Blessing or Curse? When Your Client Asks You to Serve as Trustee

estate planningAs the person who clients rely on to provide sound advice and direction on family and business matters, and as someone who shares and understands their views and perspectives, it is natural for clients and their accountant as trusted adviser to develop a personal relationship that extends beyond their professional one.  As an extension of this relationship, it is common for a client to name his accountant as a trustee in his estate plan.  The client wants the trustee to guard a host of goals and dreams that go beyond the basic preservation of assets and wealth.

The client/donor believes that his accountant as his trusted advisor understands him; that he has the wisdom to incorporate the donor’s most important values, spoken and unspoken. However, the dual responsibility of the advisor/trustee can blur the parameters of those roles, and may have legal, financial, and psychological ramifications.  Indeed, the blurred or hybrid nature of the advisor/trustee’s role offers advantages and disadvantages, risks and opportunities.

When the client becomes disabled or dies, the accountant serving as trustee has fiduciary responsibilities to the trust and its beneficiaries. Even though the advisor/trustee should give credence to the founder’s intent, the advisor must now switch his loyalty from the founder to the trust, where the standard for decision-making is significantly different from that of trusted advisor.

The founder can do anything he wants with his own assets, his own business, and his own money. He can take risks. If his net worth or income declines, it’s his responsibility and he deals with the consequences. When the advisor takes over as trustee, the problems exacerbate. As a fiduciary, the advisor cannot take the same risk – it’s not his money, his assets, or his income. As trustee he is obligated to preserve the assets for the beneficiaries. He therefore cannot act in the same role as the founder, or even in the same role he had as the trusted advisor to the founder.

For example, the founder may not operate his business based solely on profitability. He might make decisions for other reasons – to employ friends, keep older employees who are no longer productive but who were loyal to him during his lifetime, or operate a division of the company for fun, regardless of the economic consequences. The problem is intensified, however, if one of those non-productive employees is a family member who may also become a beneficiary of the trust. When the trusted advisor takes over, he cannot maintain those decisions or take those same risks.

The combination of coping with the disability or death of a friend and significant client, switching roles, understanding the risks, and navigating the family’s issues is a Molotov cocktail—and often where the trouble begins. I have previously written about the hidden psychological traps that go along with this responsibility. This column is focused on the practical provisions within the trust document that the advisor should review and be comfortable with before taking on the role of trustee. (And a preliminary point worth noting is that even if you are nominated as a Trustee you are not liable until you accept the office so if every bone in your body is telling you not to proceed decline the position; once you accept the position you are in line of liability. Should you decline before serving you have no liability).

Right to Resign and Method for Appointing a Successor Trustee – Life is a movie, not a snapshot. While it may seem like a good idea now to serve as trustee, that may not be true in five years. You may end up in conflict with a beneficiary, you may face illness, or a life changing event such as divorce that takes much of your time and energy, or you may switch jobs. At some point, serving as trustee may not be right for you. When reviewing the trust document, determine what it says about resignation and your obligations should you do so. Do you have a responsibility to appoint your successor? Who has to approve it? What if there is disagreement among the beneficiaries? If you discuss this with your client while the trust is being drafted, your input may be important. You may ask the client to provide you with a list of persons or institutions that he would consider suitable to carry on. The client may have specific thoughts about who is qualified to take that role and include those parameters in the document e.g., independent trustee (not related to donor or any member of his family), trustee with a certain number of years of experience, or a certain amount of assets under management.

Indemnification Clause – Carefully review the duty to defend and indemnification clause – most trusts contain a standard one. State law provides default protection. If there are risky assets in the trust, or obvious issues with difficult beneficiaries, it is wise for the trust document to be clear about how the trustee will be indemnified and defended. For example, a clause that limits the trustee to gross negligence only may make sense.

No-Contest Clauses – Determine if there is a no-contest clause, which means that if a beneficiary challenges the terms of the trust or the way in which it is operated, that beneficiary’s rights are impaired. A trust document that includes this type of clause can be a signal that stormy waters lay ahead.

Distribution Language – Every trust has language that specifies the standards by which the trustee may distribute income and/or principal to the beneficiaries. The trustee should be clear as to what those distribution standards are and how to implement them. If possible, ask for clarification as to what the intention is and have a mission statement prepared that sets forth both the goals and objectives. These guidelines, although precatory, can be useful to both the trustee and the beneficiaries when the trustee is exercising discretion.

Actions of Trustee: Unanimous or Mandatory – If there are co-trustees, review the document to determine if decisions are to be made by unanimous or majority action. If the document does not specify, state law will have a default provision to that effect and should be reviewed. This can be particularly important if difficulties lie ahead. It can also be important to understand how transactions (once the underlying action has been determined) are to be effectuated – in other words how many signatures are necessary. The document should be reviewed for the power to delegate administrative or ministerial tasks.

Authority to Hire Advisors and Experts – Review the document to determine what authority you have, as trustee, to hire the standard advisors such as your own attorney (in your role as trustee), accountants, and investment professionals. If there are unusual circumstances, such as a beneficiary with special needs or substance abuse issues, review the trust document to determine if you will have authority to hire mental health professionals and related caregivers. It may also be advisable to have broad authority to hire others, such as private investigators.

