

the trustee. 






(b) One−half of all expenses for accountings, judicial proceedings, 

or other matters that involve both the income and remainder 

interests. 

(c) All of the other ordinary expenses incurred in connection 

with the administration, management, or preservation of trust 

property and the distribution of income, including interest, ordinary 

repairs, regularly recurring taxes assessed against principal, 

and expenses of a proceeding or other matter that concerns primarily 

the income interest. 

(d) Recurring premiums on insurance covering the loss of a 

principal asset or the loss of income from or use of the asset. 

(26) DISBURSEMENTS FROM PRINCIPAL. (a) A trustee shall 

make the following disbursements from principal: 

1. The remaining one−half of the disbursements described in 

sub. (25) (a) and (b). 

2. All of the trustee’s compensation calculated on principal as 

a fee for acceptance, distribution, or termination, and disbursements 

made to prepare property for sale. 

3. Payments on the principal of a trust debt. 

4. Expenses of a proceeding that concerns primarily principal, 

including a proceeding to construe the trust or to protect the 

trust or its property. 

5. Premiums paid on a policy of insurance not described in 

sub. (25) (d) of which the trust is the owner and beneficiary. 

6. Estate, inheritance, and other transfer taxes, including penalties, 

apportioned to the trust. 

7. Disbursements related to environmental matters, including 

reclamation, assessing environmental conditions, remedying and 

removing environmental contamination, monitoring remedial 

activities and the release of substances, preventing future releases 

of substances, collecting amounts from persons liable or potentially 

liable for the costs of those activities, penalties imposed 

under environmental laws or regulations and other payments 

made to comply with those laws or regulations, statutory or common 

law claims by 3rd parties, and defending claims based on 

environmental matters. 

(b) If a principal asset is encumbered with an obligation that 

requires income from that asset to be paid directly to the creditor, 

the trustee shall transfer from principal to income an amount equal 

to the income paid to the creditor in reduction of the principal balance 

of the obligation. 

(27) TRANSFERS FROM INCOME TO PRINCIPAL FOR DEPRECI- 

ATION. (a) In this subsection, “depreciation” means a reduction 

in value due to wear, tear, decay, corrosion, or gradual obsolescence 

of a fixed asset having a useful life of more than one year. 

(b) A trustee may transfer to principal a reasonable amount of 

the net cash receipts from a principal asset that is subject to 

depreciation, but may not transfer any amount for depreciation: 

1. Of that portion of real property used or available for use by 

a beneficiary as a residence or of tangible personal property held 

or made available for the personal use or enjoyment of a beneficiary. 

2. During the administration of a decedent’s estate. 

3. Under this subsection if the trustee is accounting under sub. 

(12) for the business or activity in which the asset is used. 

(c) An amount transferred to principal need not be held as a 

separate fund. 

(28) TRANSFERS FROM INCOME TO REIMBURSE PRINCIPAL. (a) If 

a trustee makes or expects to make a principal disbursement 

described in this subsection, the trustee may transfer an appropriate 

amount from income to principal in one or more accounting 

periods to reimburse principal or to provide a reserve for future 

principal disbursements. 

(b) Principal disbursements to which par. (a) applies include 

the following, but only to the extent that the trustee has not been 

and does not expect to be reimbursed by a 3rd party: 

1. An amount chargeable to income but paid from principal 

because it is unusually large, including extraordinary repairs. 

TRUSTS 701.20 

2. A capital improvement to a principal asset, whether in the 

form of changes to an existing asset or the construction of a new 

asset, including special assessments. 

3. Disbursements made to prepare property for rental, including 

tenant allowances, leasehold improvements, and brokers’ 

commissions. 

4. Periodic payments on an obligation secured by a principal 

asset to the extent that the amount transferred from income to principal 

for depreciation is less than the periodic payments. 

5. Disbursements described in sub. (26) (a) 7. 

(c) If the asset whose ownership gives rise to the disbursements 

becomes subject to a successive income interest after an 

income interest ends, a trustee may continue to transfer amounts 

from income to principal as provided in par. (a). 

(29) INCOME TAXES. (a) A tax required to be paid by a trustee 

based on receipts allocated to income must be paid from income. 

(b) A tax required to be paid by a trustee based on receipts allocated 

to principal must be paid from principal, even if the tax is 

called an income tax by the taxing authority. 

(c) A tax required to be paid by a trustee on the trust’s share of 

an entity’s taxable income must be paid proportionately: 

1. From income to the extent that receipts from the entity are 

allocated to income. 

2. From principal to the extent that: 

a. Receipts from the entity are allocated to principal. 

b. The trust’s share of the entity’s taxable income exceeds the 

total receipts described in subds. 1. and 2. a. 

(d) For purposes of this subsection, receipts allocated to principal 

or income must be reduced by the amount distributed to a 

beneficiary from principal or income for which the trust receives 

a deduction in calculating the tax. 

(30) ADJUSTMENTS BETWEEN PRINCIPAL AND INCOME BECAUSE 

OF TAXES. (a) A fiduciary may make adjustments between principal 

and income to offset the shifting of economic interests or tax 

benefits between income beneficiaries and remainder beneficiaries 

which arise from: 

1. Elections and decisions, other than those described in par. 

(b), that the fiduciary makes from time to time regarding tax matters. 

2. An income tax or any other tax that is imposed upon the 

fiduciary or a beneficiary as a result of a transaction involving or 

a distribution from the estate or trust. 

3. The ownership by an estate or trust of an interest in an entity 

whose taxable income, whether or not distributed, is includable in 

the taxable income of the estate or trust or of a beneficiary. 

(b) If the amount of an estate tax marital deduction or charitable 

contribution deduction is reduced because a fiduciary deducts 

an amount paid from principal for income tax purposes instead of 

deducting it for estate tax purposes, and as a result estate taxes paid 

from principal are increased and income taxes paid by an estate, 

trust, or beneficiary are decreased, each estate, trust, or beneficiary 

that benefits from the decrease in income tax shall reimburse 

the principal from which the increase in estate tax is paid. The 

total reimbursement must equal the increase in the estate tax to the 

extent that the principal used to pay the increase would have qualified 

for a marital deduction or charitable contribution deduction 

but for the payment. The proportionate share of the reimbursement 

for each estate, trust, or beneficiary whose income taxes are 

reduced must be the same as its proportionate share of the total 

decrease in income tax. An estate or trust shall reimburse principal 

from income. 

(31) LIMITS ON LIABILITY. (a) If a trustee sends to all beneficiaries 

a written communication relating to the trust, any action 

against the trustee that is based on the subject of the written communication 

shall be commenced within 2 years after the trustee 

sends the written communication or be barred. 

(b) 1. A written communication is sent to a sui juris beneficiary 

on the date on which the written communication is delivered per- 





701.20 TRUSTS 

sonally to the sui juris beneficiary or on the date on which the written 

communication is postmarked if mailed to the sui juris beneficiary 

at his or her last−known address. 

2. A written communication is sent to a beneficiary who is not 

a sui juris beneficiary on the date on which the written communication 

is delivered personally to the beneficiary’s parent or legal 

guardian or on the date on which the written communication is 

postmarked if mailed to the beneficiary’s parent or legal guardian 

at his or her last−known address. 

(c) The identity of all of the beneficiaries shall be determined 

on the date on which the written communication is sent. 

(d) Paragraph (a) does not apply to an action based on fraud 

or misrepresentation with respect to the written communication. 

History: 1971 c. 40; 1977 c. 408; 1983 a. 189; 1985 a. 37; 1987 a. 27; 1987 a. 393 

s. 53; 1991 a. 39; 1993 a. 112, 160; 1997 a. 188; 1999 a. 85; 2005 a. 10, 216; 2009 

a. 180. 

701.21 Income payments and accumulations. (1) DIS- 

TRIBUTION OF INCOME. Except as otherwise determined by the 

trustee or a court under s. 701.20 (4g) with respect to unitrust distributions, 

if a beneficiary is entitled to receive income from a 

trust, but the creating instrument fails to specify how frequently 

it is to be paid, the trustee shall distribute at least annually the 

income to which such beneficiary is entitled. 

(2) PERMITTED ACCUMULATIONS. No provision directing or 

authorizing accumulation of trust income shall be invalid. 

(3) CHARITABLE TRUST ACCUMULATIONS. A trust containing a 

direction or authorization to accumulate income from property 

devoted to a charitable purpose shall be subject to the general 

equitable supervision of the court with respect to any such accumulation 

of income, including its reasonableness, amount and 

duration. 

(4) DISPOSITION OF ACCUMULATED INCOME. Income not 

required to be distributed by the creating instrument, in the 

absence of a governing provision in the instrument, may in the 

trustee’s discretion be held in reserve for future distribution as 

income or be added to principal subject to retransfer to income of 

the dollar amount originally transferred to principal; but at the termination 

of the income interest, any undistributed income shall be 

distributed as principal. 

History: 2005 a. 10. 

701.22 Distributions in kind by trustees; marital 

bequests. In case of a division of trust assets into 2 or more 

trusts or shares, any distribution or allocation of assets as an equivalent 

of a dollar amount fixed by formula or otherwise shall be 

made at current fair market values unless the governing instrument 

expressly provided that another value may be used. If the 

governing instrument requires or permits a different value to be 

used, all assets available for distribution, including cash, shall, 

unless otherwise expressly provided, be so distributed that the 

assets, including cash, distributed as such an equivalent will be 

fairly representative of the net appreciation or depreciation in the 

value of the available property on the date or dates of distribution. 

A provision in the governing instrument that the trustee may fix 

values for purposes of distribution or allocation does not of itself 

constitute authorization to fix a value other than current fair market 

value. 

The valuation of assets for distribution is the current market value at the time of 

distribution. Estate of Naulin, 56 Wis. 2d 100, 201 N.W.2d 599 (1972). 

701.23 Removal of trusts. (1) REMOVAL TO FOREIGN JURIS- 

DICTION. Unless the creating instrument contains an express prohibition 

or provides a method of removal, a circuit court having 

jurisdiction of a trust created by a will admitted to probate in such 

court may, upon petition of a trustee or a beneficiary with the consent 

of the trustee and after a hearing as to which notice has been 

given to the trustee and other interested persons, order removal of 

such trust to another state where the court finds that such removal 


is in accord with the express or implied intention of the settlor, 

would aid the efficient administration of the trust or is otherwise 

in the best interests of the beneficiaries. Such order may be conditioned 

on the appointment of a trustee in the state to which the trust 

is to be removed and shall be subject to such other terms and conditions 

as the court deems appropriate for protection of the trust 

property and the interests of the beneficiaries. Upon receipt of satisfactory 

proof of compliance with all terms and conditions of the 

order, the court may discharge the local trustee from further 

responsibility in the administration of the trust. 

(2) REMOVAL TO THIS STATE. Unless the creating instrument 

contains an express prohibition against removal or provides a 

method for removal, a court may, upon the petition of a foreign 

trustee or beneficiary with the consent of the trustee, appoint a 

local trustee to receive and administer trust property presently 

being administered in another state. The local trustee may be 

required to give bond conditioned on the faithful performance of 

his or her duties or to meet any other conditions required by a court 

in the other state before permitting removal of the trust to this 

state. 

History: 1977 c. 449 s. 497; 1993 a. 486. 

701.24 Applicability. (1) Except as otherwise provided in 

sub. (3) and s. 701.19 (9) (a), ss. 701.01 to 701.19, 701.21, 701.22, 

and 701.23 are applicable to a trust existing on July 1, 1971, as 

well as a trust created after such date, and shall govern trustees acting 

under such trusts. If application of any provision of ss. 701.01 

to 701.19, 701.21, 701.22, and 701.23 to a trust in existence on 

August 1, 1971, is unconstitutional, it shall not affect application 

of the provision to a trust created after that date. 

(2) Section 701.20 applies to every trust or decedent’s estate 

existing on May 17, 2005, and to every trust or decedent’s estate 

created or coming into existence after that date, except as otherwise 

expressly provided in s. 701.20 or by the decedent’s will or 

the terms of the trust. With respect to a trust or decedent’s estate 

existing on May 17, 2005, s. 701.20 (5) to (30) shall apply at the 

beginning of the trust’s or estate’s first accounting period, as 

defined in s. 701.20 (2) (a), that begins on or after May 17, 2005. 

(3) Sections 701.06 (6) (b), (c), and (d) and 701.19 (10) are 

applicable to a trust existing on April 11, 2006, as well as a trust 

created after that date, and shall govern trustees acting under such 

trusts. If application of any provision of s. 701.06 (6) (b), (c), or 

(d) or 701.19 (10) to a trust in existence on April 11, 2006, is 

unconstitutional, it shall not affect application of the provision to 

a trust created after that date. 

History: 1971 c. 66; 1977 c. 309; 2005 a. 10, 216. 

701.25 Applicability of general transfers at death provisions. 

Chapter 854 applies to transfers at death under trust 

instruments. 

History: 1997 a. 188. 

Wisconsin’s New Probate Code. Erlanger. Wis. Law. Oct. 1998. 

701.26 Disclaimers of nonprobate transfers. (1) A 

recipient may disclaim, under s. 854.13, any of the following: 

(a) All or part of an interest in a joint tenancy, upon the death 

of another joint tenant. 

(b) All or part of an interest in survivorship marital property, 

upon the death of the other spouse. 

(c) All or part of an interest that is created by a nontestamentary 

instrument and transferred at death, upon the death that causes the 

transfer. 

(d) All or part of any other interest transferred under a governing 

instrument, as defined in s. 854.01 (2). 

(2) A recipient may disclaim, under s. 700.27, all or part of any 

interest transferred under an inter vivos governing instrument, as 

defined in s. 700.27 (1) (c). 

History: 1997 a. 188; 2005 a. 216. 




SECTION 15 

Fiduciaries and Fighting Families: How to 

Pick Up the Pieces During and After Family 

Trust Litigation 

Adam D. Cox 

Trust Point Inc. 

Minneapolis 

Julian Zebot 

Maslon, Edelman, Borman & Brand, LLP 

Minneapolis 


Fiduciaries and Fighting Families: How to Pick Up the Pieces 

During and After Family Trust Litigation 

Adam D. Cox, Trust Point Inc. 

Julian C. Zebot, Maslon Edelman Borman & Brand, LLP 

I. What every (would-be) trust litigator should consider and discuss with his or her 

client at the outset. 

A. Initial Considerations 

1. A Disclaimer* 

2. Red Light, Green Light 

3. The Expectations Game 

4. Collateral Damage 

B. The Retainer Agreement—Avoiding Problems Down the Road 

1. Whom do I represent? 

2. What is the scope of representation? 

3. How do I get paid? 

II. 

ADR in Family Trust Litigation 

A. ADR: A Fork in the Road 

1. Arbitration 

a. Is this even possible? 

2. Mediation 

a. Not mandatory? Not anymore (practically speaking) 

B. Mediation 

1. What are the advantages? 

2. Tips and Traps 

a. Timing 

b. Choosing a Mediator 

c. Preparation 

1

III. 

Crafting Lasting Settlement Agreements 

A. Negotiation and Drafting 

1. Make it binding 

2. Attorneys’ Fees 

3. Special provisions 

B. A New Trustee? 

1. What to consider 

2. Fiduciary’s perspective (what to ask for) 

a. Last 3 years’ tax returns, including any applicable gift or estate tax 

returns 

b. Asset statements 

c. Agreement on investment policy 

d. All governing documents 

e. Removal and replacement language 

f. Indemnification for past acts 

g. Which responsibilities have been carved-out for others 

h. Provisions affecting governing documents 

C. So You’ve Got a Settlement…Now What? 

1. Court approval? 

2. What if it falls apart? 

IV. 

How to Move Forward Based on How We Got Here. 

A. Identification of Issues 

1. Perception trumps reality 

2. History 

3. Reliability of information from others 

4. Positioning of fiduciary 

5. Mutual concerns 

6. Goals 

7. Is a future relationship important 

V. On-boarding Relationships with a History of Litigation 

A. Initial Meeting Considerations 

1. Large group or individual meetings first 

2. Location – neutral or comfortable 

2

3. Who should attend 

4. Agenda or free-flowing 

5. Capacity concerns 

6. Ground rules & tone 

B. Correspondence 

1. Statements 

2. Access to information 

3. Frequency & format 

4. Future meetings 

5. Individual meetings 

VI. 

Bonus Topic! Tips for Drafters 

A. Defining a Legacy 

1. Encourage open communication 

2. Assumption of need & ability can be hurtful 

3. Family meetings 

4. Set & manage expectations 

5. Work to preserve the family, not the assets 

6. Sweat the small stuff 

B. Families Don’t Fit Into Formulas 

1. So don’t let the tax tail wag the estate planning dog 

DISCLAIMER: The views set forth herein are the personal views of the authors. These materials do not constitute 

legal advice and the authors assume no responsibility for any reliance on them. All statements and original sources 

should be verified and facts and other issues not addressed herein should be considered by the reader. 

3

SECTION 16 

Medical Assistance 2013 

Julian J. Zweber 


Saint Paul 



I. INTRODUCTION ............................................................................................................................... 1 

II. MEDICAL ASSISTANCE DEMOGRAPHICS ............................................................................... 3 

III. THE 2013-2014 MEDICAL ASSISTANCE NUMBERS ............................................................... 5 

A. THE MONTHLY GIFT PENALTY (SAPSNF) AMOUNT ........................................... 5 

B. COST OF LIVING AND OTHER ADJUSTMENTS ..................................................... 6 

1. SOME NUMBERS CHANGE; OTHERS HAVEN'T ...................................... 6 

2. PERSONAL NEEDS ALLOWANCES FOR SINGLE PERSONS ................ 6 

3. COMMUNITY SPOUSE ASSET ALLOWANCES ......................................... 7 

4. COMMUNITY SPOUSE INCOME ALLOWANCES .................................... 9 

IV. MAINTENANCE OF EFFORT (MOE) FREEZES CONTINUE ............................................. 10 

A. CASCADING MOES ......................................................................................................... 10 

B. RESTRICTIONS ON STATE MEDICAL ASSISTANCE 

CHANGES AFTER THE ACA MOE ENDS ................................................................. 13 

V. DEATH OF THE TRANSFER/APPLY/DENY STRATEGY ...................................................... 13 

A. THE 2009 AMENDMENT TO ELIMINATE REDUCTION OF 

PENALTY PERIODS FOR PARTIAL RETURN OF UNCOMPENSATED 

TRANSFERS ........................................................................................................................ 13 

B. STATE PLAN AMENDMENT .......................................................................................... 14 

C. CURRENT HPCM GUIDELINES .................................................................................... 14 

VI. AVOIDING PROBLEMS WITH THE NEW ASSET TRANSFER POLICIES ....................... 19 

VII. THE 2009 AMENDMENTS WAITING FOR JANUARY 1, 2014, 

TO BECOME EFFECTIVE ............................................................................................................ 19 

A. REDUCTION OF EXCESS ASSETS IN MONTH OF APPLICATION.................... 19 

B. LIMITING USE OF CURRENT INCOME TO PAY OLD MEDICAL 

EXPENSES .......................................................................................................................... 20 

C. INCREASING NURSING FACILITY LEVEL OF CARE CRITERIA ..................... 21 

VIII. THE REFORM 2020 PATHWAYS TO INDEPENDENCE WAIVER ....................................... 25 

IX. OTHER MA PROVISIONS NOT CHANGING IN THE PAST YEAR .................................... 26 

A. NO CHANGE IN TREATMENT OF GIFTS TO RELIGIOUS GROUPS, 

CHARITIES, AND FAMILY MEMBERS ...................................................................... 26

B. START DATE OF PENALTY PERIOD REMAINS THE SAME BUT 

PROBLEMS PERSIST ...................................................................................................... 28 

C. UNDUE HARDSHIP WAIVERS ..................................................................................... 29 

X. THE MINNESOTA CASES INTERPRETING FEDERAL FRESTRICTIONS 

ON RECOVERY OF MA BENEFITS CORRECTLY PAID ....................................................... 31 

A. ESTATE OF BARG ............................................................................................................. 31 

B. ESTATE OF GROTE .......................................................................................................... 31 

C. ESTATE OF PERRRIN ...................................................................................................... 32 

D. ESTATE OF RUDDICK ..................................................................................................... 32 

E. DOUGLAS COUNTY V. LINDGREN ............................................................................. 33 

XI. UPDATE ON THE 2009 LEGISLATION TO UNDO BARG AND ITS PROGENY ............... 36 

XII. MEDICAL ASSISTANCE FOR ADULTS WITHOUT CHILDREN ......................................... 36 

XIII THE COMMUNITY SPOUSE SUPPORT OBLIGATION .......................................................... 37 

A. TREATMENT OF COMMUNITY SPOUSE INCOME UNDER 

FEDERAL LAW .................................................................................................................. 37 

B. STATE ATTEMPT TO CIRCUMVENT FEDERAL LAW .......................................... 37 

C. REPEAL OF THE COMMUNITY SPOUSE SUPPORT OBLIGATION .................. 37 

XIV. REDESIGN OF HOME AND COMMUNITY BASED SERVICES ........................................... 38 

A. HIGH HOPES FOR REDESIGN ...................................................................................... 38 

B. INCREASED NURSING FACILITY LEVEL OF CARE CRITERIA 

CRITICAL TO REDESIGN ............................................................................................... 38 

XV. THE 2013 MEDICAL ASSISTANCE AMENDMENTS ............................................................... 39 

A. CONFORMING MEDICAL ASSISTANCE AND MINNESOTACARE 

TO THE AFFORDABLE CARE ACT ............................................................................. 39 

1. AFFORDABLE CARE ACT PROVISIONS BECOMING 

EFFECTIVE JANUARY 1, 2014 ........................................................................ 39 

2. REVISING MINNESOTACARE TO CONFORM TO 

BASIC HEALTH PLAN REQUIREMENTS ................................................... 41 

B. RESESIGNING HOME AND COMMUNITY BASED SERVICES ............................ 44 

ii


MEDICAL ASSISTANCE 2013 

A. These materials are being finalized on May 22, 2013. On May 20, 2013, 

the Legislature adjourned shortly before midnight, the constitutional 

deadline for adjournment in the odd year of the biennium. Over the 

previous weekend, the House and the Senate passed the Conference Report 

on HF 1233, the Omnibus Health and Human Services Finance Bill for 

2013. To finish these materials in time to get them into the book for this 

Conference, there is no time to wait for assignment of a Chapter number to 

the new Act and the Governor’s signature. Although no Chapter number 

has been assigned as yet, these materials will rely on the contents of the 

Conference Committee Report (hereafter “Conference Report”) to learn 

what is in store for the medical assistance program for the coming year or 

two. References in these materials to the Article and Section numbers of 

the new Act will to the Conference Report. These references will be the 

same in the new Act even though the Chapter number has not yet been 

assigned. 

B. As we enter the 2013-2014 biennium, the health care policy leaders in this 

State continue to hope to contain the future costs of the medical assistance 

program by pursuing policies first proposed and enacted during the 

Pawlenty Administration in 2009. These policies have not yet been fully 

implemented because of obstacles in federal law. The Dayton 

Administration has accepted these policy directions and has banked heavily 

on implementing these policies when federal law no longer blocks them. 

These federal obstacles will be discussed in more detail below. 

C. To understand the plans for future cost containment, one must first 

understand the difference between medical assistance entitlement programs 

and waiver programs. Under current federal law, the United States 

matches state funding for medical assistance spending for nursing home 

care (Skilled Nursing Facilities) regardless of the costs incurred. Spending 

for nursing home care is an entitlement program. There are open 

appropriations at the federal level to fund spending for nursing home care. 

At the state level, the Legislature appropriates sufficient funds to provide 

the payments required by the medical assistance programs. If the 

appropriations run short, additional funds must be appropriated in the 

following year. In effect, these commitments are open-ended with respect 

to benefits available for residents of skilled nursing facilities. Although the 

States have some flexibility in designing their medical assistance programs, 

there are many requirements and restrictions set forth in federal law that 

1

control eligibility for entitlement programs. The States complain about the 

lack of “flexibility” in many of these requirements. This is code for the 

frustrated desire of the States to cut medical assistance benefits and 

eligibility for medical assistance programs. 

D. Minnesota operates a number of health care programs authorized and 

controlled by federal waivers. 1 These programs are not entitlement 

programs. They are funded at levels approved by the Legislature. 

Minnesota cannot cut these programs under the terms and conditions of 

current waivers, but the State can limit the expansion of these programs to 

save money. 

E. Since 2009, the strategy to contain future increases in the cost of medical 

assistance has been dependent on the possibility that the federal government 

will approve several waiver reqests to allow Minnesota to redesign its 

medical assistance programs. These waiver requests are designed to 

achieve substantial savings in health and human service expenditures. To 

balance the State budget for the 2011-2012 biennium, the 2011 Legislature 

passed the Omnibus Health and Human Services Finance Act of 2011, 

(2011 Omnibus HHS Act) Laws of Minnesota 2011, Ch. 41. In the 2011 

Omnibus HHS Act, the Legislature directed the Commissioner of Human 

Services to continue requesting waivers from the Center for Medicare and 

Medicaid Services (CMS) 2 to allow a complete redesign of all the medical 

assistance programs in Minnesota. These waiver requests will be discussed 

in more detail below. The projected savings from these waivers would be 

possible, of course, only if the State receives the requested waivers in a 

timely manner. If the waivers are not received in a timely manner, the 

2011 Omnibus HHS provided for cuts in reimbursement rates for health 

care providers are scheduled to be implemented. In effect, the health care 

providers were being held hostage to reimbursement cuts until CMS 

approves the requested waivers. With the change of control of the 

Legislature as a result of the November 2012 election, the 2013 Legislature 

1 Waivered Home and Community Based Services (HCBS) programs include Elderly Waiver 

(EW), Brain Injury (BI), Community Alternatives for Disabled Individuals (CADI), 

Community Alternative Care (CAC), the Developmental Disabilities program (DD), and MA 

for Employed Persons with Disabilities (MA-EPD). These programs and MA for nursing 

home care (LTC-MA) comprise the Minnesota “Health Care Programs.” 

2 The Center for Medicare and Medicaid Services (CMS) is the name of the federal agency 

formerly known as the Health Care Financing Administration (HCFA). This agency is the 

federal agency charged with administration of the federal Medicare and Medicaid programs. 

2

has decided to increase reimbursement rates to providers, while still 

holding out hope for approval of the pending waiver requests. 

F. Two waiver requests to reform medical assistance have been submitted to 

the Centers for Medicare and Medicaid Services (CMS). 3 They will be 

discussed in more detail below. Pending approval of the waiver requests, 

the medical assistance programs remain stuck in a limbo of sorts, relatively 

the same but with several very big changes that occurred in 2012. These 

materials will discuss the most notable medical assistance developments 

since last year’s Probate and Trust Law Conference. 

G. References in these materials to the HCPM are references to the Health Care 

Programs Manual published by the Minnesota Department of Human Services 

(DHS). The HCPM provides guidelines to county financial workers to assist them 

in determining eligibility for medical assistance and other Minnesota health care 

programs. The HCPM is available at: 

http://hcopub.dhs.state.mn.us/ 

II. 

MEDICAL ASSISTANCE DEMOGRAPHICS 

A. Large numbers of Minnesotans are affected by the medical assistance program 

(commonly called “MA” or “Medicaid”). In 2012, 732,821 Minnesotans, on 

average per month, received one form of MA benefits or another. 4 This number is 

projected to increase to 742,708, on average per month, in 2013. 5 Of the number of 

eligibles in September 2012, 470,290 Minnesotans received benefits available to 

families and children, 122,759 received benefits available for persons with 

disabilities, 84,354 received benefits available to adults with no children, and only 

3 There are three waiver requests awaiting approval by CMS. They are the Long Term Care 

Realignment Section 1115 Waiver Request, which was original submitted February 13, 2012, 

and was revised and re-submitted to CMS on November 21, 2012, and the Reform 2020; 

Pathways to Independence Waiver Request, which was originally submitted to CMS on August 

24, 2012, and subsequently revised and re-submitted on November 21, 2012. A third waiver 

request, Minnesota’s Demonstration to Integrate Care for Dual Eligibles (Medicare and 

Medicaid) was submitted to CMS on April 26, 2012. This waiver request is still pending. It 

will not be discussed in these materials. 

4 “Eligibles and Payments,” Family Self-Sufficiency and Health Care Program Statistics, January 2013, p. 30, 

Reports and Forecasts Division, Minnesota Department of Human Services, available at: 

http://www.dhs.state.mn.us/main/idcplg?IdcService=GET_FILE&RevisionSelectionMethod=LatestReleased&Re 

ndition=Primary&allowInterrupt=1&noSaveAs=1&dDocName=dhs_id_016338. 

5 Id. 

3

57,302 received benefits available for the elderly. 6 

B. As of February 13, 2013, there were 373 MA-certified and/or state licensed skilled 

nursing facilities (SNFs) in Minnesota, 7 with a total of 32,728 active beds. 8 The 

average statewide occupancy rate in 2009 for SNFs was 91.6 percent. The 

monthly average number of MA recipients served in SNFs during State Fiscal 

Year 2010 was 18,371. 9 

C. The MA programs pay expenses that are considered medically necessary, but only 

for persons who are elderly, or permanently and totally disabled, or who fit other 

eligibility categories such as pregnant women, children, families with children, and 

the new program for low-income adults without children. Low-income adults 

without children are not eligible for this program if they are eligible for benefits 

under another program. They must have income levels at or below poverty level 

to qualify for benefits. These programs have no asset test, no look-back period, 

no penalties for asset transfers and no recovery of MA benefits correctly paid for 

this program. Programs that assist families with children are linked to poverty and 

also provide eligibility for MA. There is no look-back period, no penalties for 

asset transfers and no recovery of benefits correctly paid. The elderly and persons 

with disabilities must satisfy both income and asset limits to qualify for MA. The 

elderly and persons with disabilities also face a look-back period, penalties for 

asset transfers, attempts to recover MA benefits correctly paid and other obstacles 

to eligibility that the vast bulk of MA recipients do not face. These obstacles and 

6 “Enrollees Eligible in Sept 2012 as of Feb 02, 2013,” Monthly Medical Care Programs Enrollment Counts 

Statewide and by County, by Program and Program Components, February 2013, p. 3, available at: 

http://www.dhs.state.mn.us/main/idcplg?IdcService=GET_FILE&RevisionSelectionMethod=LatestReleased&Re 

ndition=Primary&allowInterrupt=1&noSaveAs=1&dDocName=dhs_id_016343. These numbers totalled 

734,705, a difference of 1,874 more than the monthly average number of recipients reported pursuant to 

Footnote 1. 

7 Minnesota Nursing Home Report Care Fact Sheet, February 13, 2013, p. 3, available at: 

http://nhreportcard.dhs.mn.gov/nhreportcardfactsheet.pdf. 

8 Id. A decade ago there were approximatley 46,000 certified nursing home beds in Minnesota. Over the past 

decade, the State has actively pursued a policy of encouraging operators of nursing homes to close nursing homes 

and reduce beds. A number of nursing homes have closed due to the inadequacy of approved nursing home 

reimbursement rates under MA in the face of rising expenses, the obsolescence of older nursing home facilities, 

and the public and private pressures to shift nursing home residents into less expensive Assisted Living facilities. 

As a result, there are far fewer nursing home beds available now than a decade ago. The number of nursing 

home beds continues to decline from year to year. 

9 Nursing Facility (NF) Facts, Nursing Facility Rates and Policy (NFRP) Division, Long-Term Care Policy 

Center, MN DHS, updated as of November 11, 2011, available at: 

http://www.dhs.state.mn.us/main/idcplg?IdcService=GET_DYNAMIC_CONVERSION&RevisionSelectionMeth 

od=LatestReleased&dDocName=id_005399. More recent information is not readily available from the DHS 

web site regarding current occupancy rates. 

4

the problems they cause for some common estate planning techniques will be 

discussed in detail in these materials. 

D. The elderly and persons with disabilities usually receive what is called 

“long term care” (LTC) benefits. Long term care is care for medical conditions 

that extend 30 days or longer. These materials only apply to persons who are or 

might be applying for benefits to pay for long term care, either at home, in a 

hospital, in assisted living, or in a nursing home. The Minnesota Department of 

Human Services (DHS) refers to the programs for these benefits as “LTC” 

programs. As shown by the numbers cited above, the elderly and persons with 

disabilities are a substantial part of the MA caseload, but the elderly are only a 

small part of this total number. Unfortunately, anyone can become part of this 

tiny number if the infirmities of old age or the onset of a catastrophic illness or 

injury forces the individual to seek long-term care at home, in a hospital, in 

assisted living or in a nursing home. When planning to avoid probate, no one can 

reliably predict whether the need for MA benefits will affect that person or that 

person’s spouse at some point in the future. 

III. 

THE 2013-2014 MEDICAL ASSISTANCE NUMBERS 

Here are the medical assistance numbers that change from year to year: 

A. THE MONTHLY GIFT PENALTY (SAPSNF) AMOUNT 

1. The monthly asset transfer penalty divisor (the so-called "SAPSNF" rate) is 

$5,371 for applications submitted from July 1, 2012, to June 30, 2013. 10 

This rate is used to penalize uncompensated transfers made during the 

applicable look-back period. See Health Care Programs Manual (hereafter 

"HCPM") § 19.40.30. 11 The new SAPSNF rate for the coming 12 months 

10 The SAPSNF rate for the period from July 1, 2011, to June 30, 2012 was $5,340. For the 

previous 12 months, the SAPSNF rate was $5,360. The SAPSNF rate for July 1, 2011, to 

June 30, 2012, was the first time in the history of the SAPSNF rate that it did not increase 

significantly over the previous year. The SAPSNF rate for July 1, 2012 to June 30, 2013, 

resumed the pattern of increasing each year. The 2013 Legislature is increasing MA nursing 

home reimbursement rates by 5%. The SAPSNF rate two years from now should reflect this 

healthy increase. 

11 

The HCPM provides “guidance” to county financial workers to assist them in determining 

eligibility for the Minnesota Health Care Programs. Since December of 2006, a searchable 

version of the HCPM has been available on the Internet. As part of the effort to make the manual 

more accessible, it was completely reorganized and renumbered. The most current version of the 

HCPM can be found at: http://hcopub.dhs.state.mn.us/hcpmstd/. Prior sections of the HCPM 

5

usually becomes known in late June of each year. See HCPM § 22.35 for 

updated standards and guidelines as they are announced. 

2. The five-year look-back period required by the Deficit Reduction Act of 

2005 (hereafter "DRA '05”) is now fully phased-in for all uncompensated 

transfers. See HCPM § 19.40.15. The look-back period starts 60 months 

prior to the month of application. For MA applications submitted in June 

of 2013, the look-back period will go back from the date of application in 

June to the corresponding date in June of 2008. HCPM § 19.40.15. 

Uncompensated transfers that occurred prior to June of 2008 do not have to 

be reported in a June 2013 application for MA benefits. 12 The look-back 

period is just a reporting period; not all transfers of assets for less than fair 

value are subject to penalty. 

3. A current transfer of assets for less than fair value will be subject to the 

look-back period if the transferee or the transferee's spouse applies for 

medical assistance benefits within 61 months of the transfer date, 

counting both the month of transfer and the month of application. 

Transfers are caught by the look-back period if made within the month of 

application or the prior 60 months. 

PRACTIVE TIP: To be on the safe side, if the goal is to avoid reporting a transfer, no 

application should be submitted until a full 61-month period has elapsed following the transfer. 

B. COST OF LIVING AND OTHER ADJUSTMENTS 

1. SOME NUMBERS HAVE CHANGED; OTHERS 

HAVE NOT 

Some of the numbers used to determine eligibility for long-term care 13 

(hereafter "LTC") benefits change every year on either January 1, or July 

1, for applications submitted on or after those dates. Other numbers 

are archived and are available through links in each section of the HCPM. 

12 The first date on which an applicant submits an application for medical assistance benefits 

locks-in the first date of the look-back period, even if the first application is subsequently 

withdrawn. No application for medical assistance benefits should ever be submitted without 

first determining the starting date of the potential look-back period. 

13 Long term care (LTC) is care lasting or expected to last 30 days or longer in an institution. 

The term is also applied to care in a home- or community-based setting (HCBS) that lasts or is 

expected to last 30 days or longer. 

6

change only when Social Security payments are adjusted by Cost of Living 

Adjustments (COLA). From 2008 to 2011, these COLA numbers did not 

change. Finally, starting in 2012, these numbers began to change again, as 

shown below. 

2. PERSONAL NEEDS ALLOWANCES FOR SINGLE 

PERSONS 

a. The Clothing and Personal Needs Allowance for an individual in 

a nursing home has jumped from $92 per month, to $94 per month 

for calendar year 2013. 

b. A veteran with no spouse or dependents is allowed a Clothing and 

Personal Needs Allowance of $90 per month at the Minnesota 

Veterans Home. A veteran in a nursing home that takes medical 

assistance gets the benefit of the larger MA Clothing and Personal 

Needs Allowance. See HCPM § 22.45. 

3. COMMUNITY SPOUSE ASSET ALLOWANCES 

a. The basic rule is that an amount equal to one-half of the countable 

resources (assets) 14 owned by a husband and wife, whether 

individually or in common, on the Asset Assessment Date will be 

protected for the community spouse at the time of the other 

spouse's application for medical assistance, subject to minimum and 

maximum amounts. If an application for medical assistance 

benefits is submitted in a year following the year in which the Asset 

Assessment Date becomes locked in place, the community spouse 

will get the benefit of higher minimum and maximum amounts in 

the year of application, if any. See HCPM § 19.45. 

b. The Asset Assessment Date is usually triggered by the first period 

14 A countable resource is any asset other than an excluded asset. Income is treated separately 

and differently than assets. Example of excluded assets are the homestead, one motor vehicle 

used for transportation, household goods, personal goods, and real or personal property used in a 

trade or business, whether or not the resource is considered available. An asset is considered 

“available” if the applicant has both legal authority and actual ability to use the resource for selfsupport. 

Some resources, such as trusts established by a husband or wife containing assets of the 

husband or wife, are counted if trust assets or income can be used for the benefit of the husband 

or wife, and are treated as available even if the resource is not actually available. Only available 

assets are counted at the time of application for benefits. 

7

of institutionalization for the spouse applying for MA-LTC 15 or 

HCBS benefits, which period lasts for 30 days or longer, and which 

occurs at any time since October 1, 1989. If no 30-day or longer 

period of institutionalization in a medical facility (a hospital or 

nursing home or a combination of them) has occurred, the Asset 

Assessment Date can be triggered by receipt of home- or 

community-based services (HCBS) and completion of a Long Term 

Care Consultation (LTCC) screening, 16 in connection with receipt 

of home- or community-based LTC services that would qualify for 

payment under the Alternative Care (AC) or Elderly Waiver (EW) 

programs. 

A continuous period of institutionalization for receipt of home 

and community-based services is established when both of the 

following conditions are met. 

The individual received services that lasted at least 30 

consecutive days that were paid or would qualify for 

payment by the EW or AC programs if the individual 

was otherwise eligible for either program, and receipt of 

the services prevented the individual from residing in an 

LTCF. A licensed provider qualified to provide home 

and community-based services must deliver the services. 

The individual received an LTCC within the past 60 days 

that demonstrated a need for an institutional level of care. 

HCPM § 19.45. 

The Asset Assessment date when home- or community-based 

services are being received is the date of the LTCC screening. See 

HCPM § 19.45. In Manual Letter #52, issued effective July 1, 

2012, DHS clarified that a continuous period of institutionalization 

in a medical facility and receipt of qualifying home- or communitybased 

services can be added together to reach the 30-day period of 

continuous institutionalization. HCPM § 19.45. 

15 MA-LTC is the name given the medical assistance benefits to be provided in a Skilled 

Nursing Facility (SNF), in other words: in a nursing home. 

16 Minn. Stat. § 256B.0911 requires that a county human services agency, on request, must 

provide a home screening to determine the needs of the resident for LTC services. See the 

discussion of the LTCC screening statutes, in Section VII.B.2., of these materials. 

8

PRACTICE TIP: When the Asset Assessment Date is triggered by 30 continuous days of stay in 

a medical facility, the first day of the stay becomes the Asset Assessment Date. When the 30 

days is triggered by receipt of home- or community-based services, the Asset Assessment Date is 

the date of the LTCC Screening. See HCPM § 19.45. When the Asset Assessment Date “is 

based on” receipt of home- or community-based services, HCPM states that the Asset Assessment 

Date is the date of the LTCC screening. Id. In this author’s opinion, any break between 

discharge from a medical facility and the start date of receipt of qualifying home- or communitybased 

services would break the 30 continuous day requirement. 

c. The Maximum Community Spouse Asset Allowance (CSAA) has 

increased from $113,640 for applications submitted in calendar year 

2012, to $115,920 for applications submitted in calendar year 2013. 

To protect the maximum amount of available assets for a 

community spouse for applications submitted in 2012, countable 

resources must equal or exceed $231,840 (formerly $227,280) as 

measured on the Asset Assessment Date. HCPM § 22.40. This 

number will remain in effect for applications submitted in 2012. It 

might change for applications submitted on or after January 1, 

2013, if Social Security payments are again increased by a COLA. 

d. The Minimum Community Spouse Asset Allowance for 2012 

increased from $32,245 in 2012, to $32,890. HCPM § 22.40. To 

protect more than the minimum amount, the husband and wife must 

own more than $65,780 (formerly $64,490) in countable resources 

as measured on the Asset Assessment Date. Like the maximum, 

the minimum will not change, if at all, until January 1, 2013, at the 

earliest. 

e. For applications in 2013, when countable assets on the asset 

assessment date are between $65,780 and $231,840, the 2013 

CSAA will protect available assets in an amount equal to one-half 

of the countable resources measured on the Asset Assessment 

Date. 

4. COMMUNITY SPOUSE INCOME ALLOWANCES 

a. Federal law allows a transfer of income from the MA spouse to the 

Community Spouse if the Community Spouse has income below a 

federal standard. The federal standard is called the Community 

Spouse Income Allowance (CSIA). 

b. The Minimum LTC Community Spouse Income Allowance 

increased on July 1, 2012, from $1,840 to $1,892 for the period 

9

from July 1, 2012, through June 30, 2013. HCPM § 22.45. The 

income allowance is expected to increase on July 1, 2013, for the 

following year. 

c. In calculating the amount of income protected for a community 

spouse, the community spouse's shelter expenses are taken into 

account. See, generally, HCPM § 23.15.10.05. For treatment of 

income, see HCPM Ch. 21. If the Community Spouse’s shelter 

expenses exceed the Basic Shelter Allowance (see below), the 

Community Spouse can qualify for an additional income allowance 

from the income of the MA spouse. 

d. The Community Spouse’s shelter expenses are calculated by adding 

actual monthly expenses for rent or mortgage payments, 

property taxes, homeowners or renters insurance, and condo or 

townhouse association monthly maintenance charges. These 

actual expenses are added to Standard Utility Allowance (see 

below). HCPM § 22.45. 

e. As of October 1, 2012, the Standard Utility Allowance was 

increased from $402 per month to $450 per month if the 

community spouse pays for heating or cooling; $138 (formerly 

$120) if the community spouse has no heating or cooling 

expenses, but pays for electricity; and $37 (no change from the 

previous year) if the community spouse has telephone expenses. 

These utility allowances have nothing to do with the actual 

expenses incurred for these items. HCPM § 22.45. 

f. On July 1, 2012, the Basic Shelter Allowance for a community 

spouse increased from $552 to $568. HCPM § 22.45. The Basic 

Shelter Allowance is expected to increase on July 1, 2013. 

g. If the community spouse's actual shelter expenses for the 

countable expenses exceed the Basic Shelter Allowance, the 

excess, known as the Excess Shelter Allowance, is added to the 

Minimum Income Allowance. This increases the amount of 

income protected for the community spouse, up to the Maximum 

LTC Community Spouse Income Allowance. (see below) HCPM 

§ 22.45. 

h. On January 1, 2013, the Maximum LTC Income Allowance 

increased from $2,841 to $2,898. HCPM § 22.45. The Maximum 

LTC Income Allowance will not increase again until January 1, 

10

2014. 

i. If the community spouse does not have enough income from his or 

her own sources to meet the Community Spouse Income 

Allowance, income can be transferred from the Medical Assistance 

Spouse to the Community Spouse. This transfer is a one-way 

street. It only goes from the Medical Assistance Spouse to the 

Community Spouse. 

j. There is no cap under federal law on the amount of income that a 

community spouse may have and keep. 

IV. 

ACA MAINTENANCE OF EFFORT (MOE) COMING TO END 

A. CASCADING MOES 

1. Since July 1, 2008, Minnesota has been blocked from making 

significant changes in its medical assistance programs by a series of 

federal maintenance of effort (MOE) requirements. 

2. "Maintenance of effort" means that the state, in order to receive 

federal medical assistance matching funds, cannot reduce its efforts 

to provide basic medical assistance benefits to Minnesota residents 

compared to benefits that were available under previous eligibility 

standards, methodologies or procedures. 

3. These maintenance of effort requirements were imposed by the 

American Recovery and Reinvestment Act of 2009 (ARRA), Public 

Law 111-5, 17 the Education, Jobs and Medicaid Assistance Act of 

2010 (EJMAA), 18 and the Patient Protection and Affordable Care 

Act (ACA) of 2010, 19 The current maintenance of effort 

requirement is contained in ACA. 

17 

This law is also called the Stimulus Act, but it should not be confused with the stimulus acts 

passed in the last year of the Bush Administration, the Economic Stimulus Act of 2008, and the 

Emergency Economic Stabilization Act, which created the Troubled Assets Relief Program 

(TARP). 

18 

Pub. L. 111-5. 

19 

Pub. L. 148. 

11

4. As a result of these maintenance of effort requirements, Minnesota 

could not implement any changes in medical assistance eligibility 

standards, methodologies, or procedures under its Medicaid plan 

(including any federal waivers) which were "more restrictive than 

the eligibility standards, methodologies, or procedures, 

respectively, under such plan (or waiver) as in effect on July 1, 

2008." 20 

5. Despite the first maintenance of effort law, the Minnesota 

Legislature, at the request of the Pawlenty Administration, passed a 

number of changes to the medical assistance asset transfer statutes, 

but delayed the effective date of these changes until maintenance of 

effort requirements would no longer apply. These changes will be 

discussed in more detail below. 

6. The CMS provided a fact sheet, which listed the following 

examples of restrictions on eligibility that would violate the MOE: 21 

a. eliminating eligibility groups or sub-groups 

b. instituting or increasing premiums that would restrict, limit, 

or delay eligibility 

c. increasing the stringency of institutional level of care 

determination processes 

d. adopting more restrictive cost neutrality calculations for 

home- and community-based waiver eligibility, reducing 

home- and community-based waiver capacity, or reducing 

or eliminating unoccupied waiver slots 

e. reducing income or asset standards 

f. applying income or asset standards to new groups 

20 

ARRA § 5001. 

21 

See CMS, "American Recovery and Reinvestment Act of 2009 (ARRA) Section 5001: 

Increased Federal Medical Assistance Percentage (FMAP)" factsheet, cited in a memo dated June 

29, 2010, from Randall Chun, Legislative Analyst, to the members of the Minnesota House 

Health Care and Human Services Policy and Oversight Committee and the Minnesota House 

Health Care and Human Services Finance Division for a joint public hearing held on June 30, 

2010 (hereafter "the Chun Memo"). 

12

g. making income or asset methodologies more restrictive 

h. making definitions of blindness or disability more restrictive 

i. adopting more stringent requirements for determining eligibility 

(e.g. increasing the frequency of eligibility 

redeterminations, requiring additional evidence from 

individuals, reducing the time given to individuals to 

response to a request for information) 

B. RESTRICTIONS ON STATE MEDICAL ASSISTANCE CHANGES 

AFTER THE ACA MOE ENDS 

1. Although the ACA MOE may be coming to an end, the State is not free to 

make changes to the Minnesota medical assistance programs without prior 

approval from CMS. Many provisions in the Conference Report on HF 

1233 require federal approval to be implemented. These materials will 

discuss a number of the more important provisions. 

2. Federal approval for changes that are inconsistent with current federal 

statutes can come only through approval of the pending Waiver Requests or 

through new Waiver Requests. Changes that are consistent with current 

federal statutes can only be implemented through CMS approval of State 

Plan Amendments. Changes proposed through Waiver Requests must 

include an opportunity for public comment at both the State and Federal 

levels. Changes proposed through State Plan Amendments do not require 

public comment, but the changes proposed in the coming year would 

require approval through the Waiver Request process because the changes 

are not consistent in many respects with current federal law. 

V. DEATH OF THE TRANSFER/APPLY/DENY STRATEGY 

A. THE 2009 AMENDMENT TO ELIMINATE REDUCTION OF PENALTY 

PERIODS FOR PARTIAL RETURN OF UNCOMPENSATED TRANSFERS 

Laws 2009, Ch. 79, Art. 5, Sec. 21, amending Minn. Stat. § 256B.- 

0595, Subd. 2. 

Under prior law, a penalty period for an uncompensated transfer of assets 

was reduced dollar-for-dollar by a partial return of the transferred assets. This 

interpretation of federal law has been in effect since November of 1993. This 

interpretation allowed a portion of transferred assets to be retained by the 

transferee once a penalty period started to apply. 

13

This was commonly known as the "transfer/apply/deny" strategy by which all 

excess assets were transferred to another family member in one lump sum, the 

individual then applied for medical assistance benefits, and the penalty period 

would then start to run. Once the penalty period started to run, the penalty period 

was shortened by one month for each month after the start of the penalty period, 

and the penalty period was further reduced by returning part of the transferred 

assets each month as the original transferor needed funds to pay medical expenses 

not covered by medical assistance. This strategy allowed the family members to 

keep substantial portions of transferred assets. 

To stop this practice, or at least hinder it, the 2009 amendment proposed to allow a 

penalty period to be reduced or eliminated only if all transferred assets are 

returned within 12 months of the start date of the penalty period. The amendment 

prohibited adjustment of a penalty period unless the full value of the transferred 

assets was returned. 

This change was supposed to be effective for periods of ineligibility established on 

or after January 1, 2011, but was blocked until implementation of the State Plan 

Amendment discussed below. 

Previous policy remains in effect, allowing the transfer/apply/deny strategy, 

for penalty periods imposed prior to December 1, 2011. Previous policy can 

be found by following the “Archive” link in HCPM § 19.40.35. 

B. THE STATE PLAN AMENDMENT 

Here, in pertinent part, is the State Plan Amendment approved by the Chicago 

Regional Office of CMS in September of 2011. The new language is shown by 

underlining: 

State: Minnesota 

Supplement 9 to Attachment 2.6-A 

TN-11-03 Page 3 

Effective: 01/01/11 

Approved: SEP 23 2011 

Supersedes: 06-11, 03-22 and 96-17 

10. Eliminating a Penalty Period Established on or after January 1, 

2011: A penalty period cannot be shortened by a partial return of assets 

used in the calculation of the penalty period. A penalty period can be 

eliminated only if the transferors have all assets that were included in the 

calculation of the penalty period returned to them. An asset will not be 

considered returned unless the value of the asset at the time of return is not 

14

less than the asset’s value on the date of the transfer. A transferee, or joint 

transferee, of an asset received in a form other than cash may return the 

value of the asset in cash if the return is made in an amount equal to the 

value of the asset on the date of the transfer. 

C. CURRENT HCPM GUIDELINES 

Although the State Plan Amendment approved as TN 11-03 was approved 

retroactive to January 1, 2011, 22 DHS chose not to implement the change until 

December 1, 2011, for penalty periods imposed on or after that date. Because of 

the importance of these new policies, the new provisions of HCPM § 19.40.35, 

are reproduced in full, below: 

HCPM 

Chapter 19 - Assets 

Effective: January 1, 2012 

19.40.35 - Imposing a Transfer Penalty 

Transfer Penalty Imposed due to a Transfer 

Some transfer penalties are imposed because the client or the client’s spouse 

transferred assets without receiving adequate compensation. Effective with any transfer 

penalty imposed on or after December 1, 2011, a client can only end a transfer penalty in 

these situations by receiving a full return of the transferred assets. Do not redetermine a 

transfer penalty if assets are partially returned. A transfer penalty is imposed on the date 

the agency calculates a transfer penalty and sends the client a notice regarding the penalty 

period. (emphasis added) 

Note: Assets, in this context, refers to both income and resources of the client or 

the client’s spouse. 

The requirement that a client receive a full return of the transferred assets in order 

to end a transfer penalty applies after a transfer penalty is imposed; continue to follow the 

standard steps in processing a transfer when determining if a client is subject to a transfer 

penalty. Take into account any compensation the client received when determining the 

amount of an uncompensated transfer prior to imposing a transfer penalty. 23 

Example: 

22 Since the State Plan Amendment approved as TN 11-03 was approved retroactive to January 

1, 2011, the request for approval must have been submitted by the Pawlenty Administration 

sometime prior to January 2011. 

23 In the hearing on the Temporary Restraining Order requested in the Ellis case, described in 

more detail below, the attorney for the Commissioner of Human Services clarified that MA 

would take into account, and give credit for, all compensation (return of value) received by the 

applicant or spouse prior to actual imposition of a penalty period. 

15

Ronald applied for MA. He transferred $40,000 to his son within lookback 

period. Ronald received $15,000 in compensation from his son. 

Action: 

Take into account the compensation received by Ronald when processing the 

transfer. The uncompensated amount of the transfer is $25,000. If Ronald is otherwise 

eligible for MA payment of LTC services, impose a transfer penalty based on the 

uncompensated amount of the transfer. Once imposed, Ronald can only end his transfer 

penalty by receiving a full return of the transferred assets ($25,000). 

Refer to the archived section of the manual for the policy on return of assets for 

transfer penalties imposed prior to December 1, 2011. 

Clarification of Full Return 

A transfer penalty cannot end unless the transferor (s) receives a full return of the 

transferred assets. When the transferee is returning the same transferred asset, the value of 

the asset at the time of the return must be equal to or greater than the value of the asset at 

the time of the transfer in order to be considered a full return. (emphasis added) 

For non-cash transfers, the transferee has the option to substitute a cash payment 

in exchange for the return of the transferred asset. The amount of the cash payment must 

be equal to or greater than the uncompensated amount used to calculate the transfer 

penalty. If the value of the transferred asset has decreased or the transferee no longer has 

the transferred asset, the only way the transfer penalty can end is if the transferee provides 

a cash payment to the transferor. A transferee cannot substitute a non-cash asset in 

exchange for the transferred asset. (emphasis added) 

In order to return transferred assets, the transferee must make the returned asset or its cash 

equivalent available to the transferor. It is available if the transferor has both the legal 

authority and the actual ability to use the asset or to convert it to cash. A direct payment of 

the transferor’s obligations by the transferee (such as payment of his or her nursing home 

bill) is not a return of transferred assets because the assets are never actually available to 

the transferor. 24 (emphasis added) 

Example: 

Abigail is married to Bruce. Abigail has a transfer penalty because of the 

following uncompensated transfers that were made in the lookback period: 

Abigail removed herself as an owner from a parcel of land at 101 Main 

Street she co-owned with her sister. Bruce was not an owner of the parcel of land. 

The value of the land at the time of the transfer was $50,000. The uncompensated 

24 This is a major change of policy. Previous guidelines allowed the recipient of transferred 

assets to make direct payments to a nursing home or home care provider and receive credit for 

return of value to the transferor. The new policy also seems to require that the transferee, 

rather than some other family member, must return the transferred value to the transferor. To 

be on the safe side, return of transferred value should follow the same path back as it followed 

when it was transferred. 

16

amount of the transfer was $25,000. The land is now valued at $40,000. 

Bruce transferred 100 shared of XYZ stock to his granddaughter. 

Abigail was not an owner of the stock. The value of the 100 shares of stock at the 

time of the transfer was $20,000. The uncompensated amount of the transfer was 

$20,000. The 100 shares of stock are now valued at $25,000. 

Abigail and Bruce transferred their homestead at 789 Elm Street to their 

son. They both owned the home. The value of the home at the time of the transfer 

was $175,000. The uncompensated amount of the transfer was $150,000 because 

the couple received some compensation for the home. The home is now valued at 

$200,000. 

Action: 

In order to end the transfer penalty, all of the following transactions 

must occur 

1. Abigail's sister must give Abigail $25,000. Abigail's sister cannot add 

her back as a co-owner of the land in order to end the transfer penalty 

because the value of the land has decreased. 

2. Bruce's granddaughter can either transfer back 100 shares of XYZ 

stock or give Bruce $20,000. 

3. Abigail and Bruce's son can either transfer back the homestead at 789 

Elm Street to Abigail and Bruce or give Abigail and Bruce$150,000. 

Verification Requirements 

A client must verify all of the following before a transfer penalty can end: 

The transferee(s) returned all of the transferred assets or their cash 

equivalent to the transferor(s). 

The value of the returned asset(s) at the time of the return is 

equal to or greater than the value of the asset(s) at the time of the transfer. 

Ending the Transfer Penalty 

The transfer penalty cannot end unless a client has verified that all transferees 

have returned all transferred assets or their cash equivalent. Upon receipt of the 

verification, end the transfer penalty beginning the first of the month following the month 

of the full return. 

Example: 

Carol received a Long-Term Care Consultation (LTCC) on December 3 that 

documented she needs an institutional level of care. She applied for MA that same day. 

She was determined eligible for basic MA but ineligible for EW because of a transfer 

penalty. Carol gave her son $18,000 within her lookback period and did not receive 

adequate compensation. She has a 3.37 month transfer penalty that began December 1. On 

January 19, Carol’s authorized representative provides verification that Carol received a 

17

full return of the transferred assets on January 12. 

Action: 

End the transfer penalty effective February 1. 

Effect of Returned Income or Assets on Eligibility for MA 

Treat the transfer and subsequent return of an asset as a trust-like device. 

Consider the asset to have been available to the transferor from the point at which the 

transfer occurred. 

For people on MA, evaluate the returned asset following standard guidelines. 

Excess countable assets are a barrier to ongoing eligibility. If an enrollee has excess 

countable assets, close MA with timely notice. Continued eligibility is possible if an 

enrollee reduces the excess countable assets before the effective date of closing. 

For people enrolled in MA for months after the transfer occurred, follow standard 

program guidelines for determining overpayments. 

Example: 

Douglas entered an LTCF on December 5, and applied for MA the same day. He 

transferred $20,000 to his grandson within his lookback period and did not receive 

adequate compensation. Douglas was determined eligible for basic MA but ineligible for 

MA payment of LTC services. On December 28 you impose a 3.75 month penalty with a 

begin date of December 1. Douglas provides verification on February 13 that his grandson 

returned the $20,000 to him on February 10. 

Action: 

End the transfer penalty effective March 1. Consider the $20,000 to have been available to 

Douglas from the date of the transfer. Therefore, he had excess assets for the months of 

December, January and February. Determine any MA overpayments for those months. 

Close MA effective March 1 for excess assets. Inform Douglas that MA can continue if he 

reduces the excess countable assets before the effective date of closing. 

Eligibility for MA Payment of LTC Services 

A client is not automatically eligible for MA payment of LTC services upon the 

end of a transfer penalty. Ending the transfer penalty only eliminates a barrier for MA 

payment of LTC services identified in a previous request. When a transfer penalty ends, 

determine if the client currently meets all eligibility requirements for MA payment of LTC 

services. 

People not enrolled in MA when the transfer penalty ends must reapply 

for MA if it is outside the application processing period associated with the last 

completed application 

People enrolled in MA when the transfer penalty ends must submit a 

MHCP Request for Payment of Long-Term Care Services (DHS-3543) if they 

had a gap of one calendar month or more between the date the worker imposed 

18

Example: 

the transfer penalty and the date of the request for MA payment of LTC services. 

This is a continuation of the Douglas example above. On February 28, Douglas 

informs you that he reduced his excess countable assets by paying outstanding obligations, 

including his LTCF charges for the months of December, January and February. He 

provides verification that the value of his assets is now within the MA asset limits. 

Action: 

Reopen MA. Send Douglas an MHCP Request for Payment of Long-Term Care 

Services (DHS-3543) in order to determine eligibility for MA payment of LTC services. If 

Douglas meets the eligibility requirements, MA payment of LTC services can start March 

1. 

VI. 

AVOIDING PROBLEMS WITH THE NEW ASSET TRANSFER POLICIES 

A. Prove that a transfer was for fair value. 

B. Prove that the transfer is exempt from penalty. See the penalty exceptions in 

Minn. Stat. § 256B.0595. subds. 3 and 4. 

C. Return all uncompensated transfers prior to applying for medical assistance or, 

if an application already has been submitted, return all uncompensated transfers 

prior to receiving a Notice of Action to impose a penalty period. 

D. If a penalty period is imposed before all uncompensated transfers have been 

returned, appeal the Notice of Action. This will keep the application process 

pending and allow additional time to return additional uncompensated value. 

E. Apply for a hardship waiver. See Minn. Stat. § 256B.0595, subds. 3 and 4. 

F. Contact the author of these materials to discuss whether your case might make a 

good case to challenge the new policies in court. 

VII. THE 2009 AMENDMENTS WAITING FOR JANUARY 1, 2014 TO BECOME 

EFFECTIVE 

A. REDUCTION OF EXCESS ASSETS IN MONTH OF APPLICATION 

Laws 2009, Ch. 79, Art. 5, Sec. 18, amending Minn. Stat. § 256B.056, Subd. 

3d 

Under current law, if an applicant is eligible for benefits by the last day of the 

month and applies for medical assistance benefits by the last day of the month, the 

19

applicant is eligible for benefits back to the first day of the month. That is current 

month coverage, not retroactive coverage. Retroactive coverage is coverage for a 

month prior to the month of application. Under current law, if there are excess 

assets in the month of application, 25 they can be reduced in any way, which does 

not cause a period of ineligibility for benefits. This means that excess assets can 

be reduced on anything for value up to the day before the day of application for 

benefits. This allows the excess assets to be used to pay medical expenses for 

months prior to the month of application, credit card debt, household expenses and 

other liabilities. This change continues to be blocked by the ACA MOE. The 

amendment would make clear that excess assets in the month of application could 

be used only to pay bills incurred for health services in the month of application or 

the retroactive period, if retroactive coverage is requested. If current coverage is 

requested, excess assets could no longer be used to establish a funeral account (a 

separate bank account designated for funeral and holding no more than $1,500) 

and the remaining excess assets could be used only to pay bills for health services 

incurred during the 45 or 60 day period required by Rule 9505.0090 for the 

processing of an application which would otherwise be paid by medical assistance. 

This change, if implemented, would require excess assets to be reduced prior to 

the end of the month before the month of application if they are needed to pay 

other bills. Excess assets in the month of application could only be used to relieve 

the medical assistance program of expenses it otherwise would be required to pay. 

B. LIMITING USE OF CURRENT INCOME TO PAY OLD MEDICAL 

EXPENSES 

Laws 2009, Ch. 79, Art. 5, Sec. 20, amending Minn. Stat. § 256B.0575 

Federal law allows a recipient's current income to be used to pay "necessary 

medical or remedial care recognized under State law but not covered under 

the State plan . . . subject to reasonable limits the State may establish on the 

amount of these expenses." 42 U.S.C. 1396a(r)(1)(A)(ii). In 2007, the 

University of St. Thomas Law School Legal Aid Clinic forced Hennepin County to 

25 

Several counties have misapplied the concept of "excess assets." Excess assets are determined 

as of the date of application for medical assistance. Excess assets do not exist prior to the 

date of application. Some counties treat uncompensated transfers made in the month of 

application but prior to the application date as excess assets, and delay the start date of benefits to 

the first day of the month following the month of application. If an applicant meets all MA 

eligibility criteria by the last day of the month, eligibility starts on the first day of that month, and 

the penalty period for any uncompensated transfers during the look-back period, including such 

transfers in the month of application, start on the first day of the same month. See the Decision 

of State Agency in Appeal of D.E. for Medical Assistance Long-term Care, cited and discussed 

earlier in these materials. 

20

allow a recipient's current income to be used to pay nursing home expenses 

incurred in months prior to the start of the recipient's eligibility for benefits. In 

response to this case, DHS persuaded the Legislature to amend Minn. Stat. § 

256B.0575 to define "reasonable medical expenses" as expenses incurred only 

during current periods of medical assistance eligibility, thereby circumventing the 

success of the Legal Aid Clinic. In 2009, the same statute was amended, effective 

July 1, 2009, to further restrict use of current income "to expenses that were not: 

(1) for long-term care expenses incurred during a period of ineligibility . . . ; (2) 

incurred more than three months before the month of application associated with 

the current period of eligibility; (3) for expenses incurred by a recipient that are 

duplicative of services that are covered under chapter 256B; or (4) nursing facility 

expenses incurred without a timely assessment as required under section 

256B.0911 [a long-term care consultation screening prepared by the appropriate 

county workers]." 

These new restrictions, as well as the previous ones, appear to stretch the 

meaning of the language in 42 U.S.C. 1396a(r)(1)(A)(ii), cited above. CMS has 

not approved either 3) or 4), described above. 

C. INCREASING NURSING FACILITY LEVEL OF CARE CRITERIA 

Laws 2009, Ch. 79, Art. 8, Secs. 1-5, amending Minnesota Statutes, §§ 

144.0724, subds. 2, 4, 8 and by adding new subdivisions 11 and 12, respectively. 

Long Term Care Realignment Section 1115 Waiver Request, November 

21, 2012 

Reform 2020 Waiver Request, November 21, 2012 

1. In 2009 the Legislature embarked on a new strategy to control growth in 

medical assistance expenditures. Federal law since the 1980's has required 

Pre-Admission Screenings prior to admission of potential nursing home 

residents. The purpose of the screenings, as originally enacted by Congress, 

was to prevent admission of potential nursing home residents who 

should receive services in other more appropriate facilities, such as intermediate 

care facilities for persons with developmental disabilities. 

3. The new strategy required development of more restrictive criteria for 

admission to a nursing facility to prevent admission of residents at the 

lowest level of needed care. The persons who would otherwise be admitted 

to a nursing home but who under this new strategy would not qualify 

for admission to a nursing home would be diverted into a new program to 

21

e called the “Essential Community Supports” (ECS) program. As a 

direct effect of not being eligible for nursing home placement, the person 

would not be eligible for payment of medical assistance benefits for nursing 

home services or waiver programs such as Elderly Waiver (EW), and 

Community Alternatives for Disabled Individuals (CADI). 26 The waiver 

program participants must be at risk of nursing home placement. By 

raising nursing facility level of care criteria, a certain number of 

individuals by definition would no longer be at risk of nursing home 

placement. The impact of this change, and the resulting savings, would 

filter through all the home- and community-based waiver programs. 

4. Here are the criteria that would be applied when the new NF LOC 

becomes effective, as provided in Minn. Stat. § 144.0724: 

Minn. Stat. 144.0724 (no amendments in 2013) 

Subd. 11.Nursing facility level of care. 

(a) For purposes of medical assistance payment of long-term care 

services, a recipient must be determined, using assessments 

defined in subdivision 4, to meet one of the following nursing 

facility level of care criteria: 

(1) the person requires formal clinical monitoring at least 

once per day; 

(2) the person needs the assistance of another person or 

constant supervision to begin and complete at least four of the 

following activities of living: bathing, bed mobility, dressing, 

eating, grooming, toileting, transferring, and walking; 

(3) the person needs the assistance of another person or 

constant supervision to begin and complete toileting, transferring, 

or positioning and the assistance cannot be scheduled; 

(4) the person has significant difficulty with memory, 

using information, daily decision making, or behavioral needs 

that require intervention; 

(5) the person has had a qualifying nursing facility stay of 

at least 90 days; 

(6) the person meets the nursing facility level of care 

criteria determined 90 days after admission or on the first 

quarterly assessment after admission, whichever is later; or 

(7) the person is determined to be at risk for nursing 

26 For the list of other HCBS programs, see Footnote 2, above. 

22

facility admission or readmission through a face-to-face long-term 

care consultation assessment as specified in section 256B.0911, 

subdivision 3a, 3b, or 4d, by a county, tribe, or managed care 

organization under contract with the Department of Human 

Services. The person is considered at risk under this clause if the 

person currently lives alone or will live alone upon discharge and 

also meets one of the following criteria: 

(i) the person has experienced a fall resulting in a 

fracture; 

(ii) the person has been determined to be at risk of 

maltreatment or neglect, including self-neglect; or 

(iii) the person has a sensory impairment that 

substantially impacts functional ability and maintenance of 

a community residence. 

(b) The assessment used to establish medical assistance 

payment for nursing facility services must be the most recent 

assessment performed under subdivision 4, paragraph (b), that 

occurred no more than 90 calendar days before the effective date 

of medical assistance eligibility for payment of long-term care 

services. In no case shall medical assistance payment for longterm 

care services occur prior to the date of the determination of 

nursing facility level of care. 

(c) The assessment used to establish medical assistance 

payment for long-term care services provided under sections 

256B.0915 and 256B.49 and alternative care payment for services 

provided under section 256B.0913 must be the most recent faceto-face 

assessment performed under section 256B.0911, 

subdivision 3a, 3b, or 4d, that occurred no more than 60 calendar 

days before the effective date of medical assistance eligibility for 

payment of long-term care services. 

5. DHS has estimated that the following numbers of individuals who 

otherwise would qualify for HCBS services would lose eligibility. 27 

Average No. Losing 

Eligibility per Month 

SFY 2014 SFY 2015 

27 

These estimates are taken from Appendices IX of the Long Term Care Realignment Section 

1115 Waiver Request dated November 21, 2012, the full text of which is available at: 

https://edocs.dhs.state.mn.us/lfserver/Public/DHS-6647-ENG. 

23

NF (28) (166) 

EW (1,630) (3,396) 

CADI (271) (554) 

AC (136) (248) 

TOTALS (2,064) (4,364)) 

The NF LOF realignment will not affect Brain Injury (BI) program 

eligibles because DHS believes that all BI eligibles will meet the increased 

level of care criteria. 

6. In place of medical assistance, some disqualified individuals would receive 

benefits under the Essential Community Supports (ECS) Program. The 

ECS program would provide specific services for persons age 65 and older 

who are not eligible for medical assistance but meet Alternative Care (AC) 

financial eligibility criteria. ECS will provide up to $400 per person per 

month for an assessed need for care coordination and one or more of four 

services which are deemed most needed to maintain independence in the 

community: personal emergency response systems, homemaker services, 

chore services, and caregiver support and education. Nutrition services, 

including home-delivered meals and congregate dining, would be available 

to ECS participants through the Older Americans Act Title III funding. 28 

Conference Report amendments would add a one-time benefit of $600 in a 

twelve month period to provide case management services to help a 

person's transition to ECS. 

7. To implement the new strategy, which became known as the "NF LOC 

Initiative," the State first had to develop objective criteria for determining 

level of need. Prior screenings relied mostly on the subjective opinions of 

physicians and other screeners to determine whether an individual needed 

nursing home placement. 

8. To implement the new strategy, which was originally supposed to take 

effect on January 1, 2011, 29 the Aging and Adult Services Division and the 

Disability Services Division of the Minnesota Department of Human 

Services convened a stakeholder work group composed of representatives 

of various lead agencies and interest groups. 

28 DHS Essential Community Supports Program Fact Sheet dated September 26, 2010. 

29 The implementation date for the NF LOC changes has been delayed every year since its 

original passage. The change is now supposed to become effective on or after July 1, 2012, in 

recognition of the delay in receiving approval of the requested waiver. Laws of 2012, Ch. 

247, Art. 4, Sec. 52 (SF 2294). 

24

The NF LOC Initiative has been hard at work since 2009, providing input 

regarding referral protocols and roles of lead agencies, financial workers, 

Area Agencies on Aging and providers in the implementation of the NF 

LOC changes and the related "Essential Community Supports" program; 

provide input regarding the development of resource information and 

training for lead agencies to maximize referral protocols and options for 

individuals who do not meet public program financial eligibility, level of 

care, or other service eligibility criteria; and provide feedback on consumer 

and provider information materials related to the long-term care choices of 

private pay individuals and their families. 

9. Since a primary purpose of the NF LOC Initiative is to reduce eligibility 

for medical assistance benefits, it could not be implemented while a MOE 

freeze remains in effect, unless the pending waiver request is approved by 

CMS. Once the current MOE freeze ends, there will be one less obstacle 

to approval of the waiver request by CMS. No word on the current status 

of this waiver request is available as of May 22, 2012. The NF LOC 

request is also included in the Reform 2020 Waiver Request, discussed 

below. 

VIII. THE REFORM 2020 PATHWAYS TO INDEPENDENCE WAIVER 

Laws 2011, 1 ST Spec. Sess., Ch. 9, Art. 7, Sec. 53. 

This session law directed the Commissioner of Human Services to develop a proposal to 

the U.S. Department of Health and Human Services to include any necessary waivers, 

state plan amendments, requests for new funding or realignment of existing funds, and any 

other federal authority that may be necessary for the projects identified in the subdivisions 

of this section. 

The list included projects to: 

(1) Develop health care delivery demonstration projects; 

(2) Promote personal responsibility and healthy outcomes 

(3) Encourage utilization of high quality, cost-effective care; 

(4) Limit assets for certain adults without children (the early expansion of 

medical assistance benefits to adults without children contains no asset 

limits); 

(5) Empower and encourage work, housing and independence; 

(6) Redesign home- and community-based services; 

(7) Coordinate and streamline services for people with complex needs, 

including those with multiple diagnoses of physical, mental, and 

developmental conditions; 

25

(8) Implement nursing home level of care criteria; 

(9) Improve integration of Medicare and Medicaid; 

(10) Provide intensive residential treatment services; 

(11) Seek federal Medicaid matching funds for Anoka Metro Regional 

Treatment Center; 30 and 

(12) Seek waivers to allow Medicaid eligibility for children under age 21 

receiving care in residential facilities 

The full text of the Reform 2020 Waiver Request as re-submitted to CMS on 

November 21, 2012, is available at: 

https://edocs.dhs.state.mn.us/lfserver/Public/DHS-6535E-ENG 

No further information is available regarding the status of the request. Many of the 

provisions in the Conference Report depend on approval of this Waiver Request. 

