The Tax Code will in some situations regarding the funding a trust automatically allocate to the trust the transferor’s generation skipping (GST) tax exemption, classifying it a GST Trust. That deemed allocation is intended to protect the transferor from inadvertently failing to use his/her GST exemption when it is likely that skip-persons, e.g., a grandchild, will receive an interest in the transferred asset. However, there are occasions when the transferor may not want to use his/her GST exemption on transfers made to an irrevocable trust. What is, and what is not, a GST Trust requires a complicated analysis.

The big mistake is in assuming that all inherited retirement accounts can be rolled over to the beneficiary and then to the inherited ‘beneficiary’ IRA. There is no 60-day rollover option. Only surviving spouses can engage in a roll over to the survivor’s own retirement account. Using the wrong method to move an inherited retirement account will result in unintended distributions and cause the beneficiary to lose opportunities to obtain tax-deferred growth in the inherited retirement account.

With the new Final Regulations, with an accumulation see-through trust, only the current trust beneficiary and the secondary beneficiary or beneficiaries (who takes when the current trust beneficiary no longer is living or is ineligible to receive distributions) are counted when implementing the see-through trust rules. This is a positive result since it narrows the group of trust beneficiaries who must be identified for the see-through rules.

Expect to see a lot of activity by the IRS in the coming years asserting taxable gifts as more and more trustees take advantage of the numerous trust modification provisions in the Michigan Trust Code, or its trust decanting provisions, to change the terms of the trust with a notice to remainder beneficiaries, but without requiring actual consent by those remainder beneficiaries to the changed trust terms.

The owner of both an IRA and a Roth 401(k) account who must take RMDs now has a bit more flexibility in determining the amount of RMD he/she must take. However, any 401(k) designated beneficiary (traditional or Roth 401(k)) who is subject to the SECURE Act’s 10-year annual distribution rule because the account owner died after his/her RBD,  must take annual RMDs on the entire inherited 401(k) account amount, including the inherited Roth 401(k) account.

Lots of thought must go into whether to leave income in a trust and subject it to confiscatory federal income tax rates, or to distribute that income to trust beneficiaries, exposing the taxable income to a beneficiary’s lower marginal federal income tax rate.

As a generalization, when the settlor of a revocable trust becomes incapacitated, the successor trustee of that trust should only communicate and report to the settlor’s agent acting under a durable power of attorney. If there is no such agent able to receive the successor trustee’s accountings, then the trustee must furnish the information pertaining to the trust and its administration or all qualified trust beneficiaries, who will then have standing to challenge the trustee and its administration of the revocable trust.

When creating an estate plan, understanding a wealthy settlor/donor’s intentions for each generation is fundamental in planning to maximize the use of that individual’s GST exemption, or when to save the exemption for other uses. For those individuals who may not be so wealthy, it is important to not waste their GST exemptions when they establish trusts for the children (non-skip persons) and their grandchildren (skip persons) and who may rely on the automatic allocation of their GST exemption when it is not needed. The key take-away from this missive is that any distribution to a non-skip person from a trust that is exempt from the GST tax is effective a waste of that transferor’s GST exemption. Creating separate trusts for non-skip persons and skip persons might provide a more efficient use of the donor’s GST tax exemption.

The failure to timely file a Form 5329 along with the individual’s Form 1040 will cause the 6-year statute of limitations to apply to future IRS audits that there was a failure to take an RMD. The only way to shorten that statute of limitations from 6 years to 3 years is to use the zero-filing strategy with Form 5329, which most account owners are unlikely to do.

IRC 2036, one of the string provisions of the Tax Code, is something of a stealth provision that can trip up a sound estate plan. The scope of IRC 2036 is surprisingly broad, and it can lead to unexpected estate tax liability in not-so-obvious situations.