Wills and Trusts

Wyatt, Tarrant & Combs, LLP


Tennessee Tenancy by the Entirety Joint Revocable Trust

Codified as Public Chapter 829 and signed by Governor Haslam into law on April 29, 2014, a new form of joint trust is available for transfers to trusts on or after July 1, 2014. Although the trust is not named by the statute, the trust substantially resembles the common law form of property known as tenancy by the entirety. Some practitioners have appropriately referred to this trust as the “marital asset protection trust.” I previously discussed this subject here, albeit briefly.

This statute has been codified as T.C.A. § 35-15-510.

Common law tenancy by the entirety. Before I get into the finer points of the TE Trust, a refresher on how tenancy by the entirety works in general (and its benefits) is appropriate.  Tenancy by the entirety is a special form of joint tenancy Continue reading


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State Reformation to Update Provisions Left Over From the Original GST Did Not Create New GST Problems

In PLR 201322025 a decedent’s GST trust called for a distribution of $250,000 to a son’s trust, a number tied to the GST in effect before 1986. The trust contained a provision to update the $250,000 amount if the Code changed. When the decedent died in 1987 the executor exempted all of the assets from GST and now the trustee has obtained a court order to distribute all of the assets to the son’s trust. The IRS determined there were no adverse GST, gift, or estate tax consequences.

Turney P. Berry
Louisville, Kentucky

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Conversion to Unitrust Did Not Affect GST Tax Grandfathered Status

In PLR 201320009 the place of administration of a trust had been moved from one state to another. However, the court order granting the move provided that the law of the original state would govern the validity and construction of the trust. When the trustee wanted to convert the distribution provisions to a unitrust, it applied the law of the original state, which had adopted a unitrust statute.

Moving the place of administration without changing the governing law, as here, is often helpful to ensure no inadvertent change that might affect a grandfathered trust.

Turney P. Berry
Louisville, Kentucky

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Late Disclaimer OK: Disclaimer within Nine Months of Awareness

In PLR 201334001 the IRS determined disclaimers were timely on the following facts:

Grantor created Trusts several years before his death on Date 1, a date before January 1, 1977, for the benefit of the lawful lineal descendants of his daughter (Daughter), per stirpes. Daughter’s son, Grandson is the current beneficiary of Trusts. Upon the death of Grandson, Grandson’s son (Taxpayer) will be entitled to income distributions from Taxpayer’s per stirpital share of Trusts. The income distributions will continue until the earlier of Taxpayer’s death or the perpetuities date. Upon termination of each of the Trusts, any remaining trust property will be distributed to Taxpayer and Taxpayer’s brother, per stirpes.

Taxpayer, who is over 18 years of age, represents that Taxpayer learned of the transfers creating his interests in Trusts on Date 2. Taxpayer further represents that he had no knowledge that he possessed any interest in Trusts, prior to Date 2. Taxpayer proposes to execute and timely file and deliver a written disclaimer to the trustees for each of Trust 1, Trust 2, Trust 3, and Trust 4, on or before Date 3, stating that he irrevocably, unconditionally and without qualification, disclaims and refuses to accept any interest that would otherwise pass to Taxpayer under the relevant provisions of Trusts. The disclaimers will be valid under Statute 1 and Statute 2. Date 3 is a date occurring not more than nine months after Date 2.

The ruling states:

Section 25.2511-1(c)(2) of the Gift Tax Regulations provides, in relevant part, that, in the case of taxable transfers creating an interest in the person disclaiming made before January 1, 1977, where the law governing the administration of the decedent’s estate gives a beneficiary, heir, or next-of-kin a right completely and unqualifiedly to refuse to accept ownership of property transferred from a decedent (whether the transfer is effected by the decedent’s will or by the law of descent and distribution), a refusal to accept ownership does not constitute the making of a gift if the refusal is made within a reasonable time after knowledge of the existence of the transfer. The refusal must be unequivocal and effective under the local law. There can be no refusal of ownership of property after its acceptance. In the absence of the facts to the contrary, if a person fails to refuse to accept a transfer to him of ownership of a decedent’s property within a reasonable time after learning of the existence of the transfer, he will be presumed to have accepted the property.

The U.S. Supreme Court has recognized that, under the predecessor to this regulation, an interest must be disclaimed within a reasonable time after obtaining knowledge of the transfer creating the interest to be disclaimed, rather than within a reasonable time after the distribution or vesting of the interest. Jewett v. Comm’r, 455 U.S. 305 (1982). The requirement in the regulations that the disclaimer must be made within a “reasonable time” is a matter of federal, rather than local law. Id. at 316. Whether a period of time is reasonable under the regulations is dependent on the facts and circumstances presented.

In this case, Taxpayer will execute each disclaimer within nine months of learning of the transfers creating his interests in each of Trust 1, Trust 2, Trust 3, and Trust 4. Accordingly, based upon the information submitted and the representations made, we conclude that Taxpayer’s proposed disclaimers of his interests in Trusts, if made on or before Date 3, will be made within a reasonable time after Taxpayer learned of the existence of the transfers under § 25.2511-1(c)(2). Furthermore, provided that Taxpayer’s disclaimers are valid under State law and assuming the other requirements of § 25.2511-1(c)(2) are met, Taxpayer’s disclaimer of his interests in Trusts will not be taxable gifts under § 2501.

