Creative Estate Planning Techniques for Inherited Assets






A.           Goals.

1.            Minimize or avoid inclusion of the inherited assets in the beneficiary’s estate.

2.            Protection of the inherited assets from claims of the beneficiary’s spouse in the event of divorce.

3.            Protection of the inherited assets from claims of the beneficiary’s creditors.

4.            Defer income taxes on inherited IRAs for as long as possible.

B.           Estate Taxes.

1.            Estate taxes are imposed on the transfer of assets from a decedent to his or her beneficiaries.

2.            Exemptions:











C.           Gift Taxes.

1.            A gift tax is imposed on the transfer of assets during a person’s life.  There are many exemptions from the gift tax, the most common of which are the following:

a)            Gifts to qualifying charities are exempt from gift tax.

b)            Annual exclusion gifts – the taxpayer may generally exclude the first $12,000 of gifts made to each donee during each calendar year from the gift tax.

c)            Tuition expenses and medical expenses paid directly to providers are exempt from gift tax.

d)            A taxpayer may gift up to $1,000,000 during life but this reduces his or her estate tax exemption available at death.

D.           Generation Skipping Transfer Taxes (“GST Taxes”).

1.            Lifetime gifts and transfers at death to beneficiaries who are more than one generation below the transferor’s generation (for example grandchildren) may be subject to the generation skipping transfer tax.  The GST tax is designed to insure that, for the most part, all property is taxed at every generation’s level and is not avoided by skipping generations.

2.            Exemptions:











1,000,000 (indexed for inflation)

E.           Legal Considerations for a Trust Designed to Avoid Inclusion of Inherited Assets in the Beneficiary’s Estate.

1.            The beneficiary should not be the grantor (creator) of the trust so usually the parent is the grantor of the trust.

2.            The beneficiary (for example, a child) can be the Trustee of the trust provided that the beneficiary’s right to receive distributions is limited to an ascertainable standard relating to the health, education, maintenance and support of the beneficiary.  Ascertainable standards are defined in IRC § 2041(b)(1)(A).

3.            The beneficiary can have a limited power of appointment to determine where the assets pass at the beneficiary’s death provided that the power cannot be exercised in favor of the beneficiary, his or her estate, creditors or creditors of the estate.  The limited power of appointment can be as broad or as limited as desired.  If the beneficiary doesn’t exercise the power of appointment, the assets pass generally to the beneficiary’s descendants.

F.            Legal Considerations for a Trust Designed to Protect Against Creditor Claims.

1.            Wis. § 701.06 (Wisconsin’s Spendthrift Statute) provides that with respect to a support trust (i.e. a trust where the Trustee shall distribute income or principal subject to a particular standard such as health, education, support and maintenance), the Court may order the Trustee to pay claims for child support and public support but otherwise creditors cannot reach the assets of the trust.

2.            However, there have been cases where the Court has found that if the beneficiary is the sole beneficiary and sole Trustee of a trust, the assets may be available to creditors.

3.            Accordingly if maximum creditor protection is the primary objective, a trust should have an independent Trustee (such as a bank) and purely discretionary distribution provisions.

4.            Example:  Parent is the grantor of the trust, the child is the beneficiary and a bank is the Trustee.  The Trustee may distribute income or principal, in the sole discretion of the Trustee for the beneficiary’s best interests.

G.           Legal Considerations for a Trust Designed to Keep Assets Separate in Event of Divorce.

1.            Wis. Stats § 767.255(2)(a) provides that the following property is individual property and not subject to property division:

a)            Property received as a gift, property received by reason of the death of another, by a trust distribution, by bequest or inheritance (Note:  This provision doesn’t apply if the Court finds that refusing to divide such property will create a hardship on the other party.)

b)            § 767.255(3) provides that one of the factors to be considered in altering an equal division of the marital assets is whether one party has substantial assets not subject to division by the Court.

2.            The goal of a trust intended to protect inherited assets in the event of divorce is really to segregate the assets so they don’t become mixed with the marital assets of the beneficiary.

