«Aggregated Summary of Reports Provided by ABA-PTL and ACTEC-Prac List serves 2015 Heckerling Estate Planning INSTITUTE Edited, Aggregation of On-Site ...»
Ms. Cantrell noted that Form 706 filings statistics for 2011 deaths released by the IRS last year were up (most likely due to portability). She noted Form 706 preparation has increased. Today the clients with between 5-10 million are the hardest to plan. Planners must take into account income, transfer taxes, fiduciary duties, ethical duties, administrative matters, and how does changing these plans affect creditor and spousal claims.
The panel noted that parties should address how state law affects their planning but must also be considerate of the fact that it changes. Questions often arise as to whether to have a trust continue or should it be terminated?
Often with state estate and income taxes, you may want to keep the bypass trust in effect for even modest estates.
This is a fact intensive issue depending on the basis of the assets, the tax rates of the beneficiaries, and the tax rates of the decedent. Ms. Sloan noted that the most important question is often where do the children live and what are their tax rates, but not necessarily what the decedent’s estate tax rate is. When clients have children living throughout the country it gets complicated. Ms. Cantrell mentioned that if a bypass trust terminates and it is not all paid out to surviving spouse you should be wary of the complex basis issues regarding the disposition of lifetime interests.
Next the panel moved on to avoiding unwanted discounts which may reduce basis. Mr. Bergner noted that the IRS may start arguing for discounts instead of against them. Ms. Sloan mentioned that the number of valuation cases decreased last year, and the IRS may no longer be as interested in valuation discounts. They noted that discounts are not always beneficial. Planners may want to consider changing distribution standards, reworking the cash out provisions, and changing voting requirements to reduce discounts on death. The panel discussed opportunities with liquidating distributions that may trigger tax in non-liquidating distributions. The panel also warned against triggering the seven year rule on liquidation if there was a contribution of appreciated property within seven years.
The Seven year rule prevents tax free exchanges through partnerships. Also, the panel discussed the various basis issues that may occur if there are not pro-rata distributions of assets.
Mr. Bergner provided that the IRS may soon start asserting fractional interest discounts at death on property. If there are co-owners, it may be best to give both people the right to sell the property without the others consent to ensure that no discounts are added. He noted most of us report ½ the value of joint property on an estate tax return, but there should probably be a discount.
The panel then discussed how to cause property to be included in a settlor’s estate to receive a step-up in basis. If you have a swap power, you could swap cash for the low basis assets. If there is no swap power, you could do purchase and sale transaction in a grantor trust without recognizing income. Mr. Bergner also noted that if you need grantor trust status, you can intentionally trigger grantor trust status by borrowing money from the trust. Mr.
Bergner then discusses gift reporting regulations and discussed how if reporting a swap there may be no need for an appraisal for adequate disclosure, although it would be preferred.
Ms. Cantrell noted she liked purchasing the remainder interest in a CRT, GRAT or QPRT to get the asset back in a settlor’s estate. The panel then discussed the various issues involved with using these techniques. Ms. Sloan noted that when terminating these remainder interests, you should get the consent of all parties to prevent fiduciary liability. Other ideas discussed included staying in a residence after the QPRT term, or simply disregarding partnership formalities and using them as a piggy bank. We may be able to use prior IRS victories to our advantage to have a basis step up.
Mr. Bergner noted that a beneficiary who is not an executor can argue for a new basis contrary to what was reported on a Form 706. This can even be done after the Form 706 statute of limitations has passed, to avoid an estate tax audit. Courts have allowed this argument if there is reasonable evidence. It may even be possible for a child to argue that an asset should have been includable on a Form 706, to obtain a step up in basis.
