PMCA Liability Insurance, Ltd.
Risk Management/Loss Prevention Program
Case No. 1101
Cause: Improper Advice Related to Generation Skipping Tax Matters
Case Summary: The insured offered his clients’ advice concerning the establishment of
family trusts in order to manage their rather large estate. The trusts were established in
1996 and assets were transferred into the trusts in a manner to avoid gift tax issues.
The beneficiaries were given the right to withdraw a portion of each contribution to avoid
this problem using the “Crummy Power” provision in the law.
The concern came about due to the trust being designed to be a “Skip Trust” which
meant it was designed so that upon the death of one of the first beneficiaries their
portion of the trust would not be included in their respective estates. As structured the
trusts were potentially subject to generation skipping transfer tax (GST). Similar trusts
were established in the following years. In a subsequent year the law was changed
requiring the client to file a late allocation of GST exemption to the trust. This was not
done and subjected them to tax liabilities they should not have been.
Outcome/Lessons: The primary damage was in the cost of the work to straighten out
the problems, which required the work of an attorney and a CPA. The law was
reviewed to be certain the proper amendments were made. There were no taxes or
penalties to pay and the situation was properly resolved.