Author: Blank Rome LLP

Categories
Estate Planning

ChatGPT, Esq. Has Entered the Legal Chatroom

Sara K. Osinski —

ChatGPT passed the bar exam on its first try. To make matters more alarming, ChatGPT can draft someone’s Will in a matter of minutes.

Before sounding the unemployment alarms, what is ChatGPT exactly? ChatGPT is a chatbot powered by artificial intelligence (“AI”) that produces human-like responses in text form. Since its launch in November 2022, ChatGPT has provided quick responses to simple estate planning and estate administration questions; generated accessible online templates; and drafted briefs, responses, complaints, Wills, and trusts. Additionally, unlike attorneys, ChatGPT does not charge an hourly rate or a flat fee.

While ChatGPT may sound like an attorney’s nightmare, it will not be able to replace attorneys altogether. OpenAI, the creators of ChatGPT, warn that ChatGPT should not be relied upon for advice. In fact, when a user asks ChatGPT any legal question, the chatbot will warn the user as follows: “I’m sorry, but as an AI language model, I am not authorized to provide legal services or advice. It’s important to consult with a licensed attorney who is qualified to provide you with legal advice.” Despite this warning, when framing the question correctly, a user can eventually acquire a draft Will or trust template through ChatGPT. Although helpful, this template provides a false sense of security for the user, especially one who does not have a legal background in tax or trusts and estates. This means that if ChatGPT drafts a Will or trust, the user will likely need to do additional research, not only in the area of tax or trusts and estates, but also in other related substantive practice areas, to ensure the information provided is accurate, thereby leaving room for error, both human and computer.

Additionally, while ChatGPT is a helpful and cost-efficient tool, the user will need to ask the appropriate questions in order to prepare and execute their estate planning documents accurately. As there are many nuances to each person’s estate plan and complexity arising from the ever-changing tax code, there are many questions that a user may not consider if they are not familiar with the estate and tax planning process. For instance, if a user executes his or her ChatGPT-generated Will without asking ChatGPT (or a reliable trusts and estates attorney) how to do so under relevant state laws, if such Will is executed incorrectly, the consequences may be as serious as having an invalid and inoperable Will upon his or her death. Therefore, instead of the user’s assets passing according to his or her intent, the state law for those users who die with an invalid Will controls the distribution process.

This could also result in substantial unintended tax consequences that otherwise could have been avoided had the user consulted with a reliable trusts and estates attorney. The user may also fail to consider certain obligations that he or she has to his or her spouse (or others) under the terms of a marital agreement or certain marital obligations that arise under state law. When preparing estate planning documents, a reliable trusts and estates attorney not only considers the areas of tax and trusts and estates, but also may need to consider issuing arising in the areas of matrimonial law, corporate law and securities, real estate law, and intellectual property. Working with a law firm with a wide range of practice areas will generally result in the preparation of a comprehensive estate plan that can address all of these substantive areas of the law. Individuals without formal legal training will likely not know how these practice areas intersect in preparing an estate plan.

Another consideration to using ChatGPT as your trusts and estates attorney replacement is that estate planning and estate administration can be a highly emotional process. Therefore, if a user is utilizing ChatGPT while under a highly emotional state, fatal errors are likely to occur. Deadlines may be missed, information left out of a Will or trust, estate planning documents incorrectly executed, estate administration forms incorrectly filled, etc. Additionally, while ChatGPT may provide simple responses to legal questions, because its responses are computer generated, they cannot provide an emotional sounding board for a user who is experiencing intense emotions with his or her estate planning or estate administration process.

An additional consideration when thinking about using ChatGPT for estate planning or estate administration is that these documents involve personal and sensitive information that should only be shared between the user, the user’s attorney, and the user’s loved ones. While the user can take a multitude of precautions, any content created online using ChatGPT is at risk for being hacked or stolen by malicious hackers. A Will and other estate planning documents should be treated with the utmost care and attention, and that includes protecting the privacy of such documents.

While ChatGPT may be good at taking a test, due to the nature of the underlying technology, it may never be capable of genuine reasoning, providing human compassion, and applying creativity to an individual’s legal questions. There are a whole host of potential concerns and problems with using ChatGPT to prepare an estate plan. As such, this program should not be used as a substitute for a trusts and estates attorney.

Categories
Estate Planning Estate Tax Exemption Capture Planning Gift Tax Income Tax

Irrevocable Trusts: Who Is the Taxpayer?

Kyle G. Durante —

In establishing and funding an irrevocable trust, a common question is who is responsible for the income tax liabilities associated with the trust? Many individuals assume that the trust is a separate and independent taxpayer, requiring the trustees to file income tax returns for the trust. However, that is not always the case.

Irrevocable trusts are either classified as “grantor trusts” or “non-grantor trusts.” When an irrevocable trust is classified as a grantor trust, the trust is treated as identical to the settlor or the donor, requiring the settlor to report all matters of income and deduction with respect to the trust on his or her own individual income tax returns. When an irrevocable trust is classified as a non-grantor trust, the trust is deemed to be a separate taxpayer, requiring the trustees to file annual income tax returns for the trust (known as fiduciary income tax returns) reporting all matters of income and deduction with respect to the trust.

Generally, whether an irrevocable trust will be classified as a grantor or non-grantor trust depends on certain powers that may have been retained by the settlor with respect to the trust, who are the beneficiaries of the trust, and certain provisions in the trust. For instance, if the settlor retained the power of substitution (also known as a swap power), if the trustees have the power to use trust income to pay premiums on a life insurance policy insuring the life of the settlor or if the settlor’s spouse is a permissible beneficiary of the income of the trust, the irrevocable trust will be deemed to be a grantor trust. As a general rule, although not always the case, an irrevocable life insurance trust (holding a life insurance policy insuring the life of the settlor) or a spousal lifetime access trust (“SLAT”) will almost always be deemed a grantor trust during the settlor’s lifetime.

