New AI Rules and Tax Risks Transform Estate Planning
The 22nd Annual Jerry A. Kasner Estate Planning Symposium was held on Aug. 27 and 28, hosted by Santa Clara School of Law. Here are five key developments that were highlighted at the conference.
AI’s Growing Role in Estate Planning
A central theme of the conference was that artificial intelligence is quickly moving from a productivity tool into a professional responsibility issue for trusts and estates practitioners. Courts, regulators and bar associations are increasingly focused not on whether attorneys use AI, but on how they use it. Across recent case law, proposed California legislation and State Bar guidance, the consistent message is that attorneys remain fully responsible for the accuracy, confidentiality and legal sufficiency of AI-assisted work product (and that transparency with courts regarding AI use is generally preferable to trying to hide it). Practitioners may soon face affirmative obligations to verify cited authorities, disclose certain AI use and maintain appropriate oversight and documentation. The practical takeaway for firms is that now’s the time to establish clear AI policies, implement citation-review procedures, monitor AI developments in local court rules and consider whether future pleadings, petitions, declarations and verifications may need to address AI-assisted drafting.
From a litigation perspective, AI is also increasingly reshaping the discovery process. Presenters discussed the growing use of technology-assisted review and other machine-learning tools to identify relevant documents within large collections of emails, text messages, Teams chats, cloud-based communications and social media data. While these tools can significantly reduce review costs and improve efficiency, litigators were reminded that AI-assisted collections must remain defensible and that search terms, custodians and collection parameters should be carefully documented to avoid later discovery disputes.
As electronically stored information continues to expand, practitioners should also anticipate that AI-generated drafts, prompts and related communications may themselves become subjects of discovery in future litigation, reinforcing the need for thoughtful internal governance and recordkeeping practices.
Difficult to Value Interests
Just because an interest is difficult to value doesn’t mean you can’t gift it. One of the more significant tax developments discussed at the conference was the impact of McDougall, 163 T.C. 112 (2024), the subsequent valuation decision in Lewis, T.C. Memo. 2026-58 (July 20, 2026), (Lewis-McDougall), and Chief Council Advice 202352018 (Dec. 29, 2023)on trust modifications and qualified terminable interest property (QTIP) planning. Together, these authorities reflect an increasingly aggressive Internal Revenue Service position that beneficiaries may make taxable gifts when they consent to trust modifications, trust terminations or other transactions that diminish their beneficial interests.
In Lewis-McDougall, the children agreed to terminate a $117 million QTIP trust and distribute all trust assets to their father. Although their remainder interests were contingent and subject to a limited power of appointment (POA), the Tax Court held that they had given up valuable rights and that each made a taxable gift of more than $35 million. The court largely disregarded arguments that the spouse’s limited POA significantly reduced the value of the children’s interests, focusing instead on what they would have received under state law on a trust termination.
The practical takeaway is that beneficiary consent should no longer be viewed as a routine administrative step. Increasingly, the IRS and the courts may view that consent as a transfer of value with potential gift tax consequences. Practitioners should carefully evaluate proposed QTIP trust modifications and terminations for unintended gift tax consequences and consider whether existing trustee powers, decanting authority or distribution provisions can achieve the desired result.
The lesson for planners is simple: Focus on drafting flexibility into QTIP trusts whenever possible through trustee powers, trust protectors, powers of appointment and decanting provisions to help avoid unintended gift tax consequences when future changes to the trust are needed.
While Lewis-McDougall serves as an important warning, the case involved a highly specific set of facts and leaves many critical planning questions unanswered.
Decanting as a Risk-Management Tool
The conference highlighted decanting as a practical planning tool in response to the gift tax concerns raised by CCA 202352018 and Lewis-McDougall. The IRS appears focused on whether beneficiaries have a meaningful right to object and whether that objection could have prevented the modification. Through that lens, if a beneficiary has the legal ability to stop a transaction but instead allows it to proceed, thereby giving up a valuable interest, the IRS may view it as a taxable gift.
