Although trusts are effective estate-planning tools used to avoid probate and minimize estate and gift taxes, their income-tax implications must also be considered to ensure that there are no unintended tax consequences. The drafting attorney should point out the advantageous and disadvantageous fiduciary income-tax implications for the type of trust being considered and then determine which trust is the best fit for the client. 

Can undue influence lead to a Trust Amendment via a Trust Protector who is an independent party? This issue was recently litigated in Arizona. In this case, Austin and Kay were married for 57 years. Near the end of their marriage, Austin was diagnosed with Parkinson’s Disease. Austin became romantically involved with his caretaker, Lindi. Austin and Kary divorced; thereafter, Austin and Lindi married.

During Austin and Kay’s divorce, Austin had his attorney, Paul, create an irrevocable trust. The trust provided for the following distributions upon Austin’s death: 45% to Kay, 45% to their children, and 10% to Lindi. The only person that could amend the trust was the Trust Protector, Paul. Paul was not subordinate to Austin within the meaning of IRC 672(c). After the divorce was finalized, Austin requested that Paul amend the trust. Paul added a no contest clause, eliminated Kay as a beneficiary, made Lindi the sole income beneficiary upon Austin’s death, reduced the children’s’ share, and added Lindi’s sons as remainder beneficiaries.

Navigating a postdeath trust administration can be daunting, and attorneys must have the necessary skills, knowledge, and competence to diligently and effectively provide legal services to fiduciary clients during this process.