The panel then moved to getting trust assets into a beneficiary’s estate. The easiest answer is to distribute trust assets to a beneficiary. The panel noted it is important to review the entire trust document as there may be hidden tools to accomplishing goals. It is also important to document any trust terminations in a family settlement agreement, but remember that the IRS is not bound by the agreement. The panel then discussed triggering the Delaware tax trap, they also discussed the situation where a credit shelter trust gave the spouse all income and the assets significantly appreciated. It may be possible to make a late QTIP election for a full basis step up on these assets.
Finally, the panel discussed how to avoid the 3.8% tax on Net Investment Income? The recent case of Frank Aragona Trust, v. Comm’r, 142 TC No.9 (2014) where a trustee met the material participation test was discussed.
The panel noted that it may be possible to distribute all passive activity investment gains to a beneficiary who is active in the business. They discussed the possibility of toggling grantor trust status on or off depending on whether the beneficiary or the trustee is active. Another option is to make distributions to the beneficiaries up to the threshold of the Net Investment Income tax.
Session III-B A Closer Look at Powers of Appointment in the Current Planning Environment Turney P. Berry, Sarah S. Butters, Thomas P. Gallanis The panel will look at key issues in drafting and exercising powers of appointment such as choice of law, design of powers, and comparing powers of appointment to fiduciary distribution and administrative powers. The Uniform Powers of Appointment Act will be reviewed as well as general common law principles. Common and clever uses of powers will also be featured.
Reporter:Carol A. Sobczak Esq.
Unfortunately, Prof Thomas P. Gallanis had the flu and could not be present. Fortunately, Mr. Berry and Ms.
Butters presented a very insightful special session. Ms. Butters, primarily a litigator, provided a useful prospective.
First, readers are directed to view the Uniform Powers of Appointment Act and any other uniform acts at http://www.uniformlaws.orgwww.uniformlaws.org. The free site also includes comments, which are of great value.
The speakers began by explaining that powers of appointment are not fiduciary powers, like trust modifications or decanting powers. The new “divided trusteeship” duties, such as with trust protectors, are the subject of a new uniform act which is being worked on currently. Powers of appointment (POAs) are different in that they are nonfiduciary powers.
The most common reason to include POAs is for a “second look” - so that a trust may be changed due to changed circumstances or tax laws changes. Two questions to ask are (i) do you want someone to be able to make such changes, and (ii) who should do so and by what standards?
Also, old trusts may have bad investment standards, obsolete provision, etc. POAs can be exercised to send trust assets to a new trust with better provisions. There are other ways to do this, such as by using trust protectors or decanting, but powers of appointment may be simpler.
POAs may be considered “powers to Disappoint.” Think of a trust fbo mom and kids, mom wants a new car; kids don’t want her to have a Ferrari, only a Ford, but mom has a POA and could “disappoint” the kids who disagree with her by disinheriting them.
We need to be careful when we add POAs and consider how well we have done our job. If our client can disinherit half of his family, is that what the client would have wanted? What about when the client is old and infirm and subject to undue influence of others? That could result in a misuse of the power.
The new trends Ms. Butter is seeing as a litigator include (beside the old trend to bring flexibility to estate plans) getting a new basis in trust assets, avoiding GST issues, and avoiding income tax by appointing to a trust in a jurisdiction that does not have state income tax.
POAs are useful to add flexibility to estate plans, to potentially keep family members in line (by threatening to use it), but also to keep charities in line where they may have changed their focus, not being in line with the grantor’s original intent.
POAs can help when family dynamics change due to the beneficiaries’ ages, marital issues, creditor issues, divorce issues, etc.
However, unanticipated circumstances may arise with the exercise of POAs. Might the assets now be subject to the claims of creditors? Do we know all the consequences of exercising a power?
Mr. Berry gave the example of Mom, who has a trust from her mother that will not be included in her estate for federal estate tax purposes. But her son, the only beneficiary after Mom, wants to get a step-up in basis. So son, with consent of Mom and other beneficiaries, modifies the trust to give Mom a general power of appointment so that it is included in her gross estate and son will get a new basis in trust assets. But what if Mom runs a school bus off the road? Will the trust be subject to the claims of the injured? What if the POA is subject to approval by other beneficiaries? What if mom created the power herself, would there be different treatment? There is no easy answer. Merely having a testamentary general POA does not create rights in creditors - this is the general rule.
