Update Estate Plans for Recently Increased Estate Tax Exemption

• Published in: Estate Planning 2018-10, Vol.45 (10), p.39-42
• Main Author: Damiani, David J
• Format: Article
• Language: English
• Subjects: Advantages; Beneficiaries; Capital gains; Estate planning; Estate taxes; Income taxes; Jurisdiction; Powers of appointment; Situs; State laws; Tax exemptions; Tax rates; Trusts
• ISSN: 0094-1794

Decanting may also be useful for purposes beyond deliberate estate inclusion, such as: * Modifying an undesirable successor trustee situation. * Changing situs for income tax purposes. * Protecting a special needs beneficiary. * Resolving an unclear provision in a trust instrument.3 Other than a 2017 private letter ruling4 concerning the preservation of grandfathered status against the generation-skipping transfer (GST) tax, the IRS generally has shied away from issuing tax rulings on the decanting of trusts. [...]Section 2514(d) holds that the exercise of certain limited powers of appointment during life will trigger gift tax recognition, while Section 2041(a)(3) creates estate inclusion for the exercise of certain powers of appointment at death. In states that have abolished the rule against perpetuities, it is likely impossible to postpone vesting and invoke the trap, perhaps unless the trust document itself defines a vesting period.6 The trap will cause a trust that is exempt from GST tax under the grandfathering rules (because it was irrevocable on or before 9/25/19857) to become subject to GST, so advisors have to be careful not to trigger inadvertent GST consequences when triggering the trap. In states that have abolished the rule against perpetuities, it is likely impossible to postpone vesting and invoke the trap. 1 Attorney Susan T. Bart of Schiff Hardin has compiled a valuable and publicly accessible comprehensive summrrent state decanting laws, last updated in October 2017 and available at www.schiffhardin.com/insights/publications/2017/summaries-of-state-decanting-statutes. 2 For detailed analysis of when income tax considerations may arise in decanting, see Blattmachr, Horn, and Zeydel, "An Analysis of the Tax Effects of Decanting," 47 Real Property, Trust and Estate Law J. 141 (Spring 2012), available at www.americanbar.org/content/dam/aba/publications/real_property_trust_and_ estate_law_journal/v47/01/2012_aba_rpte_ journal_v47_no1_spring_ blattmachr_horn_ zeydel.authcheckdam.pdf. 3 For an extensive commentary on the mechanics and potential uses of decanting, see Aghdami and Durst, "Decanting Comes of Age" (2/12/2018), available at www.wdcepc.org/assets/Councils/Washington-DC/library/Decanting%20%28Trusts%29%20Outline%20%20Feb%202018.pdf.