The Not Necessarily Irrevocable Trust 24 TH E O R EG ON CE RT IFIE D PUBLIC. BOA Proposed Rules Revisions 12. Understanding BEPS 27

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1 TH E O R EG ON CE RT IFIE D PUBLIC orcpa.org OCTOBER/NOVEMBER 2016 The Not Necessarily Irrevocable Trust 24 BOA Proposed Rules Revisions 12 Understanding BEPS 27 Oregon Health Marketplace 30 Financial Instruments Standard 32

2 CONTRIBUTORS THE OREGON CERTIFIED PUBLIC Jay Richardson Deanna Franco Jay Richardson, CPA, CGMA, CMA, CFM, is a shareholder at Buckley Law PC. His practice emphasizes taxation, business formation and transactions, estate planning, and securities. Jay has advised small and medium-sized business owners for more than 30 years and they include service, technology, and manufacturing companies. Jay currently serves as chair-elect on the OSCPA Board of Directors. Deanna L. Franco is an attorney with Buckley Law PC, licensed in both Oregon and Washington. Deanna s practice focuses on probate/trust administration, guardianship and conservatorship proceedings, estate planning, and business law. Their article, I Know the Trust says Irrevocable, But It Ain t Necessarily So, is on page 24. Michael Ferguson, CPA, CMA, is a partner in Ernst & Young LLP s International Tax Services Group for the Pacific Northwest. He has extensive experience consulting with both U.S. and foreign-based privately held multinational companies. Michael s expertise centers on structuring and financing cross-border mergers and acquisitions, tax-efficient cash repatriation Michael Ferguson Tracy Fisher strategies, tax-efficient supply chain management, and tax deferral structuring. Tracy Fisher, CPA, is a senior manager in the International Tax Services Group in the Ernst & Young Portland office. She has more than ten years of experience in public accounting, serving clients of various complexities and sizes, as well as in several different industries. Her experience includes consulting with both U.S. and foreign-based multinational companies on their international tax needs. Their article, Understanding BEPS: The Basics, is on page 27. Publisher Oregon Society of CPAs Mailing address PO Box 4555 / Beaverton, OR Location SW Laurel St. / Beaverton, OR / Fax: orcpa.org / oscpa@orcpa.org Chair Harry E. Bose Chair-Elect Jay Richardson Vice Chair Amy I. Dale Past Chair Timothy R. Filkins Board of Directors Anna Barnsley Werblow, One Year James A. Carnegie, One Year John M. Gamiles, Two Years John D. Hawkins, One Year Michael E. Lynch, Two Years Kari T. Patterson, One Year Katrina Z. Powell, Two Years Chapter Council Chairs Joy E. Ragsdale Benton-Linn Chapter Yvonne D. Zbranak Central Oregon Chapter Christopher J. Cockburn Eastern Oregon Chapter R. L. Widmer Emerald Empire Chapter Kimberly A. Walton Mid-Columbia Chapter Laura D. Fisher South Coast Chapter Vicki J. Forehand Southern Oregon Chapter President/CEO Sherri L.D. McPherson, CAE Editor Leslie R.P. Konst, MS lkonst@orcpa.org Jim Russel Jim Russel, MBA, has over 30 years in the benefits industry and is part of the Craford Benefit Consultants advisory team that supports the OSCPA benefits program. Jim is recognized as a benefits thought leader with expertise in strategic planning, benefit plan metrics, and improving the value and financial performance of health plans. His article, Oregon Health Insurance Update, is on page 30. The Oregon Society of CPAs assumes no responsibility for statements or advertisements herein, and reserves the right to reject any advertising. The thoughts, opinions, and advertisements are those of the authors, editors, and advertisers. In this publication, masculine terms shall be understood to include the feminine and vice versa as stated in the OSCPA Bylaws and the OSCPA Policy Compendium. Send address changes to OSCPA / PO Box 4555 / Beaverton, OR Or update your member profile online at orcpa.org/members/member_info John D. Rossi III, CPA, is an associate professor of accounting at Moravian College in Bethlehem, PA. He is a member of the editorial board of the Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of CPAs. His article, FASB Issues Long-Awaited Financial Instruments Standard, is on page 32. John D. Rossi III Copyright OSCPA 2016 Magazine design by Joleen Funk joleen.funk@gmail.com Cover image by istock.com Stock images by istock.com Printed by Journal Graphics, Portland, Oregon 4 The Accountant OCTOBER / NOVEMBER 2016