The questions from the audience included whether a POA can be drafted so that power can’t be exercised without consent of another person; whether you can exercise a POA to another person to avoid creditors or whether that would be a fraudulent transfer. These, and other questions, are not easily answered.
The new Uniform Act allows a POA to be exercised in either a will or a trust. The creation, revocation, or amendment of a POA is governed by the law of the donor’s domicile. The exercise, release, or disclaimer of the power, or the revocation of the power, is governed by the law of the powerholder’s domicile at the time of the exercise, release, disclaimer or revocation.
What are the ramifications when you have same-sex marriage partners and one state may, one may not, approve of the marriage and the POA allows the exercise in favor of spouses? Or with artificially reproduced children - who is a descendant? What about adult adoptions The substantial compliance provisions of the Uniform Act permit the validity of POAs even if all formal requirements are not complied with, but if the POA complies with what the donor AND the powerholder intended, it should be OK. Best practice is to specifically refer to and comply with donor’s requirements as set forth in the power.
Be careful of old documents in effect before certain laws passed, such as those relating to adopteds, artificial insemination, etc. because the default may be what the law was at the time and place the document was drafted.
What may be a fraud on a power? An impermissible appointment? What if dad appoints to kids provided they will take care of mom? What if dad appoints to 2 sons but not the 3rd to take care of mom? If there is a “contract” based on a conspiracy, a litigator may take the case.
There are a lot of outstanding issues about the details and specific transactions regarding POAs, but the bottom line is that there are more questions now, and the uniform act does not address them all, especially now that we are using POAs for other than just flexibility. Always look to your specific state law for guidance.
Session III-C Trust Protectors for Trusts for Individuals with Special Needs: Not an Option Anymore - But Not Just Boilerplate Lawrence A. Frolik, Bernard A. Krooks, Kathleen R. Sherby Planners setting up trusts for beneficiaries with special needs know that because such beneficiaries are unlikely to be able to protect their interests, a trust protector is needed. But the planner should carefully consider just what is being “protected” and what trust provisions are needed to ensure that the protector, in name, is a protector, in fact. And should the protector be a fiduciary? All this and more will be discussed as we move the use of trust protector from the world of theory to the land of the practical.
Reporter: Joanne Hindel Esq.
This special session builds on Ms. Sherby's related general session from Thursday morning.
Generally, beneficiaries will monitor the actions of trustees, but with special needs beneficiaries this is not possible.
If a beneficiary is not able to watch out for his or her own interests, then a trust protector might be able to do so on behalf of that beneficiary.
Special needs trusts fall within two basic groups: self-settled trusts (d4A trusts) where the funds come from the settlor/beneficiary and pooled trusts (d4C trusts).
The examples used by the panel were of situations where a third party establishes a trust for a special needs beneficiary.
The examples contain trusts with wholly discretionary authority in the trustee and with provisions that require the trustee to ensure that governmental benefits will not be adversely affected by trust distributions.
The panel reviewed a few situations where the trustee of a special needs trust was challenged by a court for not attending to the unique needs of the beneficiary of these trusts. This is one of the reasons why a trust protector might be helpful to fulfill that duty.
The panel presented a group of problems to discuss the role of the trust protector in each scenario. In the
problems, the trust protector had the following powers:
1. The power to remove or replace the trustee and if necessary to name a successor trustee.
2. The power to move the trust to another state or country.
3. The power to make corrections to the trust document
4. The power to amend the trust in light of federal or state tax law changes.
5. The right to be compensated from a trust under the same standard as a corporate trustee.
Further, the following powers might be added when appropriate:
1. The power to approve or disapprove proposed distributions
2. The power to add beneficiaries.