Section 663(b) allows a trustee or executor to make an election to treat all or any portion of amounts paid to beneficiaries within 65 days of the close of the trustâs or estateâs tax year as though they were made on the last day of the prior tax year.
On a somewhat related note, fiduciaries may wish to have capital gains be treated as âincomeâ and taxed at the beneficiary level rather than the trust level to take advantage of the tax arbitrage between trust and individual tax rates. Copyright © 2020 Hess-Verdon, PLC.
• the parties were estopped from objecting to the distributions by the consents they executed; Although there apparently is no gift of the remainder interest in the above situation, there are other issues that must be addressed. Consideration also must be given to whether IRC §§2035 through 2037 could apply. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. Whether this artificial transfer of the remainder interest constitutes a completed gift under these circumstances is a separate issue. In light of the Tax Court’s recent decision in the Estate of Lillian L. Halpern v. Commissioner, 70 TCM 229 (1995), and other recent Tax Court decisions, one new option a practitioner may want to consider under the above circumstances is to distribute assets from the marital trust to descendants of the surviving spouse. 7 Id.
as well as creating a list of potential creditors so that they can meet the obligation of the courts. §2056(b)(7)(B)(ii)(II). The advantage to the taxpayer with this “after the fact” approach is that, except in the case of the spouse’s incapacity or possibly when the language of the trust specifically forbids any distributions, it is very difficult to envision a Florida court ever reversing the actions of the trustee when everyone has consented to and benefited from the action, particularly considering the number of arguments set forth in the Halpern decision against reversing the distribution. at 241 n.33. Tier 1 distributions are governed by section 662 (a) (1). To determine if the distribution is made âpursuant to the terms of the governing document,â practitioners generally rely on the Old Colony Trust case.7 So long as the executor or trustee has the discretion to make payments to charity, generally the payment will be considered as being made pursuant to the terms of the governing instrument. Whether the surviving spouse has “an interest” in the distributed assets is a question of state law, and a federal court therefore must attempt to ascertain what state law is in this respect, just as it did in Halpern. The trustees did not get prior court approval for any of these distributions.
Regarding the specific grounds mentioned by the Tax Court in Halpern for not reversing the distributions, these grounds should also be accepted by a Florida court.
9337001. 620 Newport Center Drive The decedent’s husband died, leaving a will which created a marital trust for his wife, Lillian L. Halpern. The so-called âMiddle Tierâ is reserved for amounts paid to or permanently set aside for charities. This analysis does not even take into account state taxes. It might be advisable to include specific language in the durable power authorizing the attorney in fact to consent to any distribution made from any trust including the marital trust of a deceased spouse. Due to this differential between fiduciary income tax rates and individual income tax rates, fiduciaries may wish to have as much of the trustâs earnings during the year as possible be treated as fiduciary income, which may be eligible for a DNI deduction and therefore taxed on the beneficiaryâs tax return and not the fiduciary return. Is the unauthorized distribution of assets from the marital trust a disposition of part of the spouse’s income interest?
The Trustee will pay any due taxes and debts before distribution. The distributed assets consequently would be included in the surviving spouse’s gross estate for federal estate tax purposes. General Power of Appointment Marital Trust.
That is why the QTIP trust must be structured to distribute income, to show that the surviving spouse has a “qualified lifetime interest.” The marital deduction ultimately ensures that the QTIP trust assets will not count towards the deceased spouse’s taxable estate.
Stephens et al., Federal Estate and Gift Taxation, ¶10.01[6], at 10-26. 18 See Priv.
Except possibly in the case of a second marriage, an estate planner should always consider recommending to the husband and wife that a “five and five power” be included in the marital trust(s). Because of her limited power to appoint the trust corpus at her death under these present facts, the spouse has control over who will be the ultimate recipient of the remainder interest. Newport Beach, CA 92660. The estate tax exemption is $11.58 million in 2020. If the Will had authorized payment of the decedentâs debts and expenses, it is likely that the payments would have qualified for a charitable deduction. This means that practitioners should be wary of the upcoming March 5 deadline to determine if the trust or estate can benefit from a distribution made within the first 65 days of 2020. Beneficiary Rights: Rights to Information. If you are a beneficiary of a family Trust fund, then there are a myriad of topics to understand how trust fund distribution to beneficiaries occurs. The first two cases, Estate of Council v. Commissioner, 65 TC 594 (1975), and the Estate of Hartzell v. Commissioner, TC Memo. This is particularly so in the common marital trusts like QTIP trusts. After filling out the form, we will receive it immediately. 1994-576, involve distributions from general power of appointment marital trusts. The vast majority of irrevocable trusts allow âincomeâ to be paid out at least annually, with âprincipalâ available to the beneficiary under an ascertainable standard.
Not receiving Trust updates, and Trustee refuses to give an accounting? Peter B. Tiernan is a sole practi-tioner who practices in Margate.
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This column is submitted on behalf of the Tax Section, Joel D. Bronstein, chair, and Michael D. Miller and David C. Lanigan, editors. Regardless of whether §2038 or §2044 is found to apply in this situation, the issue is still whether the distributions were legally ineffective (and consequently whether the surviving spouse has “an interest” in the distributed assets as of the surviving spouse’s death to which either §2038 or §2044 applies). The Service was kind enough to include regulatory examples illustrating these concepts. QTIP Trusts Containing Limited Power of Appointment. Also, the practitioner should examine the trust instrument to make sure there is no language included to the effect that the trust is for the “exclusive benefit” of the surviving spouse during her lifetime.18. 14 Id. Also relevant is that Halpern indicates that creditors and IRS are not to be considered to be interested parties for purposes of seeking legal redress.8 As one commentator has pointed out, “reconstituting a marital trust for estate tax purposes when the trust has been terminated with the consent of the beneficiaries who would have received the trust property is a questionable result because the IRS should not have a status superior to the beneficiaries.”9.
Paying out capital gains to the beneficiary may have adverse effects as well, such as if the beneficiary does not have enough liquid cash to pay the taxes, or if the payout will cause the beneficiary to have so much income that Social Security payments become taxable, or if the beneficiary is too young or inexperienced to manage a large distribution on his or her own. The Tax Court concluded, therefore, that the 1987 and 1988 distributions were still subject to Mrs. Halpern’s general power at the date of her death and included in her gross estate under IRC §2041. The Tax Court pointed out two significant characteristics of the case: 1) in light of the surviving spouse’s general power of appointment, the remaindermen’s inter- est was not vested; and 2) the remaindermen were benefited by the distributions as opposed to being adversely affected thereby.2 The Tax Court also indicated that, since no beneficiary had any vested interest, there was no material frustration of the testator’s intention by taking this approach.
If a loved one has passed away, and you are a beneficiary and not receiving updates from the Trustee, it may be time to discuss with an estate planning lawyer the proper steps to stay on the right side of the courts. This aspect distinguishes Casey from the Halpern type gift.
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