3 I Know the Trust Says Irrevocable, 1 But It Ain t Necessarily So By Jay Richardson and Deanna Franco When I use a word, Humpty Dumpty said, in rather a scornful tone, it means just what I choose it to mean neither more nor less. The question is, said Alice, whether you can make words mean so many different things. The question is, said Humpty Dumpty, which is to be master that s all. Lewis Carroll ( ) (Respectfully quoted) Oregon CPAs frequently perform services for trustees or beneficiaries of non-charitable irrevocable trusts. Often, CPAs are trustees. When an irrevocable trust loses its way due to changed circumstances, or when trustees and beneficiaries find themselves in a dispute, help may be available. Thanks to Oregon s Uniform Trust Code (UTC), an irrevocable trust s terms can, in some circumstances, be modified or revoked. Immutable, it seems, is not the master meaning of irrevocable. Background Oregon s UTC is found in chapter 130 of the Oregon Revised Statutes (ORS). The scope of the UTC is broad. Chapter 130 governs representation of beneficiaries, creation of trusts, creditor claims, spendthrift trusts, claims against a trust based upon the debts of the settlor, 2 revocable trusts, the office, duties, liabilities and powers of trustees, prudent investor rules and trust certifications. Included in Chapter 130 are sections entitled nonjudicial settlement agreements (ORS ) and modification and termination of trust (ORS ). 3 The Trust Modification Statutes are complicated and much of their content will not be discussed. 4 Some portions of the Trust Modification Statutes have particular relevance to Oregon CPAs. Nonjudicial settlement agreements Anyone who has been involved in a court action knows court proceedings are costly in emotion, time, and money. Worse, the court may not agree with the desired change to the trust. Recognizing the costs of court action, the UTC permits nonjudicial settlement agreements (NSA). ORS Purpose. An NSA is available if the NSA does not violate a material purpose of the trust. 5 ORS (4). Hence, ascertaining the material purpose of the trust is critical but not always easy. The material purpose of the trust may be found within the trust document or based upon other evidence of the settlor s intent. Parties. One of the most important issues with NSAs is determining who must execute it. An NSA must be executed by all interested persons : the settlor (if living), the trustee(s) and all qualified beneficiaries. 6 Binding effect. An NSA is not required to be filed with the court. If the NSA is not filed with the court, the NSA is binding only on the parties to the agreement. ORS (3)(b). In general, if the NSA is filed with the court (and no one objects), the NSA is also binding on all beneficiaries even if they were not a party to the agreement. ORS (6)(e). Scope. Although an NSA has the word settlement in its name, an NSA is not limited to settling disputes. Indeed, ORS (3)(c) may be executed as to any matter involving a trust and contains a non-exclusive list of administrative matters that may be resolved by an NSA. Those matters of particular interest to CPAs are: The interpretation or construction of the terms of the trust or other writings that affect the trust and the approval of a trustee s report or accounting: Many CPAs are involved in trust accounting and reporting, so an NSA can be used to approve their work. Direction to a trustee to refrain from performing a particular act or the grant to a trustee of any necessary or desirable power: Many CPAs serve as a trustee, and an NSA can be a critical tool to provide them direction to perform their trustee duties. The resignation or appointment of a trustee or cotrustee, the determination of a trustee s compensation, the transfer of a trust s principal place of administration and resolving disputes arising out of the administration or distribution of the trust: One example of this use of 24 The Accountant OCTOBER / NOVEMBER 2016

4 OREGON'S TRUST CODE an NSA may involve the state income taxation of a trust. If a trust is subject to income taxation in a state because a trust s administration takes place in a state as required under the terms of the trust, an NSA may be used to change the situs of administration to obtain more favorable state income taxes. Modifying the terms of the trust, including extending or reducing the period during which the trust operates: This matter, as can be seen, is quite broad. A very powerful companion provision in the UTC is ORS (6) that allows interested persons to enter into an NSA to terminate a trust if the termination does not violate a material purpose of the trust. Modification or termination without judicial action: uneconomic trusts and impossibility of achieving trust purposes The UTC states that a trust terminates if no purpose of the trust remains to be achieved or [t]o the extent that one or more of the purposes of the trust have become... impossible to achieve. Apparently, no court involvement or beneficiary approval is required; indeed the literal language of the statute suggests that termination appears to be automatic. 7 ORS (1). A CPA s financial analysis can be critical in determining whether the trust is ready for termination. ORS (3) states that a trustee, without court approval, may terminate a trust if termination is appropriate by reason of circumstances not anticipated by the settlor and termination will not be inconsistent with the material purposes of the trust. 