by Jon Tidd
If the gift is still in the planning stage, the situation is salvageable. What usually works best is to arrange for the charity’s planned gift attorney to talk one on one with the donor’s attorney, so that the donor’s attorney is not embarrassed in front of his or her client. Attorneys tend to very much like dealing with other attorneys, so this approach can work well.
But what if the gift arrangement was completed some time ago and the bad advice just now comes to light? Here there are two possibilities: [1] the error can be “erased;” or [2] the error can’t be erased, meaning someone’s going to take a hit.
Example [1]: Husband tells Lawyer that he wants to create a charitable remainder trust under his will for the benefit of Wife and Charity. Lawyer advises adding Husband’s elderly Brother as a secondary payout recipient. Husband says, sure, why not? Husband subsequently dies, leaving a large amount to the trust. Whoops. It turns out that adding Brother to the trust knocks out the estate tax marital deduction for Wife’s interest in the trust (that’s the tax law). A bad deal. But the bad advice here can be erased and the marital deduction preserved. How? By Brother’s disclaiming his interest in the trust with 9 months of Husband’s death (again, just the tax law).
Example [2]: Same facts, except no one knows to tell Brother to disclaim, so no timely disclaimer is made. IRS asserts a multi-million-dollar tax deficiency against Husband’s estate, as it throws out the estate’s claim of a marital deduction with respect to the trust. Bad deal. IRS is not going to be denied. If need be, it can take the taxes owed out of the trust. That would cause the trust to be disqualified as a charitable remainder trust . . . a very, very bad deal.
These two examples are based on an actual situation to which the IRS issued a devastating private letter ruling.
Bad advice is commonplace in the gift planning arena, and it’s seldom obvious to the non-expert eye. If you think bad advice may have been given in your gift planning arena, appropriate legal counsel may be able to help you navigate.
