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 2004
Index (back)
Report 2
Tuesday, January 6
Reporter: Gene Zuspann Esq.
9:45 - 10:30 a.m.
But I Just Wanted a Few Strings Over the Trust Assets
for Me and My Family
Steve R. Akers
Steve has a lengthy outline - 105 pages. He discussed 20
points in the outline.
He suggests that the attorney first talk with the client
about the non-tax reasons for selecting a trustee. His outline
sets out a number of non-tax factors - capacity, personal
attributes of the trustee, impartiality investment sophistication,
permanence, fees and others. He touched on several of these
topics.
Steve then discussed tax issues in the selection of a trustee.
This part of the presentation and outline are broken down
into donor tax issues and beneficiary tax issues.
He discussed gift tax issues and retained rights and the
problems caused by incorrect selection. The donor should not
have a retained beneficial interest unless the donor is in
a jurisdiction authorizing a self-settled trust.
He analyzed a situation where the donor transfers assets
to a spouse with the potential of having the spouse appoint
the assets back to the grantor. There is a timing issue -
this should not occur quickly but should work if there is
no arrangement.
The nature of the relationship with a 3rd party trustee to
the donor can cause problems. There are also dispositive powers
that can trigger negative tax effects under 2036 and 2038.
If the distribution powers do not contain ascertainable standards,
have an absolute prohibition of the donor becoming a trustee,
even thought the event that could cause the donor to become
a trustee is remote or impossible. The string causes inclusion,
not the ability or intent to pull the string.
Certain administrative powers can cause inclusion in the
estate. Generally, if the powers are subject to review by
the court then there will not be a problem. Steve discussed
and there is a large section of the outline analyzing the
Byrum and Strange cases and the fiduciary duty exception under
Byrum. See Rev Rul 81-15.
Two prohibited administrative powers are the power to vote
stock and incidents of ownership over life insurance. Note
that 2036(b)(2) has a different 3 year rule if at any time
during the 3 years the donor had the right to vote the stock.
Trustee removal and appointment powers - some of these can
cause inclusion. The power in the donor to appoint him or
herself as trustee. The power to appoint additional trustees
not including self should not cause inclusion. He briefly
touched upon Rev Rul 79-353 and the Vak and the Wall cases
regarding the power to remove and replace trustees.
Foreign trusts can have significant problems. These include
reporting for foreign trust and selection of a trustee.
The outline includes a large section in Grantor trust status
but Steve only commented on these rules for a moment.
The next section covered Beneficiary Tax issues.
These include discretionary beneficial interests and gifts
by a beneficiary if the beneficiary fails to exercise rights.
He emphasized that once a beneficiary becomes trustee and
acquires a power that constitutes a general power of appointment
there is a permanent taint that is difficult to shed. This
can be overridden by inclusion of ascertainable standards.
Some states also have laws that protect a trustee/beneficiary
if the instrument does not include ascertainable standards.
The Upjohn case - the power of a trustee to satisfy the trustee's
support obligations - can cause problems. Upjohn is a 2503
case, it is not a 2041 case.
Again, if the beneficiary can appoint him/herself as trustee
and if there are no ascertainable standards then such a power
will cause inclusion in the estate of the beneficiary.
Having the beneficiary as the sole trustee may cause application
of the grantor trust rules under 678. It appears from the
cases that an ascertainable standard exception exists but
this law is case law and not in the statutes or regulations.
The attorney should determine if the appointment of a trustee
in another state would cause income tax inclusion/exclusion
in the other state. He also discussed resident vs nonresident
trusts as determining which state will tax the trust. He listed
four rules determining taxation - residency of the grantor,
administration in the state, residency of the trustee and
residency of the beneficiary.
The next section in the outline covered savings clauses.
Steve said: "Use a savings clauses." He indicate
that many attorneys do not use savings clauses. His response
is why not use one. There is no downside.
Finally, he spent a couple of minutes on Creditor issues
in trustee selection. He pointed out that despite "black-letter
law," there is little authority that a spendthrift clause
will protect a beneficiary acting as a trustee.
10:45 - 11:30 a.m.
Cottage Savings is a Loss to Trust Beneficiaries
Lloyd Leva Plaine
The issues addressed are the effect of Cottage Savings and
Section 1001 on various actions effecting trusts.
Lloyd believes that a division or consolidation should not
be a gain realization event. However, the IRS rulings sometimes
do not reach this conclusion. The determination is whether
there is a "material difference" for the purposes
of §1001(a).
The IRS position has varied depending on whether the power
to divide, consolidate or even a distribution exists in the
trust. The Service has held that §1001 applies if the
trust does not have such a provision even if the action is
court approved.
Lloyd (and her materials) discuss a number of PLR's. The
IRS's initial position was that a reformation or division
would be subject to §1001 if the beneficiary's interest
is materially different from the interest in the new trust.
The IRS now appears to recognize that a trust event authorized
in the instrument will not constitute an exchange [under §1001].
There are a number of rulings in the last 3 years following
this position. Now there are several rulings that also hold
that a statutorily authorized action will not be an exchange.
Also, most bona fide settlements conforming to the intent
of the grantor have been held not to be exchanges.
She next discussed the grandfathered GST trusts. Lloyd does
not believe that this should apply to such trusts. Cottage
Savings should not apply to situations absent a sale or exchange
of an interest in a trust. However, the Service seems to believe
that there will be cases where no sale of exchange was involved
that it does apply.
She discussed several situations and the effects of each.
These include discretionary distributions of trust principal
from an exempt trust to a new trust, court settlement of a
bonafide dispute, judicial construction and some other actions.
Adoption of a unitrust approach or an adjustment under UPIA
section 104 should not cause a problem. Her presentation and
materials was based upon the proposed 643 regulations. The
final regs do somewhat expand the GST effective date safe
harbor. The final regs set out what state laws will be respected
and give some examples. The final regs support the conclusion
that an adjustment or conversion will not be a problem if
the action is authorized by state statute. Lloyd emphasized
that the regs say 'state statute,' not 'state law.'
There are two examples in the regs that authorize a conversion
to a unitrust or an adjustment under state statute and conclude
that there will not be a problem under GST. (Examples 11 and
12). If the client's state does not authorize one of these
alternatives, then either the trust situs must be moved or
such an action could cause problems with a grandfathered GST
trust.
There are a number of rulings discussing a greater of a unitrust
or an income approach but they do not discuss gain realization.
Lloyd discussed good and bad rulings and the varying fact
situations. One (PLR 200231011) of these concluded that gain
recognition would occur. Lloyd believes that this ruling is
fact driven and the result should not apply in most cases.
She does not believe that the adoption of a unitrust approach,
an adjustment approach, or the greater of the two should be
treated as a realization event. She analyzed different situations
and discussed the reasons what there should not be gain recognition.
Where are we? If you have a state statute, you should be
OK. If the instrument authorizes the actions, then you should
be OK. If you go to court to authorize an action in a reformation
of the trust to comply with the settlor's intent, you should
be OK. Outside of these parameters, the law is not settled
and you should probably be cautious.
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