The Case for Making Gift Transfers in Trust -- Part I

Introduction to Modern Estate Planning

Estate planning has traditionally been concerned with saving taxes, especially transfer taxes.[1]  Recent legislation has significantly reduced, if not eliminated, estate tax reduction as a concern for many families.[2] Today, many financial advisors claim that this recent legislation is a "game changer" that should cause planners to rethink the traditional emphasis on reducing transfer tax and shift their focus to reducing income tax.

Formerly, estate planning focused inordinately on the reduction of estate tax liability through the use of "credit shelter trusts" to hold estate tax exempt property and ensure its passage to children and grandchildren free of estate tax.  These trusts followed a very traditional design and contained relatively inflexible and rigid provisions that were intended to restrict a beneficiary's access to the trust assets until some future time when he or she would be better able to manage them directly.  Clients would then choose the date (usually based on the age of a child or grandchild) at which the trust would terminate and full control of the assets would be turned over to the beneficiary.

Because trusts also require additional administration and are subject to relatively high income tax rates, many advisors now claim that trusts are not only no longer necessary, but also that they may be detrimental to the preservation of family wealth.

Against this background, it's no wonder that clients continue to struggle with balancing their desire to provide their children with access to the wealth that they have worked so hard to accumulate against the dangers inherent in providing unrestricted access too early and subjecting those assets to risk associated with the child's relative immaturity and lack of experience.  They are not helped by suggestions that simpler is better and that income tax considerations argue against transferring property in trust.  If all a trust represents is a rigid, income tax detrimental restriction on a beneficiary's access to her assets, then resistance to the use of trusts is understandable.

A fundamental premise of this series is that the game has not changed.  While saving tax (whether income or transfer tax) is important, a narrow focus on tax planning strategies can obscure the real, underlying objective of all financial planning—and that is to so organize and conduct one’s financial affairs so that they are relatively transparent.  This means that the pressures, stresses, concerns, worries, identity, ego and self-esteem issues surrounding one’s relationship with money cease to matter to his or her enjoyment of and involvement in life.  Family financial wealth can provide options and alternatives that contribute to an increased quality of life.

If planning ignores this fundamental objective, a considerable amount of individual time and physical and emotional energy is spent in dealing with money problems and opportunities or in using money and other financial assets to compensate for a failure to thrive in other areas of life.

We have all witnessed (and, if we are honest, participated in) poor decisions involving financial assets.  The burgeoning field of behavioral finance has catalogued the various thinking biases (called "heuristics") to which human beings are subject.[3]  Experienced estate planning lawyers have a plethora of horror stories illustrative of the many (though similar) ways that beneficiaries can lose or squander a large inheritance.  Proper estate planning, at minimum, includes intelligent risk management and the implementation of legitimate asset protection strategies so that our hard-earned assets remain available to those people and causes we care about.

Indeed, the entire game is and has always been in creating lives that consistently and progressively increase our clients' (and our own) experience of well-beingProtecting against avoidable risk of loss is critical to winning that game over the long-term.

As trusts became less necessary to accomplish estate tax reduction, the question many clients now have is why leave property to children and grandchildren in trust at all?

If trusts were required to be written in the traditional, restrictive way, then it would be difficult to argue that they continue to be necessary or even desirable as a method of passing property and assets to children and grandchildren.

Modern estate planners are familiar with the general concern and misconception (rooted in decades of unimaginative practice) that trusts are created by lawyers to keep beneficiaries from enjoyment of property they believe should rightfully be theirs.

The reality is that property transmitted to a beneficiary in trust can confer significantly greater benefits than can be derived from property transferred to that beneficiary outright, not only with regard to tax savings but also from the claims of creditors and other financial predators, including an estranged spouse in a divorce context. From the beneficiary's perspective, it is difficult to envision any rights in property owned outright that cannot also be provided in a trust through proper design and drafting, including flexible distribution standards, trustee powers and beneficiary powers of appointment.

In the second installment, we will describe in more detail the advantages of using trusts.

Article written by John R. Bedosky, partner at Hinman, Howard & Kattell, LLP.  To reach Mr. Bedosky directly please email him at or call (607) 723-5341.

[1] For purposes of this discussion, transfer taxes include the federal gift, estate and generation-skipping transfer (GST) taxes.  Many states (including New York) have their own separate estate tax, but no current gift tax or GST tax system. All transfer taxes are excise taxes on the transfer of wealth.

[2] At least until the laws change again.

[3] Kahneman, D. (2011). Thinking, Fast and Slow. New York: Farrar, Strauss, Giroux.

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