H.           Example:

1.            Daughter is married and has marital assets of $4,000,000.  Daughter is expecting a significant inheritance from her mom ($500,000) and asks for recommendations.

2.            With a $2,000,000 federal exemption for Daughter and her spouse, her own assets can be protected from the federal estate tax by using a typical joint revocable trust estate plan where the assets are divided into a family trust and survivor’s trust at the first spouse’s death to take advantage of the first spouse’s estate tax exemption.  However, the proposed inheritance will push Daughter into an estate tax paying situation at her death.

3.            Proposed solution:  Daughter has a trust drafted to receive the inheritance.  Terms of the trust:

·        Mom is the Grantor.

·        Daughter is the Trustee.

·        Daughter will receive all income from the trust.

·        Daughter can receive principal distributions for her health, education, maintenance and support.

·        Daughter has a limited power of appointment to leave an income interest in the trust for her spouse and to determine how the assets pass to her descendants and/or charity.

·        The assets of the trust will not be includable in Daughter’s estate for estate tax purposes.

·        Mom can make a simple change to her estate plan to provide that the share for Daughter passes to the new trust.

Result:  Daughter saves $304,000 of estate tax at her death (under current exemptions).  Assets are segregated from Daughter’s marital assets in the event of divorce and Daughter can name an independent Trustee in the event of creditor issues and have some creditor protection.


A.           Required Minimum Distribution Rules.

1.            MRD in year of death.  The minimum required distribution for the year in which the participant died is based on the deceased participant’s required distribution schedule.  This payment is made to the beneficiaries of the account (not the “estate”).  Thus, if the deceased participant had not yet taken the minimum distribution under the Uniform Table for the year of his death, the beneficiary(ies) must take out that distribution before the end of the calendar year in which death occurred.

2.            Spouse as the sole beneficiary.

a)            Rollover.  The surviving spouse may rollover the benefits to his or her own IRA.  Advantage of the rollover is to name new younger beneficiaries such as children to receive the remaining IRA assets at the spouse’s death to allow for maximum income tax deferral.

b)            No Rollover.  During the surviving spouse’s lifetime, the surviving spouse must take required distributions over her life expectancy, recalculated annually, beginning in the year the participant would have reached age 70-1/2.  Once the surviving spouse dies, any benefits remaining in the original participant’s plan must be paid out over the remaining (fixed term) life expectancy of the surviving spouse, computed as of her age on her birthday in the year of the surviving spouse’s death.

3.            One non-spousal beneficiary.  If there is one individual beneficiary, then the beneficiary must take required distributions either under the 5-year rule or over the beneficiary’s unrecalculated life expectancy (determined based on the beneficiary’s age on the beneficiary’s birthday in the year after the year in which the participant died) beginning no later than December 31 of the year after the calendar year in which the participant died.

4.            Multiple “designated beneficiaries”; no separate accounts; use shortest life expectancy.  If there are several “designated beneficiaries” and they have not established “separate accounts” payable to the various beneficiaries by December 31 of the year after the year in which the participant died, and if they are all individuals, then (even if one is the participant’s spouse), they must take distributions either under the 5-year rule, or over the oldest beneficiary’s life expectancy (determined based on his or her age on his or her birthday in the year after the year in which the participant died) beginning no later than December 31 of the year after the year in which the participant died.

5.            Separate accounts.  If there are multiple beneficiaries that have “separate accounts” payable to the various beneficiaries by December 31 of the year after the year in which the participant died, the above rules are applied separately to each such “separate account”.

6.            Trust as beneficiary. If a trust meets the following requirements, you can look through the trust agreement and treat the beneficiaries as if they had been named directly:

a)            The trust must be valid under state law.

b)            The beneficiaries must be identifiable from the trust agreement.  This means that you have to be able to tell who is the oldest possible beneficiary.  Any power of appointment or “spray power” could violate this requirement.

c)            The trust is irrevocable or will, by its terms, become irrevocable on the death of the participant.

d)            Certain documentation must be provided to the plan administrator.

e)            All of the beneficiaries must be individuals.

f)             No person can have the power to change the beneficiaries after the designation date.

g)            The trust should not allow expenses or estate taxes to be paid out of retirement assets.