Investment Language – As fiduciary, you have an obligation to invest the trust assets prudently. Review the trust to determine if the trustee is to make allocations between income and principal. If the trust holds risky assets such as a closely held business or real estate, review the language to be sure the trustee has the authority to continue to hold that asset even if it is not productive or profitable. Just because the donor chose to retain those assets, without specific language in the trust document, that investment authority does not transfer to the trustee. Also, owning a significant concentration of one stock is probably not a prudent investment unless the trust document authorizes the trust to continue to hold it even if it loses value. If the trust holds loans, those should be secured unless the trust specifically authorizes loans to be unsecured – it is prudent however, to secure loans even if they are made to a beneficiary.  If, as trustee, you hire investment advisors, make sure that you do due diligence and check the investment advisor’s references and background. Make sure you determine how the investment advisor is compensated and how those fees are charged to the trust.

Accountings and Reportings – A critical element of a successful trustee/beneficiary relationship is open and transparent communication about finances and distributions.  Review the trust document to determine what reports are required and who should receive them. Also determine what the procedure is for assenting to the accountings –especially if a beneficiary does not acknowledge or assent to the accounting. It is also advisable to have regular in-person or telephone meetings with the beneficiaries to answer any questions and ascertain their needs.

Compensation – Review the document to determine how your compensation will be established and what expenses are reimbursable. If you are also serving as the trust’s accountant, be clear on whether that is part of your trustee fee, and if not, how compensation would be otherwise billed. Since you, as trustee, are paying yourself as accountant, it is important that there is a clear understanding of when you are acting as trustee (and how you are compensated for that) and when you are acting as accountant (and how you are compensated for that).

Serving as a trustee for your valued client can be an honor and a privilege –but it is important to understand the difference between your role as trusted advisor and your role as trustee and to review the trust document objectively with an eye to the future.


Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

What Do You Mean Irrevocable? I Want to Amend That Trust

If I had a dollar for every time a client came to me asking to change his or her signed irrevocable trust document, I would have stockpiled trusts enough money for a nice European vacation. I am also quite sure that many of my estate planning colleagues have had similar experiences.

While rushing to make significant gifts at the end of 2012, many clients chose to establish irrevocable trusts at the same time. And now that the American Taxpayer Relief Act of 2012 has been signed into law, and the federal gift tax exclusion of $5 million (adjusted for inflation) is now permanent, that perennial question is right around the corner –  how do I change my irrevocable trust?

For many clients, the changes have nothing to do with taxation- there have been changes in the family (death, divorce, remarriage, substance abuse, or mental illness of the beneficiary), changes with the choice of fiduciary, or changes in circumstances.

Because of the gifting rush at the end of last year, and because the unprecedented opportunity to make significant tax-free gifts will continue, clients should understand that not only will the initially gifted assets bypass the transfer tax system, any appreciation in the value of the assets will not be subject to the estate tax until distributed.

For assets that are discounted, leveraged, and/or have significant ability to appreciate, the real wealth win will come during the client’s lifetime. As significant assets continue to appreciate outside of the transfer tax system, and the sheltered family wealth continues to appreciate, the family will face other changes. For gift, estate, and generation-skipping tax reasons, clients have always made irrevocable choices in a snapshot of time that will reverberate through the entire full length movie of life.

Of course, it is possible that the drafter contemplated that question and has already put some safety mechanisms in place. However, if that is not the case, there may still be other options for the client. This column will address an increasingly common option: decanting the assets of one irrevocable trust to a new irrevocable trust.

Decanting a trust is a mechanism by which the trustee of an irrevocable trust, known as the “Distributing Trust,” transfers assets to another irrevocable trust, known as the “Receiving Trust.” The ability of a trustee to make this distribution exists, depending on the jurisdiction, by a statutory power, a common law power, a power in the trust instrument to make such a distribution, or by the exercise of a power of appointment to make the distribution. These powers are commonly known as “decanting powers.”

The use of decanting powers has become increasingly popular as a means of ensuring that a method exists for dealing with changed circumstances that were not contemplated when the trust was drafted. The Internal Revenue Service issued Notice 2011-101 (April 2, 2012), which discusses the estate, gift, income and generation-skipping tax consequences of decanting. The Notice states that when decanting, beneficiary consent or court approval is not typically required or sought. In addition, decanting does not include any required interim or final distribution from a trust by the terms of the document; the trustee has a fiduciary duty and that, for the most part, the trustee who is decanting does not have any beneficial ownership in the trust itself.

The Notice refers to the first case dealing with decanting, Phipps v. Palm Beach Trust Co. 142 Fla. 782 (1940), a Florida Supreme Court case which held that a trustee could invade the trust principal by paying it over to another trust for the beneficiary of the original trust. This case was based on common law, not any specific authority in the trust document itself to decant. As pointed out in the Notice, there is reason to believe that the common law of every other jurisdiction in the country confers a decanting power on all the trustees who have the authority to invade trusts for the benefit of their beneficiaries. There are no contrary court decisions in this country.

Subsequent to this case, different states enacted legislation that authorizes decanting. There are 13 states (Alaska, Arizona, Delaware, Florida, Indiana, Missouri, Nevada, New Hampshire, New York, North Carolina, Ohio, South Dakota and Tennessee) that have adopted decanting statutes permitting trustees with distribution powers under the trust to distribute to beneficiaries, and to distribute property to another trust for the benefit of one or more of such beneficiaries – even if that other trust has different terms from those of the original trust.

