Tennessee’s Unitrust Conversion Statute is Broken

If you are considering converting an income-only trust to a unitrust, think again. 

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Gift-Splitting When Spouse is Trust Beneficiary

Wife transfers property to a trust for the benefit of Husband. The trust is intentionally structured so as not to qualify for the gift tax marital deduction. Wife files a gift tax return in connection with the gift, and Husband consents to split the gift. Husband is the primary beneficiary of the trust during his life. When Husband dies, will any part of the trust be includible in his estate for federal estate tax purposes?

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2018 Federal Income Tax Rates: Estates and Trusts

These numbers will be adjusted annually for inflation based on the chained consumer price index (C-CPI-U). For more on the Tax Cuts and Jobs Act, click here. Source: Joint Explanatory Statement of the Committee of Conference, p. 13 (pdf) Posted by Joel D. Roettger, JD, LLM, EPLS  

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SLATs: When the Beneficiary Spouse Dies Before the Grantor Spouse

Consider adding a testamentary limited power of appointment to make SLATs more effective.

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Keeping Real Estate Purchases Private

For reasons of privacy and asset protection, clients sometimes seek to conceal or obscure their ownership of real property. Tennessee law, however, does not make it easy to do so.

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Is a Trust Protector a Fiduciary under Tennessee Law?

Yes, generally, but it does not have to be. 

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Trust Protectors in Tennessee: The Basics

Trust protectors (also known as trust advisors) are becoming a common feature of irrevocable trusts. But what is a trust protector? 

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Support Trusts

As the previous post notes, a special rule applies to a support trust in which the settlor’s spouse is a beneficiary. In that case, the trustee shall consider the spouse’s other resources (i.e., assets outside of trust) before making a distribution. But what is a “support trust” and why does the classification matter?

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Trustee’s Consideration of Other Resources

Consider the following scenario. A trust instrument provides that the trustee is authorized, but not required, to distribute income and principal for a beneficiary’s health, support, maintenance, and education. The beneficiary, who has significant assets of her own, requests a distribution to pay for elective surgery. The trust agreement, as is commonly the case, says nothing about a beneficiary’s other resources (i.e., assets outside of the trust). In deciding whether to approve the trust distribution, must the trustee nonetheless consider whether the beneficiary has the means to pay for the surgery on her own? 

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Joint Revocable Trust: Gift on Creation?

Not if the non-contributing spouse has the unilateral power to revoke:

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July 7520 Rate Announced

The 7520 rate for July 2017 will drop to 2.2%. This is the lowest rate so far for the year. A table showing historical 7520 rates since 2008 is here. The effectiveness of various estate planning and charitable planning techniques is measured in terms of the 7520 rate. These techniques include Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs), Charitable Remainder Trusts (CRTs), and Charitable Lead Trusts (CLTs). If the assets transferred to these trusts appreciate faster than the 7520 rate in effect at the time of transfer, a plan would normally be considered successful in shifting value outside of a taxpayer’s estate for estate tax purposes.  Fortunately, the 7520 tends to be low relative to market rates of […]

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Children Born after the Will is Executed

A good Last Will and Testament will address the issue of children born after the document is executed. Nonetheless, the Tennessee Code has the situation covered: A child born after the making of a will, either before or after the death of the testator, inclusive of a mother-testator, not provided for nor disinherited, but only pretermitted, in the will, and not provided for by settlement made by the testator in the testator’s lifetime, shall succeed to the same portion of the testator’s estate as if the testator had died intestate. The statute goes on to say that a pretermitted child’s share is to be funded pro rata out of the shares of the other beneficiaries.  Note that the quoted statute only […]

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Revocable Trust as Post-Nup?

Can a revocable trust created by one spouse after marriage constitute an enforceable postnuptial agreement for divorce purposes? This question arose in a recent case decided by the Tennessee Court of Appeals. The facts are as follows: Husband and Wife were married in 2006. It was a second marriage for both parties. In 2009, Husband established a revocable trust, naming himself as trustee and Wife as successor trustee. The revocable trust named Husband as current beneficiary and Wife and children as remainder beneficiaries of anything left in the trust at Husband’s death. Husband also executed a will that directed his probate assets to the revocable trust at death. Husband funded the revocable trust with at least four properties: (1) a lakehouse […]

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TISTs: Who SHOULD be Trustee?

A previous post discusses who can legally be the trustee of Tennessee Investment Services Trust (TIST). A better question might be: who should be the trustee of a TIST? Choosing the wrong trustee could expose a TIST to creditors. One argument in favor of piercing a TIST is that the trustee is beholden to the grantor. That is, a creditor might argue there is a tacit understanding that the trustee will simply follow the grantor’s instructions without exercising independent judgment. This is simply a version of the alter ego argument discussed here. Essentially, the argument is that the trust is a sham and thus should be disregarded.  The best way to avoid this argument is to appoint a trustee that has written policies […]

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Forms of Asset Protection

Ownership by the Other Spouse–It is not uncommon for a spouse with high liability exposure to transfer assets to his or her spouse with a lower risk profile. Tenancy by the Entirety (TBE)–TBE refers to assets titled in the name of husband and wife. A creditor of one spouse may not reach TBE property unless and until the non-debtor spouse dies or the TBE is severed by the divorce of the parties. Retirement Assets–State law protects IRAs from the creditors. Federal law protects qualified plans such as 401(k)s. This protection applies to the account owners. Whether it extends to beneficiaries who inherit the accounts is an open question. According to the Supreme Court, the answer is no, at least in […]

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The Right for Trusts to Remain Silent

Under the Tennessee Trust Code, is a trustee required to give beneficiaries information about their trust? Not necessarily.