If these requirements are met, required distributions will be based on the life expectancy of the oldest beneficiary.

7.            5 year rule.  If there are one or more beneficiaries without “separate accounts” by December 31 of the year after the year in which the participant died, and any of them is not an individual (even if one is the participant’s spouse), then the participant has “no designated beneficiary”.  All benefits must be distributed under the “5 year rule” no later than December 31 of the year that contains the fifth anniversary of the date of death.

B.           Problems with Naming Trusts as Beneficiary of Retirement Assets.

1.            Complexity in meeting the requirements set forth above.

2.            Income tax issues.

a)            Trusts have very compressed income tax brackets and to the extent retirement distributions pass to a trust and are not distributed out to beneficiaries in the same year, higher income tax rates can apply.

b)            The trust needs to create fractional shares for beneficiaries (rather than pecuniary shares) or else there is a risk that retirement assets will be subject to tax immediately.

C.           General Recommendations Regarding Beneficiary Designations for Retirement Plans.

1.            Name spouse or adult children as outright beneficiaries in most routine cases.

·        Spouse can rollover and name children as the beneficiaries.

·        Each child can then have a separate account and use his or her own life expectancy for determining the required minimum distributions.

o   For example, a 50 year old child would only have to withdraw 1/33.1 in the first year (for $100,000 IRA, the required distribution would only be $3,022).

o   Be sure to check what happens if a child dies – is there an option for the deceased child’s share to go to his/her descendants or only to the surviving children.

·        The main advantages are maximum income tax deferral and simplicity – easy to accomplish and administer.

2.            Name a trust as the beneficiary for minor beneficiaries.

·        Required minimum distributions from the retirement plan to the trust would be based on the oldest beneficiary’s life expectancy.

·        If the trust didn’t distribute at least that amount to or for the beneficiaries, the income would be taxable to the trust.  Trusts have very compressed income tax benefits.

·        However, in this situation protecting the minor beneficiaries is of bigger concern than minimizing income tax.

3.            Name a trust for an adult beneficiary where there are reasons for the trust which are more compelling than ultimate income tax deferral.

·        For example, parent has set up a lifetime trust (GST Trust) for his son to minimize estate taxes and protect the assets in the event of divorce.  Parent can name the trust as the beneficiary of his retirement assets.

·        In this situation, the trust should include “conduit trust” provisions, which basically provide that as a required distribution from the retirement account is received by the trust, the trust will distribute the same amount to the beneficiary.  Avoids complex rules outlined in paragraph A.6. above.

·        This results in the beneficiary being taxed at personal income tax rates rather than at trust income tax rates.

·        Protects the balance remaining in the account at the beneficiary’s death from estate taxes.

4.            Name a trust where provisions of estate plan are very complex and it would be too hard to incorporate those into the beneficiary designation.

5.            Name a trust for the surviving spouse in certain situations such as a second marriage or poor financial decision making history of the surviving spouse.


A.           Transfer by Affidavit § 867.03 (1g).

1.            Limit is increased to $50,000 (from $20,000).

2.            Affidavit may now be made by the Trustee of a revocable trust.

3.            Person accepting the property under the affidavit must distribute the property according to the governing instrument or, if none, according to the rules of intestacy law.

4.            Example – Husband dies survived by his wife.  All assets were in joint tenancy except some stock valued at $25,000 which was titled just in husband’s name.  The Transfer by Affidavit can be completed to transfer the stock to wife without a probate proceeding.

B.           Transfer on Death Deed (§ 705.15).

1.            Real estate can now be transferred upon death without probate by using a “TOD” Deed with no dollar limit.

2.            Especially helpful in situations where a client has a home and a few other assets that are able to pass by other non-probate means such as:

·        “POD” accounts – payable on death bank accounts that pass automatically at death.  Client completes a “POD” form at the bank prior to death.

·        Joint tenancy property.

·        Assets with beneficiary designations such as insurance, retirement plans, IRAs and annuities.