Turney P. Berry
Louisville, Kentucky

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Estate of Kite: Sale of Business to Children for a Deferred Private Annuity

In Estate of Virginia V. Kite et al. v. Commissioner, T.C. Memo. 2013-43, the court confronted the sale of a partnership (“KIC”) in 2001 by Mrs. Kite to her children, in exchange for a private annuity that would begin in 10 years. Mrs. Kite was then 74 and had a greater than 50% chance of living for more than 18 months and in fact she had a 12.5 year life expectancy. However, Mrs. Kite died in 2004. The Court upheld the transaction as being bona fide for full and adequate consideration, stating as follows:

Before participating in the annuity transaction, Baldwin [another limited partnership], which was wholly owned by the Kite children or their trusts, contributed approximately $13.6 million of assets to KIC. As a result, the Kite children did not need to rely on the assets already held by KIC to make the annuity payments. In addition, the Kite children did not transfer the assets underlying the KIC interests back to Mrs. Kite after the annuity transaction was completed. In fact, they did not make any distributions from KIC, but allowed the KIC assets to accumulate in order to have income available when the annuity payments became due. The Kite children therefore expected to make payments under the annuity agreements and were prepared to do so.

Mrs. Kite also demonstrated an expectation that she would receive payments. Mrs. Kite actively participated in her finances and over the course of her life demonstrated an immense business acumen. Accordingly, it is unlikely that Mrs. Kite would have entered into the annuity agreements unless they were enforceable and, more importantly, she could profit from them. In addition, Mrs. Kite, unlike the surviving spouse in Estate of Hurford, was not diagnosed with cancer or other terminal or incurable illness. In fact, the record, which includes a letter from Mrs. Kite’s physician, establishes to the contrary — that Mrs. Kite was not terminally ill and she did not have an incurable illness or other deteriorating physical condition. Mrs. Kite and her children reasonably expected that she would live through the life expectancy determined by IRS actuarial tables, which was 12.5 years after the annuity transaction. Indeed, if Mrs. Kite lived to her life expectancy as determined by IRS actuarial tables, she would have received approximately $800,000 more in annuity payments than the value of her KIC interests. At a minimum, Mrs. Kite would have made a profit with the potential of a greater return if she lived longer. Continue reading

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Effects of limitations on Crummey Withdrawal Rights: in terrorem clauses and Mandatory Arbitration provisions

What is the effect of a mandatory arbitration and in terrorem clause on Crummey rights? In CCA 20120826 an issue was whether purported withdrawal rights were sufficient to create a present interest. The CCA states:

To be a present interest, a withdrawal right must be legally enforceable. For example, if a trust provides for withdrawal rights, and the trustee refuses to comply with a beneficiary’s withdrawal demand, the beneficiary must be able to go before a state court to enforce it. See Cristofani v. Commissioner, 97 T.C. 74 (1991); Restatement of the Law of Trusts § 197 (Nature of Remedies of Beneficiary); Bogert, Trusts and Trustees Vol. 41, § 861 (Remedies of the Beneficiary and Trustee).

As a matter of public policy, the federal courts are the proper venue for determining an individual’s federal tax status, and the federal courts are not bound by the determinations of a private forum (such as Other Forum) concerning such status. Alford v. United States, 116 F.3d 334 (8th Cir. 1997). Likewise, as a matter of public policy, a State court will not take judicial notice of a private forum’s (or group’s or sect’s) construction and determination of State law pertaining to a trust agreement, such as the Trust in this case. Cite 2. These determinations are strictly within the purview of the State courts. Cite 3; Cite 4.

Under State law, a trust clause may prohibit a beneficiary from seeking civil redress. Cite 5. Although the State legislature made a public policy decision to allow a beneficiary to make certain inquiries without fear of risking forfeiture, these “safe harbors” are not relevant here. Cite 6.

Under the terms of the Trust in this case, a beneficiary cannot enforce his withdrawal right in a State court. He may only press his demand before an Other Forum and be subject to the Other Forum’s Rules. Notwithstanding any provisions in the Trust to the contrary, the Other Forum will not recognize State or federal law. If the beneficiary proceeds to a State court, his existing right to income and/or principal for his health, education, maintenance and support will immediately terminate. He will not receive any income or principal for his marriage, to buy a home or business, to enter a trade, or for any other purpose. He will not have withdrawal rights in the future, and his contingent inheritance rights will be extinguished. Thus, a beneficiary faces dire consequences if he seeks legal redress. As a practical matter, a beneficiary is foreclosed from enforcing his withdrawal right in a State court of law or equity.

Withdrawal rights such as these are not the legally enforceable rights necessary to constitute a present interest. Because the threat of severe economic punishment looms over any beneficiary contemplating a civil enforcement suit, the withdrawal rights are illusory. Consequently, no annual exclusion under § 2503(b) is allowable for any of the withdrawal rights. See Rev. Rul. 85-24, 1985-1 C.B. 329; Rev. Rul. 81-7, 1981-1 C.B. 474.

Is the ruling correct? In Rev. Rul. 83-108 notice was not given in the year of the gift at all, but rather was given in the next year. No notice is arguably a greater obstacle to the exercise of withdrawal rights than mandatory arbitration or an in terrorem clause. On the other hand, may a cut off of rights be so substantial as to de facto limit a purported withdrawal right?

Turney P. Berry
Louisville, Kentucky