Estate Planning Case 6

I. QUESTION PRESENTED
1. How will Mr. Dutton’s property be distributed at his death?
2. How much property will each trust hold upon completion of the estate?
3. Who will hold positions as fiduciaries at Mr. Dutton’s death?
4. Who are the beneficiaries of the trust created by Mr. Dutton? What is each beneficiary’s respective property interest?
5. What creditor protection was provided to Mr. Dutton’s assets in the course of implementing his estate plan?
II. SHORT ANSWER
1. Both the Acme and Intel stock will become a part of the probate estate and eventually be allocated between the church Mr. Dutton attended, his employees, and the marital and family trust. The home and bank account will be transferred directly to Erika Dutton. The 401(k)

will become part of the Paul Dutton 2013 Trust and the IRA will be divided between Stephen Dutton and Cindy Dutton.
2. The Marital Trust will hold $4.15 million worth of Acme stock. The Family Trust will hold $1.3 million of Acme stock. The Paul Dutton 2013 Trust will hold $5.1 million worth of assets, composed of a stock portfolio, cash, and Mr. Dutton’s 401(k).
3. Erika Dutton will serve as the executor of the probate estate. Stanley Sparks will serve as the trustee of the Marital Trust. Trust Company Bank will be the trustee of both the Family Trust and the Paul Dutton 2013 Trust.
4. Both Erika Dutton and Mr. Dutton’s descendants hold a variety of different interest in all three trust. See the discussion below for details on the interest each holds.
5. All three trust are subject to a spendthrift provision which will protect the beneficial interest of Mr. Dutton’s family members in the trust from most creditors.
III. INTRODUCTION
Before his death, your father created a robust estate plan to financially provide for you, his family, which consisted of three trust and several direct transfers of assets. In a sad turn of events, this plan must now by implemented and completed. I will do my best to describe how this plan will be implemented in this document and the ultimate outcomes that will occur for all property he held at his death. If anything in this explanation is not clear or does not answer a question you may have about his estate plan, please feel free to contact me.
IV. DISCUSSION
a. Division of Property at Death Based on Will or Other Transfers
I would like to begin this document by reviewing the property Mr. Dutton held before his death and the value of each property interest. Before his death, Mr. Dutton held the following pieces of property:
1. Acme Auto Parts Inc. stock worth 50% of the company’s ownership and having a value of $5 million.
2. An interest in his home with Erika held as tenants by the entirety. The home’s total value was $1 million and his portion was, therefore, worth $500,000.
3. An interest in a joint bank account, with Erika. The account’s total value was $200,000 and his potion is worth $100,000.
4. Intel Inc. stock worth $300,000.
5. A 401(k) account through his employment with Acme with a value of $2.4 million.
6. An Individual Retirement Account with Vanguard with a value of $400,000.
The location of where this property now resides is dependent upon how Mr. Dutton had titled the property or provided for its distribution in his estate plan. Both the Acme and Intel stock will pass, through his will, to his probate estate and eventually be divided between the marital and family trust he has created in his will, the employees he has designated in his will, and his charitable distribution to Home County Bible Church.
For both his 401(k) and IRA retirement accounts, Mr. Dutton has made specific beneficiary designations. The 401(k) account’s designated beneficiary is the Paul Dutton 2013 Trust. This account will then be managed in conformity with the terms of that trust. The IRA has a designation of “To my descendants who survive me, per stirpes.” Per stirpes simply means that the property will be divided into a number of equal shares based upon the number of children the individual has, both living and dead. Those children who are still alive will receive their share and those that are dead will have their share divided among their own children. This type of per stirpes is called “English Per Stirpes” and is assumed when the document does not specify which type of per stirpes is intended. Uniform Probate Code § 2-708; 2-709. This means that the IRA will be divided equally between Stephen and Cindy, they can seek to receive the entire balance of this account now or receive certain minimum distributions from the account over their life expectancy. This will allow both assets to avoid being transferred through probate.
Both the home and the bank account are held in a unique form of property titling. Tenancy by the entirety is a form of property titling provided for married couples that allows for the property to automatically be transferred to the other spouse upon the death of one spouse. Joint tenancy with a right to survivorship provides a similar transfer right for individuals who may or may not be married. Mr. Dutton’s interest in both the bank account and home have automatically been transferred to Erika upon his death and will not be transferred through his Will or probate.
b. Division of Property in Estate upon Distribution
The probate estate will hold both the Acme and Intel stock upon the death of Mr. Dutton. These stock shares must then be divided among four beneficiaries: Home County Bible Church, the Marital Trust, the Family Trust, and his employees. The Will provides that $500,000 of this property must go to Home County Bible Church and this transfer will provide the estate with a charitable deduction for estate tax purpose. The Codicil to his Will also designates that $50,000 should be divided between some of his employees at Acme.
The remainder of the property ($4.75 million at death and $5.45 million at the time of distribution) will be divided between the Marital Trust and Family Trust through the “pre-residuary pecuniary formula clause” and the “true worth clause.” These two clauses work together to facilitate the lowest imposition of the estate tax on the property.

