Technical Section – Trust, Estates & Taxation Newsletter – Fall 2012

August 31, 2012 | Trusts & Estates

President Obama’s Budget Impacts Intentionally Defective Trusts

If President Obama’s 2013 budget proposal passes then a grantor trust would be included in the grantor’s estate or used to pay gift taxes if trust assets are distributed before the grantor’s death or the grantor ceases to be treated as the owner.  This attempt to deter the use of the Intentionally Defective Grantor Trusts is the first time the government has taken notice of this popular estate planning tool.

New Net Investment Tax to Impact all Non-Grantor Trusts

With the passage of the new health care plan, it is anticipated that beginning in 2013, all non-grantor trusts and estates with income over $11,200 (indexed for inflation) will be subject to a new net investment tax of 3.8%, although the Internal Revenue Service has not yet issued guidance.

Representatives Personally Liable for Estate Tax Despite Indemnity Agreement

In U.S. v. Johnson, Case No. 2:11-CV-00087, the decedent was survived by four children of whom two were her fiduciaries.  The fiduciaries deferred a portion of the estate tax under IRC Section 6166 and later distributed the decedent’s assets to her beneficiaries who had agreed in writing to each pay their proportionate share of the unpaid estate tax.  A few years later the decedent’s corporation went bankrupt, the estate defaulted on the unpaid taxes and the IRS sought payment from the fiduciaries as well as the beneficiaries.  The Court concluded that Section 6324(a)(2) which imputes personal liability to a decedent’s transferees, was not applicable to the beneficiaries despite the indemnity agreement because they were only entitled to receive the assets after certain gifts were made  and all taxes were paid.  Instead, the Court concluded that the Trustees of the family trust which received all the assets under the decedent’s Will were the transferees under IRC Section 6324(a)(2).

Gifts of Limited Partnership Interests Qualified as Present  Interests for Annual Exclusion

In Wimmer v. Commissioner, T.C. Memo 2012-157 (June 4, 2012), the court found that the gifts of limited partnership interests qualified for the annual exclusion because the donees received income distributions.  This case is significant because three cases prior to Wimmer had denied the annual exclusions for gifts of limited partnership interests.  In order for gifts to convey a present interest, they must convey a substantial economic benefit by allowing use, possession or enjoyment of (1) property or (2) income.  In Wimmer, since the partnership agreement contained so many restrictions on transferability, the Court determined that the beneficiaries did not have a present right to use the property.  However, using a three-part test which demonstrated that the partnership was expected to generate income, the income would flow steadily to the beneficiaries and the income was ascertainable based on the stock history, the Court determined that the beneficiaries had a right to the income and thus that the gift qualified for the annual exclusion.

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