See the discussion of amendments contained in the Conference Report below. 

IX. 

OTHER MA PROVISIONS NOT CHANGING IN THE PAST YEAR 

A. NO CHANGE IN TREATMENT OF GIFTS TO RELIGIOUS 

GROUPS, CHARITIES, AND FAMILY MEMBERS 

1. All uncompensated transfers made on or after February 8, 2006, and 

during the applicable look-back period must now be reported to the county 

agency when an application for medical assistance is submitted, and the 

transfers will cause a period of ineligibility for long term care benefits 

(nursing home or home- or community-based services) unless the applicant 

can establish by convincing evidence that the transfer was made for a 

permitted purpose or exclusively for a purpose other than becoming 

eligible for medical assistance or maintaining eligibility. 42 U.S.C. § 

1396p(c); Minn. Stat. § 256B.0595. There is no longer an exception for 

small transfers. 

2. The HCPM § 19.40.05.05 discusses the penalty exception for transfers 

made for a purpose other than to become eligible for medical assistance. 

HCPM § 19.40.05.05 provides the following guidance for county financial 

workers (lettering in the original): 

j. Presume that an uncompensated transfer was made for the purpose of obtaining or 

maintaining MA eligibility unless the client provides convincing evidence that it 

30 Rep. Jim Abeler, Chair of the House Health and Human Services Committee, represents 

District 48B, which includes the City of Anoka. 

26

was not [sic] made exclusively for another reason. Uncompensated transfers do 

not result in a transfer penalty if the client can show that the transfer was made 

exclusively for a purpose other than to obtain or maintain eligibility for MA 

payment of LTC services. 

k. Always treat uncompensated transfers made for the following reasons as if they 

were made for the purpose of establishing or maintaining MA eligibility: 

(1) Preserving an estate for heirs; 

(2) Avoiding probate; 

(3) Reducing taxes. 

l. Give clients the opportunity to provide convincing evidence that an 

uncompensated transfer was made exclusively for a purpose other than qualifying 

for MA payment of LTC services. Verbal assurances and statements signed by 

the client are not sufficient without further documents. Evaluate each situation on 

a case-by-case basis. 

3. HCPM § 19.40.05.05 states that convincing evidence that a transfer was 

exclusively for another purpose includes: 

a. Proving that remaining assets would be below the applicable asset limit even if the 

transferred asset had been retained. This exception would apply only if assets 

remained below asset limits at all times from the month in which the transfer 

occurred through the month in which the person request MA payment for longterm 

care services. 

b. Providing documentation that the transfer was beyond the client's control, such as 

a court-ordered payment. 

c. Demonstrating that the need for long-term care could not have been anticipated at 

the time of the transfer (e.g. George, age 44, in good health, pays for daughter's 

wedding and then suffers a stroke which could not have been anticipated). 

d. Demonstrating an unanticipated loss of assets or income which reduced available 

assets to eligibility limits. 

e. Demonstrating a well-established history of making regular contributions to a 

religious or charitable nonprofit organization to which the client belongs. 

f. Providing proof of intending to receive fair market value (The HCPM provides 

no guidance as to how this exception could be proven). 

4. In 2009 the State Agency issued a decision in Appeal of D.E. for Medical 

27

Assistance Long-term Care. 31 This decision involved an appeal from a 

denial of medical assistance benefits as a result of uncompensated transfers 

to the applicant's church and various family members covering the period 

from February 8, 2006, to November of 2008. The applicant provided 

evidence of a series of gifts over the 17 years prior to her application for 

benefits. The county agency disregarded transfers made prior to February 

8, 2006, and all gifts to the applicant's church, but imposed a penalty 

period for $8,530.00 for gifts to family members during the look-back 

period. Despite the Appellant's argument that a pattern of gifting birthday 

and Christmas presents to family members over a period from 1991 to the 

date of application proved that the gifts to family members after February 

8, 2006, were made exclusively for a purpose other than to become eligible 

for medical assistance benefits, DHS Judge Amy Lynne Hermanek 

concluded that the appellant failed to produce evidence "to meet the 

especially high burden of proof imposed by the law." 32 The Appellant contended 

that when gifts to family members were made, the Appellant "lived 

frugally on her social security and savings, and that the insubstantial 

individual gifts did not substantially reduce her overall wealth given her 

minimal spending on her own needs, and that she was not anticipating 

nursing home placement in any case." In the Judge's Conclusions of Law, 

she noted that "[I]t cannot be said that the need for long-term care 

services was completely unanticipated. . . . . The evidence before me 

does not conclusively establish that the gifting was exclusively for 

another purpose, regardless of the clear history of the gifting. 

Therefore, the $8530 in family gifts made during the period February 

8, 2006 through October 2008 was properly counted by the county 

agency as an improper transfer." 

B. START DATE OF PENALTY PERIOD REMAINS THE 

SAME BUT PROBLEMS PERSIST 

31 

To locate this decision on the Internet do a computer search for "Fair Hearings Decision 

Database Minnesota." In the search window enter "19.40.05." and search dates from 3/01/09 to 

5/30/09. The search will locate Appeal I.D. No. 39750. Click on "View Appeal." 

32 

See Minn. Stat. 256B.0595, Subds. 1, 3, and 4, which establish that any transfer of assets 

for less than fair market value is presumed to be improper and subject to penalty unless the 

applicant furnishes convincing evidence to establish that the transfer was exclusively for another 

purpose. This is the same standard of proof which applies to all eligibility criteria for medical 

assistance benefits. 

28

1. Prior to February 8, 2006, the penalty period for an uncompensated 

transfer began on the first day of the month after the month in which the 

transfer occurred. Minn. Stat. § 256B.0595, Subd. 2. 

2. For uncompensated transfers made on or after February 8, 2006, the 

penalty period does not start until the later to occur of the first day of the 

month in which the transfer was made, or on the date on which an 

individual (a) has applied for medical assistance; (b) is eligible for medical 

assistance benefits without regard to the uncompensated transfers; and (c) 

is receiving institutional level of care, either through home- or communitybased 

programs or in a nursing home. 33 

3. In some counties, there continues to be a problem getting the correct start 

date of the penalty period when an individual applies for Elderly Waiver 

(EW) benefits after making an uncompensated transfer. In these counties, 

the county refuses to open the case and start the penalty period if the 

applicant is disqualified from receipt of home- or community-based 

services because of an uncompensated transfer. A penalty period 

disqualifies the applicant from receipt of LTC benefits. LTC benefits are 

benefits for nursing home care or home- or community-based services. 

The Elderly Waiver program pays for home- or community-based services. 

These counties take the position that if the applicant cannot receive 

benefits, they cannot open the case or start the penalty period. This 

practice is wrong. It clearly violates the provisions of 42 U.S.C. § 

1396p(c) after amendment by DRA '05. The Agency Decision in the 

Appeal of D.E. for Medical Assistance Long-term Care, cited above, also 

discusses the start date of a penalty period when the applicant made an 

uncompensated transfer in the same month as application. In that case, the 

applicant gave $34,000 to her son by a check which cleared her bank on 

November 12, 2008. The application was submitted on November 12, 

2008. After the check cleared, the applicant's available assets were reduced 

to the $3,000 asset eligibility limit. The county imposed a penalty 

period for this gift and the gifting to family members in prior months, to 

start on the first day of the month following the start date of medical 

assistance eligibility. The Agency Decision reversed the county's start day 

and ordered that the penalty begin on the first day of the month of application 

on the grounds that the applicant met all eligibility criteria in the 

month of November without regard to the uncompensated transfers. 

33 

Institutional level of care is care delivered in a nursing facility or care delivered through 

home or community-based waivered services, such as services eligible for payment through the 

Alternative Care (AC) program or the Elderly Waiver (EW) program. 

29

C. UNDUE HARDSHIP WAIVERS 

1. As transfer penalties become more difficult to avoid or minimize, the 

possibility of obtaining a hardship waiver has become much more 

important. 

2. DRA '05 clarified the requirement that States make hardship waivers 

available to applicants who have made uncompensated transfers during the 

look-back period. 42 U.S.C. § 1396p(d), after amendment by DRA '05, 

now reads as follows: 

(d) Availability of Hardship Waivers--Each State shall 

provide for a hardship waiver process in accordance with 

section 1917(c)(2)(D) of the Social Security Act (42 U.S.C. 

1396p(c)(2)(D)-- 

(1) under which an undue hardship exists when application 

of the transfer of assets provision would deprive the 

individual-- 

(A) of medical care such that the individual's 

health or life would be endangered; or 

(B) of food, clothing, shelter, or other 

necessities of life; and 

(2) which provides 

for-- 

(A) notice to recipients that an undue 

hardship exception exists; 

(B) a timely process for determining whether 

an undue hardship waiver will be granted; 

and 

(C) a process under which an adverse 

determination can be appealed. 34 

3. The federal requirement was implemented by amendments to Minn. Stat. § 

256B.0595, subd. 4, clause (5). 

4. DRA '05 also included provisions which allow nursing homes, for the first 

time, to apply for hardship waivers on behalf of nursing home residents. 

See 42 U.S.C. § 1396p(c)(2)(D). 

5. As a practical matter, hardship waivers are not usually granted unless the 

applicant is facing eviction from a nursing home. "Undue hardship" is 

defined in the federal "State Medicaid Manual" at Section 3258.10(C)(5) as 

34 

Deficit Reduction Act, Pub. L. No. 109-171, § 6011(d). 

30

follows: 

[Undue hardship] exists when application of the 

transfer of assets provisions would deprive the 

individual of medical care such that his/her health or 

his/her life would be endangered. Undue hardship 

also exists when application of the transfer of assets 

provisions would deprive the individual of food, 

clothing, shelter or other necessities of life. Undue 

hardship does not exist when application of the 

transfer of assets provisions merely causes the 

individual inconvenience or when such application 

might restrict his or her lifestyle but would not put 

him/her at risk of serious deprivation.... You [the 

state] have considerable flexibility in deciding the 

circumstances under which you will not impose 

penalties under the transfer of assets provisions 

because of undue hardship.... 

X. THE MINNESOTA CASES INTERPRETING FEDERAL RESTRICTIONS ON 

RECOVERY OF MA BENEFITS CORRECTLY PAID 

A. ESTATE OF BARG 

Minnesota appellate courts have issued recent decisions involving Medical 

Assistance estate recovery issues. The Barg case is the starting point for any 

estate recovery claim made against the estate of a surviving spouse for Medical 

Assistance benefits paid on behalf of the predeceased spouse who died prior July 

1, 2009. In re: Estate of Francis E. Barg, 752 N.W.2d (Minn. 2008), reh’g 

denied (July 21, 2008), cert. denied sub nom. Vos v. Barg, 129 S.Ct. 2859 

U.S. 2859 (2009). Attorney Thomas J. Meinz of Princeton, MN, represented 

the Estate. 

B. ESTATE OF GROTE 

The Grote court upheld recovery against the surviving spouse’s estate when the 

husband and wife owned property jointly at the time of the predeceased Medical 

Assistance recipient’s death. In re: Estate of Sylvester G. Grote, 766 N.W. 2d 

82 (Minn. Ct. App. 2009). The court held that the full value of the homestead 

was subject to recovery if the property was still in joint tenancy when the 

recipient spouse died. The parties did not request review by the Minnesota 

Supreme Court. The Grote case might have been wrongly decided, but an 

appeal to the Minnesota Supreme Court would be necessary to overturn it. 

31

Attorney Sally K. Mortenson of Burnsville, MN, represented the Estate. 

PRACTICE TIP: To avoid the result in the Grote case, do not allow marital 

assets to remain in joint tenancy between husband and wife once one of them 

starts receiving medical assistance benefits. Transfer all assets to the 

community spouse as soon as possible, except the checking account where the 

recipient’s Social Security and other income is deposited. There is no penalty 

for transferring assets between husband and wife at any time. 42 U.S.C. §§ 

1396p(c)(2)(A)(i) and 1396p(c)(2)(B)(i). Make sure this happens before the 

MA recipient spouse dies or the Grote case will apply. 

C. ESTATE OF PERRIN 

The Perrin court upheld the district court’s reliance on the Barg case and the 

doctrine of collateral estoppel to deny a Medical Assistance claim asserted under 

Minnesota’s spousal liability statute (Minn. Stat. § 519.05). In re: Estate of 

Richard L. Perrin, 796 N.W.2d 175 (Minn. Ct. App. 2011), review denied 

(Minn. June 28, 2011). Attorney David E. Culbert of Minneapolis, MN, 

represented the Estate. 

D. ESTATE OF RUDDICK 

The facts in the Estate of Ruddick were not disputed. Wife died in March 2008 

after receiving over $165,000 in Medical Assistance benefits. Husband died in 

January 2010 and the homestead was the sole probate asset. Husband received 

no Medical Assistance benefits. At wife's death, she and husband jointly owned 

a bank account with a balance of less than $3,000. The homestead was owned 

solely by the husband at the wife's death. The Ramsey County collection unit 

filed a claim pursuant to Minn. Stat. §§ 256B.15 and 519.05 against the 

husband's estate for the entire amount of Medical Assistance provided to the 

wife. The Minnesota Department of Human Services intervened of right as a 

party to the case. The Personal Representatives partially allowed the Medical 

Assistance claim in the amount $840.64, the net amount that transferred to 

husband at the wife's death after subtracting wife's funeral and burial expenses. 

This partial allowance was made based on the holdings of In re Estate of Barg, 

752 N.W.2d 52 (Minn. 2008). 

The parties stipulated to the facts and the Estate filed a motion for summary 

judgment. The County claimed that Minnesota's spousal liability statute, Minn. 

Stat. § 519.05, independently authorized a Medical Assistance claim against the 

surviving spouse's estate. The Estate claimed that the County was collaterally 

estopped from re-litigating whether a claim could be asserted under Minn. Stat. 

§ 519.05 because the issue had already been litigated and decided against such a 

32

claim in both Estate of Barg and In re Estate of Perrin, 796 N.W.2d 175 (Minn. 

App. 2011). The County argued that the 2009 amendment to Minn. Stat. § 

519.05 referencing claims under Minn. Stat. § 256B.15 had not been previously 

re-litigating a claim pursuant to Minn. Stat. § 519.05 based on the doctrine of 

collateral estoppel. The County claimed that the issues were not identical to 

Perrin because the Perrin court did not address the 2009 amendment. The 

District Court determined that the 2009 amendments were irrelevant because at 

the time of their enactment the decedent was single and not married, holding 

that the Ruddick marriage ended at the death of the wife in 2008. 

Even if collateral estoppel did not apply, the District Court addressed two 

alternative holdings. First, because the wife died prior to July 1, 2009, the 

District Court found that the County is not entitled to recover under the 2009 

amendments because the effective date of the amendments did not provide for 

retroactive application and therefore they could not be applied retroactively. 

Second, even if the 2009 amendment applied, Barg precludes recovery because 

the 2009 amendment to Minn. Stat. § 519.05 merely directs counties to recover 

Medical Assistance under Minn. Stat. § 256B.15 and the only benefits that can 

be recovered are those in which the Medical Assistance recipient spouse had an 

interest in at the time of her death. The amendment to Minn. Stat. § 519.05 

only added the following clause, "...including any claims arising under section 

246.53, 256B.15, 256D.16, or 261.04.." and did not include an independent 

basis for recovery of MA that comported with federal or state laws. 

Summary judgment was granted in favor of the Estate partially allowing the 

County's claim in the amount of $840.64 and disallowing the remainder of the 

claim. The appeals period on the Ruddick case ended in early May 2212 and no 

appeal was taken. 

In re Estate of Donald K. Ruddick, Ramsey County District Court File No.: 

62-PR-10-183 (March 2, 2012, Judge Paulette Kane Flynn). Attorney Peter M. 

Hendricks of Garvey, Boggio & Hendricks, P.A., in Bloomington, MN, 

represented the Estate. 

E. DOUGLAS COUNTY V. LINDGREN 

1. In 1993, Minnesota added a "transferee cause of action" to Minn. Stat. § 

256B.0595, subd. 4. 35 This provision states in pertinent part: 

. . . . When a waiver is granted, a cause of action exists 

against the person to whom the assets were transferred for 

35 

Laws of Minnesota 1993, 1st Spec. Sess., Ch. 14, Art. 5, Sec. 35. 

33

that portion of long-term care services provided within: 

(i) 30 months of a transfer made on or before 

August 10, 1993; 

(ii) 60 months of a transfer if the assets were 

transferred after August 30, 1993, to a trust or 

portion of a trust that is considered a transfer of 

assets under federal law; 

(iii) 36 months of a transfer if transferred in any 

other manner after August 30, 1993, but prior to 

February 8, 2006; or 

(iv) 60 months of any transfer made on or after 

February 8, 2006, 

or the amount of the uncompensated transfer, whichever 

is less, together with the costs incurred due to 

the action; . . . . 

2. In 2009, Douglas County attempted to assert this cause of action 

against the son and daughter of Marlys Lindgren after Douglas 

County approved a hardship waiver for Marlys. The penalty was 

imposed because of the transfer of Marlys' homestead to her 

children during the applicable look-back period. Douglas County 

v. Alexandra Kjerstyn Lindgren and Bruce Dale Lindgren, Dist. 

Ct. File No. 21-CV-09-477. Attorney JoEllen Doebbert of 

Alexandria, Minnesota, represented the defendants. 

3. In this case, Dale and Marlys Lindgren transferred their homestead 

to their two adult children, half in December 2003 and the other 

half in March of 2004. Marlys Lindgren entered a nursing home in 

November of 2004 and applied for medical assistance benefits in 

late December 2005. Douglas County imposed a penalty period for 

the transfers. Marlys appealed. In August of 2007, while the 

appeal was still pending, the nursing home requested a waiver of 

the penalty period due to the nursing home's threat to evict Marlys 

for non-payment of charges. Douglas County granted the waiver 

and paid the nursing home retroactive to January 2006. Upon 

learning of the waiver, the DHS judge dismissed the appeal as 

moot. Douglas County then commenced an action under Minn. 

Stat. § 256B.0595, subd. 4, clause (5), to recover the amount of the 

uncompensated transfers to apply against the benefits paid to the 

nursing home prior to Marlys' death on October 13, 2009. 

4. The defendants in Lindgren cited federal law which allows recovery 

of medical assistance benefits correctly paid only as allowed by 

34

federal law. See 42 U.S.C. § 1396p(b). The defendants argued 

that federal law does not allow a transferee cause of action when a 

hardship waiver is granted. Douglas County argued that the federal 

statute does not apply. 

5. On July 28, 2010, Judge David R. Battey issued his decision 

denying the County's Motion for Partial Summary Judgment, and 

granting the Defendent's Motion for Summary Judgment. 

6. The Court's memorandum concluded with the following statements: 

The County is correct; Congress was in fact 

concerned that people would transfer assets for less 

than fair market value. However it addressed the 

issue by requiring a period of ineligibility for those 

who did. It did not leave open the possibility for 

states to create separate claims against third parties 

for medical assistance correctly paid. The Court 

acknowledges that, from a policy standpoint, 

preempting Minnesota's cause of action against 

transferees could lead to individuals transferring 

large amounts of assets to non-dependent children in 

hopes of receiving publicly-funded assistance; 

however, it is clear Congress considered this, and 

added the ineligibility period to combat this potential 

problem. 

For those reasons, the Court finds that 42 U.S.C. section 

1396p(b) preempts Minnesota Statutes section 256B.0595, 

subd. 4b(b). Because section 256B.0595, subd. 4b(5) is 

preempted, summary judgment is granted in favor of the 

Defendants. 36 

7. The rationale of the Lindgren decision would apply to all of the 

"transferee cause of action" provisions in Minn. Stat. § 256B.0595. 

8. Douglas County appealed the Lindgren decision to the Court of 

36 

The citation to Minn. Stat. § 256B.0595, subd. 4b(5) is a typographical error and incorrect. 

The correct citation to the specific statute under which the cause of action was brought is to 

256B.0595 (2009), subd. 3(b). Subdivision 4b was enacted in 2003 but has never become 

effective because it has been blocked by federal law. The citation was corrected in the amended 

order. 

35

Appeals, but within three weeks of filing the appeal, the County 

requested dismissal of the appeal. The explanation given to counsel 

for the Estate was that an "important document," that would change 

the result, was not found until after the appeal was filed, and 

without that important document in the record, the appeal could 

fail. The Attorney General's office therefore was not interested in 

supporting the county's appeal. Without Attorney General support, 

the County was not interested in pursuing the appeal. By 

abandoning appeal of the Lindgren case, DHS can be expected to 

encourage the counties to pursue similar claims in other cases. 

Whether one "important document" can make a difference in 

interpreting the plain language of the applicable federal statute is 

open to doubt. The Lindgren case stands nevertheless as an 

important victory in the challenge to "transferee cause of action" in 

Minn. Stat. § 256B.0595. Attorney JoEllen Doebbert of 

Alexandria, MN, represented the Lindgrens. 

XI. 

UPDATE ON 2009 LEGISLATION TO UNDO BARG AND ITS PROGENY 

A. In anticipation of the potential loss in Barg, the Pawlenty Administration persuaded 

the 2009 session of the Legislature to amend various statutes to nullify Barg for 

recovery of medical assistance benefits for recipients who die on or after July 1, 

2009. These amendments also affect the property rights of community spouses 

whose spouse receives medical assistance benefits and dies on or after July 1, 

2009. 

B. The impact of these amendments on marital property rights, title to real property, 

intestate succession, and probate practice was discussed at length in Medical 

Assistance Estate Recovery and Marital Property Rights--Another Trip Through the 

Rabbit Hole, in Breakout Session D, Session 33, at last year's Probate and Trust 

Law Conference. 

C. No test case to challenge the 2009 amendments has reached the hearing stage as 

yet. A test case can be expected before next year's Probate and Trust Law 

Conference. 

XII. 

MEDICAL ASSISTANCE FOR ADULTS WITHOUT CHILDREN 

A. Starting March 1, 2011, Minnesota accepted the invitation provided by the 

Affordable Care Act to provide early expansion of medical assistance benefits to 

adults without minor children living with them. This new program is commonly 

36

called "MA for Adults Without Children." 37 

Assistance Medical Care (GAMC) program. 

This program replaced the General 

B. Persons eligible for expanded medical assistance must have income at or below 

75% of federal poverty guidelines (currently $699 per month for a household of 

one). There is no asset limit for the new program and no look-back period. The 

new program is funded largely at federal expense. 

C. This program is not available to persons who might be eligible for other medical 

assistance programs. 

XIII. THE COMMUNITY SPOUSE SUPPORT OBLIGATION 

Laws 2011, 1 st Spec. Sess., Ch. 9, Art. 3, Sec. 5, amending Minn. Stat. § 256B.14, by 

adding a subdivision 3a. 

A. TREATMENT OF COMMUNITY SPOUSE INCOME UNDER FEDERAL 

LAW. 

Under federal law, none of the community spouse’s income is treated as available 

to the medical assistance spouse in determining the medical assistance spouse’s 

income obligation towards LTC benefits. 42 U.S.C. 1396r-5(b)(1). 

B. STATE ATTEMPT TO CIRCUMVENT FEDERAL LAW 

1. This new statute was a blatant attempt to force a support obligation on a 

medical assistance recipient’s spouse, even though none of the community 

spouse’s income was counted against medical assistance eligibility. It 

would have required a community spouse with income in excess of the 

maximum monthly income allowance protected by the Community Spouse 

Income Allowance (which currently ranges from $1,892 per month 

minimum, to a maximum of $2,898 per month, depending on shelter 

expenses), to contribute income, measured in four brackets, toward the 

support of the medical assistance spouse. The amount of support was to be 

calculated on a sliding scale, ranging from 7.5% to 33% of the excess, 

depending on the community spouse’s monthly income (hereafter “the 

CSSO”). 

2. DHS opposed this proposal because the fiscal note showed that calculating 

37 Bulletin No. 11-21-02, which explains this program in full, is available at: 

http://www.dhs.state.mn.us/main/groups/publications/documents/pub/dhs16_158479.pdf. 

37

the monthly contribution, monitoring its payment and enforcing the 

requirement against delinquent spouses would cost more than the support 

that could be expected to be collected from spouses. Nevertheless, the 

proposal was included in the 2012 Omnibus Health and Humans Services 

Finance Act. 

C. REPEAL OF THE COMMUNITY SPOUSE SUPPORT OBLIGTION 

Laws of Minnesota 2013, Ch. ___, Art. 7, Sec. 64, repealing Minn. Stat. § 

256B.14, subd. 3a, effective July 1, 2013. 

DHS opposition has prevailed. Never mind. 

XIV. REDESIGN OF HOME AND COMMUNITY BASED SERVICES 

A. HIGH HOPES FOR REDESIGN 

The Dayton Administration, like its predecessor, has pinned its hopes for medical 

assistance cost containment from day one on a major redesign of government 

programs to provide home and community based services to keep older 

Minnesotans out of nursing homes. Minnesota was an early leader in regulating 

nursing homes to improve their quality and prevent deficient care. As a result, 

Minnesota has a higher percentage of the elderly in nursing homes than many 

other states. Also, because of the high degree of regulation and the costs of 

compliance with regulatory standards, Minnesota nursing homes are very 

expensive. 

The accepted theory is that substantial savings will result if fewer persons enter 

nursing homes for care. The theory includes the belief that substantial savings will 

result from delaying, even for a short time, entry into a nursing home. A 

necessary part of this theory is the belief that there are a number of nursing home 

residents who do not need to be there. The term “right-sizing care” is often heard 

in support of efforts to redesign Minnesota’s health care delivery system. 

As noted earlier, since 2009 Minnesota has been planning for decentralization of 

the health care delivery system. We are now approaching the day when these 

plans might be put into effect. Whether these plans will be implemented on 

January 1, 2014, or at some later date, depends on approval of the pending Long 

Term Care Realignment Waiver and the Reform 2020 Waiver Requests currently 

at the Centers for Medicare and Medicaid Services (CMS). 

B. INCREASED NURSING FACILITY LEVEL OF CARE CRITERIA 

CRITICAL TO REDESIGN 

38

The starting point for redesign of home and community based services is keeping 

Minnesotans out of nursing homes. If a person cannot enter a nursing home 

because the person’s needs are not great enough, the person not only fails to be 

eligible for medical assistance benefits in a nursing home, he or she also fails to 

qualify for the waiver programs that require risk of nursing home placement as a 

condition for eligibility. 38 Keeping people out of nursing homes therefore saves 

money two ways. 

To identify the persons who would not qualify for nursing home placement, 

Minnesota has had to develop a much more complicated screening system to 

separate those who qualify for nursing home placement from those who will not. 

To save money by reducing nursing home and waiver service populations, 

Minnesota is prepared to dramatically increase the administrative cost of screening 

persons for proper placement. The increased reliance on Long Term Care 

Consultation Screening to keep people out of medical assistance is reflected in the 

many amendments to the screening statutes made in Article 2 of the Conference 

Report. See Section XV.B., below. The increased screening system will also be 

used to “inform” the screened persons of care options available outside of nursing 

homes in local communities. 

In place of medical assistance eligibility for persons who need outside assistance to 

remain at home, and to provide alternatives, the Essential Community Supports 

(ECS) program was created, contingent on federal approval of the Realignment 

and Reform 2020 Waiver requests. 

To fill the gap caused by removing people from medical assistance programs, the 

State is proposing to encourage local efforts to keep persons in their homes. These 

efforts to enourage local supports are reflected in the authorizations for new DHS 

projects added to Minn. Stat. Ch. 256B, in Article 2 of the Conference Report. 

See Section XV.B, below. 

XV. 

THE 2013 MEDICAL ASSISTANCE AMENDMENTS 

A. CONFORMING MEDICAL ASSISTANCE AND MINNESOTACARE TO 

THE AFFORDABLE CARE ACT 

1. AFFORDABLE CARE ACT PROVISIONS BECOMING 

EFFECTIVE JANUARY 1, 2014 

38 These programs are the Elderly Waiver (EW) program and the Community Alternatives for 

Disabled Persons (CADI) program. The Alternative Care (AC) program also requires risk of 

nursing home placement. 

39

Each state must have a transparent, competitive health insurance 

marketplace (an Affordable Insurance Exchange) where individuals and 

small businesses can purchase affordable qualified insurance. 39 Minnesota 

has elected to sponsor its own marketplace, which shall be known as 

“MNsure.” Enrollment must begin on October 1, 2013. The statutes that 

authorize and govern MNsure are found in Minn. Stat. Ch. 62V. 

The health insurance plans offered in the individual and small business 

market, both inside and outside of the Exchange, must offer a 

comprehensive package of items and services, known as essential health 

benefits. Essential health benefits must include services within at least ten 

core categories, ambulatory patient services; emergency services; 

hospitalization; maternity and newborn care; mental health and substance 

use disorder services, including behavioral health treatment; prescription 

drugs; rehabilitative and habilitative services and devices; laboratory 

services; preventive and wellness services and chronic disease 

management; and pediatric services, including oral and vision care. 

Insurance policies must cover these benefits in order to be certified and 

offered in Exchanges, and all Medicaid state plans must cover these 

services by 2014. 

Small businesses and individuals, including self-employed individuals, may 

be eligible for a tax credit that can be used to lower what the individual 

pays for monthly health plan premiums. Individuals who qualify can take 

the premium tax credit in the form of advance payments to lower their 

monthly health plan premiums. The value of the tax credit will depend on 

family income. The tax credit will be determined as part of the application 

for a health care plan. The tax credit will be sent directly to the insurance 

company and applied to the premium, so the individual will pay less out of 

pocket. 

The tax credit is sent directly to your insurance company and applied to 

your premium, so you pay less out of your own pocket. 

ACA requires a standard application form to be used to apply for plans 

offered through the Exchange. CMS has promulgated a five-page 

application form. The application form will also be the starting point to 

apply for all health care programs, including state medical assistance 

39 For a summary of ACA requirements, see 7 Key Terms in the Affordable Care Act that 

Small Businesses Should Know available at: http://www.healthcare.gov/law/timeline/full.html 

40

programs, available in the State. 

Section 2002 of the Affordable Care Act requires that Modified Adjusted 

Gross Income (MAGI) will be the basis for determining Medicaid and 

CHIP eligibility for nondisabled, nonelderly individuals, effective January 

1, 2014. CMS has recommended that the States adopt a Standardized 

MAGI Conversion Methodology for converting existing Medicaid and 

CHIP net income standards to MAGI. Minnesota will convert to MAGI 

for all health care programs that take income into account in determining 

eligibility for benefits. 

2. REVISING MINNESOTACARE TO CONFORM TO BASIC 

HEALTH PLAN REQUIREMENTS 

Laws of Minnesota 2013, Ch. ___, (HF 1233) Art. 1, Secs. 28 to 63. 

In 1986, Minnesota created the MinnesotaCare program. 40 MinnesotaCare 

has been a publicly subsidized state health insurance program for residents 

who do not have access to affordable health care coverage. 41 The program 

served an average of 129,000 people each month in fiscal year 2012. It has 

been funded by a state tax on Minnesota hospitals and health care 

providers, federal Medicaid matching funds and enrollee premiums. 

Most people have not been eligible if their employer offers health insurance 

and pays at least half of the monthly cost. There are exceptions to this rule 

for some children. 

Most enrollees have paid a monthly premium, determined by a sliding-fee 

scale based on family size and income. There have been exceptions for 

children in households below certain income levels, some military families 

and American Indians. Many enrollees have paid their premium online. 

Health care services have been provided through health plans. People were 

allowed to choose their health plan from those serving MinnesotaCare 

enrollees in their county. 

40 Laws of Minnesota 1986, Ch. 444, codified as Minn. Stat. Ch. 256L. 

41 See Minnesota Department of Human Services MinnesotaCare Fact Sheet available at: 

http://www.dhs.state.mn.us/main/idcplg?IdcService=GET_DYNAMIC_CONVERSION&dDo 

cName=id_006255&RevisionSelectionMethod=LatestReleased 

41

Since its inception, MinnesotaCare has been cited as an important part of 

the Minnesota health care delivery system. It has been cited as one of the 

reasons why more Minnesotans have health insurance than most other 

states. Unfortunately, MinnesotaCare does not fit nicely into the design of 

the Affordable Care Act to provide health insurance coverage starting 

January 1, 2014. 

Article 1 of the Conference Report contains the modifications to 

MinnesotaCare that will be needed to qualify MinnesotaCare for federal 

funds under ACA. These amendments make the following changes: 

Art. 1, Sec. 3, amends Minn. Stat. § 256B.01, by adding a new subd. 35, 

directing the Commissioner of Human Services to obtain federal approval 

to increase the income standard for MinnesotaCare 275% of federal 

poverty guidelines. (currently $2,497 per month for a household of one; 

$3,344.25 for a household of two). 

Art.1, Sec.7, amends Minn. Stat. § 256B.02, by adding a new subdivision 

19 to define Minnesota Insurance Affordability Programs to include 

medical assistance under chapter 256B; a program that provides advance 

payments of premium tax credits under ACA; MinnesotaCare; and a Basic 

Health Plan as defined under ACA. 

Art. 1, Sec. 8, amends Minn. Stat. § 256B.04, subd. 18, to require that the 

state agency (the Department of Human Services) take medical assistance 

applications by telephone, via mail, in-person, online via an Internet Web 

site, and through other commonly available electronic means. If an 

applicant is not eligible for medical assistance, the state agency must 

determine potential eligibility for other insurance affordability programs. 

Art. 1, Sec. 19, amends Minn. Stat. § 256B.056, by adding a new subd. 

7a, to require that the Commissioner of Human service make an annual 

determination of eligibility for medical assistance benefits based on 

information contained in the enrollee’s case file and other information 

available to the agency, including information available through an 

electronic data base, without requiring the enrollee to submit information 

when sufficient information is otherwise available to the state agency. This 

amendment also requires the commissioner to provide enrollees with prepopulated 

renewal forms that only require correction or additional 

information. If the enrollee fails to return the renewal form in a timely 

manner, the enrollee may submit the required information within four 

months of denial of benefits and be reinstated without a lapse in coverage. 

42

If the enrollee is required to satisfy a medical spend-down each month, the 

enrollee must be renewed every six months. 

Art. 1, Sec. 20, amends Minn. Stat. § 256B.056, subd. 10, to require that 

the Commissioner utilize information obtained through approved electronic 

services and data bases to verify medical assistance eligibility. The 

purpose of this amendment is to allow “real-time” determinations of 

eligibility and to maintain program integrity. 42 

Art. 1, Sec. 24, amends Minn. Stat. § 256B.057, by adding a new subd. 

12, to allow qualified participating hospitals to determine presumptive 

eligibility for medical assistance for applicants who may have a basis for 

eligibility using Modified Adjusted Gross Income. 43 

Art. 1, Sec. 30, amends Minn. Stat. § 256L.01, subd. 5, to provide that 

the income standard for MinnesotaCare will be Modified Adjusted Gross 

Income. This amendment is effective on January 1, 2014, or upon federal 

approval whichever is later. 

Art. 1, Sec. 31, amends Minn. Stat. § 256L.01 by adding a new subd. 6 to 

add the definition of Minnesota Insurance Marketplace, as defined in 

section 62V.02, to Chapter 256L. 44 

Art. 1, Sec. 34, amends Minn. Stat. § 256L.02, by adding a new subd. 6, 

to direct the Commissioner of Human Services to seek federal approval to 

implement MinnesotaCare as a basic health program. 

Art. 1, Sec.43, amends Minn. Stat. § 256L.04, by adding a new subd. 1c, 

to provide that a person eligible for MinnesotaCare is not eligible for 

enrollment in a qualified health plan offered through the Minnesota 

Insurance Marketplace. This section is effective January 1, 2014. 

Art. 1, Sec.48, amends Minn. Stat. § 256L.04, by adding a new subd. 14, 

42 The obvious purpose of this amendment is to allow quick verification of Modified Adjusted 

Gross Income for applicants and enrollees. 

43 This would allow prompt determinations of eligibility for benefits under the MA for Adults 

Without Children program. 

44 In the Conference Report, Art. 1, Sec. 67, the Revisor of Statutes is instructed to replace the 

term “Minnesota Insurance Marketplace” with the term “MNsure” wherever it appears in the 

Minnesota Statutes, Rules and Article 1. 

43

to provide that an individual who is eligible for medical assistance is not 

eligible for MinnesotaCare. The Commissioner is directed to coordinate 

eligibility and coverage to ensure that individuals moving between medical 

assistance and MinnesotaCare have seamless eligibility and access to health 

care services. 

Art. 1, Sec. 49, amends Minn. Stat. § 256L.05, subd. 1, to provide that 

applicants for MinnesotaCare may submit applications online, in person, by 

mail, or by phone in accordance with the Affordable Care Act, and by any 

other means by which an application for medical assistance may be 

submitted. Applications may be submitted through the Minnesota 

Insurance Marketplace or MinnesotaCare. Applications must be available 

at any location where medical assistance applications must be made 

available. 

Art. 1, Sec. 66, directs the Commissioner of Human Services to seek 

authority from CMS to allow Minnesota to continue disregarding spousal 

income and assets for home and community based programs. 45 

B. REDESIGNING HOME AND COMMUNITY BASED SERVICES 

Article 2 of the Conference Report contains the amendments to implement the 

proposed redesign of the delivery system for home and community based services 

in Minnesota. All of Article 2 is contingent on federal approval of the Reform 

2020 Waiver Request. See Art. 2, Sec.60, below. Article 2 includes amendments 

to make the following changes: 

Art. 2, Sec.4, amends Minn. Stat. § 256.01, subd. 2 to designate the Senior 

Linkage Line and the Disability Linkage Line as the Aging and Disability 

Resource Center under federal law. 

45 The Affordable Care Act requires that States to implement the Spousal Impoverishment 

Rules enacted as part of the Medicare Catastrophic Coverage Act of 1988 to all home and 

community based waiver programs effective January 1, 2014. The Minnesota CADI waiver 

does not take into account spousal income or assets. This allows a CADI applicant to transfer 

excess assets to the Community Spouse without penalty and still qualify for benefits. The 

Spousal Impoverishment Rules protect a poor spouse against impoverishment, but require a 

wealthier spouse to reduce marital assets to the protected amount. On the other hand, the 

CADI waiver does not allow income to be transferred from the MA spouse to the Community 

Spouse. This sometimes causes problems for a low-income Community Spouse. The Spousal 

Impoverishment Rules allows monthly income to be transferred from the MA spouse to the 

Community Spouse to satisfy the Community Spouse Income Allowance. 

44

Art. 2, Sec. 4, amends Minn. Stat. § 256.975, subd. 7, to add duties to the Senior 

Linkage Line to include outreach to seniors and their caregivers, annual plans by 

neighborhood, city, and county, as necessary, to address the needs of geographic 

areas in the state where there are dense populations of seniors, to work with 

metropolitan counties to establish local aging and disabilities resource centers, to 

accept referrals from residents or staff of nursing homes, to identify and contract 

residents of nursing homes deemed appropriate for discharge, and provide referral 

to long-term care consultation services. 

Art. 2, Sec. 7, amends Minn. Stat. § 256.975 by adding a new subd. 7a, to 

provide that all individuals seeking admission to Medicaid certified nursing 

facilities must be screened prior to admission regardless of income, assets or 

funding sources, except as exceptions might apply. This amendment includes 

extensive criteria for the screening to identify persons with mental health issues or 

developmental disabilities. 

Art. 2, Sec.8, amends Minn. Stat. § 256.975, by adding a new subd. 7b, to 

provide for an extensive list of exemptions and exceptions to mandatory screenings 

prior to admission to Medicaid certified nursing facilities. This amendment 

includes extensive requirements for post-admission screenings to be met if an 

exemption applies to pre-admission screening. For example, no screening is 

required for admission to a nursing home under contract with the Veterans 

Administration. The amendment includes a lengthy list of circumstances allowing 

emergency admissions without prior screening. 

Art. 2, Sec.9, amends Minn. Stat. § 256.975, by adding a new subd. 7c, to 

provide lengthy detailed requirements for the conduct of telephone and face-to-face 

pre-admission screenings. 

Art. 2, Sec. 15, amends Minn. Stat. § 256B.021, by adding a new subd. 6, to 

authorize the commissioner on federal approval to establish a targeted 

demonstration project to provide navigation, employment supports, and benefits 

planning to MA recipients to encourage independence and work. This amendment 

is effective July 1, 2013, but does not authorize the start of the demonstration 

project until January 1, 2014. 

Art. 2, Sec. 15, amends Minn. Stat. § 256B.021, by adding a new subd. 7, to 

authorize the commissioner on federal approval to establish a targeted 

demonstration project to provide service coordination, outreach, in-reach, tenancy 

support, and community living assistance to MA recipients to promote housing 

stability, reduce costly medical intervention, and increase opportunities for 

independent community living. 

45

Art.2, Sec. 21, amends Minn. Stat. § 256B.0911, by adding a new subd. 4e, to 

provide that the determination of the need for nursing facility, hospital, and 

intermediate care facility levels of care must be made according to criteria 

developed by the commissioner and in section 256B.092, using forms developed 

by the commissioner. Effective January 1, 2014 (subject o approval of the Reform 

2020 Waiver Request) for individuals age 21 and older, the determination of need 

for nursing facility level of care must be based on the criteria in section 144.0724, 

subd. 11 (the new increased NF LOC criteria). For individuals under age 21, the 

determination of the need must be based on the criteria in section 144.0724, subd. 

11, effective on or after October 1, 2019. 46 

Art. 2, Sec. 23, amends Minn. Stat. § 256B.0911, subd. 7, to provide that a 

nursing home facility may not bill a person who is not a medical assistance 

recipient for resident days that precede the date of completion of a screening 

required by section 256.975, subds. 7a to 7c. 

Art. 2, Sec. 24, amends Minn. Stat. § 256B.0913, subd. 4, to provide that an 

individual must be at risk of nursing home placement to obtain Alternative Care 

benefits. 

Art. 2, Sec. 26, amends Minn. Stat. § 256B.0917, by adding a new subd. 1a to 

authorize the Commissioner of Human Services to fund a project to make strategic 

changes in the long-term services and supports system for older adults including 

statewide capacity for local service development and technical assistance, and 

statewide availability of home and community-based services for old adult 

services, caregiver support and respite care services, and other supports in the state 

of Minnesota. These projects are intended to create incentives for new and 

expanded home and community-based services. These projects are intended, in 

part, to reach older adults in early stages of need to delay the use of more costly 

services, support older adults to live in community settings, support informal 

caregivers, build community-based approaches and community commitment to 

delivering long-term services and supports for older adults in their own homes, 

strengthen and develop additional home and community-based services and 

alternatives to nursing homes and other residential services, and strengthen 

programs that use volunteers. 47 

46 The Affordable Care Act has different provisions that apply to children under age 21 who 

would be eligible for the federally mandated Children’s Health Insurance Program (CHIP), 

which is part of medical assistance. 

47 This list of goals for health care projects is a concise statement of the State’s plan to redesign 

home and community-based services in Minnesota. The primary goal is keeping older adults 

46

Art. 2, Sec. 30, amends Minn. Stat. § 256B.0917, by adding a subd. 7a to 

authorize the Commissioner of Human Services to contract with “core home and 

community-based services providers” to provide services and supports to older 

adults both with and without family and other informal caregivers. A “core home 

and community-based services provider” is a Faith in Action, Living at Home 

Block Nurse, Congregational Nurse, or similar community-based program that 

organizes and uses volunteers and paid staff to deliver nonmedical services 

intended to assist older adults to identify and manage risks and to maintain their 

community living and integration in the community. This term is defined in the 

new subd. 1b, added to Minn. Stat. § 256B.0917 by Art. 2, Sec. 27 of the 

Conference Report. 

Art. 2, Sec. 44 states that “This article is contingent on federal approval.” Article 

2 is captioned “Contingent Reform 2020; Redesigning Home and Community- 

Based Services.” It appears, therefore, that none of the foregoing amendments are 

effective until CMS approves the pending Reform 2020 Waiver Request. 

in their homes with volunteers and local communities providing needed services rather than 

government programs paying professional providers for care in the home or in other facilities. 

47

SECTION 17 

Marital Deduction Planning and 

Administration – First Comes Love, Then 

Comes Marriage, Then Comes a Maritalized 

Estate Plan 

Marya P. Robben 


Minneapolis 


MARITAL DEDUCTION PLANNING: 

First Comes Love, Then Comes Marriage, Then Comes a Well-Drafted Estate Plan 

By Marya P. Robben 

LINDQUIST & VENNUM LLP 


I. BASIC CONCEPTS OF MARITAL DEDUCTION PLANNING ................................................. 2 

A. The Code and Regulations .................................................................................................. 2 

B. Marital Estate Planning Options ......................................................................................... 4 

C. Types of Bequests: Outright or in Trust ............................................................................ 9 

II. ESTATE AND GIFT TAXES ....................................................................................................... 13 

A. Federal Estate Tax ............................................................................................................ 13 

B. Preparing Schedule M of the Federal Estate Tax Return .................................................. 14 

C. Gift Tax ............................................................................................................................. 15 

D. Minnesota Estate Tax ........................................................................................................ 15 

III. MARITAL DEDUCTION PLANNING WITH IRAS AND QUALIFIED PLANS ..................... 16 

A. General .............................................................................................................................. 16 

B. Roll-over ........................................................................................................................... 16 

C. Naming a trust ................................................................................................................... 17 

D. Post-Mortem Planning Opportunities ............................................................................... 19 

IV. DISCOUNTS ................................................................................................................................. 20 

A. General Concept ............................................................................................................... 20 

B. Advantages and Disadvantages. ........................................................................................ 20

THE BASICS OF MARITAL DEDUCTION PLANNING 

I. BASIC CONCEPTS OF MARITAL DEDUCTION PLANNING 

A. The Code and Regulations 

1. Section 2001(a) imposes a tax on the transfer of the “taxable estate” of every decedent who is 

a resident or citizen of the United States. 

2. Allowance of Marital Deduction. I.R.C. § 2056. 

a. “[T]he value of the taxable estate shall . . . be determined by deducting from the value 

of the gross estate an amount equal to the value of any interest in property which passes or has 

passed from the decedent to his surviving spouse, but only to the extent that such interest is 

included in determining the value of the gross estate.” 

b. As explained below, the deduction is limited with respect to life estates and other 

terminable interests. I.R.C. § 2056(b). 

3. The executor must establish all of the following facts to obtain the marital deduction with 

respect to any property interest. Treas. Reg. § 20.2056(a)-1(b). 

a. The decedent was survived by a spouse. Treas. Reg. § 20.2056(c)-2(e); see Estate of 

Lee v. Commissioner, T.C. Memo 2007-371 (ruling estate not entitled to marital deduction 

because spouse did not actually survive and language in will that spouse shall be “deemed” to 

have survive does not apply for marital deduction purposes). 

b. The property interest passed from the decedent to the spouse. Treas. Reg. 

§§20.2056(b)-5 through 20.2056(b)-8 and 20.2056(c)-1 through 20.2056(c)-3; see Estate of 

Hanson v. U.S., 2007 WL 817393 (S.D.N.Y.) (ruling estate not entitled to marital deduction 

because decedent bequeathed asset to children who in turn used asset to satisfy debt to 

surviving spouse arising under a marital Separation Agreement). 

c. The property interest is a deductible interest. Treas. Reg. § 20.2056(a)-2. 

d. The value of the property interest. Treas. Reg. § 20.2056(b)-4. 

e. The surviving spouse must be a citizen of the United States. I.R.C. §2056(d). 

4. Terminable Interest Property I.R.C. § 2056(b). 

a. Rule: Generally, terminable interest property passing to a surviving spouse does not 

qualify for the estate or gift tax marital deduction. A terminable interest is an interest in 

property which will terminate or fail on the lapse of time or the occurrence or failure of some 

contingency. Treas. Reg. § 20.2056(b)-1(b). 

1) Examples include life estates, terms for years and patents. 

2) The determination is made whether an interest is terminable as of the date of 

the decedent’s death. See, e.g., Estate of Wycoff v. Commissioner, 506 F.2d 1144 

2

(1974); PLR 7902020 (ruling gift to spouse did not qualify for marital deduction 

because it was a terminable interest that was not saved by a qualified exception where 

language provided distribution shall be made “just as soon as international conditions 

will permit”). 

b. Five exceptions: The following are five exceptions to what would otherwise be 

nondeductible terminable interests. In other words, these circumstances allow application of 

the marital deduction: 

1) Qualified terminable interest property: QTIP is property passing from the 

decedent to the surviving spouse where the surviving spouse has a qualifying income 

interest for life and for which the personal representative has made an election to treat 

the property as qualifying for the marital deduction. I.R.C. § 2056(b)(7); Treas. Reg. 

§ 20.2056(b)-7(b). 

2) Survival for limited period: When the spouse’s interest is conditioned upon a 

period of survival not exceeding six months after the decedent’s death and the spouse 

survives for that period. I.R.C. § 2056(b)(3); Treas. Reg. § 20.2056(b)-3. 

3) Life estate with power of appointment: When the spouse is given an income 

interest for life coupled with a general power of appointment. I.R.C. § 2056(b)(5); 

Treas. Reg. § 20.2056(b)-5. 

4) Payments with power of appointment: When the spouse’s interest consists of 

life insurance or annuity payments with a general power of appointment. I.R.C. 

§ 2056(b)(6); Treas. Reg. § 20.2056(b)-6. 

5) Charitable remainder trusts: When the spouse is the only non-charitable 

beneficiary of a qualified charitable remainder trust under I.R.C. § 664. I.R.C. 

§ 2056(b)(8); Treas. Reg. § 20.2056(b)-8. 

5. Qualified Domestic Trust. I.R.C. § 2056A. 

a. Rule: Generally, property passing to a surviving spouse who is not a U.S. citizen does 

not qualify for the marital deduction. See I.R.C. §2056(d) (requiring surviving spouse to be a 

U.S. citizen). 

b. Exception: As an exception to this general rule, a qualified domestic trust (QDOT) is 

a trust that qualifies for the marital deduction where the surviving spouse is not a citizen of the 

United States. Treas. Reg. § 20.2056A-1(a). 

c. Generally, three requirements must be satisfied to qualify as QDOT treatment. 

1) Trustee: One trustee must be a U.S. citizen and must have the authority to 

withhold taxes imposed by I.R.C. § 2056A from any amounts distributed from the 

trust. Treas. Reg. §20.2056A-1. 

2) Affirmative election: The executor must irrevocably elect to treat a trust as a 

QDOT by the date determined as follows: 

a) If a timely federal estate tax return is filed, the election must be made 

on the last federal estate tax return filed before the due date (including 

extensions of time to file actually granted) or, 

3

) If a timely return is not filed, the election must be made on the first 

federal estate tax return filed after the due date. 

3) Must qualify as marital trust under I.R.C. §2056: The trust must also qualify 

for the federal estate tax marital deduction under §2056(b)(5) (life estate with power 

of appointment), §2056(b)(7) (qualified terminable interest property, including joint 

and survivor annuities under §2056(b)(7)(C)), or §2056(b)(8) (surviving spouse is the 

only noncharitable beneficiary of a charitable remainder trust), or meet the 

requirements of an estate trust as defined in §20.2056(c)-2(b)(1)(i) through (iii). 

Treas. Reg. §20.2056A-2(b). 

d. Carefully review the regulations under I.R.C. §2056A before drafting a QDOT and 

before making a QDOT election. 

B. Marital Estate Planning Options 

1. “Portability Planning”—Is this an option? 

a. The American Taxpayer Relief Act of 2012 signed on January 2, 2013, made 

permanent the ability of a surviving spouse to elect to claim the deceased spouse’s federal 

estate tax exemption. This is the “DSUEA” election or the portability issue that is now 

available. 

b. Some discussion is occurring regarding whether this should be a new option in the 

marital planning realm. Specifically, should we now draft into marital plans that we will have 

a “portability plan” where we do no other tax planning on the first death but rather simply plan 

to elect to claim the DSUEA of the first spouse to die. 

c. One sample language from Howard Zaritsky in January 2013: 

Deceased Spousal Unused Exclusion Amount Election. I direct that the personal 

representative of my estate do all things necessary to make a valid election to allow 

my surviving spouse to have the benefit of my deceased spousal unused exclusion 

amount, to the greatest extent permitted under applicable federal estate tax law. My 

surviving spouse shall have no obligation to make any payment to my estate or to the 

other beneficiaries of my estate in order for the personal representative of my estate to 

make or because the personal representative of my estate has made this election, nor 

shall any equitable adjustment be made with respect to the dispositions under my 

estate because the personal representative of my estate has made this election. 

d. Whether this will become an affirmative planning option as part of a widespread 

standard of practice is not yet known. If you choose to do “marital portability planning,” the 

drafting may look something like the following in combination with the above language from 

Mr. Zaritsky: 

I leave my residuary estate to my spouse if she survives; except that if 

at the time of my death no election is available for my spouse to claim 

my remaining federal estate tax exemption pursuant to a DSUEA (or 

similar) election, then instead my estate shall be distributed as 

follows: 

4

(A) Then do your other language—disclaimer language or 

fractional formulas. 

2. Simple/Non-tax plan. 

a. This plan does not utilize the exemption amount on the first death. 

b. When to use: Consider this type of plan when estate tax planning is not an issue. 

c. Example: “I leave my residuary estate to my spouse, if my spouse survives me.” 

d. Advantages: This plan is the most straightforward option. It is easy for the clients to 

understand and results in the least complicated estate administration. 

e. Disadvantages: This plan does not provide flexibility in the event the value of the 

estate increases from the time of will execution to date of death. The best post-death planning 

that could be done would be for the surviving spouse to disclaim a portion of the estate and 

have it pass to any surviving children or pursuant to trust terms if a trust is provided. These 

assets would then be unavailable to the spouse for health, education, maintenance or support. 

f. Notes: Gifts may be made to the spouse in trust if appropriate, even though the plan is 

not tax driven. Consider this option for couples in a second marriage or where the surviving 

spouse is not able to manage assets. 

3. Disclaimer plan 

a. This plan typically provides for all assets to be distributed to the surviving spouse, 

outright or in trust, using the marital deduction, but provides that if the spouse disclaims any 

portion of the estate, the assets will be distributed in another manner, commonly to a credit 

shelter trust. 

b. This plan delays the decision regarding whether to use the exemption amount on the 

first death. It allows the surviving spouse to determine whether any portion of the first 

spouse’s exemption amount should be used after the first death. 

c. When to use: Consider this type of plan where it is unclear whether estate tax 

planning is necessary and when flexibility is important. 

d. Example: “I give my residuary estate to my spouse, if my spouse survives me. If my 

spouse survives me but disclaims any portion of my residuary estate, I give the disclaimed 

portion to the trustee of the credit shelter trust under Article Four.” 

e. Advantages: This plan is very flexible. It allows a decision to be made when the first 

spouse dies based on the current financial information of the couple and based on the tax laws 

on the date of death. 

f. Disadvantages: To use the exemption amount on the first death, this plan requires 

careful and detailed work after the first death. Both the surviving spouse and the attorney must 

be willing and able to do post-mortem planning. 

1) In Minnesota, a qualified disclaimer must be filed in the Probate Court within 

9 months of the date of death. 

5

2) The surviving spouse must not benefit from any of the disclaimed assets prior 

to disclaiming them. 

3) It is essential to carefully follow the requirements of I.R.C. § 2518 or the 

exemption amount may be lost. 

g. Notes: This plan will allow for a credit shelter trust, which may never be funded. The 

share to the spouse does not necessarily have to be outright. 

4. Optimum marital planning. 

a. Although there are several ways to implement this plan, as discussed further below, 

the basic concept is to shelter from estate tax the maximum amount which is available to pass 

estate tax free in the estate of the first spouse to die. Most commonly this is accomplished by 

funding a credit shelter trust, whereby the surviving spouse can still have access to the assets 

for health, education, maintenance and support. 

b. When to use: Consider this plan when estate tax planning is necessary. 

c. Funding methods: Typical funding methods include using any of the following: 

1) The marital deduction pecuniary amount, 

2) The credit shelter pecuniary amount, or 

3) Fractionally dividing the residuary estate into the credit shelter and the marital 

deduction shares. 

d. Details on Funding Methods: 

1) Pecuniary amount: An amount which remains constant throughout 

administration. Usually, in optimum marital planning, this amount is determined by a 

formula. 

a) Marital deduction pecuniary amount: The amount which remains 

constant is that of the marital share. In other words, this funding method uses 

a formula to define the marital share as a specific amount, which will not 

fluctuate before distribution. 

(i) 

Examples: 

(a) If my spouse shall survive me, “my Executor shall 

distribute to my spouse, an amount from the assets 

composing my estate equal to the minimum amount 

necessary to reduce the federal estate tax payable as a result 

of my death to the least amount possible, assuming for 

purposes of determining such minimum amount that such 

minimum amount qualifies for the marital deduction 

allowable in computing such tax, taking into account my gifts 

(including gifts treated as made by me) and all deductions, 

exclusions and reductions in value allowed in computing such 

tax, and using allowable credits against such tax only to the 

extent that such use does not increase any estate tax payable 

6

to any jurisdiction.” Michael Mulligan, Nearly Twenty Years 

After ERTA – Planning for QTIP and the Unlimited Marital 

Deduction with the Advantage of Hindsight, ADVANCED 

ESTATE PLANNING LECTURE SERIES, Minnesota State 

Bar Association, February 2000. 

(b) I give to my spouse “a sum equal to the amount by 

which the value of the property disposed of by this will 

exceeds the aggregate of (1) the value of the property 

disposed of by the preceding Articles of this will, (2) a sum 

equal to the largest amount, if any, that can pass free from 

federal estate tax under this will by reason of any tax referred 

to in section 2001(b)(2) of the Internal Revenue Code and the 

applicable credit amount and the state death tax credit 

(provided use of this credit does not require an increase in the 

state death taxes paid) allowable to my estate but no other 

credit and after taking into account of my adjusted taxable 

gifts and any reduction in them pursuant to Treas. Reg. 

§25.2701-5 and property disposed of my previous Articles of 

this will and property passing outside of this will which is 

includable in my gross estate and does not qualify for the 

marital or charitable deduction and after taking account of 

charges to principal that are not allowed as deductions in 

computing my federal estate tax and (3) my debts, expenses 

of administration and other charges payable from principal by 

my executors, including the death taxes referred to in Article 

---- hereof, which reduce the value of property disposed of by 

this will that may qualify for the marital deduction.” 

RICHARD B. COVEY, MARITAL DEDUCTION AND 

CREDIT SHELTER DISPOSITIONS AND THE USE OF 

FORMULA PROVISIONS, 202 (1997). 

(ii) Advantages: This formula ensures that the marital share will 

be funded with a specific amount. As of the correct valuation date, 

that amount will be the lowest possible amount which will result in 

the least amount of federal tax. If the estate assets increase in value 

during the course of administration, any increase in value will be 

allocated to the credit shelter amount. 

(iii) 

Disadvantages: 

(a) If the estate assets decrease in value during the course 

of administration, the credit shelter trust is reduced. 

(b) If a pecuniary funding formula is used, the actual 

funding of the trust will result in a taxable event, resulting in 

the realization of capital gain or loss to the estate. 

(iv) Example: See Rev. Rul. 56-270: I.R.S. determined marital 

deduction pecuniary amount was a bequest of a specific amount and 

that the estate realized capital gains to the extent that the fair market 

7

value on date of distribution exceeded the fair market value on date of 

death. 

(v) A hybrid pecuniary method allows for the marital share to 

receive assets at federal estate tax values versus date of distribution 

values as long at the assets used to fund the marital share are fairly 

representative of appreciation or depreciation taking place after 

federal estate tax valuation, taking into account all available assets. 

b) Credit shelter pecuniary amount: The amount that remains constant is 

that of the credit shelter share. In other words, this funding method uses a 

formula to define the credit shelter share as a specific amount, which will not 

fluctuate before distribution. 

(i) Example: I give to my spouse a sum equal to the largest 

amount that “can pass free from federal estate tax under this Article 

by reason of any tax referred to in section 2001(b)(2) if the Internal 

Revenue Code and the applicable credit amount and state death tax 

credit (provided use of this credit does not require an increase in state 

estate taxes paid) allowable to my estate but no other credit and after 

taking into account of my adjusted taxable gifts and any reduction in 

them pursuant to Treas. Reg. Sec. 25.2701-5 and property disposed of 

my previous Articles of this will and property passing outside of this 

will which is includable in my gross estate and does not qualify for 

the marital or charitable deduction and after taking account of charges 

to principal that are not allowed as deductions in computing my 

federal estate tax.” RICHARD B. COVEY, MARITAL 

DEDUCTION AND CREDIT SHELTER DISPOSITIONS AND 

THE USE OF FORMULA PROVISIONS, 201 (1997). 

(ii) Advantages: This formula ensures that the credit shelter trust 

will be funded with the exemption amount which was available on the 

appropriate valuation date. If the estate assets decrease in value 

during the course of administration, the credit shelter trust will still be 

funded with the exemption amount. An overall decrease in estate 

assets simply means that more assets may be needed to satisfy the gift 

to the credit shelter trust. 

(iii) 

Disadvantages: 

(a) If a pecuniary funding formula is used, the actual 

funding of the trust will result in a taxable event, resulting in 

the realization of capital gain or loss to the estate. 

(b) If the estate assets, specifically the assets eventually 

used to fund the credit shelter trust, increase in value during 

the course of administration, the increased value does not 

increase the value of the trust. The credit shelter trust does 

not share in any increases in the estate which may occur 

during the course of administration. 

8

2) Fractional share: As the value of the assets fluctuate over the course of 

administration, the credit shelter share and the marital share reflect their proportionate 

share of the increase or decrease in value. 

a) Example: If my spouse survives me, I give to my spouse that 

fractional share, if any, of my residuary estate which - after taking into 

account all interest in property passing pursuant to previous provisions of this 

will or apart from this will and after taking into account the credits allowable 

to my estate by Section 2010 and (to the extent is does not increase the death 

tax payable to any state) by Section 2011 of the Internal Revenue Code – will 

produce a total marital deduction of the minimum size required to result in the 

lowest possible net federal estate tax upon my estate. In computing the 

numerator and the denominator of the fraction that determines the share of my 

residuary estate passing pursuant to this paragraph, the values of all assets as 

finally determined for federal estate tax purposes shall control. 

b) Advantages: 

(i) Any increase or decrease in the estate’s assets are shared by 

the martial share and credit shelter share proportionately. 

(ii) Funding of the trusts is not a taxable event which will trigger 

capital gains or losses to the estate. 

(iii) See Rev. Rul. 60-87: In this case the I.R.S. clarifies the 

distinction between fractional formula funding and pecuniary formula 

funding and states that funding of trusts in a fractional formula estate 

does not recognize capital gain or loss. 

c) Disadvantages: 

C. Types of Bequests: Outright or in Trust 

1. Outright. 

(i) If the assets of the estate decrease in value during the course 

of administration, the amount that can be sheltered from estate tax on 

the death of the first spouse is proportionately reduced. 

(ii) When using a “pure” fractional formula, the fraction is 

applied to each asset in the estate and each asset is “split,” with a 

portion of each assets being distributable to the marital share and a 

portion of each asset being distributable to the credit shelter share. 

This typically makes administration more difficult. However, it is 

possible to use a hybrid fractional “pick and choose” method of 

funding which allows the Executor to allocate “whole” assets to 

certain shares as long as the assets allocated to each share, in total, are 

fairly representative of appreciation and depreciation of post estate 

tax values. 

a. This is the most straightforward bequest. It is often used for the share passing to the 

surviving spouse if it is a first marriage and after-death control of the assets is not an issue. 

9

. Any unused portion of this bequest will be taxed in the estate of the spouse who dies 

second. 

c. Example: “If my spouse survives me, I give my residuary estate to my spouse.” 

2. Trust. 

a. General power of appointment trust (I.R.C. §2056(b)(5)) 

1) This type of trust gives the surviving spouse access to the trust income and 

principal for life and the power to determine its disposition on death. It is common 

where a spouse wants assistance managing the assets after the first death but where 

the first spouse does not need to control its ultimate disposition. 

2) Any unused portion of this bequest will be taxed in the estate of the spouse 

who dies second. 

b. Qualified Terminable Interest Property Trust (I.R.C. §2056(b)(7)) –QTIP Trust. 

1) Although there are several advantages to using a QTIP, it is commonly used 

with second marriages and can be useful when working with discounts. It allows the 

first spouse to transfer the assets estate tax free on death and to retain control of the 

assets at the death of the second spouse. 

a) The surviving spouse will receive all income during life and will have 

access to trust principal for health, education, and support. 

b) On the death of the surviving spouse, the terms of the trust direct the 

disposition of any remaining trust property. The spouse who dies second has 

no control over the disposition. 

c) Unused trust property will be taxed in the surviving spouse estate. 

2) Election issues: 

a) The executor must affirmatively elect to have a trust treated as a 

QTIP trust under I.R.C. §2056(b) in order for the assets passing to this trust to 

receive a marital deduction. I.R.C. §2056(b)(7)(B)(v). 

b) Once the election is made it is irrevocable. However, if the personal 

representative makes an unnecessary QTIP election, the election may be 

disregarded if the taxpayer produces sufficient evidence that the election was 

not needed. See PLR 200702018 (Jan. 12, 2007) (applying Rev. Proc. 2001- 

38, 2001-24 I.R.B. 1335). 

c) If the personal representative fails to make a QTIP election on a 

timely filed estate tax return, the election may be made late in some 

circumstances. If the taxpayer acted reasonably and in good faith and if the 

granting of relief will no prejudice the interest of the government, the IRS has 

the discretion to allow a late election. See PLR 200728005 (applying I.R.C. 

§§301.9100-1 and 301.9100-3 which give the Commissioner discretion to 

give extensions for making regulatory and statutory elections in certain 

situations). 

10

d) The amount subject to the election can be increased, at least in some 

situations. See PLR 200832011 (Aug. 8, 2008) (allowing estate tax marital 

deduction for amount greater than that elected on the estate tax return, where 

the return election was intended to reduce the estate tax to zero, but the 

attorney and executor made a mistake as to the amount of deduction required 

to produce that result). 

3) Partial QTIP Election 

a) Because the QTIP election is in fact an election—it is not mandatory, 

the personal representative can determine not only whether to make the 

election but also to what portion of the trust the election shall apply. On many 

estates, it will seem apparent that a full marital deduction is desirable. 

However, some situations may arise where a full marital deduction is not 

appropriate, such as the assets may be subject to higher tax rates in the 

surviving spouse’s estate and the surviving spouse has a short life expectancy; 

or the credit shelter trust was not fully funded on its own. 

b) Post-mortem planning: The QTIP election can be made on a timely 

filed estate tax return, including extensions. Thus, the filing of the estate tax 

return and the decision of whether to QTIP and how much can be delayed for 

15 months after the first death. During this time, the estate tax situation of the 

surviving spouse may become more clear. 

c) To make a partial QTIP election, the personal representative’s 

election language simply needs to identify the portion of the trust to which the 

election is being made and that portion of the trust is reported on Schedule M 

of the estate tax return. The remainder of the trust does not receive a marital 

deduction and will be subject to estate taxes. 

4) Reverse QTIP Election 

a) What it is: A reverse QTIP election is a combination of two 

elections. The two elections provide the estate of the first spouse to die with a 

marital estate tax deduction and a generation skipping transfer tax planning 

benefit. 

b) Why it is done: The purpose is to enable the first spouse to die the 

chance to use his GST exemption while still benefiting from the marital estate 

tax deduction. 

(i) Usually, the transferor of property for GST purposes is the 

last person in whose estate the assets are taxed for estate tax purposes. 

Thus, in a standard QTIP situation, the transferor of the QTIP trust for 

GST tax purposes is the second spouse to die because the marital 

QTIP trust is taxed in the surviving spouse’s estate. 

(ii) To enable the first spouse to die to utilize his GST exemption 

while still benefiting from the marital deduction, the reverse QTIP 

election allows the first spouse to die to be treated as the transferor of 

the QTIP assets for GST tax purposes. The benefit is that then both 

11

spouses are able to use GST exemption while still minimizing estate 

taxes with the marital deduction. 

c) How it works: First, the personal representative of the estate must 

make a standard QTIP election on the estate tax return. Second, on the same 

estate tax return, the personal representative must make an election for 

purposes of the GST tax provisions to treat all of the property in the QTIP 

trust as if the QTIP election had not been made. I.R.C. §2652(a)(3). 

d) Authority: The guidance for this election is in the GST code and 

regulations. See I.R.C. §§2631, 2632, 2652(a)(3) and the regulations 

thereunder. See, e.g., PLR 200742015 (permitting an extension of time to 

make a reverse QTIP election). 

c. Clayton Contingent QTIP Election 

1) An alternative to the traditional marital deduction formula is the use of a 

Clayton contingent QTIP election. See Estate of Clayton v. Comm’r, 976 F.2d 1486 

(5th Cir. 1992); Treas. Reg. § 20.2036(b)-7(d)(3). Under this method, the surviving 

spouse is given a qualifying income interest for life in a QTIP trust. The decedent’s 

personal representative or trustee, through the use of a Clayton contingent QTIP 

election, can determine how much of the QTIP trust property should be qualified for 

the marital deduction. See Sebastian Grassi, Jr., Drafting Flexibility Into Trusts Helps 

Cope With Uncertainty, Estate Planning, July 2002. The assets for which the QTIP 

election is not made can pass to an alternate trust (or other beneficiary), including a 

credit shelter trust or even a trust of which the surviving spouse is not a beneficiary. 

This provides significant post-mortem planning flexibility for the fiduciary. 

Treasury Regulations § 20.2056(b)-7(d)(3) provides that a qualifying 

income interest for life that is contingent upon the personal representative’s election 

will not fail to be a qualifying income interest for life because of that contingency or 

because the portion of the property for which the election is not made passes to or for 

the benefit of persons other than the surviving spouse. 

2) A Clayton-style plan does not require the use of a formula in the governing 

instrument. The fiduciary has the flexibility to do post-mortem estate tax planning. 

The obligation to take action after the death of the first spouse rests with the personal 

representative or trustee and not with the surviving spouse. In fact, the surviving 

spouse should not be the fiduciary because of a potential conflict of interest. The 

pitfalls of a qualified disclaimer do not apply. The election allows the personal 

representative, to the extent the QTIP election is not made, to keep principal out of the 

survivor’s estate without the requirement to distribute all income to the survivor, thus 

reducing the surviving spouse’s gross estate. See Sebastian Grassi, Jr., Drafting 

Flexibility Into Trusts Helps Cope With Uncertainty, Estate Planning, July 2002, at 

349. 

3) In this type of plan, especially, it is important that the personal representative 

be someone highly regarded and trusted by the decedent because the personal 

representative determines who is entitled to the beneficial shares of the estate: the 

surviving spouse or the alternate beneficiaries (typically a credit shelter trust). The 

election is made on the decedent’s IRS Form 706, so the personal representative 

potentially has fifteen months after the decedent’s death to make the determination. 

12

Form 706 is due nine months from the decedent’s date of death and a six-month 

extension is commonly granted. Whenever a Clayton-style election is used, the 

planner should consider whether to apportion estate taxes attributable to the property 

that is not elected for the marital deduction. Id. 

d. Qualified domestic trust (I.R.C. §2056A)—QDOT. 

1) As explained above, this trust must be used to claim a marital deduction when 

the surviving spouse is not a citizen of the United States. 

2) A QDOT has very specific requirements, including that the non-citizen spouse 

cannot be a trustee of the trust. Be certain to follow Treas. Reg. §20.2056A when 

drafting a QDOT. 

II. 

ESTATE AND GIFT TAXES 

A. Federal Estate Tax 

1. History 

a. Since its inception in 1797, the federal estate tax format and rates have changed 

significantly, including at least four repeals. Most recently, the 2001 Economic Growth and 

Tax Relief Reconciliation Act (“EGTRRA”) increases the federal applicable exclusion amount 

gradually before the tax is completely repealed in 2010 and replaced with a carry-over basis 

income tax system. At the same time, the maximum estate tax rate gradually decreases. The 

gift tax system is not repealed in 2010, but the tax rate is reduced. Then, in 2011, the Byrd 

Rule’s sunset clause repeals EGTRRA itself, and the pre-EGTRRA estate tax returns. 

b. As of January 1, 2011, the federal estate tax exclusion amount returned to $1,000,000, 

which was the pre-EGTRRA federal estate tax exclusion for 2006. It is also important to 

remember that EGTRRA has wider applications beyond the repeal of the federal estate tax and 

that, by changing the federal estate tax, gift tax and generation-skipping transfer tax 

provisions, EGTRRA has significantly impacted marital deduction planning. 

Historical Information on Federal Estate Tax Applicable Exclusion and Credit Amounts 

Year Maximum Rate Exclusion Credit 

2008 45% $2,000,000 $780,800 

2009 45% $3,500,000 $1,455,800 

2010 Repeal Repeal N/A 

2011 60% $1,000,000 $345,800 

2. ATRA legislation passed in 2013 changed the exemption again such that it is now $5,250,000 

and will continue increasing for inflation. Planners and estate administrators will have to 

remain constantly aware of the adjustments to this number to ensure the funding formulas are 

used and applied correctly. 

3. While I.R.C. Section 2001(a) establishes the federal estate tax, the exemption is established by 

section 2010(a), which provides a “credit of the applicable credit amount shall be allowed to 

the estate of every decedent against the tax imposed by section 2001.” The corresponding 

federal applicable exclusion amounts are set forth in a table following section 2010(c). 