The formula clause does this by requiring the exact amount of property required to reach the lowest amount of estate tax attainable, be transferred to the Marital Trust and the residue transferred to the Family Trust. In this circumstance, the formula clause has allowed the estate to avoid any imposition of estate tax at all. Now that the estate tax has been calculated, the true worth clause allows any increase in value or income earned on the property to be transferred to the Family Trust tax-free. This bars the spouse from having to pay estate tax on this increase when he or she dies. The clause achieves this by only transferring property with a fair market value at the time of distribution equal to the value allocated to the Martial Trust at death. Rev. Proc. 64-19

(1964).
To achieve the lowest amount of estate tax imposed (zero here), $4,150,000 in the probate estate property will be allocated to the Marital Trust and $600,000 will be allocated to the Family Trust at the time of death (see chart below). At the time of distribution, the value of the Acme stock has increased from $5 million to $5.5 million and the value of the Intel stock has increased from $300,000 to $500,000. This means that the probate estate will have a total value of $6 million to be distributed. On account of the true worth clause, mentioned above, the increase in value will all be allocated to the Family Trust on a tax-free basis (see chart below).

The date of distribution values for the properties allow for an easy allocation of property in the estate between the two trust and two specific devises. Since the Intel stock is worth $500,000, it should be transferred to Home County Bible Church in satisfaction of the charitable donation provided for in the Will. A portion of the Acme stock worth $4,150,000, and equivalent to 37.72% ownership of the company, should be transferred to the Marital Trust. Another portion of the stock, with a value of $50,000 and ownership interest of 0.45% should be sold to provide the cash to give to the employees or transferred directly to the employees themselves. The remaining $1,300,000, equal to 11.82% of ownership, should be transferred to the Family Trust. As discussed above, all appreciation in the value of the trust has been allocated to the Family trust estate tax-free so that Erika will not be required to pay estate tax on the already accumulated appreciation upon her own death.
c. Property That Will be Held in Each Trust
The following table summarizes the property that will be held by each trust after distribution of the probate estate:
Marital Trust Family Trust Paul Dutton 2013 Trust
• $4,150,000 of Acme stock • $1,300,000 of Acme stock • $1,900,000 in diversified stock portfolio
• $1,000,000 cash from life insurance policy proceeds
• $2,200,000 in 401(k)
__________________________
• Total: $5,100,000

