Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Sunday, June 25, 2006

Extrinsic Evidence and Patent Ambiguities

In In re Estate of Mousel, the testator, Opal, left a will with a survivorship clause, stating “in the event that my husband and I meet simultaneous death in an accident or if he does not survive me for 60 days, I direct that the provisions for him shall lapse and my estate shall pass under [the] residuary estate,” which was left to the children of her brother George. In a separate provision of the will, Opal left some ranch real estate to the relatives of her husband George. When her husband failed to survive her by 60 days, there was a patent ambiguity as to whether her entire estate, including certain ranch real estate, should pass to her brother’s children. Looking only at the language in the will, the trial court “concluded that Opal intended that the ranch real estate was to pass to George's relatives and that the balance of her estate was to pass to Orville's children.” The appellate court affirmed, saying that consideration of any evidence outside of the will is prohibited when considering the testator’s intent.

June 25, 2006 in New Cases, Wills | Permalink | Comments (0) | TrackBack (0)

Saturday, June 24, 2006

Remainder Beneficiaries entitled to accounting in Indiana

Woodward, the grantor of an irrevocable trust, was also a remainder beneficiary. His wife would receive proceeds in the event of his death for her health, support and maintenance. If and when she died, their sons would receive income for their support. If all the sons died without leaving issue before the Trust was distributed, then Woodward was the beneficiary, followed by St. Benedict Catholic Church in Evansville.

Woodward was the original trustee. Upon his resignation, Marshall & Ilsley was named trustee. Woodward asked for an accounting of the trust in March 2004 because he had concerns about administration of the trust; however, Marshall & Ilsley refused. The trial court in Marshall & Ilsely Trust Company, N.A. v. Woodward said that Woodward was entitled to an accounting as a remainder beneficiary under Indiana law, and the appellate court affirmed.

A remainder beneficiary is a person entitled to receive principal either 1) on the day before an income beneficiary dies or another terminating event occurs; or 2) on the last day of a period during which there is no beneficiary to whom a trustee may distribute income. See Ind.Code § § 30-2-14-11, -20.

Under the first prong, Woodward is a remainder [beneficiary] if the trust terminates because of the death of his childless grandchildren before distribution. Under the second prong, the children are the only beneficiaries to whom the trustee may distribute income. When there are no income beneficiaries (i.e., when the last child dies), Woodward would be entitled to the trust principal if none of the children had issue.

            Although his right to the trust principal is contingent on his childless grandchildren                         predeceasing him, Woodward is within the definition of a remainder beneficiary under the                 statute.

June 24, 2006 in New Cases, Trusts | Permalink | Comments (0) | TrackBack (0)

Friday, June 23, 2006

Recent Developments Create Planning Opportunities for Disclaimers of Nonprobate Property

Reed W. Easton has posted the abstract of his article “Recent Developments Create Planning Opportunities for Disclaimers of Nonprobate Property” on SSRN. The abstract is reproducted below and may also be found here.

Planning for federal gift and estate taxes may involve the use of disclaimers of property. A disclaimer can be defined as an irrevocable gratuitous refusal to accept the ownership of property passing either by lifetime gift, bequest at death or by operation of law as with joint tenancy with right of survivorship or payment on death. A disclaimer must generally be affected before the disclaiming person has accepted any of the benefits from the transferred interest. ("Non-Acceptance Test")

The IRS in a number of recent rulings has taken what some may say is a very flexible position in circumstances where a surviving spouse has inadvertently or due to need accepted a benefit from joint assets or other assets that pass outside of the will such as life insurance proceeds, pension or IRA account benefits prior to the effective date of a disclaimer. The result is that many otherwise failed estate plans focused on doubling the size of the available tax exemption for a married couple may have been arguably resurrected.

As discussed in this article the IRS in a number of recent private letter rulings and a very significant public revenue ruling involving an IRA account has arguably increased the non probate property subject to disclaimer by not construing the Non-Acceptance Test quite so literally.

June 23, 2006 in Articles, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Evaluating the Potential Success of a GRAT Against Competing Strategies to Transfer Wealth

Jonathan G. Blattmachr (Milbank, Tweed, Hadley & McCloy LLP) and Diana S.C. Zeydel (Greenberg Traurig, LLP) have posted the abstract of their article “Evaluating the Potential Success of a GRAT Against Competing Strategies to Transfer Wealth” on SSRN. The abstract is below, and the full text of the article can be accessed here.

