Wills and Trusts

Wyatt, Tarrant & Combs, LLP


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Tennessee Trust Lawyers Have More Tools Than Ever Before

Tennessee is without a doubt one of the leading Trust Law jurisdictions, and Tennessee estate planners have more tools than ever before.

In 2000, Tennessee adopted the Uniform Principal and Income Act which provides certainty and safe harbor to Trustees with respect to trust accounting principles. In 2002, the Uniform Prudent Investor Act did the same with respect to the management of trust investments.

In 2004, Tennessee adopted the Uniform Trust Code (one of the first five jurisdictions to adopt it). Although the Trust Code did not diverge significantly from the common law, it made Tennessee Trust Law more accessible and cohesive. Among other things, the Trust Code gave Tennessee attorneys innovative methods such as virtual representation, Non-Judicial Settlement Agreements, and judicial and non-judicial trust modifications and terminations to deal with some of Trust Law’s most vexing issues.

The year 2007 brought a 360 year rule against perpetuities (which coincidentally I may be able to thank for my job!), self-settled asset protection trusts (innocuously named the Tennessee Investment Services Act), and updates to the now non-uniform Tennessee Uniform Trust Code which allowed beneficiaries to serve as their own trustee without jeopardizing the spendthrift protections granted to them by the trust.

The year 2010 brought further Trust Code updates, but most importantly brought the Tennessee Community Property Trust Act which allows a married couple to establish a joint revocable trust that has some unique and advantageous income tax consequences. Even apart from the income tax advantages of the Community Property Trust, the trust has a more subtle benefit: a joint plan. Rather than the traditional tax plan of splitting assets between spouses, this joint trust allows couples to put all of their assets into a single joint trust. Practitioners can tell you that clients have always been uncomfortable splitting up their assets for tax purposes. However, clients have just loved being able to put their assets into a single joint trust. Read more about Community Property Trusts here.

In 2012, Tennessee retroactively repealed the Tennessee Gift Tax and gradually repealed the Tennessee Inheritance Tax through 2016. Read more here.

Finally, 2013 brought comprehensive reform to the (now ironically named) Tennessee Uniform Trust Code. As is discussed in a previous post, 2013’s reform essentially did three things: (1) enhance asset protection for beneficiaries, (2) protected Trustees by giving them far more discretion, and (3) allowed for directed trusts to allow trusts to segregate the roles of investment and trust administration. Another change enhanced the attractiveness of Tennessee Asset Protection Trusts. Read more here.

The Reveal. So. . . What’s next? Come July 1, 2014 Tennessee Attorneys will have yet another arrow in their estate planning quiver: The Tenancy by the Entirety Joint Revocable Trust was signed into law on . Click here for a summary of Public Chapter 829.

A Tenancy by the Entirety Joint Revocable Trust (“TE Trust”) will be immensely useful. Sure, some clients will be more appropriate for a Community Property Trust to get a double basis step-up, but many could use the asset protection advantages of a TE Trust. Generally, whether property is held as tenancy by the entirety is a question of intent and is most often seen with the family home. Now practitioners can take the opportunity to protect their clients (and the surviving spouses most of all) by removing any doubt.

Just like other property held as tenants by the entirety, assets held in the TE Trust will pass free from the creditors of first spouse to die. Joint creditors and creditors of the survivor will still be able to levy against assets held in the trust. Perhaps use of a disclaimer trust in the TE Trust could avoid creditors of the survivor, but that may be pushing it.

Eight other states have specifically authorized such joint trusts. Click here to read more.

This is no do-it-yourself project either. Care must be taken to ensure that upon funding, the intricacies of the notice requirements in the statute have been followed in order to obtain the allowed protection.

Practitioners, update your forms and get ready.

Advisers, keep this in mind for your clients that have any possibility of asset protection issues (i.e., Dr. Klutz).

Stay Tuned.

Rob Malin

 


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No QTIP Election Unless Necessary to Reduce Estate Tax

If Fred dies in 2011 with a $4,000,000 estate and is survived by his second wife, Mabel, Fred’s estate plan may provide for a QTIP-eligible trust for Mabel’s benefit, remainder to Fred’s children. Although the QTIP election is not necessary in order to zero out Fred’s estate taxes, making a QTIP election could be desirable because of potential increase in basis at Mabel’s subsequent death if the trust assets were included in her estate.

Rev. Proc. 2001-38 precludes the QTIP election unless doing so reduces the estate tax. Thus a change in basis may be achieved only by giving the surviving spouse some modicum of control over the assets to be included in the spouse’s estate (e.g. a testamentary power of appointment in favor of the creditors of her estate). See e.g. PLRs 200407016, 200603004, and 201112001. The original policy was to help taxpayers avoid inclusion in the survivor’s estate of “unnecessary” assets. Such a policy might support allowing a QTIP election to achieve a basis change at the second spouse’s death but there is scant authority to support the argument.

In PLR 201338003 the surviving spouse or executor properly allocated all assets to the credit shelter trust but listed those assets on Schedule M of the 706 and was deemed to have made a QTIP election. The PLR applied Rev. Proc. 2001-38 to void the QTIP election.

Turney P. Berry
Louisville, Kentucky