Decanting an irrevocable trust can be a powerful estate planning tool. There are many reasons to consider decanting, including: protecting the tax treatment of the trust, granting a beneficiary a power of appointment, reducing administrative costs, altering trusteeship provisions, extending the termination date of a trust, converting a grantor trust to a nongrantor trust (or vice versa), changing a trust’s governing law, dividing the trust property to create separate trusts and reducing personal liability, converting a trust into a supplemental needs trust to permit a beneficiary to qualify for certain governmental benefits, making trust instruments spendthrift trusts, addressing changed circumstances in the family or trusteeship, modifying administrative powers, creating a dynasty trust, and correcting drafting errors without court involvement.

When considering decanting a trust it is important to be aware of the income, gift, estate, and generation-skipping tax consequences. As the Notice points out, the income tax issues include whether the existence of the decanting power causes the trust to be a grantor trust, whether decanting a trust that is treated as a grantor trust to one that is not a grantor trust is an income tax realization event, whether there is a recognition of gain (to the trust or to the beneficiary of the Receiving Trust) on the transfer, whether the Receiving Trust, upon receiving the assets of the decanted trust, also carries the tax attributes of those assets, whether the grantor of the Distributing Trust continues to be a grantor after decanting, and whether the existence of a decanting power results in the loss of Qualified Subchapter S trust status (QSST).

Gift and estate tax issues include whether a beneficiary whose interests are diminished as a result of the decanting has made a taxable gift, whether or not the decanting provision jeopardizes the marital deduction, and whether or not the donor of the Distributing Trust continues to be the Donor of the Receiving Trust. There are also generation-skipping considerations that should also be carefully considered.

IRS Notice 2011-101 provides important guidance on the tax issues that surround decanting a trust that no longer serves its intended purpose. Notwithstanding the tax complexities highlighted in the Notice and which must be navigated, for those significantly funded and appreciating irrevocable trusts that face issues not contemplated at the outset, decanting is a tremendous opportunity that should be fully considered and explored.


Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Kraft sons’ Trust Case Could Have Statewide Impact – Annino Quoted in Boston Business Journal

By Jay Fitzgerald, Special to the Journal

family trusts imageA move by the sons of New England Patriots owner Robert Kraft to modify a three-decades-old family trust may have a far-reaching tax impact on thousands of other trusts across the state.

The trust case before the state Supreme Judicial Court, which last week heard arguments from attorneys representing the trust’s longtime trustee and the four adult Kraft sons, is considered to be narrow in scope and somewhat routine on its own. But the Boston Bar Association has filed an amicus brief seeking a more broad ruling by the SJC about similar family trusts in Massachusetts.

The Kraft trustee, 81-year-old businessman Richard Morse, and the four adult Kraft sons — Kraft Group executives Jonathan Kraft and Daniel Kraft, as well as Boys & Girls Club of Boston CEO Joshua Kraft and David Kraft — are seeking to move the assets of a trust established by their parents in 1982 into a new trust that would give them more direct and individual control over assets.

No details were provided about the value of the original Kraft trust or its assets — including whether the assets include a stake in the Kraft Group, the company that controls a number of paper and packaging businesses and the Patriots and the New England Revolution sports franchises.

Attorneys for Morse, who plans to retire soon and give up his role as trustee of the Kraft trust, say they need guidance from the SJC about whether any trust modifications might trigger an onerous “Generation Skipping Tax.” This slaps a 40 percent federal tax on assets above $10.5 million transferred to the children of trust beneficiaries — in this case, the grandchildren of Robert and the late Myra Kraft — at the time such a transfer takes place.

All family trusts that were created before 1985 — including the original 1982 Kraft trust on behalf of the Kraft sons, who today are now all in their 40s — are exempt from this federal tax. In effect, the Krafts are asking whether the newly worded trust would retain its grandfathered exemption from the tax.

According to legal industry experts, it’s routine for the Supreme Judicial Court to hear specific cases about various trusts, since the Internal Revenue Service has to abide by the ruling of any state’s high court when taxing assets of private trusts.

“The Kraft case may be interesting because of the family but it’s kind of narrow on its merits,” said Rick Breed, a partner and estate planner at Boston law firm Tarlow Breed Hart & Rodgers. “But where the rubber meets the road is the Boston Bar Association brief and the GST implications.”

The Boston Bar Association is asking the SJC to make a more broad ruling that would apply to other trusts across the state, not just the Kraft trust. That could include thousands of trusts collectively worth billions of dollars.

A broader ruling would affect other family trusts established before the generation-skipping-tax law was modified in 1985 — and whether they can retain their GST exemptions after modifications. It could also affect other trusts and how they distribute assets “in further trust,” or transferring assets from one trust to another newly worded trust.

Andrew Rothstein, a Goulston & Storrs attorney who helped draft the BBA’s brief, said trust lawyers and many beneficiaries have long sought more clarification from the SJC about the power of trustees to distribute assets “in further trust.”

Such transfers are often considered because the original wording of many older trusts may not suit the needs of aging beneficiaries years later, often after their parents or trust benefactors have died. In the case of the Kraft sons, the motion filed by attorneys for Morse cited the fact that the original 1982 trust was written when the sons were just boys. The sons today, the attorneys say, are capable of controlling the trusts without a “disinterested” trustee, as originally was required in the 1982 trust.

The proposed Kraft trust changes — apparently agreed to by all parties in the case, including Morse, the four sons and Robert Kraft — say the assets will be narrowly used for the sons’ health care, education and other carefully worded purposes that will keep assets within their own individual estates.