However, for gift taxes, section 2505(a) fixes the applicable exclusion amount at $1,000,000 

13

for tax years 2002 through 2010. Now, under ATRA we have the applicable exclusion 

amount set at $5,000,000 at the federal level as of 2013. Note that the new Minnesota tax bill 

appears to be adding a Minnesota gift tax element although as of this writing the details are 

not fully known. 

B. Preparing Schedule M of the Federal Estate Tax Return 

1. The marital deduction is claimed on Schedule M—Bequests, Etc., to Surviving Spouse of the 

United States Estate (and Generation-Skipping Transfer) Tax Return, IRS Form 706. The 

instructions for completing Schedule M are found in Form 706 itself. According to the 

instructions, the tax preparer should “list each property interest included in the gross estate 

that passes from the decedent to the surviving spouse and for which a marital deduction is 

claimed.” 

a. Note that every asset appearing on Schedule M should also appear on another 

schedule on the estate tax return. Schedule M is where you list the asset in order to claim the 

marital deduction. You report the existence of the asset and its inclusion in the gross estate on 

other schedules. 

b. The instructions ask the preparer to include a cross reference to the item listed on 

Schedule M to the schedule where the asset is included in the decedent’s gross estate. For 

example if the decedent owned real estate that is reported on Schedule B and that real estate is 

devised to the spouse, then list it on both schedules, and on Schedule M include a 

parenthetical cross-reference such as “(See Schedule B, item 1).” 

2. No double deductions: If the estate has already taken a deduction for part or all of the 

property on Schedules J through L, however, the taxpayer is not allowed to take an additional 

deduction on Schedule M for the same property interest. For example, if you are including 

real estate on Schedule M for which you have already taken a deduction on Schedule K for the 

outstanding mortgage, you need to reduce the value of the real estate by the mortgage 

deduction. 

3. The easiest way to qualify for the marital deduction is to leave assets to a spouse outright. 

4. Qualified terminable interest property (“QTIP”) that qualifies for the marital deduction must 

be listed on Schedule M. One note of caution: the value of the property entered in whole or in 

part on Schedule M will be granted a marital deduction unless the taxpayer specifically limits 

the deduction to a portion of the property. 

5. To partially elect marital deduction treatment for QTIP property, make sure not to 

inadvertently take a complete marital deduction for the full value of the trust property. In 

other words, the practitioner must specify the amount of property to which the QTIP election 

applies. 

6. Keep in mind that, if you are electing a marital deduction for an IRA or qualified plan account, 

those accounts are qualified terminable interest property. Thus, you must elect the percentage 

subject to the marital deduction. It is wise to state the percentage even if it is 100%. If the 

account is payable to a qualifying marital trust for the surviving spouse, both the account (as 

QTIP property) and the martial trust (as a QTIP marital trust or a general power of 

appointment marital trust) must be listed on Schedule M. 

14

C. Gift Tax 

1. EGTRRA partially severed the uniform gift and estate tax system that was enacted under the 

Tax Reform Act of 1976. As of 2004, the gift tax applicable exclusion amount did not match 

the estate tax applicable exclusion amount, although the maximum gift and estate tax rates 

were still the same. Specifically, while the federal estate tax exclusion increased to 

$1,500,000 in 2004, the maximum gift tax exclusion remained at $1,000,000. The concept of 

a unified credit did not exist in those years, and clients who used their full gift tax applicable 

exclusion amount during their lifetimes may still have part of their estate tax applicable 

exclusion amount remaining upon their deaths. Note that ATRA reunified these exemptions 

for tax years 2013 and forward. 

D. Minnesota Estate Tax 

1. Since 2001, Minnesota’s estate tax laws have not been unified with the federal estate tax laws. 

Minnesota’s laws have remained with the pre-EGTRRA estate tax exclusion amounts. MINN. 

STAT. § 291.005, subd. 1, Part (8) (“‘Internal Revenue Code’ means the United States Internal 

Revenue Code of 1986, as amended through December 31, 2002.”). 

2. The fact that Minnesota is no longer a pick-up state for estate tax purposes significantly 

impacts existing marital deduction estate plans. Many marital estate plans drafted before 

EGTRRA funded the credit shelter amount using the maximum assets that could pass free of 

federal estate tax. This type of plan could now result in Minnesota estate tax upon the death of 

the first spouse. With increasing federal applicable exclusion amounts and Minnesota 

exemption fixed at $1,000,000, pre-EGTRRA estate plans may end up paying estate taxes that 

could be deferred and avoided completely. 

3. This does not mean that clients should automatically limit these plans to avoid paying any 

estate tax on the death of the first spouse. In some cases, it may make sense to pay some 

Minnesota estate tax on the death of the first spouse in order to shelter a greater amount from 

federal estate taxes on the second death. The maximum Minnesota estate tax rate is 16%, 

while the maximum federal estate tax rate is currently 48%. With the uncertainty in the tax 

rates, applicable exclusion amounts, and the dates of each spouse’s death, it is important to 

build flexibility into estate plans and opportunities for post-mortem estate planning. 

4. As of this writing, the Minnesota legislature was working on the passage of a state gift tax for 

lifetime gifts in excess of $1,000,000. The details of implementation are not fully known, but 

presuming it is enacted this will be a further decoupling aspect of Minnesota law compared to 

the federal laws. Advisors will have to be very careful not to recommend gifting that will 

result in state gift tax without fully discussing it with the clients. 

5. This decoupling of the federal and Minnesota estate tax systems means that an estate may be 

required to file a Minnesota estate tax return even though the estate is not required to file a 

federal estate tax return. Minnesota Statutes section 289A.10, subd. 1 sets forth the 

requirements for filing a Minnesota estate tax return, providing that a personal representative 

must file a Minnesota estate tax return for a decedent who has an interest in property with a 

situs in Minnesota, if either of the following is true: 

a. a federal estate tax return is required to be filed; or 

b. the federal gross estate exceeds . . . $1,000,000 for estates of decedents dying after 

December 31, 2005. 

15

As the statute indicates, the Minnesota applicable exclusion amount does not exceed $1,000,000 under the 

current legislation. 

III. 

MARITAL DEDUCTION PLANNING WITH IRAS AND QUALIFIED PLANS 

A. General 

1. IRA and qualified plan assets are included in the decedent’s gross estate for estate tax 

purposes. If these assets are left to or for the benefit of a surviving spouse, they can qualify 

for the marital deduction under § 2056. The easiest way to leave assets to a surviving spouse 

is to name the spouse outright as the sole beneficiary. A surviving spouse has special 

privileges that are not available to other beneficiaries. One of the most significant privileges 

is that a surviving spouse may roll an IRA over into her own name and treat the assets as her 

own. If done properly, this rollover does not trigger any income tax consequences, and the 

surviving spouse may then name her own beneficiary and calculate her minimum distributions 

using her own age and the Uniform Lifetime Table. In effect, this can help to defer the 

recognition of income tax on the IRA for a longer period of time. 

2. Any time you are planning for retirement assets with a married client, you need to keep in 

mind the Retirement Equity Act of 1984 (“REA”). Pub. L. No. 98-397. REA is designed to 

protect retirement benefits for the non-participant spouse. If the client wants to name someone 

other than his spouse, REA may require that the spouse consent to the non-spouse beneficiary 

in writing. Be sure to read the account documents carefully to determine if REA applies. 

REA is governed by §§ 401(a)(11) and 417 and the applicable regulations that are mirrored in 

ERISA 205. Traditional IRAs and Roth IRAs are not subject to REA. 

B. Roll-over 

1. A surviving spouse has the ability to roll over the decedent’s IRA to her own IRA. In order to 

do a tax-free roll-over, the surviving spouse must deposit the proceeds from the IRA into her 

own IRA within sixty days of taking the distribution. § 408(d)(3). You may be able to obtain a 

waiver of the sixty-day requirement in the case of hardship. Rev. Proc. 2003-16. 

2. Other types of qualified accounts, such as §§ 401(k) or 403(b) plans, might not allow the 

spouse the opportunity to roll the account over. In that case, the spouse may be able to take a 

lump sum distribution from the qualified account and place the assets into her own IRA 

without any income tax consequences. If the spouse is named as the outright beneficiary and 

chooses not to roll the IRA over into her own name, she still has other advantages to help 

defer the income tax consequences. If the participant died before his required beginning date, 

the surviving spouse does not need to start taking distributions in the year following death, but 

can choose to start taking distributions at the later of the year following death or the year the 

participant would have reached his required beginning date. Also, if the participant died 

before his required beginning date, the spouse’s life expectancy is treated as a recalculated life 

expectancy as long as the spouse is the sole designated beneficiary on the designation date 

(September 30 of the year after the participant’s death). When the surviving spouse dies, the 

life expectancy then becomes a non-recalculated life expectancy and is reduced by one each 

year. 

Example: Fred dies at the age of sixty-seven (before his required beginning 

date), survived by his wife, Wilma, who is only sixty years old. Fred had a $200,000 

IRA that Wilma decides not to roll over into her own IRA. Unlike George in the 

previous example, Wilma does not need to start taking distributions from the IRA for 

16

three years, when Fred would have turned 70½. At that time, the minimum required 

distribution is calculated under the Single Life Table based on Wilma’s life 

expectancy at the age of sixty-three. If the account has grown to $225,000, the 

minimum required distribution would be $9,911.89. ($225,000 divided by 22.7.) For 

the next year the minimum required distribution will be based on the life expectancy 

of a sixty-four year old under the Single Life Table, and the account will be divided 

by 21.8. 

3. Reasons not to roll over: If the surviving spouse is younger than 59½, she may choose to keep 

the account in the name of the deceased participant so that she can take distributions as a 

beneficiary without incurring any penalties (there is a 10% penalty for taking distributions 

before the age of 59½.). § 72(t)(1). After she reaches 59½, she would then have the option of 

rolling the balance of the account over into her own name. There is not a time deadline for a 

surviving spouse to roll an IRA over to her own IRA, so it could be rolled over in the first year 

or ten years later. However, any actual distributions to the spouse must be rolled-over within 

sixty days. 

4. After the roll over: If the surviving spouse has already rolled the IRA over into her own name 

and wants to take distributions from the account before she reaches the age of 59½, there is an 

exemption from the 10% penalty under § 72(t). The spouse can take distributions from her 

account as a “part of a series of substantially equal periodic payments (not less frequently than 

annually) made for the life (or life expectancy) of the [spouse] or the joint lives (or joint life 

expectancies) of such [spouse] and [her] designated beneficiary.” § 72(t)(2)(A)(iv). The 

surviving spouse does not need to continue the substantially equal payments after reaching the 

age of 59½, because distributions at that point would not be subject to the penalty. In addition 

to an exception for death prior to age 59½, there are ten other exemptions. 

C. Naming a trust 

1. Although the general rule is that a designated beneficiary must be an individual, a trust can be 

named as a beneficiary of an IRA or qualified plan and still have a designated beneficiary for 

minimum required distributions as long as the following five requirements are met. 

a. Five requirements 

1) The trust must be valid under state law. Treas. Reg. § 1.401(a)(9)-4, 

A-5(6)(1). 

2) The trust must either be irrevocable or become irrevocable upon the death of 

the account owner. 

3) The beneficiaries must be “identifiable from the trust instrument.” Treas. Reg. 

§ 1.401(a)(9)-4, A-5(6)(3). 

4) A copy of the trust instrument or summary information about the trust, its 

beneficiaries, and contingencies must be provided to the plan administrator or 

custodian by October 31st of the year after the year of the participant’s death. Treas. 

Reg. § 1.401(a)(9)-4, A-6(b). 

5) Generally, all beneficiaries of the trust must be individuals (no charities or 

estates). 

17

. The primary concern with meeting these requirements is dealing with the beneficiaries 

of the trust. The trust beneficiaries must be identifiable, and they must be individuals. This 

usually is not a problem for the primary beneficiary, but it can be an issue for the contingent 

beneficiaries. The rules allow you to look through a trust instrument to the life expectancy of 

the oldest trust beneficiary to determine the minimum required distributions, it must be 

absolutely clear that none of the future beneficiaries will be older than the current oldest 

beneficiary. This appears to include even remote possibilities. PLR 2002-28-025; PLR 

2002-35-038. For example, if your IRA names your spouse in trust and the trust distributes to 

your children on your spouse’s death, then it appears to qualify, and the spouse and children 

will be considered beneficiaries. PLR 93-22-005. But what if none of your children survive 

the term of the trust? If the governing instrument has a contingent distribution paragraph that 

follows the intestacy laws of Minnesota, it is possible that the trust could be distributed to 

your parents. MINN. STAT. § 524.2-103. Certain beneficiaries may be ignored if they are mere 

potential beneficiaries, although it is not clear exactly who fits this definition. Treas. Reg. 

§ 1.401(a)(9)-5, A-7(c). Unfortunately, this problem does not have a clear solution, and any 

client who names a trust must be prepared for the possibility that the trust will not be a 

qualified designated beneficiary. 

2. If you want the trust to qualify for the marital deduction, you will also need to meet the 

requirements for qualified terminable interest property (“QTIP”). For a detailed discussion on 

QTIPs see chapter 4. In order to qualify the IRA or qualified plan as a QTIP trust, all income 

must be distributed to the surviving spouse for life in at least annual installments. 

§ 2056(b)(7)(B). Minimum required distributions from IRAs or qualified plans to the trust 

might not include all of the annual income earned in the account. The all-income to the 

surviving spouse rule is satisfied if the trust meets the following requirements: 

a. The surviving spouse has the right to compel the trustee to withdraw from the IRA an 

amount equal to all the income earned on IRA assets at least annually, and to 

distribute such amounts to the surviving spouse. 

b. No person (including the spouse) has the power to appoint any part of the trust 

property to any person other than the spouse. 

c. The IRA document contains no prohibition on withdrawal from the IRA of amounts in 

excess of the annual minimum required distributions. Rev. Rul. 2000-2, 2000-1 C.B. 

305. 

3. Keep in mind, if the client names a QTIP trust as the beneficiary, then the surviving spouse is 

not allowed to roll the account over into her own name and, therefore, does not have the 

ability to extend the income tax deferral for her lifetime. 

Example: Fred is the owner of a $1,000,000 IRA. He names his spouse as 

the sole beneficiary of the IRA, and leaves the assets to her in an outright distribution. 

Fred dies at the age of sixty-eight (before his required beginning date), and his 

surviving spouse, who is sixty, rolls the account over into her own name. She names 

their children as the beneficiaries of the account, and does not need to start taking 

distributions from the account until she reaches the age of 70½. At that time, her 

minimum required distributions would be calculated using the Uniform Lifetime 

Table based on her life expectancy. 

Example: Changing Example 8-5 by having Fred leave the IRA assets to his 

spouse using a QTIP trust, she would not have the option of rolling the account over 

into her own name. Distributions will begin when Fred would have reached his 

18

equired beginning date, and they will be calculated using the spouse’s life expectancy 

under the Single Life Table. 

4. Another type of trust that qualifies for the marital deduction is the general power of 

appointment trust discussed in chapter 3. General power of appointment trusts may fail to 

qualify as a designated beneficiary, however, because of the requirement that all beneficiaries 

be identifiable. Treas. Reg. § 1.409(a)(9)-4, A-5(6)(3). The IRS has taken the position that all 

potential future beneficiaries under a power of appointment should be considered, and the fact 

that the power could be exercised in favor of a charity or an individual beneficiary who is 

older than the current beneficiary means that the trust does not qualify as a designated 

beneficiary. NATALIE B. CHOATE, LIFE AND DEATH PLANNING FOR RETIREMENT BENEFITS 

75-76 (5 th ed. 2003). Remember, if there is not a designated beneficiary and the participant 

dies before his required beginning date, the account must be paid out in five years. 

§ 401(a)(9)(B)(ii). If he dies after his required beginning date, the account will be paid out 

over the participant’s life expectancy. § 401(a)(9)(B)(i). 

5. One possible solution to the various trust issues is to make the trust a conduit trust. A 

“conduit trust” is not an official term, but it is used to describe a trust that requires the entire 

minimum required distribution to be withdrawn by the trustee and immediately distributed to 

the beneficiary. Treas. Reg. § 1.401(a)(9)-5, A-7(c)(3), Example 2. Using a conduit trust 

allows you to disregard the future beneficiaries under the Treasury Regulations. Id. The 

reason you are allowed to ignore the future beneficiaries is that presumably all of the 

retirement assets will be distributed out to the primary beneficiary if she lives to her full life 

expectancy. The problem is that, if the goal is to keep assets in the trust for the future 

beneficiaries, a conduit trust may not meet that goal. 

D. Post-Mortem Planning Opportunities 

Because designated beneficiaries are not determined until September 30 of the year following the year 

of the participant’s death, beneficiaries named by the participant who disclaim before that date will not be 

considered in determining the designated beneficiary. Treas. Reg. § 1.401(a)(9)-4, A-4(a). Because the rules 

allow this “grace period” before designated beneficiaries are finalized, actual beneficiaries named by the 

participant in a beneficiary designation may not end up being “designated beneficiaries.” If the primary 

beneficiary disclaims, the contingent beneficiary may become the designated beneficiary. 

Beneficiaries not qualifying as “designated beneficiaries” may also receive a complete distribution 

prior to September 30 of the year following the participant’s year of death, leaving only qualified “designated 

beneficiaries.” This is especially useful for the participant who has named a charity as well as a spouse or 

child as beneficiary. Under the previous rules, the presence of a charity as a co-beneficiary ruined the other 

beneficiary’s opportunity to be a “designated beneficiary.” The current rules allow the IRA to distribute the 

charity’s share in full before September 30 of the year after the participant’s year of death, leaving the 

remaining portion of the IRA to be distributed to the remaining designated beneficiary. 

Under a previous Example, a client left 10% of his IRA to his church and the rest to his wife. When 

the client dies, he does not have a designated beneficiary under the Treasury Regulations. A designated 

beneficiary must be an individual, so a charity cannot be a designated beneficiary. In order to cure this 

problem, the planner can advise the spouse to pay 10% of the IRA to the charity in full satisfaction of its share. 

There are no income tax consequences because the church is a tax-exempt organization, and the spouse will 

now qualify as the designated beneficiary if the distribution to the church is made before September 30 of the 

year following death. The spouse can elect to remain as the designated beneficiary, or she could roll the 

account over to her own IRA. 

19

Many clients name their spouse and children as beneficiaries. In the case of multiple beneficiaries, the 

life expectancy of the oldest beneficiary is used to determine the payout period for all beneficiaries. Thus, if 

the beneficiaries have disparate ages, the younger beneficiaries are forced to receive a shorter payout period 

and thus less tax deferral. However, due to the regulation determining the identity of designated beneficiaries 

on September 30 of the year following the year of the participant’s death, the IRA may be divided into 

separate accounts even after the participant dies. If the IRA is so divided, each beneficiary’s distribution 

schedule will be calculated individually. A participant may leave a percentage share of the account to multiple 

beneficiaries, and the IRA funds will be considered split into “separate accounts.” The separate accounts must 

be established by December 31 of the year following death. Treas. Reg. § 1.401(a)(9)-8, A-2. Generally, it is 

not necessary to physically divide property in one IRA into separate IRAs, but watch out for IRA plan 

agreements with restrictions against separate accounts. In that circumstance, the IRA plan terms control, and 

the client should set up separate IRAs for separate beneficiaries during lifetime, if possible. 

IV. 

DISCOUNTS 

A. General Concept. If discounts are available, make sure to preserve them. Avoid 

unnecessary aggregation of assets if it increases estate tax values. Consider the value of 

each asset by looking at exactly what the decedent has the power to transfer, not 

necessarily what the decedent owned. 

B. Advantages and Disadvantages. 

1. Advantages: Preserving or creating minority interest discounts 

a. Interest held in QTIP and interest owned by decedent are not merged. See Estate of 

Bonner v. United States, 84 F.3d 196 (5 th Cir. 1996) (holding that decedent’s interest in 

property owned individually did not merge with interest in same property held in QTIP for the 

benefit of decedent and, accordingly, that decedent’s estate was entitled to fractional interest 

discounts when valuing property); Estate of Mellinger v. Commissioner, 112 T.C. 26 (1999)n 

(ruling the shares of company held in QTIP trust should not be aggregated with the shares held 

by decedent individually for valuation purposes despite fact that shares were eventually sold in 

a single block and, thus, that valuation discounts are available to estate); Estate of Nowell v. 

Commissioner, T.C. Memo 1999-15 (ruling interest in QTIP trusts and in revocable trust shall 

not be merged for estate tax valuation even though many subjective factors show overlap in 

trust and asset administration). 

b. Planning opportunities: 

1) Consider using a QTIP trust to prevent the aggregation of interests, especially 

if the couple has a closely held business or valuable real estate. 

2) Partnerships should be drafted with discounts in mind at the time of funding 

and when transfers will be made in the future, especially on death. 

2. Disadvantages: The discounts may work against the estate if charitable deductions are sought. 

See Ahmanson v. United States, 674 F.2d 731 (9 th Cir. 1981); rev’d on other grounds, 733 

F.2d 623 (9 th Cir. 1984) (ruling an estate may only be allowed a deduction for estate tax 

purposes for what is actually received by the charity where a majority interest was severed 

resulting in a reduced charitable deduction. 

20

SECTION 18 

Estate Planning Issues for Farmers 

Hans K. Carlson 

Costello, Carlson & Butzon, LLP 

Jackson 


SECTION 19 

Representing the Fiduciary with IRS and 

Minnesota Revenue Tax Controversies 

Claudia M. Revermann 


Saint Cloud 



1. Initial considerations ........................................................................................1 

2. Fiduciary personal liability ..............................................................................3 

3. Spousal relief from joint and several liability ..................................................5 

4. Collection .........................................................................................................7 

5. Other Minnesota considerations ......................................................................9

REPRESENTING THE FIDUCIARY WITH IRS AND MINNESOTA 

REVENUE TAX CONTROVERSIES 

1. Initial considerations 

Claudia M. Revermann, JD, CPA 


a. The Personal Representative or Trustee (the Fiduciary) is responsible for the 

following: 

i. Making sure all of decedent’s previous year’s federal and state income tax 

returns were filed; 

ii. Filing decedent’s final federal and state income tax returns; 

iii. Filing the federal and state estate tax returns, if applicable; 

iv. Filing the federal and state estate or trust income tax returns, if applicable; 

v. Paying all outstanding tax liabilities of decedent, including income taxes, 

property taxes, business taxes, etc.; and 

vi. Reporting and paying income tax on any compensation he or she receives 

as a result of services performed as a fiduciary. 

b. Form 56, Notice Concerning Fiduciary Relationship, should be filed with the 

Internal Revenue Service. Treas. Reg. §301.6903-1(a) and (b) state that every 

fiduciary is required to give notice in writing to the IRS that he or she is acting for 

another in a fiduciary capacity. Form 56 serves this purpose. The danger of not 

providing notice is that any IRS notices will be sent directly to the Fiduciary and 

will be deemed sufficient for IRS purposes of, for instance, assessing tax. Even 

without the Fiduciary receiving notice, the IRS can move forward with collection 

on the liability. In addition, regarding transferee liability under IRC §3713(b) and 

assessment of personal liability against the Fiduciary, in the absence of a notice of 

fiduciary relationship, any notice of §3713(b) liability mailed to the PR at his or 

her last known address is sufficient. 

Therefore, to comply with the Regulation and to protect the Fiduciary from an 

assessment due to the failure to provide the IRS with the Fiduciary’s name and 

address, Forms 56 should be filed for the estate (or Trust) and for the decedent. A 

separate Form 56 must be filed for each person “whom you are acting in a 

fiduciary capacity.” It is suggested that the Fiduciary file this form for the past 

three years’ tax returns and to include a copy of the Trust or Letters of 

Administration, as applicable. 

In any case where the Fiduciary resigns or is removed by the court or the by the 

trust instrument, the former Fiduciary should file Forms 56 notifying the IRS of 

the termination of fiduciary relationship. Filing the termination of fiduciary 

relationship should provide the former Fiduciary with protection against personal 

liability arising from estate events or actions subsequent to the termination. The 

1

termination notices should be filed as soon as possible in order to relieve the 

former Fiduciary from liability for actions that are required to be taken subsequent 

to the termination, such as filing new tax returns with accompanying tax 

payments. Providing the IRS with notice of the termination of a fiduciary 

relationship will not protect the Fiduciary from personal liability for activities 

previously undertaken by or required of the fiduciary for the periods in which he 

or she was serving as Fiduciary, such as filing returns or making payments of tax 

due. Additional steps need to be taken to further insulate the Fiduciary from 

liability. 

c. The Fiduciary should collect and review the decedent’s federal income tax 

reporting information (e.g. 1099s) and prior federal and state income and gift tax 

returns for the three years preceding death. Review all of decedent’s records to 

identify any correspondence and/or notices from the IRS. If an accountant had 

previously prepared decedent’s tax returns, the Fiduciary should meet with the 

accountant to discuss all tax issues. If information seems incomplete or additional 

information is necessary, consider requesting copies of previously filed tax 

returns (IRS Form 4506), requesting a transcript (IRS Form 5406), or making a 

Freedom of Information Act request to obtain missing information. 

d. Filing any of the above suggested forms does not act as notice of a change of 

address for IRS purposes. The Fiduciary should consider filing IRS Form 8822, 

Change of Address, to ensure that all decedent’s mail is forwarded to the 

Fiduciary. 

e. If the Fiduciary, or counsel for the Fiduciary, deems it necessary to discuss 

decedent’s tax matters with the IRS, Form 2848, Power of Attorney, will be 

required to be filed to give the IRS authority to discuss matters with the 

representative. Again, Form 56 must be filed before (or in conjunction with) the 

Power of Attorney or it will not be accepted. When completing the Power of 

Attorney form, it will be helpful to check the box requesting that copies of all 

mailings be sent to the representative. In addition, be sure all years, including the 

current year, are indicated on the form so amended Powers of Attorney will not be 

required as matters progress. 

Minnesota’s companion form is Form REV184, Minnesota Authorization of 

Power of Attorney. The Fiduciary may choose to request full authority, without 

restrictions, to cover any possible issues that may arise in his/her research of 

decedent’s tax history. 

f. Filing reminders – To most effectively process decedent’s final returns and collect 

any refund due to the estate, the Fiduciary should consider the following: 

i. Write “DECEASED,” the taxpayer’s name, and the date of death across 

the top of the tax return. 

2

ii. The personal representative, if applicable, should sign the tax return. If 

decedent is survived by a spouse and the spouse is filing a joint return, the 

spouse should also sign. For a surviving spouse, if no separate personal 

representative is designated, the spouse should designate “Filing as 

surviving spouse” on the signature line. 

iii. To claim a refund for an unmarried (non-joint filing) decedent, file IRS 

Form 1310 with the tax return. If the court has appointed a personal 

representative, the court order should accompany the form. 

2. Fiduciary personal liability. 

a. Federal and state law holds fiduciaries liable for income and estate taxes where 

there are insufficient funds available to pay tax liabilities. Often times this occurs 

when amounts have been distributed without reserving enough to pay amounts 

that become due. To prevent this from happening, the Fiduciary should promptly 

review and assess the accuracy, completeness, and compliance with IRS 

requirements. If problems arise, the Fiduciary should determine a way to rectify 

the mistakes or omissions and assess the liabilities associated with the issues that 

arise, including the estimated tax liability and costs of curing the problems (e.g. 

tax professional fees). The necessary cash should be retained by the estate/trust 

for payment of the eventual obligations. 

b. Generally, the IRS has three years to assess tax liability deficiencies on income, 

estate, and gift tax returns filed by decedent or the Fiduciary. Because most estate 

and trust administrations do not go on that long, the Fiduciary should be aware of 

his/her potential ongoing liability exposure and should be counseled as to how it 

may be limited. 

i. Notice of Fiduciary Capacity – See discussion above regarding filing IRS 

Form 56. 

ii. I.R.C. §6905(a) provides that, after a decedent’s individual (but not 

fiduciary) income or gift tax return has been filed, a Fiduciary may file 

IRS Form 5495 for release of the Fiduciary’s personal liability for such 

income or gift tax. Treasury Regulations do not impose a time limit for 

filing Form 5495. 

If Form 5495 is properly filed, the IRS has nine months in which to notify 

the Fiduciary of any deficiency for decedent’s applicable income or gift 

tax returns. If the Fiduciary pays the additional tax, or if no notice is 

received from the IRS within nine months from the date of filing Form 

5495, the Fiduciary is then discharged from personal liability. 

3

If the Fiduciary is released from personal liability for any such income or 

gift tax, the IRS may still assess deficiencies against the Fiduciary in his or 

her fiduciary (not individual) capacity, and may collect the taxes due from 

assets of the estate (provided the limitations period for assessment and 

collection has not run). 

iii. In addition, a Fiduciary may also file IRS Form 4810 to request prompt 

assessment of any income (individual or fiduciary) tax or gift tax, 

including any tax that may be due on returns filed by the decedent that are 

still “open” under the statute of limitations. If a request for prompt 

assessment is made, the statute of limitations for assessment is shortened 

from three years to 18 months, but not beyond three years after the return 

was filed. Thus, if the statute of limitations will run prior to the shortened 

assessment period, filing the request for prompt assessment will not 

extend that period. 

Note, however, that if the request is made where there is a surviving 

spouse who filed a joint return with decedent, the assessment period will 

not be shortened for the surviving spouse, who will remain jointly and 

severally liable for the decedent’s tax liability. 

A review of Estate of Walker v. Commissioner, 90 T.C. 253 (1988) is a 

prime example of why it is important for the Fiduciary to make the 

request. In this case, the IRS sent a personal representative a notice of 

deficiency within three years after the tax return filing but after the estate 

had been distributed and after the probate court had discharged the 

personal representative from liability. The personal representative had not 

made a request for prompt assessment and, unfortunately, the notice of 

deficiency was therefore held to be timely. 

Minnesota’s corresponding request can be made on Form M22. Similar to 

the IRS, the request shortens the statute of limitations on auditing the 

income tax return from 3½ years to 18 months (from the date of filing). 

Estate tax returns are not eligible for the request. 

iv. There is a separate request for discharge of personal liability regarding 

estate taxes due. I.R.C. §2204(a) provides that a Fiduciary may make 

written application for the prompt determination of the estate tax and for 

discharge of personal liability for payment. The request should be made 

to the same IRS Service Center where the estate tax return was filed. 

There is no IRS form for this request. Once the request is made, the IRS 

has nine months to notify the Fiduciary of any estate tax deficiency and, 

upon payment of such additional tax, the Fiduciary is discharged from 

4

personal liability. If no such notification is received, the Fiduciary is 

automatically discharged from personal liability. This procedure does not 

relieve the estate from liability for the payment of additional estate tax, 

nor does it serve to release the estate tax lien from estate assets or shorten 

the time to assess the tax. Instead, releases the Fiduciary from being held 

personally responsible. Without this request, the IRS would have 

additional time past the three year assessment period to tie the Fiduciary to 

the personal liability. 

In some cases, estate taxes are paid in installments (e.g. taxes attributable 

to a closely-held business). Until the final installment is made, the 

Fiduciary’s personal liability remains; however, the Fiduciary can make a 

request to furnish a bond to secure the total amount of estate tax to be paid 

or he/she can elect that a lien be imposed with respect to certain property, 

which is described as “§6166 lien property.” 

3. Spousal relief from joint and several liability 

a. On behalf of a deceased spouse, the Fiduciary may make the initial request for 

relief as long as the decedent met the requirements for making the request while 

he or she was alive. If the decedent made the request during his or her lifetime, 

the Fiduciary may follow through with the request on behalf of the estate. The 

decedent’s marital status is determined on the earlier of the date relief was 

requested or the date of death. 

b. Specifically, the Fiduciary may seek relief in three possible forms: 

i. Innocent Spouse Relief. A joint filer, whether currently married or not, 

may elect to limit their liability for unpaid taxes attributable to an 

understatement arising from erroneous items on a joint return. This 

requires lack of knowledge or lack of reason to know of an understatement 

attributable to erroneous items. 

ii. Separation of Liability Relief. A Fiduciary, on behalf of a deceased 

taxpayer, may elect to limit the estate’s liability to the portion of the 

deficiency that is attributable to items specifically allocable to the 

taxpayer. Items are generally allocated between spouses in the same 

manner as they would have been allocated had the spouses filed separate 

returns. 

iii. Equitable Relief. If the previous two forms of relief are either denied or 

inapplicable, the Fiduciary may still request relief based on the facts and 

circumstances showing it would be inequitable to hold the estate liable for 

all or part of any unpaid tax or deficiency arising from a joint return. 

5

c. Relief is requested by using Form 8857, Request for Innocent Spouse Relief (and 

Separation of Liability, and Equitable Relief), or other similar statement signed 

under penalties of perjury, within two years of an assessment of additional tax. A 

claim may be made prior to assessment, such as during an audit examination. 

However, the effect of the election occurs only after there is a deficiency. A 

deficiency only arises when the IRS has assessed the tax. 

d. Keep in mind the effect of federal or state transferee liability or property laws on 

the estate and surviving spouse. It is possible to separate liability for IRS and 

Minnesota Department of Revenue purposes, yet still have the estate (or surviving 

spouse) remain liable for unpaid taxes and have the property be subject to 

collection. 

For example, Husband and Wife file their 2009 joint income tax return by April 

15, 2010. Husband dies in January 2012, and the estate assets are passed to Wife. 

In July 2012, the IRS assesses a deficiency for the 2009 return for tax issues 

attributable to Husband. Wife files a request for spousal relief, which is granted, 

leaving Husband’s estate solely liable. Due to the estate transfer to Wife, the IRS 

may pursue collection against her. 

e. Consider the following potential positive and negative factors the IRS may use to 

determine whether to grant full or partial relief to a requesting Fiduciary on behalf 

of a taxpayer. No single factor is determinative in any particular case. Rather, all 

factors will be considered and weighed appropriately. 

i. Was the spouse separated (whether legally separated or living apart) or 

divorced from the nonrequesting spouse? 

ii. Was the spouse abused by the nonrequesting spouse, and did such abuse 

amount to duress? 

iii. Was the legal obligation for payment of the outstanding tax liability 

allocated to either spouse pursuant to a divorce decree or agreement? If it 

was allocated to nonrequesting spouse, did the requesting spouse 

reasonably believe nonrequesting spouse would pay the liability? 

iv. Did the spouse know or have reason to know of the item giving rise to a 

deficiency or that the reported liability would be unpaid at the time the 

return was signed? 

v. Has the spouse significantly benefited (beyond normal support) from the 

unpaid liability or items giving rise to the deficiency? 

vi. Will the spouse (the estate) experience economic hardship if relief from 

6

the liability is not granted? 

vii. Did the spouse (or the Fiduciary) make a good-faith effort to comply with 

federal income tax laws in the subsequent tax year(s) to which the request 

for relief relates? 

f. Minnesota has its own relief process with its Joint Spouse Allocation program, 

pursuant to Minn.Stat. §289A.31, subd. 2. A written request is made to the 

Minnesota Department of Revenue’s Taxpayer Rights Advocate Office, which 

includes copies of the joint tax returns (federal and state), the death certificate (or 

the parties’ divorce decree as the case may be), and any other applicable 

information to assist the Department in allocating the tax liability. Once the 

request is made, the nonrequesting spouse is notified. A determination letter will 

be sent to both parties, who will have 30 days to respond with any additional 

information for the Department to consider. Upon final assessment, the 

Department will update its records for the reallocation of tax liability, if 

applicable. Taxpayers are not refunded any payments made prior to the request; 

however, amounts paid in after the request will be refunded after a final 

determination is made. 

4. Collection 

a. It is clear that the Fiduciary’s ability to pay taxes is limited by the amount of 

assets available; however, sufficient amounts need to be appropriately distributed 

and held back to pay outstanding tax liability. Otherwise, the Fiduciary or the 

heirs can be held liable and collection will be pursued against them. 

b. After assessment and nonpayment, the IRS and Minnesota Department of 

Revenue collection departments take on the task of seeking assets from which to 

get paid. The first search is for probate assets. If no known assets are located and 

no probate is opened, the debt is likely deemed uncollectible. However, there are 

certain non-probate assets that can be collected on. For example, assets held in 

trust can be used for payment of outstanding liabilities. It is the Trustee’s 

fiduciary responsibility to pay all debts of the trust before distributing the Trust 

corpus. In this case, the trustee may be held personally liable for any unpaid taxes 

if the assets are intentionally distributed without the taxes being paid. Intent is 

broadly construed and the Trustee is held to a high standard. He or she should 

have had no reason to know that the taxes were due prior to distributing the Trust 

assets. 

c. An unanticipated difficulty may arise if the assets of the estate are not readily 

saleable or have no current market and the estate tax due thereon cannot be paid 

7

when ordinarily due. Use, for examples, an estate holding a large tract of land 

that may not be sold except over a long period of time or stock of a closely held 

corporation. The IRS is not in the business of holding and selling land or stock, 

so an alternative election must be made to postpone the payment of the tax. Upon 

a showing of undue hardship, IRC §§6161 and 6163 allow the IRS to extend the 

time for the payment. Note however that the estate tax return must still be filed 

timely and the election must be filed before the due date of the return. 

i. Under IRC §6161, the estate tax may be deferred for a reasonable period 

not to exceed 10 years. Allowance of the extension is in the absolute 

discretion of the Commissioner. To meet the standard of “undue 

hardship” one must generally show that the asset cannot be converted to 

cash except by forced sale prices or that borrowing funds against assets is 

not possible with reasonable lending terms. However, if a market exists 

for the asset, it is not necessarily an undue hardship to take a loss on the 

sale, especially if the loss could be deemed to be due to general economic 

conditions. 

ii. Remainder interests pose separate considerations. While this remainder 

interest is includible in the decedent’s taxable estate, remainderpersons 

can only reap the benefits and full enjoyment of the interest when the 

preceding estate is terminated. It may be necessary for money to be raised 

to pay the tax on the entire interest, yet the remainderpersons’ ability to 

sell or borrow against the interest is hampered. Accordingly, IRC §6163 

allows for an election to delay payment of the estate tax attributable to the 

remainder interest until six months after the termination of the preceding 

estate interest. This delay can be extended another two years upon a 

showing of undue hardship. 

iii. A bond may be required in exchange for granting the extension of the 

payment. For IRC §6163 extensions, it is mandatory that the bond amount 

be double the tax due. 

iv. Additional considerations are made for closely held business stock under 

IRC §6161. If the stock exceeds either 35% of decedent’s gross estate or 

50% of the taxable estate, the Fiduciary may elect to pay the tax in two or 

more (but not exceeding 10) equal installments. This election allows for a 

stock redemption without dividend consequences to pay for estate taxes, 

funeral and costs of administration. While the redemption amount cannot 

exceed these actual costs, the proceeds do not actually need to go toward 

payment of these expenses. 

v. Of particular note is that interest will continue to be accrued until the 

entire outstanding tax liability is paid. However, the IRS does give a 

8

“break” for when an IRC §§6161 or 6163 extension is granted assessing 

interest at a rate of 4%, rather than the usual 6%. 

d. The Fiduciary may negotiate abatement of penalties due to extenuating 

circumstances related to the late filing or late payment of decedent’s income 

taxes. An abatement request can be made any time after the tax has been 

assessed. Examples of appropriate reasons for the request include decedent’s 

mental or physical health concerns, lack of education or aptitude, high level of 

complexity of tax or compliance issues, unavoidable absence, inability to obtain 

necessary records, extraordinary circumstances involved with administering 

decedent’s estate. These reasons must show that decedent (or the Fiduciary) was 

prevented from making timely tax filings and payments. The request should tell 

the taxpayer’s (Fiduciary’s) story with impact, including his/her plan for 

compliance and a sincere acknowledgement of rectifying the issue. 

5. Other Minnesota considerations 

a. Property tax refunds. A surviving spouse or dependent of decedent may file for a 

property tax refund. The personal representative or other fiduciary may not claim 

the refund. 

b. Minn. Stat. §§289A.08, Subd. 1(b) and 289A.31, Subd. 1(1) set forth the personal 

representative’s statutory duty to file any past due unfiled income tax returns and 

to pay decedent’s income taxes due. 

c. Pursuant to Minn. Stat. §270C.58, Subd. 3, a personal representative can be 

assessed for decedent’s tax liabilities. 

9

SECTION 20 

Portability Under the New Tax Law and 

Regulations – Porta-Planning 

Robert A. McLeod 


Minneapolis 



Page 

I. HOW TO MAKE THE ELECTION ................................................................................... 1 

A. Time to Make Election ............................................................................................ 1 

B. Opting out of the Election. ...................................................................................... 1 

C. Irrevocability ........................................................................................................... 2 

D. Amending the Election. .......................................................................................... 2 

E. Who Makes the Election? ....................................................................................... 2 

F. Requirements for a Form 706. ................................................................................ 2 

G. Computing the DSUE Amount ............................................................................... 4 

II. COMPUTING THE DUE AMOUNT ................................................................................ 4 

A. Definitions............................................................................................................... 4 

B. Calculation of the DSUE ........................................................................................ 4 

C. The Federal Form 706, Part 6, Section C................................................................ 6 

D. Deceased Spouse? ................................................................................................... 6 

III. HOW DOES PORTABILITY EFFECT QDOTs? ............................................................. 7 

A. Example 1 ............................................................................................................... 7 

B. Example 2 ............................................................................................................... 8 

C. Example 3 ............................................................................................................... 8 

IV. AUDITS OF DECEASED SPOUSE RETURNS. .............................................................. 8 

A. The IRS may examine returns of a decedent .......................................................... 8 

V. ESTATE PLANNING AND PORTABILITY. .................................................................. 8 

A. Does GSTT and Portability Mix? ........................................................................... 8 

B. Grantor Trusts ......................................................................................................... 9 

C. Income vs. Estate Tax ............................................................................................. 9 

D. Ante-nuptial Agreements ...................................................................................... 10 

E. There is a 3 part series of articles entitled Portability ........................................... 10 

VI. THE TEMPORARY REGULATIONS ............................................................................ 11

I. HOW TO MAKE THE ELECTION 

PORTABILITY SEMINAR 

A. Time to Make Election. The election must be timely made as prescribed by law. 

Code § 2010(c)(5)(A). 

1. Made on Form 706. Code § 2010(c)(5)(A). See Part 6 of Form 706. 

2. If an estate tax return is required. File in time “prescribed by law” which 

for a timely filed 706 is 9 months after death, with possible 6 month 

extension. Code § 6018/6075. “An estate that elects portability will be 

considered, for purposes of Subtitle B and Subtitle F of the Internal 

Revenue Code (Code), to be required to file a return under section 

6018(a). Accordingly, the due date of an estate tax return required to elect 

portability is 9 months after the decedent’s date of death or the last day of 

the period covered by an extension (if an extension of time for filing has 

been obtained). See §§ 20.6075–1 and 20.6081–1 for additional rules 

relating to the time for filing estate tax returns.” Temp. Reg. § 20.2010- 

2T(a)(1). 

3. If an estate return is not required. If an estate tax return is not required to 

be filed because the estate is less than the basic exclusion amount, to make 

a timely filed portability election the regulations provide that the election 

is as if an estate tax return is required to be filed. Temp. Reg. § 20.2010- 

2T(a)(1). “Timely filing required. An estate that elects portability will be 

considered, for purposes of Subtitle B and Subtitle F of the Internal 

Revenue Code (Code), to be required to file a return under section 

6018(a). Accordingly, the due date of an estate tax return required to elect 

portability is 9 months after the decedent’s date of death or the last day of 

the period covered by an extension (if an extension of time for filing has 

been obtained). See §§ 20.6075–1 and 20.6081–1 for additional rules 

relating to the time for filing estate tax returns.” 

B. Opting out of the Election. 

1. If the estate does not want to make the election, there are a couple of ways 

to opt out. 

a. Check the box on Form 706, Part 6, Section A. 

b. A statement opting out is made in the return or attached to the 

return. “Temp. Reg. § 20.2010-2T(a)(3)(i). The executor states 

affirmatively on a timely-filed estate tax return, or in an attachment 

to that estate tax return, that the estate is not electing portability 

under section 2010(c)(5). The manner in which the executor may 

make this affirmative statement on the estate tax return will be as 

DOCS-#3893487-v1

set forth in the instructions issued with respect to such form 

(‘‘Instructions for Form 706’’).” This is accomplished by the 

check-the-box provision on the current Form 706. 

c. Don’t file a Form 706. Temp. Reg. § 20.2010-2T(a)(3)(ii), 

2T(a)(1). You can simply fail to file a Form 706 and thereby make 

no election. 

C. Irrevocability. Elections, once made and after the filing period passes, are 

irrevocable. Code § 2010(c)(5)(A). Temp. Reg. § 20.2010-2T(a)(4). 

D. Amending the Election. 

1. It appears that the Temporary Regulations contemplate that elections may 

need to be amended. 

2. Temp. Reg. § 20.2010-3T(c)(1)(ii) contemplates amended or corrected 

DSUE amounts applicable for surviving spouses, and 

3. Temp. Reg. § 20.2010-3T(d) contemplates that the IRS may change the 

DSUE amount upon audit. 

E. Who Makes the Election? 

1. Executors. An appointed executor, recognized under state law, (Code § 

2203) may file a Form 706 and make the portability election. Temp. Reg. 

§ 20.2010-2T(a)(6)(i). 

2. Non-Appointed Executors. “If there is no appointed executor, any person 

in actual or constructive possession of any property of the decedent (a 

non- appointed executor) may file the estate tax return on behalf of the 

estate of the decedent and, in so doing, elect portability of the decedent’s 

DSUE amount…” Temp. Reg. § 20.2010-2T(a)(6)(ii). 

F. Requirements for a Form 706. 

1. The Form 706 must be complete and properly prepared. Temp. Reg. § 

20.2010-2T(a)(2). Also See Section C, Part 6 of Form 706. 

2. “An estate tax return will be considered complete and properly- prepared 

for purposes of this section if it is prepared in accordance with the 

instructions issued for the estate tax return (Instructions for Form 706) and 

if the requirements of §§ 20.6018–2, 20.6018–3, and 20.6018–4 are 

satisfied.” Temp. Reg. § 20.2010-2T(a)(7)(i). 

3. If no federal Form 706 is required except to make a portability election, 

the filing requirements may be lessened but only for very limited 

circumstances described below. Temp. Reg. § 20.2010-2T(a)(7)(ii). With 

- 2 -

espect to such an estate, for bequests, devises, or transfers of property 

included in the gross estate, the value of which is deductible under section 

2056 or 2056A (marital deduction property) or under section 2055(a) 

(charitable deduction property), an executor is not required to report a 

value for such property on the estate tax return (except to the extent 

provided in this paragraph (a)(7)(ii)(A)) and will be required to report only 

the description, ownership, and/or beneficiary of such property, along with 

all other information necessary to establish the right of the estate to the 

deduction in accordance with §§ 20.2056(a)–1(b)(i) through (iii) and 

20.2055–1(c), as applicable. 

a. This provision will not apply if: 

i. The value of such property relates to, affects, or is needed 

to determine, the value passing from the decedent to 

another recipient; (e.g., partial QTIP election or a 

disclaimer or part of the property is devised to third 

parties); 

ii. 

iii. 

iv. 

The value of such property is needed to determine the 

estate’s eligibility for the provisions of sections 2032, 

2032A, 6166, or another provision of the Code; 

Less than the entire value of an interest in property 

includible in the decedent’s gross estate is marital 

deduction property or charitable deduction property; or 

A partial disclaimer or partial qualified terminable interest 

property (QTIP) election is made with respect to a bequest, 

devise, or transfer of property includible in the gross estate, 

part of which is marital deduction property or charitable 

deduction property. 

b. The limited Form 706 reporting requirements applies only if the 

executor exercises due diligence to estimate the fair market value 

of the gross estate, including the property described in paragraph 

(a)(7)(ii)(A) of this section. The Instructions for Form 706 will 

provide ranges of dollar values, and the executor must identify on 

the estate tax return an amount corresponding to the particular 

range within which falls the executor’s best estimate of the total 

gross estate. Until such time as the prescribed form for the estate 

tax return expressly includes this estimate in the manner described 

in the preceding sentence, the executor must include the executor’s 

best estimate, rounded to the nearest $250,000, on or attached to 

the estate tax return, signed under penalties of perjury. Temp. Reg. 

§ 20.2010-2T(a)(7)(ii)(B). 

- 3 -

G. Computing the DSUE Amount. The DSUE amount must be computed on a 

properly filed return. See Section II herein. 

II. 

COMPUTING THE DUE AMOUNT. The Deceased Spousal Unused Exclusion 

(DSUE) is confusing if you just read Code § 2010(c)(4), but if you read the regulations, 

the regulations clarify the computation. 

A. Definitions. 

1. Applicable Exclusion Amount: is the Basic Exclusion Amount 

($5,250,000) plus the DSUE. Code § 2010(c)(2); Temp. Reg. § 20.2010- 

1T(d)(2). 

2. Basic Exclusion Amount is the $5,000,000 indexed for inflation. Code § 

2010(c)(3)(A)/(B); Temp. Reg. § 20.2010-1T(d)(3)(i). 

3. DSUE: The Code § 2010(c)(4)(B) definition is different from the 

Temporary regulations. The Regulations provide the clearer definition. 

The regulations break Code § 2010(c)(4)(B)(ii) into 2 additional subparts 

to account for gift taxes paid on prior gifts made by the decedent. Under 

the regulations the decedent gets credit for paying taxes on prior gifts. The 

Code provision does not clearly explain that the gifts that were subject to 

gift taxes paid do not reduce the amount of exclusion that may pass to the 

surviving spouse. In simple terms, if Decedent made gifts of $3,000,000 of 

gifts in a year when the gift exclusion amount was only $1,000,000, the 

question arises whether the $2,000,000 portion of the gift (which Decedent 

properly paid gifts taxes on when made) reduce the exclusion amount. In 

other words, is the DSUE to the surviving spouse $4,000,000 ($5,000,000- 

$1,000,000) or is it $2,000,000 ($5,000,000-$3,000,000)? The quick 

answer is that the regulations clearly provide that the DSUE amount is 

$4,000,000 (that answer is not as clear if you read Code § 

2010(c)(4)(B)(ii)). The regulations answer the ambiguity raised by the 

now famous Example 3 of the Joint Committee on Taxation report that 

first discussed this issue. 

B. Calculation of the DSUE. Under the Regulations (Temp. Reg. § 20.2010-2T(c)): 

“(c) Computation of the DSUE amount—(1) General rule. Subject to paragraphs 

(c)(2) through (c)(4) of this section, the DSUE amount of a decedent with a 

surviving spouse is the lesser of the following amounts— 

(1) The basic exclusion amount in effect in the year of the 

death of the decedent; or 

(ii) The excess of— 

(A) The decedent’s applicable exclusion amount; 

over 

(B) The sum of the amount of the taxable estate and 

the amount of the adjusted taxable gifts of the 

- 4 -

decedent, which together is the amount on which the 

tentative tax on the decedent’s estate is determined 

under section 2001(b)(1). 

(2) Special rule to consider gift taxes paid by decedent. Solely 

for purposes of computing the decedent’s DSUE amount, the 

amount of the adjusted taxable gifts of the decedent referred to 

in paragraph (c)(1)(ii)(B) of this section is reduced by the 

amount, if any, on which gift taxes were paid for the calendar 

year of the gift(s).” 

1. Example 1. H1 and W are married. H1 dies in 2013 leaving $3,000,000 in 

taxable gifts and the rest of the estate to W. Applying the regulations, H1’s 

DSUE is $2,250,000. That is because the DSUE is the lesser of (1) the 

Basic Exclusion Amount ($5,250,000) or (2) the Applicable Exclusion 

Amount ($5,250,000 + a last deceased spouse DSUE, none in this case) – 

the taxable estate ($3,000,000) = $2,250,000; 

Answer: $2,250,000 

2. Example 2. H1 and W are married. H1 made $3,000,000 worth of gifts in 

2003 when the exclusion amount was only $1,000,000, so he paid tax on 

$2,000,000 worth of gifts. H1 dies in 2013 and devises the entire estate to 

W. What is H1’s DSUE? It is $4,250,000 computed as the lesser of: 

(1) The Basic Exclusion Amount, $5,250,000, and 

(2) The Applicable Exclusion Amount ($5,250,000 + a last deceased 

spouse DSUE, none in this case) – the taxable estate ($1,000,000 from 

prior gifts) = $4,250,000; 

Answer: $4,250,000 

It is important to note Temp. Reg. § 20.2010-2T(c)(2) which provides that 

“adjusted taxable gifts” in Temp. Reg. § 20.2010-2T(c)(1) is reduced to 

the extent gift taxes were paid on the prior gifts. Since H1 paid gift taxes 

on the $2,000,000 taxable portion of the transfers in 2003 those transfers 

are not considered when calculating the DSUE. 

3. Example 3. H1 and W1 are married. W1 dies in 2012 leaving H1 a DSUE 

of $3,000,000. H1 marries W2. H1 then dies in 2013. What is H1’s 

DSUE? It is the lesser of: 

(1) The Basic Exclusion Amount, $5,250,000, and 

(2) The Applicable Exclusion Amount ($5,250,000 + a last deceased 

spouse DSUE, in this case $3,000,000) – the taxable estate 0 = 

$8,000,000; 

Answer: $5,250,000 

4. Example 4. Computation of DSUE amount. (i) Facts. In 2002, having 

made no prior taxable gift, Husband (H) makes a taxable gift valued at 

$1,000,000 and reports the gift on a timely-filed gift tax return. Because 

the amount of the gift is equal to the applicable exclusion amount for that 

year ($1,000,000), $345,800 is allowed as a credit against the tax, 

- 5 -

educing the gift tax liability to zero. H dies on September 29, 2011, 

survived by Wife (W). H and W are US citizens and neither has any prior 

marriage. H’s taxable estate is $1,000,000. The executor of H’s estate 

timely files H’s estate tax return and elects portability, thereby allowing W 

to benefit from H’s DSUE amount. (ii) Application. The executor of H’s 

estate computes H’s DSUE amount to be $3,000,000 (the lesser of the 

$5,000,000 basic exclusion amount in 2011, or the excess of H’s 

$5,000,000 applicable exclusion amount over the sum of the $1,000,000 

taxable estate and the $1,000,000 amount of adjusted taxable gifts). 

5. Example 5. Computation of DSUE amount when gift tax paid. (i) Facts. 

The facts are the same as in Example 4 except that the value of H’s 

taxable gift in 2002 is $2,000,000. After application of the applicable 

credit amount, H owes gift tax on $1,000,000, the amount of the gift in 

excess of the applicable exclusion amount for that year. H pays the gift tax 

owed on the transfer in 2002. (ii) Application. On H’s death, the executor 

of H’s estate computes the DSUE amount to be $3,000,000 (the lesser of 

the $5,000,000 basic exclusion amount in 2011, or the excess of H’s 

$5,000,000 applicable exclusion amount over the sum of the $1,000,000 

taxable estate and $1,000,000 adjusted taxable gifts). H’s adjusted taxable 

gifts of $2,000,000 were reduced for purposes of this computation by 

$1,000,000, the amount of taxable gifts on which gift taxes were paid. 

C. The Federal Form 706, Part 6, Section C. The Federal Form applies the 

regulations as follows: 

1 Enter the Amount from line 9c, Part 2 (the Applicable 

Exclusion Amount, i.e., Basic Exclusion Amount and 

DSUE from last deceased spouse) 

2 Enter the Amount from line 7, Part 2 (gift taxes paid or 

payable 

D. Deceased Spouse? 

_____________ 

_____________ 

3 Divide amount on line 2 by 35% (not less than zero) _____________ 

4 Add lines 1 and 3 _____________ 

5 Enter the amount from line 5, Part 2 (Taxable Estate and 

Taxable Gifts) 

_____________ 

6 Subtract line 5 from 4 (not less than zero) _____________ 

7 DSUE portable to the surviving spouse (lesser of line 6 

or 9a, Part 2 - the Basic Exclusion Amount 

_____________ 

1. Testamentary Transfers. In the case of testamentary transfers, the last 

deceased spouse is the surviving spouse’s last deceased spouse at the time 

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of the surviving spouse’s death. Temp. Reg. § 20.2010-1T(d)(5), 3T(a), 

3T(c). 

a. Example 1. H1 and W are married and H1 dies in 2012 leaving W 

a DSUE of $5,120,000. W now has a total Applicable Exclusion 

Amount of $10,370,000 when W dies. This amount can go up to 

the extent W’s exemption amount increases due to inflation but the 

DSUE amount does not increase with inflation. 

b. Example 2. Same facts as Example 1, except W gets married to 

H2. Unfortunately H2 used up his $5,120,000 exemption with gifts 

in 2012 so his only remaining exemption is $130,000. If H2 dies in 

2013 before W, then H2’s DSUE is given to W and H2 is the Last 

Deceased Spouse. Now, W only has an Applicable Exclusion 

Amount of $5,380,000. 

2. Intervivos Transfers. In the case of lifetime gifts, the last deceased spouse 

is determined at the time of the gift. Temp. Reg. § 20.2010-2T(a) and (c) 

and 3T(b). This in concept allows for the Black Widow Rule. 

a. Example 1. H1 dies in 2011. W receives H1’s DSUE of 

$5,000,000. W makes $5,000,000 of gifts in 2011. W still has her 

entire $5,250,000 exemption in 2013. 

b. Example 2. Same facts as example 1, but now W marries H2 in 

2012. H2 dies in 2012 and leaves a $4,000,000 DSUE. W then 

makes gifts of $5,120,000 in 2012. W still has $4,000,000 of her 

exemption left. 

c. Example 3. Same facts as example 1. W marries H2 who has 

$4,000,000 of exemption left. W makes another gift of $1,000,000. 

W’s remaining exemption is $4,250,000. When she made her gift 

her Last Deceased Spouse was H1 and he had left her $5,000,000 

DSUE that she used up. When she married H2 she does not get his 

exemption until he dies (or they gift split). Therefore the gift she 

made reduced her own exemption amount. 

III. 

HOW DOES PORTABILITY EFFECT QDOTs? Temp. Reg. § 25.2505-2T(d)(i), (ii) 

basically provides that the DSUE as it applies to a QDOT is determined when the 

surviving spouse dies (or the QDOT terminates). When the surviving spouse dies, the 

amount of the QDOT is treated as a taxable transfer at the time of H1’s death. In general, 

the surviving spouse is not able to use the DSUE for the surviving spouse’s lifetime gifts 

unless the surviving spouse makes the gift in the same year that the surviving spouse dies. 

Also, the surviving spouse is not able to personally use any part of the DSUE unless there 

is a treaty between the US and the other country. Temp. Reg. § 25.2505-3T(e). 

A. Example 1. H is a US Citizen and W is a resident, non-US Citizen. H dies in 2011 

leaving a $3,000,000 estate. Of that amount, $1,000,000 in taxable gifts were 

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made and $2,000,000 was placed into a QDOT for W. When W dies in 2012, the 

QDOT is worth $2,500,000. H’s DSUE is $1,500,000 ($5,000,000- $1,000,000 

gifts at death - $2,500,000 QDOT). 

B. Example 2. Same facts as example 1 except W made gifts in 2012 of $1,000,000. 

In this case, since W made the gifts in the same year as her death the gifts can 

consume part of H’s DSUE and the DSUE is reduced to $500,000 ($5,000,000- 

$1,000,000 gifts at death - $2,500,000 QDOT-$1,000,000 in gifts in 2012). 

C. Example 3. Computation of DSUE amount when QDOT created. (i) Facts. 

Husband (H), a US citizen, makes his first taxable gift in 2002, valued at 

$1,000,000, and reports the gift on a timely-filed gift tax return. No gift tax is due 

because the applicable exclusion amount for that year ($1,000,000) equals the fair 

market value of the gift. H dies in 2011 with a gross estate of $2,000,000. H’s 

wife (W) is a US resident but not a citizen of the United States and, under H’s 

will, a pecuniary bequest of $1,500,000 passes to a QDOT for the benefit of W. 

H’s executor timely files an estate tax return and makes the QDOT election for 

the property passing to the QDOT, and H’s estate is allowed a marital deduction 

of $1,500,000 under section 2056(d) for the value of that property. H’s taxable 

estate is $500,000. On H’s estate tax return, H’s executor computes H’s 

preliminary DSUE amount to be $3,500,000 (the lesser of the $5,000,000 basic 

exclusion amount in 2011, or the excess of H’s $5,000,000 applicable exclusion 

amount over the sum of the $500,000 taxable estate and the $1,000,000 adjusted 

taxable gifts). No taxable events within the meaning of section 2056A occur 

during W’s lifetime with respect to the QDOT, and W makes no taxable gifts. In 

2012, W dies and the value of the assets of the QDOT is $1,800,000. (ii) 

Application. H’s DSUE amount is re-determined to be $1,700,000 (the lesser of 

the $5,000,000 basic exclusion amount in 2011, or the excess of H’s $5,000,000 

applicable exclusion amount over $3,300,000 ($5,000,000 -$500,000 taxable 

estate - $1,800,000 of QDOT assets - the $1,000,000 adjusted taxable gifts)). 

IV. 

AUDITS OF DECEASED SPOUSE RETURNS. 

A. The IRS may examine returns of a decedent in determining the decedent’s DSUE 

amount, regardless of whether the period of limitations on assessment has expired 

for that return. Code § 2010(c)(5)(B). The regulations provide that the IRS may 

audit the tax return of the last deceased spouse over a period that extends through 

the surviving spouse’s normal statute of limitations, but it appears that the audit is 

supposed to be limited to the calculation (and adjustment of any calculation) of 

the DSUE amount and not the entire deceased spouse’s return. Temp. Reg. § 

20.2010-2T(d), 3T(d), 25.2505-2T(e). 

V. ESTATE PLANNING AND PORTABILITY. 

A. Does GSTT and Portability Mix? It is not quite clear if you can use portability 

and GSTT planning together. One option is a grantor trust, discussed below. The 

GSTT exemption is not portable and so it may seem as if you either must make a 

- 8 -

GSTT election or a portability election, but you can’t do both. Well the answer to 

that dilemma is not certain, but it is not clear either. 

1. Example 1. When H dies in 2013 he devised the entire $5,250,000 estate 

into a QTIP Trust for W. In that case portability is elected to transfer his 

DSUE of $5,250,000 to W. At the same time, the estate for H elects to 

make a reverse QTIP election and apply H’s GSTT exemption to the QTIP 

Trust. When W dies in December 2013 the QTIP Trust is worth 

$6,000,000. In this case, the Trust is exempt of GSTT, but H’s portability 

election does not exempt $750,000 of the Trust (but W’s exemption 

probably does). 

Rev. Proc. 2001-38. In Rev. Proc. 2001-38 the IRS provided the taxpayer 

a procedure that if a QTIP election is made when it was not necessary to 

reduce estate taxes then the QTIP election (including GSTT elections) are 

void. This is helpful, for example, to a taxpayer who accidentally makes a 

QTIP election for a credit shelter trust or other similar mistake. What is 

unclear in the Rev. Proc. is whether the IRS can, on its own initiative, void 

a QTIP election when it was not needed. If an estate funds a QTIP trust to 

allocate GST Exemption and use portability planning as well, the IRS 

might be able to void the QTIP election. This is a particularly difficult 

situation for states like Minnesota. First, if a return is modified by the 

taxpayer or IRS, the taxpayer is supposed to inform the Minnesota 

Department of Revenue under Minn. Stat. § 289A.38 Subds. 7, 8, 9. 

Therefore the Minnesota Department of Revenue may tax such 

adjustments. Also, the status of partial State QTIP’s in Minnesota is still a 

complicated matter. Note Rev. Notices #10-03 (revoked) and # 12-05. 

2. Example 2. H1 dies with a $4,000,000 estate. A QTIP election is made for 

the estate placed in an otherwise qualified trust. When W dies, if the Trust 

is worth $5,000,000, instead of using the whole $5,000,000 DSUE to 

shelter the QTIP trust from tax, the taxpayer would try to void the QTIP 

election. Then the estate would have a DSUE of $1,000,000 for W’s estate 

(because the trust is funded as a credit shelter trust in H1’s estate at 

$4,000,000 that appreciates to $5,000,000) and none of the trust is in W’s 

estate. On the other hand, if the trust lost value to $3,000,000, the taxpayer 

would not void the QTIP election and has $2,000,000 of DSUE to apply to 

W’s estate. 

B. Grantor Trusts. As we learned at the end of 2012, lifetime exemption gifting with 

the aid of grantor trusts allows the taxpayer to allocate GST exemption and make 

lifetime gifts to supercharge a trust. Unlike GRAT’s and other ETIP trusts, the tax 

benefits of gifting are immediate. Consuming DSUE with GST exemption in 

grantor trusts is a great opportunity to leverage GST and exemption gifting. 

C. Income vs. Estate Tax. The Minnesota Estate tax reaches its highest rate at 16%. 

The income tax rates are at 39% and rising and even capital gains rates are at 20% 

- 9 -

or more. If you fund a credit shelter trust up front on the first spouse to die and if 

the assets appreciate significantly, the capital gains tax or income tax may exceed 

the estate tax on the second spouse’s death if you just retained the asset until the 

survivor’s death. 

1. Example 1. H dies in 2011 and a credit shelter trust is funded with 

$1,000,000. The DSUE to W is $4,000,000. If the trust appreciates to 

$5,000,000 by the time W dies the capital gains alone will be at least 

$800,000 when the estate taxes would have been zero. In this case, 

holding the assets and using the portability provisions is better tax 

management. (Of course, we are using a crystal ball to see the future first). 

2. Example 2. Alternatively to example 1, if a credit shelter trust is only 

funded to $1,000,000, if the balance of the estate is allocated to the 

surviving spouse, the surviving spouse’s estate may pay higher federal and 

state estate taxes by running up the brackets if all assets are held in the 

survivor’s estate. H1 dies with $1,000,000 in a credit shelter trust and 

$4,000,000 to the spouse (and $4,000,000 DSUE amount to spouse). 

When spouse dies the $4,000,000 appreciates to $12,000,000. In this case 

the taxes are higher both state and federal than if they had been taxed only 

at the state level on the first spouse’s death. 

D. Ante-nuptial Agreements. We may want to consider the use of portability in antenuptial 

agreements. If the executor of a deceased spouse refuses to file an estate 

tax return or elect portability a great deal of tax benefit can be lost, perhaps only 

due to spite. An ante-nuptial agreement might want to include agreements to elect 

portability. Gift splitting may also become a bigger issue with portability and the 

parties may or may not want to mandate gift-splitting. 

E. There is a 3 part series of articles entitled Portability - Part One 

(http://www.americanbar.org/content/dam/aba/events/real_property_trust_estate/h 

eckerling/2012/heckerling_report_2012_portability_part_one.authcheckdam.pdf), 

Portability – The Regulations 

(http://meetings.abanet.org/webupload/commupload/RP512500/otherlinks_files/p 

ortability_the_regulations_2013_01_14_paper_1.authcheckdam.pdf) , and 

Portability – The Game Changer 

(http://www.americanbar.org/content/dam/aba/events/real_property_trust_estate/h 

eckerling/2013/portability_the_game_changer_2013_01_15_paper_2.authcheckda 

m.pdf ). 

These were published by the American Bar Association and primarily authored by 

Richard S. Franklin, Lester B. Law, and George D. Karibjanian. These articles 

provide a more detailed examination of the portability issues and estate planning 

considerations. 

- 10 -

VI. 

THE TEMPORARY REGULATIONS 

PART 20—ESTATE TAX; ESTATE OF DECEDENTS DYING AFTER AUGUST 16, 1954 

■ Paragraph 1. The authority citation for part 20 is amended by adding entries in numerical order 

to read as follows: 

Authority: 26 U.S.C. 7805. * * * 

Section 20.2010–0T also issued under 26 U.S.C. 2010(c)(6). 



Section 20.2010–3T also issued under 26 U.S.C. 2010(c)(6). * * * 

■ Par. 2. Section 20.2001–2T is added to read as follows: 

§ 20.2001–2T Valuation of adjusted taxable gifts for purposes of determining the deceased 

spousal unused exclusion amount of last deceased spouse (temporary). 

(a) General rule. Notwithstanding § 20.2001–1(b), see §§ 20.2010–2T(d) and 20.2010–3T(d) for 

additional rules regarding the authority of the Internal Revenue Service to examine any gift or 

other tax return(s), even if the time within which a tax may be assessed under section 6501 has 

expired, for the purpose of determining the deceased spousal unused exclusion (DSUE) amount 

available under section 2010(c) of the Internal Revenue Code (Code). 

(b) Effective/applicability date. Paragraph (a) of this section applies to the estates of decedents 

dying in calendar year 2011 or a subsequent year in which the applicable exclusion amount is 

determined under section 2010(c) of the Code by adding the basic exclusion amount and, in the 

case of a surviving spouse, the DSUE amount. 

(c) Expiration date. The applicability of this section expires on or before June 15, 2015. 


§ 20.2010–0T Table of contents (temporary). 

This section lists the table of contents for §§ 20.2010–1T through 20.2010–3T. 

§ 20.2010–1T Unified credit against estate tax; in general (temporary). 

(a) General rule. 

(b) Special rule in case of certain gifts made before 1977. 

(c) Credit limitation. 

(d) Explanation of terms. 

(1) Applicable credit amount. 

(2) Applicable exclusion amount. 

(3) Basic exclusion amount. 

(4) Deceased spousal unused exclusion (DSUE) amount. 

(5) Last deceased spouse. 

(e) Effective/applicability date. 

(f) Expiration date. 

§ 20.2010–2T Portability provisions applicable to estate of a decedent survived by a spouse 

(temporary). 

(a) Election required for portability. 

(1) Timely filing required. 

- 11 -

(2) Portability election upon filing of estate tax return. 

(3) Portability election not made; requirements for election not to apply. 

(4) Election irrevocable. 

(5) Estates eligible to make the election. 

(6) Persons permitted to make the election. 

(7) Requirements of return. 

(b) Computation required for portability election. 

(1) General rule. 

(2) Transitional rule. 

(c) Computation of the DSUE amount. 


(2) Special rule to consider gift taxes paid by decedent. 

(3) [Reserved] 

(4) Special rule in case of property passing to qualified domestic trust. 

(5) Examples. 

(d) Authority to examine returns of decedent. 



§ 20.2010–3T Portability provisions applicable to the surviving spouse’s estate (temporary). 

(a) Surviving spouse’s estate limited to DSUE amount of last deceased spouse. 

(1) In general. 

(2) No DSUE amount available from last deceased spouse. 

(3) Identity of last deceased spouse unchanged by subsequent marriage or divorce. 

(b) Special rule in case of multiple deceased spouses and a previously-applied DSUE amount. 


(2) Example. 

(c) Date DSUE amount taken into consideration by surviving spouse’s estate. 


(2) Special rule when property passes to surviving spouse in a qualified domestic trust. 

(d) Authority to examine returns of deceased spouses. 

(e) Availability of DSUE amount for estates of nonresidents who are not citizens. 

(f) Effective/applicability date. 

(g) Expiration date. 


§ 20.2010–1T Unified credit against estate tax; in general (temporary). 

(a) General rule. Section 2010(a) allows the estate of every decedent a credit against the estate 

tax imposed by section 2001. The allowable credit is the applicable credit amount. See paragraph 

(d)(1) of this section for an explanation of the term applicable credit amount. 

(b) Special rule in case of certain gifts made before 1977. The applicable credit amount 

allowable under paragraph (a) of this section must be reduced by an amount equal to 20 percent 

of the aggregate amount allowed as a specific exemption under section 2521 (as in effect before 

its repeal by the Tax Reform Act of 1976) for gifts made by the decedent after September 8, 

1976, and before January 1, 1977. 

- 12 -

(c) Credit limitation. The applicable credit amount allowed under paragraph (a) of this section 

cannot exceed the amount of the estate tax imposed by section 2001. 

(d) Explanation of terms. The explanation of terms in this section applies to this section and to §§ 

20.2010–2T and 20.2010–3T. 

(1) Applicable credit amount. The term applicable credit amount refers to the allowable credit 

against estate tax imposed by section 2001 and gift tax imposed by section 2501. The applicable 

credit amount equals the amount of the tentative tax that would be determined under section 

2001(c) if the amount on which such tentative tax is to be computed were equal to the applicable 

exclusion amount. The applicable credit amount is determined by applying the unified rate 

schedule in section 2001(c) to the applicable exclusion amount. 

(2) Applicable exclusion amount. The applicable exclusion amount equals the sum of the basic 

exclusion amount and, in the case of a surviving spouse, the deceased spousal unused exclusion 

(DSUE) amount. 

(3) Basic exclusion amount. The basic exclusion amount is the sum of— 

(i) For any decedent dying in calendar year 2011, $5,000,000; and 

(ii) For any decedent dying after calendar year 2011, $5,000,000 multiplied by the cost-of-living 

adjustment determined under section 1(f)(3) for that calendar year by substituting ‘‘calendar year 

2010’’ for ‘‘calendar year 1992’’ in section 1(f)(3)(B) and by rounding to the nearest multiple of 

$10,000. 

(4) Deceased spousal unused exclusion (DSUE) amount. The term DSUE amount refers, 

generally, to the unused portion of a decedent’s applicable exclusion amount to the extent this 

amount does not exceed the basic exclusion amount in effect in the year of the decedent’s death. 

For rules on computing the DSUE amount, see §§ 20.2010–2T(c) and 20.2010–3T(b). 

(5) Last deceased spouse. The term last deceased spouse means the most recently deceased 

individual who, at that individual’s death after December 31, 2010, was married to the surviving 

spouse. See §§ 20.2010–3T(a) and 25.2505–2T(a) of this chapter for additional rules pertaining 

to the identity of the last deceased spouse for purposes of determining the applicable exclusion 

amount of the surviving spouse. 