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Governor Signs SB0769

Today Governor Haslam signed SB0769, a bill that revises various provisions of the Tennessee Code relating to wills, trusts, and probate. The substantive provisions of the bill take effect July 1. Analysis of the bill may be found at the following links: 2017 Probate Omnibus Bill 2017 Probate Omnibus Bill: What’s Missing? Trust Funding & the Probate Omnibus Bill Memorandums of Personal Effects after SB0769 Tennessee’s Revised Slayer Statute Source: Tennessee Legislature Website Posted by Joel D. Roettger, JD, LLM, EPLS

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PLR: CRUT Not Subject to Private Foundation Rules

Grantor executes a charitable remainder unitrust (CRUT). CRUTs are normally subject to certain private foundation rules. However, Grantor never claims an income tax or gift tax charitable deduction with respect to the trust. Is the CRUT still subject to the private foundation rules? A quick review of I.R.C. § 4947(a)(2) would suggest the answer is yes. It provides that: In the case of a trust which is not exempt from tax under section 501(a), not all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B), and which has amounts in trust for which a deduction was allowed under section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, section 507 (relating to […]

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Funding a Trust with Annuities? Beware.

There are income tax consequences to transferring annuities for less than full and adequate consideration. If you are considering making a gift of annuities in trust, keep the following in mind: If an individual who holds an annuity contract transfers it without full and adequate consideration, such individual shall be treated as receiving an amount equal to the excess of the cash surrender value of such contract at the time of transfer, over the investment in such contract at such time, under the contract as an amount not received as an annuity. In other words, gifting an annuity triggers gain to the annuity owner to the extent the cash surrender value exceeds basis, as a general rule. In may be […]

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Trust Funding & the Probate Omnibus Bill

An unassuming provision in the probate omnibus bill may prove to be a trap for some unwary practitioners. SB 0769, the 2017 Probate Omnibus Bill, has been transmitted to the Governor for his signature. One of the more perplexing provisions of the incipient law is Section 13, which adds the following to the end of T.C.A. § 35-15-402, Requirements for Creation [of a Trust]:  (d)   A lifetime trust is valid as to any assets held by the trust to the extent the assets have been transferred to the trust. For purposes of this subsection (d): (1)   Assets capable of registration, such as real estate, stocks, bonds, bank and brokerage accounts, and the like, are transferred to the trust through the […]

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2017 Probate Omnibus Bill: What’s Missing?

The 2017 probate omnibus bill is notable not just for what it contains, but also for what it does not contain. The original version of the bill was HB 0567. It contained several sections that addressed the effect of divorce or annulment on an estate plan. Under current law, divorce/annulment, by itself and without any further action of the testator revokes any disposition or appointment of property made by the will to the former spouse, any provision conferring a general or special power of appointment on the former spouse, and any nomination of the former spouse as executor, trustee, conservator or guardian, unless the will expressly provides otherwise. Similarly, a decree of annulment, divorce, dissolution of marriage, or legal separation revokes […]

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Early Termination of CRTs

There is a high economic cost to terminating a charitable remainder trust (CRT) before the date specified in the trust. There are two primary tax issues associated with terminating a CRT early:  the excise tax on self-dealing and the excise tax on the termination of a private foundation (a CRT is treated like a private foundation for purposes of this tax). These issues can apparently be avoided by following procedures described in various private letter rulings (PLRs). However, a PLR is only binding on the person who requested it.  Thus these PLRs provide guidance only and may not be relied upon as precedential authority. According to the available guidance, a CRT can be terminated early if authorized under applicable state law.  […]

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Excess Distributions Prove Fatal (and Costly) for CRUT

A taxpayer, admittedly operating under bad advice from a financial planner and an attorney, nonetheless paid a steep price for failing to administer a charitable remainder unitrust (CRUT) properly. Grantor established a trust. He intended for the trust to qualify as a CRUT. He named himself as a co-trustee and initial beneficiary. The remainder beneficiary upon termination of the trust was, of course, a charity. The term of the CRUT was 20 years. During the term of years, the CRUT was required to pay Grantor, if living, otherwise a successor beneficiary “B”, a fixed percentage (presumably 5%) of the trust assets or the net income of the trust, whichever was lesser. If the net income in later years exceeded the fixed […]

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Grantor as Alter Ego of Trustee

Should the grantor of an irrevocable trust be treated as the alter ego of the trustee? The IRS and creditors would prefer the answer to be yes, but the Tennessee Trust Code generally says otherwise: Absent clear and convincing evidence, no settlor of an irrevocable trust may be deemed to be the alter ego of a trustee of such trust. What are some of the factors that would provide clear and convincing evidence that the grantor has too much control over the administration of the trust? NOT the following, whether taken alone or in combination: The grantor is serving as a trustee, a trust advisor, a trust protector or other fiduciary; The grantor has an unrestricted power to remove or replace; […]

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Savings Statute for Interested Trustees

Some easy to overlook statutes in the Tennessee Trust Code can save a poorly drafted trust with an interested trustee from inadvertent taxation and creditor exposure. An interested trustee is a trustee who is also a beneficiary of the trust. If the trust instrument gives an interested trustee the power to make distributions to himself, that power should be limited to an “ascertainable standard,” typically health, support, maintenance, and education. Otherwise, the trustee will possess a general power of appointment. Likewise, an interested trustee will be deemed to have a general power of appointment if he can make distributions for the purpose of discharging a legal obligation. This is a problem because assets subject to a general power of appointment are […]

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