Trust Drafting – Writing a Client Letter
Andrew McGoyle is in your office, along with his wife, Randi. They are there because they want to establish a trust for the benefit of their children and grandchildren. The clients have three adult children: Amy, Bethany and Corey. Amy is married and has three children of her own. Corey is married with two children, but is in the process of divorcing his wife, Linda, with whom neither Corey nor the clients have gotten along with in years.
Bethany suffers from severe psychological disabilities. She is currently living in a group home for the mentally disabled. While she is certainly capable of maintaining family relationships and appreciating art, music and life in general, she is incapable of handling her personal finances and needs assistance with certain everyday chores.
The clients tell you from the outset that they love all of their children equally and want to provide for them and their families equally. They also tell you that, while they think that Amy and Corey possess roughly the same skill in terms of financial management and judgment, they think that Amy is better suited to manage their assets because she has fewer major life problems that she is dealing with.
The McGoyles own the following assets:
1) A residential house in Clifton, New Jersey, worth about $700,000. They bought the house in 1967 for $38,000.
2) A summer home in Myrtle Beach, South Carolina, worth about $350,000. They bought the house in 2003 for $280,000.
3) A 401(k) tax-deferred pension account owned by Andrew, valued at $1,200,000.
4) A 403(b) tax-deferred pension account owned by Randi, valued at $280,000.
5) A jointly held brokerage account at Charles Schwab with a portfolio of stocks and bonds, worth about $1,600,000.
6) A portfolio of stocks held by Randi alone, worth about $250,000, that she inherited from her parents.
7) An art collection, worth about $300,000, owned by Andrew.
8) Various other small accounts and assets, worth less than $10,000 in the aggregate.
Assume that the state of New Jersey imposes a state estate tax on all assets over $675,000 but that all other state estate tax rules (including the marital deduction, etc.) mirror the federal rules.
Please provide recommendations on how I should draft a letter to Mr. and Mrs. McGoyle proposing a plan wherein you will draft and they will execute a trust, for the benefit of their family. You should not actually draft the trust at this time. In the letter, you may discuss whatever issues you feel are relevant, but you should, at a minimum, discuss the following issues:
– Whether the trust should be revocable or irrevocable, and why.
– What assets can and should be placed into the trust, and why (or why not, as the case may be)
– What you can do to minimize the federal and state estate and gift tax liability for the couple.
– What should be done with Bethany’s share, since she is unable to manage it on her own.
– Who should manage the trust assets and what title he or she should be given.
– What provisions will be established in the event of a predeceased child who leaves minor children.
– What the capital gains tax implications of transferring assets to the trust can be and what can be done about those implications.