(e) Effective/applicability date. Paragraphs (d)(2), (d)(3), (d)(4), and (d)(5) of this section apply 

to the estates of decedents dying in calendar year 2011 or a subsequent year in which the 

applicable exclusion amount is determined under section 2010(c) of the Internal Revenue Code 

by adding the basic exclusion amount and, in the case of a surviving spouse, the DSUE amount. 

Paragraphs (a), (b), (c), and (d)(1) of this section apply to the estates of decedents dying on or 

after June 15, 2012. 

(f) Expiration date. The applicability of this section expires on or before June 15, 2015. 

■Par. 5. Section 20.2010–2T is added to read as follows: 

§ 20.2010–2T Portability provisions applicable to estate of a decedent survived by a spouse 

(temporary). 

(a) Election required for portability. To allow a decedent’s surviving spouse to take into account 

that decedent’s deceased spousal unused exclusion (DSUE) amount, the executor of the 

decedent’s estate must elect portability of the DSUE amount on a timely-filed Form 706, 

‘‘United States Estate (and Generation-Skipping Transfer) Tax Return’’ (estate tax return). This 

election is referred to in this section and in § 20.2010–3T as the portability election. 

(1) Timely filing required. An estate that elects portability will be considered, for purposes of 

Subtitle B and Subtitle F of the Internal Revenue Code (Code), to be required to file a return 

- 13 -

under section 6018(a). Accordingly, the due date of an estate tax return required to elect 

portability is 9 months after the decedent’s date of death or the last day of the period covered by 

an extension (if an extension of time for filing has been obtained). See §§ 20.6075–1 and 

20.6081–1 for additional rules relating to the time for filing estate tax returns. 

(2) Portability election upon filing of estate tax return. Upon the timely filing of a complete and 

properly-prepared estate tax return, an executor of an estate of a decedent (survived by a spouse) 

will have elected portability of the decedent’s DSUE amount unless the executor chooses not to 

elect portability and satisfies the requirement in paragraph (a)(3)(i) of this section. See paragraph 

(a)(7) of this section for the return requirements related to the portability election. 

(3) Portability election not made; requirements for election not to apply. The executor of the 

estate of a decedent (survived by a spouse) will not make or be considered to make the 

portability election if either of the following applies: 

(i) The executor states affirmatively on a timely-filed estate tax return, or in an attachment to that 

estate tax return, that the estate is not electing portability under section 2010(c)(5). The manner 

in which the executor may make this affirmative statement on the estate tax return will be as set 

forth in the instructions issued with respect to such form (‘‘Instructions for Form 706’’). 

(ii) The executor does not timely file an estate tax return in accordance with paragraph (a)(1) of 

this section. 

(4) Election irrevocable. An executor of the estate of a decedent (survived by a spouse) who 

timely files an estate tax return may make and may supersede a portability election previously 

made, provided that the estate tax return reporting the decision not to make a portability election 

is filed on or before the due date of the return, including extensions actually granted. However, 

see paragraph (a)(6) of this section when contrary elections are made by more than one person 

permitted to make the election. The portability election, once made, becomes irrevocable once 

the due date of the estate tax return, including extensions actually granted, has passed. 

(5) Estates eligible to make the election. An executor may elect portability on behalf of the estate 

of a decedent (survived by a spouse) if the decedent dies in calendar year 2011 or during a 

subsequent period in which portability of a DSUE amount is in effect. However, an executor of 

the estate of a nonresident decedent who was not a citizen of the United States at the time of 

death may not elect portability on behalf of that decedent, and the timely filing of such a 

decedent’s estate tax return will not constitute the making of a portability election. 

(6) Persons permitted to make the election— 

(i) Appointed executor. An executor or administrator of the estate of a decedent (survived by a 

spouse) that is appointed, qualified, and acting within the United States, within the meaning of 

section 2203 (an appointed executor), may file the estate tax return on behalf of the estate of the 

decedent and, in so doing, elect portability of the decedent’s DSUE amount. An appointed 

executor also may elect not to have portability apply pursuant to paragraph (a)(3) of this section. 

(ii) Non-appointed executor. If there is no appointed executor, any person in actual or 

constructive possession of any property of the decedent (a non- appointed executor) may file the 

estate tax return on behalf of the estate of the decedent and, in so doing, elect portability of the 

decedent’s DSUE amount, or, by complying with paragraph (a)(3) of this section, may elect not 

to have portability apply. A portability election made by a non- appointed executor cannot be 

superseded by a contrary election made by another non-appointed executor of that same 

decedent’s estate (unless such other non-appointed executor is the successor of the nonappointed 

executor who made the election). See § 20.6018– 2 for additional rules relating to 

persons permitted to file the estate tax return. 

- 14 -

(7) Requirements of return— 

(i) General rule. An estate tax return will be considered complete and properly- prepared for 

purposes of this section if it is prepared in accordance with the instructions issued for the estate 

tax return (Instructions for Form 706) and if the requirements of §§ 20.6018–2, 20.6018–3, and 

20.6018–4 are satisfied. However, see paragraph (a)(7)(ii) of this section for reduced 

requirements applicable to certain property of certain estates. 

(ii) Reporting of value not required for certain property— 

(A) In general. A special rule applies with respect to certain property of estates in which 

the executor is not required to file an estate tax return under section 6018(a), as determined 

without regard to paragraph (a)(1) of this section. With respect to such an estate, for bequests, 

devises, or transfers of property included in the gross estate, the value of which is deductible 

under section 2056 or 2056A (marital deduction property) or under section 2055(a) (charitable 

deduction property), an executor is not required to report a value for such property on the estate 

tax return (except to the extent provided in this paragraph (a)(7)(ii)(A)) and will be required to 

report only the description, ownership, and/or beneficiary of such property, along with all other 

information necessary to establish the right of the estate to the deduction in accordance with §§ 

20.2056(a)–1(b)(i) through (iii) and 20.2055–1(c), as applicable. However, this rule does not 

apply to marital deduction property or charitable deduction property if— 

(1) The value of such property relates to, affects, or is needed to determine, the value passing 

from the decedent to another recipient; 

(2) The value of such property is needed to determine the estate’s eligibility for the provisions of 

sections 2032, 2032A, 6166, or another provision of the Code; 

(3) Less than the entire value of an interest in property includible in the decedent’s gross estate is 

marital deduction property or charitable deduction property; or 

(4) A partial disclaimer or partial qualified terminable interest property (QTIP) election is 

made with respect to a bequest, devise, or transfer of property includible in the gross estate, part 

of which is marital deduction property or charitable deduction property. 

(B) Statement required on the return. Paragraph (a)(7)(ii)(A) of this section applies only 

if the executor exercises due diligence to estimate the fair market value of the gross estate, 

including the property described in paragraph (a)(7)(ii)(A) of this section. The Instructions for 

Form 706 will provide ranges of dollar values, and the executor must identify on the estate tax 

return an amount corresponding to the particular range within which falls the executor’s best 

estimate of the total gross estate. Until such time as the prescribed form for the estate tax return 

expressly includes this estimate in the manner described in the preceding sentence, the executor 

must include the executor’s best estimate, rounded to the nearest $250,000, on or attached to the 

estate tax return, signed under penalties of perjury. 

(C) Examples. The following examples illustrate the application of paragraph (a)(7)(ii) of 

this section. In each example, assume that Husband (H) dies in 2011, survived by his wife (W), 

that both H and W are US citizens, that H’s gross estate does not exceed the excess of the 

applicable exclusion amount for the year of his death over the total amount of H’s adjusted 

taxable gifts and any specific exemption under section 2521, and that H’s executor (E) timely 

files Form 706 solely to make the portability election. 

- 15 -

Example 1. (i) Facts. The assets includible in H’s gross estate consist of a parcel of real property 

and bank accounts held jointly with W with rights of survivorship, a life insurance policy 

payable to W, and a survivor annuity payable to W for her life. H made no taxable gifts during 

his lifetime. 

(ii) Application. E files an estate tax return on which these assets are identified on the proper 

schedule, but E provides no information on the return with regard to the date of death value of 

these assets in accordance with paragraph (a)(7)(ii)(A) of this section. To establish the estate’s 

entitlement to the marital deduction in accordance with § 20.2056(a)–1(b) (except with regard to 

establishing the value of the property) and the instructions for the estate tax return, E includes 

with the estate tax return evidence to verify the title of each jointly held asset, to confirm that W 

is the sole beneficiary of both the life insurance policy and the survivor annuity, and to verify 

that the annuity is exclusively for W’s life. Finally, E certifies on the estate return E’s best 

estimate, determined by exercising due diligence, of the fair market value of the gross estate in 

accordance with paragraph (a)(7)(ii)(B) of this section. The estate tax return is considered 

complete and properly prepared and E has elected portability. 

Example 2. (i) Facts. H’s will, duly admitted to probate and not subject to any proceeding to 

challenge its validity, provides that H’s entire estate is to be distributed to a QTIP trust for W. 

The non-probate assets includible in H’s gross estate consist of a life insurance policy payable to 

H’s children from a prior marriage, and H’s individual retirement account (IRA) payable to W. H 

made no taxable gifts during his lifetime. 

(ii) Application. E files an estate tax return on which all of the assets includible in the gross 

estate are identified on the proper schedule. In the case of the probate assets and the IRA, no 

information is provided with regard to date of death value in accordance with paragraph 

(a)(7)(ii)(A) of this section. However, E makes a QTIP election and attaches a copy of H’s will 

creating the QTIP, and describes each such asset and its ownership to establish the estate’s 

entitlement to the marital deduction in accordance with the instructions for the estate tax return 

and § 20.2056(a)–1(b) (except with regard to establishing the value of the property). In the case 

of the life insurance policy payable to H’s children, all of the regular return requirements, 

including reporting and establishing the fair market value of such asset, apply. Finally, E certifies 

on the estate return E’s best estimate, determined by exercising due diligence, of the fair market 

value of the gross estate in accordance with paragraph (a)(7)(ii)(B) of this section. The estate tax 

return is considered complete and properly prepared and E has elected portability. 

(iii) Variation. The facts are the same except that there are no non-probate assets, and E elects to 

make only a partial QTIP election. In this case, the regular return requirements apply to all of the 

property includible in the gross estate and the provisions of paragraph (a)(7)(ii) of this section do 

not apply. 

Example 3. (i) Facts. H’s will, duly admitted to probate and not subject to any proceeding to 

challenge its validity, provides that 50 percent of the property passing under the terms of H’s will 

is to be paid to a marital trust for W and 50 percent is to be paid to a trust for W and their 

descendants. 

(ii) Application. The amount passing to the non-marital trust cannot be verified without 

knowledge of the full value of the property passing under the will. Therefore, the value of the 

- 16 -

property of the marital trust relates to or affects the value passing to the trust for W and the 

descendants of H and W. Accordingly, the general return requirements apply to all of the 

property includible in the gross estate and the provisions of paragraph (a)(7)(ii) of this section do 

not apply. 

(b) Computation required for portability election— 

(1) General rule. In addition to the requirements described in paragraph (a) of this section, an 

executor of a decedent’s estate must include a computation of the DSUE amount on the estate tax 

return to elect portability and thereby allow the decedent’s surviving spouse to take into account 

that decedent’s DSUE amount. See paragraph (b)(2) of this section for a transitional rule when 

the estate tax return form prescribed by the Internal Revenue Service (IRS) does not show 

expressly the computation of the DSUE amount. See paragraph (c) of this section for rules on 

computing the DSUE amount. 

(2) Transitional rule. Until such time as the prescribed form for the estate tax return expressly 

includes a computation of the DSUE amount, a complete and properly-prepared estate tax return 

will be deemed to include the computation of the DSUE amount. See paragraph (a)(7) of this 

section for the requirements for a return to be considered complete and properly- prepared. Once 

the IRS revises the prescribed form for the estate tax return to include expressly the computation 

of the DSUE amount, executors that previously filed an estate tax return pursuant to this 

transitional rule will not be required to file a supplemental estate tax return using the revised 

form. 

(c) Computation of the DSUE amount—(1) General rule. Subject to paragraphs (c)(2) through 

(c)(4) of this section, the DSUE amount of a decedent with a surviving spouse is the lesser of the 

following amounts— 

(i) The basic exclusion amount in effect in the year of the death of the decedent; or 

(ii) The excess of— 

(A) The decedent’s applicable exclusion amount; over 

(B) The sum of the amount of the taxable estate and the amount of the adjusted taxable gifts of 

the decedent, which together is the amount on which the tentative tax on the decedent’s estate is 

determined under section 2001(b)(1). 

(2) Special rule to consider gift taxes paid by decedent. Solely for purposes of computing the 

decedent’s DSUE amount, the amount of the adjusted taxable gifts of the decedent referred to in 

paragraph (c)(1)(ii)(B) of this section is reduced by the amount, if any, on which gift taxes were 

paid for the calendar year of the gift(s). 

(3) [Reserved] 

(4) Special rule in case of property passing to qualified domestic trust. When property passes for 

the benefit of a surviving spouse in a qualified domestic trust (QDOT) as defined in section 

2056A(a), the DSUE amount of the decedent is computed on the decedent’s estate tax return for 

the purpose of electing portability in the same manner as this amount is computed under 

paragraph (c)(1) of this section, but this DSUE amount is subject to subsequent adjustments. The 

DSUE amount of the decedent must be redetermined upon the occurrence of the final distribution 

or other event (generally the death of the surviving spouse or the earlier termination of all 

QDOTs for that surviving spouse) on which estate tax is imposed under section 2056A. See § 

20.2056A–6 for rules on determining the estate tax under section 2056A. See § 20.2010– 

- 17 -

3T(c)(2) regarding the timing of the availability of the decedent’s DSUE amount to the surviving 

spouse. 

(5) Examples. The following examples illustrate the application of this paragraph (c): 

Example 1. Computation of DSUE amount. (i) Facts. In 2002, having made no prior taxable gift, 

Husband (H) makes a taxable gift valued at $1,000,000 and reports the gift on a timely-filed gift 

tax return. Because the amount of the gift is equal to the applicable exclusion amount for that 

year ($1,000,000), $345,800 is allowed as a credit against the tax, reducing the gift tax liability 

to zero. H dies on September 29, 2011, survived by 

Wife (W). H and W are US citizens and neither has any prior marriage. H’s taxable estate is 

$1,000,000. The executor of H’s estate timely files H’s estate tax return and elects portability, 

thereby allowing W to benefit from H’s DSUE amount. 

(ii) Application. The executor of H’s estate computes H’s DSUE amount to be $3,000,000 (the 

lesser of the $5,000,000 basic exclusion amount in 2011, or the excess of H’s $5,000,000 

applicable exclusion amount over the sum of the $1,000,000 taxable estate and the $1,000,000 

amount of adjusted taxable gifts). 

Example 2. Computation of DSUE amount when gift tax paid. (i) Facts. The facts are the same 

as in Example 1 except that the value of H’s taxable gift in 2002 is $2,000,000. After application 

of the applicable credit amount, H owes gift tax on $1,000,000, the amount of the gift in excess 

of the applicable exclusion amount for that year. H pays the gift tax owed on the transfer in 2002. 

(ii) Application. On H’s death, the executor of H’s estate computes the DSUE amount to be 

$3,000,000 (the lesser of the $5,000,000 basic exclusion amount in 2011, or the excess of H’s 

$5,000,000 applicable exclusion amount over the sum of the $1,000,000 taxable estate and 

$1,000,000 adjusted taxable gifts). H’s adjusted taxable gifts of $2,000,000 were reduced for 

purposes of this computation by $1,000,000, the amount of taxable gifts on which gift taxes were 

paid. 

Example 3. Computation of DSUE amount when QDOT created. (i) Facts. Husband (H), a US 

citizen, makes his first taxable gift in 2002, valued at $1,000,000, and reports the gift on a 

timely-filed gift tax return. No gift tax is due because the applicable exclusion amount for that 

year ($1,000,000) equals the fair market value of the gift. H dies in 2011 with a gross estate of 

$2,000,000. H’s wife (W) is a US resident but not a citizen of the United States and, under H’s 

will, a pecuniary bequest of $1,500,000 passes to a QDOT for the benefit of W. H’s executor 

timely files an estate tax return and makes the QDOT election for the property passing to the 

QDOT, and H’s estate is allowed a marital deduction of $1,500,000 under section 2056(d) for the 

value of that property. H’s taxable estate is $500,000. On H’s estate tax return, H’s executor 

computes H’s preliminary DSUE amount to be $3,500,000 (the lesser of the $5,000,000 basic 

exclusion amount in 2011, or the excess of H’s $5,000,000 applicable exclusion amount over the 

sum of the $500,000 taxable estate and the $1,000,000 adjusted taxable gifts). No taxable events 

within the meaning of section 2056A occur during W’s lifetime with respect to the QDOT, and 

W makes no taxable gifts. In 2012, W dies and the value of the assets of the QDOT is 

$1,800,000. 

- 18 -

(ii) Application. H’s DSUE amount is redetermined to be $1,700,000 (the lesser of the 

$5,000,000 basic exclusion amount in 2011, or the excess of H’s $5,000,000 applicable 

exclusion amount over $3,300,000 (the sum of the $500,000 taxable estate augmented by the 

$1,800,000 of QDOT assets and the $1,000,000 adjusted taxable gifts)). 

(d) Authority to examine returns of decedent. The IRS may examine returns of a decedent in 

determining the decedent’s DSUE amount, regardless of whether the period of limitations on 

assessment has expired for that return. See § 20.2010–3T(d) for additional rules relating to the 

IRS’s authority to examine returns. See also section 7602 for the IRS’s authority, when 

ascertaining the correctness of any return, to examine any returns that may be relevant or 

material to such inquiry. 

(e) Effective/applicability date. This section applies to the estates of decedents dying in calendar 

year 2011 or a subsequent year in which the applicable exclusion amount is determined under 

section 2010(c) of the Code by adding the basic exclusion amount and, in the case of a surviving 

spouse, the DSUE amount. 



§ 20.2010–3T Portability provisions applicable to the surviving spouse’s estate 

(temporary). 

(a) Surviving spouse’s estate limited to DSUE amount of last deceased spouse— (1) In general. 

A deceased spousal unused exclusion (DSUE) amount of a decedent, computed under § 

20.2010– 2T(c), is included in determining a surviving spouse’s applicable exclusion amount 

under section 2010(c)(2), provided— 

(i) Such decedent is the last deceased spouse of such surviving spouse within the meaning of § 

20.2010–1T(d)(5) on the date of the death of the surviving spouse; and 

(ii) The executor of the decedent’s estate elected portability (see § 20.2010– 2T(a) and (b) for 

applicable requirements). 

(2) No DSUE amount available from last deceased spouse. If the last deceased spouse of 

such surviving spouse had no DSUE amount, or if the executor of such a decedent’s estate did 

not make a portability election, the surviving spouse’s estate has no DSUE amount (except as 

provided in paragraph (b)(1)(ii) of this section) to be included in determining the applicable 

exclusion amount, even if the surviving spouse previously had a DSUE amount available from 

another decedent who, prior to the death of the last deceased spouse, was the last deceased 

spouse of such surviving spouse. See paragraph (b) of this section for a special rule in the case of 

multiple deceased spouses and a previously-applied DSUE amount. 

(3) Identity of last deceased spouse unchanged by subsequent marriage or divorce. A 

decedent is the last deceased spouse (as defined in § 20.2010–1T(d)(5)) of a surviving spouse 

even if, on the date of the death of the surviving spouse, the surviving spouse is married to 

another (then-living) individual. If a surviving spouse marries again and that marriage ends in 

divorce or an annulment, the subsequent death of the divorced spouse does not end the status of 

the prior deceased spouse as the last deceased spouse of the surviving spouse. The divorced 

- 19 -

spouse, not being married to the surviving spouse at death, is not the last deceased spouse as that 

term is defined in § 20.2010– 1T(d)(5). 

(b) Special rule in case of multiple deceased spouses and previously- applied DSUE amount— 

(1) In general. A special rule applies to compute the DSUE amount included in the applicable 

exclusion amount of a surviving spouse who previously has applied the DSUE amount of one or 

more deceased spouses to taxable gifts in accordance with § 25.2505–2T(b) and (c) of this 

chapter. If a surviving spouse has applied the DSUE amount of one or more last deceased 

spouses to the surviving spouse’s transfers during life, and if any of those last deceased spouses 

is different from the surviving spouse’s last deceased spouse as defined in § 20.2010–1T(d)(5) at 

the time of the surviving spouse’s death, then the DSUE amount to be included in determining 

the applicable exclusion amount of the surviving spouse at the time of the surviving spouse’s 

death is the sum of— 

(i) The DSUE amount of the surviving spouse’s last deceased spouse as described in paragraph 

(a)(1) of this section; and 

(ii) The DSUE amount of each other deceased spouse of the surviving spouse, to the extent that 

such amount was applied to one or more taxable gifts of the surviving spouse. 

(2) Example. The following example, in which all described individuals are US citizens, 

illustrates the application of this paragraph (b): 

Example. (i) Facts. Husband 1 (H1) dies on January 15, 2011, survived by Wife (W). Neither has 

made any taxable gifts during H1’s lifetime. H1’s executor elects portability of H1’s DSUE 

amount. The DSUE amount of H1 as computed on the estate tax return filed on behalf of H1’s 

estate is $5,000,000. On December 31, 2011, W makes taxable gifts to her children valued at 

$2,000,000. W reports the gifts on a timely-filed gift tax return. W is considered to have applied 

$2,000,000 of H1’s DSUE amount to the amount of taxable gifts, in accordance with § 25.2505– 

2T(c), and, therefore, W owes no gift tax. W has an applicable exclusion amount remaining in 

the amount of $8,000,000 ($3,000,000 of H1’s remaining DSUE amount plus W’s own 

$5,000,000 basic exclusion amount). After the death of H1, W marries Husband 2 (H2). H2 dies 

in June 2012. H2’s executor elects portability of H2’s DSUE amount, which is properly 

computed on H2’s estate tax return to be $2,000,000. W dies in October 2012. 

(ii) Application. The DSUE amount to be included in determining the applicable exclusion 

amount available to W’s estate is $4,000,000, determined by adding the $2,000,000 DSUE 

amount of H2 and the $2,000,000 DSUE amount of H1 that was applied by W to W’s 2011 

taxable gifts. Thus, W’s applicable exclusion amount is $9,000,000. 

(c) Date DSUE amount taken into consideration by surviving spouse’s estate—(1) General rule. 

A portability election made by an executor of a decedent’s estate (see § 20.2010–2T(a) and (b) 

for applicable requirements) applies as of the date of the decedent’s death. Thus, the decedent’s 

DSUE amount is included in the applicable exclusion amount of the decedent’s surviving spouse 

under section 2010(c)(2) and will be applicable to transfers made by the surviving spouse after 

the decedent’s death. However, such decedent’s DSUE amount will not be included in the 

applicable exclusion amount of the surviving spouse, even if the surviving spouse had made a 

transfer in reliance on the availability or computation of the decedent’s DSUE amount: 

- 20 -

(i) If the executor of the decedent’s estate supersedes the portability election by filing a 

subsequent estate tax return in accordance with § 20.2010– 2T(a)(4); 

(ii) To the extent that the DSUE amount subsequently is reduced by a valuation adjustment or the 

correction of an error in calculation; or 

(iii) To the extent that the surviving spouse cannot substantiate the DSUE amount claimed on the 

surviving spouse’s return. 

(2) Special rule when property passes to surviving spouse in a qualified domestic trust. When 

property passes from a decedent for the benefit of a surviving spouse in one or more qualified 

domestic trusts (QDOT) as defined in section 2056A(a) and the decedent’s executor elects 

portability, the DSUE amount available to be included in the applicable exclusion amount of the 

surviving spouse under section 2010(c)(2) is the DSUE amount of the decedent as redetermined 

in accordance with § 20.2010–2T(c)(4). The earliest date on which the decedent’s DSUE amount 

may be included in the applicable exclusion amount of the surviving spouse under section 

2010(c)(2) is the date of the occurrence of the final QDOT distribution or final other event 

(generally, the death of the surviving spouse or the earlier termination of all QDOTs for that 

surviving spouse) on which tax under section 2056A is imposed. However, the decedent’s DSUE 

amount as redetermined in accordance with § 20.2010–2T(c)(4) may be applied to certain 

taxable gifts of the surviving spouse. See § 25.2505–2T(d)(2)(i) of this chapter. 

(d) Authority to examine returns of deceased spouses. For the purpose of determining the DSUE 

amount to be included in the applicable exclusion amount of the surviving spouse, the Internal 

Revenue Service (IRS) may examine returns of each of the surviving spouse’s deceased spouses 

whose DSUE amount is claimed to be included in the surviving spouse’s applicable exclusion 

amount, regardless of whether the period of limitations on assessment has expired for any such 

return. The IRS’s authority to examine returns of a deceased spouse applies with respect to each 

transfer by the surviving spouse to which a DSUE amount is or has been applied. Upon 

examination, the IRS may adjust or eliminate the DSUE amount reported on such a return; 

however, the IRS may assess additional tax on that return only if that tax is assessed within the 

period of limitations on assessment under section 6501 applicable to the tax shown on that 

return. See also section 7602 for the IRS’s authority, when ascertaining the correctness of any 

return, to examine any returns that may be relevant or material to such inquiry. For purposes of 

these examinations to determine the DSUE amount, the surviving spouse is considered to have a 

material interest that is affected by the return information of the deceased spouse within the 

meaning of section 6103(e)(3). 

(e) Availability of DSUE amount for estates of nonresidents who are not citizens. The estate of a 

nonresident surviving spouse who is not a citizen of the United States at the time of such 

surviving spouse’s death shall not take into account the DSUE amount of any deceased spouse of 

such surviving spouse within the meaning of 

§ 20.2010–1T(d)(5) except to the extent allowed under any applicable treaty obligation of the 

United States. See section 2102(b)(3). 

(f) Effective/applicability date. This section applies to the estates of decedents dying in calendar 

year 2011 or a subsequent year in which the applicable exclusion amount is determined under 

section 2010(c) of the Code by adding the basic exclusion amount and, in the case of a surviving 

spouse, the DSUE amount. 

- 21 -

(g) Expiration date. The applicability of this section expires on or before June 15, 2015. 

PART 25—GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954 

■ Par. 7. The authority citation for part 25 is amended by adding an entry in numerical order to 

read as follows: 

Authority: 26 U.S.C. 7805. * * * 

Section 25.2505–2T also issued under 26 U.S.C. 2010(c)(6). * * * 

■ Par. 8. Section 25.2505–0T is added to read as follows: the applicable credit amount in effect 

under section 2010(c) that would apply if the donor died as of the end of the calendar year, 

reduced by the sum of the amounts allowable as a credit against the gift tax due for all preceding 

calendar periods. See §§ 25.2505–2T, 20.2010–1T, and 20.2010–2T of this chapter for additional 

rules and definitions related to determining the applicable credit amount in effect under section 

2010(c). 

(b) Applicable rate of tax. In determining the amounts allowable as a credit against the gift tax 

due for all preceding calendar periods, the unified rate schedule under section 2001(c) in effect 

for such calendar year applies instead of the rates of tax actually in effect for preceding calendar 

periods. See sections 2505(a) and 2502(a)(2). 

(c) Special rule in case of certain gifts made before 1977. The applicable credit amount allowable 

under paragraph (a) of this section must be reduced by an amount equal to 20 percent of the 

aggregate amount allowed as a specific exemption under section 2521 (as in effect before its 

repeal by the Tax Reform Act of 1976) for gifts made by the decedent after September 8, 1976, 

and before January 1, 1977. 

(d) Credit limitation. The applicable credit amount allowed under paragraph (a) of this section 

for any calendar year shall not exceed the amount of the tax imposed by section 2501 for such 


(e) Effective/applicability date. Paragraph (a) of this section applies to gifts made on or after 

January 1, 2011. Paragraphs (b), (c), and (d) of this section apply to gifts made on or after June 

15, 2012. 



§ 25.2505–2T Gifts made by a surviving spouse having a DSUE amount available 

(temporary). 

(a) Donor who is surviving spouse is limited to DSUE amount of last deceased spouse—(1) In 

general. In computing a surviving spouse’s gift tax liability with regard to a transfer subject to 

the tax imposed by section 2501 (taxable gift), a deceased spousal unused exclusion (DSUE) 

amount of a decedent, computed under § 20.2010–2T(c) of this chapter, is included in 

determining the surviving spouse’s applicable exclusion amount under section 2010(c)(2), 

provided: 

(i) Such decedent is the last deceased spouse of such surviving spouse within the meaning of § 

20.2010–1T(d)(5) of 

§ 25.2505–0T (temporary). 

- 22 -

Table of contents 

This section lists the table of contents for §§ 25.2505–1T and 25.2505–2T. 

§ 25.2505–1T Unified credit against gift tax; in general (temporary). 

(a) General rule. 

(b) Applicable rate of tax. 

(c) Special rule in case of certain gifts made before 1977. 

(d) Credit limitation. 



§ 25.2505–2T Gifts made by a surviving spouse having a DSUE amount available (temporary). 

(a) Donor who is surviving spouse is limited to DSUE amount of last deceased spouse. 


(2) No DSUE amount available from last deceased spouse. 

(3) Identity of last deceased spouse unchanged by subsequent marriage or divorce. 

(b) Manner in which DSUE amount is applied. 

(c) Special rule in case of multiple deceased spouses and previously-applied DSUE amount. 


(2) Example. 

(d) Date DSUE amount taken into consideration by donor who is a surviving spouse. 


(2) Special rule when property passes to surviving spouse in a qualified domestic trust. 

(e) Authority to examine returns of deceased spouses. 

(f) Availability of DSUE amount for nonresidents who are not citizens. 

(g) Effective/applicability date. (h) Expiration date. 

■ Par. 9. Section 25.2505–1T is added read as follows: 

(a) General rule. Section 2505(a) allows a citizen or resident of the United States a credit against 

the tax imposed by section 2501 for each calendar year. The allowable credit is 

to this chapter at the time of the surviving spouse’s taxable gift; and (ii) The executor of the 

decedent’s estate elected portability (see § 20.2010– 2T(a) and (b) of this chapter for applicable 

requirements). 

(2) No DSUE amount available from last deceased spouse. If on the date of the surviving 

spouse’s taxable gift the last deceased spouse of such surviving spouse had no DSUE amount or 

if the executor of the estate of such last deceased spouse did not elect portability, the surviving 

spouse has no DSUE amount (except as and to the extent provided in paragraph (c)(1)(ii) of this 

section) to be included in determining his or her applicable exclusion amount, even if the 

surviving spouse previously had a DSUE amount available from another decedent who, prior to 

the death of the last deceased spouse, was the last deceased spouse of such surviving spouse. See 

paragraph (c) of this section for a special rule in the case of multiple deceased spouses. 

(3) Identity of last deceased spouse unchanged by subsequent marriage or divorce. A decedent is 

the last deceased spouse (as defined in § 20.2010–1T(d)(5) of this chapter) of a surviving spouse 

even if, on the date of the surviving spouse’s taxable gift, the surviving spouse is married to 

another (then- living) individual. If a surviving spouse marries again and that marriage ends in 

- 23 -

divorce or an annulment, the subsequent death of the divorced spouse does not end the status of 

the prior deceased spouse as the last deceased spouse of the surviving spouse. The divorced 

spouse, not being married to the surviving spouse at death, is not the last deceased spouse as that 

term is defined in § 20.2010–1T(d)(5) of this chapter. 

(b) Manner in which DSUE amount is applied. If a donor who is a surviving spouse makes a 

taxable gift and a DSUE amount is included in determining the surviving spouse’s applicable 

exclusion amount under section 2010(c)(2), such surviving spouse will be considered to apply 

such DSUE amount to the taxable gift before the surviving spouse’s own basic exclusion 

amount. 

(c) Special rule in case of multiple deceased spouses and previously- applied DSUE amount—(1) 

In general. A special rule applies to compute the DSUE amount included in the applicable 

exclusion amount of a surviving spouse who previously has applied the DSUE amount of one or 

more deceased spouses. If a surviving spouse applied the DSUE amount of one or more last 

deceased spouses to the surviving spouse’s previous lifetime transfers, and if any of those last 

deceased spouses is different from the surviving spouse’s last deceased spouse as defined in § 

20.2010–1T(d)(5) of this chapter at the time of the current taxable gift by the surviving spouse, 

then the DSUE amount to be included in determining the applicable exclusion amount of the 

surviving spouse that will be applicable at the time of the current taxable gift is the sum of— 

(i) The DSUE amount of the surviving spouse’s last deceased spouse as described in paragraph 

(a)(1) of this section; and 

(ii) The DSUE amount of each other deceased spouse of the surviving spouse to the extent that 

such amount was applied to one or more previous taxable gifts of the surviving spouse. 

(2) Example. The following example, in which all described individuals are US citizens, 

illustrates the application of this paragraph (c): 

Example. (i) Facts. 

Husband 1 (H1) dies on January 15, 2011, survived by Wife (W). Neither has made any taxable 

gifts during H1’s lifetime. H1’s executor elects portability of H1’s deceased spousal unused 

exclusion (DSUE) amount. The DSUE amount of H1 as computed on the estate tax return filed 

on behalf of H1’s estate is $5,000,000. On December 31, 2011, W makes taxable gifts to her 

children valued at $2,000,000. W reports the gifts on a timely- filed gift tax return. W is 

considered to have applied $2,000,000 of H1’s DSUE amount to the 2011 taxable gifts, in 

accordance with paragraph (b) of this section, and, therefore, W owes no gift tax. W is 

considered to have an applicable exclusion amount remaining in the amount of $8,000,000 

($3,000,000 of H1’s remaining DSUE amount plus W’s own $5,000,000 basic exclusion 

amount). After the death of H1, W marries Husband 2 (H2). H2 dies on June 30, 2012. H2’s 

executor elects portability of H2’s DSUE amount, which is properly computed on H2’s estate tax 

return to be $2,000,000. 

(ii) Application. The DSUE amount to be included in determining the applicable exclusion 

amount available to W for gifts during the second half of 2012 is $4,000,000, determined by 

adding the $2,000,000 DSUE amount of H2 and the $2,000,000 DSUE amount of H1 that was 

applied by W to W’s 2011 taxable gifts. Thus, W’s applicable exclusion amount during the 

balance of 2012 is $9,000,000. 

(d) Date DSUE amount taken into consideration by donor who is a surviving spouse—(1) 

General rule. A portability election made by an executor of a decedent’s estate (see § 20.2010– 

2T(a) and (b) of this chapter for applicable requirements) applies as of the date of the decedent’s 

- 24 -

death. Thus, the decedent’s DSUE amount is included in the applicable exclusion amount of the 

decedent’s surviving spouse under section 2010(c)(2) and will be applicable to transfers made by 

the surviving spouse after the decedent’s death. However, such decedent’s DSUE amount will 

not be included in the applicable exclusion amount of the surviving spouse, even if the surviving 

spouse had made a taxable gift in reliance on the availability or computation of the decedent’s 

DSUE amount: 

(i) If the executor of the decedent’s estate supersedes the portability election by filing a 

subsequent estate tax return in accordance with § 20.2010– 2T(a)(4) of this chapter; 

(ii) To the extent that the DSUE amount subsequently is reduced by a valuation adjustment or the 

correction of an error in calculation; or 

(iii) To the extent that the DSUE amount claimed on the decedent’s return cannot be determined. 

(2) Special rule when property passes to surviving spouse in a qualified domestic trust—(i) In 

general. When property passes from a decedent for the benefit of a surviving spouse in one or 

more qualified domestic trusts (QDOT) as defined in section 2056A(a) and the decedent’s 

executor elects portability, the DSUE amount available to be included in the applicable exclusion 

amount of the surviving spouse under section 2010(c)(2) is the DSUE amount of the decedent as 

redetermined in accordance with § 20.2010–2T(c)(4) of this chapter. The earliest date on which 

the decedent’s DSUE amount may be included in the applicable exclusion amount of the 

surviving spouse under section 2010(c)(2) is the date of the occurrence of the final QDOT 

distribution or final other event (generally, the death of the surviving spouse or the earlier 

termination of all QDOTs for that surviving spouse) on which tax under section 2056A is 

imposed. However, the decedent’s DSUE amount as redetermined in accordance with § 

20.2010–2T(c)(4) of this chapter may be applied to the surviving spouse’s taxable gifts made in 

the year of the surviving spouse’s death, or if the terminating event occurs prior to the surviving 

spouse’s death, then in the year of that terminating event and/ or any subsequent year during the 

surviving spouse’s life. 

(ii) Example. The following example illustrates the application of this paragraph (d)(2): 

Example. (i) Facts. Husband (H), a US citizen, dies in January 2011 having made no taxable gifts 

during his lifetime. H’s gross estate is $3,000,000. H’s wife (W) is a US resident but not a citizen 

of the United States and, under H’s will, a pecuniary bequest of $2,000,000 passes to a QDOT 

for the benefit of W. H’s executor timely files an estate tax return and makes the QDOT election 

for the property passing to the QDOT, and H’s estate is allowed a marital deduction of 

$2,000,000 under section 2056(d) for the value of that property. H’s taxable estate is $1,000,000. 

On H’s estate tax return, H’s executor computes H’s preliminary DSUE amount to be 

$4,000,000. No taxable events within the meaning of section 2056A occur during W’s lifetime 

with respect to the QDOT. W makes a taxable gift of $1,000,000 to X in December 2011 and a 

taxable gift of $1,000,000 to Y in January 2012. W dies in September 2012, not having married 

again, when the value of the assets of the QDOT is $2,200,000. 

(ii) Application. H’s DSUE amount is redetermined to be $1,800,000 (the lesser of the 

$5,000,000 basic exclusion amount in 2011, or the excess of H’s $5,000,000 applicable 

exclusion amount over $3,200,000 (the sum of the $1,000,000 taxable estate augmented by the 

$2,200,000 of QDOT assets)). On W’s gift tax return filed for 2011, W cannot apply any DSUE 

amount to the gift made to X. However, because W’s gift to Y was made in the year that W died, 

W’s executor will apply $1,000,000 of H’s redetermined DSUE amount to the gift on W’s gift 

tax return filed for 2012. The remaining $800,000 of H’s redetermined DSUE amount is included 

in W’s applicable exclusion amount to be used in computing W’s estate tax liability. 

- 25 -

(e) Authority to examine returns of deceased spouses. For the purpose of determining the DSUE 

amount to be included in the applicable exclusion amount of the surviving spouse, the Internal 

Revenue Service (IRS) may examine returns of each of the surviving spouse’s deceased spouses 

whose DSUE amount is claimed to be included in the surviving spouse’s applicable exclusion 

amount, regardless of whether the period of limitations on assessment has expired for any such 

return. The IRS’s authority to examine returns of a deceased spouse applies with respect to each 

transfer by the surviving spouse to which a DSUE amount is or has been applied. Upon 

examination, the IRS may adjust or eliminate the DSUE amount reported on such a return; 

however, the IRS may assess additional tax on that return only if that tax is assessed within the 

period of limitations on assessment under section 6501 applicable to the tax shown on that 

return. See also section 7602 for the IRS’s authority, when ascertaining the correctness of any 

return, to examine any returns that may be relevant or material to such inquiry. 

(f) Availability of DSUE amount for nonresidents who are not citizens. A nonresident surviving 

spouse who was not a citizen of the United States at the time of making a transfer subject to tax 

under chapter 12 of the Internal Revenue Code shall not take into account the DSUE amount of 

any deceased spouse except to the extent 

allowed under any applicable treaty obligation of the United States. See section 2102(b)(3). 

(g) Effective/applicability date. This section applies to gifts made in calendar year 2011 or in a 

subsequent year in which the applicable exclusion amount is determined under section 2010(c) 

of the Code by adding the basic exclusion amount and, in the case of a surviving spouse, the 

DSUE amount. 

(h) Expiration date. The applicability of this section expires on or before June 15, 2015. 

- 26 -

SECTION 21 

New Lawyer Panel: “What Law School Didn’t 

Teach Us” 



Minneapolis 



Saint Paul 

James F. Held 


Edina 



Minneapolis 

Cory R. Wessman 

Erickson & Associates, P.A. 

Minneapolis 



Building & Managing Client Relationships & Expectations 

Jamie F. Held 

I. Introduction ......................................................................................................1 

II. Who is Your Client ...........................................................................................1 

III. Managing Expectations & Creating the WOW Experience .............................3 

IV. Establish Processes & Deliver Consistent Experiences for All Clients ..........6 

V. Involve Others & Take Care of Others ............................................................7 

VI. Conclusion .......................................................................................................7

I. Introduction 

Building & Managing Client Relationships & Expectations 

Jamie F. Held 


Edina, Minnesota 

Attorneys are in a client service industry. Like it or not, clients make us or break us. Without 

clients we cannot be successful. After all, someone must pay for our time. 

Because clients are integral to our success, it is imperative that we understand what our clients are 

looking for and what they expect. As their attorney, we play a crucial role in developing these 

expectations. We cannot, however, conduct the analysis from our perspective alone. We must 

understand the client’s perspective. 

Competition in the legal field is tough and constantly increasing. We not only need to be 

concerned about other practitioners. We must also consider other alternatives available to potential 

clients – Legal Zoom, software programs, downloadable forms, internet lawyering, paralegal assistance 

services, and non-lawyer professionals. 

We need to acknowledge that our clients, the general public consumer, is not readily able to 

assess the quality of our legal work. After sending clients drafts for their review, I hear my clients’ 

remark about the amount of “legalese” within a Will or Trust. The common comment is, “All the names 

look correct but some of this is just too legal to understand.” Consequently, instead of judging us on our 

legal abilities, the client assesses us based on the level of customer service they receive. Customer 

service is something they can understand. Therefore, when building and managing relationships knowing 

the law is not enough. In addition to meeting their legal needs, we must meet their expectations. 

As a result of this, you must “WOW” your clients. You must leave them feeling well served and taken 

care of. If you do not, you are missing out: 

 

 

 

 

II. 

You are missing out on giving clients a great experience with your firm 

You are not creating fans who will spread the word about your service 

You are not building long-term relationships 

You are not making as much money as you could 

Who is Your Client 

a. Take time to assess who is your client 

Who is your client? Who is your ideal client? Are you serving the clients you want to be 

serving? Do you offer a wide variety of estate planning and probate services? Do you go beyond estate 

planning and probate? Do you specialize in a specific area of law within the estate planning field? 

1

It is important for you to know the answers to these questions. It is important both for your firm 

and for potential clients. It seems simple enough and something we should already know, but it takes 

some serious thought to answer these questions. 

When you are first getting off the ground, it is easy to want to say “yes” to every call and 

potential client. That can come back to bite you if you are not careful. It’s ok to say “no.” In fact, it’s 

quite prudent to say “no.” Unless you plan to fully invest the time and energy into a new or rarely 

practiced area of law, you are not doing yourself or your client any favors. You also must consider our 

ethical obligations of competency and client representation. Do you really want to spend the time 

necessary to become competent in this new or rarely practiced area? If you do not intend to more 

frequently practice in the area in question, I recommend you say “no.” All the time and energy you spend 

diverts your attention from your primary areas of focus. You must also think about whether or not you 

can realistically charge the client for all of the time spent. 

Saying “no” may seem odd when you are trying to build a practice, build a client base and build 

referral sources, but in the long run you will be much happier that you did. Take the time necessary to 

define exactly what your areas of practice are and who are your ideal clients. Having a clear answer to 

these questions will aid you in communicating with others about your practice. 

b. What does your client want and need? 

Once you know who your clients are, it is much easier to determine how you will serve them. 

We all want happy clients, but above that we should strive to “WOW” our clients. It is the only way to 

give our clients a reason to return and to refer us to their friends and family members. Clients have 

certain needs from their estate planning attorney but they may also have wants. 

 

 

 

 

 

 

 

Convenient meeting times 

Convenient meeting location 

Free parking 

Electronic communication 

Bringing their kids along 

Few meetings 

Assistance with compiling necessary information 

We are all capable of meeting their needs for an estate plan. However, you cannot take for 

granted that because you are the attorney you know exactly what the client is looking for and needs. It is 

very important to understand their underlying goals and objectives. 

I am a big proponent of interdisciplinary client service. I am not opposed to asking the client, the 

client’s CPA and/or the financial planner about the client. These other individuals can offer insights that 

may not come out with conversations with the client. If these other professionals have been working with 

the client for a while they may be able to shed some light on areas that you would not otherwise learn 

about: 

 

 

Family dynamics and concerns 

Past experiences with a parent’s passing 

2

Being the beneficiary of a trust 

Future property ownership goals 

Long-term business transition planning 

If you do not know what your clients need or want … ASK. Ask open ended questions and ask 

often. Ask during the initial consultation, ask through the engagement and follow-up after the conclusion 

of the engagement by asking about the process and experience. 

III. 

Managing Expectations & Creating the WOW Experience 

Some experts say you have approximately 6 seconds to make a good first impression. Take some 

time to figure out how you want to interact with your clients. What does your ideal client-focused law 

firm look like: 

 

 

 

Consider the experience you want each client to have with your firm 

Consider what part of that experience you (and your employees, if applicable) would have in 

making this experience a reality 

Consider what needs to happen for this experience to occur for each client 

a. Communication 

Clients want to be heard. They want an opportunity to speak. And they want someone to listen, 

to really listen. Clients want to tell you about their goals, their objectives, and their experiences which 

have formed their opinions and often times the reason why they are meeting with you, the attorney. There 

is often a specific catalyst causing them to contact you. It might be the recent loss of a loved one, the first 

vacation without the kids, assisting a parent with their estate plan, etc. Whatever the motivation, the 

client wants to share this information, and more, with you. 

Clients do not want to hear all about your experiences, other clients, your family, etc. Be more 

“interested” than “interesting.” Practice active listening. Ask open-ended questions. Then, sit back and 

listen. This provides an opportunity to learn more about your clients. Ask follow-up questions only 

where appropriate. Try not to interrupt too often. Let the client go with their train of thought and get 

their story out. Upon completion, ask additional questions to obtain more information. 

Be sure to understand your client’s concerns. What is the main reason for initiating an estate 

plan? What are they worried about? What experience have they had or heard about that is influencing 

their expectations, attitudes, goals and objectives? 

b. Clearly Specify the Engagement 

Once you have listened to the client, it is time for you to do some talking. Educate the client 

about estate planning and their options. Explain why various documents are important and the choices 

they have in creating those documents. Be sure to clarify the engagement. 

It is the attorney’s job to clearly identify the scope of the engagement. Make sure the client 

clearly understands what you will and will not do. Do not assume that you and the client are on the same 

page about what the engagement entails. There are many nuances to an estate planning project that a 

3

client would assume would be included in the standard engagement. As attorneys we know these items 

can take significant additional time and assume substantial risk. For example, the client may assume the 

following are part of the estate planning or probate engagement: 

 

 

 

 

 

 

 

Provide beneficiary designation language and update assistance 

Trust funding 

Drafting a deed 

Completing a tax return 

Amending a Will or Trust in the future 

Reviewing a purchase agreement 

Maintaining the estate checking account 

Several times throughout an engagement you may need to remind the client about the scope of the 

project: 

 

 

 

 

During the initial client meeting or consultation 

In the Engagement Letter 

During the engagement process 

In a follow up or closing letter 

Be sure to have a frank discussion with the client about the fees for the engagement. Be ready for 

the initial sticker shock. People often assume that creating a Will is a simple process and thus should cost 

no more than a couple of hundred dollars. Once you figure out your fee structure (which is a topic for 

another whole session), stick to it. Simply be ready to discuss your fees with the client. Often times once 

the client better understands all that goes into the process, they are more accepting of the cost. 

Have a verbal conversation as well as clearly stating the fees in an engagement letter and drawing 

the clients attention to the fee section. Nothing is worse than completing an engagement and having a 

client act surprised over the fees charged. You may need to reiterate throughout the engagement process 

what the fees are. This is especially true if the fees may fluctuation. For example, if you charge a fee per 

deed drafted or separate fees for trust funding assistance. 

It is always better to error on the side of over-communicating and explaining these items so that 

there is a clear understanding of the scope of the engagement. 

a. Billing 

Billing is often an attorney’s least favorite activity. Can you bill for your time while billing? Did 

I accurately track all of my time? Will my client remember the fee arrangement? Will the hours surprise 

the client? And the list goes on and on. 

Billing is a very important part of the engagement and must be handled. Obviously it is important 

to collecting money and being profitable. That is after all why we are doing all of this! But billing serves 

other purposes during the engagement. Billing provides an opportunity to communicate with clients. It 

shows a client that you are working on their engagement even if you have not spoken to them or met with 

them recently. It is essential to provide specific descriptions for this purpose. Make sure to tell your 

4

clients what you are doing for them. This helps them to understand the various parts of the process of the 

engagement. 

I often write a personal note on the bill. This provides an opportunity for me to reach out to my 

clients and include a personal touch. 

Be sure to bill regularly. Nothing is worse than a client receiving a large bill at the end of an 

hourly engagement for a significant sum. The client is sure to call and complain or silently grumble their 

dissatisfaction. Lay out the billing terms in your engagement letter and stick to them. If you say you will 

bill monthly, bill monthly. It sounds simple but I am always surprised by the number of attorneys who do 

not send out monthly bills even though that is what their standard engagement letter states. 

b. Follow-up 

Be sure to keep your clients in the loop. We know that legal work takes time – time to draft, time 

spent waiting for a response from the court, a county property records office, a taxing authority, a 

financial institution, or another attorney. Clients, however, are not aware of the steps we need to 

undertake to accomplish various parts of the process. Keep your clients informed. Inform then at the 

beginning of the process about the steps involved and the time expected to complete the project. This, 

however is not enough. Clients will forget and they will get anxious when the process starts to take a 

while. Keep them apprised through the process. Follow-up regularly so they know that you are working 

on their matter even when they have not heard from you. 

Be sure to inquire about what method of communication your clients prefer – email, phone, mail. 

I always ask clients how they would like to be contacted if I need to obtain additional information, have 

drafts for their review, or want to schedule a meeting. I am often surprised as to which method clients 

prefer and therefore I never assume. 

After an engagement is complete be sure to follow-up. Send a thank you note or a closing letter. 

Send an engagement survey or questionnaire. This will serve many purposes. First, it shows the client 

that you appreciated their business and the opportunity to work with them. It gives the client an 

opportunity to voice their opinion – good or bad. If the feedback is positive that is a good sign that you 

are satisfactorily dealing with your clients. If the feedback is negative don’t despair. Now you know 

there is room for improvement and you can make the necessary adjustments in your practice. 

Acknowledge the feedback and learn from it. Feedback provides an opportunity for growth and process 

improvement. Do not take it personally or pout as a result. Remember, this is a business. A client 

service business. Where the client is always right! (Well, not always.) 

The second reason for post-engagement follow-up is to put you in the clients mind again. If the 

client is thinking of you they are more likely to share your name with someone else who needs your 

assistance and could become a client. The more often that a client thinks about you and the experience 

with your law firm, the better the chance that they will pass along your name to others. 

If you encounter a way to stay in contact with your clients going forward after completion of an 

engagement, do. Again, it’s about getting your name in front of your clients and maintaining the 

relationship so that they think or you and their past experience. There are many different ways to stay in 

touch with clients: 

5

IV. 

Send birthday cards 

Mail an annual letter or regular newsletter 

Get clients to subscribe to a blog or online newsletter 

Send articles or other items relevant to a specific client 

Send an annual holiday card 

Establish Processes & Deliver Consistent Experiences for All Clients 

It is important to consistently deliver a positive experience for all of your clients. We all have our 

favorite clients to work with or our clients who bring in the most revenue. But these clients should not 

garner all of our time and attention. You must give each and every client the same excellent service. 

In order to do this consistently and effectively, you must develop systems. A system is a 

predetermined way to achieve a certain result. In order to develop a system you must first decide on the 

desired outcome. Again, this is a process that requires some uninterrupted time and attention: 

 

 

 

 

 

 

 

Choose a task or function to focus on 

Determine the desired outcome 

Write a system for how you will achieve the outcome 

Educate those that work with you 

Apply the system every time 

Review the system regularly and ask for input 

Refine the system as necessary 

Your customer service will improve once you have established systems and processes for 

handling client interactions. Once you have developed your system, employ it each and every time. This 

will ensure that each and every client is receiving the same level of care and attention. You must be sure 

to use the systems you have developed. It may take some practice getting into a habit of using the 

systems but after a while it will become second nature. Systems may be helpful for: 

 

 

 

 

 

 

 

 

 

Handling a client’s first contact (whether via phone or email) 

Scheduling appointments 

Initial consultation 

Completing intake forms 

Initial consultation follow up 

Insuring frequent communication during an engagement 

Billing 

Staying in touch with clients post-representation 

Asking for referrals 

When you develop a system it is important that the system be followed each and every time. 

After all, when the system is followed, you guarantee a consistent outcome for each and every client. Be 

sure that all those that work with you and participate with the engagement understand and follow the 

processes you have established. 

6

Be aware, however, that sometimes you must step outside the system to better serve the client. 

There are times when flexibility and deviation from the system are more important. Be careful not to 

deviate from the system too frequently, otherwise, what is the point of the system. Speak with those who 

work with you so that there is a common understanding about when deviation is acceptable. Following a 

deviation from the system be sure to assess why the deviation was necessary. Was it a unique situation? 

Is a change in the overall system is warranted? 

V. Involve Others & Take Care of Others 

Be sure to involve others in the care of your clients. If you have other employees or support staff, 

this is more self-evident. Be sure to get input from others who work with your clients as they may have 

ideas of see things you do not. 

Be sure to ask referral sources for thoughts and ideas. Often times the client goes back to the 

original referral source with a review of the process. The referral source may not think or may forget to 

provide feedback. 

VI. 

Conclusion 

Building and managing client relationships and expectations is a critical part of our job. Ask 

other attorneys for advice and suggestions. Ask your clients for their thoughts. Be open to change. And, 

consistently revisit your interactions with your clients. There is always room for improvement. 

7


Estate and Trust Administration 101: Identification, Classification, Collection, and Re- 

Titling of Assets 

Cory Wessman 

Initial Client Engagement and Information Gathering ..............................................1 

Identification and Classification of Assets ................................................................4 

Collection and Re-Titling of Assets ...........................................................................6

Estate and Trust Administration 101: Identification, Classification, 

Collection, and Re-Titling of Assets 

Cory Wessman 

Erickson & Wessman, P.A. 

Minneapolis, Minnesota 

This summary is intended to assist attorneys with little or no experience handle the following 

tasks routinely associated with the administration of an estate or trust following a death: 

Initial Client Engagement and Information Gathering; 

Identification and Classification of Assets; and 

Collection and Re-Titling of Assets. 

While not included in these print materials, please refer to the CD-ROM for a summary of the 

following additional tasks routinely associated with the administration of an estate or trust: 

Valuation of Assets; 

Payment of Debts & Expenses; 

Tax-Related Matters; and 

Distributions to Beneficiaries. 

INITIAL CLIENT ENGAGEMENT AND INFORMATION GATHERING 

The first step is to meet with the decedent’s surviving family members (spouse and/or children) 

in order to (1) determine the steps necessary to transfer ownership of the decedent’s assets and 

(2) define the terms and scope of the legal representation. Unless the decedent’s surviving 

spouse or dependent children does not have access to assets to pay for living expenses, I 

encourage family members to schedule an appointment only when they feel emotionally ready to 

proceed. 1 Once ready, the following matters should be addressed: 

Obtain Basic Information About the Decedent 

Most law firms have standard questionnaire forms used to obtain basic information about the 

decedent, including names and contact information of family members, asset and liability 

information, and other information summarized below. This type of questionnaire could be 

provided to the surviving family members before or after this initial meeting. It may also be 

helpful to obtain a copy of the decedent’s obituary before an initial meeting with the surviving 

1 Surviving family members should provide themselves with sufficient time between the death and the first meeting. 

Individuals in the early stages of grief will not be able to retain a large amount of information, or handle multiple 

tasks at once. This is particularly true if the death was unexpected. 

1

family members. Particularly if you have not previously worked with the decedent or the 

decedent’s family, the obituary may shed some light on his or her family background, any 

charitable or civic participation, as well as his or her previous employment history. 

Gather Important Documents 

You should collect the following documents as soon as possible: 

 

 

 

 

 

 

Original copies of the decedent’s will and any codicils thereto (if any); 

Any trust agreements and any trust amendments thereto; 

Any written statements identifying bequests of tangible personal property; 

Copies of a predeceased spouse’s will or trust agreements (if any); 

Real estate property tax statements; and 

The decedent’s most recently filed income tax return. 

Contact Third Parties 

You should confirm with the family members that various third parties have been notified of the 

decedent’s passing. 

 

 

 

Notify the Veteran’s Administration. If the decedent was a veteran or the surviving 

spouse of a veteran, contact the Veteran’s Administration. 

Notify the Social Security Administration. In many cases, the funeral home will 

contact the Social Security Administration on behalf of the family. If this is not the case, 

arrangements should be made to contact the Social Security Administration at (800) 772- 

1213. When notifying Social Security, you will need to provide the decedent’s social 

security number. In the event that the decedent received a social security benefit for the 

month in which the decedent died, it is necessary for the family to return the benefit. 2 

Notify Decedent’s Employer (current and previous). The decedent’s family members 

may be entitled to accrued but unpaid salary, a death benefit on a group life insurance 

policy or other similar benefits. The employer should be able to put the family in touch 

with the right personnel (often either a human resources representative of the company or 

third-party administrator) in order to determine what benefits the family is entitled to. 

2 If the benefit was received by check, then the check should be returned; if by automatic deposit, then the bank 

should be notified of the decedent’s death, and the automatic deposit should be reversed. 

2

Obtain Asset Information 

You should request that the family begin collecting information on the decedent’s assets. Family 

members should review the decedent’s financial records to gather information on the nature and 

extent of the decedent’s current assets and liabilities. If the decedent worked with a financial 

advisor, the financial advisor will often be able to provide an accurate summary of many of the 

decedent’s assets and liabilities. In any event, the family member who will become the fiduciary 

(summarized below) should carefully review the decedent’s financial records so that he or she is 

aware of all of the decedent’s assets and debts. Bank or brokerage statements are usually sent on 

a monthly or quarterly basis. The fiduciary should attempt to obtain and review these statements 

to uncover previously unknown assets and debts. 

Form the Attorney-Client Relationship 

As summarized below, it will be necessary to categorize all of decedent’s assets in order to 

determine what legal steps will be necessary to properly transfer the decedent’s assets to the 

decedent’s beneficiaries. Once this has been accomplished, then you should clarify, in a written 

retainer agreement, the exact nature of the attorney-client relationship. If a trust or estate will be 

administered, in most cases it is advisable for you to represent the fiduciary. 

Obtain Death Certificates 

You should obtain certified copies of the decedent’s death certificate. In many instances, the 

funeral director will provide the family with certified copies of the death certificate. However, 

especially in those instances in which a decedent owned multiple non-probate assets or accounts, 

it will be necessary to obtain additional certified copies. 3 Currently, the cost of certified copies is 

$13 for the first certified copy, and $6 for each additional certified copy. In order to obtain the 

death certificates as soon as possible, you should contact the registrar of the county of the 

decedent’s residence with a signed application for certified copies of the death certificate. 4 The 

application may be signed by a surviving family member, a fiduciary, or an attorney. 

Obtain Tax Identification Number(s) 

As soon as it becomes clear whether an estate or a trust (or both) will need to be administered by 

reason of the decedent’s death, the fiduciary should obtain a tax identification number or 

employer identification number (“EIN”) for the trust or estate. This EIN should be used 

whenever opening a new account in the name of the trust or estate, and for filing all tax returns 

on behalf of the estate or trust. The EIN can be obtained through one of two ways: 

3 While it is not necessary to have a certified copy of the death certificate for probate administration purposes, the 

transfer of certain non-probate assets will require certified copy of the death certificate. 

4 The Minnesota Certificate of Death Application can be accessed online at: 

www.health.state.mn.us/divs/chs/osr/death.html. 

3

1. Website. The fiduciary should complete the online process at: 

https://sa.www4.irs.gov/modiein/individual/index.jsp. The fiduciary will need to 

provide his or her social security number as the “responsible party.” Once the 

application is completed, the website will generate a letter with the EIN. 

2. Phone. The EIN can also be obtained by phone. In order to proceed in this manner, 

the fiduciary should first complete and sign IRS Form SS-4. The completed Form SS- 

4 should then be faxed to the IRS at 216-516-3990. Once the Form SS-4 has been 

faxed to the IRS, contact the IRS at 866-816-2065 to obtain the EIN. 

IDENTIFICATION AND CLASSIFICATION OF ASSETS 

In order for surviving family members to understand the probate and trust administration 

process, I find it helpful to categorize all the decedent’s assets into one of three different 

categories: (1) trust assets; (2) other non-probate assets; and (3) probate assets. Before providing 

a definitive overview to the surviving family members as to how assets will actually pass, you 

should collect information on current asset ownership. 5 Once you obtain this information, you 

will be in a position to determine the steps necessary to transfer all the decedent’s assets. 

1. Trust Assets 

First, assets may be owned by a trust. 6 An asset is not necessarily owned by a trust if a decedent 

had created a trust; the asset must have been re-titled into the trust during lifetime. You can 

confirm that an asset was owned by a trust, or was payable to a trust following the decedent’s 

death, by examining title to the asset. For example, the real estate certificate of title or a bank or 

brokerage account statement will indicate whether an asset is owned by a trust. 

The trust agreement will include provisions for the administration of the trust following the death 

of the decedent, including the appointment of a trustee, the person or entity responsible for the 

administration of the trust. Among other duties, the trustee is responsible for the collection, 

inventory, and preservation of these assets, as further summarized below. Common types of 

assets that are owned by a trust, or payable to a trust following death, include: 

o Real estate 

o Marketable securities accounts 

o Life insurance policies 

5 Particularly where the decedent or the decedent’s family members were not receiving the assistance of an attorney 

before death, it is not uncommon for assets to be legally titled differently from the understanding of surviving family 

members. 

6 The trust may have been a “revocable trust” (also sometimes referred to as a “living trust” or a “revocable living 

trust”) in which the trust had been created by the decedent and was subject to revision by the decedent during his or 

her lifetime. Alternatively, the trust may have been owned by an “irrevocable trust.” 

4

2. Other “Non-Probate” Assets 

Second, the ownership of an asset may be automatically transferred to one or more beneficiaries 

by reason of the decedent’s death through one of several “non-probate” means. Like an asset 

owned by a trust, these types of assets will be distributed to the decedent’s beneficiaries without 

requiring probate proceedings. Unlike trust assets, however, these other “non-probate” assets do 

not require a named trustee to collect and administer the assets as part of a trust administration. 

Rather, as an attribute of this form of ownership, the asset can be automatically transferred to one 

or more new owners without the necessity of a probate proceeding or trust administration. Other 

non-probate assets generally include the following types of assets: 

JTWROS Assets. Some types of assets are “jointly” owned between two or more co-owners as 

“joint tenants with right of survivorship” (“JTWROS”). 7 As a legal attribute of this kind of 

ownership, the ownership is automatically transferred to the surviving owner at the first death. 

Two types of assets commonly owned as JTWROS are: 

o Residence. A residence is commonly owned JTWROS between a husband and wife. 

o Convenience Checking Accounts: A decedent may have opened a checking account 

JTWROS to provide a family member with access to cash in order to pay expenses 

during incapacity or following death. 

Beneficiary Designation: A “beneficiary designation form” is a form completed by the decedent 

during his or her lifetime that has the legal effect of transferring ownership on an asset 

immediately upon the decedent’s death. The entity administering the asset has agreed to transfer 

the decedent’s account(s) or assets to those persons designated on the form. So long as the 

decedent had designed specific individuals as the beneficiaries, these types of assets can be 

transferred without the need for a probate proceeding and can be considered “non-probate” 

assets. Assets that often pass by a beneficiary designation at the death of the owner include: 

o life insurance policies; 

o annuities; and 

o retirement accounts (such as Roth and Traditional IRAs, 401(k)s, and 403(b)s). 

Transfer on Death/Payable on Death Designations. Certain bank accounts or investment 

accounts may be transferred directly to one or more named beneficiaries through a “transfer on 

death” (“TOD”) designation or a “payable on death” (“POD”) designation. Like a beneficiary 

designation form for a life insurance policy or a retirement account, a TOD or POD is 

accomplished through the completion of a form provided by the administrator of the account, 

and allows the decedent to specify the new owner of the account following death. 

7 Please refer to the Probate Avoidance materials to review the important distinction between “joint tenants with 

right of survivorship” (“JTWROS”) and “tenants in common.” 

5

Transfer on Death Deed. A “Transfer on Death Deed” (“TODD”) is a relatively new 

development under Minnesota law. It allows anyone owning Minnesota real property to specify, 

by deed, who should receive the real estate following the death of the current owner, subject to 

any outstanding mortgages on the property. If a married couple owns the property, the married 

couple could together execute and record a TODD that specifies who should receive the real 

estate following the death of both the husband and wife. In order to be effective, the TODD 

must have been properly executed and recorded prior to death. 

3. Probate Assets 

Third, assets that cannot be categorized as either (1) trust assets or (2) other non-probate assets 

should be considered “probate” assets. The legal transfer of these types of assets generally 

involves the supervision of the state court system—a process generally called “probate.” 

COLLECTION AND RE-TITLING OF ASSETS 

Once assets have been identified and categorized, and the attorney-client relationship 

established, the fiduciary should begin the process of collecting and re-titling assets. 

Trust Assets: 

Accounts or assets that were owned in the name of the decedent’s trust during lifetime should be 

re-titled so that the asset is under the control of the trustee. In order to accomplish this, the 

account or asset generally requires the following two changes: 

 

 

New Trustee. First, in most cases it will be necessary to remove the name of the 

decedent as the named trustee and re-title the trust assets in the name of the designated 

“successor” trustee. Even if the decedent was not serving in any fiduciary capacity at the 

time of his or her death, in many cases the trust document includes provisions for the 

appointment of one or more “successor” trustees to serve following death. 

New Tax Identification. Second, it is necessary to assign a new tax identification number 

to the trust, as summarized above. While all items of income and loss on trust assets 

were previously reported directly on decedent’s personal income tax return, now the trust 

has its own separate tax characteristics. 

The bank, brokerage firm, life insurance company, or other third party administering the trust 

assets will generally need the following documentation to make these changes: 

1. The new tax identification number for the trust; 

2. The name and contact information for the trustee; and 

3. Either (i) a new Certificate of Trust; or 

6

(ii) the pages of the trust agreement showing the name of the trust, the name of 

the designated successor trustee following death, the signature page(s) of the trust, 

and a death certificate. 

The account should be titled in the name of the trustee, but in a fiduciary capacity on behalf of 

the trust. For example, if Child A is named as Trustee of the Parent Trust, the account should be 

titled as follows: “Child A, as Trustee of the Parent Trust under Agreement dated 1/1/2000.” 

Other Non-Probate Assets 

Unlike assets owned by a trust or estate, other non-probate assets pass immediately to the 

individually-named beneficiaries (or co-owners, in the case of JTWROS assets). These types of 

non-probate assets can be transferred as soon as possible following the decedent’s death. 8 

JTWROS Accounts. In general, the ownership of a jointly-owned account automatically transfers 

to the surviving co-owner. 9 Only if the decedent’s Will specifically referenced this account, or if 

there is some other “clear and convincing” evidence of a different intention, is someone other 

than the surviving co-owner entitled to this jointly-owned account. 10 

JTWROS Real Estate. If real estate was owned with a surviving spouse JTWROS, the residence 

can be transferred without the necessity of probate proceedings through the filing of an 

“Affidavit of Identity and Survivorship. ”11 Please see the Recording 101 materials for a 

discussion of transferring title on real estate previously owned JTWROS. 

Beneficiary Designated Assets. If the decedent had named specific individuals as beneficiaries of 

a retirement account, annuity or life insurance policy, these named beneficiaries should contact 

the administrator and complete a claim form provided by the administrator. 12 The transfer in 

ownership of tax-deferred retirement accounts requires special attention. Unless most other 

assets, which pass free of any income taxes, such is not the case with an inherited tax-deferred 

retirement account. In many instances, a beneficiary receiving retirement account assets can elect 

to defer, for a significant period of time, the payment of the income taxes associated with the 

retirement account assets by not withdrawing assets from the inherited retirement account. It is 

important to carefully review the options available to the beneficiary and select that option which 

provides the beneficiary with the greatest tax benefit. 

8 The new owners of these other non-probate assets hold no fiduciary duties to other family members once the nonprobate 

asset has been transferred to them, individually. 

9 Minn. Stat. §524.6-204. 

10 In re Estate of Butler, 803 N.W.2d 393 (Minn. 2011). 

11 MCLE P-088A. 

12 In some instances the decedent’s probate estate is considered the beneficiary, either because the estate was named 

as the primary beneficiary under a beneficiary designation form, or because the decedent had not designated any 

beneficiary whatsoever, in which case the “default” beneficiary could be the decedent’s estate. Under such 

circumstances, it will be necessary to provide the administrator with “Letters,” as described below, before the asset 

can be transferred to the estate. 

7

Transfer on Death/Payable on Death Accounts. Like a beneficiary designation, a Transfer on 

Death (“TOD”) account or a Payable on Death “POD” account is transferred directly to the 

named beneficiary following the death of the owner. In order to accomplish this transfer, it is 

usually most efficient to contact the administrator to determine what documentation the 

administrator will need to complete the transfer. Generally, the administrator will request (i) a 

death certificate and (ii) proof of identity of the TOD/POD beneficiary. The administrator will 

provide its own transfer of ownership form for the beneficiary to complete. 

Transfer on Death Deed. If the decedent had properly executed and recorded a “Transfer on 

Death Deed” (“TODD”) during lifetime, the real estate can be transferred without the necessity 

of probate proceedings. As summarized in the Recording 101 materials, this transfer can be 

accomplished through an “Affidavit of Identity and Survivorship.” 13 

Probate Assets 

In most instances in which a decedent died with probate assets, probate proceedings will be 

necessary to transfer these assets. Before third parties will recognize the designated Personal 

Representative’s authority to act, they will require the Personal Representative to provide 

“Letters.” 14 Please review the Surviving Your First Probate materials for a summary of the steps 

necessary to obtain Letters. Once the Letters are obtained, the Personal Representative should 

transfer the estate assets to a newly-created account in the name of the decedent’s estate. 

In order to open a new account in the name of an estate, the bank should be provided with: 

1. The tax identification number for the estate; 

2. The “Letters” obtained through probate proceedings; and 

3. The name and contact information of the Personal Representative. 

The account should be titled in the name of the estate (e.g. “Estate of John Doe”). The only 

authorized signer on the account would be the appointed Personal Representative. 

Collection of Personal Property By Affidavit. In the unlikely event that an individual dies with 

probate assets that do not include real estate and are collectively valued at no more than $50,000, 

it may be possible for the decedent’s family members to transfer the asset without initiating a 

probate proceeding. If the following requirements are met, the family could transfer the probate 

asset(s) through a simple affidavit called an “Affidavit of Collection of Personal Property:” 15 

 

None of the probate assets are interests in real estate; 

13 MCLE P-088A. 

14 Either “Letters Testamentary” or “Letters of Administration,” depending upon whether the decedent died with a 

valid will (“testate”) or without a valid will (“intestate”). 

15 MCLE P-680. 

8

The total value of the probate assets is less than $50,000, after deducting liens and 

encumbrances; 16 

30 days have elapsed since the decedent’s death; 

No personal representative has been appointed for the decedent’s estate, nor is an 

application pending for the appointment of a personal representative; and 

The “successor” named in the affidavit is the person entitled to the property according to 

the decedent’s Will (or, if none, then according to Minnesota intestacy law). 17 

The Affidavit should be signed by the “successor” and, along with a certified death certificate, 

provided to the administrator of the probate asset that needs to be transferred. The affidavit can 

be used to collect various kinds of property, including tangible personal property, bank accounts, 

mutual fund shares, other marketable securities accounts, notes, and debts owed to the decedent. 

Transfer of Motor Vehicles: The title of an automobile can be transferred by an affidavit supplied 

by the Department of Motor Vehicles. 18 

16 Please note that the $50,000 limitation only applies to the value of estate assets, not the value of trust and other 

non-probate assets. 

17 Minn. Stat. §524.3-1201. 

18 The affidavit can be found online at: https://dps.mn.gov/divisions/dvs/forms-documents/Pages/motor-vehicleforms.aspx. 

9


Surviving Your First Probate Proceeding 


I. Generally ..........................................................................................................1 

II. Formal Versus Informal Proceedings ...............................................................1 

III. Insolvent Estates ..............................................................................................3 

IV. Real Estate in a Probate Proceeding ................................................................4 

V. Miscellaneous ..................................................................................................4

Surviving Your First Probate Proceeding 



I. Generally 

A. Statutory Authority for probate administrations in Minnesota is found in Chapters 

524 and 525. The Uniform Probate Code (Chapter 524) has been enacted in 18 

states including Minnesota but it should be noted that many states have modified 

the uniform provisions. 

B. Threshold for filing a probate in Minnesota is $50,000. If the estate is less than 

the threshold then an Affidavit of Collection is appropriate. Minnesota Statute 

Section 524.3-1201. 

D. Create a questionnaire and a checklist. 

C. Consider purchasing the Minnesota Estate Administration Deskbook (4th Edition- 

March 2012). 

II. Formal Versus Informal Proceedings 

A. Factors to consider when determining whether to open informally or formally: 

1. Is the estate solvent? 

2. Are there minor beneficiaries? 

3. Do you know who all the heirs are and have addresses for all of them? 

4. Are there known disputes among the heirs? 

5. Do you have the original will? 

6. Is the will executed properly? 

7. Is there real estate? If so, do the heirs plan to sell or distribute the real 

estate? 