Tax-efficient wealth transfer is an important goal of most sound estate planning strategies. A grantor retained annuity trust (GRAT) is a wealth transfer technique created by Section 2702 of the Internal Revenue Code and corresponding Treasury Regulations. Taxpayers and practitioners therefore perceive the GRAT as a sanctioned means to transfer wealth at a reduced transfer tax cost. A GRAT may permit the transfer of wealth to or for others with little, if any, gift tax due and with no estate tax. The GRAT may accomplish that goal or purpose for one or more reasons. This article presents a framework to determine if and how it may be successful in accomplishing its purpose. It also provides some comparisons of a GRAT to a more direct transfer of wealth and to an installment sale to a grantor trust.

June 23, 2006 in Articles, Estate Planning - Generally, Estate Tax | Permalink | Comments (0) | TrackBack (0)

Thursday, June 22, 2006

Bongard's Nontax Motive Test: Not Open and Schutt

Wendy C. Gerzog (University of Baltimore) has posted the abstract of her article “Bongard's Nontax Motive Test: Not Open and Schutt” on SSRN. The full text may be accessed here. The abstract is as follows:

Under either the Bongard majority's test or a business or economic analysis test, Bigelow and the two Korby opinions would likely be decided the same way. They involved clearly testamentary transfers where the assets of the FLP were intended to be, and were in fact, used for their respective decedents' lifetime needs.On the other hand, Schutt, which was decided in the taxpayer's favor under the application of the Bongard majority's nontax motive test to unique facts, would likely have been decided differently under a business purpose test or economic analysis. Despite Schutt's nontax motive of restricting the trusts' terms, the bottom line is that in Schutt the taxpayer did what the taxpayer in Turner did. He was not operating a business and he converted liquid assets into illiquid ones. Objectively, Schutt transferred assets to an FLP for a limited partnership interest that was worth less than the value of his transferred assets. Because the transfers were not in the ordinary course of a business, he should not have been able to take advantage of the presumption that the transfer constituted an economic equivalence. Section 2036 excepts only a bona fide sale for an adequate and full consideration in money or money's worth so that the decedent's estate is not diminished. Under a traditional economic analysis, therefore, the value of the assets that Schutt transferred to his FLP should have been included in his gross estate under section 2036.

June 22, 2006 in Articles, Trusts | Permalink | Comments (0) | TrackBack (0)

Individual Income Tax Planning with a FLP/LLC

Reed W. Easton (Seton Hall University School of Business) has recently published his article “Individual Income Tax Planning with a FLP/LLC” for the March/April 2006 Business Entities Journal. 8 NO. 2 Bus. Entities 24. Here is the abstract:

Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs) are commonly used by individuals with large estates to transfer securities and real estate to members of their family with reduced gift or estate tax consequences due to valuation discounting. The valuation discounting associated with the FLP/LLC technique results from the lack of control and lack of an established market for the limited partner (LP) interests or nonvoting membership interests. The reductions to the value of the interests in the FLP or LLC may range from 15% to over 50%, depending on the specific facts and circumstances.

However, FLPs and LLCs may not be as attractive as they once were for transfer tax purposes because of recent successes that the IRS has had in challenging these structures. But, despite unfavorable case law, the use of a FLP or an LLC as an income tax planning tool should not be overlooked.

This article presents a planning idea that uses a FLP or an LLC structured to defer or shift the recognition of imminent gains from the sale of partnership property. This deferral or shift, coupled with an estate tax deduction under Section 691(c) or additional estate tax deductions resulting from the increased income tax liability of the decedent, can result in significant savings. While the idea is not free from risk, if structured properly, significant income tax deferral can be achieved with very little downside risk. The suggestion contained herein was derived from a particular client engagement.

