November 15, 2012 Will 2012 Be The Last Year for Defective Grantor Trusts and Understanding Your Clients with Cognitive Disorders



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While no one can predict what estate tax law changes are going to take place between now and the end of 2013, we can spend a couple of minutes appreciating one of the best players on our board game of estate tax planning – the Defective Grantor Trust.

The ability to have assets held in a trust that is immune from estate tax while being disregarded for income tax has a number of unique advantages, especially when coupled with the ability to purchase assets for low interest notes or annuity payment rights, and to simplify tax reporting by permitting income and deductions from the trust itself and subsidiary entities owned by the trust and the grantor to be disregarded for income tax reporting purposes.

It is no wonder that the Obama Administration’s February 2012 budget proposals (including $3.7 million in spending in 2013) sought to have these trusts become subject to federal estate tax.  Thank heavens that there is a high probability that such trusts which are established before proposed legislation comes out will typically be grandfathered.

Does every affluent client have a Defective Grantor Trust, or at least they have had the opportunity to set one up?

Yes, there are only 46 days left in the tax year, and it can take some time to explain the concept, design the trust, and get it set up, but why not present a Simplified Grantor Trust form whereby the client will establish an irrevocable trust for family members that can name Trust Protectors who can fine tune the trust provisions when there is more time in 2013.

Clients can be reminded that a Defective Grantor Trust can own part of an LLC or other entity on behalf of family members without causing the LLC or other entity to have to be taxed as a partnership, which would be the case if the grantor and a child or other family members besides his or her spouse were the owners of the entity.

“On the sixth day of Christmas, my grandpa gave to me, a Defective Grantor Trust that owns a pear tree.”

 The Trap:  placing assets in a trust that will have income taxed to the grantor works well from a gift tax standpoint, but if and when there will be distributions made to descendants, who are in lower tax brackets it might be preferred that the trust be taxed as “complex” whereby its taxable income (known as “distributable net income” in the trust tax lingo) would be carried out to the beneficiary to be taxed at the beneficiary’s lower bracket.  For high bracket grantors, this can also cause avoidance of the 3.8% Medicare tax that is scheduled to come into effect on January 1 with respect to dividends, interest, and other passive income earned by single individuals having more than $200,000 of overall income and married couples having more than $250,000 of overall income.

The Trick to avoid the Trap: is to make sure that the Defective Grantor Trust can become a complex trust by having the Grantor or an appropriate other party be able to release the feature of the trust that causes it to be defective for income tax purposes.  This is usually the power to replace trust assets with assets of equal value or the presence of non-beneficiaries who have the right to add spouses of beneficiaries and/or charities as additional discretionary beneficiaries of the trust.

When drafting, make sure that these powers can be released if and when the time is right.


In the estate planning world, the focus is usually on the interaction between assets, liabilities, inheritance goals, and state and federal taxes. It can be very easy for estate planners to become lost in the numbers and not take into account the client’s mental and physical health, two dynamics of the estate planning equation that can be absolutely critical, particularly for your elderly clients. Understanding the futures of clients with potentially debilitating mental diseases is necessary to help them plan properly. To that end, we offer a quick overview on a medical condition that may be affecting your elderly clients: Cognitive Disorders.

Our brains age constantly, resulting in what has been termed “cognitive aging.” Individuals most often begin to see the effects of cognitive aging in their 40’s, when little things like losing keys, slower reaction times, or difficulty remembering a name from the past begin to happen. For some, cognitive aging will result in disorders that affect the ability to make sound estate planning and personal decisions

Because cognitive disorders go hand-in-hand with aging and people are living so much longer, we are seeing larger numbers of people develop cognitive disorders. For instance, the percentage of men with some form of cognitive disorder in the age range of 70-74 is 11%. That number skyrockets to 34% for men 85 and older.

It had been long thought that cognitive disorders, such as Alzheimer’s, were unavoidable. But recent research has shown that some degree of cognitive aging is avoidable. Staying healthy by avoiding severe or long-term diseases will lower an individual’s risk of a cognitive disorder.

Cognitive disorders come in one of four forms: (1) “Age-Associated Memory Impairment” – basically, a more severe form of memory loss than average age-associated memory loss; (2) “Age-Associated Cognitive Decline” – when “Age-Associated Memory Impairment” combines with severe losses to other cognitive abilities, such as language or depth perception; (3) “Mild Cognitive Impairment” – the state in between (1) or (2) and (4); and (4) “Dementia.”