B. Time limits for filing: 

1. At least 5 days (120 hours) must have passed since the Decedent’s death. 

2. Watch the survivorship clause in the will, if any. 

1

3. If more than 3 years have passed since the Decedent’s death, a probate 

proceeding is no longer appropriate and one must file a Decree of Descent 

proceeding instead. The Determination of Descent statutes can be found 

at Minnesota Statute Sections 525.31 through 525.313. 

C. Demands for Notice 

1. A Demand for Notice is a document that is filed with the Court, often by a 

creditor of the Estate, to ensure that it receives notice of the initiation of a 

probate proceeding in regards to a Decedent, and any action taken in 

regards to the Estate. 

2. One should always check to see if a Demand for Notice has been filed 

prior to filing your application or petition. Check either online at 

http://pa.courts.state.mn.us or by calling the probate court administrator. 

3. If there is a Demand for Notice on file prior to filing one of the following 

must occur: 

D. Informal Proceeding 

a. The demandant must remove/withdraw the Demand for Notice; or 

b. Copies of the applicable documents must be sent to the demandant 

with notice that you intend to file the documents after the 

expiration of a 14-day period. An affidavit of mailing must then 

accompany the application or petition. Minn. Stat. § 524.3-204. 

c. However, under Minn. Stat. § 524.3-204, the requirement provided 

in b. above do not apply to any order entered or petition filed in 

any formal proceeding. 

1. Application - Requirements listed in Minn. Stat. § 524.3-301. 

2. Probate Registrar - In person meeting versus mail - varies by county 

3. Other requirements prior to the issuance of letters: 

a. Publication 

b. Notice and affidavit of mailing 

c. Oath and Acceptance by personal representative 

d. Notice to Spouse and Children 

2

4. Closing the estate - Statement to Close by personal representative 

E. Formal Proceeding 

III. Insolvent Estates 

1. Supervised versus unsupervised 

2. Petition - Requirements listed in Minn. Stat. § 524.3-402 

3. Notice of hearing 

a. Mailing of notice to all interested parties 

b. Publication 

4. Hearing - Testimony by petitioner or other interested person - varies by 

County. 

5. Other requirements prior to the issuance of letters 

a. Oath and Acceptance by personal representative 

b. Notice to Spouse and Children 

c. Affidavit of Mailing regarding Order 

6. Inventory 

7. Closing the estate 

a. Supervised versus unsupervised 

b. Plan of Distribution and Proposal for Distribution 

c. Final Account 

A. Necessity of formal administration 

B. Bond and pre-approval of bond 

C. Priority of claims under Minn. Stat. § 524.3-805 

D. Recovery of assets from third parties 

3

E. Personal Representative personally liable for payment of claims if priority 

established by statute is not followed. See Minn. Stat. § 524.3-807 

F. Closing formally 

G. Final account 

H. Plan of Distribution and Proposal for Distribution 

I. Formal Discharge of Personal Representative and Bond 

IV. Real Estate in a Probate Proceeding 

A. Specific devise 

1. Deed of distribution versus personal representatives deed 

B. Thirty day limitation within an informal proceeding 

C. Notice to Commissioner 

1. Distribution within seventy days prohibited without a waiver 

D. The purchase agreement – “As is” addendum and inclusion of language pertaining 

to a Personal Representative’s Deed at closing, and not a warranty deed. 

E. Sales package 

F. Pre-approval for Torrens property 

V. Miscellaneous 

A. Private Agreement Among Successor binding on Personal Representative 

B. Summary Proceedings 

C. Homestead Exemption 

D. Who is your client? 

4


Estate Planning to Reduce, Defer or Avoid U.S. and Minnesota Estate Taxes 


I. Transfer Taxes Generally .................................................................................1 

II. 

Planning with Gifts...........................................................................................4 

III. Planning with Disclaimers ...............................................................................5 

IV. Planning with Credit Shelter/Marital Trusts, A/B Trusts ................................7

Estate Planning to Reduce, Defer or Avoid U.S. and Minnesota Estate Taxes 



St. Paul, Minnesota 

The material contained herein is intended to summarize the laws as of May 1, 2013. While 

mention is made periodically throughout the materials of pending legislation, the reader should 

verify that no changes in the law have been made since the date above. 

I. Transfer Taxes Generally 

A. United States Estate Tax 

1. Imposed on the transfer of the taxable assets owned by a United States citizen of 

resident that occurs upon the death of said individual. Internal Revenue Code 

(IRC) §2001(a). 

2. 2013 Exemption Amount – the amount of assets a taxpayer can transfer at death 

under federal law before an estate tax is imposed. 

a. $5,250,000 for deaths occurring in 2013. 

b. If the value of the total estate (plus taxable gifts given during lifetime) is 

under this amount, no federal estate tax will be due to the Internal 

Revenue Service (IRS). IRC §2010(c). 

3. 2013 Filing Requirement: 

a. If the estate (including taxable gifts) is over $5,250,000, a Form 706 estate 

tax return must be filed with the IRS. 

b. The return and any tax payment is due within 9 months of the date of 

death. A 6-month extension to file the return is available, but the payment 

cannot be extended without incurring interest and possibly penalties. 

c. Even if a return is required for filing, a tax may still not be due depending 

upon possible deductions, i.e., marital, charitable, and expenses of 

administration. Note: You do not get to take deductions into account 

when determining whether a return is required. 

4. 2013 Estate Tax Rate: the top rate is 35%, which is imposed on the amount in 

excess of $5,250,000. 

B. United States Gift Tax 

1. Imposed on transfers of assets during lifetime that are made for less than full and 

adequate consideration, if the aggregate amount transferred during the donor’s 

lifetime exceeds the applicable exemption amount. 

2. 2013 Annual Exclusion Amount- the amount federal law states is de minimis, and 

that no reporting of the gift is required. 

a. In 2013, the annual exclusion amount is $14,000. A donor can give up the 

annual exclusion to any other person without reporting the gift. IRC 

§2503. 

1

. In order to qualify for the $14,000, the gift must be “present interest,” 

which generally means an outright, unrestricted gift directly to the 

recipient or to a trust with “Crummey rights” to withdraw. 

c. A married couple can give a combined amount of $28,000 per year to as 

many people as they choose. 

d. The annual exclusion amount increases based on inflation. The last 

increase, from $13,000 to $14,000, occurred at the end of 2012/beginning 

of 2013. 

e. The donor can gift this amount to an unlimited number of people as long 

as the amount paid to any one individual does not exceed $14,000 in the 


3. 2013 Lifetime Gift Exclusion 

a. Under Federal law, the amount a donor can give during his or her lifetime 

in excess of the annual exclusion before gift tax is imposed 

b. 2013 Lifetime Gift Exclusion Amount: the lifetime gift exclusion is tied 

to the estate tax exclusion, meaning that a taxpayer can give up to a total 

of $5,250,000, whether the transfers occur during the taxpayer’s lifetime 

or at death. 

c. For example, if the donor makes gifts of $3,000,000 during his or her 

lifetime, then, under current law in 2013, only $2,250,000 will be exempt 

from Federal estate taxes at death. 

4. Other Exempt Gifts 

a. Tuition paid directly to a qualified education institution does not need to 

be reported, does not use one’s annual exclusion and does not use one’s 

lifetime gift credit. 

b. Payment of qualified medical expenses paid directly to the provider of the 

medical services does not need to be reported, does not use one’s annual 

exclusion and does not use one’s lifetime gift credit. 

5. 2013 Filing Requirement 

a. If the donor gave gifts in excess of $14,000 to any one person (other than a 

spouse) in a calendar year, the donor must file a Form 709 gift tax return 

to report the amount of gift exclusion used. 

b. If the donor made gifts of future interests, of any amount, a Form 709 gift 

tax return must be filed. 

c. If one spouse made gifts in excess of $14,000 to any one or more persons 

and the other spouse consents to apply his/her annual exclusion, a gift tax 

return must be filed to split those gifts. 

d. Form 709 Gift Tax Return is due on April 15 of the year following the 

year the gifts were made, with the option to file a 6-month extension 

e. If a gift tax is due, the donor is responsible for paying the tax, not the 

recipient. 

C. United States Generation-Skipping Transfer Tax (GST Tax) 

1. Transfers made by a taxpayer during life or at death to or for the benefit of a 

person two or more generations below the transferor or 37.5 years younger (“a 

skip person”) than the transferor are subject to an additional GST Tax. IRC 

§§2613 and 2651. 

2

2. 2013 Exemption Amount: $5,250,000 for transfers occurring in 2012. IRC §2631 

3. Filing Requirement: the allocation of GST Exemption can be made on Form 709 

if the GST interest was created by a lifetime gift or, if the interest was created 

upon the death of the transferor, then the allocation is made of a Form 706. 

4. Automatic Allocation of GST Exemption. The Internal Revenue Code provides 

for the automatic allocation of GST Exemption to certain transfers, regardless of 

whether a Form 709 gift tax return or a Form 706 is filed, unless the taxpayer files 

an affirmative and timely statement to opt out of the automatic allocation rules. 

IRC §2632. 

5. Once GST Exemption is allocated, whether intentionally on a Form 709 or Form 

706, or by virtue of the automatic allocation rules, it is irrevocable. Reg. 

§26.2632-1. 

D. Minnesota Estate Tax 

1. 2013 Exemption Amount 

a. $1,000,000 for deaths occurring in 2013. 

b. If the value of the total gross estate is under this amount, no Minnesota 

estate tax will be due to the Minnesota Department of Revenue (MN 

DOR). 

2. 2013 Filing Requirement: 

a. If the value of the estate total estate, wherever located, is over $1,000,000, 

a Minnesota estate tax return (M706) must be filed with the MN DOR. 

b. The Minnesota estate tax is applied similarly to the Federal estate tax and 

the M706 incorporates the Federal Form 706 as part of the filing 

requirement. The available deductions and the due date of the M706 

mirror those of the Federal estate tax return. 

c. There are, of course, some differences between the Minnesota and Federal 

Return, such as the availability of certain elections. These are beyond the 

scope of these materials. 

3. 2013 Estate Tax Rate 

a. Minnesota applies different tax rates depending upon the size of the estate. 

b. The Minnesota Department of Revenue states the highest marginal estate 

tax rate is 41%, and the minimum rate is approximately 9%. 

c. The high rate generally applies to amounts just over the $1,000,000 

exemption amount, estates between $1,000,001-1,093,000 incur the 41% 

rate. The rate generally decreases as the size of the estate increases. 

d. Lesson: Under law in place as of May 1, 2013, if the taxpayer’s estate is 

just over the Minnesota estate tax exemption, it may be beneficial to gift 

an amount sufficient to reduce the amount that will remain at death to 

below $1,000,000, assuming the taxpayer is willing to make gifts. The 

Minnesota Legislature is considering a bill that would change the filing 

requirement and taxation calculation to consider certain lifetime gifts. 

E. Minnesota Gift Tax 

3

1. Minnesota does not have a gift tax as of May 1, 2013. However there is a bill 

making its way through the Minnesota legislature that would enact a Minnesota 

gift tax for lifetime gifts in excess of $1 million. 

2. Despite the absence of a gift tax, gifts are added back into the estate tax 

calculation. The Minnesota estate tax is based on the adjusted gross estate (line 3 

of the Form 706), which is calculated before gifts are added back in to the estate. 

This offers a unique opportunity to Minnesota residents to make gifts during their 

lifetime so as to reduce the size of the taxpayer’s estate below the $1 million 

filing threshold. 

3. Exception: If the decedent has an estate of up to $1,093,000, if prior gifts were 

made, the estate tax calculator available at the Minnesota Department of Revenue 

website shows an increase in the amount of tax due as a result of the prior gifts. 

4. Be careful when making gifts that you are not trading Minnesota estate taxes for 

capital gains tax, which could be at a higher rate. Gifts of cash or assets where 

the donor’s basis is equal to (or close to) the fair market value are best. 

F. Minnesota Generation- Skipping Transfer Tax 

Minnesota does not have a GST Tax. 

II. Planning With Gifts 

A. Annual Exclusion Gifts 

1. Each taxpayer can make gifts of the annual exclusion amount, currently $14,000 

per person, per done in 2013, to an unlimited number of people each calendar 

year. This allows a taxpayer to transfer potentially significant amounts without 

having to report the transfers. 

2. For example, if a married couple has 3 adult children who are all married, the 

donor parents can give each couple a total of $56,000, for a total of $168,000 of 

gifts that are tax free and do not need to be reported (assuming the gifts are 

present interests). If the donor parents make these gifts for period of 10 years, it 

will reduce their estate by at least $1,680,000! 

3. By making annual gifts of the annual exclusion amount, a taxpayer can transfer 

significant sums tax-free and without reducing his/her remaining unified credit 

amount. 

4. In order to qualify for the annual exclusion, gifts made with trusts must give the 

beneficiary the right to withdraw a portion of the gift for a prescribed period of 

time, typically 30 days, after the beneficiary is notified of the gift. (Crummey 

right). The grant of this right to withdraw makes the gift a present interest, 

qualifying the transfer for the annual gift tax exclusion. In the absence of the 

right of withdrawal, the gift to the trust will use lifetime gifting credit. 

B. Lifetime Gift Exclusion 

1. For gifts of larger sums, the donor may begin using his or her lifetime gifting 

credit, $5,250,000 in 2013. A married couple can transfer a combined 

$10,500,000! 

4

2. If one spouse has greater financial resources than the other, the more monied 

spouse can transfer up to $10,500,000, provided the other spouse consents to split 

the gifts on the gift tax return. IRC § 2513. 

3. Given the disparity between the Federal exemption and the Minnesota exemption, 

if the taxpayer’s estate is under $5,250,000, and assuming the taxpayer is so 

inclined, making sizable gifts during life to reduce the amount remaining at death 

can be a simple and effective way to reduce the amount of Minnesota estate tax 

that will be due upon death. 

C. Death-Bed Gifts or Gifts During Incapacity 

1. If the taxpayer is competent, and willing to make gifts, he or she can continue to 

make gifts until the time of death. 

2. If gifts are made near the date of death, it is critical that the gifts be completed 

before the death of the taxpayer. This means that cash must be withdrawn and 

actually given to the recipient, checks must be cashed and cleared by the donor’s 

bank (which may take several days), etc. 

3. Gifts of insurance policies should be avoided to prevent the policy coming back 

into the estate, if the policy is gifted within three years of the decedent’s death 

under I.R.C. Sec. 2035. 

4. If the taxpayer is incapacitated, the ability of another person to make the gifts on 

behalf of the donor depends upon the document authorizing the gifts. 

5. Minnesota Statutory Short Form Power of Attorney: The form provided in 

Minnesota Statutes Section 523.24 specifically authorizes the attorney-in-fact to 

make gifts for the purpose of minimizing income, estate, inheritance or gift taxes, 

provided that the gifts to the attorney-in fact do not exceed $10,000. 

6. For clients with a history of gifting and who would like gifts to continue in the 

event the client becomes incapacitated in the future, consider authorizing gifts in 

the client’s Revocable Trust or executing a general, durable power of attorney 

which authorizes large gifts. 

7. Caveat: The bill proposed before the Minnesota legislature would include gifts 

made within 3 years of death as part of the Minnesota taxable estate. 

III. Planning with Disclaimers 

A. Disclaimers, generally 

1. A disclaimer is an irrevocable and unqualified refusal by a person to accept an 

interest in property. 

2. In order for the disclaimer to be effective, it must meet certain requirement under 

the Internal Revenue Code and Minnesota law. 

B. Qualified Disclaimers under IRC §2518 and Reg. 25.2518-2 must meet all of the 

following criteria: 

1. Irrevocable and unqualified. 

2. In a writing identifying the interest disclaimed and signed by the disclaimant or 

the legal representative of the disclaimant. 

3. Delivered to the person holding the property, or the legal representative of that 

person, in a timely fashion. 

5

a. Within 9 months of a completed lifetime gift. 

b. Within 9 months of the 21 st birthday of the disclaimant. 

c. Within 9 months of the date of death of the person who granted the 

interest (this deadline cannot be extended). 

4. Made prior to the disclaimant accepting the interest disclaimed or any direct or 

indirect benefits. 

a. Acceptance is: use of the property, acceptance of income, dividends or 

rent, directing others regarding the property, exercise of a power of 

appointment over the property. 

b. Acceptance is not: vesting of title by operation of law, continued 

residence in jointly held property, exercise of non-fiduciary powers, 

acceptance of one interest is not enough to accept separate other interests, 

payment of taxes. 

5. The disclaimed interest must pass either to the spouse of the decedent or to a 

person other than the disclaimant without any direction from the disclaimant. 

C. Qualified Disclaimer under Minnesota Statutes §524.1-1101, et seq. 

1. Similar to Federal law, a Minnesota disclaimer is effective upon delivery to the 

person holding the assets; the disclaimer no longer needs to filed with the district 

court. 

a. Exception: a disclaimer must be filed if delivery is not possible 

b. Exception: a disclaimer must be filed if an interest in real estate is 

disclaimed. 

2. Tax qualified disclaimers must be filed within 9 months of the date of the interest 

was created. 

3. Minnesota law also permits disclaimers that are: 

a. Non-qualified, 

b. Of jointly held property, 

c. By a Trustee, and 

d. Of Powers of Appointment and other non-fiduciary powers. 

4. A disclaimer is not permitted if the disclaimant is insolvent. 

D. Disclaimer as part of Estate Planning Documents 

1. Disclaimers incorporated as part of a Will or Trust to permit post-death estate tax 

planning. 

2. The governing document should provide that the any assets disclaimed by the 

spouse shall pass to a Trust (a “Disclaimer Trust”). 

3. The surviving spouse can be named as a beneficiary of the Disclaimer Trust, and 

receive income and principal pursuant to an ascertainable standard. 

4. If the disclaimant is anyone other than the spouse, the disclaimant may not benefit 

from the asset for any reason, not as a devisee, a residuary beneficiary, or as an 

heir-at-law. Reg. 25.2518-2(e)(1)-(2). 

E. Reasons to Disclaim 

1. So that another person can benefit from the asset without the disclaimant having 

to accept the asset and make a gift. 

6

2. Correct mistakes in the beneficiary designation or estate plan. 

3. Avoid receipt of tainted assets, such as environmentally contaminated real estate. 

4. Tax Planning. 

IV. Planning with Credit Shelter/Marital Trusts, A/B Trusts 

A. Applicability: One may wish to select a Credit/Shelter plan instead of a disclaimer plan 

for one or more of the following reasons: 

a. Estates between the Minnesota estate tax exemption and the Federal exemption 

(between $1,000,000 and $5,250,000 in 2012) should consider incorporating 

estate tax planning provisions to avoid the unnecessary payment of estate taxes 

upon the death of the surviving spouse. 

b. The success of disclaimers depends upon the timely delivery of a disclaimer by a 

surviving spouse. The emotional impact of a spouse’s death may make decisionmaking 

difficult. 

c. The success of gifting to reduce estate taxes relies upon the taxpayer’s willingness 

to part with assets during lifetime. 

d. If tax provisions that utilize the applicable estate tax exemption are incorporated 

and integrated as part of the estate plan, there is potentially less room for errors 

and missed opportunities. 

B. Funding the Trust: 

a. In order to circumvent the potential risks of relying on disclaimers, and to address 

estates that did not fully utilize the lifetime gifting credit, the Will or Revocable 

Trust can incorporate what is referred to as any of the above titles (hereinafter 

referred to individually and collectively as a “Credit Shelter Trust”) to direct the 

Personal Representative or Trustee to utilize the applicable estate tax exemption 

by use of a funding formula. 

b. Since the Minnesota estate tax was decoupled from the Federal estate tax, it is 

important to pay careful attention to the funding language for Credit Shelter 

Trusts. 

c. Clients who have documents that pre-date the 2001 estate tax law changes may 

require funding up to the Federal estate tax exemption. If the decedent’s estate is 

$5,000,000, assuming no gifts were made during lifetime, then the Credit Shelter 

Trust may receive all of the estate assets. In addition, an estate tax of $ 391,600 

will be due to the State of Minnesota because the Credit Shelter Trust is unlikely 

to qualify for the marital deduction. 

d. For Minnesota residents with estates in excess of the current state exemption 

amount, the language should require that the Credit Shelter Trust be funded to the 

maximum amount that can pass free of state and federal estate taxes. Drafting 

Wills and Trust Agreements 6 th Edition (2008, updated 2011) provides sample 

language. 

e. Use of a funding formula will allow full use of the $1,000,000 million Minnesota 

estate tax exemption at the death of the first spouse, and prevent those assets, and 

any growth on those assets, from being included in the estate of the surviving 

spouse. 

f. The Credit Shelter Trust can only be used to its full benefit if the deceased 

taxpayer has assets passing under the Will or Revocable Trust that are equal to or 

7

in excess of the applicable estate tax exemption (i.e. joint assets, unless 

disclaimed, will not be available to fund the Credit Shelter Trust). 

g. In addition to utilization of a funding formula, the Will or Revocable Trust may 

also give the spouse the ability to disclaim any assets passing to the spouse, 

outright or in a Marital Trust, and direct the disclaimed assets to the Credit Shelter 

Trust. This may incur a Minnesota estate tax, but that may be advantageous if it 

will reduce the surviving spouse’s estate and avoid federal estate taxes in the 

future. 

C. Credit Shelter Trust Administration 

a. The surviving spouse can be a beneficiary, as can the descendants of the decedent, 

and receive distributions of income and principal for health, support, maintenance 

and education (ascertainable standard). 

b. The surviving spouse can serve as the Trustee of the Trust. 

c. The surviving spouse can be granted a special power of appointment (not a 

general power of appointment) to direct assets among the decedent’s issue or 

other persons without risking inclusion in the estate of the spouse. CAVEAT: the 

surviving spouse cannot exercise a power of appointment over any assets of the 

Credit Shelter Trust which were added as a result of the spouse’s disclaimer. 

D. Marital Trusts 

a. Qualification for the marital deduction is the same under Minnesota law as under 

federal law. 

b. The Marital Deduction applies and no estate tax is imposed at the death of the 

first spouse if: 

i. Assets pass to the surviving spouse outright. 

ii. Assets for the benefit of the spouse are held in a qualifying Marital Trust 

1. Qualified Terminable Interest Property Trust (QTIP) 

a. All income paid to the spouse. 

b. The spouse has the power to direct the sale of non-income 

producing property. 

c. Note: Minnesota has no separate QTIP election. Therefore 

a Federal estate tax return must be filed with the IRS, even 

if the estate is under the federal filing threshold, to make 

sure that Minnesota will recognize it. 

2. Marital Trust by which the spouse is entitled to greater rights to 

assets, such as discretionary distributions of principal, the right to 

withdraw some or all of the principal, or the spouse has a general 

power of appointment exercisable at death. 

c. The assets of the Marital Trust will be included in the estate of the surviving 

spouse upon the surviving spouse’s death. 

8


Preparing Your First Estate and Gift Tax Return 


Estate Tax Return – Form 706 ...................................................................................1 

A. Real Estate.......................................................................................................1 

B. Stocks and Bonds ............................................................................................1 

C. Schedules C through I .....................................................................................2 

D. Deductions ......................................................................................................2 

E. Other Notable Items ........................................................................................3 

F. Filing the Minnesota Return – M706...............................................................3 

Gift Tax Return – Form 709 ......................................................................................3

Preparing Your First Estate and Gift Tax Return 



Minneapolis, Minnesota 

Preparing your first estate or gift tax return can be overwhelming and it can be difficult to 

determine where to start. The following materials are not meant to be an exhaustive treatise as to 

any and all issues relating to estate and gift tax returns, but I do hope that the materials provide 

some helpful tips and examples for navigating your first return. 

Estate Tax Return – Form 706 

The estate tax return is a tax return prepared in conjunction with a decedent’s death. If the 

decedent is a Minnesota resident, and owns property in excess of $1,000,000, both a Minnesota 

and federal estate tax return should be prepared. This return will be due nine months after the 

decedent’s death. It is possible to extend the filing deadline of this return; however, any tax 

payment is still generally due nine months following a decedent’s death. 

The estate tax return is really meant to be a snapshot of all assets the decedent owned as 

of the date of his or her death either alone or in joint tenancy or tenancy-in-common with another 

person. Each asset will need to be valued on the date of death and certain assets have different 

valuation requirements. The estate tax return contains schedules that will include some detail as 

to these assets and the values. The totals from these schedules will then carry forward to the first 

page of the return. Please see Appendix 1-3 for an example of the first three pages of a return. 

The first three pages summarize all information from the various schedules. 

A. Real Estate 

Real estate is generally included on Schedule A of the return. Please see Appendix 4 for 

an example as to how to describe a piece of real estate. Real estate must be valued as of the date 

of death. It is advisable to obtain an appraisal rather than using the current property tax 

statement value for the property. Most taxing authorities, notably the Minnesota Department of 

Revenue, require that an appraisal be obtained rather than using the current property tax 

statement value. If there is a sale of the property after date of death, it is possible to use that 

sales price. The real estate generally will be listed on Schedule A, but can be listed on Schedule 

F if it is held jointly, and Schedule G if it was part of a decedent’s revocable trust. If the real 

estate was owned by a revocable trust or any other trust, it is considered a transfer during the 

decedent’s life rather than real estate under Schedule A. Please see Appendix 7 showing a 

description of real estate held in joint tenancy. 

B. Stocks and Bonds 

Stocks and bonds are generally included on Schedule B of the estate tax return. Stocks 

and bonds must be valued as of the date of death. The appropriate way to value stocks and bonds 

is to use the mean value of each security on the date of death. The mean is the average between 

the high and low value of the security on the date of death, including any accrued interest or

dividends. It is important to make sure the valuation is correct and not simply use the value on 

the last statement or a value given to you by an investment advisor. Many statements use the 

incorrect value such as the close on the last day rather than the appropriate value required by the 

IRS. Please see Appendix 5 for an example as to how to list stocks and bonds. Similar to real 

estate, if the investment account or stocks and bonds are held in a revocable trust, this will be 

listed on Schedule G instead of Schedule B. Further, if the stock or bond is a closely-held asset, 

an appraisal of the company may be necessary. 

C. Schedules C through I 

Schedules C through I are fairly self-explanatory and include mortgages, notes, and cash 

owned by the decedent, insurance on the decedent’s life, jointly-owned property, and other 

miscellaneous property. It is important to note that any life insurance should include what is 

referred to as a Form 712 that is provided by the life insurance company that values the interest 

of the policy as of the decedent’s death. Miscellaneous property usually contains a description of 

tangible personal property; specifically, any of those pieces of property with significant value. 

Again, if this personal property has been transferred to a revocable trust, this property will be 

listed on Schedule G, where transfers during the decedent’s life are listed. See Appendices 6 

through 15 for examples of each of these schedules. 

Transfers during decedent’s life on Schedule G have been addressed above in conjunction 

with any transfers to a trust the decedent made during his life. This includes an irrevocable or 

revocable trust. It is important to analyze whether or not the trust is includable in decedent’s 

estate for tax purposes, but may need to be listed on this schedule either way. Many irrevocable 

lifetime trusts need to be listed, but may not necessarily incur additional tax or add to the taxable 

estate of the decedent. 

Finally, it is important to note that powers of appointment that include some estate tax 

inclusion should be listed on Schedule H. These materials will not address the intricacies 

surrounding determinations regarding powers of appointment, how they may be includable in 

one’s gross estate or how they should be listed. Further, Schedule I lists any annuities the 

decedent may have been receiving during his or her lifetime. These annuities are valued in a 

specific way using IRS tables. These materials again will not address the intricacies of reporting 

and quantifying these annuities. 

D. Deductions 

Schedules J through O include any deductions that decrease the decedent’s gross estate. 

If you review Appendix 1 and look at line 2, this is where the total allowable deductions are 

subtracted from the gross estate. Schedule J lists funeral expenses and any expenses incurred in 

administering property subject to claims. Schedule K lists debts and mortgages and liens on 

property. Schedule L lists losses or expenses that are not subject to claims. Schedules M and O 

are those assets that are passing to a surviving spouse or a charity which in turn receive 

corresponding marital and charitable deductions and are subtracted from the gross estate before 

the tax is calculated. Please see Appendices 16 through 20 for examples of these schedules. 

2

E. Other Notable Items 

There are a few other items to note when gathering information in preparing your first 

return. The first is whether the decedent made any previous taxable gifts. The return will 

require you to disclose any gift tax returns filed and any taxable gifts reported. If you look to 

line 4 on the first page of the return, you will see where adjusted taxable gifts are typically listed. 

Further, the questions on page 3 of the return, shown in Appendix 3, are important because the 

IRS is seeking to acquire additional information to discover whether additional lifetime transfers 

were made by the decedent that should be included in the decedent’s taxable estate. Again, these 

materials will not address the intricacies of how and when you should answer yes or no to these 

questions, but they are important to review and to consider. 

All assets must be valued as of date of death, but it is possible that if the assets have 

decreased in value six months from the date of death to use what is called an “alternate valuation 

date.” This alternate valuation date is exactly six months from the decedent’s death, and may 

only be used if it reduces the decedent’s federal tax. This is not something that is useful or that 

can be used if the decedent is only paying Minnesota tax. In the case of alternate valuation, all 

assets must be revalued, including the updates to any appraisals, as of that six-month date. 

Further, any transfers receiving GST tax exemption must be noted on Schedule R of the 

estate tax return. An example of Schedule R is included as Appendix 21. 

Finally, it is important to include any documentation required to support the amounts 

provided and/or inclusion treatment of the assets. The form asks for some specific attachments 

such as a will, trust, death certificate, and previous gift tax returns filed. The return will also 

require that you file any Form 712, disclaimers or other documents impacting the distribution of 

assets, as well as documentation for the values used for any assets. The more documentation you 

provided to the IRS, the less likely it is to have follow-up questions or a corresponding audit. 

F. Filing the Minnesota Return – M706 

Once the federal return is prepared, that return is used to compile the Minnesota return. 

The Minnesota Department of Revenue requires that you file a copy of the federal return along 

with any exhibits, even if you are not anticipating the requirement to file a federal return. For 

example, if the decedent’s estate is $2,000,000 and you have no federal filing requirement, you 

still have to prepare the federal return in order to prepare the Minnesota return, and provide the 

Minnesota Department of Revenue with a copy of that return. Further, it may be advisable in the 

era of portability to file a federal return even if you are under the Minnesota taxable amount. 

Gift Tax Return – Form 709 

Similar to the filing of an estate tax return, the gift tax return is filed in the year following 

any reportable gifts made by a taxpayer or his/her spouse, and documents a snapshot of the value 

of that gift as of the date of the gift. Please see attached Appendix 22 through 24 for an example 

of the first three pages of a gift tax return. The gift tax return is due on April 15 of the year 

following a reportable gift. Reportable gifts are any gifts over the annual exclusion amount 

3

($13,000 per year per donee). If you are filing a gift tax return for a client, however, you do need 

to include any of those gifts under that annual exclusion amount. 

The gift tax return can also be used to document non-gift transactions that you would like 

the IRS to review, such as a sale of assets to a trust. Though this may not trigger gift tax 

implications, it is important to start the statute of limitations on this type of transaction. 

A number of gifts are very simple to list, such as gifts of cash to specific individuals. 

Please see Appendix 25 for an example of gifts of cash made to individuals. Gifts of securities 

must be valued similar to the estate tax return in that the value of the gift is the mean of the high 

and low plus any accrued interest or dividends on that particular security. Gifts of closely-held 

interest should be documented with an appraisal or similar type of valuation method. These 

materials are not going to go into the intricacies of valuation, specifically as it relates to closelyheld 

business interests. 

Documenting gifts of cash to insurance trusts or the creation of grantor retained annuity 

trusts requires some different documentation. Please see Appendices 26 through 28 for an 

example of an insurance premium payment to an insurance trust, the funding of a grantor 

retained annuity trust, and the documentation of an installment sale to an irrevocable trust. It is 

important to know which gifts qualify for annual exclusion treatment and which do not. 

Generally transfers to an insurance trust with language including Crummey withdrawal rights 

qualify as annual exclusion gifts, but transfers to fund grantor retained annuity trusts, gifts of 

business interests, and some others do not qualify for annual exclusion gift treatment and should 

not be included as annual exclusion gifts on the gift tax return. 

Further, any gifts that are automatically allocated GST exemption because they are 

indirect or direct steps that you would like to opt out of allocation require a statement in this 

regard. Please see Appendix 30 for an example of this opt-out language. Finally, any gifts 

receiving GST allocation should be filed on a Schedule C reflecting these transfers. Please see 

Appendix 29 as an example. 

4

SECTION 22 

Small Estates Panel – Practical Planning 

Ideas for the Modest Estate 



Bloomington 

Bryan Jamison 

Jamison & Jamison 

Shoreview 

Mary Frances M. Price 

Edina Estate & Elder Law, P.A. 

Edina 

James T. McNary 

McNary Law Offices 

Red WIng 


THE WANDRY WAY: A BETTER APPROACH TO THE 

DISCLAIMER OF HARD-TO-VALUE ASSETS? 

James T. McNary 

McNary Law Office, P.A. 


I. Introduction………..…………………………………………………………………………… 2 

II. Disclaimers Under State Law…………..………………………………………………. 2 

III. “Qualified” Disclaimers Under the Internal Revenue Code……………. 3 

A. The Writing Test…………………………………………………………………………. 3 

B. The Nine Month Test.….…………………………………………………………….. 4 

C. The No Acceptance Test……...…………………………………………………….. 4 

D. The No Direction Test………..………………………………………………………. 5 

E. Disclaimers of Separate & Severable Interests……..……………………. 5 

IV. The Disclaimer‐based Plan & Hard‐to‐Value Assets.….…………………… 6 

A. The Wandry Case……………………………………………………………………….. 7 

B. The Christiansen Case..…………………………………………………………….. 10 

V. Conclusion…………………………………………………………………………………… 11

I. Introduction 

Disclaimers have long been an important tool in the estate planner’s toolbox, but they have been 

especially useful during the past decade as we’ve coped with both the ever-changing federal 

estate tax exemption amounts and the disconnect between the state and federal estate tax 

exemption amounts.Because of the flexibility they afford, disclaimers will continue to be an 

important post-mortem planning device. 

In this paper I will briefly review the requirements of a disclaimer under State law and a 

“qualified disclaimer”under the Internal Revenue Code. I will then focus on the use of formula 

disclaimers as means of allocating hard-to-value assets to the credit shelter trust. Finally, I will 

discuss the Federal Tax Court case Wandry v. Commissioner, T.C. Memo 2012-88 (March 

26,2012) and the Eighth Circuit decision in Estate of Christiansen, 586 F.3d 1061 (8 th Cir. 2009), 

two cases that read together offer an excellent guideline for an effective pecuniary formula 

disclaimer. 

II. Disclaimers Under State Law 

Minnesota adopted the Uniform Disclaimer of Property Interests Act, (“the Act”) effective 

January 1, 2010. The Act is codified at Minnesota Statutes §§ 524.2-1101 – 524.2-1116. Under 

the Act a person may disclaim, in whole or in part, any interest in or power over property, 

including a power of appointment, even if the creator of the interest imposed a spendthrift 

provision or a restriction or limitation on the right to disclaim.To be effective under the Act, a 

disclaimer must (1) be in writing, (2) declare the writing as a disclaimer, (3) describe the interest 

or power disclaimed, (4) be signed by the person or fiduciary making the disclaimer and be 

acknowledged in the manner provided for deeds of real estate to be recorded, and (5) be 

delivered or filed in the manner provided in section 524.2-1114. Minn. Stat. §524.2-1107.A 

disclaimer under the Act is not a transfer, assignment or release of the interest disclaimed.Id. 

In the case of a disclaimer of an interest created by will, other than an interest in a testamentary 

trust,the disclaimer must be delivered to the personal representative of the decedent's estate; if no 

personal representative is serving when the disclaimer is sought to be delivered, the disclaimer 

must be filed with the clerk of the court in any county where venue of administration would be 

proper.Minn. Stat. §524.2-1114. In the case of a disclaimer of an interest in a testamentary 

trustthe disclaimer must be delivered to the trustee serving when the disclaimer is delivered or, if 

no trustee is then serving, to the personal representative of the decedent's estate.If no personal 

representative is serving when the disclaimer of an interest in a testamentary trust is sought to be 

delivered, the disclaimer must be filed with the clerk of the court in any county where venue of 

administration of the decedent's estate would be proper.Id.If the disclaimer is of an interest in an 

inter vivos trustthe disclaimer must be delivered to the trustee serving when the disclaimer is 

delivered, or if no trustee is then serving, it must be filed with the clerk of the court in any county 

where the filing of a notice of trust would be proper. Id. 

Delivery of a disclaimer may be effected by personal delivery, first-class mail, or any other 

method that results in its receipt.Id. Delivery of a disclaimer of an interest in or relating to real 

2

estate is presumed upon the recording of the disclaimer in the office of the county recorder or 

registrar of titles of the county or counties where the real estate is located.Id. 

The Act provides a disclaimer may be barred for a number of reasons. A disclaimer is ineffective 

if the disclaimant waives the right to disclaim in writing. Minn. Stat. §524.2-1106. A disclaimer 

is also barred if any of the following occur before the disclaimer becomes effective: (1) the 

disclaimant accepts the portion of the interest sought to be disclaimed; (2)the disclaimant 

voluntarily assigns, conveys, encumbers, pledges, or transfers the portion of the interest sought 

to be disclaimed or contracts to do so; (3) the portion of the interest sought to be disclaimed is 

sold pursuant to a judicial sale; or (4) the disclaimant is insolvent. Id. 

Under the Act a disclaimer may be made at any time unless it is barred under section 524.2- 

1106. This can be a trap for the unwary because, as will be discussed below, in order to be a 

“qualified disclaimer” under the Internal Revenue Code a disclaimer must generally be made 

within nine months of the date of the transfer creating the interest. 

A disclaimer may be of a portion of the interest that would otherwise pass to the disclaimant. 

Minn. Stat. §524.2-1107 provides a disclaimer may be expressed as a fraction, a percentage, a 

monetary amount, or specific property. As will be discussed, this enables a disclaimant to use a 

formula to fund a credit shelter trust with hard-to-value assets. 

III. “Qualified Disclaimers” Under the Internal Revenue Code 

Section 2518 of the Internal Revenue Code (“the Code”) created the concept of the “qualified 

disclaimer” which is defined as an irrevocable and unqualified refusal to accept an interest, or an 

undivided portion of an interest, in property. If a person makes a qualified disclaimer as 

described in section 2518,for purposes of the Federal estate, gift, and generation-skipping 

transfer tax laws, the disclaimed interest in property is treated as if it had never been transferred 

to the person making the qualified disclaimer. Instead, the property is considered to have passed 

directly from the transferor of the property to the person entitled to receive the property as a 

result of the disclaimer. Treas. Reg. §25.2518-1(b).Accordingly, a person making a qualified 

disclaimer is not treated as making a gift. Similarly, the value of a decedent's gross estate for 

purposes of the Federal estate tax does not include the value of property with respect to which 

the decedentmade a qualified disclaimer. Id.If the disclaimer is not a qualified disclaimer, for the 

purposes of the Federal estate, gift, and generation-skipping transfer tax provisions, the 

disclaimer is disregarded and the disclaimant is treated as having received the 

interest.Id.Essentially, §2518 imposes four tests for a qualified disclaimer: (a) a writing test; (b) a 

nine month test; (c) an acceptance test; and (d) a passage test. 

A. The Writing Test 

The first test is pretty simple – Code § 2518(b)(1) simply requires that the refusal to accept an 

interest in property be in writing, that the writing identify the interest in property disclaimed and 

that the writing be signed either by the disclaimant or by the disclaimant's legal 

3

epresentative.The writing should indicate that the disclaimant’s refusal to accept an interest in 

property is both unqualified and irrevocable. 

B. The Nine Month Test 

Code § 2518(b)(2) requires that the writing be received by the transferor of the interest, the 

transferor’s legal representative, or the holder of the legal title to the property to which the 

interest relates not later than the date which is 9 months after the later of: (a) the day on which 

the transfer creating the interest in the disclaimant is made, or (b) the day on which the 

disclaimantattains age 21.The 9-month period for making a disclaimer is generally to be 

determined with reference to the transfer creating the interest in the disclaimant. Reg. § 25.2518- 

2(c)(3)(i).With respect to inter vivos transfers, a transfer creating an interest occurs when there is 

a completed gift for Federal gift tax purposes, regardless of whether a gift tax is imposed on the 

completed gift. Id.With respect to transfers made by a decedent at death or transfers that become 

irrevocable at death, the transfer creating the interest occurs on the date of the decedent's death, 

even if an estate tax is not imposed on the transfer. Id. 

The general rules for determining when there is a transfer commencing the 9 month disclaimer 

period do not apply to the disclaimer of joint interests. There are two sets of special rules 

applicable to disclaimers of joint property interests – one set of rules applies to joint bank and 

investment accounts and the other applies to all other jointly-held property interests. The rule for 

joint bank, brokerage and other investment accounts is thatif the transferor could unilaterally 

regain the transferor's own contributions to the account without the consent of the other cotenant, 

such that the transfer is not a completed gift under Reg. § 25.2511-1(h)(4), the transfer creating 

the survivor's interest in the decedent's share of the account occurs on the death of the deceased 

cotenant. Reg. § 25.2518-2(c)(4)(iii). The rule for all other types of jointly-held property interests 

is that a qualified disclaimer of the interest to which the disclaimant succeeds upon creation of 

the tenancy must be made no later than 9 months after the creation of the tenancy regardless of 

whether such interest could be unilaterally severed under local law. Reg. § 25.2518-2(c)(4)(i). A 

qualified disclaimer of the survivorship interest to which the survivor succeeds by operation of 

law upon the death of the first joint tenant to die must be made no later than 9 months after the 

death of the first joint tenant to die regardless of whether such interest could be unilaterally 

severed under local law. Id. 

Notwithstanding the foregoing rules, a beneficiary who is under 21 years of age has until 9 

months after his twenty-first birthday in which to make a qualified disclaimer of his interest in 

property. Reg. § 25.2518-2(d)(3.) 

C. The No Acceptance Test. 

Under Code § 2518(b)(3) a disclaimer will be qualified only if the disclaimant has not previously 

accepted the disclaimed interest or any of its benefits.This requirement is obviously in keeping 

with common law notions of gifts which hold that a gift is completed upon acceptance by the 

4

donee. There cannot be a renunciation of a gift after one has accepted it.Acceptance is 

manifested by an affirmative act which is consistent with ownership of the interest in property. 

Reg. § 25.2518-2(d)(1).Once acceptance has occurred it cannot be rectified by a repayment or a 

return of the property which the beneficiary would like to disclaim. 

Merely taking delivery of an instrument of title, without more, does not constitute acceptance. 

Id.Moreover, a disclaimant is not considered to have accepted property merely because under 

applicable local law title to the property vests immediately in the disclaimant upon the death of a 

decedent. Id. 

D. The No Direction Test 

Code § 2518(b)(4) requires that as a result of the disclaimer the interest in the disclaimed 

property must pass without any direction on the part of the disclaimant to either the surviving 

spouse of the decedent, or to a person other than the disclaimant. Code § 2518(b)(4) essentially 

imposes two tests: (a) a no direction test, and (b) a no interest test.Under the “no direction” test 

the disclaimant, whether or not she is the surviving spouse of the transferor, must not have the 

power to direct to whom the property passes. The requirements of a qualified disclaimer under § 

2518 are not satisfied if the disclaimant, either alone or in conjunction with another, directs the 

redistribution or transfer of the property to another person (or has the power to direct the 

redistribution or transfer of the property interest to another person) unless such power is limited 

by an ascertainable standard. Reg. § 25.2518-2(e)(1).Under the “no interest” test, if the 

disclaimant is someone other than the surviving spouse of the transferor the interest in the 

disclaimed property must pass to someone other than the disclaimant. If the disclaimant is the 

transferor’s surviving spouse the disclaimed property may pass to or for the spouse’s benefit. 

E. Disclaimers of Separate and Severable Interests 

Code § 2518(c)(1) provides that a disclaimer of an undivided portion of an interest in property 

which meets the requirements of § 2518(b) is treated as a qualified disclaimer of such 

proportionate interest.A disclaimer of an undivided portion of a separate interest in property 

which meets the other requirements of a qualified disclaimer under § 2518(b) and the 

corresponding regulations is also a qualified disclaimer. Reg. §25.2518-3(b). An undivided 

portion of a disclaimant's separate interest in property must consist of a fraction or a percentage 

of each and every substantial interest or right owned by the disclaimant in such property and 

must extend over the entire term of the disclaimant's interest in such property and in other 

property into which such property is converted. Id. 

Likewise, a disclaimer of a specific pecuniary amount out of a pecuniary or nonpecuniary 

bequest or gift which satisfies the other requirements of a qualified disclaimer under § 2518(b) 

and the corresponding regulations is a qualified disclaimer provided that no income or other 

benefit from the disclaimed amount inures to the benefit of the disclaimant either prior to or 

subsequent to the disclaimer. Reg.§25.2518-3(c). 

5

IV. The Disclaimer-Based Estate Plan and Hard-to-Value Assets 

One of the advantages of the disclaimer based estate plan is its flexibility. It allows the surviving 

spouse to use the optimal (rather than unlimited) marital deduction and appropriately use the 

deceased spouse’s estate tax exemption to fund the credit shelter trust. The surviving spouse may 

decide within the nine months after the predeceasing spouse’s death whether, and to what extent, 

to fund the credit shelter trust based upon a review of then-applicable tax laws, her financial 

needs and anticipated life expectancy. In many instances this flexibility makes the disclaimer 

estate plan the plan of choice for “small estates.” This has been especially true over the course of 

the last decade when Federal exemption amounts were constantly changing and Minnesota decoupled 

from the Federal estate tax. 

Notwithstanding the disclaimer trust estate plan’s several advantages, there are instances where 

such plans can be less user-friendly. One instance where the implementation of the disclaimer 

estate plan can be problematic is where hard-to-value assets must be allocated between the 

marital share and the credit trust share. The allocation of assets between the marital share and the 

credit trust share is relatively straight forward where the assets consist of cash or marketable 

securities; the process is more delicate where the assets are closely-held business interests or real 

estate. Where the allocation involves assets, the valuation of which is more subjective, there is a 

risk of over-funding the credit shelter share and triggering an estate tax liability. 

Assume the following hypothetical facts. H dies with a $1.5 million estate comprised of 200 

acres of farm land and $500,000 of cash and c.d.s. His wife has her own separate estate worth 

more than $1,000,000. W believes the value of the land is $5,000/acre. Conventional planning to 

minimize Minnesota estate taxes would have $1,000,000 of H’s estate allocated to the credit 

shelter share with the other $500,000 going to the marital share. Under a disclaimer trust estate 

plan W might be inclined to disclaim all 200 acres of farm land and keep the liquid assets. If the 

land really has a fair market value of $5,000/acre the credit share would then be funded with 

$1,000,000.However, if the land is determined to have a fair market value of $6,000/acre the 

credit share would be funded with $1,200,000 triggering a Minnesota estate tax liability of 

$45,200. 

How might W use a disclaimer trust estate plan and guard against this valuation risk? There are a 

several potential solutions. First, W could choose to take a conservative approach and disclaim a 

fractional share of the farm land certain to keep the amount allocated to the credit share safely 

below $1,000,000. Perhaps she would disclaim only 75% of the real estate so that if the fair 

market value of the land is finally determined to be $6,000/acre the credit share would be funded 

with only $900,000. However, such an approach could mean leaving money on the table. 

Another way W could guard against allocating too much land to the credit share would be to use 

a fractional formula disclaimer under Code §2518(c)(1) and the corresponding regulations. Such 

formulas are not new, of course. They have been used in testamentary planning for years.W’s 

6

formula disclaimer might renounce “that portion of H’s estate that does not qualify for the 

federal estate tax marital deduction, plus the largest pecuniary amount (if any) that can be added 

to such amount without incurring state estate tax….” Treas. Reg. §25.2518-3(d), Example 20 is 

an example of such a fractional share disclaimer. 

A third approach to limiting the amount of the hard-to-value asset transferred to the credit share 

would be to disclaim an explicit pecuniary amount of the asset described by a formula. Reg. 

§25.2518-3(c) clearly authorizes the disclaimer of a pecuniary amount. A 2012 Tax Court case 

providesguidance as to what such a pecuniary formula disclaimer might look like. 

A. The Wandry Case 

In Wandry v. Commissioner, T.C. Memo 2012-88 (March 26, 2012) the Tax Court approved gifts 

of LLC unitsthe taxpayersmade using a formula clause that transferred stated dollar values 

(pecuniary amounts) to children and grandchildren. The Wandry decision caused quite a stir 

among commentators. By many accounts it was the major estate planning case of the year. 

Wandry was a gift tax case. It’s asignificant case because it was the first reported case to hold 

that a “formula transfer clause”(as opposed to a “formula allocation clause”) was valid. It also 

represented the first time a court had approved a defined value clause gift where a charity wasn’t 

involved. 

In Wandry the Court held the taxpayers made gifts of a specified dollar value of membership 

units rather than of fixed percentage interests in the LLC. Furthermore, the Court held such 

aformula transfer clause did not violate the condition subsequent prohibition of Commissioner v. 

Proctor, 142 F.2d824 (4 th Cir. 1944). The Court stated that the absence of a charity to take a 

portion of the property transferred under the Wandrys’ formula did not render the formula an 

impermissible condition subsequent or violate public policy. Even though the Wandrydecision is 

significant primarily to those doing gift or sale planning, the conceptual framework approved by 

the court is also instructive in the context of disclaimers of hard-to-value assets. 

In Wandry the taxpayers’ gifts of LLC units were described on assignments and memorandums 

of gift. Notably, the Tax Court recited the language of the gift documents verbatim on page 5 of 

its opinion. Each gift document provided: 

I hereby assign and transfer as gifts, effective as of January 1, 2004, a sufficient number of 

my Units as a Member of Norseman Capital, LLC, a Colorado limited liability company, so 

that the fair market value of such Units for federal gift tax purposes shall be as follows: 

Name 

Gift Amount 

Kenneth D. Wandry $261,000 

Cynthia A. Wandry $261,000 

Jared S. Wandry $261,000 

Grandchild A $11,000 

7

Grandchild B $11,000 

Grandchild C $11,000 

Grandchild D $11,000 

Grandchild E $11,000 

Total $1,099,000 

Although the number of Units gifted is fixed on the date of the gift, that number is based on 

the fair market value of the gifted Units, which cannot be known on the date of the gift but 

must be determined after such date based on all relevant information as of that date. 

Furthermore, the value determined is subject to challenge by the Internal Revenue Service 

(“IRS”). I intend to have a good-faith determination of such value made by an independent 

third-party professional experienced in such matters and appropriately qualified make such a 

determination. Nevertheless, if after the number of gifted Units is determined based on such 

valuation, the IRS challenges such valuation and a final determination of a different value is 

made by the IRS or a court of law, the number of gifted Units shall be adjusted accordingly so 

that the value of the number of Units gifted to each person equals the amount set forth above, 

in the same manner as a federal estate tax formula marital deduction amount would be 

adjusted for a valuation redetermination by the IRS and/or a court of law. 

In the view of the Tax Court, the Wandry parents made gifts of specified dollar values of 

membership units rather than fixed percentage interests in the LLC. According to the Court, at 

all times the parents believed the gifts were of a dollar value, not a specified number of units. 

Wandryat p. 6. The Court analyzed the gifts as follows: 

1. Under the terms of the gift documents, the donees were always entitled to receive 

predefined Norseman percentage interests which the gift documents essentially 

expressed as a mathematical formula. For each of the Wandry children the formula 

was expressed as: 

X = 

$261,000____ 

FMV of Norseman 

2. This formula had one unknown - the value of Norseman’s assets on January 1, 2004. 

But though unknown, that value was constant. 

3. Before and after the IRS audit the donees were entitled to receive the same Norseman 

percentage interests. Each donee-child was entitled to receive that Norseman 

percentage interest which had a value of $261,000. After the redetermination of the 

value of Norseman by the IRS, each of the donee children was entitled to receive 

8

approximately a 1.98% Norseman membership interest, rather than the 2.39% interest 

determined by the taxpayers’ appraiser. 

See Wandry at pp. 23 & 24. 

Applying the Wandry formula to our hypothetical situation above, the surviving spouse’s 

disclaimer might look something like this: 

I hereby disclaim a sufficient number of acres of that certain xxx County Minnesota real 

estate described on Exhibit A attached hereto so that the fair market value of said real 

estate for Minnesota and federal estate tax purposes shall be $1,000,000. Although the 

number of acres of real estate disclaimed is fixed as the date of this disclaimer, that 

number is based on the fair market value of the disclaimed real estate. I understand the 

value of the real estate as reported on the decedent’s estate return is subject to challenge 

by the Internal Revenue Service and/or the Minnesota Department of Revenue. If the 

IRS or the Minnesota Department of Revenue challenges such valuation and a final 

determination of a different value is made by the IRS, the Minnesota Department of 

Revenue or a court of law, the amount of land disclaimed shall be adjusted accordingly so 

that the value of the real estate disclaimed equals the amount set forth above, in the same 

manner as a federal estate tax formula marital deduction amount would be adjusted for a 

valuation redetermination by the IRS and/or a court of law. 

Such a disclaimer would be a renunciation of a given dollar amount of the real estate, rather 

than a fixed percentage or fractional portion of the real estate. Under the terms of this 

disclaimer there would be transferred to the credit trust that percentage of the real estate that 

equaled $1,000,000. Consequently, there would be no adverse tax consequence if the value of 

the real estate as finally determined differed from the amount reported on the decedent’s estate 

tax return. If that were to be the case, the credit trust would simply be funded with a different 

percentage of real estate. This approach is preferable to a disclaimer of a fixed percentage or 

fraction of the real estate which can result in an over-funding of the credit trust if the value of 

the real estate is increased upon final determination. 

Signalingits continued disapproval of defined value clauses, the IRS has indicated it will not 

acquiesce in the Wandry decision. I.R.B. 2012-46 (November 13, 2012). Keep in mind, 

however, that Wandry was a gift tax case. While the IRs remains uncomfortable with 

taxpayers using defined value clauses to describe the amounts of their gifts, formula 

disclaimers have long been approved under the disclaimer regulations. Moreover, the 

disclaimer of a pecuniary portion of a hard-to-value asset was explicitly approved by the 8 th 

Circuit Court of Appeals in Estate of Christiansen v. Commissioner,130 T.C. 1 (2008) 

(reviewed by the Court), aff’d, 586 F.3d 1061 (8th Cir. 2009).Consequently, a pecuniary 

9

formula similar to the one used inWandry can be a prudent way to describe the disclaimed 

portion of a hard-to-value asset. 

B. The Christiansen Case 

In Christiansen, Christine Christiansen Hamilton, the decedent’s only child, and the executor 

of the decedent’s estate, disclaimed her interest in the estate “as finallydetermined for federal 

estate tax purposes” as to all amounts over $6.35 million. The decedent’s Will provided that 

twenty-five percent of anydisclaimed amounts were to go to a charitable foundation. The 

Commissioner denied the estate’s claimed charitable deduction for amounts passing to the 

foundation as a result of the disclaimer maintaining that the parties’ agreed-upon adjustment 

to the valuation of certain partnership interests served as post-death, postdisclaimercontingencies 

that disqualified the disclaimer under Code §2518 and 

TreasuryRegulation §20.2055-2(b)(1). The Tax Court disagreed with the Commissioner and 

allowed the charitable deduction for the amounts passing to the foundation as a result of the 

partial disclaimer. 

Before the 8 th Circuit, the Commissioner argued that formula disclaimers that have the 

practical effect of disclaiming all amounts above a fixed-dollaramount should be disallowed. 

According to the Commissioner, disclaimers such as the one made by the decedent’s daughter 

fail to preserve a financialincentive for the Commissioner to audit an estate tax return 

becausewith such a disclaimerany post-challenge adjustment to the value of an estate would 

consist entirely of anincreased charitable donation. The Commissioner argued such 

disclaimersshould be categorically disqualified as against public policy because there would 

be no possibility ofenhanced tax receipts as an incentive for the Commissioner to audit the 

return andensure accurate valuation of the estate, 

The 8th Circuit Court of Appeals affirmed the Tax Court and held that the disclaimer executed 

by the decedent’s daughter was a valid partial disclaimer of a fixed dollar amount. The Court 

held that references to value “as finallydetermined for estate tax purposes” were not 

references that were dependent upon post-deathcontingencies that would disqualify a 

disclaimer. Because the only uncertainty at the time of the disclaimer was the calculation of 

the value to be placed on the foundation’s right to receivetwenty-five percent of the estate in 

excess of $6.35 million, and because no post-deathevents outside the context of the valuation 

process were alleged as post-deathcontingencies, the disclaimerwas a qualified disclaimer. 

Responding to the Commissioner’s assertion that a disclaimer of all amounts above a fixeddollaramount 

should be disallowed as against public policy, the Court declared that the 

Commissioner’s role is not merely to maximize taxreceipts and conduct litigation based on a 

calculus as to which cases will result in thegreatest collection; the Commissioner’s role is to 

enforce the tax laws. The Court stated it wasn’t necessary for the Commissioner to serve as a 

watchdog against the under-valuations of the disclaimed assets because with a fixed-dollaramount 

partial disclaimer, the contingentbeneficiaries taking the disclaimed property have an 

interest in ensuring that theexecutor or administrator does not under-report the estate’s value. 

Consequently, a partial disclaimer of a fixed pecuniary amount above a specified dollar 

amount is valid under the disclaimer regulations and does not contravene public policy. 

10

V. Conclusion 

Disclaimers will continue to be important post-mortem planning tools. However, the 

disclaimer of hard-to-value assets can pose certain difficulties. The pecuniary formula used in 

Wandry isn’t necessarily a new or different idea, but it is an easy way to think about, and 

express, a formula amountthat can be used to minimize valuation risk. 

11

Small Estates Panel 



Medical Assistance Provided to Predeceased Spouse and Claims Against the Estates of Surviving 

Spouses 

A. Medical Assistance recipient died prior to July 1, 2009 

1. If the surviving spouse also died prior to July 1, 2009, then the case is controlled by 

the Minnesota Supreme Court decision of In re Estate of Francis E. Barg, 752 N.W.2d 

52 (Minn. 2008) and the Minnesota Court of Appeals decision of In re Estate of 

Richard L. Perrin, 796 N.W.2d 175 (Minn. App. 2011). Barg holds that the amount 

of the Medical Assistance claim that can recovered from the surviving spouse’s estate 

is limited to the value of assets that transferred to the surviving spouse as a result of 

the death of the Medical Assistance recipient. Perrin holds that the County is barred 

by the doctrine of collateral estoppel from relitigating an issue argued in Barg. 

2. If the surviving spouse died after July 1, 2009, the county may attempt to apply the 

2009 amendments to Minn. Stat. § 519.05 as the basis of recovering Medical 

Assistance benefits from the surviving spouse’s estate. Following the Barg decision, 

the Minnesota Legislature amended Minn. Stat. §§ 256B.15 (Medical Assistance 

estate recovery statute) and 519.05 (spousal liability statute) seeking to expand 

Medical Assistance estate recovery. The amendments to Minn. Stat. § 256B.15 only 

apply to Medical Assistance recipients who died on or after July 1, 2009. The 2009 

amendment to Minn. Stat. § 519.05(a) only added the following language: 

“…including any claims arising under section … 256B.15 …” 

3. In re: Estate of Donald K. Ruddick, Ramsey County District Court File No.: 62-PR- 

10-183 (March 2, 2012). This is the first known district court decision involving a 

Medical Assistance claim against the estate of a surviving spouse who died after July 

1, 2009 for Medical Assistance provided solely to a predeceased spouse who died 

prior to July 1, 2009. 

Janis Ruddick received Medical Assistance benefits in the amount of $165,504.63 

and she died in March 2008 survived by her husband, Donald. The only asset in 

which Janis had any ownership interest was a jointly owned bank account with 

Donald. After payment of funeral and burial expenses, the remaining balance in the 

account was $860.64. Donald died in January 2012. The County filed a Written 

Statement of Claim in Donald’s estate for $165,504.63 and pursuant to Minn. Stat. §§ 

256B.15 and 519.05. The Minnesota Department of Human Services intervened as a 

party. The Estate allowed the claim in the amount of $860.64 based on Barg. 

The Estate argued the County is collaterally estopped from relitigating the Medical 

Assistance claim under Minn. Stat. § 519.05 because the issue had already been 

litigated and decided in Barg and Perrin. The County and DHS argued that the 

1

amendment to Minn. Stat. § 519.05(a) effective July 1, 2009 provided the basis to 

recover the claim. The Court ruled that the County’s claim under spousal liability is 

barred by the doctrine of collateral estoppel. Even if collateral estoppel did not apply, 

the Court held that the 2009 amendments to Minn. Stat. § 519.05 could not apply 

because the marriage between Donald and Janis ended at Janis’ death in 2008 and the 

amendment became effective in 2009 and cannot be applied retroactively unless 

clearly intended by the legislature. As an alternative, the Court held that even if the 

amendment to Minn. Stat. § 519.05 applied, the County is directed to recover benefits 

pursuant to Minn. Stat. § 256B.15 and the Barg decision is controlling. 

4. In re: Estate of Margaret L. Meyer, Douglas County District Court File No.: 21-PR- 

11-1872 (November 16, 2012). This case has almost identical similar facts to the 

Ruddick case because the Medical Assistance recipient died prior to 2009 and the 

surviving spouse died in 2011. 

Herbert Meyer received Medical Assistance benefits of$197,177.17 and he died in 

September 2005. Prior to his death, he transferred his interest in the homestead to his 

spouse, Margaret. Margaret died in August 2011. After paying funeral expenses, 

Herbert’s estate consisted of $712.68. The County made a claim against Margaret’s 

estate citing Minn. Stat. §§ 256B.15 and 519.05 as a basis for the claim. The personal 

representative allowed the claim in the amount of $712.68. 

The Court granted the Estate’s motion for summary judgment. The Court came to 

similar conclusions as the Ruddick court. First, Minn. Stat. § 256B.15, subd. 2 allows 

a Medical Assistance claim but recovery is limited under Barg to assets in which the 

Medical Assistance recipient had an interest at the time of his death. Second, the 

Court reviewed Minnesota’s spousal liability statute. The Court rejected the 2009 

amendment to Minn. Stat. § 519.05(a) because the marriage ended when Herbert died 

in 2005 and statutes cannot be applied retroactively. The Court then analyzed the 

version of Minn. Stat. § 519.05 in effect in 2005 and determined that recovery is not 

allowed under this statute because husband and wife were not “living together” at the 

time that Medical Assistance benefits were paid to Herbert. Third, the Court rejected 

the spousal liability statute as an alternative basis for recovering benefits because this 

statute is in conflict with the more specific provision in Minn. Stat. § 256B.15. 

“Therefore, as the general rule, the provisions of Minn. Stat. § 519.05 must yield to 

the provisions of Minn. Stat. § 256B.15, pursuant to § 645.26, subd. 1.”Meyer at page 

8. The Court applied the Perrin case in holding that the doctrine of collateral estoppel 

prevents the County from relitigating Minnesota’s spousal liability statute as an 

alternative theory to recovery Medical Assistance benefits. 

5. In re: Estate of Merlin E. Mix, Carlton County District Court File No.: 09-PR-11- 

982 (December 20, 2012). This is another “straddle case” in which the Court 

disallowed the County’s claim in its entirety against the estate of the surviving 

spouse. The County tried to claim that the predeceased Medical Assistance recipient 

wife had an interest in the surviving spouse’s Department of Veterans Affairs benefits 

received after her death. The County claimed that Minn. Stat. § 519.05 authorizes 

recovery. The Court rejected this argument relying on Barg and holding that the 

2

assets must have been subject to an interest of the Medical Assistance recipient at the 

time of her death. Under Barg, the interest must be: (1) recognized by law; (2) which 

the Medical Assistance recipient held at the time of death; and (3) that resulted in a 

conveyance of an interest of some value to the surviving spouse that occurred as a 

result of the recipient’s death. The Medical Assistance recipient had no interest in 

the surviving spouse’s federal benefits and the Court disallowed the claim against 

surviving spouse’s estate. The benefits the surviving spouse received after his 

spouse’s death were not contingent upon her death. 

6. Ruddick, Meyer and Mix Aftermath? While these cases are not statewide precedent, 

they should be provided as persuasive authority that the spousal liability statute is not 

an alternative theory to recover benefits. It is possible that other counties will 

continue to assert claims that the district courts in Ramsey, Douglas and Carlton 

Counties have disallowed. 

B. Medical Assistance recipient died on or after July 1, 2009 

1. If both the Medical Assistance recipient and surviving spouse die on or after July 1, 

2009, then the 2009 amendments to Minn. Stat. 256B.15 apply. These amendments 

define marital property subject to estate recovery more broadly than the statute at 

issue in Barg. The 2009 amendments also attempt to restrict the ability of the 

surviving spouse to transfer property after the death of the Medical Assistance 

recipient. See Minn. Stat. § 256B.15, subd. 2b. There are no known court decisions 

addressing the legality of the 2009 amendments. 

Uniform Bank Deposit Form, Minn. Stat. §§ 524.6-201 et seq. 

On May 1, 2013, Governor Dayton signed H.F. 19 approving a sample form for single or 

multiple-party accounts regarding: (1) ownership; (2) rights at death; and (3) agency 

designation. (Laws 2013, Ch. 36).Account owners can designate an agent in a writingwithout 

the necessity of a Power of Attorney and without conferring ownership rights. An agent is a 

person authorized to make account transactions for a party. An attorney-in-fact or a conservator 

has the power to terminate the agent’s authority. The agent’s authority terminates at the account 

owner’s death. 

Issues/Questions: 

1. Can the agent make gifts of the account to the agent? 

2. Unlike the new Statutory Short Form Power of Attorney (effective for Powers of 

Attorney executed on or after January 1, 2014), the designated agent does not need to 

sign any acknowledgment accepting the scope and limitations of the agency relationship. 

3. Is this a “poor person’s” Power of Attorney? 

Uniform Disposition of Community Property Rights at Death Act, Minn. Stat. §§ 519A.01 – 

519.11 

3

On April 25, 2013, Governor Dayton signed H.F. 369 (Laws 2013, Ch. 24) allowing property 

acquired during marriage in community property states to retain its community property 

characteristics subject to rebuttable presumptions. Upon the death of a married person, one-half 

of the community is the property of the surviving spouse not subject to testamentary disposition, 

while the other one-half is subject to the testamentary disposition under Minnesota laws. The 

one-half of the property that is the decedent’s property is not subject to the surviving spouse’s 

right to elect against the Will and is not included in any elective share calculation. 

The Act imposes time limitations on when a written demand can be made by the surviving 

spouse or the spouse’s successor in interest to assert community property rights. The demand 

must be made within four (4) after the date of the first publication of the notice to creditors in a 

probate administration. For property held in trust, the demand must be made within 60 days after 

the decedent’s death. 

4

A. The Doctrine of Advancements, Hotchpot and Minnesota’s Treatment of 

Intervivos Gifts vs. Loans. 

Advancements. At common law, any gift given to a child during a testator’s lifetime 

was presumed to be an advancement, or prepayment of the child’ s share of his 

parent’s estate. A child would bear the burden of proving that the lifetime transfer was 

intended as a gift as opposed to an advancement. 

Hotchpot. When the doctrine of advancement is applied, the donee of the lifetime gift 

must allow the value of the lifetime transfer to be brought into the “hotchpot” if the 

done wants to share in the decedent’s estate. Where the advancement reaches the level 

where the donee would theoretically have to “put back” in the hotchpot in order to 

ensure equal distributions to all beneficiaries, the donee may elect to stay out of the 

hotchpot. 

The Restatement of Property (Third) Will and Donative Transfers defines an 

advancement as follows: 

“An inter vivos gift made by an intestate decedent to an individual 

who, at the decedent’s death, is an heir is treated as an 

advancement again the heir’s estate if the decedent 

acknowledged in writing that the gift was so to operate.” 

Due to difficulties ascertaining a donor’s lifetime intent, many states have gone in the 

opposite direction of the doctrine of advancement. Minnesota is one such state having 

adopted the Uniform Probate Code that declares a gift as an advancement only if the 

donor declares in a contemporaneous writing or the donee acknowledges in writing that 

the gift is an advancement. 

Mary Frances M. Price, J.D. 

EDINA ESTATE AND ELDER LAW P.A. 

1

More specifically, Minnesota Statute §524.2-109 provideswhere an individual dies 

intestate as to all or a portion of an estate, property the decedent gave during the 

decedent's lifetime to an individual who, at the decedent's death, is an heir is treated as 

an advancement against the heir's intestate share only if the decedent declared in a 

contemporaneous writing or the heir acknowledged in writing that the gift is an 

advancement; orthe decedent's contemporaneous writing or the heir's written 

acknowledgment otherwise indicates that the gift is to be taken into account in 

computing the division and distribution of the decedent's intestate estate. 

B. Drafting Ambiguity and Summary Judgment.Bank of America, N.A. 

v.Shank, No. A10-45, 2010 WL 3220136 (Minn. Ct. App. Aug. 17, 2010). 

1. Case facts and Issues. 

Polly Shank (“Polly”) died on January 2, 2008. Polly was predeceased by her 

husband, John Shank, Sr. and had two surviving children, Lawrence and John 

Shank (“Lawrence” and “John,” respectively). At the time of her death her estate 

included two promissory notes from her son Lawrence, one in the amount of 

$6,015.93, and the second in the amount of $92,731.75. Prior to her death, 

Polly made numerous transfers to Lawrence, in addition to the transfers 

reflected by the promissory notes, for things such as rent, lawyers’ fees, 

sculpture costs, and forgiveness of interest. Polly’s records reflect payment from 

her to Lawrence, on a monthly basis, for rent, from September 1999 to the date 

of her death, totaling almost $238,000.00. The value of Polly’s estate, at the 

date of her death, was approximately $1,312,721, including the promissory 

notes. 

John argued that based upon language in the Trust, Polly intended all lifetime 

transfers made to Lawrence, including, but not limited to, those evidenced by 



2

promissory notes and/or mortgages, be treated as advancements, and deducted 

from his share of her estate. 

Bank of America, N.A. (“Trustee”) as Trustee for the Trust petitioned the court 

for guidance on the terms of the Trust pertaining to loans and advancements. 

They also sought guidance in calculating the two sons’ interest in the trust 

income and principle. The provision as to which interpretation was sought by 

the Trustee was as follows: 

“7. Allocation of remaining trust assets. 

…I intend my children to be treated essentially equally as to 

advancements and loans received during my lifetime or assets of my 

estate received at my death. If, at my death, either child of mine is 

indebted to me on a Promissory Note or mortgage, I direct that the 

outstanding principal balance and accrued interest of the indebtedness 

be considered an advancement to such child from my estate and be 

deducted from the share of the residue due my child…thus reducing his 

share of other assets of my estate accordingly. The amount of said 

outstanding principal balance and accrued interest shall be determined 

by my trustees based upon my records or the trustees’ records. Such 

indebtedness shall be considered an asset of my estate for purposes of 

computing the value of said estate.” 

Lawrence moved for summary judgement arguing that the Trust provisions on 

loans and advancements were clear and unambiguous and only pertained to 

indebtedness evidenced by promissory notes or mortgages. The district court 

referee did not find the Trust language to be ambiguous and therefore granted 

summary judgment. The district court confirmed the referee’s findings and 

upheld summary judgment in favor of Lawrence. 



3

John filed notice of review of the summary judgement order with the Hennepin 

County District Court, arguing that the referee had erred and the language was 

ambiguous. The court reviewed the summary judgement order and found the 

language to be clear and unambiguous. The district court found that there was 

advancement to Lawrence of $98,747.68. 

On appeal to the Minnesota Court of Appeals, the issue was whether the 

language in the Trust was clear and unambiguous as to its provision on 

indebtedness evidenced by promissory notes or mortgages as advancement to 

the estate. 

The court found that no language in the will limited the term “advancement” to 

indebtedness evidenced by promissory note or deed. The court further found 

that while Minn. Stat. §524.2-109 only applies to advancements in cases of 

intestacy, it also provides a standard for guidance in determining intent when 

there is no clear language from the testator. 

Minn. Stat. §524.2-109 provides that an inter vivos transfer will only be 

considered an advancement if there is a contemporaneous writing stating such 

by the decedent or a contemporaneous writing by the heir stating that the gift is 

an advancement, or if contemporaneous writings by the decedent or heir 

indicate that “the gift is to be taken into account in computing the division and 

distribution of the decedent’s intestate estate.” 

The court stated that while there was no contemporaneous writing with the 

inter vivos gifts made to Lawrence, the trust did provide express language that 

indebtedness evidenced by promissory notes or mortgages was to be treated as 

an advancement. However, the Trust did not indicate that only transfers 

evidenced by promissory notes or mortgages were to be treated as 



4

advancements. The Court opined that because advancements could have 

multiple meanings, there was a genuine issue of material fact regarding whether 

the language was ambiguous. 

The matter was reversed and remanded to the district court to determine what 

amounts were to be included as advancements and subtracted from Lawrence’s 

distributive share of the Estate. 

On remand to Hennepin County District Court, after examining all of the 

evidence, the referee determined that only transfers to Lawrence that were 

memorialized by a promissory note or mortgage were to be deducted from his 

share of the estate. The court found that Polly intended to treat her children 

equally, but “equally in what was her ‘estate’.” Any other amounts provided 

aside from the promissory notes or mortgages were simply gifts, which were 

evidenced annually by gift tax returns she filed. 

The court also relied heavily on the testimony of the attorney who drafted the 

document as she had “no financial interest in the outcome of this matter.” The 

court noted that it was the attorney’s testimony that Polly intended either a 

promissory note or mortgage was necessary before a transfer to Lawrence could 

be considered an advancement and deducted from his share of the estate. 

