Missives

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.

Trustees can expect to see more limited powers of appointment in the trust instruments that they administer. The trustee should always take an independent review of an attempted exercise of the limited power of appointment to confirm that its exercise is consistent with the scope of the power. Even if the trustee has interpreted the trust instrument correctly, or the power holder’s exercise of the limited power of appointment, the trustee should always go to the probate court for confirmation if there is any possibility of a dispute. Finally, going to the probate court seeking confirmation about the power is appropriate and not a breach of fiduciary duty is there is going to be a disappointed party about the exercise (or nonexercised) of the power of appointment.

Basis consistency regarding assets received from a decedent estate is still required in reporting to the IRS, but some of the more objectionable rules found in the Proposed Regulations have been changed in the Final Regulations.

Choosing the right asset to place in a spousal lifetime access trust is important. If a residence is transferred to the SLAT, while that might make sense from an asset protection/legacy perspective, it could also bring with it a high level of IRS scrutiny. Once again, we find ourselves dealing with IRC 2036.

All discretionary trusts should contain a provision that authorizes the trustee to make distributions of the trust’s gross income to public charities to enable the trustee to manage the trust’s federal income tax liability.

A new bill is before Congress to provide yet another means to save for future medical expenses, the HOPE Act. It is not clear if this legislation, if it becomes law, is much of an improvement on the existing health savings account options currently in the Tax Code.

IRC 2036 is a trap that awaits many transferors who intend to play the valuation-discount-game with the transfer of readily marketable assets to an illiquid family limited partnership or LLC in exchange for an unmarketable interest. This is even more likely to spring that trap when this sophisticated transfer planning is engaged in by the transferor’s agent who acts under a durable power of attorney, which seems to be a ‘red flag’ for the Tax Court these days.

Intrafamily loans can be an effective way to shift wealth to lower family generation members without incurring any gift tax.