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Massachusetts Supreme Judicial Court Allows Amendment to Trust to Help Avoid Taxes

The construction of a will or trust in Massachusetts can determine whether or not the estate of a deceased person is distributed according to his or her wishes. The placement of punctuation or the absence of two words can completely change the meaning of a document and how assets are issued. The structure of the document can certainly affect how or whether the assets are taxed upon transfer.

image.jpgAt the end of last year, the Massachusetts Supreme Judicial Court issued a ruling on one of the trusts created among a series of trusts for the benefit of a couple’s children and grandchildren. The couple each created trusts in their names to provide income for their sons, preserving principal for future generations. The trust under the patriarch’s name was irrevocable upon his death and established two trusts for his wife’s benefit during her lifetime. She was granted the power of appointment over the marital trust, and when she passed, the principal of the patriarch’s trust was divided into two “share trusts” for each son. The sons had the power of appointment over these trusts to “one or more of the Donor’s issue.”

These share trusts were not subject to the Federal generation skipping transfer (GST) tax, which taxes property transfers made to grandchildren that were not subject to the estate tax upon the trust’s initial transfer. This tax was enacted in 1986 and offered exemptions up to $3.5 million. This tax was enacted after the patriarch’s death, but while the matriarch still lived, so she created her own trust to help avoid the taxation of the GST. She used her power of appointment over the marital trust by appointing it to her new trust, directing that amounts equal to the exemption be held in a family trust. The trust explicitly stated that her grandchildren and remote descendants are fully exempt from the GST tax.

The trust at issue in this case was the trust issued to the younger son, who died in 2009 without any children. He used his power of appointment by directing the property remaining in his trust to be added to the GST-exempt family trust. The trustees brought forth this suit in discussion, because they believed if the power of appointment was exercised, the GST exemption would be lost. The trustees felt that the family trust,as drafted, was not measured by blood issue, and could include children of adoption. The trustees wanted to limit the possibilities by adding “by blood” to the language, which would keep the GST exemption in place.

The Supreme Judicial Court allowed the trust’s language to be amended to include the words “by blood,” which allowed the GST exemption to remain. The court felt the construction of the couple’s respective trusts made it clear that they intended to avoid taxes to the advantage of the beneficiaries. The court felt the omission of “by blood” after “all of the Donor’s issue” to be a drafting mistake, and not a reflection of the intent of the original donor.

The Massachusetts estate planning attorneys at Karsner and Meehan have the drafting experience you need to confidently create a will or establish a trust. For a consultation, contact our office at 508.822.6600.

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