Tenth Annual Probate Administration

Transcription

1 Tenth Annual Probate Administration November 13, 2014 Chapter 8 1:00-1:30pm Testamentary Trust Funding & Estate Tax Elections Steven J. Schindler, Perkins Coie LLP PowerPoint distributed at the program and also available for download in electronic format: 1. Testamentary Trust Funding and Estate Tax Elections There are no additional materials for this chapter.

2

3 Testamentary Trust Funding & Estate Tax Elections November13, 2014 Presented by Steven J. Schindler Counsel Perkins Coie LLP Why Are There Testamentary Trusts? Control Taxes Why Is It Important to Fund Testamentary Trusts Correctly? 1. Correct assets, or correct value, to the correct beneficiaries. 2. Avoid avoidable tax consequences. 3. Help trustees be good fiduciaries. 1

4 Testamentary Trusts: All Shapes and Sizes I give such property: in trust for the care of my dog, Benji (Pet Trust) in trust for my children until the youngest reaches the age of 25 (Trust for Children) in trust for my spouse for life, then to my children (Marital/Spousal Bypass/Credit Trust) in trust for my children and their descendants for 150 years (Dynasty Trust) in trust to develop a new English alphabet Tax Exemptions and Rates in 2014 Federal Exemption: $5.34 million Tax Rate: Flat 40% State estate tax is deductible Unused federal exemption is portable Washington Exemption: $2.012 million Tax Rates: $ million: 10% $ million: 14% $ million: 15% $ million: 16% $ million: 18% $ million: 19% $ million: 19.5% >$ million: 20% Qualified Terminable Interest Property Trusts Planning upon the death of the first spouse may involve a QTIP Trust for tax efficient planning QTIP Trusts 1. Mandate all income to the surviving spouse, and 2. May not distribute to anyone other than the surviving spouse for life. 2

5 QTIP Trusts: Marital Deduction Election Personal Representative may elect to treat all or any portion of QTIP Trusts as subject to marital deduction for federal or Washington purposes. IRC 2056; RCW If election is made, assets remaining are subject to estate tax at surviving spouse s death. Different elections may be made for federal and Washington purposes. Partial elections are permitted. 7 Income Tax Implications: Basis Adjustment v. Credit Sheltering Type of Trust QTIP Election Subject to Estate Tax at Survivor's Death Yes Step-up in Cost Basis at Survivor's Death Yes No QTIP Election No No Income Tax Implications: New Planning Optimal planning at first death now may be full QTIP election for federal purposes but no QTIP election for Washington purposes (as to first $2.012 million). At survivor s death, Trust is includible for federal tax purposes, but is offset by portable exemption, and obtains full cost basis adjustment. Trust is not includible for Washington purposes (as to first $2.012). 3

6 Other Estate Tax Elections Alternate Date Valuation (2032) Special Use Valuation (2032A) Estate Tax Installment Payments (6166) 10 Why Funding Formulas? Changes in Facts "I give $500,000, adjusted for inflation using the year of execution of this Will as the base year for the adjustment, to a trust for my child" "I give my estate in equal shares to separate trusts for my children, provided that such shares shall be adjusted for any lifetime taxable gifts I make in the future to any child" Changes in Value "I give my residence to my first child and an amount equal in value to the residence at the time of my death to my second child" Changes in Law "I give the maximum amount that may pass free of any federal estate tax to a trust for my children" Funding Formulas: What Kinds? Fractional Funding Equal Shares Percentages Fractional Formulas Pecuniary/Residuary Funding Specific Amount, and then Residue Specific Amount often determined by formula 4

7 Funding Formulas: Fractional Funding "I give half my estate in trust for my wife, Elizabeth, and half my estate in trust for our children." "I give 1% of my estate in trust for my dog, Benji, if he survives me, and the rest of my estate in equal shares, one share in trust for my wife, Elizabeth, and one share in trust for our children." Funding Formulas: Pecuniary/Residuary Funding "I give $1,000 in trust for my dog, Benji, and I give the residue of my estate in trust for the benefit of both my wife, Elizabeth, and my daughter, Caroline." "I give the greatest amount that may pass free of federal or state estate tax in trust for my children and the residue of my estate in trust for my wife, Elizabeth." Fractional Funding Methods: Pro Rata and Non-Pro Rata Pro Rata Funding Fractional portion of each asset Divide everything, sell what cannot be divided and distribute cash Rarely encountered Non-Pro Rata Funding Shares divided by total value rather than by asset Personal Representative may pick and choose assets to fund each fractional share If Will is silent, RCW (15) permits nonpro rata distribution 5

8 Pecuniary Funding Methods and Considerations Methods "True Worth" "Fairly Representative" "Minimum Worth" Considerations How is income or gain allocated? Is there flexibility to pick and choose assets? Must assets be revalued? Is capital gain recognized? Pecuniary Funding Methods: "True Worth" Fund pecuniary amount with assets using "date of distribution" values Trust receives exactly the pecuniary amount in value no more, and no less (as long as estate assets are sufficient) Only assets used to fund pecuniary amount must be revalued at distribution time Personal Representative generally may pick and choose Income tax is recognized if pecuniary share is funded with built-in gain assets (relative to adjusted basis) Pecuniary Funding Methods: "Fairly Representative" Fund pecuniary amount with assets using estate tax values, provided that the assets selected shall have an aggregate fair market value fairly representative of the appreciation or depreciation of the assets available for distribution up to the date of distribution Gain or loss is shared proportionally All assets must be revalued for gain or loss Pick and choose flexibility is limited No gain recognition if assets may be allocated in fairly representative manner, but gain may be recognized otherwise** 6

9 Pecuniary Funding Methods: "Minimum Worth" Fund pecuniary amount with assets using the lesser of estate tax values and date of distribution values No depreciation may be allocated to pecuniary share, but appreciation may be In credit/marital context, should be found only with regard to marital share Only assets used to fund pecuniary amount that may have depreciated must be revalued Personal Representative generally may pick and choose (subject to fiduciary duties) No gain recognition generally, as in the aggregate, pecuniary share cannot receive gain assets** When Are Testamentary Trusts Funded? Near the end of administration Creditor Claims settled Taxes filed, paid (and settled) Revaluation of assets, as necessary Early funding? Proceed with caution to protect personal representative Asset Allocation Schedule Asset FMV at death Real $2M Property Stock $3M Cash $0 Total $5M FMV at distribution $1.35M $4.5M $150,000 $6M Pecuniary Marital "TW" Trust $1.35M $500,000* $150,000 $2M Residuary Trust $0 $4M $0 $4M 7

10 Trust Funding Logistics Obtain EIN for each trust Establish accounts and transfer assets Notify beneficiaries Trustee resource Obtaining EIN Establish Accounts/Transfer Assets "For trusts under will/testamentary: You must attach copies of the pages of the will that confirm the creation of the trust" 8

11 Washington Trust Law: Notice Obligations Notify beneficiaries within sixty days at outset RCW (2) Existence of Trust Identity of Trustor Trustee's name, address and telephone Right to request information May now be waived by the trustor/testator Keep beneficiaries reasonably informed RCW (1) Note safe harbor form in RCW 11.96A.070(1) for commencement of limitations period Recap Recognize type of formula Revalue assets as necessary at funding Consider income tax gain recognition Weigh income tax against estate tax Transfer assets Help the Trustee get started 9