National Estate Planning Awareness Week is October 19-25, 2020. To celebrate, let’s take a look at some recent case law that deals with a mutual will and a subsequent, traditional will.

A mutual will is one that is binding upon the Testator. Each Testator, usually married couples, those in a committed relationship, or ex-spouses, each draft a mutual will and the survivor cannot change its terms. But what happens when the survivor executes a subsequent will with different terms? Which one controls? How would a practitioner go about helping a client enforce a mutual will?

A common strategy employed for Medicaid qualification purposes is to turn an asset of a married couple into an income stream for the community spouse. This is due to the name on the check rule, which states that whomever is listed as the payee on the check (or income payment), that is who the income is attributed to. Couple this with the fact that in most states a community spouse can have unlimited income without jeopardizing eligibility for an institutionalized spouse, and the result is a viable strategy for decreasing assets for eligibility purposes. The name on the check rule came under fire in a recent case, but emerged victorious.

In Badgley v. United States, the 9^th Circuit upheld summary judgment in favor of the IRS in a case regarding the legality of including the entire grantor-retained annuity trust (GRAT) value in a decedent’s estate for purposes of the estate tax under 26 U.S.C. § 2036(a)(1).

A GRAT is an irrevocable trust that meets the requirements of 26 U.S. Code § 2702. A GRAT is usually used to transfer appreciating assets to the next generation with minimal taxes due. When property is transferred to the GRAT, then such property is subject to gift taxes on the present value of the GRAT’s remainder interest, in accordance with 26 U.S. Code § 7520. A reduction in the gift value of trust property is permitted if the grantor retains an annuity interest in the trust. However, if the beneficiary is a family member, then the annuity interest must be a qualified interest under §2702. Trust property can be transferred to the beneficiary without gift tax implications by modifying the trust term and annuity amount in a way as to zero out any remainder. But what about estate taxes if the grantor dies during the annuity payout period?