8 ORS (1) states that, after notice to the qualified beneficiaries, a trustee may terminate a trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration. 9 CPAs who either are involved with or review a trust s books and financial statements are often the first professional to recognize an uneconomic trust. Judicial involvement In some circumstances, court approval is required to sanction a trust modification or termination otherwise not obtainable through an NSA. Modification, termination, or trustee removal. ORS (2) provides slightly broader powers to a court than those available to a trustee under ORS (1). Under ORS (2), a court may remove and appoint a trustee if the court finds that the value of the trust property is insufficient to justify the cost of administration of the trust. Note that there are no dollar guidelines or thresholds in determining whether a trust s property is insufficient. Modification or termination by consent. An irrevocable trust may be modified or terminated with approval of the court upon consent of the settlor and all beneficiaries who are not remote interest beneficiaries, 10 even if the modification or termination is inconsistent with a material purpose of the trust. ORS (1). If the Settlor is deceased, or their consent cannot be obtained, modification or termination becomes much more difficult. In that case: An irrevocable trust may be terminated with court approval upon the consent of all beneficiaries who are not remote interest beneficiaries if the court concludes that continuing the trust is not necessary to achieve any material purpose of the trust. Similarly, an irrevocable trust may be modified with court approval upon the consent of all beneficiaries who are not remote interest beneficiaries if the court concludes that the modification is not inconsistent with a material purpose of the trust. ORS (2). Only for purposes of ORS , a spendthrift provision 11 in a trust is rebuttably presumed to be a material purpose of a trust. Modifications or termination because of unanticipated circumstances or inability to administer trust effectively. As stated above, a trustee has certain powers to terminate a trust due to unanticipated circumstances. A trustee not willing to use this power may turn to the court. Under ORS (1), a court may modify the administrative or dispositive terms of a trust or terminate the trust if modification or termination will further the purposes of the trust and the modification or termination is requested by reason of circumstances not anticipated by the settlor. 12 To the extent practicable, the modification must be made in accordance with the settlor s probable intention. This is particularly useful if the CPA becomes aware of a trust that is no longer serving the probable needs of the settlor. A court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or wasteful, or would impair the trust s administration. ORS (2) Reformation to correct mistakes. A court may reform 13 the terms of a trust, even if the terms are unambiguous, to conform the terms to the settlor s intention if the person requesting reformation proves by clear and convincing evidence that both the settlor s intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement. ORS Given the complexities of the law, and the complexities of many estates, this statute may be quite useful to a CPA who identifies that the terms of the trust were influenced by a mistake of fact or law. Modification to achieve settlor s tax objectives. The court may modify the terms of a trust to achieve the settlor s tax objectives 14 if the modification is not contrary to the settlor s probable intention. ORS The court may provide that the modification has retroactive effect. 15 Oregon Society of CPAs orcpa.org 25

5 OREGON'S TRUST CODE Tax consequences of modification or termination of an irrevocable trust Anytime one of the foregoing modification or termination tools is considered, a CPA can provide valuable insight into two different issues: To what extent is a retroactive modification binding on the relevant taxing authorities, such as the IRS and the State of Oregon? The IRS s position, to which courts have generally agreed, is that the IRS is not bound by any retroactive modification unless they were a party. There is a large body of work on this topic and the CPA is encouraged to review the relevant cases and administrative rulings. What are the tax consequences of the modification or revocation? Typical questions that might arise are: will there be adverse income tax consequences because the trust holds Subchapter S stock? If a beneficiary consents to a modification, will the modification result in a possible taxable gift because the beneficiary transferred some or all of its interest in trust property to another beneficiary? See PLR What are the estate, income and gift tax consequences to the settlor if the settlor is a party to NSA? Final note trust decanting Estate planning and trust