The attorneys for Morse and the Krafts declined to comment, except to say that there’s an amicable consensus among all parties in the case that modifications to the original 1982 trust were necessary. “This is not a hostile, adversarial case,” said Jonathan Bernstein, an attorney for the Kraft sons at Morgan Lewis Bockius.

Patricia Annino, an attorney at Boston law firm Prince Lobel Tye, said there’s intense legal interest in general across the nation about the ability to “decant,” or transfer assets from one trust entity to another, due to the originally strict wording on how and who can control assets as stipulated in original trusts. Original trust restrictions may be technically outdated years later, legal experts say, although modifications must stay within the general intent of original trusts. “A lot of trust lawyers are looking at all types of decanting issues across the country,” Annino said. “It’s a big issue.”

Source:  Boston Business Journal


Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Planning For an Unpredictable Future: Key Organizational and Operational Components of a Trust

As professional advisors, we help clients plan for the future – yet none of us knows what the future holds. We must trust deed imagetherefore do our best to help create a solid, yet flexible, foundation that will accommodate changes to the family, the business, and the tax and regulatory environments. When we work with a client to help create an estate plan, we make sure that plan is implemented and executed. We might then feel that our job is done. But in reality, our job is done only if the client happens to die the very next day.

At the initial client meeting, it is our responsibility to explain that creating an estate plan is an ongoing process. The planning documents are but one frame in a long movie – the script of which has not been finalized, the participants not cast in concrete, and the provisions not intended to be permanent. In other words, estate planning, like life, is a movie, not a snapshot. Once that concept is clearly explained, the client should understand that the plan needs to be continually reviewed and revised.

For many families, the most important estate planning document is the Trust. It is the document that may continue past the client’s lifetime, past the spouse’s death, and past the death of the children. Over the last 20 years, many advisors and clients established a trust for tax purposes – to reduce the estate taxes that the family will pay when both spouses die. But for the past 20 years, there hasn’t been nearly enough focus on the non-tax components of the trust arrangement.

As advisors, we must be aware of the dual components of using trusts in estate planning – organizational and operational. The organizational structure is established when the trust is signed. The operational structure starts from that point and continues on. The family, the laws, and the investments will all change – and the fiduciaries will need to make decisions.

Organizational Components of the Trust. For many clients, the foundation of estate planning is the trust and its provisions. This fundamental organizational document lays the groundwork for later implementation, so it is important to pay careful attention to the wording. Some key organizational components include:

  • Who is the donor (person establishing the trust)? Who are the initial players? Who are the beneficiaries? Who are the trustees?
  • Does the trust contain a stated purpose?
  • Is it revocable or irrevocable?
  • What are the provisions that pertain to the trustee powers? How many trustees are required? Must the trustees act unanimously or by majority? What is the standard for trustee removal? What is the standard for appointing new trustees? Are there specific powers authorized in the document, e.g. retaining a family business or selling real estate?
  • What are the provisions that pertain to the beneficiaries? Who are the permissible beneficiaries? Spouse only? Spouse for life then children? Spouse and children concurrently? Spouse and descendants? In-laws? Charities?
  • Powers of appointment. Does the trust include provisions that give beneficiaries the power in their Will to change who will receive the assets or the terms of the trust? Is it a special power of appointment, limited to a certain class, such as the donor’s descendants? Is it a general power of appointment – meaning the power to expand the group to charities, to creditors, to anyone?
  • Does the trust include a spendthrift clause that will protect the trustee assets (as long as they are not distributed from the trust) from the creditors of any beneficiary?
  • Jurisdictional issues. What state law governs how the trust will be administered? Can that jurisdiction be changed? If so, who can change it?
  • Termination of the Trust. When does it end? After the death of the donor and his/her spouse? When the children reach a certain age? Does it run for the Rule against Perpetuities period? Does it end only when the trustees decide to end it?

Operational Components of Trust Administration. The organizational components of the trust document outlined above are the guide to how the trust will be operated – from the date the trust is signed until the date the trust ends. Key operational components of trust administration include how the clauses in the trust are interpreted and implemented. To understand the scope of the administration it is important to contemplate issues such as:

  • Investments. After reviewing the powers in the trust documents, the trustees must then review the law in effect at the time of administration and decide how they will operate the trust. Will the trust be operated for growth? For income? For balance? Will certain assets, even if nonproductive, (such as residential real estate) be maintained? Should rent be charged? Should the trustees provide loans of trust assets to beneficiaries? On what terms? With formal notes? What should be the terms of repayment?
  • Distributions of Income and Principal to Trust Beneficiaries. The trustee will review the document and determine who the class of permissible beneficiaries is at any given time. With that in mind, the trustee (guided by the documents and the law) must make decisions regarding distributions. Should they be equal? Income only? Income and principal? Principal only for limited reasons? Should the trustee require an annual budget from the beneficiary before making a decision? Should the trustee authorize regular payments? Should any beneficiary requests be denied?

When making these decisions, the trustee should be aware that the pattern of distribution can have consequences to the creditors of the beneficiary. There may also be considerations in a divorce – what, if anything, is the soon-to-be-ex-spouse of the beneficiary entitled to? The trustee will also have to decide the process for evaluating bequests from the beneficiary. A face-to-face meeting? Communicating by phone or email? Who is to be consulted? Are there provisions in the trust that require monitoring – such as no distributions if it is believed that a beneficiary suffers from substance abuse? If so, how should that be monitored? Is there a withdrawal right? In other words, does the beneficiary have the right to withdraw funds no matter what the trustee says?