Conversely, when a trustee is already acting within authority granted by the trust instrument or applicable law, a beneficiary may not have a legally effective right to object, reducing the gift tax concern. Because decanting generally relies on existing trustee authority rather than beneficiary approval, beneficiaries often have no statutory right to block the transaction. As a result, there’s a stronger argument that the modification is being accomplished through trustee action rather than a taxable transfer by the beneficiaries.
The conference emphasized that the more a situation depends on beneficiaries agreeing to surrender rights, the easier it becomes for the IRS to characterize the transaction as a gift by those beneficiaries. Although decanting doesn’t eliminate all transfer tax risk, it may help avoid these beneficiary-consent issues when the desired result can be accomplished through trustee action rather than beneficiary approval.
Longevity and the Importance of the Planning Record
The conference also highlighted the reality every trusts and estates practitioner eventually faces: Clients are living longer, family dynamics are becoming more complex and the estate-planning file increasingly serves as the primary evidence when disputes arise years later.
Prudent practitioners should assume that a settlor may not be available to explain decisions when those decisions are later challenged. Accordingly, planners were encouraged to create a comprehensive file documenting family history, dispositive intent, reasons for unequal distributions, capacity observations and other information that may become critical in a future contest.
Particular attention was devoted to capacity and undue influence claims. Importantly, it was noted that courts consistently place greater weight on contemporaneous evidence than on retrospective testimony. Neuropsychological testing, medical records, attorney observations and detailed file memoranda were identified as some of the most persuasive forms of evidence should capacity be later challenged.
The presenters emphasized a point well known to litigators: Many disputes stem not from flaws in the estate plan itself, but from an inadequate record of the client’s intent. Ambiguous communications, contradictions between emails and signed documents, undocumented changes in instructions and failures to address capacity concerns all create opportunities for future litigants. As such, contemporaneous notes, client explanation letters and written confirmations of important decisions can significantly strengthen the evidentiary record, reducing both the likelihood of future challenges and the prospect that any challenge will ultimately succeed.
The lesson extends beyond the planning stage. Trust administration communications, beneficiary correspondence, accountings and statutory notices frequently become key trial exhibits years later. Practitioners, therefore, should approach every communication with the understanding that a court may someday review it. In an era of longer life expectancies and increasingly complex family dynamics, a thorough record remains one of the most effective tools for preserving and defending the client’s intent.
Jurisdictional Complexity in Modern Estate Planning
Another timely session examined the growing importance of conflict-of-laws issues in modern trusts and estates practice. Increased geographic mobility, multi-state families, the rise of intangible wealth and the continued divergence of state trust laws have made these issues far more common than in prior decades.
Clients frequently assume a trust remains governed exclusively by the law originally referenced in the document. In reality, trust administration often involves multiple jurisdictions with competing interests. Domicile, trust situs, trustee and asset location, governing-law provisions and the specific issue being litigated may all affect which state’s law ultimately applies.
The discussion highlighted the distinction between conflicts arising from unintentional acts and those arising from intentional planning. Clients may inadvertently create conflict-of-laws issues simply by moving to another state, relocating trust administration, changing trustees or acquiring property elsewhere. What began as a California trust may later involve Nevada trustees, Arizona real property, Delaware business interests and beneficiaries residing throughout the country. Additionally, the presenters noted that seemingly routine drafting provisions can affect the applicable law. For example, when a trust or will directs the sale of real property and distribution of the proceeds, the doctrine of equitable conversion may cause the property to be treated as personal property, shifting the choice-of-law analysis from the law of the property’s situs to the decedent’s domicile. This serves as a reminder that drafting decisions may have significant consequences beyond trust administration and disposition planning.
The session also addressed the increasing use of jurisdictions such as Nevada and Delaware to obtain favorable trust-administration laws, creditor protections, directed-trust structures and longer trust durations. However, the presenters cautioned that a choice-of-law provision isn’t always dispositive. For example, California courts may decline to enforce another state’s law when application would conflict with a fundamental California public policy, including certain rules involving beneficiary disclosure obligations, perpetuities concerns and community property protections.
The practical takeaway for planners is to view governing-law clauses, situs provisions, trustee selection and administrative flexibility as integral drafting considerations rather than boilerplate. In an era of increasing jurisdictional complexity, periodic review of long-term trusts may be just as important as the original drafting itself.