3.            TOD Deed shouldn’t require the filing of a Real Estate Transfer Return.  However, some counties are requiring a return.

4.            Owner retains all rights with respect to the property and can revoke the TOD designation by filing a subsequent deed.

C.           Marital Property.

1.            § 766.31(3)(b) – The surviving spouse and recipients of the decedent’s marital property interest may agree to divide marital property based on aggregate value rather than item by item without Court approval.

2.            Example:  Husband and wife own a cottage worth $100,000 and stock worth $100,000 as marital property.  Husband dies and leaves his 1/2 of the marital property to his children from a prior marriage.  Wife and children can agree that children will take the cottage and wife will take the stock.

D.           Uniform Transfers to Minors Act. (§ 880.675(1m))

1.            A custodian under an UTMA account can now transfer assets of the UTMA account to a qualified minor’s trust under IRC § 2503(c).

2.            This allows the assets to be retained in trust past age 21 if the child doesn’t exercise their withdrawal right during the window required at age 21 (usually 30 days).

E.           Guardian ad Litem (§ 897.09).

1.            A guardian ad litem will now be able to waive notice of hearings to prove a Will or for administration allowing probates to be commenced on waiver instead of at a hearing.


A.           Chapter 880 will no longer exist and will mostly be found in Chapter 54.

B.           Authorizes the appointment of a guardian for an individual as early as 17 years and 9 months – allows the family of a child with disabilities to be named guardian in advance of the person turning age 18 so there’s no gap.

C.           Requires the Court, before appointing a guardian of the person or estate, to find there is no less restrictive means of meeting the need for assistance (such as training, education, support services, health care, assistive devices, etc.).

D.           Court has to identify specific reasons why a guardian should be appointed where there is a previously executed valid power of attorney.  Validates the importance of prior planning by the individual through durable powers of attorney and health care powers of attorney.

E.           Emphasizes limited guardianship - ward retains all rights, not specifically assigned to the guardian by the Court or otherwise limited by Statute.  Rights that the Court can limit:

·        Consent to marriage.

·        Execute a Will.

·        Serve on a jury.

·        Hold driver’s license.

·        Consent to sterilization.

·        Right to vote.

F.            Rights that the Court cannot limit:

·        Private communication.

·        Retaining and meeting privately with an attorney.

·        Challenging guardianship.

·        Right to free speech and religion.

G.           Permits a guardian, contingent upon Court approval to:

·        Make gifts.

·        Transfer funds to an existing revocable trust.

·        Create a special needs trust.

·        Exercise rights under a retirement plan or account.

H.           Expands interested persons list.

·        Ward.

·        Spouse and adult children.

·        Parent of a minor.

·        Heir if no spouse, child or parent.

·        Nominate guardian.

·        Trustee of a trust established by or for the ward.

·        Agents under a durable power of attorney or health care power of attorney.


A.           IRA distributions of up to $100,000 per year are excluded from gross income for “qualified charitable distributions” made during 2006 and 2007 by taxpayers who are at least 70-1/2 on the date the distribution is made to charity.

B.           Only applies to traditional IRAs and Roth IRAs.

Note:  Owners of ineligible plans could rollover to an IRA in order to make a charitable distribution.

C.           A married couple could donate $200,000 provided each has their own IRA from which the distribution is made.

D.           The distribution to charity can count as the taxpayer’s required minimum distribution.

E.           A “qualified charitable distribution” excludes donor advised funds or supporting organizations.

F.            Must be paid directly to the charity, not the taxpayer.

G.           This law will generally benefit:

·        Non-itemizers.

·        Taxpayers whose charitable deductions are maxed out.

·        High income earners where the receipt of the required distribution from the plan impacts the deductibility of medical expenses, miscellaneous itemized deductions, the phase-out of itemized deductions and child tax credit and the application of the AMT.




This document provides information of a general nature.  None of the information is intended as legal advice.  Additional facts and information or future developments may affect the subjects addressed in this document.  You should consult with a lawyer about your personal circumstances before acting on any of this information because it may not be applicable to you or your situation. 

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