  • Powers of Appointment. If there are powers of appointment in the document, have they been exercised? To whom and for what duration?

Once the trust is signed, you and the client should discuss when the plan will be reviewed next. Many advisors encourage their clients to write an annual letter to the trustee, which might contain provisions that are read only when the trustee is administering the trust. As life changes, the client could send this letter to help guide the trustee on issues relevant to administering the trust – such as a troublesome marriages, creditor issues, special needs, mental illness, and substance abuse.

Since the primary decision for establishing a trust may no longer be to reduce estate taxes, it is important for advisors and clients keep the organizational and operational components in mind, paying careful attention to meeting the trust’s goals and objectives.


Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Estate planning for valuable art (Part Two)

Lessons Brooke Astor could have used.

To continue our discussion from May 22.  Here are several additional options and considerations you may find appealing.


The donor may determine how the income interest will be calculated with a CRT. There are two types of CRTs: the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT). The CRAT is designed so that the actual dollar amount distributed to the donor (and/or the other persons the donor designates) are fixed when the trust is created and funded. Generally the predetermined annuity amount will not change no matter how the trust assets fluctuate in value. A CRAT can be appealing to the donor who needs a specific amount of income and who is concerned about a change in income payments.

A CRUT is designed so that the amount distributed to the donor is recalculated each year based on a fixed percentage of the trust’s fair market value for that year. Unlike the CRAT, the CRUT is not a fixed annuity payment. The fixed percentage will not change; however, the amount that the donor receives can fluctuate. If the CRT performs well and the trust assets increase in value, so will the income interest payment, which is calculated as a fixed percentage of the increased trust value. However the reverse is also true, and if the trust decreases in value, the income interest will also be affected. A CRUT is appealing for the investment-minded donor who wants to benefit from increased income payments resulting from the long-term appreciation of the trust assets. There are various types of CRUTs, which should be explored in greater detail before the client makes a final decision.

A disadvantage of using a CRT for art is that because art is personal property, the income tax deduction may be limited significantly. In addition, when a charitable contribution consists of a future interest in tangible personal property, no deduction may be taken until all interests and rights to possession or enjoyment of the property have expired or are held by a person other than the donor (Sec. 170(a)(3)).

The tax benefits of transferring art to a CRT and later selling it include avoiding the capital gains tax on the sale of the asset and removing the underlying value of the asset from the donor’s taxable estate. Of course, the reason that the art is removed from the taxable estate is that it is no longer owned by the donor. For that reason, some donors couple the use of a CRT with what is known as an irrevocable life insurance trust. When used together, these tools replace the art’s value and keep that value out of the donor’s taxable estate.


The client may also choose to make a gift (lifetime or at death) of the art to family members in trust. If the client wishes the art or collection to stay with intended beneficiaries, he or she can establish an irrevocable trust and transfer the collection to it. That will protect the assets from the creditors of the beneficiaries and preclude its value from being taxed in the client’s estate. If doing so, it is advisable to add enough funds to that trust to insure and maintain the art. Choosing a trustee must be carefully considered as the trustee or trustees will have the continuing ability to manage the trust assets, including the art.

Fractional Interests

A gift of a fractional interest in art should also be considered. However, the Pension Protection Act of 2006 (PPA) greatly limited the value of this strategy. Until passage of the PPA, a collector could donate a fractional interest in a work of art to a museum that qualifies as a charitable institution. Collectors did so for many reasons, one of which was that they could take a tax deduction for the value of the fractional interest. For example, if a collector donated a 50% interest in a painting to a museum, he or she could write off half the value as a charitable deduction. The painting would spend half the year in the donor’s possession and half the year in the museum’s. Unfortunately, this led Congress to be concerned that collectors may have been abusing the write-off by enjoying more than their rightful share of the art. For example, if a collector donated 50% of the art but kept it for more than six months a year, the public would be losing out on the painting’s availability during the excess period.

To address this perceived abuse, Congress changed the law to make donations of partial interests in artwork much less attractive for donors. Generally, before the PPA, the collector would bequeath the remainder of the fractional interest to the museum so the collector’s estate would take a charitable contribution deduction for the remaining current fair market value at the time of the collector’s death. But the PPA changed the law to require that the write-off be based on the art’s value at the time the original fractional interest was donated if the art appreciated in value, rather than on its value at the time of the collector’s death. If the art’s value has appreciated in that period, as it typically does, the law will reward the collector by reducing the amount his or her estate could take as a deduction for the donation and thus increasing the estate tax liability.

Consider the example of a painting worth $1 million when the collector first donated 50% to the museum. The collector bequeaths the remaining 50% of the painting when she dies, at which time it is worth $10 million. Under the old rule, the painting would pass to the museum and the estate would take a $5 million charitable contribution deduction. Under the new law, her estate may only deduct $500,000 and the estate would have to pay taxes on $4.5 million more than it would have under the old law.

The PPA also introduced recapture rules (deductions turned back into taxable income) that further reduce the desirability of contributing a partial interest in art. If the collector fails to donate the balance of the art to the museum on or before the earlier of 10 years of the original gift or the collector’s death, the collector will be forced to recapture the deduction. In addition to paying income tax and interest on the recaptured amount, the collector must pay an additional 10% tax on it. This essentially requires the collector to donate or bequeath the remaining fractional interest or lose the tax benefit of the original gift.