Regarding testimony that Polly regularly told Lawrence he was “cutting into his 

inheritance,” the court found that such statements were in reference to the fact 

that “the less money she had, the smaller his half of her estate would be so the 

statements were technically correct. The statements do not mean that Polly 

intended to deduct gifts to Lawrence from his share of the estate.” 

A copy of the district court’s order is attached to these materials. 



5

2. Possible Ramifications. 

It is often difficult as an estate planning attorney to know whether the 

documents you draft will be challenged. Indeed, there is typically not a dispute 

over language and the intent of a testator until after one is deceased. 

This case is illustrative of the need to formalize your client’s intentions, to the 

extent possible, in writing. This was a difficult case in that the deposition 

testimony of the attorney drafting the document indicated that the document 

was clear, but that it was difficult to know whether Polly intended that only 

loans or mortgages be deducted, or that all unequal transfers be included. She 

also acknowledged that, if only written loans were to be considered 

advancements, there was no need in include the equalization language 

expressing Polly’s intent that her children be treated “essentially equally as to 

advancements and loans received during my lifetime or assets of my estate 

received at my death.” She also acknowledged that, if only written loans were to 

be deducted, it would not have been necessary to include the term 

“advancement” at all. Thus, it appeared as though while the document was 

clear, the decedent’s intent may not have been clear. 

It is always easier to second-guess an attorney’s drafting after a client is 

deceased. To save litigation costs and time, to the extent possible, we need to 

be as clear in our drafting and documenting our conversations with clients as 

possible. In this case, after payment of attorney fees to litigate the case and 

trustee fees, both John and Lawrence will ultimately receive approximately 

$200,000.00 as inheritance from their mother’s $1.3 million estate. 

C. Practical Advice --Factors to Consider When Advising Clients on 

Lifetime Gifts, Transfers and/or Loans in light of Shank 



6

a) Filing a gift tax return for gifts, drafting a promissory note or other 

writing for loans and/or notes; 

b) A client’s pattern or history of support for a particular child; 

c) Drafting a client’s documents so as not to create ambiguity; 

d) Dictating following meetings and follow-up letters to the client with a 

recitation of the attorney’s understanding of the client’s wishes. 



7

SECTION 23 

Transfer on Death Deeds; Frequently Asked 

Questions and Unresolved Issues 

Jennifer L. Carey 

Hanft Fride 

Duluth 

Julian J. Zweber 


Saint Paul 



I. INTRODUCTION 1 

II. BACKGROUND 1 

III. 

COMPARISON TO OTHER TRANSFERS OF REAL PROPERTY 

AT DEATH 1 

A. JOINT TENANCY OR LIFE ESTATE 1 

B. REVOCABLE LIVING TRUST 1 

C. PROBATE 2 

IV. 

COMMON QUESTIONS ABOUT TRANSFER 

ON DEATH DEEDS 2 

A. RECORDING REQUIREMENTS 2 

B. STATE DEED TAX 2 

C. CERTIFICATION OF REAL ESTATE VALUE; 

CONSERVATION FEES; AND WELL DISCLOSURE 

CERTIFICATES 3 

D. TAX CONSEQUENCES 3 

E. CAPACITY TO EXECUTE A TODD 3 

F. SUCCESSOR BENEFICIARIES 4 

G. MARRIAGE AND DIVORCE 5 

H. JOINDER BY A SPOUSE NOT IN TITLE 5 

I. REVOCATION BY SPOUSE NOT IN TITLE 6 

J. RESERVATION OF MARITAL RIGHTS 6 

K. CREDITOR CLAIMS 7 

L. MEDICAL ASSISTANCE ELIGIBILITY AND LIENS 7 

M. AFFIDAVIT OF IDENTITY AND SURVIVORSHIP 

AND CLEARANCE CERTIFICATE FOR MEDICAL 

ASSISTANCE 8 

N. DEATH OF BENEFICIARY 8 

O. AFTER-ACQUIRED PROPERTY 10 

V. MINN. STAT. § 507.071 SECTION BY SECTION 

TEXT WITH COMMENTS AND PRACTICE TIPS 10 

i


TRANSFER ON DEATH DEEDS; 

FREQUENTLY ASKED QUESTIONS 

AND UNRESOLVED ISSUES 

These materials are an updated version of the materials presented by Jennifer L. 

Carey at the 2011 Real Estate Institute on November 4, 2011. The authors have 

added new questions, answers, commentary and practice tips to those materials. 

There are five parts to these materials: Part I. Introduction; Part II. Background; 

Part III. Comparison to Other Transfers of Real Property at Death; Part IV. 

Common Questions About Transfer on Death Deeds; and Part V. Minn. Stat. 

§507.071 Section by Section Text With Comments and Practice Tips. 

II. 

BACKGROUND 

The Minnesota Transfer on Death Deed (TODD) has been in effect since August 

1, 2008. Legislation in a few other states uses the name “beneficiary deed” instead 

of “transfer on death dead.” The law is designed to provide a simple means of 

transferring title to real property upon the death of the owner without the need for 

probate, while allowing the owner to maintain absolute control over the property 

during his or her lifetime. The owner has the power to revoke the TOD deed at 

any time or change the beneficiary without the joinder, consent or knowledge of 

the beneficiary. 

III. 

COMPARISON TO OTHER TRANSFERS OF REAL PROPERTY AT 

DEATH 

A. JOINT TENANCY OR LIFE ESTATE 

Joint tenancies or transfers reserving a life estate are common, inexpensive, nonprobate 

methods used to transfer real property upon the death of the owner The 

difference between a joint tenancy and a TODD is that joint tenancy creates 

current ownership rights and a TODD does not. Transfers reserving a life estate 

solve part of the ownership problem created by the use of joint tenancy. The 

owner retains control of the property during lifetime. However, both require the 

joinder of the other “owners” in order to sell or refinance the property during the 

owner’s lifetime. 

B. REVOCABLE LIVING TRUST 

Using a revocable trust allows the owner to change his or her mind and change 

the beneficiary at any time and the beneficiaries creditors cannot reach the trust 

assets during the owner’ life time. Unlike a will or a deed, the trust document 

1

emains private both during the owner’s lifetime and after death. For some 

owner’s the ability to keep dispositive provisions private is an important aspect of 

using a revocable trust. 

The biggest disadvantage of using a revocable trust is the cost. In addition, assets 

must be transferred to the trust during the owner’s lifetime to avoid probate. If 

the owner fails to transfer the assets into the trust before death, those assets will 

have to go through probate anyway. 

C. PROBATE 

The potential cost and delays and public nature of the process are the primary 

disadvantage of transferring property through probate. However, in the opinion 

of these authors probate in Minnesota is a relatively inexpensive process with 

limited supervision and in many situations is preferable to non-probate 

alternatives. Nonetheless, probate avoidance is often an appropriate goal, 

particularly in a simple estate. 

IV. 

COMMON QUESTIONS ABOUT TRANSFER ON DEATH DEEDS 

A. RECORDING REQUIREMENTS 

Does a TODD have to be recorded in every county where the real property 

is located to be effective? 

To be effective, a TODD must be recorded in at least one county where 

the described real property is located before the death of the first Grantor 

Owner to die. The recording requirement helps alleviate concerns about 

fraud and undue influence or the possibility of the unrecorded deed 

“hidden in grandpa’s dresser drawer”. In other words, the requirement of 

recording helps insure that the owner thoughtfully intended to make the 

transfer. 

Authority: Minn. Stat. § 507.071, Subd. 8. 

B. STATE DEED TAX 

How is deed tax calculated and paid? 

Because a TODD has no effect at the time it is recorded and has no effect 

until the Grantor Owners die at a later date, a TODD is exempt from state 

deed tax. Because a TODD is exempt from deed tax, the word “Exempt” 

should be inserted in the space for deed tax on a TODD, rather than 

“None.” There is no need to recite that “The consideration for this transfer 

is $500 or less.” 

2

Authority: Minn. Stat. § 287.22(15). 

C. CERTIFICATES OF REAL ESTATE VALUE; CONSERVATION 

FEES; AND WELL DISCLOSURE CERTIFICATES 

If a TODD is exempt from deed tax, is it also exempt from other recording 

fees and filing requirements? 

Because there is no deed tax, no certificate of real estate value is required, 

there is no need to pay conservation fees, and no well disclosure certificate 

is required. 

Authorities: Minn. Stat. §§ 40A.152, Subd. 1; 287.241, Subd. 1; and 

103I.235, Subd. 1(c). 

A TODD must comply with all the general laws applicable to deeds, such 

as signatures by spouses, acknowledgement of signatures, and drafting 

statement. 

Authority: Minn. Stat. § 507.071, Subd. 2, cross referencing Minn. Stat. 

§§ 507.02, 507.24, 507.34, 508.48 and 508A.48. 

D. TAX CONSEQUENCES 

Does the Grantor Owner have to file a gift tax return for a TODD? 

No, the Grantor Owner does not have to file a gift tax return for a TODD. 

Execution and recording of a TODD is an incomplete gift since the owner 

retains full use of the property with a power to revoke and therefore for 

gift tax purposes a gift does not occur upon execution of the TODD. 

Since the property will be subject to estate tax in the Grantor Owner’s 

estate there will be a step-up in basis under I.R.C. § 1014(a)(1). 

Authorities: Reg. § 25.2511-2; I.R.C. § 1014(a)(1). 

E. CAPACITY TO EXECUTE A TODD 

What capacity is required for a Grantor Owner to execute a TODD? 

The statute does not indicate the level of capacity required to execute a 

TODD. One of the authors believes that the level of capacity required 

should be the same as the level of capacity required to execute a will 

because a TODD is a will substitute, and, like a will, has effect only at 

death. The other author believes that the question is interesting as an 

academic question, but that it probably makes little or no difference 

because a TODD is a deed and not a will. A TODD would be challenged 

3

for many of the same reasons as a will would be challenged: lack of 

capacity, mistake, undue influence and fraud. To be on the safe side, a 

challenger would also allege lack of capacity, mistake, undue influence 

fraud, and any of the other grounds for challenging the validity of a deed. 

In either case, the presumption of capacity would have to be overcome by 

the challenger. 

Authority: None provided by the statute. 

F. SUCCESSOR BENEFICIARIES 

Can you designate back-up beneficiaries in case the primary beneficary 

dies before the Grantor Owner? 

Like a trust, a TODD may contain a series of contingent successor 

beneficiaries to provide for the possibility that several of the named 

beneficiaries may not survive the Grantor Owner. When a Grantor Owner 

executes a TODD, the Grantor Owner should consider whether to name 

one or more contingent successor beneficiaries, particularly in situations in 

which the death of a beneficiary before the Grantor Owner may cause a 

disruption in the owner’s estate plan. 

The statute provides that the TODD shall state the condition under which 

the interest of the successor grantee beneficiaries would vest. The authors 

believe that any condition other than the death of the primary beneficiary 

would require a court action to determine whether the condition has been 

met. 


See also Section III.J., DEATH OF BENEFICIARY, below, regarding 

what happens if no successor beneficiaries are named and the designated 

Grantee Beneficiary predeceases the Grantor Beneficiary. 

PRACTICE TIP: When a client wants to name more than a small 

number of multiple Grantee Beneficiaries, and provisions must be made 

for Successor Beneficiaries to avoid the anti-lapse issues raised in Section 

III.J, below, a simple Will in Probate or a Living Trust might be preferable 

to a TODD. A TODD works best in simple situations. Complicated 

situations or the prospect of complicated situations are best handled in 

probate or other probate-avoidance techniques. 

4

G. MARRIAGE AND DIVORCE 

What happens to a TODD if the Grantor Owner marries after signing and 

recording a TODD? What happens if the Grantor Owner divorces? 

Failure of a spouse to join in a TODD that was executed by the Grantor 

Owner before the parties’ marriage, whether recorded before or after the 

marriage, will leave title subject to the new spouse’s marital or statutory 

rights acquired by reason of the marriage. 

No conveyance of a homestead after marriage is valid without the 

signature of both spouses. A TODD that purports to transfer a homestead 

that is not joined in by both spouses is void. See Section III.H. JOINDER 

OF SPOUSE NOT IN TITLE, immediately below. 

If a TODD is created naming a spouse as the beneficiary and the marriage 

is subsequently ended by divorce or annulment, the divorce or annulment 

will revoke the TODD. 

Authority: Minn. Stat. §§ 507.071, Subd. 2; 507.02 

H. JOINDER BY A SPOUSE NOT IN TITLE 

Must a spouse who is not in title sign a TODD? 

The definitions of “Grantor Owner” and “Owner” in the TODD statute 

exclude a spouse who is joining in a TODD solely for the purpose of 

conveying the spouse’s statutory or marital interests in the property. 

Authority: Minn. Stat. § 507.071, Subd. 1, clauses (c) and (d), 

respectively. 

This leads to some confusion whether a spouse must join in a deed to 

make it effective. 

Except in certain circumstances, the signatures of both spouses are 

required under Minn. Stat. § 507.02 to convey title to the homestead. 

There is no way to establish of record that property is non-homestead 

except by recording a Court order. As a consequence, if both spouses do 

not sign a TODD, the TODD will be considered void unless a Court 

determines that the property is non-homestead. 

As a practical matter, both spouses must sign a TODD to avoid questions 

whether it satisfies the requirements of Minn. Stat. § 507.02. 


5

I. REVOCATION BY SPOUSE NOT IN TITLE 

If a spouse not in title joins in a TODD, may the spouse revoke the TODD 

before it becomes effective? 

The TODD statute allows a Grantor Owner to revoke a TODD at any time 

before it becomes effective. 


A spouse who is joining in a TODD solely for the purpose of conveying 

the spouse’s statutory or marital interests in the property is not a Grantor 

Owner or Owner as defined in Minn. Stat. § 507.071, Subd. 1, clauses (c) 

or (d), respectively. A spouse not in title who joins in a TODD is not 

allowed to revoke the TODD at a later date. 

PRACTICE TIP: To preserve the right of a joining spouse not in title to 

revoke a TODD, the spouse should insist on becoming a Grantor Owner 

before signing the TODD. But see Section III.J. RESERVATION OF 

MARITAL RIGHTS, below. 

J. RESERVATION OF MARITAL RIGHTS 

Does a TODD convey title subject to the marital rights of a surviving 

spouse? 

When a TODD becomes effective, it conveys title subject to all effective 

conveyances, assignments, contracts, mortgages, deeds of trust, liens, 

security pledges, judgments, tax liens and other encumbrances made by 

the Grantor Owner or to which the property was subject during the 

Grantor Owner’s lifetime, including but not limited to, any claim by a 

surviving spouse. 


This language might cause some confusion regarding marital rights after a 

TODD becomes effective. The Real Property Section Legislative 

Committee (RPSLC) will be proposing some technical amendments in the 

2014 Legislative session to avoid any confusion. In the meantime, the 

RPSLC takes the position that a spouse who signs a TODD releases all 

marital and statutory rights at the time of signing the TODD. These 

marital rights are not revived when the TODD becomes effective. 

The language referring to a claim by a surviving spouse would apply to a 

situation where the spouse did not sign the TODD, in which case the 

6

TODD would be void or the surviving spouse has some other claim, not 

involving assertion of marital or statutory rights as a spouse. 

PRACTICE TIP: In the unusual situation where a TODD is intended to 

become effective while a spouse remains surviving, specific language 

should be included in the TODD to make clear whether marital or 

statutory rights for the surviving spouse are being released or reserved for 

the surviving spouse. 

K. CREDITOR CLAIMS 

Does a TODD pass title subject to general unsecured creditor claims? 

Real property described in a TODD passes subject to all effective 

conveyances, assignments, contracts and other encumbrances, including 

medical assistance claims and liens. The statute does not otherwise 

provide for payment of unsecured claims. 

Authority: Minn. Stat. § 507.071, Subd. 3 

L. MEDICAL ASSISTANCE ELIGIBILITY, LIENS AND CLAIMS 

Does a TODD have any effect on the Grantor Owner’s eligibility for 

Medical Assistance? Will a TODD take priority over a Medical 

Assistance lien? 

The statute is not a Medical Assistance planning tool. Because a TODD 

has no effect until it becomes effective, it will not be treated as a transfer 

of assets at the time of execution and recording. As a result, the signing 

and recording of a TODD will not be treated as an uncompensated transfer 

during the applicable look-back period. Conversely, it will not trigger the 

waiting period before the applicable look-back period might apply. A 

TODD, therefore, will not shelter assets against Medical Assistance asset 

limits and will not disqualify a person from Medical Assistance if the 

property is excluded from asset limits, such as a homestead, or is 

otherwise not counted against asset limits. 

Authority: Minnesota Department of Human Services Health Care 

Programs Manual (HCPM), § 19.50, available at: 

http://hcopub.dhs.state.mn.us/19_50.htm#GAMC_transfer_sub 

heading 

A recorded TODD has no effect until it becomes effective. Nothing in the 

TODD statute prevents a properly recorded Medical Assistance lien from 

taking priority over a recorded TODD that is not yet effective. Even if no 

Medical Assistance lien has been recorded prior to the effective date of a 

7

TODD, the county Medical Assistance collection unit might have a claim 

against the real property described in the TODD. See generally, Minn. 

Stat. § 256B.15 regarding collection of Medical Assistance claims. A 

medical assistance claim survives the effective date of a TODD. 


M. AFFIDAVIT OF IDENTITY AND SURVIVORSHIP AND 

CERTIFICATE OF CLEARANCE FOR MEDICAL ASSISTANCE 

CLAIM 

How is title established in the beneficiary after the death of the Grantor 

Owner? 

The statute provides that an Affidavit of Identity and Survivorship, a 

certified copy of a death certificate, and a clearance certificate must be 

obtained and recorded in each county in which the real estate is located. 

This author recommends combining and recording these documents a one 

document. The Registrar of Titles will not issue a new certificate of title 

in the name of the beneficiary until all of these documents, including the 

clearance certificate, have been recorded. This author recommends using 

the Series 10.8 Uniform Conveyancing Blanks form of Affidavit of 

Identity and Survivorship for Transfer on Death Deed and Clearance 

Certificate for Public/Medical Assistance. 

Authority: Minn. Stat. § 507.071, Subds. 20 and 23. 

N. DEATH OF BENEFICIARY 

What happens if a Grantee Beneficiary dies before the Grantor Owner? 

If a designated Grantee Beneficiary dies before the Grantor Owner, the 

result depends on the language used in the TODD and the application of 

the anti-lapse and lapse provisions found in Minn. Stat. § 507.071, Subds. 

11 and 12, respectively. 

Only One Grantee Beneficiary: 

If the TODD specifies that the Grantee Beneficiary takes title only if the 

Grantee Beneficiary survives the Grantor Owner, then the conveyance to 

the Grantee Beneficiary will not be effective and the TODD might be 

ineffective to convey the property described in the TODD unless other 

provisions in the TODD pass title to a successor beneficiary as allowed by 

Minn. Stat. § 507.071, Subd. 5, or the anti-lapse provisions in Minn. Stat. 

§ 507.071, Subd. 11 apply. 

8

In the absence of TODD language that specifies that a Grantee Beneficiary 

must survive the Grantor Beneficiary, the anti-lapse provisions in Subd. 11 

will apply. If a Grantee Beneficiary who is a grandparent or lineal 

descendant of a grandparent of the grantor owner fails to survive the 

grantor owner, the issue of the deceased grantee beneficiary who survive 

the grantor owner take in place of the deceased grantee beneficiary. If 

they are all of the same degree of kinship to the deceased Grantee 

Beneficiary, they take equally. If they are of unequal degree, those of 

more remote degree take by right of representation. 


If the anti-lapse subdivision applies, a probate proceeding will probably 

have to be commenced to identify the successor grantee beneficiaries. 

PRACTICE TIP: Care should be taken to avoid application of the antilapse 

subdivision. Better practice would be to specifically name successor 

beneficiaries who would be likely to survive the designated Grantee 

Beneficiary. 

If all the grantee beneficiaries and all successor beneficiaries, if any, fail to 

survive, and if the anti-lapse provisions in Subd. 11 do not apply, the 

TODD is void. 


Multiple Grantee Beneficiaries: 

The TODD statute is less than clear regarding what happens if multiple 

Grantee Beneficiaries are named in the TODD. A TODD may designate 

multiple Grantee Beneficiaries, to take title as joint tenants, as tenants in 

common or in any other form of ownership or tenancy that is valud under 

the laws of this Minnesota. 

Authority: Minn. Stat. § 507. 

If the TODD designates that the Grantee Beneficiaries take title as joint 

tenants, the death of a Grantee Beneficiary prior to the death of the 

Grantor Beneficiary should not cause any problem. The surviving joint 

tenant beneficiaries will take title. 

If the TODD designates that the Grantee Beneficiaries take title as tenantsin-common, 

a probate proceeding will be required to determine who takes 

in place of the deceased Grantee Beneficiary. 

9

PRACTICE TIP: To avoid the complications that could ensue if 

multiple beneficiaries, and multiple successor beneficiaries, are desired, a 

simple will or a living trust might be a better solution than a TODD. 

O. AFTER-ACQUIRED PROPERTY 

Should after-acquired property be included on a TODD? 

A TODD is not effective to transfer any interest in the real property 

acquired by the Grantor Owner after the date of signing the TODD unless 

the Grantor Owner designates in the TODD that it will apply to any 

interest described in the real property acquired by the Grantor Owner after 

signing or recording the TODD. 


All the TODD forms included in the Uniform Conveyancing Blank set 

include a box to check to include after-acquired property. The authors 

recommend use of these forms. Here is a link to the Uniform TODD 

forms: 

http://mn.gov/commerce/images/UniformConvBlanksList.pdf 

See UCB Forms 10.8.1, 10.8.2, 10.8.3, and 10.8.4. See also 10.8.9 

(Clearance Certificate), and 10.8.10 (Revocation). 

The authors recommend checking the box because the authors cannot 

think of any good reason to not include after-acquired property in a 

TODD. 

V. MINN. STAT. § 507.071 SECTION BY SECTION TEXT WITH 

COMMENTS AND PRACTICE TIPS 

507.071 

Subdivision 1.Definitions. 

For the purposes of this section the following terms have the meanings given: 

(a) "Beneficiary" or "grantee beneficiary" means a person or entity named as a 

grantee beneficiary in a transfer on death deed, including a successor grantee 

beneficiary. 

(b) "County agency" means the county department or office designated to recover 

medical assistance benefits from the estates of decedents. 

10

(c) "Grantor Owner" means an owner named as a grantor in a transfer on death 

deed upon whose death the conveyance or transfer of the described real property 

is conditioned. Grantor Owner does not include a spouse who joins in a transfer 

on death deed solely for the purpose of conveying or releasing statutory or other 

marital interests in the real property to be conveyed or transferred by the transfer 

on death deed. 

(d) "Owner" means a person having an ownership or other interest in all or part of 

the real property to be conveyed or transferred by a transfer on death deed. Owner 

does not include a spouse who joins in a transfer on death deed solely for the 

purpose of conveying or releasing statutory or other marital interests in the real 

property to be conveyed or transferred by the transfer on death deed. 

(e) "Recorded" means recorded in the office of the county recorder or registrar of 

titles, as appropriate for the real property described in the instrument to be 

recorded. 

(f) "State agency" means the Department of Human Services or any successor 

agency. 

(g) "Transfer on death deed" means a deed authorized under this section. 

COMMENT: There is a critical distinction between the definition of “Grantor 

Owner” and “owner”. A Grantor Owner has an ownership interest in the property 

to be conveyed by transfer on death deed and executes the transfer on death deed. 

An Owner has an ownership interest in the property and does not execute a 

transfer on death deed. Spouses of Grantor Owners who join in a transfer solely 

for the purpose of conveying their statutory or marital interest are not Owners or 

Grantor Owners. 

Subd. 2.Effect of transfer on death deed. 

A deed that conveys or assigns an interest in real property, including a mortgage, 

judgment, or any other lien on real property, to a grantee beneficiary and that 

expressly states that the deed is only effective on the death of one or more of the 

Grantor Owners, transfers the interest to the grantee beneficiary upon the death of 

the Grantor Owner upon whose death the conveyance or transfer is stated to be 

effective, but subject to the survivorship provisions and requirements of section 

524.2-702. A transfer on death deed must comply with all provisions of 

Minnesota law applicable to deeds of real property including, but not limited to, 

the provisions of sections 507.02, 507.24, 507.34, 508.48, and 508A.48. 

COMMENT: The beneficiary must survive the Grantor Owners by at least 120 

hours. All Spouses of the Grantor Owners must join in the transfer on death deed 

to release their interest. 

11

Subd. 3.Rights of creditors and rights of state and county under sections 

246.53, 256B.15, 256D.16, 261.04, and 514.981. 

The interest transferred to a beneficiary under a transfer on death deed after the 

death of a Grantor Owner is transferred subject to all effective conveyances, 

assignments, contracts, mortgages, deeds of trust, liens, security pledges, 

judgments, tax liens, and other encumbrances made by the Grantor Owner or to 

which the property was subject during the Grantor Owner's lifetime, including but 

not limited to, any claim by a surviving spouse or any claim or lien by the state or 

county agency authorized by section 246.53, 256B.15, 256D.16, 261.04, or 

514.981, if other assets of the deceased owner's estate are insufficient to pay the 

amount of any such claim. A beneficiary to whom the interest is transferred after 

the death of a Grantor Owner shall be liable to account to the state or county 

agency with a claim or lien authorized by section 246.53, 256B.15, 256D.16, 

261.04, or 514.981, to the extent necessary to discharge any such claim remaining 

unpaid after application of the assets of the deceased Grantor Owner's estate, but 

such liability shall be limited to the value of the interest transferred to the 

beneficiary. To establish compliance with this subdivision and subdivision 23, the 

beneficiary must record a clearance certificate issued in accordance with 

subdivision 23 in each county in which the real property described in the transfer 

on death deed is located. 

COMMENT: The interest conveyed by the Grantor Owner to the beneficiary is 

subject to all effective mortgages, liens and encumbrances made by the Grantor 

Owner in place prior to the grantor’s death, including Medical Assistance or 

Public Assistance claims or liens. The statute does not otherwise provide for 

payment of unsecured claims. 

PRACTICE TIP: The statute is not a Medical Assistance planning tool. 

However, a transfer on death deed will have no effect on a person’s eligibility for 

Medical Assistance. 

Subd. 4.Multiple grantee beneficiaries. 

A transfer on death deed may designate multiple grantee beneficiaries to take title 

as joint tenants, as tenants in common or in any other form of ownership or 

tenancy that is valid under the laws of this state. 

PRACTICE TIP: If the Grantor Owner chooses to name two or more 

beneficiaries, the TODD should indicate how the beneficiaries will take title to 

the property, e.g. joint tenants or tenants in common. If the Grantor Owner fails to 

designate how the beneficiaries will take title, the beneficiaries will take title as 

tenants in common. 

Subd. 5.Successor grantee beneficiaries. 

12

A transfer on death deed may designate one or more successor grantee 

beneficiaries or a class of successor grantee beneficiaries, or both. If the transfer 

on death deed designates successor grantee beneficiaries or a class of successor 

grantee beneficiaries, the deed shall state the condition under which the interest of 

the successor grantee beneficiaries would vest. 

PRACTICE TIP: Naming a class of beneficiaries is not recommended. It is a 

trap for the unwary because of the potential for unintended consequences. 

Subd. 6.Multiple joint tenant grantors. 

If an interest in real property is owned as joint tenants, a transfer on death deed 

executed by all of the owners that conveys an interest in real property to one or 

more grantee beneficiaries transfers the interest to the grantee beneficiary or 

beneficiaries effective only after the death of the last surviving Grantor Owner. If 

the last surviving joint tenant owner did not execute the transfer on death deed, 

the deed is ineffective to transfer any interest and the deed is void. An estate in 

joint tenancy is not severed or affected by the subsequent execution of a transfer 

on death deed and the right of a surviving joint tenant owner who did not execute 

the transfer on death deed shall prevail over a grantee beneficiary named in a 

transfer on death deed unless the deed specifically states that it severs the joint 

tenancy ownership. 

COMMENT: Execution of a TODD by joint tenants does not sever the joint 

tenancy unless the TODD specifically states that it does sever the joint tenancy. 

Subd. 7.Execution by attorney-in-fact. 

A transfer on death deed may be executed by a duly appointed attorney-in-fact 

pursuant to a power of attorney which grants the attorney-in-fact the authority to 

execute deeds. 

PRACTICE TIP: An original or certified copy of the Power of Attorney and an 

Affidavit by Attorney-in-Fact must also be recorded with the TODD. 

Subd. 8.Recording requirements and authorization. 

A transfer on death deed is valid if the deed is recorded in a county in which at 

least a part of the real property described in the deed is located and is recorded 

before the death of the Grantor Owner upon whose death the conveyance or 

transfer is effective. A transfer on death deed is not effective for purposes of 

section 507.34, 508.47, or 508A.47 until the deed is recorded in the county in 

which the real property is located. When a transfer on death deed is presented for 

recording, no certification by the county auditor as to transfer of ownership and 

current and delinquent taxes shall be required or made and the transfer on death 

deed shall not be required to be accompanied by a certificate of real estate value. 

13

A transfer on death deed that otherwise satisfies all statutory requirements for 

recording may be recorded and shall be accepted for recording in the county in 

which the property described in the deed is located. If any part of the property 

described in the transfer on death deed is registered property, the registrar of titles 

shall accept the transfer on death deed for recording only if at least one of the 

grantors who executes the transfer on death deed appears of record to have an 

ownership interest in the property described in the deed. No certification or 

approval of a transfer on death deed shall be required of the examiner of titles 

prior to recording of the deed in the office of the registrar of titles. 

COMMENT: A TODD that includes real property in more than one county id 

valid as a decree once it is recorded in at least one of the counties. Nonetheless, it 

should be recorded in each of the counties where any part of the real property is 

located in order to provide record notice against other recorded instruments. 

PRACTICE TIP: The statute cannot be used as a mechanism to avoid compliance 

with subdivision laws. Each parcel of land described in a TODD should be a 

separate tax parcel or approved for subdivision to avoid the problem of how to 

subdivide the property after the death of the Grantor Owner. 

Subd. 9.Deed to trustee or other entity. 

A transfer on death deed may transfer an interest in real property to the trustee of 

an inter vivos trust even if the trust is revocable, to the trustee of a testamentary 

trust or to any other entity legally qualified to hold title to real property under the 

laws of this state. 

COMMENT: A TODD can also be used to transfer real property to a charitable 

or educational institution. 

Subd. 10.Revocation or modification of transfer on death deed. 

(a) A transfer on death deed may be revoked at any time by the Grantor Owner or, 

if there is more than one Grantor Owner, by any of the Grantor Owners. To be 

effective, the revocation must be recorded in the county in which at least a part of 

the real property is located before the death of the Grantor Owner or owners who 

execute the revocation. The revocation is not effective for purposes of section 

507.34, 508.47, or 508A.47 until the revocation is recorded in the county in which 

the real property is located. Subject to subdivision 6, if the real property is owned 

as joint tenants and if the revocation is not executed by all of the Grantor Owners, 

the revocation is not effective unless executed by the last surviving Grantor 

Owner. 

(b) If a Grantor Owner conveys to a third party, subsequent to the recording of the 

transfer on death deed, by means other than a transfer on death deed, all or a part 

of such Grantor Owner's interest in the property described in the transfer on death 

deed, no transfer of the conveyed interest shall occur on such Grantor Owner's 

14

death and the transfer on death deed shall be ineffective as to the conveyed or 

transferred interests, but the transfer on death deed remains effective with respect 

to the conveyance or transfer on death of any other interests described in the 

transfer on death deed owned by the Grantor Owner at the time of the Grantor 

Owner's death. 

(c) A transfer on death deed is a "governing instrument" within the meaning of 

section 524.2-804 and, except as may otherwise be specifically provided for in the 

transfer on death deed, is subject to the same provisions as to revocation, revival, 

and nonrevocation set forth in section 524.2-804. 

Subd. 11.Antilapse; deceased beneficiary; words of survivorship. 

(a) If a grantee beneficiary who is a grandparent or lineal descendant of a 

grandparent of the Grantor Owner fails to survive the Grantor Owner, the issue of 

the deceased grantee beneficiary who survive the Grantor Owner take in place of 

the deceased grantee beneficiary. If they are all of the same degree of kinship to 

the deceased grantee beneficiary, they take equally. If they are of unequal degree, 

those of more remote degree take by right of representation. 

(b) For the purposes of this subdivision, words of survivorship such as, in a 

conveyance to an individual, "if he or she survives me," or, in a class gift, to "my 

surviving children," are a sufficient indication of intent to condition the 

conveyance or transfer upon the beneficiary surviving the Grantor Owner. 

COMMENT: If the Grantor Owner makes a class gift, such as “to my 

grandchildren who survive me” without naming each grandchild in the TODD, a 

court action will be required to identify the beneficiaries under the class gift. 

Subd. 12.Lapse. 

If all beneficiaries and all successor beneficiaries, if any, designated in a transfer 

on death deed, and also all successor beneficiaries who would take under the 

antilapse provisions of subdivision 11, fail to survive the Grantor Owner or the 

last survivor of the Grantor Owners if there are multiple Grantor Owners, if the 

beneficiary is a trust which has been revoked prior to the Grantor Owner's death, 

or if the beneficiary is an entity no longer in existence at the Grantor Owner's 

death, no transfer shall occur and the transfer on death deed is void. 

COMMENT: In this event, title will remain in the name of the Grantor Owner as 

though no TODD had ever been recorded. 

Subd. 13.Multiple transfer on death deeds. 

If a Grantor Owner executes and records more than one transfer on death deed 

conveying the same interest in real property or a greater interest in the real 

property, the transfer on death deed that has the latest acknowledgment date and 

that is recorded before the death of the Grantor Owner upon whose death the 

15

conveyance or transfer is conditioned is the effective transfer on death deed and 

all other transfer on death deeds, if any, executed by the Grantor Owner or the 

Grantor Owners are ineffective to transfer any interest and are void. 

Subd. 14.Nonademption; unpaid proceeds of sale, condemnation, or 

insurance; sale by conservator or guardian. 

If at the time of the death of the Grantor Owner upon whose death the conveyance 

or transfer is stated to be effective, the Grantor Owner did not own a part or all of 

the real property described in the transfer on death deed, no conveyance or 

transfer to the beneficiary of the nonowned part of the real property shall occur 

upon the death of the Grantor Owner and the transfer on death deed is void as to 

the nonowned part of the real property, but the beneficiary shall have the same 

rights to unpaid proceeds of sale, condemnation or insurance, and, if sold by a 

conservator or guardian of the Grantor Owner during the Grantor Owner's 

lifetime, the same rights to a general pecuniary devise, as that of a specific 

devisee as set forth in section 524.2-606. 

Subd. 15.Nonexoneration. 

Except as otherwise provided in subdivision 3, a conveyance or transfer under a 

transfer on death deed passes the described property subject to any mortgage or 

security interest existing at the date of death of the Grantor Owner, without right 

of exoneration, regardless of any statutory obligations to pay the Grantor Owner's 

debts upon death and regardless of a general directive in the Grantor Owner's will 

to pay debts. 

Subd. 16.Disclaimer by beneficiary. 

A grantee beneficiary's interest under a transfer on death deed may be disclaimed 

as provided in sections 524.2-1101 to 524.2-1116, or as otherwise provided by 

law. 

COMMENT: The interest disclaimed will be distributed as if the disclaimant had 

died immediately preceding the death that caused the TODD to become effective. 

Depending upon the relationship of the parties, and any survivorship language in 

the TODD, the antilapse provision may impact distribution under the TODD after 

the disclaimer. 

Subd. 17.Effect on other conveyances. 

This section does not prohibit other methods of conveying property that are 

permitted by law and that have the effect of postponing ownership or enjoyment 

of an interest in real property until the death of the owner. This section does not 

16

invalidate any deed that is not a transfer on death deed and that is otherwise 

effective to convey title to the interests and estates described in the deed that is 

not recorded until after the death of the owner. 

Subd. 18.Notice, consent, and delivery not required. 

The signature, consent or agreement of, or notice to, a grantee beneficiary under a 

transfer on death deed, or delivery of the transfer on death deed to the grantee 

beneficiary, is not required for any purpose during the lifetime of the Grantor 

Owner. 

Subd. 19.Nonrevocation by will. 

A transfer on death deed that is executed, acknowledged, and recorded in 

accordance with this section is not revoked by the provisions of a will. 

COMMENT: Although the Grantor Owner may be confused about whether a will 

can revoke a TODD, the law is clear. The TODD, if validly executed and 

recorded (and unrevoked) will control, and the Grantor Owner’s will has not 

effect on the TODD. 

Subd. 20.Proof of survivorship and clearance from public assistance claims 

and liens; recording. 

An affidavit of identity and survivorship with a certified copy of a record of death 

as an attachment may be combined with a clearance certificate under this section 

and the combined documents may be recorded separately or as one document in 

each county in which the real estate described in the clearance certificate is 

located. The affidavit must include the name and mailing address of the person to 

whom future property tax statements should be sent. The affidavit, record of 

death, and clearance certificate, whether combined or separate, shall be prima 

facie evidence of the facts stated in each, and the registrar of titles may rely on the 

statements to transfer title to the property described in the clearance certificate. 

COMMENT: See above Question and Answer relating to Clearance of Clearance 

for Medical Assistance Claim. 

Subd. 21.After-acquired property. 

Except as provided in this subdivision, a transfer on death deed is not effective to 

transfer any interest in real property acquired by a Grantor Owner subsequent to 

the date of signing of a transfer on death deed. A Grantor Owner may provide by 

specific language in a transfer on death deed that the transfer on death deed will 

apply to any interest in the described property acquired by the Grantor Owner 

after the signing or recording of the deed. 

17

COMMENT: See above Question and Answer relating to after-acquired property. 

Subd. 22.Anticipatory alienation prohibited. 

The interest of a grantee beneficiary under a transfer on death deed which has not 

yet become effective is not subject to alienation; assignment; encumbrance; 

appointment or anticipation by the beneficiary; garnishment; attachment; 

execution or bankruptcy proceedings; claims for alimony, support, or 

maintenance; payment of other obligations by any person against the beneficiary; 

or any other transfer, voluntary or involuntary, by or from any beneficiary. 

COMMENT: Because the beneficiary has no interest in the property while the 

Grantor Owner is alive, the beneficiary’s creditors also have no interest. 

Subd. 23.Clearance for public assistance claims and liens. 

Any person claiming an interest in real property conveyed or transferred by a 

transfer on death deed, or the person's attorney or other agent, may apply to the 

county agency in the county in which the real property is located for a clearance 

certificate for the real property described in the transfer on death deed. The 

application for a clearance certificate and the clearance certificate must contain 

the legal description of each parcel of property covered by the clearance 

certificate. The county agency shall provide a sufficient number of clearance 

certificates to allow a clearance certificate to be recorded in each county in which 

the real property described in the transfer on death deed is located. The real 

property described in the clearance certificate is bound by any conditions or other 

requirements imposed by the county agency as specified in the clearance 

certificate. If the real property is registered property, a new certificate of title must 

not be issued until the clearance certificate is recorded. If the clearance certificate 

shows the continuation of a medical assistance claim or lien after issuance of the 

clearance certificate, the real property remains subject to the claim or lien. If the 

real property is registered property, the clearance certificate must be carried 

forward as a memorial in any new certificate of title. The application shall contain 

the same information and shall be submitted, processed, and resolved in the same 

manner and on the same terms and conditions as provided in section 525.313 for a 

clearance certificate in a decree of descent proceeding, except that a copy of a 

notice of hearing does not have to accompany the application. The application 

may contain a statement that the applicant, after reasonably diligent inquiry, is not 

aware of the existence of a predeceased spouse or the existence of a claim which 

could be recovered under section 246.53, 256B.15, 256D.16, 261.04, or 514.981. 

If the county agency determines that a claim or lien exists under section 246.53, 

256B.15, 256D.16, 261.04, or 514.981, the provisions of section 525.313 shall 

apply to collection, compromise, and settlement of the claim or lien. A person 

claiming an interest in real property transferred or conveyed by a transfer on death 

deed may petition or move the district court, as appropriate, in the county in 

which the real property is located or in the county in which a probate proceeding 

18

affecting the estate of the grantor of the transfer on death deed is pending, for an 

order allowing sale of the real property free and clear of any public assistance 

claim or lien but subject to disposition of the sale proceeds as provided in section 

525.313. On a showing of good cause and subject to such notice as the court may 

require, the court without hearing may issue an order allowing the sale free and 

clear of any public assistance claim or lien on such terms and conditions as the 

court deems advisable to protect the interests of the state or county agency. 

COMMENT: As noted above, this author recommends using Series 10.8 

Uniform Conveyancing Blanks form of Clearance Certificate for Transfer on 

Death Deed. 

Subd. 24.Form of transfer on death deed. 

COMMENT: The statute includes a suggested form of TODD, which is 

intentionally omitted from these materials. This author recommends use of the 

Series 10.8 Uniform Conveyancing Blanks for Transfer on Death Deeds. 

Subd. 25.Form of instrument of revocation. 

COMMENT: The statute includes a suggested form of revocation of a TODD, 

which is intentionally omitted from these materials. This author recommends use 

of the Series 10.8 Uniform Conveyancing Blanks for Revocation of Transfer on 

Death Deeds. 

Subd. 26.Jurisdiction. 

In counties where the district court has a probate division, actions to enforce a 

medical assistance lien or claim against real property described in a transfer on 

death deed and any matter raised in connection with enforcement shall be 

determined in the probate division. Notwithstanding any other law to the contrary, 

the provisions of section 256B.15 shall apply to any proceeding to enforce a 

medical assistance lien or claim under chapter 524 or 525. In other counties, the 

district court shall have jurisdiction to determine any matter affecting real 

property purporting to be transferred by a transfer on death deed. 

COMMENT: Probate Court is part of the District Court. In most cases, disputes 

involving a TODD will be filed in the probate division of the District Court. 

19

SECTION 24 

Sales of Real Estate: From Listing 

Agreement to Closing 

Bradley Hintze 

Catherine L. Sjoberg 


Minneapolis 


SALES OF REAL ESTATE – FROM LISTING AGREEMENT TO CLOSING 

By Bradley Hintze & Trina Sjoberg 

Gray Plant Mooty Mooty & Bennett, P.A. 

_____________________________________________________________________________ 

Introduction 

Real estate issues can arise in the context of Probate and Trust law in a wide variety of circumstances. 

For this seminar, we have chosen to examine the residential purchase agreement and the related 

transactional process. This program will primarily focus on the residential real estate transaction from 

the position of a personal representative selling real property from the estate of a decedent, but the 

concepts discussed will apply in most cases to any sale of residential real property. We will do our best 

to throw in “best practices” and “practice pointers” where we have run across issues in our own 

practices. 

I. Setting the Stage 

A. Who are the Players? 

1. Principals 

2. 3 rd parties 

B. Issues to consider 

1. Who owns the property? 

The Transaction 

2. What type of property is being sold? 

3. What else is being sold? 

4. What title evidence does the Seller have? 

5. Are there any other legal issues that could complicate the sale? 

II. 

Step One – Identifying the Buyer 

A. Listing the property 

1. Is there someone who is interested in purchasing the property? 

2. Listing For Sale by Owner (“FSBO”) 

3. Listing with a Broker

B. Listing Agreement 

1. Key terms 

a. Identify property and parties 

b. Identify base‐line transaction terms 

c. Identify terms of relationship with Broker 

2. Addendum to modify terms of relationship with Broker 

C. Disclosure Statement 

a. When is commission earned 

b. Dual agency discount / prohibition of dual agency 

c. Are there any “exclusions”? 

1. Minnesota Real Property Disclosure. See Minn. Stat. Sections 513.52‐.60 

a. Generally required for any transfer of a property that is or is intended to 

be occupied as a “single family residential property.” Includes 

condominiums and townhomes, but excludes multi‐family properties 

(and colorably any residential property that is intended to be used as a 

rental property). 

b. Disclosure must be made in good faith and must “include all material 

facts of which the seller is aware that could adversely and significantly 

affect:” (1) an ordinary buyer’s use of the property; or (2) an intended 

use of which the seller is aware. See Minn. Stat. Sections 513.55 

c. Exceptions include: (i) transfers to heirs or devisees of a decedent; or 

(ii) transfers to a spouse, parent, grandparent, child or grandchild. 

There is NO EXCEPTION for the Personal Representative or a Trustee 

selling a property. See Minn. Stat. Sections 513.54 and .56 

d. There is no liability for failure to disclose unless the seller making the 

disclosure KNEW about an issue and failed to disclose it. Damages 

include civil damages and possible equitable relief (which could include 

rescission). See Minn. Stat. Sections 513.57‐.59 

2. MCIOA Disclosure. See Minn. Stat. Section 515B.4‐107‐8 

a. A “Resale Disclosure Certificate” is required in all sales of any property 

subject to MCIOA (Minn.Stat. 515B). This includes condominiums, 

2

D. Best Practices 

townhomes, detached townhomes and certain single family 

developments. 

b. The Resale Disclosure Certificate is prepared by the Association and 

must be provided within 10 days after the Seller’s request. 

c. The buyer has a 10 day period to review – thus, if the purchase 

agreement is signed prior to the expiration of the 10 day review period, 

the Buyer has until the 10 th day after receipt to cancel the purchase 

agreement. 

d. The review period may be waived: (i) after receipt of the Resale 

Disclosure Certificate; (ii) via a separate written instrument; and (iii) so 

long as the waiver is not a condition of the sale. 

1. Talk to your client about using a reasoned approach to selling the property. 

2. Make sure to stress (over and over, if necessary) how important it is that you 

review documents before the client signs them. 

III. 

Step Two – the Purchase Agreement. 

A. A few words on “Form” 

1. MSBA/MAR pre‐printed Forms 

2. Attorney prepared 

B. MAR Form 

1. Page 1 

a. Properly identify Buyer and Property 

b. Legal Description? 

c. Other property 

d. Purchase price and financing 

e. Closing Date 

2. Page 2 

a. Contingency Addendum 

b. Inspection Contingency Addendum 

3

c. Deed/Title 

d. Deferred Taxes/Assessment Pro‐rations 

3. Page 3 

a. Notices 

b. Tax Pro‐rations 

c. Title 

4. Page 4 

a. Subdivision 

b. Entire Agreement 

c. Default 

5. Page 5 

a. Home Warranty Plans 

b. Environmental Concerns 

c. Water/Sewer/Wells disclosure 

6. Page 6 

a. Disclosure Statement 

b. Leakage Issues 

c. Dual Agency 

7. Page 7 

a. Execution Blocks 

b. Final Exception Date 

C. Addenda 

1. Pre‐printed forms vs. attorney prepared 

2. Financing contingency 

a. Timing 

4

. Application for financing 

c. Limiting Buyer’s “out” 

3. Purchase Price and Earnest Money 

4. Title/Survey Review 

a. Defining the universe of “title evidence” 

b. Permitted Encumbrances 

c. Timeline 

d. Remedies 

5. Default 

a. Remedies 

b. Cure Period 

6. Other Due Diligence 

a. Subdivision/approvals 

b. CIC / Association issues 

c. Inspections – indemnity and repair requirements 

7. Closing Date 

a. Date certain vs. days after events 

IV. 

Step Three – Buyer’s due diligence period 

A. Title Insurance /Survey 

B. Formal and informal inspections 

C. 3 rd Party Documents 

a. Leases 

b. Dock leases 

c. Service contracts 

V. Closing Documents 

5

A. “Property” Documents 

1. Deed 

2. Bill of Sale 

3. Assignment of Leases/Contracts 

4. Well Disclosure Statement 

B. “Title” Documents 

1. Title Policy / Pro Forma 

2. Seller’s Affidavit 

3. FIRPTA Affidavit 

4. Certified copies of Letters Testamentary 

5. Certified Copy of Will and verification that it was submitted to probate 

C. “Party Documents” 

1. If Seller or Buyer is a trust – Affidavit and Certificate of Trust, Trust Document 

(or relevant pages) 

2. If a party is an entity 

a. Certificate of Good Standing 

b. Articles of Organization/Incorporation 

c. Bylaws 

d. Member/Shareholder Control Agreement 

VI. 

Other Real Estate Issues 

A. Cancellation statute. See Minn.Stat.559.217 

1. Either party may commence cancellation 

2. Cancellation with Right to Cure 

a. Process: (i) occurrence of a default which does NOT cancel the 

purchase agreement of its own terms; (ii) the non‐defaulting party 

serves notice in form and manner required by statute; (iii) purchase 

6

agreement is cancelled if defaulting party does not cure default within 

15 days after receipt of notice. 

b. After 15 th day, cancelling party executes an Affidavit of Cancellation and 

delivers the same to the other party and the party holding the earnest 

money. Upon receipt of the Affidavit of Cancellation, the earnest 

money may be released to the cancelling party. 

3. Declaratory Cancellation 

a. Process: (i) occurrence of a default which DOES cancel the purchase 

agreement of its own terms; (ii) the non‐defaulting party serves notice 

in form and manner required by statute; (iii) purchase agreement is 

cancelled if defaulting party does not secure a court order suspending 

the cancellation within 15 days after receipt of notice. 

b. After 15 th day, cancelling party executes an Affidavit of Cancellation and 

delivers the same to the other party and the party holding the earnest 

money. Upon receipt of the Affidavit of Cancellation, the earnest 

money may be released to the cancelling party. 

B. Management of the Property 

1. Lease property 

2. Caretaker 

3. Occasional monitoring and housekeeping 

i. Keep property heated or cooled to avoid damage 

ii. 

Monitor physical status and attend to minor issues before they become 

major issues 

4. Work with client and agent to determine strategy 

7

SECTION 25 

A Gift for All Donors: Advising Philanthropic 

Clients About Charitable Gift Strategies 

Angela Fogt 

Sheryl G. Morrison 


Minneapolis 


A GIFT FOR ALL DONORS: ADVISING 

PHILANTHROPIC CLIENTS ABOUT CHARITABLE 

GIVING STRATEGIES 

by 

SHERYL G. MORRISON and ANGELA T. FOGT 


PAGE 

I. INTRODUCTION............................................................................................................. 1 

II. CHARITABLE REMAINDER TRUSTS (“CRTs”) ..................................................... 2 

III. RETIREMENT ACCOUNT GIFTS ............................................................................... 7 

IV. CHARITABLE LEAD TRUSTS (“CLTs”) ................................................................. 16 

V. PRIVATE FOUNDATIONS .......................................................................................... 19 

VI. DONOR ADVISED FUNDS .......................................................................................... 21

I. INTRODUCTION. 

Often philanthropically-minded clients know that they want to make a gift but not how 

that gift should be accomplished. These materials are designed to provide a legal 

overview of several common charitable giving methods and the tax and legal implications 

associated with them. Understanding the opportunities and limitations involving these 

charitable giving methods will enable advisors to present a client with the opportunities 

that best align with that client’s goals and needs. 

Before recommending a gift or charitable tool, it is important to understand the donor’s 

goals and intentions through the following analysis. 

A. The Timing of the Gift. 

1. Does the donor want to make this gift now, at death, or both? 

2. Will anyone else be contributing to this gift or fund (e.g., spouse or third 

party)? 

3. Is the donor relying on this gift to offset income in this tax year or in the 

next few years? 

B. The Form of the Gift. 

1. What type of property (e.g., cash, securities, artwork) is the donor 

planning to contribute? 

2. What is the donor’s basis in the property? 

3. Does the donor want to receive anything in exchange or provide another 

individual with an interest in the gift (e.g., lifetime stream of income)? 

4. Who owns the property being contributed (e.g., donor, donor and spouse 

jointly, an entity)? 

C. After the Gift is Made. 

1. Does the donor want to have continued involvement in how these funds 

will be used? 

2. Does the donor want to impose restrictions on how the gift will be used? 

3. Does the donor want recognition for making this gift? If so, what are his 

or her expectations? 

D. Other Questions. 

1. Does the donor have a particular charity or charities in mind?

2. What is the donor’s relationship with this charity? 

3. Did the charity approach the donor about making this gift? 

With this information, advisors can critically assess the structure and form of the 

charitable gift that will work best for the client. This may involve suggesting the 

contribution of a different type of asset (e.g., retirement account rather than a cash 

bequest) or a different structure for a gift (e.g., a donor advised fund rather than a private 

foundation). 

II. 

CHARITABLE REMAINDER TRUSTS (“CRTs”). 

A. Overview. 

1. A CRT is an irrevocable trust that pays one or more noncharitable 

beneficiaries a defined annual amount for a period of years. At the end of 

this period, the remaining trust property is transferred to one or more 

charitable organizations. CRTs are governed by § 664 of the Internal 

Revenue Code. 

2. When considering whether a CRT is a good match for a particular donor, 

it is necessary to consider the following elements: time and form of 

creation; funding of the CRT; form of the annual payments; recipients of 

the annual payments; charitable remainder interest; and tax considerations. 

B. Creation of the Trust. 

1. A CRT is an irrevocable trust. This means that once the donor creates the 

trust, he or she cannot revoke or unilaterally modify it. 

2. A donor can create a CRT during his or her life (an “intervivos CRT”) or 

at the time of the donor’s death (a “testamentary CRT”). 

3. The trust term of a CRT can be based on the lives of one or more named 

individuals or a term of years (not to exceed 20 years). 

a. A trust term could also consist of some combination of the life of 

an individual and a term of years (e.g., shorter of a term of years or 

the life of the donor). However, some combinations are not 

permitted, such as a trust for the life of an individual plus a term of 

years. Treas. Reg. § 664-3-(a)(5)(i). 

b. The trust agreement may also provide that the term will end upon 

the occurrence of a “qualified contingency.” See IRC § 664(f). 

Almost any event outside of the donor’s control can serve as a 

qualified contingency. 

2

4. The trustee of a CRT may be an individual, including the donor, or a 

corporation, either for-profit (e.g. a bank) or not-for-profit (e.g. the charity 

that will receive the remainder interest in the trust). 

C. Funding the CRT. 

1. A donor can fund a CRT with any type of property (e.g., cash, securities, 

real estate, artwork), however, if relatively illiquid assets are contributed 

this could impact the CRTs ability to make annual payments. 

2. The donor’s contribution to the CRT must create a charitable remainder 

interest equal to at least 10% of the value of the contributed property. See 

IRC § 664(d)(1)(D). 

3. The property contributed must be appraised (except cash or marketable 

securities) and properly substantiated. 

4. If the trust agreement contains the proper language, a CRT can receive 

additional contributions. This does not apply to a charitable remainder 

annuity trust (described below). 

D. Form of Annual Payments. 

1. A CRT must make annual payments to one or more noncharitable 

beneficiaries. These annual payments can take the form of a unitrust 

amount or an annuity amount. 

a. Unitrust Amount. A “unitrust amount” is an amount equal to a 

fixed percentage of the trust property re-determined annually. This 

percentage must be at least 5% and not more than 50%. A CRT 

that pays a unitrust amount is referred to as a Charitable 

Remainder Unitrust (a “CRUT”). There are several types of 

CRUTs: 

i. Standard. The unitrust pays an annual amount equal to 

fixed percentage of the trust value, as determined each year 

(the “unitrust amount”). 

ii. 

iii. 

Net Income (“NI-CRUT”). The unitrust pays an amount 

equal to the lesser of the unitrust amount or the amount 

actual trust income. IRC § 664(d)(3); Treas. Reg. § 1.664- 

3(a)(1)(i)(b). 

Net Income w/ Makeup (“NIM-CRUT”). This is the 

same as a NI-CRUT except that if the income is less than 

the unitrust amount in a given year, this “deficiency” may 

be made up in subsequent years to the extent that the trust 

3

income exceeds the unitrust amount. IRC § 664(d)(3); 

Treas. Reg. § 1.664-3(a)(1)(i)(b)(2). 

iv. 

Capital Gain NI-CRUT or NIM-CRUT. The trust 

agreement defines trust income so as to include capital 

gains on trust property that are attributable to appreciation 

on the trust property after acquired by the trust. Treas. Reg. 

§ 664-3-(a)(5)(i). 

v. Flip CRUT. The trust begins as a NIM-CRUT or NI- 

CRUT; however, it converts to a Standard CRUT in the 

year following a predetermined “triggering event.” A 

triggering event could include the sale of an unmarketable 

asset, a specific date, or any other event outside the control 

of the donor or another person, such as marriage, divorce, 

death, and the birth of a child. Treas. Reg. § 1.664- 

3(a)(1)(i)(c) and (d). 

b. Annuity Amount. An “annuity amount” is equal to a fixed dollar 

amount which must be at least 5% but not more than 50% of the 

initial fair market value of the trust assets. A CRT that pays an 

annuity amount is referred to a Charitable Remainder Annuity 

Trust (a “CRAT”). 

2. To satisfy the payment of the unitrust amount, the trustee of the CRT will 

make payments from the trust principal to the extent that trust income is 

insufficient (exempt with NI-CRUT or NIM-CRUT. 

3. Generally, the trustee of a CRT must make the annual payments within the 

trust’s taxable year. The Internal Revenue Service provides a grace period 

for late payments in certain limited circumstances. Treas. Reg. §§ 1.664- 

2(b), 1.664-3(h). 

E. Recipients of Annual Payments. 

1. The annual unitrust or annuity payments must be made to one or more 

noncharitable beneficiaries. Permissible non-charitable beneficiaries 

include individuals, and also include trusts and corporations so long as the 

trust only lasts for a term of years. Priv. Ltr. Rul. 9340043. 

2. Generally, individual beneficiaries must be alive when the donor creates 

the trust. Treas. Reg. 1.664-2(a)(3). 

3. Common income beneficiaries include the donor and the donor’s spouse, 

sometimes for their joint lifetimes. 

4

4. If a trust is measured by the life of an individual, the noncharitable 

beneficiary can be a trust for the benefit of that person as long as that 

person is financially disabled. Rev. Rul. 2002-20, 2002-1 CB 794 (2002). 

5. No amounts (other than the annual payments) may be paid from the trust 

to a non-charitable beneficiary. Treas. Reg. § 1.664-2(a)(4), Treas. Reg. § 

1.664-2(a)(4). 

F. Charitable Remainder Beneficiary. 

1. When the donor funds the CRT, the donor’s contribution must result in a 

charitable remainder interest equal to at least 10% of the value of the 

contributed property. See IRC § 664(d)(1)(D). 

2. At the end of a CRT’s term, the trustee distributes the remaining trust 

property to one or more section 170(c) charitable organizations, including 

public charities, private charities and a combination of public and private 

charities. 

3. Generally, the donor can retain the right to change the trust’s remainder 

beneficiary. See Rev. Ruls. 76-7 and 76-8. This allows the donor to defer 

the decision of which charity will benefit from the trust. 

G. Tax Considerations for the Donor. 

1. Income Tax. 

a. The donor will receive income tax charitable deduction during the 

year of the transfer of the property to the trust. The amount of the 

deduction will equal the present value of the portion of the trust 

that will ultimately pass to charitable beneficiaries. IRC§§ 

170(A)(2)(A); 170(f)(2)(A); 2522(c)(2)(A); and 2055(a)(2)(A). 

b. The income tax deduction is limited by the general rules governing 

the deduction of charitable contributions and contribution limits 

will vary based on the type of property contributed. 

c. In order for the donor to maximize his or her income tax 

deduction, the remainder charitable beneficiary must be described 

in IRC § 170(b)(1)(A). 

d. If the donor transfers tangible personal property to the trust (e.g., 

artwork or books), the income tax deduction is delayed until the 

noncharitable interests have expired or possibly when the tangible 

personal property is sold. Priv. Ltr. Rul. 9452026. 

e. In order to receive a charitable deduction, the donor’s contribution 

to the trust must be substantiated and properly valued. 

5

2. Gift Tax. 

a. The donor will receive a gift tax deduction equal to the amount of 

the charitable remainder. The remainder beneficiary must be 

described in IRC § 2522(a). 

b. If the donor creates a present income interest in the trust for 

another individual, the donor is making a taxable gift. If an income 

interest is provided for the donor’s spouse, the gift tax marital 

deduction will apply. IRC § 2523(g). 

c. If the donor creates a successor income interest for a noncharitable 

beneficiary, this will result in a future interest and it will not 

qualify for the annual gift tax exclusion. If the donor retains the 

right to revoke this interest in his or her will, this will prevent the 

gift from being “complete” and the transfer will not be subject to 

gift tax upon the initial funding of the trust. Treas. Reg. § 1.664- 

2(a)(4), Treas. Reg. § 1.664-3(a)(4). 

3. Estate Tax. 

a. If the donor retains a lifetime income interest, the entire value of 

the CRT trust corpus is included in the donor’s estate at his or her 

death. IRC § 2036. 

b. If the trust is included in the donor’s estate, an estate tax charitable 

deduction is allowed for the value of the remainder interest, valued 

at the donor’s death. To receive this deduction, the remainder 

beneficiary must be described in IRC § 2055(a). 

c. Any interest in the donor’s spouse will qualify for the estate tax 

marital deduction so long as the spouse is the only remaining 

noncharitable beneficiary. IRC § 2056(b)(8). 

H. Tax Considerations for the CRT. 

1. A CRT is generally exempt from income tax. IRC § 664(c)(1). There is an 

exception, however, for unrelated business taxable income (“UBTI”). IRC 

§ 664(c)(2) (imposing a 100% tax on a CRT’s UBTI). 

2. Annual payments to non-charitable beneficiaries carry out trust income in 

a particular order (often referred to as “worst-in-first-out”) depending on 

the character of the income. IRC § 664(b). The order is: ordinary income, 

then capital gains, then income with the character of tax-exempt interest. 

6

III. 

RETIREMENT ACCOUNT GIFTS. 

A. “Retirement accounts” in this presentation includes what are commonly called 

accounts in “qualified” plans because investment in the account and contributions 

to the account qualify under the Code for favorable income taxation. We will 

cover individual retirement accounts (“IRAs”) and 401(k) and 403(b) plans for 

public or government employees. These materials are not intended to cover nonqualified 

retirement accounts or Roth IRAs, both of which have different tax 

consequences. 

B. Required Minimum Distribution (“RMD”) Rules. 

1. RMD rules require withdrawals be made from the retirement account 

during the participant’s life and after the participant’s death. IRC 

§ 401(a)(9). A slower rate of withdrawals is generally considered more 

advantageous because more of the account will grow tax-free for a longer 

period. 

2. RMDs During the Life of Participant (“P”) 

a. For IRA accounts, the required beginning date (“RBD”) for RMDs 

is April 1 of the calendar year following the year in which P 

reaches age 70½. IRC § 401(a)(9)(C); Treas. Reg. § 1.401(a)(9)- 

5, A-1(c). For employer plans, the RBD can be delayed after age 

70 ½ until April 1 of the calendar year following the year P ceases 

working for employer. IRC § 401(a)(9)(C)(i)(II). 

b. After the RBD, P must withdraw amounts from the plan at a rate 

designed to draw down the account over the joint life expectancy 

of P and a deemed designated beneficiary (“DB”) 10 years younger 

than P, irrespective of whether P names an actual DB or whom the 

actual beneficiary designation names. Treas. Reg. § 1.401(a)(9)- 

5, A-4(a); see also Uniform Lifetime Table, Treas. Reg. 

§ 1.401(a)(9)-9, A-2. 

c. If P designates his spouse (“S”) as the beneficiary of the entire 

account and S is more than 10 years younger than P, the actual 

joint life expectancy of P and S is used to compute RMDs. Treas. 

Reg. § 1.401(a)(9)-5, A-4(b); see Joint & Last Survivor Table, 

Treas. Reg. § 1.401(a)(9)-9, A-3. 

3. RMDs After P’s Death 

a. If P named a DB, distributions after P’s death may be made over 

the remaining life expectancy of the DB.IRC § 401(a)(9)(A)(ii). 

b. If P has no DB, distributions must be made over P’s remaining life 

expectancy if P died after his RBD, or if P died before his RBD, 

7

must be made within five years after P’s death. IRC 

§§ 401(a)(9)(B)(i)-(ii); Treas. Reg. § 1.401(a)(9)-3. 

c. If S is the DB, S may defer taking distributions until S attains her 

own RBD by rolling over the account to her own IRA. 

IRC § 408(d). S can then spread payments over the joint life 

expectancy of S and a deemed DB 10 years younger, using the 

Uniform Lifetime Table. Treas. Reg. § 1.408-8, A-7. 

d. The Code and Regulations limit DBs to individuals. IRC 

§ 401(a)(9)(E); Treas. Reg. § 1.401(a)(9)-4, A-1. Neither a charity 

nor a charitable trust is a DB. Further, neither the estate of P nor 

P’s revocable trust is a DB. Treas. Reg. § 1.401(a)(9)-4. 

e. As a general matter, trusts are also not DBs.IRC § 401(a)(9)(B). 

However, certain noncharitable trusts may be considered “see 

through” trusts for purposes of determining whether there is a DB 

whose life expectancy may be used to measure RMDs after P’s 

death. IRC § 401(a)(9)(B)(ii); Treas. Reg. § 1.401(a)(9)-4, Q&A- 

5. A discussion of those trusts is beyond this presentation. 

f. If a charity or a charitable trust is the sole beneficiary of the 

account, the account must be distributed to the charity within five 

years after P’s death because it is not a DB. IRC § 401(a)(9)(B)(ii); 

Treas. Reg. § 1.401(a)(9)-1, Q&A-4; PLR 201021038. The charity 

beneficiary may claim the account be paid in a lump sum. Because 

the charity or charitable trust is tax-exempt, no income tax will 

normally be imposed. 

g. If there are multiple beneficiaries of a retirement account, all 

beneficiaries must be considered in determining whether there is a 

DB. Treas. Reg. §§ 1.401(a)(9)-4, 1.401(a)(9)-5. However, if a 

beneficiary is eliminated or paid out by September 30 th of the year 

following P’s death (the “beneficiary determination date”), that 

beneficiary is not considered in determining whether the account 

has a DB. Treas. Reg. § 1.401(a)(9)-4, Q&A-4. Thus, if a charity 

or a charitable trust is a beneficiary for part of the account and 

individuals are beneficiaries of the balance and the share 

designated for the charity or charitable trust is distributed by the 

beneficiary determination date, the charity will not be considered a 

beneficiary for purposes of determining whether there is a DB. 

Treas. Reg. § 1.401(a)(9)-4, A-4(a). Then the remaining individual 

beneficiaries may be considered DBs under the RMD rules and 

their life expectancies will determine the required withdrawals. 

8

C. Income Tax On Withdrawals from Retirement Accounts 

1. When P withdraws amounts from a qualified retirement account, they are, 

in general, included in full in P’s gross income as ordinary income, 

whether withdrawal is made during the participant’s lifetime or after 

death. See IRC §§ 408(d); 403(b)(3); 401(m)(7). 

2. Distributions from a qualified account after P’s death are potentially 

subject to two taxes. 

a. Amounts paid to a beneficiary upon P’s death are “income in 

respect of a decedent” which will be included in the income of the 

beneficiary. Rev. Rul. 92-47, PLR 200336020. 

b. The full amount of the account is also included in the deceased 

owner’s gross estate for federal and state estate tax purposes. 

IRC § 2039(a). 

c. An income tax deduction is available on the beneficiary’s income 

tax return for any estate taxes paid because those assets were 

included in the taxable estate to avoid a double tax. IRC § 691(c). 

d. Charities and some charitable trusts are tax-exempt. Thus, any 

amounts they receive from qualified retirement accounts will not 

be taxed. 

D. Lifetime Gifts to Charity 

1. IRA Rollover 

a. During 2013 (but not after 2013 under current law), an individual 

can make up to $100,000 of “IRA Rollover” gifts. 

i. The gift must come directly from the donor’s IRA.IRC 

§ 408(d)(8)(B). The IRA custodian can draw a check 

payable to the charitable organization and mail it to the 

donor, who can then transmit it to the charity. IRS Notice 

2007-2, Q&A-41. Some qualified retirement plan accounts 

such as a 401(k) can be rolled over to an IRA tax-free, then 

used to make an IRA Rollover gift. See IRS Publication 

590. 

ii. 

The donee must be a public charity, not a private 

foundation,IRC § 408(d)(8)(B)(i), a public charity 

classified as a “supporting organization” described in Code 

Section 409(a)(3), IRS Notice 2007-2, Q&A-35, or a donor 

advised fund administered by the donee public charity, IRC 

§408(d)(8)(B)(i). 

9

iii. 

iv. 

The gift can satisfy the donor’s pre-existing legally binding 

pledge to the charitable donee. IRS Notice 2007-2, Qs A- 

44. 

The donor must be age 70 ½ or older when he or she makes 

the gift. IRC § 408(d)(8)(B)(ii). 

v. Only outright gifts qualify. IRC § 408(d)(8). 

vi. 

The gift must be in a form that is otherwise deductible. 

IRC § 408(d)(8)(C). The donor must substantiate the gift 

with a “contemporaneous written acknowledgement” from 

the donee. IRC § 170(f)(8); IRS Publication 1771. 

b. Tax treatment of IRA Rollover gifts. 

i. The gift is excluded from the donor’s federal gross income 

even though it is a withdrawal from an IRA. IRC § 

408(d)(8)(A); IRS Notice 2007-7, Q&A 34. Because the 

gift is not included in the donor’s gross income, it does not 

cause the phase out of other federal tax benefits, e.g., 

personal exemptions and itemized deductions. 

ii. 

An IRA Rollover gift yields no income tax charitable 

deduction. IRC § 408(d)(8)(E); IRS Notice 2007-7, Q&A 

39. 

c. Donors for whom IRA Rollover is attractive. 

i. The non-itemizer - Because the non-itemizer will not claim 

a charitable deduction with respect to a gift, the IRA 

Rollover is generally the best asset to use. 

ii. 

iii. 

The very generous donor - Some individuals give more 

than they can deduct. 

The donor whose only available asset is an IRA or 

retirement account. 

2. Lifetime Withdrawals from Retirement Accounts for Charitable 

Gifts. 

a. A direct assignment or transfer of assets from a retirement account 

to a charity is treated as a withdrawal of assets from the account 

which is included in gross income, then a charitable gift with an 

income tax charitable deduction. See e.g. IRC §§ 408(d); 

403(b)(3). 

10

. P might consider making such a gift: 

i. If P wants to make more charitable gifts than the IRA 

Rollover restrictions would permit, and his IRA account is 

the only asset available to make those gifts. 

ii. 

If the gift P wants to make does not qualify under the IRA 

Rollover rules, for example, the gift will be made to a 

donor advised fund or a private foundation, then this 

strategy might be one he considers. 

c. At best, a donor using this strategy might hope to break even, 

where the charitable deduction offsets the income recognized from 

the withdrawal. However, higher AGI can expose more of a 

donor’s social security benefits to tax (IRC § 86(a)-(b)) and can 

accelerate phase-out of various benefits, such as: personal 

exemptions, itemized deductions, educational credits, educational 

interest deduction, Roth IRA contributions, and the earned income 

credit. 

E. Charitable Gifts at Death. 

1. Tax Treatment Of Gift To Family. 

a. The entire retirement account typically constitutes IRD and is 

included as ordinary income in the gross income of the recipient. 

b. The retirement account is also included in the owner’s gross estate 

for federal and state estate tax purposes. If left to a spouse in a 

proper form, it qualifies for an estate tax marital deduction. If left 

to children it is included in the owner’s taxable estate. 

2. Tax Treatment Of Gift To Charity. 

a. If properly structured, the charity will be treated as the recipient of 

the retirement account. The entire account will be included in the 

charity’s gross income as IRD, however, charities are exempt from 

federal income tax under Section 501(c)(3), so no tax will result. 

b. A retirement account left to a charity will be included in the 

owner’s gross estate for estate tax purposes, however, if the gift is 

properly structured it will qualify for an estate tax charitable 

deduction. 

3. Outright to Charity at Owner’s Death. 

a. Beneficiary designation substitutes for charitable gift provision in 

will or revocable trust. 

11

. If P wished to leave only part of the account to charity, the 

charitable and noncharitable shares should be expressed as 

fractions or percentages to avoid triggering income taxation of the 

IRD of the account. 

4. Gift for a Spouse and a Charity. 

a. Testamentary Charitable Remainder Trust (“CRT”). 

i. A CRT for S at P’s death – two forms: 

a) CRT terms are included in P’s will or revocable 

trust and is funded with a nominal amount of other 

assets if S survives P. 

b) P creates a freestanding “revocable charitable trust” 

funded with a nominal amount of cash. 

ii. 

iii. 

iv. 

Beneficiary designation for the account names the CRT as 

the beneficiary if S survives P and names the charitable 

remainder beneficiary as the contingent beneficiary if S 

predeceases P. 

If S survives P, the CRT receives the retirement account 

and makes annual payments to S for life. At S’s death, the 

remaining CRT assets are distributed to the designated 

charity. 

If S predeceases P, at P’s death the retirement account is 

distributed to the charity. 

v. RMDs. Unless S is more than ten years younger than P and 

would otherwise be designated as the sole beneficiary of 

the account, designation of the CRT as the primary 

retirement account beneficiary will have no effect on 

minimum requirement distributions from the account 

during P’s life. Treas. Reg. § 1.401(a)(9)-5, A-4(a), A- 

4(b). 

vi. 

Estate taxes. If S survives P, the retirement account is 

excluded from P’s taxable estate by a combination of estate 

tax marital and charitable deductions for the interests of S 

and the charitable remainder beneficiary. 

IRC §§ 2055(e)(2)(A), 2056(b)(8). If S predeceases P, the 

account passes to the charitable beneficiary and qualifies 

for the estate tax charitable deduction. 

12

vii. 

viii. 

Income taxes. Amounts distributed to S from the CRT are 

taxed in the usual way. IRC § 664(b)(1)-(4). Because the 

entire retirement account will typically constitute IRD, it is 

likely that all payments to S will consist entirely of 

ordinary income. IRC § 691. 

