Estate Planning Corner: Subtrusts, Tax Planning and More

By John O'Grady, O'Grady Law

Estate Planning Corner

When is a Win not a Win?
Leland Babbitt’s estate was divided into two subtrusts upon his death–one for his wife Mary Lynne and the other for his daughter from a prior marriage, Carol. Mary Lynne was entitled to the income of both trusts and she had broad power to invade the principal of them for her own benefit. Carol obtained a Superior Court order requiring Mary Lynne to provide her with an accounting for the period before Leland’s death. The appellate court reversed by ruling that, as a contingent beneficiary, Carol could not compel the trustee of a revocable trust to provide an accounting because there was no claim that Leland was incapacitated or subject to undue influence. Carol was only entitled to a post death accounting because the subtrusts became irrevocable upon Leland’s death. Under the terms of the subtrusts, Mary Lynne can freely access the principal of the trusts and Carol may inherit nothing upon the death of Mary Lynne. Carol’s battle reminds us that in 279 B.C., King Pyrrhus of Epirus defeated the Romans but lost a vast number of men. Don’t blindly lead your clients in following King Pyrrhus or Carol into battle when the possible costs outweigh the benefits of victory. Consult an experienced estate planning lawyer to be fully aware of the risks and rewards of litigation before proceeding. Babbitt v Superior Court, Cal. 2nd App. Dist., Div. 7, B263917 (2016)

Good Tax Planning Makes Good Memories
Give your loved ones the car, the cash, and the house, but don’t give them an 11-year legal battle. In his last year, Sheldon Sommers gifted valuable artwork to his three nieces, got married, sued his beloved nieces to void the gifts, and died, leaving an enormous and costly mess to his loved ones. After two state court battles and one in the United States Tax Court, it was finally determined that the gifts were irrevocable, and that estate liabilities would be paid not by the nieces but by the marital share of the estate. In other words, the new Mrs. Sommers ended up inheriting much less than Sheldon wanted her to. The allocation of estate tax among beneficiaries has long been a basic aspect of good estate planning. This case highlights the need to consider that lifetime gifts may result in estate tax liability, and the question of who will bear the cost of it, if the donor dies within three years of the gift. With the assistance of an experienced estate planning attorney, your clients can minimize their loved ones’ relationship with the IRS so that they have more time to cultivate great memories with each other. Estate of Sheldon C. Sommers 149 T.C. No. 8 (2017)

About the author
John O’Grady leads a full-service estate and trust law firm in San Francisco.  His practice includes Estate Planning & Administration, Probate and Trust Litigation.