Wills and Trusts

Wyatt, Tarrant & Combs, LLP

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Turney Berry and Jeff Yussman author “How to Lower the High Cost of Dying – Business Succession 101” for Louisville Business First

Turney Berry and Jeff Yussman, members of the Firm’s Trusts, Estates & Personal Planning Service Team, wrote an article that was recently published in Louisville Business First.  The article, “How to Lower the High Cost of Dying – Business Succession 101,” describes how death taxes can be minimized with respect to a family business.

Please click here to read the full article.


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Walter Morris quoted in Kiplinger’s Retirement Report on trust decanting

Walter Morris, member of Wyatt’s Trusts, Estates & Personal Planning Service Team, was quoted in the October issue of Kiplinger Magazine‘s Retirement Report. The article, “Old Trusts Create Tax Issues for Heirs,” discusses the potential effect that rising capital-gains taxes could have on one’s trust and what it could mean for their beneficiaries.

Please click here to read the full article.

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The New Tax Landscape for A/B Estate Plans

Walter Morris, member of Wyatt’s Trusts, Estates & Personal Planning Service Team and based in the Lexington office, was recently quoted in a Morningstar article on the new tax landscape for A/B estate plans.  The article, “Is Your Estate Plan Obsolete?” discusses how A/B plans work and suggests different options to consider for estate planning.

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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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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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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