If the client has valuable art, it is important that he or she assemble a team of advisers that understands how to deal with it. The team may include an attorney, financial adviser, tax specialist, and an art succession planner. It is wise to make sure that the team members know the extent and value of the art and how the client intends to dispose of it so that it can properly be taken into account when establishing a financial and estate plan.

The decisions and choices as to how to preserve the legacy of artwork should be thought through with care and involve a discussion with the client, the intended beneficiaries, the charitable organization, and the team of advisers.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Patricia Annino Receives “Best in Wealth Management” Award

The Euromoney Legal Media Group chose Patricia Annino, Chair of Prince Lobel’s Estate Planning and Probate Practice Group, to receive the prestigious “Best in Wealth Management” award at the second annual Americas Women in Business Law Award ceremony held May 24, 2012, in New York City.

Selected from a short-list of eight well-known, highly-qualified nominees, Patricia’s award was based on extensive peer review research conducted by Euromoney’s research team, her professional accomplishments during the past 12 months, and her advocacy and influence in the field of wealth management.

Following the success of similar award ceremonies in Europe and Asia, the Americas Women in Business Law Awards was launched by Euromoney Legal Media Group to give law firms and professional services firms the recognition they deserve for their efforts in helping women advance in the legal profession.

Patricia Annino is a nationally recognized expert on estate planning and taxation, with more than 25 years of experience serving the estate planning needs of families, individuals, and owners of closely held and family businesses. She speaks regularly on many issues of concern to family owned businesses, including succession planning, risk management, managing a business with multiple stakeholders, the risk of divorce, and more. Annino is a graduate of Smith College and Suffolk University School of Law.

Patricia is the author of two widely utilized professional texts: Estate Planning in Massachusetts, and Taxwise Planning for Aging, Ill, or Incapacitated Clients. Patricia’s recent books for consumers include, Cracking the $$ Code: What Successful Men Know and You Don’t (Yet), Women in Family Business: What Keeps You up at Night, and Women & Money, A Practical Guide to Estate Planning.

About Prince Lobel

Prince Lobel Tye LLP is a full-service law firm providing a wide range of services for Fortune 1000 companies, closely held businesses, and individuals. Prince Lobel’s attorneys are guided by the highest standards of legal excellence, professionalism, and service – whether they are addressing complex business issues or providing advice on personal legal matters. Practice areas and industries served encompass corporate law, data privacy and security, domestic relations, employment law, estate planning and probate, insurance and reinsurance, intellectual property and Internet law, litigation, media law, nanotechnology, real estate, telecommunications law, construction law, environmental law, renewable energy, health care, and education. For more information, visit Prince Lobel at

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Estate planning for valuable art (Part One); Lessons Brooke Astor could have used.

According to many who knew her, noted heiress and philanthropist Brooke Astor had a favorite painting, a Frederick Childe Hassam work known as “Flags, Fifth Avenue.” This American impressionist painting hung in a prominent place in her apartment since the early 1970s. Her son, Anthony Marshall, sold the painting while she was alive (and not competent) for $10 million and paid himself a $2 million commission. A short time after the sale, the dealer resold the painting for $20 million.

For many individuals and families, what to do and whom to trust with art is a thorny issue. It is important to consider the legacy of the work itself. Understanding the choices of who should receive it, who can afford to pay any estate taxes on it, who can afford to maintain it, who will use it, and who will appreciate it is an important part of the planning process. For many families these are not simple decisions. The right solution lies at the intersection of many complex and sometimes competing considerations.

Valuing art is an inexact science. No one can ever be sure what the market will bear. A first step to understanding the value is to get a qualified appraisal and valuation. The appraiser should be a member of either the American Society of Appraisers, the Appraisers Association of America, or the International Society of Appraisers.

It is important that the client understands the impact of taxation on the art in his or her estate (editor’s note: for more on this topic also see this Journal of Accountancy article.) For estate tax purposes, the gross estate of a U.S. citizen or resident at the time of his or her death, includes “the value of all property, real or personal, tangible or intangible, wherever situated” owned by the decedent at the time of his or her death (Sec. 2031(a)).

The IRS has established an Art Advisory Panel whose task is to assist the Service in reviewing and evaluating appraisals of artwork in conjunction with federal income, gift, and estate tax returns. (IRS Internal Revenue Manual, §42(16)4). The panel consists of 25 art experts. If a tax return containing art with a claimed value of at least $20,000 is selected for audit, the case must be referred to the panel. If the artwork exceeds $50,000, Rev. Proc. 96-15 (modified by Announcement 2001-22) provides that a request can be made for an IRS-expedited review of the art valuation.

The client should understand that with valuable art, more may be included in his or her gross estate than the art itself. Art may have to be sold and substantial commissions paid on the sales. If that is the case, it may be desirable to mandate in estate planning documents that a sale be made by the executor so that the commissions are deductible as administrative expenses. The only other way that commissions paid on the sale of the art after death are deductible from the estate is if the sale is necessary to pay the estate taxes. In other words, if the art is sold by the estate (for any reason other than it was essential to pay estate taxes) and the estate planning documents do not mandate that the art be sold, then the expenses of the sale, which can be significant, will not be deductible. Therefore, in essence, the heirs will be paying an estate tax on the lost deduction.