Dementia is a catch-all term for severe impairment to two or more cognitive abilities, including “memory, language, visuospatial ability and executive functions (e.g., planning, cognitive flexibility, executing specific tasks).” Teresa Andreoli, Cognitive Disorders Among the Elderly. Dementia includes a number of different types of mental diseases, including Alzheimer’s Disease (the most common form of dementia), Pick’s Disease, Parkinson’s Disease, and Huntington’s Disease.

Even more promising, and a factor that is in every individual’s control, is that at least some degree of cognitive aging appears to be due to lack of use of the individual’s brain. Simply putting your brain to work will help stave off cognitive aging. Maybe it’s time you advise your elderly clients to turn off The Price is Right and pick up a crossword puzzle.

For those who are already suffering a cognitive disorder, beginning a “cognitive training program” may result in some degree or reversal to a cognitive disorder. The Seattle Longitudinal Study of Adult Intelligence found that 66-2/3% of individuals suffering from cognitive disorders showed significant improvement by participating in training programs, and that 40% even returned to pre-decline levels of cognitive functioning. Just as importantly, these gains remained for over seven years.

Estate planners, attorneys, and other fiduciaries must be aware of their client’s mental health, not just to plan the client’s financial future effectively, but also to protect the client.

Clients with cognitive disorders are more susceptible to influence by family or friends with poor intentions and should be on guard for requested changes not in the client’s best interest.

Estate planners should also make sure to help, or make sure that their clients get help, in planning for their future healthcare, such as by setting up a durable power of attorney or a health care surrogate.

And finally, estate planners should also monitor the progression of a client’s cognitive disorder. It may be up to you to finally determine that a client has become incapacitated, particularly when the client lives a solitary lifestyle or is not receiving regular medical treatment.


To view a chart of this month, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the 3 please click here.


 TUESDAY, December 4, 2012 12:30 – 1:30 pm 
Pension actuary Jim Feutz will join Alan Gassman for a free CLE and CPE webinar on Update of Pension, Labor and Tax Laws, Including 2012 Law Changes and Anticipate Changes for 2013.  This webinar qualifies for 1 hour of continuing education credit.  To register for the webinar please click here.

TUESDAY, December 4, 2012, 5:30 – 6:00 pm 
Alan S. Gassman will be joined by health care attorney Lester Perling to speak onWhat Physicians Need to Know About “Excluded Persons” and How to Make Sure You Do Not Have One.  To register for the webinar please click here.

 WEDNESDAY, December 5, 12:30  – 1:00 pm
The Whistleblower Threat: Do You Have It and What Can You Do About It?  Lester Perling, J.D., M.H.A. and Alan S. Gassman, J.D., LL.M. will be presenting a webinar on the whistleblower threat.  To register for the webinar please click here.

WEDNESDAY, December 5, 5:00 – 5:30 pm
An Overview of a Professional Job Search Process with Darry Griffs.  To register for this webinar please click here.

FRIDAY, JANUARY 18, 2013  
Save the date for a three day weekend in Ft. Lauderdale!  The Florida Bar Continuing Legal Education Committee, the Health Law Section and the Tax Law Section present Representing the Physician 2013: Practical Considerations for Effectively Guiding Physicians and Their Practices.  The seminar will be held at the Sheraton in Ft. Lauderdale, Florida.   Speakers include Lester J. Perling, Esq., on the topic of Federal and Florida Health Law: Hypothetical Situations that Are Often Overlooked by Physicians

Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law.  He has co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters and the Florida Bar Journal.  is also the author of the Federal Income Taxation of the Business Entity Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition Mr. Denicolo received his B.A. and B.S. degrees from Florida State University, his J.D. from Stetson University College of Law and his LL.M. (Estate Planning) from the University of Miami.  His email address is

Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practial Tax Strategies.  Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is

 Thank you to our law clerks that assisted us in preparing this report:

Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is

 Alexandra Fugate earned her B.A. in English from the University of Florida in 2008, and J.D. from Stetson University College of Law in 2012. She has been a Guardian ad Litem for the past two years, a judicial intern for the Twelfth Circuit in Bradenton, and was recently admitted to the Florida Bar. She wants to pursue a career in business, employment, and labor law. Her email is

 Eric Moody is a third-year law student, scheduled to graduate in December 2012, at Stetson University College of Law and is considering pursuing an LLM in estate planning upon graduation. Eric is also an Articles and Symposia Editor for Stetson Law Review. In 2009, Eric received a B.S. in Business Management from the University of South Florida. Eric’s email address is