Tax exemption. The CRT is exempt from federal income 

tax. IRC § 664(c). Thus, even though the distribution of 

the account will constitute IRD to the CRT and will be 

included in the CRT’s gross income, the CRT should pay 

no income tax. 

b. QTIP Funded with Retirement Account. 

i. P designates a QTIP marital trust for S as beneficiary of the 

retirement account if S survives P, and the charity as 

contingent beneficiary if S predeceases P. 

a) QTIP must distribute all of its income to S annually. 

IRC § 2056(b)(7)(B)(ii).All income means the 

income on assets in the QTIP and income on the 

assets that remain in the retirement account. Rev. 

Rul. 2000-2, 2001-1 C.B. 305, 1/05/2000; Rev. Rul. 

2006-26, 2006-1 C.B. 939, 05/04/2006. The 

provisions of the QTIP must be drafted to make this 

requirement clear. 

ii. 

iii. 

iv. 

At S’s death, the balance remaining in the retirement 

account and all property in the QTIP will be distributed to 

the designated charity. 

RMDs. The retirement account can distribute its assets to 

the QTIP over S’s life expectancy only if the QTIP 

qualifies as a “see through” trust which allows that result; 

the QTIP must provide that the RMD amount will be 

distributed to S from the QTIP each year. 

Estate tax. If S survives P, the retirement account qualifies 

for an estate tax marital deduction in P’s estate. IRC § 

2056(b)(7)(B)(ii). All assets remaining in the QTIP and the 

retirement account at S’s death will be included in S’s 

federal gross estate. IRC § 2044. The entire QTIP Trust 

will qualify for an estate tax charitable deduction at S’s 

death. IRC § 2055(a). See PLR 9532026. If S predeceases 

P, the account passes to the charitable beneficiary and 

qualifies for the estate tax charitable deduction. 

13

v. Income tax. The QTIP distribution to S from retirement 

account assets will constitute IRD and will be ordinary 

income to S. IRC § 691. 

c. Outright to Spouse And Spouse Rolls Over to “Charitable” 

IRA. 

i. S is beneficiary of the retirement account if S survives P, 

and the charity is contingent beneficiary if S predeceases P. 

ii. 

iii. 

iv. 

If S survives P, at P’s death S rolls the account balance 

over to S’s IRA. IRC § 408(d)(3)(A); Treas. Reg. § 1.408- 

8, Q&A-5. If S predeceases P, the charity receives the 

account. 

S makes withdrawals from her IRA under the minimum 

distribution rules. 

S designates the charity as beneficiary of her IRA. 

v. At S’s death the balance in the IRA is distributed to charity. 

vi. 

vii. 

viii. 

RMDs. Spouse takes over RMDs in her own name. 

Estate Tax.If S survives P, the marital deduction applies at 

P’s death, IRC § 2056,and the charitable deduction applies 

at S’s death.IRC § 2055(a). If S predeceases P, the 

charitable deduction applies at P’s death. 

Income Tax. Amounts distributed to S from her IRA will 

constitute IRD to S, taxable as ordinary income. 

d. Split Account into Two IRAs 

i. P divides his retirement account into two IRAs. Treas. 

Reg. § 1.401(a)(9)-8, Q&A-2. He names S as beneficiary 

of one and the charity as beneficiary of the other. 

ii. 

iii. 

iv. 

If S survives P, at P’s death S rolls her account over to her 

own IRA, and the charity receives its IRA. 

RMDs. S’s share can be rolled over by her and use her 

RMDs. Charity share pays out immediately. 

Estate Tax. There is no estate tax at P’s death because of 

the marital and charitable deductions. Estate tax 

consequences at S’s death depend on who she names as 

beneficiary of her IRA. 

14

v. Income tax. The IRA with S as beneficiary is treated the 

same under as the “outright-to-spouse” method. The IRA 

for the charity is treated the same as the “outright-tocharity” 

method. 

e. Appendix A. 

5. Gifts to Children and Charity. 

a. Outright Gifts. 

i. P designates the charity and the children as the 

beneficiaries of appropriate fractions or percentages of the 

retirement account. 

ii. 

iii. 

iv. 

RMDs. If the charity’s interest is distributed out by the 

beneficiary determination date, Treas. Reg. § 1.401(a)(9)-4, 

Q&A-4, the children will be able to spread the payments 

over their life expectancies. Treas. Reg. § 1.401(a)(9)-8, 

Q&A-2. If not, then the children will receive payments 

more rapidly, over P’s remaining life expectancy if P had 

reached his RBD or over five years if P had not reached his 

RBD. IRC § 401(a)(9)(B)(i)-(ii); Treas. Reg. § 

1.401(a)(9)-3. P can avoid the risk that the charity’s share 

will be distributed too late by dividing the retirement 

account into two IRAs, with the charity as the beneficiary 

of one and the children as the beneficiary of the other. 

Estate Tax. The amount passing to the charity qualifies 

for the estate tax charitable deduction. The amount passing 

to the children will be included in P’s taxable estate and 

may generate state and federal estate tax. 

Income Tax. Distributions to the children from their share 

of the retirement account (or from their separate IRA) will 

be included in their gross income as IRD. An income tax 

deduction will be allowed against the IRD in an amount 

equal to the estate tax attributable to the IRD. IRC § 

691(c). If there is more than one child, that income tax 

deduction will, in effect, be allocated ratably among them. 

b. CRT for Children 

i. P designates a testamentary CRT for a child as beneficiary 

of all or a fraction/percentage of the retirement account. 

The testamentary CRT will be created in the same way as a 

testamentary CRT for a spouse. 

15

ii. 

iii. 

iv. 

RMDs. Spouse takes over RMDs in her own name. 

Estate tax. The account will be included in P’s gross 

estate, but an estate tax charitable deduction will be 

allowed for the present value of the charity’s remainder 

interest. IRC § 170(f)(2); Treas. Reg. § 1.170A-6. The 

value of the children’s interest in the CRT will be included 

in P’s taxable estate. 

Income Tax. The distribution the CRT receives from the 

retirement account will be included in the CRT’s gross 

income as IRD, but because the CRT is tax-exempt, it will 

not pay tax on that distribution. Distributions from the 

CRT to a child will carry out the CRT’s categories of gross 

income likely as ordinary income. 

6. Implementation. 

a) Any income tax deduction against IRD for estate 

tax paid on the children’s interest in the CRT will 

probably not benefit the children. 

a. With any retirement account other than an IRA, the “plan 

document” should be reviewed to determine whether it permits the 

type of beneficiary designation which will be needed to implement 

the desired charitable gift, and whether it permits a lump sum 

distribution. The following types of accounts are normally suitable 

for outright charitable gifts and distributions to CRTs: Profit 

sharing plan, 401(k) plan, IRA and money purchase plan. Defined 

benefit plans and 403(b) annuity plans are usually less suitable 

because the benefit often comes in the form of an annuity. 

b. If retirement account is a qualified plan account, be sure all 

necessary spousal consents are obtained. 

c. Submit proposed beneficiary designation to plan administrator or 

IRA custodian for approval. 

IV. 

CHARITABLE LEAD TRUSTS (“CLTs”). 

A. Key Characteristics. 

1. A CLT is an irrevocable trust, once the donor creates the trust, the donor 

cannot revoke or unilaterally modify the trust. 

2. The donor may create the trust during life or at death through the donor’s 

will or revocable trust. 

16

3. The trustee of the CLT makes defined annual payments to a charity for a 

specific time period. 

a. The charity may be a public charity, private foundation, or donor 

advised fund. 

b. There are potential pitfalls if the donor retains too much control 

over designating the charitable beneficiary after the donor 

establishes an intervivos trust, i.e. a trust established during the 

donor’s life. Examples: a donor who retains the right to change the 

charitable beneficiary or a donor who serves on the board of the 

private foundation. In these cases, the IRS deems the owner to 

have the right to control the enjoyment of the income from the 

trust, and the trust will be included in the donor’s estate if the 

donor dies during the term of the trust. IRC § 2036. 

c. The donor may retain the right to recommend charitable 

beneficiaries of a donor advised fund without the IRC § 2036 

problem because the donor does not have the legal authority to 

designate the fund beneficiaries. 

d. As with a CRT, the time period may be measured by a person’s 

lifetime or a term of years, or a permissible combination of both 

4. At the end of the term, the trustee pays the remaining assets of the trust to 

a non-charitable beneficiary, commonly the donor’s children or a trust for 

children. 

5. The charity’s interest in the trust is the present value of the annuity 

payments calculated using the IRC § 7520 rate. If that rate is low, the 

charity’s interest will be relatively larger than if that rate is high. 

Similarly, the non-charitable trust remainder will be valued as a smaller 

portion of the assets contributed to the trust if the IRC § 7520 rate is low. 

B. Tax Considerations. 

1. Gift Tax. The donor must pay a gift tax for property given away during 

life, with certain exemption amounts available for non-charitable 

beneficiaries. For an intervivos CLT, the donor may take a gift tax 

charitable deduction for the present value of the charitable beneficiary’s 

annuity payments from the trust. 

2. Estate Tax. The donor must pay an estate tax for property given away at 

death, with certain exemption amounts available for non-charitable 

beneficiaries. For a testamentary CLT, the donor’s estate receives an estate 

tax charitable deduction for the present value of the charitable interest. 

17

3. The estate planning benefit of a CLT arises when the assets held by the 

trustee in the trust grow at a faster rate than the IRC § 7520 rate. 

4. GST Tax. If a donor gives property to grandchildren or within trusts with 

grandchildren as potential beneficiaries, the donor must pay generationskipping 

transfer (“GST”) tax on that gift, with certain exemption amounts 

available. If the donor names grandchildren as remainder beneficiaries of a 

CLT, the donor will want to allocate GST exemption to the trust because 

payment of trust assets to grandchildren is a GST taxable event. 

C. Types of CLTs. 

a. A donor may allocate his or her GST tax exemption to the present 

value of the remainder interest in a CLUT at the time of the trust’s 

creation. IRC § 2642(a)(2)(B). 

b. Under IRC § 2642(e), the allocation of GST tax exemption to a 

CLAT cannot be finally determined until the end of the trust term. 

Rather the amount of exemption allocated at the beginning of the 

trust term is deemed to grow with the trust at the IRC § 7520 rate 

in effect at creation, and at the end of the trust term, that 

augmented exemption amount is compared with the actual trust 

remainder to determine how much of the remaining assets will be 

exempt from the GST tax. 

c. If a donor plans to name grandchildren as remainder beneficiaries 

of a CLT, the only way to be certain that the trust will not be 

subject to at least some GST tax is to use a CLUT rather than a 

CLAT. 

1. Annuity vs. Unitrust. 

a. If the trust provides for a fixed payment each year to charity, it is a 

charitable lead annuity trust (“CLAT”). The trust may vary the 

annuity over the term of the trust as long as the variations are 

certain at the time of trust creation. 

b. If the trust provides for a payment to charity each year equal to a 

fixed percentage of the value of the trust property determined 

annually, the trust is called a charitable lead unitrust (“CLUT”). 

c. The CLT has no minimum or maximum payout requirement. 

2. Grantor vs. Non-grantor. 

a. A non-grantor CLT is a trust that is not considered owned by the 

donor for income tax purposes. The estate planning benefit of the 

non-grantor CLT is transfer tax savings. Under IRC § 642(c)(1), 

18

V. PRIVATE FOUNDATIONS. 

A. Definition. 

the trust is taxed as other noncharitable trusts, but receives a 

charitable income tax deduction for annual payments to charities 

described in IRC § 170(c). 

b. A grantor CLT is considered owned by the donor for income tax 

purposes and the donor therefore receives an income tax charitable 

deduction for the present value of the charity’s interest in the trust. 

The donor recognizes income each year, however, equal to the 

amount of taxable trust income and does not receive a charitable 

deduction for the annual payments to charity. 

1. By Exclusion. Internal Revenue Code §509(a) begins by defining a 

“private foundation” as all organizations qualifying as tax-exempt 

charitable organizations under 501(c)(3), the general classification of 

“charities.” Section 509(a) then eliminates from the private foundation 

definition categories that generally refer to those that are publiclysupported 

or operating to provide directly a charitable “function.” 

Because of the more favorable tax treatment afforded to non-private 

foundations, those organizations have the burden of proving that they are 

not private foundations. All remaining organizations who cannot prove 

they are non-private foundations will be treated as private foundations. 

2. Pass-Through. A hallmark of private foundations is that they usually 

function to (1) receive contributions and then to (2) make contributions to 

regular “public” charities. 

3. Timing. By functioning as an intermediary between the contributing 

individual and the receiving public charity, the private foundation offers 

flexibility in the timing of contributions. The individual can make a large 

contribution appropriate to the individual’s income tax situation and can, 

through the private foundation, decide “later” which charities receive what 

amounts. Because only a small percentage of the assets in a private 

foundation is required to be distributed each year, it is anticipated by most 

founders that the private foundation will accumulate a permanent 

endowment-type fund, from which the annual gifts will be made. 

4. Recognition. The founder’s name is usually part of the private 

foundation’s name. If so, this provides community recognition of the 

founder as being the donor of the gifts from the private foundation. This 

also makes it easier for the founder to substitute gifts from the private 

foundation for gifts from the founder individually. 

B. Obtaining Non-Profit Status. 

19

1. Purpose. A core concept of a private foundation is that it will qualify as a 

non-profit organization for purposes of the Internal Revenue Code. This is 

important for two reasons: (1) to ensure a charitable income tax deduction 

for all contributions to the foundation and (2) to result in nearly tax-free 

treatment of earnings on the private foundations assets. 

2. Timing. A generous amount of time is allowed for the filing of the 

application for “tax-exempt” status. The application must be filed within 

fifteen (15) months after creation of the organization. See Tr. Reg. 1.508- 

11(a)(2)(i). 

3. Form. The application is submitted on IRS Form 1023: “Application for 

Recognition of Exemption Under Section 501(c)(3) of the Internal 

Revenue Code.” 

4. Effective Date. Once issued, the “favorable determination” letter is 

generally effective as of the date of formation of the organization. See 

Section 13 of Rev. Proc. 84-46. 

5. State Application. Exemption from State taxation should also be 

requested. This is usually submitted after receipt of the favorable federal 

determination letter has been received. 

C. Tax Treatment of Contributions. 

1. General Rule. Contributions to private foundations are considered to be 

“for” charity as opposed to “to” charity and are thus subject to a less 

favorable 30% of AGI ceiling for cash gifts (and a 20% ceiling for other 

property gifts) as opposed to a 50% ceiling for gifts to “public” charities. 

There is a five-year carry-forward of any excess, just as with the “public” 

charities. See I.R.C. 170(b)(1)(D)(ii). 

2. Nature of Gift. 

a. Cash. The full amount qualifies, subject to 30% of AGI ceiling. 

b. Ordinary Income Property. Only the “cost” basis qualifies, 

subject to 20% of AGI ceiling. 

c. Short-Term Capital Gain Property. Only the “cost” basis 

qualifies, subject to 20% ceiling. 

d. Long-Term Capital Gain Property. Only the “cost” basis 

qualifies, subject to 20% ceiling. 

3. Tax Treatment of Income. A private foundation does no pay income tax 

except as described in subparagraph (4) and (5) below. 

20

4. Net Investment Income. An excise tax of 2% or 1% applies to the net 

investment income of the private foundation. See I.R.C. 4940(e). 

5. Unrelated Business Income. Like other non-profit organizations, private 

foundations are subject to tax on any “unrelated business” income. See 

generally I.R.C. 513(a). 

D. Penalty Taxes. To enforce that the private foundation operates for “charitable” 

purposes, certain areas of abuse are regulated through the imposition of severe 

penalty (excise) taxes. 

1. Self-dealing. This is a primary area of concern. The founder and other 

substantial contributors, as defined under the Code’s attribution rules, are 

“disqualified persons” and as such, are generally restricted from entering 

into transactions with the private foundation. Examples include: leasing, 

sales, loans, compensation, etc. See I.R.C. 4941. 

2. Failure to Distribute. A private foundation must distribute a certain 

amount of its income to charity each year. The current requirement is 

(with some exceptions) 5% of the value of its assets. See I.R.C. 4942(d) 

and 4942(e). The failure to meet that requirement results in a tiered 

system of penalty taxes. See I.R.C. 4942. 

3. Excess Business Holdings. Private foundations are generally not 

permitted to own “more than 20% of a corporation’s voting stock, less the 

percentage owned by all “disqualified persons.” See I.R.C. 4943. 

4. Jeopardy Investments. A penalty tax applies to investments that would 

jeopardize the tax-exempt status of the private foundation. See I.R.C. 

4944. 

5. Lobbying. A private foundation must not engage in lobbying or certain 

other “political” expenditures. See I.R.C. 4945. 

VI. 

DONOR ADVISED FUNDS. 

A. Definition and Operation. 

1. A donor advised fund is a segregated fund owned by a public charity. It is 

the property of the public charity in its own capacity, not as trustee of a 

separate trust. The public charity has complete control over how the fund 

will be used. IRC §4966(d)(2)(A). 

2. Typically, all or part of the assets of the fund are used to make 

distributions to other charitable organizations which are not necessarily 

related to the public charity which holds the fund. SeeIRC 

§ 4966(d)(2)(B). 

21

3. The fund is “donor advised” in the sense that the public charity has agreed 

to take into account input from the donor or persons designated by the 

donor regarding distributions. However, the agreement with the donor 

states that these suggestions are not legally binding on the public charity 

which retains ultimate discretion regarding the fund, provided that all of 

the fund's assets are used for its exempt charitable purposes. 

B. Restrictions on Activities. Like private foundations, a donor advised fund is 

subject to a number of rules and requirements to prevent certain abuses. A 

violation of these rules results in the imposition of stiff excise taxes. 

1. Taxable Distributions. A penalty tax is imposed on any taxable 

distribution, which would include (1) a distribution to an individual, or (2) 

a distribution to an organization for a non-charitable purpose. IRC 

§ 4966(c). 

2. Prohibited Benefits. A tax is imposed on any distribution that results in a 

benefit to the donor, a member of the donor’s family, or a 35% controlled 

entity of the donor or the donor’s family. IRC § 4967(a)(1). 

3. Excess Benefits Transactions. An excess benefit transaction includes any 

“grant, loan, compensation, or other similar payment from a fund to a 

disqualified person.” IRC § 4958(c)(2). A disqualified person includes the 

donor and the donor advised fund advisors (with attribution). IRC 

§ 4958(1)(E). 

4. Excess Business Holdings. To prevent past perceived abuses, a donor 

advised fund is generally not permitted to own “more than 20% of a 

corporation’s voting stock, less the percentage owned by all “disqualified 

persons.” See I.R.C. 4943. For this purpose a donor advised fund includes 

the donor advisors on that fund and the donor, the donor’s family, and a 

35% entity controlled by one of those previously listed. 

C. Tax Treatment of Contributions. 

1. General Rule. Contributions to a donor advised fund are subject to a 50% 

AGI ceiling for cash gifts (and a 30% ceiling for other property gifts) on 

contributions since it is considered a public charity. 

2. Nature of Gift. 

a. Cash. The full amount qualifies, subject to 50% of AGI ceiling. 

b. Stock and real estate. Appreciated long-term stock and real 

estate are deductible at their fair market value up to 30% of AGI. 

22

c. Ordinary Income Property. Only the basis is considered a 

qualified charitable contribution and deduction is subject to the 

50% ceiling. 

d. Tangible Personal Property. Contributions for an unrelated use 

are considered a qualified charitable contribution in the amount of 

the donor’s basis; deduction is subject to the 50% ceiling. 

D. Donor Advised Fund versus Private Foundations. 

1. A donor advised fund does not pay the tax on investment income that 

applies to private foundations. 

2. A donor advised fund relieves the donor and the donor's family of the bulk 

of the management responsibilities with respect to the charitable fund. By 

contrast, with a private foundation, the foundation managers must manage 

the organization's investments, make decisions about grants and distribute 

funds, and prepare annual accounts and comply with IRS and state 

reporting requirements. 

3. The primary disadvantage of a donor advised fund is that the donor gives 

up legal control over the use of the charitable fund. With a private 

foundation, the donor and the donor's family can retain complete control 

over grants and other charitable distributions. 

23

Comparisons of Methods – See Appendix A 

Testamentary 

CRT 

QTIP 

Spouse/ 

Rollover IRA 

Split 

Account Into 

Two IRAs 

Donor controls charitable gift Yes Yes No Yes 

Control over amount of annual 

payment to spouse 

Donor Trustee/ IRS Spouse/ 

IRS 

Spouse/ 

IRS 

Principal available for 

distribution to spouse in 

financial emergency 

Entire account provides 

benefit to spouse 

No Yes Yes Yes only as to 

IRA for 

Spouse 

Yes Yes Yes No 

Time of gift to charity 

Spouse’s 

death 

Spouse’s 

death 

Spouse’s 

death 

Donor’s death 

This material is based on the federal tax law in effect on the date it was completed: May 16, 

2013. It is only a summary of the subject matter it addresses, and it is intended to provide 

information of a general nature only. It should not be construed as a comprehensive 

treatment or as legal advice or legal opinion on any specified facts or circumstances. Readers 

are urged to consult with an attorney concerning their own situations and any specific legal 

questions they may have. 

Pursuant to the Rules of Professional Conduct set forth in Circular 230, as promulgated by 

the United States Department of the Treasury, nothing contained in this document was 

intended or written to be used by any taxpayer for the purpose of avoiding penalties that may 

be imposed on the taxpayer by the Internal Revenue Code of 1986 and it cannot be used by 

any taxpayer for such purpose. No one may use or refer to any portion of this communication 

in promoting, marketing or recommending a partnership or other entity, investment plan or 

arrangement relating to any one or more taxpayers.

SECTION 26 

Incentive/Disincentive Provisions 


Davenport, Evans, Hurwitz & Smith, LLP 




I. Introduction ......................................................................................................1 

II. Beneficiaries .....................................................................................................2 

III. Good Behavior .................................................................................................3 

IV. Bad Behavior ...................................................................................................5 

V. Planning Techniques ........................................................................................6 

VI. Other Considerations .......................................................................................8 

VII. Other Vehicles .................................................................................................9 

VIII. Conclusion ......................................................................................................10 

Schedule I...................................................................................................................11

PLANNING AND DRAFTING FOR THE 

USE OF INCENTIVE TRUSTS 


I. Introduction. 

Public announcements by U.S. citizens in opposition to transfer tax 

repeal have drawn attention to some estate planning trends. Wealthy individuals 

no longer seem willing to focus solely on traditional strategies designed to transfer 

assets to or for the benefit of a spouse and then ultimately to descendants or other 

family members. Estate planning for clients with larger estates has traditionally 

centered on those strategies that have been designed to reduce transfer taxes. 

Estate planners and advisors have assumed that a client’s primary goal would be to 

minimize the amount of transfer taxes in order to maximize the amounts available 

to family members and more remote descendants. It now appears that some 

clients have determined that transfers of valuable assets, whether outright or in 

trust, could ultimately be detrimental to succeeding generations. Public statements 

by members of the Buffet and Gates families underscore the fact that wealthy 

clients may desire to use their estate plans to both encourage appropriate behavior 

and, at the same time, discourage inappropriate behavior by beneficiaries. In 

addition, many clients have certain beneficiaries with specific needs that may be 

addressed through unconventional estate planning. 

There seems to be a greater interest from our clients with regard to 

the use of incentive trusts. Clients also appear to be allocating a much larger share 

of their assets to non-profit entities and charitable trusts. Clients are also 

establishing private foundations or donor-advised funds with their local community 

foundations. These trends suggest that our clients are truly becoming more 

concerned about the effect that accumulated wealth will have on their 

descendants. Some primary concerns would appear to be in the areas of 

motivation, personal self-sufficiency, self-esteem, productivity, and addictive 

behavior. At the same time clients have a natural desire to provide resources to 

their descendants to assist them with financial support for education, health care, 

financial training, family support, and business ventures. 

It is unlikely that the federal transfer tax system will be abolished. 

After years of uncertainty, the federal estate and gift exemption has been set at $5 

million plus adjustments for inflation. In addition to the tremendous interest in 

dynasty trusts that can be extended beyond the typical perpetuities period, the $5 

million exemption gives planners and their clients more latitude for generational 

incentive trust planning than previously offered when the exemption was lower. It 

1

may be more important for estate planners to focus attention on drafting those 

types of incentive provisions that will influence the behavior of trust beneficiaries. 

II. 

Beneficiaries. 

A. Children. The first obvious class of persons to be affected by 

incentive trusts would be the children of our clients. However, depending 

upon the wealth of the client and the client’s age, there may be a greater 

focus on grandchildren and more remote descendants. For example, many 

clients seem quite concerned about the lifestyle that they would hope to 

maintain for themselves and their spouses. Although in recent years there 

are many clients who have accumulated significant wealth at much younger 

ages, most of our clients are not inclined to make special provisions for their 

descendants until they are certain that they have set aside sufficient assets 

to provide for their own care and support. In some circumstances our 

clients’ children are successful in their own right and may not need 

significant financial assistance. There are also situations where children may 

not appreciate any attempts by their parents to mold the behavior of 

grandchildren and great-grandchildren. It should also be noted that the goals 

and objectives of our clients may change over a period of time as they 

observe the growth and development of their children and grandchildren. 

Since planners generally accept the idea that transfer taxes will not be 

repealed, they will probably continue to tout transfers for children and 

grandchildren as early in the lives of these beneficiaries as possible. 

Particularly for generation three and beyond, it is likely that estate planners 

will promote larger gifts at younger ages. It could be argued that the need 

for incentive trust provisions will increase regardless of federal transfer tax 

exemption. 

B. Remote Descendants. It has always seemed a bit difficult to 

assist clients with planning for benefits directed at remote descendants. 

Clients are generally disinclined to make specific provisions for later 

generations because the clients seem to prefer arrangements that benefit 

their descendants who are actually known to them. As generation-skipping 

trusts and dynasty trusts are recommended more frequently, the average 

client seems to be more inclined to establish distribution requirements that 

are based on the client’s particular value system and the values that the 

client may wish to promote among the client’s more remote descendants. 

The value systems of our clients are certainly as varied as their own life 

experiences. 

C. Spouses. Many clients fully expect that their spouses will 

remarry following the client’s death. While QTIP Marital Trusts are often 

used by clients to ensure that property is ultimately distributed to the client’s 

2

descendants, the client clearly will not be able to encourage certain desirable 

behavior by a surviving spouse because of the QTIP requirements. However, 

with respect to non-marital trusts, the client may often desire to diminish or 

eliminate the distribution of income or principal to a surviving spouse in the 

event of the spouse’s remarriage or cohabitation with a prospective suitor. 

Clients are equally concerned about the distribution of principal from a 

typical marital trust that provides the surviving spouse with a general 

testamentary power of appointment. 

D. Other Beneficiaries. Our clients often have certain beneficiaries 

who have special needs that the client feels compelled to address in the 

client’s estate plan. For example, there may be a class of individual 

beneficiaries who have markedly different income levels and significant 

disparities in overall wealth. For those beneficiaries who are less affluent, 

our clients will often try to limit the use of principal in order to provide 

resources to the beneficiary throughout the beneficiary’s lifetime. This can 

apply to descendants as well as unrelated or charitable beneficiaries. 

III. 

Good Behavior. 

A. Education. Education is most frequently the subject of incentive 

trusts. Encouraging education may often involve the recognition of specific 

educational achievements. For example, a beneficiary may be rewarded for 

the commencement and pursuit of a general bachelor’s degree. Incentive 

trusts may specify a certain level of achievement, specific areas of study, 

and specific educational institutions. Other clients prefer to use a broad 

definition of the term “education.” A sample of an expanded definition of this 

term is found on Schedule 1. 

Our clients may also be inclined to promote the attainment of advanced or 

professional degrees and the achievement of certain grade point averages or 

the receipt of academic honors. Living expenses may also be provided to 

beneficiaries who seek a degree from an accredited college or university. 

Our clients may also desire to provide the trustee with the latitude to reward 

beneficiaries based on all of the facts and circumstances, including the 

beneficiary’s own abilities or disabilities. Incentive trusts may also be used 

to permit or encourage an adult beneficiary to return to school to improve 

certain skills or develop professional expertise. 

B. Productive Behavior. Many clients want to encourage 

productive behavior. Income matching provisions are sometimes used to 

promote industrious activity by a beneficiary. Care must be taken to clearly 

define the term “earned income.” The amounts of earned income shown on 

a W-2 form are easy to determine. However, self-employed beneficiaries or 

3

those who are members of a partnership may not receive a substantial 

salary. Earned income may be reduced during periods of unemployment due 

to disability. How will income matching provisions address adjustments 

made when a beneficiary’s tax return is audited? How should a beneficiary 

who chooses to provide care to children or dependent adults be treated? 

Although the landscape has clearly changed regarding opportunities for 

female beneficiaries, is it appropriate to provide a trustee with the discretion 

to treat male and female beneficiaries differently? Lastly, certain 

occupations may produce less earned income but could be just as 

worthwhile. If a beneficiary has extraordinary earned income in a given year 

that is due to unusual factors, would this produce a windfall for the 

beneficiary by reason of the matching distribution from an incentive trust? 

Would it be more appropriate to use an average of the beneficiary’s earned 

income over several years? These are all factors for the estate planner and 

the client to consider. 

C. Public Service. It is possible that our clients may want to 

encourage beneficiaries to consider full-time activity in service-related 

positions. Various ministries that provide service and assistance to nonprofit 

agencies might be favored. Missionary work, service in the Peace 

Corps, and government service might also be encouraged. Other careers as 

teachers, artists, or social workers might be encouraged. A client may 

authorize the distribution of trust income to supplement the income of 

beneficiaries who work in these areas. It might also be appropriate for the 

trustee to be permitted to provide these beneficiaries with certain items that 

they could not otherwise afford, including computer equipment, cars and 

travel. 

D. Philanthropy. Other types of incentive trusts may encourage 

charitable giving by the trust beneficiaries. Clients with definite philanthropic 

tendencies generally want to encourage their descendants to philanthropic as 

well. The allocation of a certain percentage of trust income or principal for 

distribution to non-profit organizations, coupled with a requirement that a 

beneficiary or committee of beneficiaries designate the recipients, can help 

get the beneficiaries involved in philanthropy. The client can also provide 

that the incentive trust will match personal charitable contributions made by 

each beneficiary within certain limits. It is important to carefully consider all 

pertinent income and transfer tax issues since it might be more appropriate 

for a client to establish a family foundation or a specific charitable trust. 

And lastly, a client may use charitable gifts from a trust that could reduce 

the distribution of principal to certain descendants who fail to meet or 

exceed well-defined criteria. 

4

E. Special Family Needs. In some families there may be a need for 

individual family members to provide care for elderly family members or 

relatives, physically or mentally disabled family members, and non-relatives 

who may rely upon the client for certain types of care. Incentive trust 

provisions may be drafted to provide significant benefits to a beneficiary who 

fills these needs. It is extremely important to carefully craft trust provisions 

to fairly compensate a beneficiary who is not able to maintain full-time 

employment as a result of the caregiving services provided to family 

members and other non-relatives. It may also be appropriate to allow trust 

income or principal to continue to be distributed to the beneficiary for a 

specified period of time after the death of the disabled person or after that 

person is institutionalized. 

IV. 

Bad Behavior. 

A. Addictive/Criminal. Drug abuse, alcohol abuse, and criminal 

behavior may be discouraged through the use of an incentive trust. The 

distribution of income and principal may be discontinued or delayed. At the 

same time the incentive trust may provide benefits in order that the family 

member or descendant is able to obtain treatment and to ensure that basic 

living needs are funded. Some clients may require that a beneficiary make all 

medical records available to the trustee and submit to blood tests to allow 

the trustee to determine if the beneficiary is involved with substance abuse. 

B. Spending. Some clients may desire to limit distributions to 

beneficiaries who fall in the category of consummate consumers. Trust 

provisions can require the beneficiary to provide the trustee with income tax 

returns and various financial information in order to be eligible for trust 

distributions. There are other incentive trust provisions which may give a 

trustee the flexibility to withhold distributions to beneficiaries who are not 

productively employed or engaged in productive activities. Incentive trusts 

will always include spendthrift provisions. Clients will rarely want to see 

distributions to a trust beneficiary indirectly used to accommodate the 

beneficiary’s creditors or a former spouse of the beneficiary. 

C. Charity. While certain clients may desire to encourage the 

beneficiaries to be philanthropic, other clients may wish to discourage 

charitable activities. Clients may try to discourage unusual or extraordinary 

charitable giving while at the same time fostering the appropriate asset 

stewardship among younger generation beneficiaries. The client may 

establish certain limitations with regard to contributions by trust beneficiaries 

to non-profit organizations. If those limits are exceeded, the benefits from 

the incentive trust may be reduced by the trustee. 

5

V. Planning Techniques. 

Trusts are probably the most familiar vehicle that estate planners use 

to influence the behavior of beneficiaries. Trusts are established to hold property 

that our clients do not want to transfer outright to a beneficiary. 

A. Qualified Minors Trusts/Crummey Trusts. A qualified minor’s (§ 

2503(c)) Trust allows a client to provide specific instructions to the trustee 

regarding the use of principal and income. Although actual distributions can 

be left to the discretion of a trustee, it is important that no substantial 

restrictions be imposed upon the discretion of the trustee if the client desires 

to take advantage of annual gift tax exclusions. These trusts are not 

considered to be the best vehicles for incentive purposes as the beneficiary 

receives the trust assets when reaching age 21. Some practitioners try to 

circumvent this particular problem by providing the beneficiary with the right 

at age 21 to compel distribution of the trust principal but limiting that right 

to a specific period of time. Even though a § 2503(c) Trust of this nature 

may continue until the beneficiary attains a specified age, clients generally 

prefer not to use this type of a trust because of the beneficiary’s right to 

withdraw trust principal at age 21. Some states allow a § 2503 Trust to 

be extended. Due to this particular uncertainty, clients generally prefer the 

use of discretionary trusts with Crummey provisions. The use of these 

trusts beginning when beneficiaries are very young will generally provide a 

client with some assurance that the power of withdrawal will not likely be 

exercised. Crummey trusts most certainly can include typical or not so 

typical incentive provisions and may continue until the expiration of the 

applicable perpetuities period. 

B. Trusts for UTMA Accounts. Some clients who have established 

UTMA accounts for children and grandchildren become quite concerned as 

the child or grandchild turns 18. Clients have three choices. First, the “head 

in the sand” approach requires a client to avoid mentioning anything to the 

child or grandchild about the UTMA account. The head only pops out of the 

sand if and when the bank or brokerage company makes inquiry regarding 

authorization for investment of UTMA account assets. Second, the grantor 

can quietly advise the beneficiary (or the beneficiary’s parent(s)) that the 

minor will own the UTMA account at age 18, but still make arrangements for 

the continued management of the account assets through a power of 

attorney. The child or grandchild usually senses the need to permit the 

parent or grandparent to continue to manage the account. A grab and run 

tactic implemented by the child or grandchild would only serve to dissuade 

the parent or grandparent from making future gifts and bequests. The third 

option involves the encouragement of the minor to establish a grantor trust 

for the UTMA account assets. This trust could continue until any specified 

6

age and the child or grandchild could serve as a co-trustee of the Trust. The 

other co-trustee would typically be given the discretion with regard to 

distributions of principal and income in connection with the trust’s incentive 

provisions. This type of trust may be used to extend a § 2503(c) trust as 

well. As counsel for our clients, it is important that the trust beneficiary 

understand that the lawyer represents the parent or grandparent and not the 

beneficiary. 

C. Pot/Individual Trusts. Pot trusts and trusts established for 

individual beneficiaries are commonly used to support behavior that our 

clients want to emphasize. In particular, these trusts may contain specific 

incentive provisions but commonly will provide for distributions of income 

and principal at the discretion of the trustee. They are also commonly used 

for education, health, maintenance and support. Unequal distributions are 

commonly permitted. 

D. Dynasty Trusts. Dynasty or generation-skipping trusts will 

generally include distributive provisions that grant the trustee great latitude 

with regard to the distribution of both income and principal. Clients who are 

interested in certain incentive trust provisions may also have some firm ideas 

regarding limitations on the types of investment the trustee can make. It is 

very important to carefully select any objective qualifications so that 

beneficiaries may be able to meet the criteria and qualify for distributions. It 

is equally important for the client to clearly express a client’s intentions in 

order to provide clear direction to the trustee. During the consultation and 

drafting process, the client should be encouraged to review several possible 

situations to make sure that 1) the trustee will have the appropriate 

information in order to properly administer the incentive/disincentive 

provisions; 2) the burdens on the trustee and the beneficiary to administer 

the provision do not exceed the prospective benefits; 3) the tests or 

qualifications are very clear so that disputes between the trustee and 

beneficiary can be avoided; 4) any disputes that arise can be resolved 

without resorting to litigation; and 5) the beneficiaries will not be able to 

manipulate the incentive/disincentive provisions in order to achieve results 

that are contrary to the purposes of the trust. Clients must be encouraged 

to thoughtfully consider the objectives of the trust and restrictive provisions 

that might be necessary or appropriate. 

E. Trustee Indemnification. In order for discretionary trusts to 

work properly, it is imperative that the client provide the trustee with every 

appropriate protection so the trustee can exercise discretion as intended by 

the client. State laws may not provide adequate protection in connection 

with the exercise of discretion by trustees. For example, South Dakota law, 

specifically SDCL 55-1-43, provides that a discretionary interest is neither a 

7

property interest nor an enforceable right. And a court may review a 

trustee’s distribution discretion only if the trustee acts dishonestly, acts with 

an improper motive, or fails, if under a duty to do so, to act. Even if 

applicable state law is well-defined, the trust instrument must clearly express 

the client’s desire that the exercise of discretion by the trustee will not be 

subject to challenge by any beneficiary. Appropriate exculpatory language 

should be included and the trust corpus should be available for 

indemnification of the trustee for any actions made or taken in good faith. 

The estate planner should also visit with the client about the use of an in 

terrorem provision even though this type of a provision could be 

unenforceable under applicable state law. An alternative trust provision 

would be to require that all trust expenses incurred in defending any litigation 

be charged to the share of the beneficiary who initiates the claim or brings 

the litigation. 

F. Pure Incentive Trusts. Most incentive trusts are established so 

that beneficiaries will receive distributions if and only if they are able to 

achieve certain specific criteria that contain very objective standards. If the 

objective is abstinence from the use of drugs or alcohol, gainful employment, 

fiscal responsibility or academic achievement, it is important to provide a 

very objective standard that is clearly understood and easily administerable 

by the trustee. Properly drafted incentive trusts will discourage beneficiaries 

from activities that would be intended to provoke distributions by a trustee 

based to a greater extent on sympathy or the threat of undesirable behavior. 

A beneficiary should find it difficult to use trust provisions to extract 

discretionary distributions from the trustee. Unlike a fully discretionary trust, 

an incentive trust requires the beneficiary to meet or adhere to clear 

guidelines established by the client. 

VI. 

Other Considerations. 

A. COLA. In those cases where dynasty or generation-skipping 

trusts contain incentive provisions, the client should include a requirement 

that any fixed amount be regularly adjusted for changes in the cost of living. 

B. Beneficiary information. Beneficiaries must be encouraged to 

comply with reasonable requests from the trustee for information that is 

relevant to any determinations that the trustee is required to make. This 

may include access to medical records, employment records, financial 

records and tax returns, school records, and other confidential information. 

C. Family Advisor. The estate planner should consider the use of a 

family advisor or an advisory committee that would be responsible for 

providing the trustee with pertinent information about each trust beneficiary. 

8

D. Division of Trust. Since incentive trusts will usually involve 

unequal distributions among the trust beneficiaries, the typical “pot” or 

“basket” trust may produce significant discord among family members. The 

client should be encouraged to consider requiring the division of the trust 

assets along family lines or in some other objective fashion. 

E. ADR. The client should also consider the use of mediation or 

binding arbitration in order to resolve disputes without litigation as long as 

the mediator will not be allowed to usurp the duties of the trustee. 

F. Trust Protector/Special Trustee. For those generation-skipping 

or dynasty trusts, it would be appropriate for the client to establish an 

independent, unrelated trust protector with the power to amend the trust 

instrument for specific tax purposes or to change the situs of the trust. 

Typical state laws that provide for the appointment of a trust protector allow 

the client to establish the trust protector’s powers and discretions and 

further direct that the exercise or failure to exercise of any specific powers 

shall be binding on all persons interested in the trust. For example, South 

Dakota law allows the use of trust distribution advisors. 

G. Situs. The client and the estate planner should carefully 

determine the appropriate situs for the trust. If a trust protector is not 

utilized, the trustee should be given the power and authority to change the 

situs of the trust. The client may want to permit the trust to be 

administered in an offshore jurisdiction. It is important for the trustee to 

have the power to select the most appropriate situs for the trust in light of 

the client’s objectives. 

H. Income Taxes. The trustee may be directed to consider the 

income tax effects of distributions, and gross-up a beneficiary’s distribution 

to account for income taxes payable by the beneficiary. 

VII. 

Other Vehicles. 

When focusing on incentive estate planning techniques and provisions, 

the estate planner should not overlook the importance of the use of family business 

entities. Family business organizations may be used quite effectively as tools for 

encouraging appropriate behavior by family members. With typical family limited 

partnerships, limited liability companies, or closely-held corporations, the rights of 

the limited partners, minority shareholders and members are usually restricted. The 

timing of distributions to children and grandchildren or trusts established for their 

benefit can be controlled to a certain degree. Charitable trusts and private 

foundations can also be vehicles for involving family members with investment 

decisions and philanthropy. 

9

VIII. 

Conclusion 

Estate planners should continue to focus their efforts more carefully 

on counseling their clients with regard to the use of both discretionary and pure 

incentive trusts. If there is less of a need to emphasize transfer tax planning, it 

may be more important to focus on serving more as a family counselor to help our 

clients address their family relationships and to develop appropriate goals and 

objectives. In many situations incentive trust provisions coupled with some trustee 

discretion may better serve the client’s needs. Incentive trusts are very well suited 

for those situations where a client may want to disinherit a child but not entirely. 

However, incentive trust provisions need to be carefully drafted and thoroughly 

reviewed by the client. Exculpatory provisions to protect trustees who act in good 

faith are absolutely necessary. Schedule 1 contains several sample incentive trust 

provisions. 

10

SCHEDULE 1 

SAMPLE PROVISIONS 

1. Definition of Education. The term “education” shall mean education, 

training or institutional care at any private school, night school, public school, 

preparatory school, military academy, junior college, college, university, graduate and 

professional school, trade school, school for retarded, blind or handicapped (whether 

physically, perceptually, emotionally or mentally) children or adults or school for 

children or adults subject to learning disabilities or hostels, half-way houses, 

sheltered workshops associated with private living arrangements and the like, 

whether connected with a private institution or not, as well as any other similar 

institutions not mentioned herein, either in the United States or abroad. 

Expenses incurred for education shall be deemed to include tuition, board, 

lodging, school uniforms, any special clothing needed for school, books, supplies, 

tools, instruments, laboratory, health, gymnasium and other fees and incidental 

expenses, medical and psychiatric care, as well as transportation expenses for trips 

between home and said institution, and all other services and things (including 

vocational apprenticeships, internships and residences) connected with any course of 

study, provided that in each such case, the course of study is approved by the 

Trustee. 

In addition, the term “education” shall include expenses incurred for travel 

which the Trustee believes will contribute to the educational experience of the 

person undertaking the travel. However, the term “education” does not include any 

and all travel and the Trustee shall be judicious in approving or reimbursing expenses 

for educational travel. 

2. Distribution Upon Entering College. At any time after a beneficiary has 

commenced a course of study at an accredited college or university with the 

objective of obtaining a bachelor’s degree in a subject which the trustees, in their 

discretion, deem reasonably likely to prepare the beneficiary for financial selfsufficiency, 

the trustees may make a single-lump-sum distribution to the beneficiary 

from his or her trust of an amount not to exceed $__________. The Trustees may also 

make this one time distribution to a beneficiary who does not satisfy the foregoing 

requirements, but who has commenced a course of study or training which the 

trustees, in their discretion, determine to be reasonably equivalent to the pursuit of a 

bachelor’s degree in light of all of the facts and circumstances, including the 

beneficiary’s abilities or disabilities and the beneficiary’s career goals. The 

distribution described in this paragraph may be made to the beneficiary no more than 

once during his or her lifetime. 

11

3. Distribution Upon Receiving a Bachelor’s Degree. At any time after a 

beneficiary has received a bachelor’s degree from an accredited college or university, 

or such other degree or certification as the trustees, in their discretion, shall deem 

reasonably equivalent to the attainment of a bachelor’s degree in light of all of the 

facts and circumstances, including such beneficiary’s abilities or disabilities, or the 

beneficiary’s career goals, the trustees may make a single, lump-sum distribution to 

the beneficiary from his or her trust of an amount not to exceed $__________. In 

determining the amount to be distributed under this paragraph, the trustees may take 

into account, for example, the degree of difficulty of the beneficiary’s curriculum, the 

beneficiary’s grade point average and any academic honors received by the 

beneficiary. The distribution described in this paragraph may be made to the 

beneficiary no more than once during his or her lifetime. 

4. Distribution Upon Receiving an Advanced Degree. At any time after a 

beneficiary has received an advanced degree (such as a master’s degree, a PhD, an 

MBA or a professional degree) from an accredited college or university, or such other 

educational achievement as the trustees, in their discretion, shall deem reasonably 

equivalent thereto in light of all of the facts and circumstances, including such 

beneficiary’s abilities and disabilities, the trustee may make a single, lump-sum 

distribution to the beneficiary from his or her trust of an amount not to exceed 

$__________. The distribution described in this paragraph may be made to the 

beneficiary no more than once during his or her lifetime. 

5. Indexing for Inflation. On each anniversary date of this trust 

agreement ("the Adjustment Dates"), every specific dollar amount established with 

regard to distributions that the trustee is directed or permitted to make by this trust 

agreement shall be adjusted by the percentage increase or decrease in the 

Consumer Price Index (as hereinafter defined) which occurs over the one-year 

period ending on the last day of the month preceding the Adjustment Date. The 

adjustments shall be effective as of the Adjustment Date and shall remain effective 

until the next adjustment provided for herein. As used herein, "the Consumer Price 

Index" shall mean the national Consumer Price Index--All Urban Consumers as 

published by the United States Bureau of Labor Statistics (or any other federal 

government agency or office which assumes the functions of the United States 

Bureau of Labor Statistics or performs the current functions of such office in 

calculating and publishing price indices). If the United States Bureau of Labor 

Statistics or its successor office ceases to publish the national Consumer Price 

Index--All Urban Consumers then the parties shall use the Price Index published by 

the United States Bureau of Labor Statistics or its successor office which is most 

comparable to the Consumer Price Index--All Urban Consumers. The trustee may 

select any comparable index in the event the United States Government no longer 

publishes an index to measure inflation/deflation. 

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6. Distributions to Match the Beneficiary’s Earned Income. The trustees 

may distribute to a beneficiary on a monthly, quarterly, annual, or other basis, as 

much of the net income and, to the extent the net income is insufficient, the 

principal, of the trust for each dollar of income earned by such beneficiary. The 

trustees’ determination of the amount of income and principal distributable to the 

beneficiary under this paragraph, if any, shall be absolute and binding upon all 

persons interested in the trust estate. The trustees may, for example, equate the 

income earned by the beneficiary to his or her adjusted gross income for federal 

income tax purposes, reduced by investment or passive income (such as rents, 

dividends, and interest), income from relief of indebtedness, capital gains, and 

government benefits, if any, and such other adjustments as the trustee deems 

appropriate under the circumstances. The trustees may make interim distributions to 

a beneficiary prior to their final determination of such beneficiary’s earned income 

based upon such documentation of earnings as the trustees deem appropriate, 

including, without limitation, the beneficiary’s W-2 forms, pay stubs, business profit 

or loss statements, or draft tax returns. No reimbursement shall be required of any 

beneficiary who has received a distribution under this paragraph based upon an 

estimate of his or her adjusted gross income if such adjusted gross income for the 

year in question is subsequently determined to be less than that estimated, or if such 

adjusted gross income is reduced as a result of an audit of, or amendment to, the 

beneficiary’s federal income tax return, provided, however, that the trustees may, in 

their discretion, reduce distributions in subsequent years to such beneficiary pursuant 

to this paragraph to reflect such prior overpayment. The distribution authorized under 

this paragraph shall be made to the beneficiary as soon as practicable after the 

amount of such distribution, if any, has been determined by the trustees. In no event 

shall the distributions to a beneficiary under this paragraph exceed $__________, 

collectively, in any calendar year. 

7. Withholding Distributions to a Beneficiary Not Engaged in Productive 

Activities. Notwithstanding any provision of this trust agreement to the contrary, the 

trustees may withhold any distributions of income or principal to, or for the benefit 

of, any beneficiary which are authorized or required under the terms of this trust 

agreement, if the trustees determine such beneficiary is not engaged in productive 

activities. In reaching such a determination, the trustees may consider, for example: 

(A) 

(B) 

whether the beneficiary is seriously pursuing an education which will 

enable the beneficiary to obtain gainful employment commensurate with 

his or her goals and abilities; 

whether the beneficiary is working to support himself or herself in a 

manner commensurate with his or her abilities (even if such 

beneficiary’s chosen career does not produce substantial income but 

makes a productive contribution to the community); 

13

(C) 

(D) 

(E) 

(F) 

(G) 

whether the beneficiary is working in the home as a parent in the care 

of such beneficiary’s children or other family members; 

whether the beneficiary is free of substance abuse or other negative 

addictive behavior; 

whether the beneficiary is capable of managing money in a responsible 

manner as demonstrated by past conduct; 

whether distribution to the beneficiary would serve to benefit such 

beneficiary’s creditors, including former spouses, rather than the 

beneficiary; and 

if the circumstances warrant, whether the beneficiary is involved in 

activities which promote the welfare of others or of the beneficiary’s 

community as a whole. 

8. Distributions to Substance Abusers. In making distributions to or for the 

benefit of any beneficiary whom the trustee believes may have substance abuse 

problems, we request that the trustees limit distributions to such beneficiary to those 

which the trustees deem necessary to ensure that such beneficiary’s basic living 

requirements are met. In making distributions for the basic health and maintenance 

needs of a beneficiary with substance abuse problems, the trustees are requested, to 

the extent practicable, to make payments directly to persons or organizations who are 

furnishing housing, utilities, health care (including health care insurance), and other 

basic goods and services to the beneficiary, rather than directly to the beneficiary. 

9. Distributions to Assist in Starting a Business. At any time after a 

beneficiary has attained at least ________ (___) years of age, upon the request of the 

beneficiary, the trustees may contribute to the beneficiary’s maintenance and 

support, but are not required to do so, by assisting the beneficiary to commence a 

business or profession in which the beneficiary will be employed on a full-time or 

substantially full-time basis, alone or with others. Such assistance may be in the 

form of a loan (with or without interest or security), an outright distribution, an 

investment by the trustees in the proposed endeavor, or any combination thereof. 

Prior to making a distribution to or for the benefit of the beneficiary, the trustees, or 

persons selected by the trustees, shall meet or otherwise confer with the beneficiary 

to establish a realistic business plan in order to determine the likelihood that the 

beneficiary will become financially self-supporting through the proposed endeavor, the 

timing and amounts of distributions from the beneficiary’s trust that would be 

required to ensure the success of the proposed endeavor, and whether such amounts 

would be reasonable in light of the risk of failure of the proposed endeavor, the 

remaining assets of the trust, and any other factors which the trustees deems 

reasonable under the circumstances. The trustees are discouraged from making a 

distribution under this Section to or for the benefit of any beneficiary who fails to 

14

cooperate with the trustees in establishing a realistic business plan for the proposed 

endeavor. 

10. Distributions to Assist in the Purchase of a Residence. At any time 

after a beneficiary has attained at least 25 years of age, upon the request of the 

beneficiary, the trustees may contribute to the beneficiary’s maintenance and 

support, but are not required to do so, by making a reasonable down payment for 

the purchase of an appropriate primary residence for the beneficiary, provided such 

payment shall in no event exceed $__________, or ___% of the value of the 

residence, whichever is less. Prior to making any such distribution to or for the 

benefit of the beneficiary, the trustees, or persons selected by the trustees, shall 

meet or otherwise confer with the beneficiary to determine what constitutes an 

appropriate residence for purposes of this Section based upon the needs of the 

beneficiary and his or her family (if any), as well as the beneficiary’s ability to pay 

expenses related to such residence (including debt service, property taxes, utilities 

and maintenance) from resources outside of the trust. The trustees are 

discouraged from making a distribution authorized under this Section to any 

beneficiary who fails to cooperate with the trustees in performing this analysis. 

11. Spouse. References in this trust agreement to a person’s spouse shall 

mean an individual who has been that person’s lawfully married spouse (determined 

under the applicable laws of the jurisdiction in which that person resides or resided 

at the time of his or her death) for a period of at least two (2) years, or who was 

such person’s lawfully married spouse for at least two (2) years at the time of such 

person’s death (whether or not such surviving spouse subsequently remarries), 

except that an individual shall not be considered a person’s spouse unless that 

individual is or was residing with the person as husband or wife at the time that it 

is necessary to determine the individual’s status as a spouse. For purposes of 

determining whether an individual is or was residing with a person as husband and 

wife, the trustees shall disregard temporary and short term absences unrelated to 

an intentional marital separation (including, but not limited to) absences due to 

vacation or business travel, illness, education, or emergency), or long term 

absences unrelated to an intentional marital separation (including, but not limited 

to, absences where either spouse resides in a nursing home or other skilled care 

facility). The determination of whether an individual satisfies the requirements to 

be a person’s spouse under this section shall be made in the trustee’s sole and 

absolute discretion. 

12. Change of Trust Situs. This trust agreement has been established in 

__________. Notwithstanding the foregoing, the trust protector (trustee/special 

trustee) shall have the power to direct, by written instrument (delivered to the 

trustees), the transfer of the situs of the trust to such other state of the United 

States or to such jurisdiction outside of the United States as the trust protector 

(trustee/special trustee) shall determine to be in the best interests of the trust 

15

estate and the beneficiaries of the trust, including the right to transfer the trust 

assets and to remove the trustee in the old situs, and to have a trustee appointed 

at the new situs. Following the change of situs, the administration of the trust 

shall be governed by the laws of the state (or country) of the new situs, but the 

interpretation and construction of the trust with respect to the distributive rights of 

the beneficiaries shall continue to be governed by the laws of the State of _______. 

13. Divisions. The trustees shall have the discretion to create a separate 

trust for each beneficiary, and to divide the trust along family lines to be 

administered as separate trusts. The trustees shall also have the discretion to 

create a separate trust as to any share or portion of a trust disclaimed by a 

beneficiary, and to sever the disclaimed portion to be administered as a separate 

trust. In addition, the trustees shall have the discretion to divide a trust so as to 

qualify one of the separate trusts as a qualified S corporation shareholder or as any 

other type of special trust provided for under the Code. Further, the trustees shall 

have the discretion to divide any trust or trust share into two or more separate 

trusts for tax planning purposes or because of changed circumstances, litigation 

among beneficiaries, administrative difficulties, or other reasons suggesting a need 

for a division. The allocation of property between or among separate trusts created 

from a single trust or trust share may be unequal in amount and in the type of 

assets, and the division may be made non-pro rata. 

14. General Trust Purposes. The primary purposes of the Trust shall be to 

provide the Grantors’ great-grandchildren the opportunity to obtain a post-high 

school education. The secondary purposes of the Trust are to provide for medical 

and health needs of Grantors’ great-grandchildren and to provide for their support 

needs should they decide to undertake missionary activities. Additional secondary 

purposes of the Trust are to provide Grantors’ great-grandchildren with a down 

payment for a home and funds to pay for wedding expenses. It is also the 

Grantors’ intention that the Trust assets shall not be relied upon by any Beneficiary 

as a substitute for productive effort by such Beneficiary to support himself or 

herself. Lastly, Grantors intend to reward their great-grandchildren who exhibit 

good moral character and specifically those great-grandchildren who do not have 

record of a conviction for any alcohol or drug offenses. Grantors intend to shelter 

the Trust property from generation-skipping transfer taxes. If there appears to be 

any ambiguity or conflict in the provisions of this Trust, such provisions shall be 

construed and applied to give effect to these intentions. 

15. Multiple Beneficiaries. In making discretionary distributions to any 

Beneficiary where there is more than one permissible Beneficiary, the distributions 

need not be equal among the Beneficiaries (and may be made to one Beneficiary to 

the exclusion of the others) and shall not be charged against the ultimate 

distributive share of any Beneficiary on termination of the Trust. 

16

16. Other Resources. In making discretionary distributions to any 

Beneficiary, the Trustee may take into consideration, to the extent the Trustee, in 

the exercise of its sole and absolute discretion, deems advisable, any other income 

or resources known to the Trustee to be available to that Beneficiary. 

17. Distribution Events. No trust distribution shall be made until one of 

the following events occurs: (A) a Beneficiary enrolls in a vocational, college, 

university, graduate or professional school; (B) a Beneficiary has an uninsured 

medical need; (C) a Beneficiary personally engages in missionary work; (D) a 

Beneficiary purchases a residence primarily suited to the needs of the Beneficiary 

and the Beneficiary’s immediate family, if any; and (E) a Beneficiary is married. In 

making discretionary distributions hereunder, the Trustee shall consult at least 

annually with the Grantors’ then oldest living descendant who are not under a legal 

disability. Any such consultations shall not subject a descendant of Grantors to 

any fiduciary duties or obligations hereunder. Any recommendations or 

suggestions received by Trustee in connection with such consultations shall not be 

binding on the Trustee under any circumstances. In addition, in making 

discretionary distributions hereunder, the Trustee shall consider the amount of any 

federal, state or local income taxes payable by the Beneficiary as a result of a 

distribution to the Beneficiary. Furthermore, the Trustee shall make reasonable 

inquiry into any such great-grandchild’s assets and sources of income or support 

and may require as a condition of any distribution that the great-grandchild provide 

the Trustee with such evidence relating to other assets and sources of income and 

support as the Trustee deems appropriate. Such evidence may include financial 

statements, tax returns and statements of past and projected income and 

expenses. 

18. Distributions for Education Expenses. The Trustee shall pay to or 

apply for the benefit of one or more of the Beneficiaries so much of the net income 

and, to the extent the net income is insufficient, principal of the Trust as the 

Trustee determines, in its sole and absolute discretion, is appropriate to provide 

each Beneficiary an opportunity to obtain a post-secondary education. The term 

“education” shall mean education or training beyond the secondary school level at 

any junior college, college, university, graduate school, professional school, trade 

school, technical school, or school for retarded, blind, handicapped, or disabled 

person as each Beneficiary may choose. Distributions may be made only for 

tuition, board, lodging, books, supplies, tools, instruments, laboratory, health, 

gymnasium and other fees and incidental expenses, necessary travel and internship 

programs. Distributions shall not be made for expenses related to social activities, 

sports, motor vehicles, or entertainment. Annual distributions to a Beneficiary for 

education expenses shall be limited to a sum equal to (1) the net income of the 

Trust for the preceding calendar year divided by the number of Beneficiaries who 

receive a distribution for education expenses in the next calendar year, plus (2) the 

value of the Trust principal as of January 1 st of the year preceding the distribution 

17

divided by the number of great-grandchildren of Grantors alive on January 1 st of the 

year in which the distribution will be made, multiplied by a factor of .15. 

Distributions for educational expenses shall be restricted to those Beneficiaries who 

maintain a cumulative grade point average of 2.5 (on a 4.0 point scale) or an 

equivalent grade point average. The Trustee’s discretionary authority to make 

distributions may be exercised unequally among the Beneficiaries according to the 

relevant circumstances affecting each Beneficiary, including the Beneficiary’s 

academic talents and educational requirements. An illustration of the operation of 

the formula set forth above is set forth on Schedule ___ attached hereto. 

19. Distribution for Medical Needs. The Trustee shall pay to or apply for 

the benefit of any great-grandchild of the Grantors so much of the net income and, 

to the extent the net income is insufficient, principal of the Trust as the Trustee, in 

its sole discretion, determines is necessary in the event of an uninsured medical 

need of such great-grandchild (other than drug or alcohol rehabilitation costs) 

provided that such person’s income and other assets have been exhausted or are 

otherwise unavailable for such purpose. Distributions need not be made equally 

among the Beneficiaries and under no circumstances may distributions be made to 

or for the benefit of a spouse of any such great-grandchild. Annual aggregate 

distributions to great-grandchildren under this section shall be limited to __________ 

percent (___%) of the value of the Trust principal on the first day of each calendar 

year. 

20. Distribution for Support. In the event that a Beneficiary shall engage 

in missionary work, the Trustee shall pay to or apply for the benefit of such 

Beneficiary so much of the net income and, to the extent that the net income is 

sufficient, principal of the Trust as the Trustee, in its sole discretion, determines is 

necessary for the support and maintenance of such Beneficiary, provided that such 

Beneficiary’s income and other means of support, such as parental support, have 

been exhausted or are otherwise unavailable for such purpose. Distributions under 

this section need not be made equally among the Beneficiaries. The Trustee shall 

also consider the Grantors’ intention that distributions under this section should not 

be relied upon by any Beneficiary as a substitute for productive effort by such 

Beneficiary to support himself or herself. Annual distributions to any Beneficiary 

under this section shall be limited to an amount equal to __________ percent (___%) 

of the value of the Trust’s assets as of the first day of the calendar year in which 

the distribution occurs. Distributions to a Beneficiary pursuant to this section shall 

be limited to a period of three (3) years in duration. 

21. Other Distributions. To the extent that the Trustee determines, in its 

sole and absolute discretion, that the current and future education, medical, and 

support needs of the Beneficiaries will not be significantly impaired, the Trustee 

may make distributions to any Beneficiary for the following purposes: (A) to 

reimburse a Beneficiary for all or any portion of the Beneficiary’s wedding 

18

expenses; (B) to provide a Beneficiary with all or any portion of a down payment 

to permit the Beneficiary to purchase a home; and (C) to permit a Beneficiary to 

purchase or invest in a business in which the Beneficiary will be engaged on a fulltime 

basis. Distributions need not be made equally among the Beneficiaries. 

Annual distributions to any Beneficiary under this section shall be limited to an 

amount equal to __________ percent (___%) of the value of the assets of the Trust 

on the first day of the year in which the distribution occurs. 

22. Separate Property. It is the Grantor's intention and direction that all 

distributions of both income and principal to any Beneficiary be deemed gifts to the 

Beneficiary alone and constitute the sole and separate property of the Beneficiary 

receiving the distribution. Further, it is the Grantor's intention and direction that 

the Trust Estate shall never be subject to equitable distribution or other claim of a 

spouse or former spouse of a Beneficiary as a creditor of the Beneficiary or an 

order for child support by any court under the laws of any state or country. 

23. Spousal Rights. It is Grantors’ intention and direction that no spouse 

of any Beneficiary shall ever have any rights under this Agreement. It is the 

Grantors’ intention and direction that no spouse of a Beneficiary shall ever have the 

right or power to compel any accounting of any Trustee acting hereunder nor shall 

any such spouse, or any court acting on behalf of the spouse, ever have access to 

the books or records of the Trust or the Trustee acting hereunder. 

24. Court Interference - In addition, it is the Grantors’ intention and 

direction that no court or other judicial authority shall have the power to compel 

any trustee to make any distribution which would directly or indirectly benefit a 

creditor including, but not limited to, a spouse or former spouse of any Beneficiary 

who is a creditor of the Beneficiary. 

25. No Contest/Waiver. It is the Grantors’ intention and direction that the 

Beneficiaries shall accept the actions of the Trustee hereunder without objection. 

In the event that any Beneficiary shall, directly or indirectly, object to any decision 

by the Trustee with regard to the retention or distribution of the income or principal 

of this Trust or in the event that any Beneficiary should, directly or indirectly assert 

any claim against the Trustee, file or promote the filing of a petition or application 

in any court to enjoin or compel the Trustee with regard to any distribution, or 

otherwise interfere with the administration of this Trust, such Beneficiary shall 

thereafter be ineligible for any distribution of income or principal from this Trust. 

26. Evidence of Need. In exercising its discretion hereunder, the Trustee 

shall be entitled to rely upon the written certification of the Beneficiary or the 

guardian or other legal representative of the Beneficiary as to the nature and extent 

of the Beneficiary's Needs and the Beneficiary's resources apart from the Trust to 

19

meet those Needs. Such Trustee may, but shall not be required to, make further 

inquiry into the authenticity of the facts so certified. 

27. Facility of Payment. The Trustee, in the exercise of its sole and 

absolute discretion, may make any distribution required or permitted to be made to 

any Beneficiary, in any of the following ways: (A) to the Beneficiary directly; (B) to 

the guardian or other legal representative of the Beneficiary; (C) by applying the 

funds directly for the Beneficiary without the interposition of any guardian or other 

legal representative; (D) to a custodian under any Uniform Gifts to Minors Act, 

Uniform Transfer to Minors Act or similar Act pursuant to which a custodian is 

acting or may be appointed; (E) by reimbursing or making direct payment to the 

person who is actually caring for the Beneficiary (even though such person is not 

the legal guardian or other legal representative of the Beneficiary) for expenditures 

made for the Beneficiary; (F) to any other trust of which the Beneficiary is 

determined by the Trustee, in the exercise of its sole and absolute discretion, to 

have a significant beneficial interest, to be added to and administered as a part of 

such trust; or (G) in any other manner permitted by law. In exercising the 

discretion granted to the Trustee, the Trustee's decision with regard to the manner 

of distribution shall be final and conclusive with respect to all distributions made by 

the Trustee. Distributions in the manner provided in this section shall constitute a 

complete discharge of the Trustee with respect to that distribution; provided, 

however, that any distributions to a Beneficiary shall be made in a manner which 

fully complies with requirements and limitations concerning that distribution. 

28. Termination for Unforeseen Events. The Grantors recognize some or 

all of the following conditions may arise in the future although they cannot now be 

foreseen: 

(A) 

(B) 

(C) 

(D) 

A radical change in the political, economic or social order in the United 

States of America; 

Legislation or court decisions highly detrimental to any trust created 

hereunder or to any Beneficiary, as such, hereunder; 

Lack of availability of suitable trust investments for an extended 

period; and/or 

Other events tending to greatly impair the intent and purposes of this 

instrument, including, but not limited to, a change in the tax laws that 

would result in the assets in any trust hereunder being taxed at a 

higher rate if held in trust than if distributed outright to such 

Beneficiary or Beneficiaries of such Trust. 

20

Grantors further recognize, should these conditions or any of them occur, a 

termination of this Trust might be desirable. Therefore, if at any time the Trustee 

shall in its sole discretion determination that the continuation of any Trust created 

hereunder is contrary to the interests of the Beneficiaries for any of the above 

reasons, then the Trustee may make application to the then court of general 

jurisdiction in the place where such Trust shall have its situs. If such court, by 

appropriate decree, shall determine a condition coming within any of the foregoing 

standards has occurred, and the best interests of such Trust and of the person 

interested in it require the termination of such Trust, then the Trustee shall, 

following entry of such decree and obedient to its terms, distribute the property of 

such Trust to the then Beneficiary or Beneficiaries according to their respective 

interest, as set forth in such decree. No Trustee shall be required to consider any 

action under this section until a person interested in a Trust hereunder has 

requested such consideration in writing. 

29. Special Trustee. The Trustee is authorized to appoint a special 

Trustee qualified to exercise fiduciary powers for the administration of property 

over which the Trustee shall make the determination, in the Trustee's discretion, it 

is not eligible to act or cannot administer in a practicable manner. The appointment 

of any such special Trustee shall be evidenced by an instrument in writing signed 

by the Trustee. So long as such appointment is in effect, any power or authority 

hereunder which would be exercisable by the Trustees may be exercised by the 

special Trustee with respect to the property designated for their administration with 

the same force and effect as if the Trustee had taken such action. The Trustee 

shall have the power to remove and replace a special Trustee by a written 

instrument. 

30. Exercise of Discretion. Whenever the Trustee may have authority 

under any provision of this Trust Agreement to make any determinations which 

might affect the relative rights of any current income Beneficiary and any 

subsequent Beneficiaries, the Trustee shall have full power to make any 

determinations in favor of such current income Beneficiary without being 

answerable to any person for any such determinations; but no current income 

Beneficiary may compel the Trustee to make any determinations in his or her favor. 

31. Investments. It is the intention of the Grantors that the investments 

of the trust assets consist of the highest quality securities. Grantors direct the 

Trustees to invest the trust assets in securities, including common and preferred 

stocks, corporate bonds, and money market funds, within the parameters and 

guidelines set forth in this Section 31. Investments in common and preferred 

stocks shall be limited to companies with market capitalizations commonly 

described as large capitalization companies. The market capitalization of these 

types of companies are currently at ten billion dollars or greater. No less than 

twenty percent (20%) and no more than thirty-five percent (35%) of the 

21

investments of the Trust shall consist of common or preferred stocks of large cap 

companies. No less than fifty percent (50%) and no more than sixty-five percent 

(65%) of the investments of the trust shall consist of corporate or tax exempt 

bonds. All bonds shall maintain a rating by Moody’s, or an equivalent rating 

service, no less than A and shall have maturities that are of medium term on the 

date of purchase. Grantors also recommend that any tax exempt bonds be insured 

or pre-funded. 

32. Change of Situs. The Trustee may transfer the situs of any trust 

created hereunder to another jurisdiction and may direct that the administration of 

the Trust shall thereafter be governed by the laws of such other jurisdiction. The 

power conferred on the Trustee under this section shall be a continuing power 

which may be exercised any number of times for the purpose of transferring the 

situs of the Trust. 

33. Discretionary Distributions. 

(A) 

(B) 

Statement of Settlors’ General Goals and Objectives. Settlors’ overall 

objective in establishing and funding this Trust Agreement is that 

Settlors’ Children and their issue become ethical, mature, responsible, 

self-sufficient, and productive adults. Settlors believe that a goaloriented, 

responsible, and productive life provides happiness, 

satisfaction, and self-fulfillment; as a result, Settlors do not intend that 

trust distributions deprive or distract from the need of the Beneficiaries 

to have high standards for themselves, to work hard at their career 

and family responsibilities, and to experience the satisfaction of their 

own accomplishments. 

Statement of Settlors’ Specific Goals and Objectives. In carrying out 

Settlors’ overall objectives as set forth in Section (A) of this Article, 

the Trustee shall be guided by the following: 

(1) Health Care. The Trustee may make distributions for health 

care costs, including fees of physicians, dentists, and other 

health care providers; surgery, drugs, and medication; 

hospitalization, outpatient and nursing care, including care at 

home; dental, including orthodontic, treatment, and surgery; 

psychiatric, psychological treatment, or counseling (including 

marital counseling); treatment for alcohol or drug addition, 

temporary or permanent stays in a rest or convalescent hospital, 

rest home, treatment or rehabilitation facility, or in a nursing 

home or community-based residential facility; travel or extended 

living away from home for reasons of health, and living 

expenses in connection with such travel or stays; and health or 

22

dental insurance premiums, or other costs of individual or group 

health plans. The Trustee shall consider the other income and 

resources of the Beneficiary (as provided in Article ___), and 

shall have the sole discretion in determining the appropriate 

distributions for medical and dental costs, and the Trustee’s 

judgment in this regard shall be final and binding on a 

Beneficiary. 

(2) Education. Settlors believe that the education of Settlors’ 

Children and their issue is one of the most effective and 

important means to achieve the goals and objectives set forth in 

Section (A) of this Article. Accordingly, the Trustee may make 

distributions to, or for the benefit of, a Beneficiary for 

education, including tuition, room and board, supplies, books, 

lab fees, reasonable living expenses, and all other incidental 

costs, including travel for education at a public or private 

elementary school, middle school, high school, college, 

university, or graduate school, or other educational or vocational 

training. Notwithstanding these broad purposes, Settlors intend 

that a Beneficiary’s educational endeavors must be undertaken 

with a sustained and reasonable effort, and that advanced 

college degrees (or additional college degrees) be pursued 

primarily for the purpose of advancing in a job or career. 

Settlors do not intend that a Beneficiary become a perpetual 

student with regard to post-high school education. Rather, 

Settlors intend that a Beneficiary receive distributions for posthigh 

school education so long as (a) the Beneficiary is pursuing 

his/her educational program with a reasonable degree of 

dedication; and (b) the educational program so pursued is 

reasonably destined to lead to socially productive employment. 

The Trustee shall consider the other income and resources of 

the Beneficiary (as provided in Article ___), and shall have the 

sole discretion in determining the appropriate distributions for 

education, and the Trustee’s judgment in this regard shall be 

final and binding on a Beneficiary. 

(3) Living Expenses. Settlors believe that it is important in the 

development of a Beneficiary that such Beneficiary achieves 

self-sufficiency, and that such Beneficiary experiences the 

personal satisfaction and self-confidence that comes from such 

Beneficiary’s own accomplishments. In general, Settlors intend 

that, once a Beneficiary completes his/her education, or while a 

Beneficiary is not pursuing a course of education as described in 

Section (B)(2) of this Article, such Beneficiary be employed, and 

23

that distributions from this trust for living expenses not impair 

the motivation of such Beneficiary to become an ethical, 

mature, responsible, self-sufficient, and productive adult as 

provided in Section (A) of this Article. If, in the judgment of the 

Trustee, a Beneficiary has financial difficulties because of 

his/her immaturity or lack of industry, Settlors intend that such 

difficulties be resolved by such Beneficiary and not by 

distributions from the rust; in such a case, Settlors intend the 

Trustee to be restrictive in making distributions for such 

Beneficiary’s living expenses. On the other hand, if, in the 

judgment of the Trustee, a Beneficiary is unable to earn a 

reasonable income because of age, physical, or mental 

incapacity, or other circumstances that, in the judgment of the 

Trustee, are not caused by such Beneficiary’s immaturity or lack 

of industry, Settlors intend that the Trustee may make 

distributions for the living expenses of such Beneficiary and 

those dependent upon such Beneficiary for care and support. 