At first blush, a grantor trust may be seen as a harmful result given that the settlor is transferring property to an irrevocable trust (of which the settlor is generally not a beneficiary and no longer has access to the property) but the settlor remains liable for the income tax bill. However, establishing an irrevocable trust as a grantor trust can have significant transfer tax benefits. By establishing a grantor trust, each year the settlor will report and pay any associated income tax liabilities with respect to the trust. Under current law, the payment of tax liabilities that would otherwise be paid by the trust is, in essence, a tax-free gift to the trust each year. As such, the payment of the trust’s tax liabilities by the settlor will permit the settlor to further deplete the assets in his or her own name (that will be subject to estate tax at his or her death) without using any of the settlor’s gift/estate tax exemption.

With respect to grantor trusts, of course, once the settlor dies, the trust will generally cease to be a grantor trust and convert to a non-grantor trust. It may also, however, be possible to convert the trust from a grantor trust to a non-grantor trust, and vice versa, during the settlor’s lifetime, if that would be desirable.

Irrevocable trusts are further subclassified under the Internal Revenue Code as either foreign or domestic trusts. As a general rule, domestic trusts are subject to U.S. income tax on their world-wide income, while foreign trusts are subject to U.S. income tax on only their U.S.-sourced income. The implications of each such classification and the tests to determine such classifications will be addressed in an upcoming cross-border estate planning series.

Categories
Estate Planning Matrimonial Law Spousal Rights

Don’t Forget the Will with the Prenuptial Agreement

Sean R. Weissbart —

Many prenuptial agreements include detailed provisions regulating the division of the parties’ property in a divorce but include no waivers of rights the law provides to a surviving spouse at death. The most well known of these rights is the right of election. The surviving spouse’s right of election, essentially, prevents the first spouse to die from fully disinheriting the survivor. Generally, in New York, if a surviving spouse does not inherit at least one-third of the deceased spouse’s assets, the surviving spouse can file a claim to receive this threshold amount—even when the deceased spouse’s Will (or other testamentary documents) names different beneficiaries.

It is common for prenuptial agreements—particularly between parties without children—to not waive spousal rights at death. After all, many individuals getting married have no objection to their beloved receiving at least one-third of their assets at death.

However, in some states, when a married person without children dies without a Will, his or her surviving spouse receives all of the deceased spouse’s assets. For instance, in New York, all assets of a married person without children dying without a Will (or other testamentary document) are distributed to the spouse; parents, siblings, nieces, nephews, and other relatives or friends receive nothing.

Consider the following example. Wanda, who has worked for years and has five million dollars of pre-marital assets in a brokerage account in her own name, is marrying Harry, who just graduated school and has few assets. Wanda requests that Harry sign a prenuptial agreement to protect this five million dollars from division in divorce, but the agreement is silent regarding distribution of her assets at death. Imagine Wanda has parents with limited means, a sick relative who needs money for medical care, and nieces and nephews she loves like children. If she dies before Harry without a Will (or other testamentary documents), these other loved ones would receive nothing.

What should Wanda do? The answer is simple. Before marrying Harry, Wanda should sign a Will that bequeaths assets to Harry and these close relatives. Of course, to avoid Harry exercising his right of election, her Will should bequeath to Harry, at least, the minimum threshold necessary to satisfy what Harry’s right of election would be; but her Will can freely dispose of her remaining assets however she’d like.

Many individuals sign prenuptial agreements, get married, but don’t simultaneously sign Wills. Indeed, the most common catalyst for a first Will is having children (you need a Will to appoint a guardian), which may happen years after marriage. So, in that rush to the alter, don’t forget to also sign a Will.

Categories
Estate Planning

Welcome to Future Wealth Navigator

Sean R. Weissbart, Andrew J. Haas, and Kyle G. Durante —

Welcome to Future Wealth Navigator!

Authored by Blank Rome LLP’s dedicated Trusts & Estates team of seasoned estate and tax planning and administration attorneys from across the country, Future Wealth Navigator is a one-stop shop for all matters trusts and estates. Readers can expect in-depth analysis and discussion of hot-topic issues in the trusts and estates realm, including issues related to estate and trust planning, administration, and litigation; trending estate planning tools and vehicles; and recent and proposed changes to the wealth transfer tax regime; plus analysis of other overlapping substantive practice areas, such as matrimonial and corporate law.

At first blush, many assume that trusts and estates is simply preparing for the disposition of assets upon death. Although that is a key component to any effective estate plan, the trusts and estates practice is far more complex and expansive. Client’s seek the guidance of seasoned estate planning attorneys for a myriad of other reasons, such as structuring the disposition of assets in the most tax-efficient matter, lifetime gifting and estate/gift tax exemption capture strategies, charitable giving and the establishment and maintenance of charitable entities, the sale and restructuring of business entities, contested estate disputes, assistance with the administration of trusts and decedents’ estates, preparation of certain types of tax returns (such as gift tax returns and estates tax returns), and overlapping matrimonial issues, such as addressing trusts and estates matters in negotiating a prenuptial or postnuptial agreement or upon the commencement of divorce proceedings.

Whether you are looking for a welcome distraction or to navigate through hot-topic issues that you might want to address in your own estate planning, Future Wealth Navigator is your trusted guide!

Sean R. Weissbart
Andrew J. Haas
Kyle G. Durante
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