That is one reason it is important to have a frank discussion with family, beneficiaries, and any intended charity before bequeathing art. If a piece of art has always been in the client’s family and the client believes that his or her children wish to receive it, it is wise to have a conversation with the children or heirs to see if they want the art or if they are more interested in converting it to cash. In reality, the children or heirs may be unable to pay the taxes and the cost of maintaining the art.

The possible lack of deduction from the taxable estate for expenses attributable to the sale of art underscores how critical it is to discuss the art’s legacy with heirs and with any charitable organization in the planning process. If the client wants to leave the art to a charitable organization and the organization is willing to accept it, then the art’s value is included in the taxable estate and the estate receives a charitable deduction for the gift. If the charitable organization does not accept it and there is no alternative provision and the art is sold and added to the residue or passes to individual heirs, the expenses attributable to the sale are not deductible.

If, in the discussion about art, one family member does wish to receive it, then in the planning process you must carefully address how the estate taxes on that art are to be paid —who is to bear the burden of that tax? Is it the recipient or is it the estate’s remaining assets? Another option may be to consider what is known as a disclaimer—that is, the client leaves the art to the charitable organization or to a family member, and if they disclaim it (or choose not to take it) then the will mandates the sale of that asset to ensure that the estate will receive the requisite deduction.

If the client is considering gifting art to a charitable organization, find out now whether it is realistic for that organization to accept the gift and discuss any terms of the gift. Will there be any restrictions? Are those restrictions realistic? Are there endowment funds that will accompany the donation? It can be a burden to maintain and store art for a significant period of time. In my experience, donating funds to assist with maintenance and storage is prudent.

Charitable Remainder Trusts

Lifetime gifting options should be explored. There can be income tax benefits to making the gift of art—whether outright, in trust, or by fractional interest now. To assess the benefit, you must determine the income tax basis in the asset and quantify any capital gains tax that will be due on the sale. To avoid that gain, some clients consider transferring the art to a charitable remainder trust (CRT). A CRT (known as a split interest gift) is an irrevocable trust. The donor can gift the assets to the trust and retain the right to receive income for a predetermined period. When the income period ends, the CRT ends, and the remaining assets are distributed to the charitable organizations the donor has selected.

When the donor contributes an asset to the CRT, the donor will (in most cases) receive a current income tax deduction equal to the present value of the gift the charity will eventually receive when the CRT ends. Because CRTs are generally tax-exempt, appreciated assets can be gifted to a CRT and later sold without the donor or the trust owing capital gains tax. However, a CRT with unrelated business taxable income may be subject to a 100% excise tax on the unrelated business taxable income.

When the CRT is being established, the donor must decide the length of the income interest. In many cases, it is a lifetime payment stream (and/or for the lifetimes of one or more other persons the donor designates). As an alternative, the donor may direct that the income interest be paid for a specified period not to exceed 20 years. Once the specified income interest has concluded, the CRT terminates and the remaining assets are distributed to the charities that the donor has chosen.

Next week we’ll continue this discussion by looking at several types of trusts you may want to consider when making these types of gifts, as well as, the Fractional Gift option, and changes in the way these are managed.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

How Psychedelic Drugs Can Help Patients Face Death & What it Means to Estate Planning Effected Towards the End

I recently read an article in the New York Times (read article here: about a study using Psychedelic Drugs to help patients cope with facing death as the result of a life-ending diagnosis, like cancer.  In the article it indicated that these end-of-life researchers only included otherwise healthy patients, those with no indication of mental illness, in the study.

These drugs are also being examined as treatment for alcoholism and other addictions.  While I can see the advantages of such treatment for those facing the end of their lives due to grave illnesses, it also makes me very aware of how this might affect the ability for someone to consider and finalize their estate planning needs at a time when they are not only facing their own demise, but while under the influence of psychedelic drugs.

Could this open up their decisions to scrutiny after their death?  Even though they are otherwise considered of sound mind, does this open the door for others to challenge a person’s Will or other estate planning functions finalized after such diagnosis, and while using psychedelic drugs.

I am an advocate for putting your affairs in order early on, long before you might be facing something like this, but the reality is, even if plans had been made, depending upon the individual situation, such a diagnosis could cause someone to rethink or alter their plans.

It seems like we would need to take some sort of extra steps during this process to make sure we can forego any challenges that could or would be made to change your final wishes.  I’m not exactly sure what that might look like, how we could provide verification of your ‘sound’ mind at such a time.

What do you think?  Leave your comments or questions below and expand the discussion!

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

A Special Gift for Moms on Mother’s Day

As Mother’s Day approaches, I am reminded of those times when I was just not sure of what to give my Mom on her special day.  I recall a time when I helped get her estate planning and affairs in order, and how much she appreciated the peace of mind that it allowed her once the process had been completed.  Now that she has Alzheimer’s disease I am very glad we had that conversation and she had the ability to put her affairs in order. I am also glad we had the opportunity to discuss what type of care she wanted and how that should be managed.

Whether you’re looking to support your Mom, or get your own house in order, take this time to make sure that, much like you normally focus your time as a Mom making sure that everyone else is protected and safe throughout the year, that you and yours are, too, as it relates to your estate planning needs.

It reminds me of what the flight attendants say every time the plane takes off, if the barometric pressure changes and the oxygen mask drops from the sky, put the mask over your own face first…it is only when you do that, and protect yourself, that you can know that you are strong enough to protect the others you by instinct protect.

What a wonderful gift to you and your family at a time when we pause to honor you on Mother’s Day.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Gifting Ownership of the Vacation House: A Gift or a Curse?