Notwithstanding anything contained herein to the contrary, if a 

Beneficiary has dependent issue and is committed to “stay-athome” 

rearing and caring for such issue, the Trustee may, in 

the Trustee’s discretion, make distributions for living expenses 

of such Beneficiary and those dependent upon such Beneficiary 

for their care and support. Alternatively, the Trustee, in the 

Trustee’s discretion, may make distributions to, or for the 

benefit of, a Beneficiary for childcare (in-home or outside of the 

home) in order that such Beneficiary may work outside of the 

home. 

Settlors do not intend to impose any specific employment 

standard on a Beneficiary. Thus, a Beneficiary could be a 

schoolteacher, or a neurosurgeon, or a volunteer worker in a 

church. So long as the Beneficiary is either socially productive 

or unable to be so productive because of age, physical, or 

mental incapacity, or other circumstances that, in the judgment 

of the Trustee, are not caused by such Beneficiary’s immaturity 

or lack of industry, the Trustee may make distributions for such 

Beneficiary’s living expenses. 

Settlors are aware that a Beneficiary may need differing 

amounts of distributions for living expenses at different times 

during the Beneficiary’s lifetime. Accordingly, the Settlors 

authorize the Trustee to require the Beneficiary to maintain a 

budget of his/her living expenses and to provide such budget to 

24

the Trustee on a regular basis for the purpose of supporting 

discretionary distributions hereunder. 

The Trustee shall consider the other income and resources of 

the Beneficiary (as provided in Article ___), and shall have the 

sole discretion in determining the appropriate distributions for 

living expenses, and the Trustee’s judgment in this regard shall 

be final and binding on a Beneficiary. 

34. Discretionary Income Distributions. Until the Division Date, the 

Trustee may, in the Trustee’s discretion, accumulate the income and/or may 

distribute or apply any part or all of the net income of the trust as follows: 

(A) Primary Beneficiaries and Secondary Beneficiaries. The Trustee, in the 

Trustee’s discretion, may accumulate the income and/or may distribute or 

apply any part or all of the net income of the trust to, or for the benefit of, 

any one or more living members of a group consisting of Settlors’ Primary 

Beneficiaries and Settlors’ Secondary Beneficiaries, in such amounts 

(whether equal or unequal) and at such times as the Trustee, in the Trustee’s 

discretion, determines is appropriate for the purposes set forth in Article ___, 

as those purposes may from time to time apply to such Beneficiaries. Prior 

to making any such distribution, the Trustee may but shall not be obligated 

to consult with either or both Settlors. In all events, the decision of the 

Trustee as to a discretionary distribution of income shall be final and binding 

on the Primary Beneficiary, Secondary Beneficiaries and Settlors; further 

provided, however, that income shall not be distributed or applied so as to 

discharge a legal obligation, including an obligation of support, of an 

individual acting as a Trustee hereunder. Notwithstanding this broad grant 

of discretion, it is Settlors’ intention to provide first for the Primary 

Beneficiaries, and then, to the extent income is not needed for such Primary 

Beneficiaries, for the Secondary Beneficiaries. In addition, prior to making 

discretionary distributions of income to a Secondary Beneficiary, the Trustee 

shall consult with the Primary Beneficiary who is the parent of such 

Secondary Beneficiary as to whether such distribution is in the best interests 

of the Secondary Beneficiary; nonetheless, the decision of the Trustee as to 

a discretionary distribution to income to a Secondary Beneficiary shall be 

final and binding on the Primary Beneficiary and Secondary Beneficiary. 

25

(B) 

_________ Foundation. In addition to the distributions of income 

authorized under Paragraph (A) of this Section, the Trustee, in its sole 

and absolute discretion, may distribute to the ____________ Foundation 

income reasonably judged by the Trustee to be unnecessary to satisfy 

the intended trust distributions to the Primary Beneficiaries and 

Secondary Beneficiaries under Paragraph (A) of this Section; provided, 

however, the ____________ Foundation must be in existence on the 

date of any such distribution and that the said ____________ 

Foundation must then be a Charitable Organization as defined 

hereafter. 

The Trustee shall assume no liability whatsoever for the exercise or 

nonexercise of its discretion to distribute income to the said 

____________ Foundation as provided in this Paragraph. The Trustee’s 

judgment as to the appropriate distributions of income among the 

Primary Beneficiaries, Secondary Beneficiaries, and the ____________ 

Foundation shall be final and binding on the said beneficiaries. 

35. Substance Abuse/Incarceration. 

(A) 

Substance Abuse or Incarceration. If the Trustee has actual 

knowledge that a Primary Beneficiary of Secondary Beneficiary of a 

trust uses or consumes an illegal drug, or abuses any legal drug of 

alcohol (collectively, “Substance Abuse”), or is incarcerated 

involuntarily (whether in a jail, prison, hospital, clinic, other treatment 

facility, electronic monitoring or house arrest, collectively 

“Incarceration”), the Trustee may suspend all distributions to or for the 

benefit of the Beneficiary pursuant to Section ___ of this Article, 

except for distributions for health care expenses of the Beneficiary as 

defined in Section ___ of Article ___. In addition, the Trustee may 

suspend all unitrust distributions to the affected Primary Beneficiary 

pursuant to Section ___ of this Article, and may suspend all requests 

for appointments by the Trust Protector pursuant to Section ___ of 

this Article. 

26

(B) 

(C) 

(D) 

Trustee’s Authority to Require Testing for Substance Abuse. If at any 

time the Trustee has actual knowledge that a Beneficiary engages in 

Substance Abuse, the Trustee may request in writing periodic, random 

drug or alcohol testing of such Beneficiary in such manner and at such 

times as the Trustee, in the Trustee’s discretion, shall determine. The 

tests to be performed shall be those determined to be appropriate by a 

board certified physician or psychiatrist selected by the Trustee. If 

such Beneficiary fails any such drug or alcohol test, the rights of such 

Beneficiary to distributions under this Trust Agreement may, in the 

discretion of the Trustee, be suspended as provided in Section ___ of 

this Article. The cost of all drug or alcohol testing and medical 

examinations shall be paid from the trust held for the benefit of the 

affected Beneficiary. 

Reinstatement of Rights of Beneficiary After Substance Abuse. If the 

Trustee suspends the rights of a Beneficiary as a result of Substance 

Abuse as provided in Section ___ of this Article, the Trustee shall 

reinstate such Beneficiary’s rights at such time as the Trustee 

determines after testing or medical examination that the Beneficiary 

does not suffer from Substance Abuse or, in the event the Beneficiary 

suffers from Substance Abuse, upon the written medical opinion of 

the Beneficiary’s primary treating physician that the Beneficiary has 

successfully undergone treatment for his or her Substance Abuse. 

The Trustee, in the Trustee’s discretion, may thereafter require 

periodic, random drug or alcohol testing for such Beneficiary as a 

condition of future distributions to or appointment by the Beneficiary. 

Reinstatement of Rights of a Beneficiary After Incarceration. If the 

Trustee suspends the rights of a Beneficiary as a result of 

Incarceration as provided in Section ___ of this Article, the Trustee 

shall reinstate such Beneficiary’s rights at such time as the Beneficiary 

is no longer incarcerated. 

27

(E) 

Release and Indemnification. Settlors do not intend by this Section 

___ to make the Trustee responsible for or liable to anyone for a 

Beneficiary’s actions, and Settlors specifically release the Trustee from 

any liability for any such actions and from all matters of any sort 

arising from or related to this Section ___. Settlors specifically direct 

that the Trustee have no duty whatsoever to inquire whether a 

Beneficiary engages in Substance Abuse or is incarcerated as 

described in this Section ___. Settlors specifically direct that the trust 

indemnify and hold the Trustee harmless against any and all expenses 

or liabilities incurred with respect to any matter arising from or related 

to this Section ___, including, but not limited to, any action, suit or 

proceeding brought against the Trustee for any act or thing connected 

with this Section ___. 

36. Chillin’ Out Provisions. The Trustee shall hold the entire balance of 

the trust estate, after making or providing for the payments and distributions 

set forth above, in trust, in accordance with the terms set forth in this 

Section. 

(A) 

Separate and apart from this Trust Agreement, the Trustor will have 

made arrangements for the whole body cryogenic suspension of 

himself and his pet dog, __________. As part of this arrangement, the 

Trustor will have designated a person or persons as his attorney-infact 

for health care purposes under the applicable statutes of the State 

of __________ relating to durable general powers of attorney for health 

care. The Trustor will have given instructions to such attorney-in-fact, 

either in a durable general power of attorney for health care or in 

another document, relative to medical treatment during the Trustor’s 

last illness and delivery of the Trustor’s remains the remains of 

__________ to an appropriate cryogenic facility. The Trustee is hereby 

directed to give full cooperation to the extent possible to said 

attorney-in-fact relative to such arrangements, and shall apply so 

much of the income and principal of the Trust Estate as is necessary 

to pay for the arrangements and services set forth immediately herein 

below. Any income not so expended shall be accumulated and added 

to principal. 

(1) Physical delivery of the Trustor’s and __________’s remains to 

such facility; 

(2) Maintenance of such remains in a state best suited for 

cryogenic suspension in the intervening period of time between 

the Trustor’s death and delivery to such facility; 

28

(3) The costs of initial whole body cryogenic suspension of the 

Trustor; 

(4) Cryogenic preservation and storage of the Trustor and 

__________ for the period set forth herein below. In the event 

whole body cryogenic suspension of the Trustor cannot be 

performed for any reason, the Trustor directs that to the extent 

possible, cryogenic neuropreservation be carried out instead if, 

in the Trustee’s judgment, that procedure is practically possible, 

and the Trustee is directed to pay for all costs attendant to that 

procedure. 

(B) 

(C) 

(D) 

After the Trustor and __________ have been placed in a state of 

cryogenic suspension, the Trustee shall monitor the cryogenic facility 

in which they are placed on a periodic basis to be certain that the 

facility is maintaining them in the best manner known to science at 

that time. In the event Trustee determines that they, or either of 

them, are not being so maintained, the Trustee is hereby authorized to 

have them removed to another cryogenic facility which, in the 

Trustee’s opinion, will provide superior service, no matter where in the 

world said facility may be located. 

At such time as medical and cryogenic technology is available to 

revive the Trustor with reasonable safety in the Trustee’s judgment, 

the Trustee shall authorize the revival of the Trustor and __________. 

Pending such event, the Trustee shall continue to hold and manage 

the Trust Estate and shall apply so much of the income and principal 

thereof as is necessary, in the Trustee’s judgment, to properly 

maintain the Trustor and __________ in cryogenic suspension. Any 

new income not so used shall be accumulated and added to principal. 

At the time of such revival, if in the Trustee’s judgment the revival has 

been successful and the Trustor has the capacity to properly manage 

his own financial affairs, the Trustee shall deliver the remaining trust 

estate to the Trustor and the trust shall terminate. After the revival of 

the Trustor, if, in the Trustee’s judgment, the Trustor is not able to 

properly care for himself or his financial affairs, the Trustee shall 

continue to apply income and principal of the Trust Estate for the 

Trustor’s benefit on the same basis as is set forth in paragraphs ___ 

and ___ above in the event of the Trustor’s incapacity. Any net 

income not so used shall be accumulated and added to principal. 

29

(E) 

(F) 

If the trust set forth herein must terminate by virtue of expiration of 

the perpetuities period described in paragraph ___ hereof prior to the 

successful revival of the Trustor, this Trust shall terminate and all 

assets of the trust estate shall be delivered forthwith to __________. 

In the event of the death of the Trustor under circumstances that 

would preclude the cryogenic suspension of the Trustor (whether 

whole body or neuropreservation only) because of the remoteness of 

the Trustor at the time of death from a cryogenic facility, an accident 

causing death which renders the Trustor’s remains unsuitable for 

cryogenic suspension, or any other like circumstances, the trust 

provided for in this paragraph ___ shall not be established and the 

assets of the trust estate shall be distributed in the following manner: 

30

SECTION 27 

New Law Update - Changes to Minnesota's 

Statutory Short Form Power of Attorney 

Jill A. Adkins 

Henningson & Snoxell Ltd 

Maple Grove 

Laura J. Garbe 

Erickson & Associates, PA 

Minneapolis 


Law Update: Changes to Minnesota’s Statutory Short Form Power of Attorney 

Laura J. Garbe, Attorney, Erickson &Wessman, P.A. 

Jill A. Adkins, Attorney, Henningson & Snoxell, Ltd.* 

On April 24, 2013, Governor Dayton signed into law Chapter 23 of the 2013 Minnesota Session 

Laws. This CLE sessionprovides a brief history of this law and highlights the changes made to 

Minnesota Statutes Chapter 523, the legislative home of the Minnesota Statutory Short Form 

Power of Attorney. This CLE is not a comprehensive review of every aspect of Chapter 523 and 

the presenters assume the audience for this CLE is familiar with the Statutory Short Form Power 

of Attorney (hereinafter “SSF POA”). 

5. History 

5. About the Vulnerable Adult Justice Project (VAJP) 

The bill which became Session Law 23 originated with the Vulnerable Adult Justice Project 

(VAJP). The VAJP was formed in 2007 and is a statewide consortium of stakeholders interested 

in the well-being of vulnerable adults in Minnesota.The VAJP is led by Iris Freeman, an 

experienced lobbyist andAssociate Director of the Center forElder Justice & Policy at the 

William Mitchell College of Law. 

The VAJP’s monthly meetings at William Mitchell are attended by representatives from public 

advocacy organizations (i.e. AARP), city and county attorneys offices, the Minnesota Attorney 

General’s office, the Minnesota Department of Human Services, the Minnesota Department of 

Health, the Minnesota Department of Public Safety, law enforcement, county adult protective 

services, professional guardians and conservators, health care providers, senior housing and long 

term care services, elder and disability organizations, labor unions, and legal services. In 

addition, several private elder law attorneys attend VAJP meetings in their individual capacity 

(and not as official representatives of any section of the MSBA). 

The VAJP works to identify services gaps in the protection of vulnerable adults; identify gaps 

and flaws in the underlying public policies related to vulnerable adults; identify, debate and 

advocate for proposed solutions to gaps and flaws in public policies related to vulnerable adults; 

educate public officials about current and emerging issues related to vulnerable adults; actively 

promote changes in Minnesota law, rules and policies to protect vulnerable adults and provide 

redress for victims; identify issues related to vulnerable adults that need additional research; 

foster working relationships across jurisdictions and agencies; and participate in professional 

education and public awareness efforts (including hosting World Elder Abuse Awareness Day 

each year). 

The VAJP initiated bills which resulted in new law in the 2009, 2011, 2012 and 2013 legislative 

sessions. 

2. About the Power of Attorney Committee of the VAJP 

1

A committee was formed within the VAJP in 2011to explore changes to the Minnesota SSF 

POA that might lessen the chances for POA misuse. The committee was co-chaired by your 

presenters, both of whom felt strongly about preserving those aspects of the SSF POA which 

make it convenient and easy to use. Other members of the committee included individuals from 

legal services, AARP, Volunteers of America, the University of St. Thomas School of Law, 

other elder law attorneys, and law students in William Mitchell’s elder law program. 

Over a series of meetings, the Power of Attorney committee researched and discussed the 

Power of Attorney laws of other countries and other states, as well as the Uniform Power of 

Attorney Act. The committee co-chairs met with the chair of the Probate and Trust Law Section 

committee considering the Uniform Power of Attorney Act for possible adoption in Minnesota. 

The Probate and Trust Law Section eventually abandoned its work on the Uniform Act and made 

no 2013 legislative proposal. The VAJP committee rejected the Uniform Act for a number of 

reasons despite the Act containing significant protections against misuse. 

Certain stakeholders within the VAJP supported changes to the SSF POA that were far more 

drastic than were ultimately agreed upon. The Power of Attorney committee took a pragmatic 

approach, avoiding changes that would generate strong opposition from the Bar and could be 

costly to the court system. The committee discussed a number of changes that would have 

clarified the SSF POA in various ways but remained focused on those changes most likely to 

reduce misuse and financial exploitation. In addition, the committee focused on changes 

designed to enhance criminal and civil accountability. 

The new law differs significantly from the VAJP’s initial bill as first introduced in January 

2013. Changes and amendments were made during the process of consultation with legislators, 

members of the bar, and representatives from other stakeholders including the banking industry. 

The bill passed both the House and the Senate without a single vote in opposition. 

B. Effective Date 

5. Judicial Relief, Minn. Stat. section 523.26 – effective on August 1, 2013, and applies to 

powers of attorney executed before, on, or after that date (see 523.26 (b)). 

2. Amendments made to the SSF POA form and to 523.24, subd 8 – effective for powers of 

attorney executed on or after January 1, 2014 (see 523.23 Subd 6). 

C. Changes to Chapter 523 (other than to the SSF POA form) – in numerical order 

5. 523.20 Liability of parties refusing authority of attorney-in-fact to act on principals’ 

behalf. 

A different section (discussed below) of the new law adds an Important Notice to the Attorneysin-fact 

and requires the attorneys-in-fact to not only provide a specimen signature but also a 

signature acknowledging that s/he has read and understood the Important Notice. For SSF POA 

forms signed on or after January 1, 2014, the attorney-in-fact must have signed this 

2

Acknowledgment in order to benefit from the provisions regarding liability for refusal to accept 

the authority of the attorney-in-fact. 

2. Section 523.23 Statutory Short Form Power of General POA; Formal Requirements; Joint 

Agents 

Subdivision 1 of this Section contains the SSF POA form, which is reviewed in Part D below. 

A new subdivision 6 provides the effective date (January 1, 2014) for amendments to the form. 

In addition, this subdivision clarifies that powers of attorney executed before January 1, 2014 

remain valid. 

3. Section 523.24 Construction 

Subdivision 8(2) (gift transactions) is revised so that the limitation on gifts by the attorney-infact 

to himself or to anyone he has a legal obligation to support is tied to the federal annual gift 

exclusion in the year of the gift ($14,000 in the year 2013). The prior law was $10,000. (Note: 

this change is effective only for SSF POAs executed on or after January 1, 2014). 

Subdivision 14 (all other matters) is revised to clarify that “all other matters” relates to 

financial matters and does not encompass health care decisions. 

4. Section 523.26 Judicial Relief 

This is a new provision under Chapter 523, and is effective August 1, 2013 for all powers of 

attorney executed on any date. This provision does not create a new cause of action but rather 

reinforces the use of protective proceedings (under 524.5-401 – 524.5-502) to order attorneys-infact 

to account or to order any other relief. Protective orders have always been available, but 

underutilized, to remedy issues related to powers of attorney. The presenters encourage all 

practitioners to familiarize themselves with the provisions of 524.5-401 through 524.5-502 for 

applicability to situations where an attorney-in-fact fails to account when required and/or when 

there is reason to believe that the attorney-in-fact has intentionally or unintentionally misused his 

authority. In many situations, a conservatorship is unnecessary and not desired by the parties. 

This new section entitles the principal (or any other person designated in the SSF POA by the 

principal to receive accountings) to recover reasonable attorney’s fees and costs if the court finds 

that the attorney-in-fact failed to render an accounting “after the duty to render an accounting 

arose.” No new obligation to account has been created. Attorneys-in-fact have always been 

required to account to the principal whenever requested, or as otherwise provided at the Fourth 

part of the SSF POA form or as required under the law. 

D. Changes to the SSF POA form 

5. The SSF POA form has always required principals to specify whether multiple attorneysin-fact 

may act independently or must act jointly. The new law makes a slight change to 

the NOTICE (generally on page one of the SSF POA form) which now states: If more 

3

than one attorney-in-fact is designated to act at the same time, make a check or “x” on the 

line in front of one of the following statements:… 

2. Line (N) of the listing of powers granted to an attorney-in-fact has been changed to clarify 

that “all other matters” does not refer to health care decisions under a health care directive that 

complies with Minnesota Statutes, chapter 145C. 

3. The THIRD part of the SSF POA has been completely rewritten to create a presumption 

against gifting by the attorney-in-fact to himself or herself (or anyone s/he is legally obligated to 

support). If a principal wishes to grant self-gifting authority to the attorney-in-fact, the principal 

must now write in the name of the attorney-in-fact. This will allow a principal to grant gifting 

authority to a primary attorney-in-fact but not to successors, for example. In addition, the THIRD 

part now contains a reference to the federal annual gift tax exclusion as a limitation on gifting by 

the attorney-in-fact to himself or herself or anyone s/he is obligated to support. 

4. The attorney-in-fact must still provide a specimen signature. However, the attorney-in-fact 

must also sign an Acknowledgment that s/he has read and understood the Important Notice to 

Attorney(s)-in-fact. The attorney-in-fact’s signature does not need notarization, as is the current 

law. The Important Notice to the Attorney(s)-in-fact states that while the attorney-in-fact has no 

duty to act, any actions which are taken as attorney-in-fact must be made in good faith and in the 

best interest of the principal. This Notice addresses several topics of relevance to the attorney-infact 

and contains a reminder that the attorney-in-fact may be personally liable for a failure to 

account (when required to do so) or when the principal (or anyone else) is injured by an action 

taken in bad faith by the attorney-in-fact. 

5. In addition to the new Notice to attorneys-in-fact, there is an Important Notice to the 

Principal. This Notice is an expanded version of the notice language previously found at the 

beginning of the SSF POA form. This Notice clarifies that the SSF POA does not grant health 

care decision-making authority. This Notice informs the principal of the duties of the attorney-infact 

and addresses issues such as revocation or termination of the power of attorney. 

4

STATUTORY SHORT FORM POWER OF ATTORNEY 

MINNESOTA STATUTES SECTION 523.23 

Before completing and signing this form, the principal must read and initial the 

IMPORTANT NOTICE TO THE PRINCIPAL that appears after the signature lines in this form. 

Before acting on behalf of the principal, the attorney(s)-in-fact must sign this form acknowledging 

having read and understood the IMPORTANT NOTICE TO THE ATTORNEY(S)-IN-FACT that 

appears after the notice to the principal 

PRINCIPAL 

(Name and Address of Person Granting the Power) 

_____________________________________ 

_____________________________________ 

______________________________________ 

ATTORNEY(S)-IN-FACT 

(Name and Address) 

_________________________ 

_________________________ 

_________________________ 

NOTICE: If more than one attorney-in-fact is 

designatedto act at the same time, make a 

check or "x" on the line in front of one of the 

following statements: 

Each attorney-in-fact may 

independently exercise the powers 

granted. 

All attorneys-in-fact must jointly 

exercise the powers granted. 

SUCCESSOR ATTORNEY(S)-IN-FACT 

(Optional) To act if any named attorney-infact 

dies, resigns, or is otherwise unable to 

serve. 

(Name and Address) 

First Successor 

______________________ 

______________________ 

______________________ 

Second Successor 

_____________________ 

_____________________ 

_____________________ 

EXPIRATION DATE (Optional) 

________________ _____ ________ 

Use Specific Month Day Year Only 

1

I, (the above named Principal),hereby appoint the above named Attorney(s)-in-Fact to act as my 

attorney(s)-in-fact: 

FIRST: To act for me in any way I could act with respect to the following matters, as 

each of them is defined in Minnesota Statutes, section 523.24: 

(To grant to the attorney-in-fact any of the following powers, make a check or "x" on the 

line in front of each power being granted. You may, but need not, cross out each power not granted. 

Failure to make a check or "x" on the line in front of the power will have the effect of deleting the 

power unless the line in front of the power (N) is checked or x-ed.) 

(A) 

(B) 

(C) 

(D) 

(E) 

(F) 

(G) 

(H) 

(I) 

(J) 

(K) 

(L) 

(M) 

(N) 

real property transactions; 

I choose to limit this power to real property in __________________________ 

County, Minnesota, described as follows: (Use legal description. Do not use 

street address.) 

_________________________________________________________________ 

________________________________________________________________ 

________________________________________________________________. 

(If more space is needed, continue on the back or on an attachment.) 

tangible personal property transactions; 

bond, share, and commodity transactions; 

banking transactions; 

business operating transactions; 

insurance transactions; 

beneficiary transactions; 

gift transactions; 

fiduciary transactions; 

claims and litigation; 

family maintenance; 

benefits from military service; 

records, reports, and statements; 

all of the powers listed in (A) through (M) above and all other matters other than 

health care decisions under a health care directive that complies with Minnesota 

Statutes, chapter 145C. 

SECOND: (You must indicate below whether or not this power of attorney will be 

effective if you become incapacitated or incompetent. Make a check or "x" on the line in front of 

the statement that expresses your intent.) 

This power of attorney shall continue to be effective if I become incapacitated or 

incompetent. 

This power of attorney shall not be effective if I become incapacitated or 

incompetent. 

2

THIRD: My attorney(s)-in-fact MAY NOT make gifts to the attorney(s)-in-fact,or anyone the 

attorney-in-fact is legally obligated to support, UNLESS I have made a check or an “x” on the line 

in front of the second statement below and I have written in the name(s) of the attorney(s)-in-fact. 

The second option allows you to limit the gifting power to only the attorney(s)-in-fact you name in 

the statement. Minnesota Statutes, section 523.24, subdivision 8, clause (2), limits the annual gift(s) 

made to my attorney(s)-in-fact, or to anyone the attorney(s)-in-fact are legally obligated to support, 

to an amount, in the aggregate, that does not exceed the federal annual gift tax exclusion amount in 

the year of the gift. 

____ 

I do not authorize any of my attorney(s)-in-fact to make gifts to themselves or to 

anyone the attorney(s) in fact have a legal obligation to support. 

I authorize _________________________________________(write in names), 

as my attorney(s)-in-fact, to make gifts to themselves or to anyone the 

attorney(s)-in-fact have a legal obligation to support. 

FOURTH: (You may indicate below whether or not the attorney-in-fact is required to 

make an accounting. Make a check or "X" on the line in front of the statement that expresses your 

intent.) 

My attorney-in-fact need not render an accounting unless I request it or the 

accounting is otherwise required by Minnesota Statutes, section 523.21. 

My attorney-in-fact must render __________ (Monthly, Quarterly, Annual) 

accountings to me or ___________________________________________ (Name and 

Address) during my lifetime, and a final accounting to the personal representative 

of my estate, if any is appointed, after my death. 

IN WITNESS WHEREOF, I have hereunto signed my name this ______ day of 

______________________, __________. 

(Acknowledgment of Principal) 

____________________________________ 

(Signature of Principal) 

STATE OF MINNESOTA ) 

) ss. 

COUNTY OF_____________ ) 

The foregoing instrument was acknowledged before me this ______ day of 

___________________, _________, by _________________________ (Insert Name of Principal). 

_________________________________________ 

Signature of Notary Public or other Official 

3

Acknowledgment of notice to attorney(s)-in-fact and specimen signature of attorney(s)-in-fact. 

By signing below, I acknowledge that I have read and understand the IMPORTANT NOTICE TO 

ATTORNEY(S)-IN-FACT required by Minnesota Statutes, section 523.23, and understand and 

accept the scope of any limitations to the powers and duties delegated to me by this instrument 

(Notarization not required) 

_________________________________________ 

_________________________________________ 

Specimen Signature of Attorney(s)-in-Fact 

(Notarization not required) 

_______________________________________________ 

_______________________________________________ 

This instrument was drafted by: 

______________________________ 

______________________________ 

______________________________ 

4

IMPORTANT NOTICE TO THE PRINCIPAL 

READ THIS NOTICE CAREFULLY. The power of attorney form that you will be signing is a legal 

document. It is governed by Minnesota Statutes, chapter 523. If there is anything about this form 

that you do not understand, you should seek legal advice. 

PURPOSE: The purpose of the power of attorney is for you, the principal, to give broad and 

sweeping powers to your attorney(s)-in-fact, who is the person you designate to handle your affairs. 

Any action taken by your attorney(s)-in-fact pursuant to the powers you designate in this power of 

attorney form binds you, your heirs and assigns, and the representative of your estate in the same 

manner as though you took the action yourself. 

POWERS GIVEN: You will be granting the attorney(s)-in-fact power to enter into transactions 

relating to any of your real or personal property, even without your consent or any advance notice 

to you. The powers granted to the attorney(s)-in-fact are broad and not supervised. THIS POWER 

OF ATTORNEY DOES NOT GRANT ANY POWERS TO MAKE HEALTH CARE DECISIONS 

FOR YOU. TO GIVE SOMEONE THOSE POWERS, YOU MUST USE A HEALTH CARE 

DIRECTIVE THAT COMPLIES WITH MINNESOTA STATUTES, CHAPTER 145(C). 

DUTIES OF YOUR ATTORNEY(S)-IN-FACT: Your attorney(s)-in-fact must keep complete records 

of all transactions entered into on your behalf. You may request that your attorney(s)-in-fact 

provide you or someone else that you designate a periodic accounting, which is a written statement 

that gives reasonable notice of all transactions entered into on your behalf. Your attorney(s)-in-fact 

must also render an accounting if the attorney-in-fact reimburses himself or herself for any 

expenditure they made on behalf of you. An attorney-in-fact is personally liable to any person, 

including you, who is injured by an action taken by an attorney-in-fact in bad faith under the power 

of attorney or by an attorney-in-fact’s failure to account when the attorney-in-fact has a duty to 

account under this section. The attorney(s)-in-fact must act with your interests utmost in mind. 

TERMINATION: If you choose, your attorney(s)-in-fact may exercise these powers throughout 

your lifetime, both before and after you become incapacitated. However, a court can take away the 

powers of your attorney(s)-in-fact because of improper acts. You may also revoke this power of 

attorney if you wish. This power of attorney is automatically terminated if the power is granted to 

your spouse and proceedings are commenced for dissolution, legal separation, or annulment of 

your marriage. This power of attorney authorizes, but does not require, the attorney(s)-in-fact to 

act for you. You are not required to sign this power of attorney, but it will not take effect without 

your signature. You should not sign this power of attorney if you do not understand everything in it, 

and what your attorney(s)-in-fact will be able to do if you do sign it. Please place your initials on 

the following line indicating you have read this IMPORTANT NOTICE TO THE PRINCIPAL: 

__________ 

5

IMPORTANT NOTICE TO THE ATTORNEY(S)-IN-FACT 

You have been nominated by the principal to act as an attorney-in-fact. You are under no duty 

to exercise the authority granted by the power of attorney. However, when you do exercise any 

power conferred by the power of attorney, you must: 

1) act with the interests of the principal utmost in mind; 

2) exercise the power in the same manner as an ordinarily prudent person of discretion and 

intelligence would exercise in the management of the person’s own affairs; 

3) render accountings as directed by the principal or whenever you reimburse yourself for 

expenditures made on behalf of the principal; 

4) act in good faith for the best interest of the principal, using due care, competence, and 

diligence; 

5) cease acting on behalf of the principal if you learn of any event that terminates this 

power of attorney or terminates your authority under this power of attorney, such as 

revocation by the principal of the power of attorney, the death of the principal, or the 

commencement of proceedings for dissolution, separation, or annulment of your 

marriage to the principal; 

6) disclose your identity as an attorney-in-fact whenever you act for the principal by signing 

in substantially the following manner: Signature by a person as “attorney-in-fact for 

(name of principal)” or “(name of principal) by (name of the attorney-in-fact) the 

principal’s attorney-in-fact”; 

7) acknowledge you have read and understood this IMPORTANT NOTICE TO THE 

ATTORNEY(S)-IN-FACT by signing the power of attorney form. You are personally 

liable to any person, including the principal, who is injured by an action taken by you in 

bad faith under the power of attorney or by your failure to account when the duty to 

account has arisen. The meaning of the powers granted to you is contained in Minnesota 

Statutes, chapter 523. If there is anything about this document or your duties that you do 

not understand, you should seek legal advice. 

6

PLENARY DAY 2 

Digital Life, Virtual Assets and Email – 

Digital Death – Who Gets Grandma’s Twitter 

Account? 

Karin C. Prangley 

Krasnow Saunders Cornblath Kaplan & Beninati 

Chicago, IL 


Estate Planning and Administration with Digital Assets 

Digital Life, Digital Assets and Email 

Karin Prangley, Partner 

Krasnow Saunders Kaplan & Beninati, LLP Chicago, IL 


Advances in Technology and the Internet Have Changed The 

Way We Plan Our Client’s Estates 

…………….1 

Addressing Digital assets in the Estate Planning Process 

…………….2 

Online Storage Accounts 

…………….4 

Creating a List of Digital Assets, Usernames and Passwords 

…………….5 

Fiduciary Selection and Powers 

…………….6 

Fiduciary Liability for Unauthorized Access 

……………8 

Accessing Digital Assets of Deceased or Disabled Client 

……………11 

Valuing Digital Assets for Estate and Gift Tax Purposes 

……………14 

Other Interesting Digital Developments: Electronic 

Signatures and Estate Planning Documents 

……………16 

i

I. Advances in Technology and the Internet Have Changed The Way We Plan Our 

Client’s Estates 

a. Our clients have valuable digital assets that should be addressed in the estate 

planning and administration process. For most clients, an estate plan that does not 

address digital assets is no longer a complete estate plan. 

b. Digital assets can be roughly defined as electronic content, information and/or 

media and the right to use that content, information or media Includes: 

i. Email Accounts 

ii. Smartphones, tablets, netbooks and computers 

iii. Online Sales Accounts (e.g., ebay, amazon, etsy) 

iv. Online Purchasing Accounts (e.g., paypal) 

v. Online Storage Accounts/ Cloud Storage Accounts 

vi. Webpages 

vii. Domain Names 

viii. Blogs 

ix. Social Networking Accounts (e.g., facebook, twitter, linked-in) 

x. Intellectual Property Rights in Digital Assets 

c. A digital asset can be the key to unlocking other assets with financial value. 

i. Example: a decedent’s email account that contains bank and brokerage 

statements. 

ii. If the client received electronic statements and has no other evidence of 

the existence of the account, the fiduciary may not discover the financial 

account itself without access to the email account. 

d. Digital assets themselves can also have financial value. For example: 

i. Domain names can have tremendous value: 

1. FB.com sold for $8.5 million in 2010; and 

2. sex.com sold for $13 million in 2010 (after selling for $14 million 

in 2006) 

ii. Blogging can bring a client revenue and in many cases, should be treated 

as a valuable business: 

1. In November of 2011, The Atlantic reported that America’s top 10 

most valuable blogs have an estimated aggregate value of $785 

million. 

2. The #1 most valuable blog in 2011 was gawker.com – valued at 

$318 million (more then the next 5 combined) with $53.6 million 

in ad revenue in 2010. 

3. One stay-at-home mother’s parenting blog –dooce.com – generates 

an estimated $4.8 million of ad revenue per year. 

1

iii. Former attorney and Ebay seller Linda Lightman, owner of the Ebay shop 

“Linda’s Stuff” has gross sales of approximately $16 million per year. 

e. Digital assets may carry non-financial value. These values can include the 

following: 

i. Preserving the decedent’s story and memories. Ten years ago shoeboxes 

of the decedent’s letters, photos and diaries were treasured. The new 

“digital shoebox” includes: 

1. Online photo accounts 

2. Personal blogs 

3. Email messages 

4. Twitter feeds 

ii. Genealogical information 

iii. Preventing disclosure of secrets and reputation preservation: protecting 

the sensitive information of the client is often important to prevent family 

members from emotional suffering, especially when the client is 

disabled/deceased and/or has minor children and grandchildren. Sensitive 

information can easily and quickly be spread on the internet. With full 

access to the client’s digital assets it is easier to preserve and protect the 

client’s secrets and sensitive information and certain information can be 

made more difficult to locate on the internet. 

iv. Risk of identity theft: The AARP estimates that the identities of 2.5 

million deceased Americans are subject to fraud each year and concludes 

that the crime often begins with a search of online information. Careful 

censure of online information about the decedent (such as dates of birth, 

names of family members, specifically mother’s maiden name, and place 

of residence) is critical to preventing fraudulent activities. 

II. 

Addressing Digital assets in the Estate Planning Process 

a. The most important message to convey to your clients is PLAN AHEAD! 

b. Otherwise, your client’s family and beneficiaries may end up at the mercy of a 

data forensics expert, who may not be able to recover needed information. 

c. When possible, have LLC or revocable trust own digital assets. 

i. Many digital asset providers recognize the importance of online/digital 

assets to a business and will allow an entity to own the digital asset. 

1. Exceptions: Entities usually cannot hold free web-based email 

accounts and individual social media accounts. 

ii. For example, Southwest Airlines owns and operates a webpage, blog, 

Twitter account and Facebook page. Over 30 employees maintain the 

2

Southwest blog. The death of an employee is a non-event, as far as these 

digital assets are concerned. 

iii. The client should be careful to select digital asset providers (such as blog 

hosting and social media accounts) that allow the digital asset to be owned 

by an entity such as a LLC. 

iv. If the client operates/owns a business, ensure that all digital assets used in 

connection with the business are owned by the business entity. Many 

start-up companies initially place their digital assets in the name of one or 

more founding owners. As the company grows, it is crucial to transfer 

ownership/use of the digital asset to the company itself. 

v. If the client’s promotes his business via social media, the attorney can help 

to ensure the social media account is titled in the name of the business and 

not the name of the client. 

vi. An individual social networking profile can usually be turned into a 

business page upon request. 

vii. If client is a professional athlete, celebrity or public figure who uses social 

media for endorsements and publicity, the client’s management company 

should own social media account (if possible). 

viii. Otherwise, social media activity can be transferred to company or estate 

page following death. 

ix. For example, Dick Clark’s Facebook account has been de-activated and 

turned into a memorial. However, Dick Clark Productions has an active 

Facebook “fan” page providing PR to several charities and businesses. 

x. The terms of service of most digital asset providers that do allow digital 

assets to be owned by an entity would seemingly also allow such digital 

assets to be owned by a trust. 

1. For example, the terms of service of Twitter do not appear to 

prohibit a revocable trust from holding a twitter account. 

2. However, because holding digital assets in a trust is not common, 

it is uncertain how digital assets providers would treat such 

ownership. 

3. Accordingly, digital assets with substantial value should be placed 

into a business entity such as an LLC. 

d. The appropriate planning method to preserve digital assets in the event of death or 

disability depends on the complexity of the client’s digital assets, his 

technological fluency and his trust of online resources. As with all estate 

planning, one size does not fit all. 

e. Some clients should consider an online storage account and/or a secure list of 

digital assets and passwords. See Exhibit A for a sample of how to prompt a 

3

client to make such a list. In assisting clients with this process, be mindful of the 

following traps: 

i. KEY: As explained in further detail in Section VI, the terms and 

conditions of certain websites and online account providers prevent 

anyone other than the user from accessing the user’s account, regardless of 

whether the fiduciary can clearly show he is acting as the user’s legal 

successor and regardless of whether the fiduciary has the user’s password. 

Before the fiduciary attempts to access digital assets, it is crucial that these 

terms and conditions be reviewed and the consequences for breach of 

these terms and conditions be discussed with counsel. 

ii. KEY: give fiduciary a way to FIND the list of digital assets or online 

storage account. 

iii. KEY: attorney should not custody both list of digital assets and list of 

passwords. 

III. 

Online Storage Accounts 

a. Websites that charge a monthly or yearly fee to store digital data and release it 

according to your instructions. 

b. Many allow designated persons to access the account owner’s digital assets in the 

event of disability, as well as death. 

c. Most sites will store copies of important documents (such as powers of attorney), 

which allow convenient access to important documents on-the-go. 

d. Popular online storage accounts with a succession feature include: 

i. www.legacylocker.com 

ii. www.deathswitch.com 

iii. www.mypersonaldatasafe.com 

iv. www.entrustet.com 

e. Advantages: 

i. State-of-the-art security (the most popular sites use security similar to that 

used by banks). 

ii. Allows designated person to access digital assets without knowing even a 

single password. 

iii. Allows immediate access to digital assets in the event of death (and for 

many services, disability). 

f. Disadvantages: 

i. Needs to be updated as passwords and digital assets change. 

ii. Will these services be around when you need them? Most are startups 

with little capital. 

4

iii. Note that it is unlikely that information stored on an online storage 

account that goes out of business will be misappropriated, just 

inaccessible. 

g. Inform the fiduciary of participation in an online storage account 

i. Client may tell fiduciary (in writing) that he participates in an online 

storage service. 

ii. Some online storage services will directly email your authorized designee 

when you enroll and will give the designee instructions on how to access 

digital assets in the event of the account owner’s death or disability. 

iii. Client may disclose to estate planning attorney that he participates in an 

online storage service. 

IV. 

Creating a List of Digital Assets, Usernames and Passwords 

a. For clients who have few digital assets, an “old fashioned” paper list of digital 

assets, passwords and usernames may be appropriate. This list should be 

physically secured in a lockbox, safe or locked file cabinet. 

b. Preferred method is to create a password protected file listing digital assets stored 

on home computer, smartphone or USB drive. 

c. Write the password to access the electronic list on a piece of paper which is stored 

with original estate planning documents or in safe-deposit box. 

d. Electronic List of Digital assets: 

i. To be secure, the electronic file should be encrypted and a complex 

password should be used. 

ii. Password protecting a MS Word or other office document can be easily 

circumvented and is not adequately secure. 

iii. Use software package designed to store confidential documents and 

passwords such as KeePass, SecuBox or Web Confidential. 

iv. Can back-up encrypted list to USB drive. 

e. Password to Electronic List of Digital assets: 

i. Disclosed password should be up-to-date. 

ii. If estate planning attorney does not have access to the electronic (or paper) 

list of digital assets, estate planning attorney can store password. As with 

all client confidential information, the attorney has a duty to appropriately 

safeguard client information and the password should be stored securely to 

avoid inadvertent or unauthorized disclosure. 

f. Advantages of using electronic/paper list of digital assets: 

i. Easy and cheap to implement. 

ii. Easy and cheap to update. 

g. Disadvantages: 

i. Must be updated as passwords and digital assets change. 

5

1. A reminder to update the digital asset inventory should be included 

in the closing instructions of the estate planning engagement (e.g. 

the client communication where instructions regarding change of 

beneficiaries, etc. are given). 

2. Suggested language: As we previously discussed, it may not be 

possible for your named Executor and Agent to fully access all of 

your digital property such as online accounts and email. The law 

on this issue is evolving and we anticipate changes in the near 

future that will allow your representatives to more fully access 

your digital property. For this reason, we recommend that you 

update the inventory of your digital property (which, as you may 

recall, included your usernames and passwords) as this information 

changes. That way, your representatives may access your digital 

property when the law more readily allows them to do so. Many of 

our clients also find that it is advantageous to automatically revisit 

the inventory of digital property every year, since this information 

can change rapidly. 

ii. Severe data loss could wipe out an electronic list of passwords if a backup 

is not maintained. 

V. Fiduciary Selection and Powers 

a. The tech-savvy client should select a fiduciary competent to administer his digital 

assets, or appoint a special fiduciary to administer digital assets. 

i. The fiduciary should be familiar with digital assets and have the 

technological competency to work effectively with an IT expert, if 

necessary. 

ii. If a client has sensitive digital assets/information (for example, an online 

extramarital relationship), appointment of a special fiduciary may be 

appropriate. 

iii. For young clients (approx. ages 18-35) who appoint their parents or 

individuals of substantially greater age as fiduciaries, appointment of a 

contemporary as special fiduciary to deal with social media may be 

appropriate. 

b. Consider adding special powers in power of attorney, Will and/or Trust 

Agreement authorizing fiduciary to access digital assets such as the following: 

i. Will: My Executor shall have the power and authorization to access, take 

control of, conduct, continue, or terminate my accounts on any website, 

including any social networking site, photo sharing site, micro blogging or 

short message service website or any email service website. All such 

websites may release my log-on credentials, including username and 

6

password, to my Executor, and the website shall be indemnified and held 

harmless by my estate for any damages, causes of action or claims that 

may result from this disclosure. 

ii. Trust: My Trustee shall have the power to access, handle, distribute, and 

dispose of my digital assets, and the power to obtain, access, modify, 

delete, and control my passwords and other electronic credentials 

associated with my digital devices and digital assets.” 

iii. Durable Power of Attorney. The attorney-in-fact shall have (a) the 

power to access, use, and control my digital devices, to include but not be 

limited to, desktops, laptops, tablets, storage devices, mobile telephones, 

smartphones, and any similar digital device which currently exists or may 

exist as technology develops for the purpose of accessing, modifying, 

deleting, controlling, or transferring my digital assets, and (b) the power to 

access, modify, delete, control, and transfer my digital assets, wherever 

located and to include but not be limited to, my emails received, email 

accounts, digital music, digital photographs, digital videos, software 

licenses, social network accounts, file sharing accounts, financial 

accounts, banking accounts, domain registrations, web hosting accounts, 

tax preparation service accounts, online stores, affiliate programs, other 

online accounts, and similar digital items which currently exist or may 

exist as technology develops, and (c) the power to obtain, access, modify, 

delete, and control my passwords and other electronic credentials 

associated with my digital devices and digital assets described above. 

iv. Specific Gift thereof in Will/Revocable Living Trust. To the extent I 

am able to transfer my interests in my digital assets (such assets, wherever 

located and to include but not be limited to (a) files stored on my digital 

devices, to include but not be limited to, desktops, laptops, tablets, storage 

devices, mobile telephones, smartphones, and any similar digital device 

which currently exists or may exist as technology develops; and (b) emails 

received, email accounts, digital music, digital photographs, digital videos, 

software licenses, social network accounts, file sharing accounts, financial 

accounts, banking accounts, domain registrations, web hosting accounts, 

tax preparation service accounts, online stores, affiliate programs, other 

online accounts, and similar digital items which currently exist or may 

exist as technology develops, regardless of the ownership of the physical 

device upon which the digital item is stored), to ___________________. 

c. The power to access/custody digital assets should only be granted to either the 

Executor or Trustee, not both. The client should carefully consider which 

fiduciary is most appropriate to administer the client’s digital assets. It is the 

author’s opinion that the digital asset provision should be given to the Executor in 

7

the Will and not the Trustee in the Revocable Living Trust, since some digital 

assets cannot be owned by a trust, and it is thus unclear whether the pour-over 

provision to the Revocable Living Trust will work effectively for digital assets. 

d. Moreover, the success of such provisions in general is unclear and depends on 

what type of digital asset is involved. If a digital service/asset provider has a 

privacy policy or terms of service that conflict with the Will, power of attorney or 

trust provision, the provider’s policy or terms will apply. 

e. Increasingly, state legislatures are providing express statutory authority to allow 

Executors and Personal Representatives to access and control certain digital assets 

of a deceased person. 

i. Five states (Connecticut, Oklahoma, Idaho, Rhode Island and Indiana) 

have statutes which give the Personal Representative or Executor limited 

access to certain digital assets and seventeen additional states are 

considering similar legislation. 

1. California 

2. Colorado 

3. Maine: Legislative Document 850 introduced March 5, 2013, (to 

study the issue) 

4. Massachusetts 

5. Michigan: House Bill 5929 introduced September 20, 2012 

6. Missouri 

7. Nebraska: Legislative Bill 783 introduced January 5, 2012 

8. Nevada: Senate Bill 131 introduced February 18, 2013 

9. New Hampshire: House Bill 116 introduced January 3, 2013 

10. New Jersey: Assembly Bill 2943 introduced May 14, 2012 

11. New York: Bill A823–2013 introduced January 9, 2013 

12. North Carolina Senate Bill 279 introduced March 12, 2013 

13. North Dakota: House Bill 1455 introduced January 21, 2013 

14. Ohio 

15. Oregon Senate Bill 54 introduced January 14, 2013 

16. Pennsylvania: House Bill 2580 introduced August 23, 2012 

17. Virginia: Senate Bill 914 introduced January 7, 2013 

ii. None of these laws supersede conflicting provisions in the terms, 

conditions and privacy policies of online providers. Fear of penalty for 

unauthorized fiduciary access remains (See Section VI). 

f. In January of 2012, the Uniform Law Commission approved a study committee 

on a fiduciary’s power and authority concerning digital assets of a disabled or 

deceased person. 

i. The Committee is in the process of drafting a free-standing act (rather than 

patchwork amendments to ULC acts, such as the Uniform Probate Code, 

8

the Uniform Trust Code, the Uniform Guardianship and Protective 

Proceedings Act, and the Uniform Power of Attorney Act) that will vest 

fiduciaries with at least the authority to manage and distribute digital 

assets, copy or delete digital assets, and access digital assets. 

ii. The Committee has met twice and is progressing on a draft. 

iii. The draft will need to be approved by the ULC before adopted. 

iv. It has been noted by the Committee that some state legislatures/bar 

associations are eagerly awaiting the drafted approved by the ULC before 

their state specifically considers or enacts digital asset legislation. 

VI. 

Fiduciary Liability for Unauthorized Access 

a. Before accessing the client’s virtual assets, consider who has the right to view and 

access the data. 

b. If the client is or may be involved in a lawsuit, accessing data may waive 

applicable privileges or destroy potential evidence. 

i. Consultation with litigation counsel is imperative. 

ii. Simply turning on a computer or smartphone may erase data that may be 

helpful in a forensic examination. 

c. Federal and state laws criminalize certain types of unauthorized access or damage 

to computers or data. 

d. All fifty states have criminal laws prohibiting unauthorized access to electronic 

data. 

e. See Minn. Stat. § 609.87, § 609.89, § 609.891 

i. Minn. Stat. § 609.87 defines authorization as “with the permission of the 

owner of the computer, computer system, computer network, computer 

software, or other property.” 

1. If the terms of service of a computer network do not permit the 

user’s fiduciaries to access the user’s account, then the fiduciary is 

not authorized under Minnesota law to access that computer 

network. 

ii. Minn. Stat. § 609.89: Computer Theft. Whoever intentionally and 

without authorization or claim of right accesses or causes to be accessed 

any computer network (defined as “the interconnection of a 

communication system with a computer through a remote terminal, or 

with two or more interconnected computers or computer systems, and 

includes private and public telecommunications networks”) or any part 

thereof for the purpose of obtaining services or property is subject to 

criminal penalties of up to 90 days in prison and/or a $1,000 fine (if the 

loss involved is less than $500). 

9

iii. Minn. Stat. § 609.891: Unauthorized computer access. A person is guilty 

of unauthorized computer access if the person intentionally and without 

authorization attempts to or does penetrate a computer security system and 

may be subject to felony penalties of imprisonment for up to ten years or 

to payment of a fine of not more than $20,000, or both. 

f. 18 USC §1030. The Computer Fraud and Abuse Act. Criminalizes intentional 

access of a computer without authorization or exceeding authorization and 

thereby obtaining financial data or information from a protected (e.g., private) 

computer. 

i. The U.S. Department of Justice has stated that violating a term of service 

on Facebook or Match.com is a federal crime under the CFAA, however it 

is not their intention to prosecute such “minor” violations. U.S. v. Nosal, 

No. 10-10038, D.C. No. 3:08-cr-00237 (9 th Cir. April 10, 2012); see also, 

testimony presented by DOJ on 11-15-11 before Subcommittee of U.S. 

House Judiciary Committee. 

ii. For example, the DOJ prosecuted a mom under the CFAA who posed as a 

17–year–old and cyber–bullied her daughter’s classmate, which 

MySpace’s terms of service prohibiting lying about identifying 

information, including age. U.S. v. Drew, 259 F.R.D. 449 (C.D. Cal. 

2009). 

iii. Many courts have interpreted the CFAA narrowly so that the crime 

“exceeds authorized access” is limited to violations of restrictions 

on access to information, and not restrictions on its use (i.e. 

misappropriation). See e.g., Nosal, i.d; LVRC Holdings LLC v. Brekka, 

581 F.3d 1127 (9 th Cir. 2009); Shamrock Foods Co. v. Gast, 535 F. Supp. 

2d 962 (D. Ariz. 2008); Orbit One Commc’ns, Inc. v. Numerex Corp., 692 

F. Supp. 2d 373 (S.D.N.Y. 2010); Diamond Power Int’l Inc. v. Davidson, 

540 F. Supp. 2d 1322 (N.D. Ga. 2007); Int’l Ass’n of Machinists & 

Aerospace Workers v. Werner-Masuda, 390 F. Supp. 2d 479 (D. Md. 

2005). 

iv. However, the DOJ did have at least one “success”– the 11 th Circuit has 

held that it is a federal crime under the for an SSA employee to access 

social security records of 17 people for no business reason. 

U.S. v. Rodriguez, 2010 WL 5253231 (11th Cir. Dec. 27, 2010). 

v. Under either of these evolving standards, a fiduciary does not have 

authorized access (no matter the use or purpose) if the terms of service of 

the applicable digital asset provider prohibit it. 

g. 18 USC Chapter 121. The Stored Wire and Electronic Communications and 

Transactional Records Access Act (the “SWA”). Contains provisions regarding (i) 

unlawful access to a stored communication, (ii) privacy of customer 

10

communications and records, (iii) when persons and entities may voluntarily 

disclose customer communications or records, and (iv) when persons and entities 

are required to disclose certain customer communications or records. The SWA, 

in essence, prohibits digital asset providers from disclosing customer 

communications and records except in very limited circumstances which, absent a 

government subpoena (for example, in a murder investigation) would unlikely 

apply in the estate/trust administration context. 

i. In 2012, a federal judge in California rejected the attempt by 

representatives of former beauty queen Sahar Daftary’s estate to gain 

access to her Facebook account. The estate representatives brought a civil 

action against Facebook to release the contents of the decedent’s Facebook 

account in an effort to prove her state of mind at the time of her alleged 

suicide. 

ii. In denying the request, U.S. Magistrate Judge Paul Grewal stated that the 

SWA does not require Facebook to comply with a subpoena in civil cases. 

iii. In dicta, the judge suggested that nothing prevented Facebook from 

deciding on its own terms who could have access to a deceased person's 

communications. 

VII. 

Accessing Digital Assets of Deceased or Disabled Client 

a. Crucial point that bears repeating: before the fiduciary accesses ANY digital 

asset, ensure he is authorized by the terms of the service of the applicable digital 

asset provider to do so. 

b. Next steps to access digital assets where no list or storage account exists: 

i. Make a list of all the decedent’s known digital assets, including all 

personal and professional email accounts. 

ii. After reviewing email provider terms and conditions to determine if 

fiduciary access is appropriate, fiduciary should access the decedent’s 

relevant email accounts to search for unknown digital assets and the 

information relevant to access digital assets (i.e., passwords, security 

questions, emails sent after the “I forgot my password” button is pressed, 

etc.). Email is often the gateway to discovering digital and even nondigital 

assets so the client’s email account may be very important. 

1. Attempt to access email accounts from decedent’s home and (if 

allowed) work computers, tablets, netbooks and smartphone. 

a. Internet browser programs can, at the user’s option, save 

username and password information, providing easy access 

to an email account from a home or work computer. 

b. Smartphones and tablets often have direct access to email 

accounts. 

11

c. If device is password protected, software and/or computer 

forensics specialist may be able to very easily bypass the 

password. 

2. If email account is with an Internet Service Provider (phone or 

cable company), ISP will usually reset the password upon the 

appropriate fiduciary’s request. 

3. Web-based email services: 

a. Google has recently added a feature that some may find 

helpful which is available for all Google accounts 

including, but not limited to, its popular Gmail web-based 

email service. New and existing Google users can 

designate up to 10 individuals to receive the contents of the 

user’s Google accounts in the event that such accounts are 

inactive for a designated period selected by the user. The 

user may instead choose that the account is deleted after the 

designated period of inactivity. In the event this feature has 

not been activated, gmail may release the contents of the 

email account (but not the password) to the appropriate 

fiduciary, although google has indicated that it may take 

them awhile to respond to the fiduciary’s request. 

b. Hotmail may release the contents of the email account (but 

not the password) to the appropriate fiduciary. 

c. Yahoo will release the contents of the account if the 

appropriate fiduciary obtains a court order. For example, in 

2004, the family of deceased Marine Justin Ellsworth 

sought to obtain messages from a yahoo email account and 

successfully obtained a court order directing yahoo to 

release the contents of Justin’s account. The family was 

sent a CD containing all messages Justin received, but not 

sent, as the settings chosen on his email account provided 

that sent messages would be shortly deleted. 

4. Prompt access is extremely important. 

a. Important to review/cancel automatic and electronic bill 

payments. If the estate is insufficient to pay all creditors’ 

claims, such automatic payments may expose the fiduciary 

to liability for paying creditors’ claims out of order. 

b. If prompt access is not obtained, emails could be deleted – 

most free email services delete messages if account has not 

been accessed for 4 to 9 months and will delete a person’s 

entire account if not accessed for 8 to 12 months. 

12

5. Fiduciary should change the password on all email accounts to a 

highly complex password to prevent unauthorized access. 

6. Fiduciary should access email accounts every week during the 

period of estate administration. 

7. Delete the account once the period of audit on the 706 is closed 

and/or the probate estate has been closed. 

iii. Check home and work computers for internet browser history. 

iv. Decide which digital assets, if any, should be preserved and how these 

assets will be preserved. Paragraphs e through g of this section address 

how to best preserve certain types of digital assets. 

c. Online Sales Accounts 

i. May include online business or sales through ebay, amazon, etsy and its 

related payment entities (e.g., paypal and western union). 

ii. Timely access to the sales account may be critical to preserve the value of 

the business and avoid breach of contract actions. 

iii. Fiduciary should arrange for completion of sales in-process at the time of 

death, refund incomplete sales and if desired, prevent future sales from 

occurring. 

iv. Most online sales marketplaces will allow the fiduciary to access the 

decedent’s account. However, the fiduciary generally may not transfer the 

account to another. 

d. Webpages and Blogs 

i. The decedent’s family and friends will likely know if he had a blog or 

personal webpage. 

ii. Check credit card statements and email account for evidence of hosting 

fees. 

iii. If the decedent paid for web page or blog hosting, usually the fiduciary 

can have the password reset and can gain full access. 

iv. Some free services will also re-set the password, but ask the decedent’s 

family if/why they desire access to the decedent’s blog. Will a copy of the 

content suffice? 

v. For an online business, contact web hosting agency to have access 

transferred to fiduciary. 

e. Social Networking Profiles 

i. Facebook, Myspace, Twitter, Linked-in 

ii. Most will not allow fiduciary to access account of deceased or disabled 

user. 

iii. If decedent is a public figure, prompt access to social networking profiles 

(if allowed) may be important for endorsement and PR purposes. 

13

1. When planning ahead, review of social media endorsement 

contract to determine what happens if talent dies unexpectedly is 

important. 

2. Casualty insurance may be appropriate to insure risk of death and 

subsequent breach of endorsement contract. 

iv. If the fiduciary does not know or cannot guess the password, options could 

include: 

1. Leave the account as is 

2. Delete the account; or 

3. Turn the account into a memorial page. 

v. The account may be used to alert friends and relatives of the decedent’s 

passing. 

f. Book, music, movie and other media accounts such as Itunes and Amazon Kindle. 

i. Customers own a nontransferable license to use the digital files purchased. 

ii. According to Amazon’s terms of use, “You do not acquire any ownership 

rights in the software or music content.” Cannot be transferred to another 

(which would include the fiduciary) following death or disability. 

iii. Apple limits the use of digital files to Apple devices used by the account 

owner (not successors in interest). 

iv. Contrast this non-transferability with “old fashioned” printed books and 

music and movies on disk—you could easily gift or bequeath your 

physical book, music and movie collection to another, but you cannot do 

so with your electronic book, music and movie collection. 

g. When all hope is lost call a data forensic expert. 

i. While data forensic experts should be able to find and access most types 

of digital assets, it is not without great cost (so plan ahead when possible). 

ii. To recover data effectively, the data forensic expert may need sensitive 

personal and financial information about the decedent that the fiduciary 

may be hesitant to provide. 

iii. Without knowing what digital assets a person has and the passwords 

necessary for access, it is nearly impossible to fully access a person’s 

digital assets. 

VIII. Valuing Digital Assets for Estate and Gift Tax Purposes 

a. Digital assets with financial value should be valued and included on an estate tax 

return and probate inventory. 

b. The IRS is aware that digital assets have value. IRS training materials from 2009 

state that agents should: 

i. Search the internet to investigate the taxpayer’s e-commerce activities; 

ii. Search the internet archive to view older, archived versions of websites; 

14

iii. Identify what domain names are owned by the taxpayer; and 

iv. Review a taxpayer’s business webpage and publicly available social media 

profiles. 

c. Web-based appraisal services like Web Critiques or Accurate Domains value 

domain names, websites and online businesses. 

d. These services typically review: 

i. Recent domain sales 

ii. Keyword search popularity 

iii. Brand recognition 

iv. Search frequency 

v. Domain marketability 

vi. Pay per click (PPC) popularity 

vii. E-commerce value 

viii. Spoken word popularity 

ix. Length of name 

x. Suffix 

xi. Recall value - 

xii. Web frequency 

xiii. Search engine optimization potential 

e. These services are primarily in the business of selling existing web-based 

businesses, websites and domain names and frequently place unrealistically high 

values on digital assets. 

f. These services are also unfamiliar with methodologies used to value assets for tax 

purposes. 

g. Instead engage business valuation analyst familiar with how to value assets for 

estate tax purposes and educate him on the unique challenges posed by the 

valuation of digital assets. 

h. The estate tax value of digital assets is the price at which the property would 

exchange hands between a willing buyer and a willing seller, both with reasonable 

knowledge of relevant facts. 

i. A traditional appraisal may analyze comparable sales, replacement costs, costs to 

create and future income. 

j. Many of these techniques are appropriate for the valuation of digital assets. 

k. For a domain name, market-based valuation may be used. 

l. Past sales data is available at domain marketplaces such as sedo.com, 

moniker.com and snapnames.com. 

m. However, since each domain name is unique, consideration should also be paid to 

d(i)-(xiii) above. 

15

n. For a blog, consider whether the death of the blogger renders the asset worthless, 

making something akin to a key man discount appropriate. 

IX. 

Other Interesting Digital Developments: Electronic Signatures and Estate 

Planning Documents 

a. Many types of legal documents can be created, signed and stored electronically. 

b. On June 30, 2000, Congress passed the Electronic Signatures in Global and 

National Commerce Act (E-SIGN) to facilitate the use of electronic records and 

electronic signatures in interstate commerce and to ensure validity and legal effect 

of contracts entered into electronically. 

i. . The E-SIGN Act excludes wills, codicils or testamentary trusts. 

c. In 1999, the National Conference of Commissioners on Uniform State Laws 

approved the Uniform Electronic Transactions Act (UETA) to give states a 

framework for determining the legality of an electronic signature in both 

commercial and governmental transactions. 

i. 48 states, along with the District of Columbia and the U.S. Virgin Islands, 

have adopted the UETA. The states that have not adopted the Act 

(Washington, Illinois and New York) have enacted similar legislation. 

ii. In 1997, Washington State enacted an Electronic Authentication Act as a 

way to “facilitate commerce by means of reliable electronic messages” 

and “to ensure that electronic signatures are not denied legal recognition 

solely because they are in electric form” (RCW 19.34). 

iii. As with the E-SIGN Act, the UETA does not govern wills or trusts. 

d. Currently, only one state, Nevada, has a statute allowing electronic wills (NEV. 

STAT. §133.085 (2001)). 

i. The statute defines an electronic will as one that is “written, created and 

stored in an electronic record.” 

ii. In addition to the traditional will requirements, the electronic will must 

include an electronic signature of the testator and at least one 

“authentication characteristic” of the testator. 

1. “Authentication characteristic” is defined as a “characteristic of a 

certain person that is unique to that person and is capable of 

measurement and recognition in an electronic record as a 

biological aspect of or physical act performed by that person. Such 

a characteristic may consist of a fingerprint, a retinal scan, voice 

recognition, facial recognition, a digitalized signature or other 

authentication using a unique characteristic of the person.” 

iii. Only one “authoritative copy” may exist (meaning the electronic record of 

the will must “original, unique, identifiable and unalterable”). 

16

iv. The statute allows for electronic wills, but not electronic trusts (other than 

trusts created in the electronic will). 

v. The statute was enacted to promote convenience, however, many find that 

the requirements for a valid electronic will are difficult to satisfy. See 

e.g., Boddery, Scott S., Electronic Wills, Drawing a Line in the Sand 

Against their Validity, 46 Real Property Trust & Estate Law Journal 197 

(August 2012). 

17

EXHIBIT A 

Digital Asset Inventory 

If you have a home computer, smartphone or email account or if you engage in any 

activities on the internet, please complete the following: 

1. Computer and Phone Information. List all of your personal and professional 

computers, tablets, netbooks and smartphones and identify the username and 

password to access each device. 

____________________________________________________________ 

____________________________________________________________ 

____________________________________________________________ 

2. Email Information. List all of your email addresses, describe what activities the 

email address is used for (e.g., personal, professional or to receive unwanted 

messages) and indicate the password. 

____________________________________________________________ 

____________________________________________________________ 

____________________________________________________________ 

3. Social Networking Profiles. List the usernames and passwords to each of your social 

networking profiles such as Linked In, Facebook and Twitter. In the event of your 

death or disability, should your profile be deleted? If not, who should be 

responsible for continuing your profile and what would you like for them to do with 

it? 

____________________________________________________________ 

____________________________________________________________ 

____________________________________________________________ 

18

4. Blogs, Webpages and Domain Names. List all of your blogs, domain names and 

webpages and indicate the registrar/host for each. In the event of your death or 

disability, should these sites be continued? If so, how and by whom? 

____________________________________________________________ 

____________________________________________________________ 

____________________________________________________________ 

5. Online Financial Information. List each bank and brokerage account for which you 

have online access and indicate your username and password for each account. If 

you have a paypal or other online purchasing account, list your username and 

password. 

____________________________________________________________ 

____________________________________________________________ 

____________________________________________________________ 

6. Digital Photos. If you take photos digitally, describe where you store your photos, 

list any photo sharing websites that you use and indicate your username and 

password for each site. 

____________________________________________________________ 

____________________________________________________________ 

____________________________________________________________ 

7. Other Online Accounts/Information. List any other online accounts or digital 

information that may be important or valuable. If relevant, describe what you 

would like to happen to that account or information if you die or become disabled. 

____________________________________________________________ 

____________________________________________________________ 

____________________________________________________________ 

19

8. Is there any sensitive information in the online accounts listed above that should be 

kept secret from some of your family and friends? If so, how should that 

information be handled and by whom? 

____________________________________________________________ 

____________________________________________________________ 

____________________________________________________________ 

20

BONUS ELIMINATION OF BIAS 

I Am Not My Illness: Dealing with Mental 

Illness 


Robins, Kaplan, Miller & Ciresi LLP 

Minneapolis 

Julie Grothe 

John P. Vuchetich, M.D., Ph.D. 


Saint Paul 

Michael P. Sampson 

JP Morgan Private Wealth Management 

Minneapolis 

Will Susens 

NAMI Ramsey Cournty Alliance for the Mentally Ill 

Maplewood 



I. Client with Diminished Capacity – Minnesota Rules of Professional 

Conduct, Rule 1.14 ...........................................................................................1 

II. Attorney as Advisor – Minnesota Rules of Professional Conduct ...................2 

III. 

IV. 

Zealous Advocacy – Minnesota Rules of Professional Conduct, 

Preamble, 2 ....................................................................................................3 

Confidentiality of Information – Minnesota Rules of Professional 

Conduct, Rule 1.6 ............................................................................................3

WORKING WITH A CLIENT OR FAMILY MEMBER OF A CLIENT 

WITH DIMINISHED CAPACITY 


COMMONLY IMPLICATED RULES OF PROFESSIONAL CONDUCT 

I. Client with Diminished Capacity – Minnesota Rules of Professional Conduct, Rule 

1.14: 

A. Taking protective action – “When the lawyer reasonably believes that the client has 

diminished capacity, is at risk of substantial physical, financial, or other harm unless 

action is taken and cannot adequately act in the client’s own interest, the lawyer may 

take reasonable protective action, including consulting individuals or entities that have 

the ability to take action to protect the client and, in appropriate cases, seeking the 

appointment of a guardian ad litem, conservator, or guardian.” (MRPC 1.14 (b)). 

1. “. . . [a] severely incapacitated person may have no power to make legally 

binding decisions. Nevertheless, a client with diminished capacity often has the 

ability to understand, deliberate upon, and reach conclusions about matters 

affecting the client’s own well-being.” (Comment to MRPC 1.14, 1). 

2. “Such measures include: consulting with family members, using a 

reconsideration period to permit clarification or improvement of circumstances, 

using voluntary surrogate decision-making tools, such as durable powers of 

attorney or consulting with support groups, professional services, adultprotective 

agencies, or other individuals or entities that have the ability to protect 

the client. In taking any protective action, the lawyer should be guided by such 

factors as the wishes and values of the client to the extent known, the client’s 

best interests and the goals of intruding into the client’s decision-making 

autonomy to the least extent feasible, maximizing client capacities, and 

respecting the client’s family and social connections.” (Comment to MRPC 

1.14, 5). 

3. “In determining the extent of the client’s diminished capacity, the lawyer should 

consider and balance such factors as: the client’s ability to articulate reasoning 

leading to a decision, variability of state of mind and ability to appreciate 

consequences of a decision, the substantive fairness of a decision, and the 

consistency of a decision with the known long-term commitments and values of 

the client. In appropriate circumstances, the lawyer may seek guidance from an 

appropriate diagnostician.” (Comment to MRPC 1.14, 6). 

B. Revealing confidential information – “Information relating to the representation of a 

client with diminished capacity is protected by Rule 1.6. When taking protective 

action pursuant to paragraph (b), the lawyer is impliedly authorized under Rule

1.6(b)(3) to reveal information about the client, but only to the extent reasonably 

necessary to protect the client’s interests.” (MRPC 1.14(c)). 

1. “The client may wish to have family members or other persons participate in 

discussions with the lawyer. When necessary to assist in the representation, the 

presence of such persons generally does not affect the applicability of the 

attorney-client evidentiary privilege. Nevertheless, the lawyer must keep the 

client’s interests foremost and, except for protective action authorized under 

paragraph (b), must look to the client, and not family members, to make 

decisions on the client’s behalf.” (Comment to MRPC 1.14, 3). 

2. “If a legal representative has not been appointed, the lawyer should consider 

whether appointment of a guardian ad litem, conservator, or guardian is 

necessary to protect the client’s interests.” (Comment to MRPC 1.14, 7). 

a. “In many circumstances, however, appointment of a legal representative 

may be more expensive or traumatic for the client than circumstances 

require.” (Id.). 

b. “In considering alternatives, however, the lawyer should be aware of any 

law that requires the lawyer to advocate the least restrictive action on behalf 

of the client.” (Id.). 

3. CAUTION: “Disclosure of the client’s diminished capacity could adversely 

affect the client’s interests. For example, raising the question could, in some 

circumstances, lead to proceedings for involuntary commitment. . . . At the very 

least, the lawyer should determine whether it is likely that the person or entity 

consulted will act adversely to the client’s interests before discussing matters 

related to the client. The lawyer’s position in such cases in an unavoidably 

difficult one.” (Comment to MRPC 1.14, 8). 

II. 

Attorney as Advisor – Minnesota Rules of Professional Conduct: 

A. Preamble, 2: “As advisor, a lawyer provides a client with an informed 

understanding of the client’s legal rights and obligations and explains their practical 

implications.” 

B. Rule 2.1: “In rendering advice, a lawyer may refer not only to the law but to other 

considerations such as moral, economic, social, and political factors that may be 

relevant to the client’s situation.” 

1. “Advice couched in narrow legal terms may be of little value to a client, 

especially where practical considerations, such as costs or effects on other 

people, are predominant. Purely technical legal advice, therefore, can sometimes 

be inadequate. It is proper for a lawyer to refer to relevant moral and ethical 

considerations in giving advice. Although a lawyer is not a moral advisor as 

2

such, moral and ethical considerations impinge upon most legal questions and 

may decisively influence how the law will be applied.” (Comment to MRPC 2.1, 

2). 

2. “A client may expressly or impliedly ask the lawyer for purely technical advice. 

When such a request is made by a client experienced in legal matters, the lawyer 

may accept it at face value. When such a request is made by a client 

inexperienced in legal matters, however, the lawyer’s responsibility as advisor 

may include indicating that more may be involved than strictly legal 

considerations.” (Comment to MRPC 2.1, 3). 

3. “Matters that go beyond strictly legal questions may also be in the domain of 

another profession. Where consultation with a professional in another field is 

itself something a competent lawyer would recommend, the lawyer should make 

such a recommendation.” (Comment to MRPC 2.1, 4). 

III. Zealous Advocacy – Minnesota Rules of Professional Conduct, Preamble, 2: “As 

advocate, a lawyer zealously asserts the client’s position under the rules of the adversary 

system.” 

IV. Confidentiality of Information – Minnesota Rules of Professional Conduct, Rule 1.6: 

A. “Except when permitted . . . a lawyer shall not knowingly reveal information relating 

to the representation of a client.” (MRPC 1.6(a)). 

B. “A lawyer may reveal information relating to the representation of a client if . . . the 

lawyer reasonably believes the disclosure is impliedly authorized in order to carry out 

the representation.” (MRPC 1.6(b)(3)). 

C. “A lawyer may reveal information relating to the representation of a client if . . . the 

lawyer reasonably believes the disclosure is necessary to prevent reasonably certain 

death or bodily harm.” (MRPC 1.6(b)(6)). 

“Such harm is reasonably certain to occur if it will be suffered imminently or if there 

is a present and substantial threat that a person will suffer such harm at a later date if 

the lawyer fails to take action necessary to eliminate the threat.” (Comment to MRPC 

1.6, 6). 

3

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