Feb. 12, 2025 – Everyone’s life conveys meaning and values that through estate planning can continue past their lives to family and friends.

Once the client signs the wills and trusts, life goes on – and with it will likely come unexpected changes. What now?

Making Sure Loans Aren’t Gifts

Perhaps a mother is helping her son, as in Estate of Bolles v. Commissioner, 133 A.F.T.R.2d (9th Cir. 2024), a tax case decided by the U.S. Ninth Circuit Court of Appeals.

In Bolles, the mother gave loans to her son who took over his father’s architectural firm. In the 1980s, business was suffering.

The son last paid on the loan in 1988. The next year, the mother removed her son as a beneficiary of her trust, and the son signed an agreement acknowledging that he didn’t have the assets or earning capacity to repay. The mother continued to give her son money until 2007.

The question, perhaps, not considered: Were the payments loans or gifts? It affects the maximum estate tax exemption. The Ninth Circuit affirmed the Tax Court in concluding that all funds provided after 1989 were gifts.

The case “really highlights the presumption in intrafamily transactions,” explained Kass Longie, a lawyer with Foley & Lardner LLP in Madison who assists clients with estate planning. The presumption is that such transactions are gifts. “You have a high hurdle to clear.”

“You really have to think carefully about what you’re doing when you’re doing it and before you’re doing it,” Longie said.

In this case, Longie explained, the key point in reclassifying later payments as gifts came from the mother’s estate plan. She removed her son from it in 1989. This action acknowledged that she didn’t expect to receive future payments from the son. That made the subsequent payments gifts.

Longie, who advises on business succession planning, says the first thing for a family member to consider in making such a loan arrangement is to “sit down with a [Certified Public Accountant] or financial advisor.”

After receiving that advice, the family member should ask the potential recipient, “Do you have cash flow to handle a loan?”

To meet Internal Revenue Service standards, the taxpayer needs to show for any loan that the lender had a reasonable expectation that the recipient would repay the money, Longie explained.

That requirement makes memorializing the agreement critical, Longie said. Make the loan formal, written, ideally with an interest rate at the minimum applicable federal rate.

In Bolles, Longie explained, the family may not have had a lawyer on the front end. Now the case serves as a reminder.

Strategies Regarding Incapacity

A second warning comes from JLD, Trustee of the JLD Living Trust v. Nowak, No. 361850 (Mich. Ct. App. Aug. 24, 2023), which provides Wisconsin practitioners only guidance because the Michigan Court of Appeals decided the unpublished case under Michigan law.

“It’s an oddball case,” Longie said, because in it, the court was determining an individual’s capacity before death.

Usually, after the individual dies – and the final estate plan becomes known – a person who was disinherited may feel left out and begin to look back for evidence of incapacity, Longie explained.

In JLD’s original will in 2016, he left most of his assets to his sole brother’s four children. He established a trust with himself as trustee. Two of his brother’s children would serve as successor trustees in the event JLD became incompetent. The trust would become irrevocable upon JLD’s incapacity or death.

After a neurological evaluation showed JLD had significant limits to his mental capacity that may cause him to be taken advantage of, a trustee in June 2020 petitioned for appointment of a conservator and guardian. JLD opposed the appointment.

In a temporary order, the court appointed a limited conservator – a sign that JLD lacked capacity at the time, Longie explained.

In June 2021, JLD again disputed the need for protection, including a new exam showing competency. He hoped to execute a new estate plan excluding his brother’s children as beneficiaries.

By now, three evaluations in less than a year showed JLD had testamentary capacity. The court held that JLD had sufficient capacity to revise his estate planning documents, and the Michigan Court of Appeals concluded the trial court acted within its discretion.

“I don’t know how much to take out of it,” Longie reflected, because courts may not have patience to hear such issues of capacity before death.

Attorneys can prepare for such future concerns. “Dwindling capacity happens in any number of ways. For some people, it’s really obvious,” Longie said.

An attorney who develops a relationship with his or her client should have a long-term understanding about the client’s normal mental capacity.

“It can be tough. One day he can be clear-minded. The next day he doesn’t know where he lives.”

When a client wants his or her estate planning documents changed, the lawyer should choose witnesses that the lawyer can find in the future, if needed, to provide evidence of capacity at that meeting. Witnesses who know the individual are the most helpful, Longie advised.

Changes in Families but No Changes in Documents

Just as an individual can change through age, so too can the family evolve. That’s what happened in Alvis v. Alvis, No. 2023AP366 (Wis. Ct. App. Jan. 9, 2024), a per curiam opinion that can’t be cited in Wisconsin courts but can illustrate the problem.

In Alvis, the parents signed a handwritten will in 1991 that after both their deaths, their five children should receive the parents’ possessions equally.

One of the children died in April 2011. The parents failed to change their will before the father died five months after the son and before the mother died two years later. The child who died first had a surviving child, his parents’ grandchild.

A surviving child sought probate proceedings in 2022 but merely listed the surviving grandchild as an interested person. The grandchild responded by seeking formal proceedings.

As established by Wis. Stat. section 853.27, Wisconsin’s anti-lapse statute, Wis. Stat. section 854.06, applies. The circuit court emphasized that the “gap left in the will is what the anti-lapse statute was intended to fill.”

The court of appeals agreed. Relying upon Firehammer v. Marchant, 224 Wis. 2d 673 (Wis. Ct. App. 1999), the court affirmed that the grandchild received her father’s share of the inheritance. The parents could have written a will that would have left out the grandchild or created classes of heirs, but they didn’t.

The biggest lesson from this case, Longie said, is for individuals to get professional help in drafting wills and other estate documents. “People are confident,” Longie said, but “it’s rarely as simple as anyone thinks it is.”

The lawyer needs to think about these types of contingencies, even when using a form from the Wisconsin Forms Library. Asking the client what he or she wants in these contingencies is critical.

Keeping Up With Changes

Many things can change between signing a will and trust and the end of one’s life. The world will likely look different by the time one turns 80, Longie advised. Fortunately, Wisconsin law has evolved to increase flexibility.

By appointing a team of individuals, such as a trust protector, administrative trustee, investment advisor, or designated representative – “a circle of trusted people you feel comfortable with” – one’s estate plan can adapt to changes, Longie said.

The proper selection of trustees can help as well, but even the best trustees for a large, highly valuable trust “could be overwhelmed by the value” and benefit from advisors, Longie said.

Some of those same appointees can help in the mundane aspects of trust management, such as tax preparation, records, and requests for distributions, Longie said.

Even with a good team, a client should review the plan. “A major life event is a great opportunity to look at the documents, at least,” Longie said, such as at times of birth, marriage, divorce, or a death of a fiduciary, agent, trustee, or power of attorney.

Similarly, when Longie knows about changes in laws that could help clients, he recommends sending out a letter to inform them and, perhaps, pique the client’s interest in reviewing plans for other changes in their lives.