Ben Franklin once said that fish and houseguests smell after three days. But what if the houseguest co-owns the house? The perils of the vacation home, what to do with it, who should own it and what the rules are can be a source of family satisfaction and family conflict.

Under current law, the 2012 federal gift exemption is $5,120,000. Since many parents and grandparents are uncertain of their economic future, they may not want to gift assets that still earn income. Nor do they want to give away assets that have a low income tax basis that may be sold in the future. For these families, the vacation home is an attractive asset to consider gifting.

Gifting the vacation house to the next generation, or to a dynasty trust for the benefit of subsequent descendants, can remove that home (and any appreciation in its value) from the taxable estate. But before heading down that path, homeowners must carefully consider how that home will be owned post transfer.  We will explore three options: (i) outright ownership, (ii) an irrevocable trust (which could be a dynasty trust), and (iii) a family limited partnership or a limited liability company.

Outright Ownership

Often, the choice of making an outright gift of the vacation home is not appealing, whether the next generation owns the property as tenants in common, or as joint tenants with a right of survivorship. Many states have the right to compel a sale of that asset through a court proceeding, so the ownership of the home may be divisible in a divorce and subject to that family member’s creditors.

Also, family issues and resentments may develop with co-ownership. The child who lives out of state and never uses the home may resent sharing the expenses. Plus, with each generational transfer, the ownership becomes more fractionalized and the ownership of the asset is included in the taxable estate of each subsequent generation. There could also be conflict, such as who uses it the week of July 4th? Who pays for maintenance? Should rent be charged to cover expenses?

Irrevocable Trust (could be a dynasty trust)

A more appealing option for many families is transferring ownership of the home to an irrevocable trust. To complete the gift, the trust must be irrevocable, meaning that the donor cannot retain the ability to change, amend, or revoke its terms. The art of drafting an irrevocable trust is to remember that life is a movie not a snapshot, and that the document, while irrevocable, must also be flexible enough to contemplate the future.

The trust should address what happens to the child’s share at his or her death, whether or not the child’s spouse or stepchildren can continue to use the property in a divorce, or if the child predeceases his or her spouse. It should also address who is responsible for paying expenses, the line of succession of trustees, how the home should be furnished or updated, whether nonpaying guests may use the property, and who sets the rules for using the property.

Reasonable rules include who can use the property and when, the process for how that determination is made, whether use can be exclusive or must be open to all families all the time, payment of operating expenses, noise, cleanliness, pets, number of people, who pays for landscaping, parking, whether the property can be rented to nonfamily members, and other issues affecting the use and enjoyment of the property. The trust document can also address who has the right to determine the operating reserve and when income and/or principal may be distributed to the beneficiaries.

It may be also helpful for the donor to state intent – perhaps the use of the property is not intended to be equal, but based on relative degrees of interest in and ability to enjoy the property, and to take into account relative contributions (financial or otherwise) to its maintenance and improvement.

The document may also include a buyout provision by which one beneficiary (or beneficiary’s family) can sell his or her interest to other family members. Many families do not allow family members to cash out of their share in the home. An advantage to restricting what a family member can do to convert his or her share to liquid funds provides additional creditor protection and also helps keep that interest out of the taxable estate of subsequent descendants.

The trust should also address the mechanism by which a decision can be made to sell the home – should a decision that important be left only in the hands of the trustee? Should it include the trustees and all adults in the next generation? Should the vote be by majority or unanimous? The tension in that choice is that one family member who wants to use it more than others may block the sale for personal gain.

It is important to fund the trust with enough liquid assets to cover ongoing expenses and trustees. Future family discord might be avoided if family members who do not use the property are not expected to help cover its expenses. The funding can occur during the donor’s lifetime or at his or her death, through the donor’s estate plan. Once the property is transferred to the trust, the trustees should ensure that the property has sufficient property and casualty insurance coverage.

The trust document should also address the duration of the trust. It could end at a certain date, when the underlying asset is sold, when the trustees decide to end it, when the trustees and all adult beneficiaries agree to end it, when the Rule Against Perpetuities Period ends it, or if it is governed by a state that does not have any Rule Against Perpetuities, then it may never end.

Family Limited Partnership or Limited Liability Company.

A third choice is transferring the home to a family limited partnership or limited liability company, where the terms of the operating agreement control how the property is used. These entities are more businesslike than a trust, as they are members or partners. They offer the same benefits of the irrevocable trust, but may be more flexible. The operating agreement can provide a mechanism that allows it to be amended. If the entity is underfunded, the manager or general partner can make a capital call on the owners to contribute additional funds to the entity. As with the trust, the agreement will appoint a manager or management committee. The ownership structure can have two classes- voting and nonvoting. The transfer of ownership through sale or gift can be restricted.

Another benefit to gifting in this manner is that the valuation of the gift may have additional leverage and qualify for minority discounts or lack of marketability discounts. If the gift is not made all at once – but rather over several years – then all gifts are made off the record of the respective Registries of Deeds. In other words, the transfer to the entity is recorded initially, but ensuing gifts are transfers of the units or shares in the entity and are done within the entity itself, not in the Registry. This can save annual recording fees.  Additional benefits include income tax consequences in that each owner may have the benefit of the income and deductions flow through to his or her individual income tax returns.

Summary. Gifting the vacation house this year while the federal exemption is so high may be a very wise move. It is important for clients to think through their choice of entity and the considerations mentioned above before making this irrevocable decision.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,