June 22, 2006 in Articles, Estate Planning - Generally, Scholarship | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 21, 2006

Lady Bird Deed

An enhanced life estate deed is a deed in which the holder of the life estate also retains the right to transfer the property, by sale or gift, without obtaining the consent of the owner of the remainder interest.  If the life estate holder transfers the property, the remainder interest is destroyed unlike with a traditional life estate where the life estate owner cannot transfer more than his or her life interest without the consent of the holder of the remainder interest.  Enhanced life estate deeds are sometimes called Lady Bird deeds because President Johnson allegedly used this type of deed to convey property to his wife.

Travis Robbins on the Online Lawyer Blog has recently made an interesting post on this subject entitled Estate Planning and the Enhanced Life Estate Deed which discusses the possible benefits of this technique in detail.

June 21, 2006 in Estate Planning - Generally, Non-Probate Assets | Permalink | Comments (24) | TrackBack (0)

Trees and the Estate Tax

Including a tax cut for timber companies may be the key to obtaining approval of a permanent reduction in the estate tax.

Here are some excerpts from Edmund L. Andrews, Timber Becomes Tool in Effort to Cut Estate Tax, NY Times, June 21, 2006:

Admitting that Congress would not be able to abolish the estate tax this year, House leaders unveiled a compromise that would stop just short of full repeal and would give the Senate another chance to take up the issue.

The latest proposal would eliminate the tax for all estates worth less than $5 million — up to $10 million for couples. * * * In addition, the compromise would reduce the tax rates on the few estates that would still be subject to a tax.  * * *

The House bill is similar to a compromise that Senate Republicans circulated two weeks ago, without success. But it includes a tax cut that would save timber companies about $900 million over the next three years, a new twist that could win as many as four more Democratic votes in the Senate.

The provision would reduce the corporate capital gains tax, which is assessed on sales of timber, to about 14 percent from 35 percent. Two of the timber industry's strongest advocates are the Democratic senators from Washington — Patty Murray and Maria Cantwell — who both voted with other Democrats against blocking a filibuster on the estate tax. * * * Other Democratic Senators — Mark Pryor and Blanche Lincoln of Arkansas and Mary L. Landrieu of Louisiana — were co-sponsors of a similar timber tax cut last year.

June 21, 2006 in Current Events, Estate Tax | Permalink | Comments (0) | TrackBack (0)

Grantor Trust Teleconference

American Bar Association's Section of Taxation and the ABA Center for Continuing Legal Education is presenting a teleconference on Wednesday, June 28, 2006 at 1:00 p.m. EST entitled Grantor Trusts Rulings, Rules and Practical Applications -- A Panel Discussion.

Here is the description of the program:

Our expert panel will discuss Grantor Trust Rules under Subchapter J, including recent IRS rulings, favorite techniques for “triggering” grantor trust status, and rules on EINs and tax reporting.

June 21, 2006 in Conferences & CLE, Trusts | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 20, 2006

Allocation of DNI in Trusts and Estates

Michael Tze-Yee Yu (Assistant Professor, California Western School of Law) has recently posted the abstract of his article entitled A Proposed Allocation of Distributable Net Income to the Separate Shares of a Trust or Estate that Eliminates Inequities under the Regulations upon the Receipt of Tax-Exempt Interest, upon Express Distributions of Income in Respect of a Decedent, or upon Discretionary Distributions of Principal on SSRN.  The article is slated for publication in the Pittsburgh Tax Review.

Here is the abstract of his article:

This article proposes an allocation of distributable net income (DNI) to the separate shares of a trust or estate to replace the regulations' existing allocation, which produces the following inequities.  First, by excluding tax-exempt interest from the allocation of DNI to the separate shares of trust or estate, the regulations artificially decrease the taxable income of the trust or estate and artificially increase the taxable income of the separate shares of the trust or estate. Second, by allocating the DNI attributable to income in respect of a decedent (IRD) pro rata to the separate shares that could potentially be funded with such IRD, the regulations produce two inequities: (1) a distribution of IRD other than to a separate share artificially decreases the non-separate share recipient of IRD's taxable income and artificially increases the separate shares' taxable income, and (2) an express distribution of IRD or a non-pro rata distribution of principal artificially decreases the taxable income of any recipient of either such distribution and artificially increases the taxable income of any person who is not such a recipient. This article's proposed allocation prevents the foregoing inequities and should replace the existing allocation in the regulations.

June 20, 2006 in Articles | Permalink | Comments (0) | TrackBack (0)