d. Fiduciaries Appointed by Estate Plan
There are four primary fiduciaries and four alternate fiduciaries appointed in the Will of Paul Dutton and the Paul Dutton 2013 Trust document. The Will names Erika as the executor of Mr. Dutton’s estate and Stanley Sparks as the successor executor if she is unable to assume this position. This means that Erika will have the responsibility to do the following things: locate all of Mr. Dutton’s assets, probate the will, distribute property to its proper devisees or beneficiaries, pay any debts or taxes due, and handle the day to day details of managing the property.
The other type of fiduciary that Mr. Dutton has appointed is trustees for three different trust. A trustee has four different duties: administration, disbursement, investment, and custodial. The distribution function involves making both mandatory and discretionary disbursements of property from the trust in accordance with the trust document. The investment function is a trustee’s duty to invest the trust’s assets in a reasonable and diverse manner. The custodial function is the duty of a trustee to take reasonable steps to assume control of and protect the trust property. Lastly, the administrative function deals with the trustee’s duties to keep records, bring or defend claims in trust, keep accountings, deal with taxes, and provide information to beneficiaries. The initial trustee of the martial trust will be Stanley Sparks, with Trust Company Bank acting as the successor trustee. The trustee of the family trust will be Trust Company Bank. The current trustee of the Paul Dutton 2013 Trust is Trust Company Bank, with Stephen and Cindy acting as successor trustees if Trust Company Bank is unable to act as trustee for any reason.
e. Beneficiaries of Trust Created by Estate Plan and Respective Interest
The multiple trusts created by Mr. Dutton in his estate plan provide for different beneficiaries and different distribution plans. To determine these characteristics we must look at both the trust instruments and Mr. Dutton’s Will. I will discuss each trust below and how its property will be distributed at certain points in time through an easy to understand chronological fashion.
Marital Trust
1) Erika will receive all income of the Marital Trust on an annual basis until her passing.
2) At Erika’s passing, Stephen, Cindy, and their children will be allowed to receive optional income payments, made in the trustee’s discretion, until the property has been completely depleted or distributed and Stephen and Cindy will each be entitled to receive one-sixth of the trust property each (because Stephen is already over thirty-five years of age).
3) When Stephen reaches forty-five years of age, Stephen and Cindy will each be entitled to receive one-fourth of the trust property each.
4) When Stephen reaches fifty-five years of age, Stephen and Cindy will each be entitled to receive equal shares of the remaining trust property.
5) If either Stephen or Cindy pass away before the time that any distribution in 2) through 4) occurs the property will be distributed to their children in equal shares.
Family Trust and Paul Dutton 2013 Trust (same distribution rules but completed separately)
1) From now until the time that all of Mr. Dutton’s grandchildren reach the age of twenty-five, the trustee can choose to make distributions from the trust to Erika, Stephen, Cindy, Mr. Dutton’s grandchildren, or Mr. Dutton’s other descendants. These distributions can be made in the amount and to the recipient(s) that the trustee chooses.
2) When all grandchildren reach twenty-five years of age, the trust property will be equally divided among them to be held in separate trusts for each grandchild. From this time forward the trustee can provide any property from any of the separate trust to the beneficiary-grandchild for their “health, education, support and maintenance” if necessary.
3) When each individual beneficiary-grandchild reaches or exceeds the age of thirty, the trustee will distribute half of that grandchild’s trust property directly to them.
4) When each individual beneficiary-grandchild reaches or exceeds the age of forty, the trustee will distribute the remaining property held in that grandchild’s trust directly to them.
f. Protection of Property From Creditors in Future
All three trust created by Mr.

Dutton include spendthrift protection (see section 6.6 for the Paul Dutton 2013 Trust and Article VII section D in the Will) and are protected from invasion by most creditors. A spendthrift trust clause seeks to prevent creditors of any beneficiary from being successful in any claim against a trust. In MyState, this type of clause will effectively stop any creditor or assignee of a beneficiary from reaching the interest of a beneficiary or any distribution before it is received by that beneficiary. Uniform Trust Code § 502(c). To be effective, the clause must restrain both voluntary and involuntary transfers of the beneficiary’s interest. UTC § 502(a). The only exceptions provided to spendthrift protection are a support or maintenance obligation imposed by court order for an individual’s child, spouse, or former spouse, a judgment creditor who provided services for the protection of the beneficiary’s interest in the trust (i.e. attorney), and a claim by the federal or state government. UTC § 503.
Since all three trusts contain a spendthrift provision, most creditors of a beneficiary cannot invade the trust and remove property. Cindy’s concern about her husband being able to receive a portion of her interest upon their divorce is only warranted if he receives either a child support payment or spousal maintenance payment order. If her husband holds either of these types of judgments, he will be able to attach any present or future distribution that

might otherwise be made to Cindy if she does not pay the sums requires by the court order but he will not be able to compel any distribution from the trust.