Protect Your Estate by Properly Funding Sub-Trusts

By John O’Grady, O’Grady Law Group

In the complex world of estate law, even a seemingly small oversight can cost your beneficiaries big money.

As the successor trustee of his parents’ estate, Elwood Ty Olsen learned this the hard way. Before her death, Elwood’s mother Grace signed a trust document which provide for three sub-trusts upon her death: Marital Trust A ($1 million), Marital Trust B ($504,695) and a Family Trust ($600,000). When she died in 1998, her husband Elwood Sr., made significant withdrawals from the marital trusts, donating over $1 million to Iowa’s Morningside College where he served as Vice President until 1978 and transferring $393,978 to himself.

But he failed to properly fund the three separate trusts. So after he died in 2008, the IRS successfully claimed that the funds Elwood Sr. transferred to himself constituted an unlawful “invasion” of the marital trusts. Elwood Sr. could have spared his son the time and expense of a legal battle with the federal government by honoring the tax planning of the trust document.

TC Memo 2014-58, RIA TC Memo ¶2014-058, 107 CCH TCM 1306.

About the author:

John O‘Grady, O’Grady Law Group, was the 2012 chair of BASF’s Estate Planning, Trust & Probate Section.