administration continuing education classes sometimes discuss trust decanting. In a decant, the trustee transfers some or all of the property held in an existing irrevocable trust into a new irrevocable trust with different and (presumably) more desirable terms. Many states have adopted decanting statutes; the UTC does not recognize trust decanting. Interestingly, the effect of a decant of trust property may be the same effect as an NSA or a courtapproved modification/termination. Conclusion Even though a trust by its terms says that it is irrevocable, a CPA may want to explore if one of the many options under the UTC allows the trust to be modified or terminated, either with or without court involvement. Thanks to the broad features of Oregon s UTC, trustees, settlors, and beneficiaries have significant latitude in administering trusts and resolving trust disputes without court involvement. The authors profiles are on page 4. Endnotes 1 Song title, "It Ain t Necessarily So, music by George Gershwin and lyrics by Ira Gershwin. 2 The settlor is the person creating the trust, also known as the trustor. ORS (18). 3 For purposes of this article, the nonjudicial settlement agreement and trust modification and termination sections of the UTC are referred to as the Trust Modification Statutes. 4 Those issues involve governing law, representation of parties and necessary parties. That said, some aspects of the necessary party issues are briefly discussed below. 5 Another requirement that is rarely an issue is that the modification and (ii) would otherwise be approvable by a court. A matter is otherwise approvable by a court if the proposed modification would not be void as against public policy. See ORS For purposes of this article, assume that a qualified beneficiary is a beneficiary who (i) is currently entitled to a distribution of income or principal or (ii) would be entitled to income or principal if the trust terminated or all the interests of all prior beneficiaries terminated. ORS (14). 7 Although ORS (2)(d) suggests the court must approve terminations under ORC The trustee must also obtain the consent of all qualified beneficiaries and the trustee must not (i) be a beneficiary of the trust or (ii) have a duty of support for any beneficiary of the trust. 9 ORS calls these trusts uneconomic. 10 A remote interest beneficiary is essentially any beneficiary whose beneficial interest is contingent upon the successive terminations of all prior beneficiaries. ORS (15). 11 A spendthrift provision is found in almost all trusts, is usually titled as such in the trust document, and refers to any trust language that restrains both voluntary and involuntary transfer of a beneficiary s interest, usually to creditors. ORS (19). 12 A change in the tax laws may be an example of an unanticipated circumstance; however, a change in tax laws is also covered by ORS We assume that reform simply means modify although sometimes reform means retroactive modification which adds its own complexities, especially regarding income, gift and estate taxation. The IRS s position on retroactive trust modifications is discussed in Rev. Rul , C.B With recent changes in the estate tax laws, ascertaining a settlor s tax objectives may be difficult. For example, increasing basis rather than reducing the value of assets may be the best strategy for the trust, but was that the settlor s intent when the trust was drafted 20 years ago? 15 As discussed in footnote 11, caution is recommended before making any change retroactive, especially where the change has desired tax benefits. Looking for more on trusts? Everything You Need to Know About Trusts #W06155 November 14, 2016 / Online Designed for CPAs, as well as attorneys and financial planners, this course will start with an overview of trust laws and general concepts, then dive into common structures and progress into advanced trust planning issues. Highlights include revoking irrevocable trusts. What CPAs Should Know About Trust Instruments #W10031 December 1, 2016 / Online This is a survey course on the intergenerational transfer of property -- focusing on what the CPA should know about trust instruments. It will cover a broad number of topics ranging from the fundamental legal principals necessary for the trust and estate practitioner to understand, to the ability of language in the trust instrument to accomplish a certain tax result. Estate and Life Planning Issues for the Middle-Income Client #09773 December 2, 2016 / OSCPA Center, Beaverton Clients think that estate planning only applies to the very rich. In truth, there are many issues of critical concern for which the middle-income client needs to plan. This course is a must-attend for all CPAs who work with middle-income clients and are looking for ways to provide additional quality services. For more information and to register, visit orcpa.org/cpe/educational_catalog; enter the event number. 26 The Accountant OCTOBER / NOVEMBER 2016