SO YOU LEFT YOUR TRUST AT HOME WHEN YOU MOVED TO FLORIDA
Florida is a state with great appeal for retirees. Warm weather, absence of state income, intangibles, or estate tax, and favorable creditor protection laws have all played a part in the substantial migration of clients to Florida from states in the northeastern United States for many years.1 As a result, Florida lawyers will continue to review estate planning documents for clients who have moved here from other states. A number of these clients will have, or will be the beneficiaries of, irrevocable trusts created in these former jurisdictions that need to be reviewed. Many of these “older trusts” will be taxed by those former jurisdictions on certain types of income. Some of these trusts may contain outdated provisions that need to be revised. These might include changes of trustees and their successors, extension of time for outright distributions to descendants, allowance for directed investments, correction of drafting errors, change of the trust from nongrantor tax status to grantor tax status or vice versa, transfer of insurance policies, transfer of the place of administration or the governing law of the trust, and other desired revisions.
This article discusses those circumstances in which it may be possible to modify the provisions of irrevocable trusts established in those former jurisdictions and/or achieve a change of governing law to the state of Florida. For convenience, this article will occasionally refer to the client’s former jurisdiction of residence as the “original state” and irrevocable trusts originally created in the client’s former jurisdiction as “original trusts.” In addition, reference to “living trust” will refer to irrevocable instead of revocable trusts.
The fact that the client who has moved to Florida may be a settlor, beneficiary, or trustee of the original trust will not generally mean that the governing law of the original state has moved here as well. Determining which state’s law will apply to an original trust involves an often difficult conflict of laws determination. Although settlors and testators are generally free to designate which state’s governing law applies in the trust instrument as long as there is no violation of strong public policy,2 in the absence of a designation in the trust instrument, “situs” for governing law purposes will generally depend on whether the issue involves: 1) validity (does the trust violate a rule of law such as the rule against perpetuities); 2) construction (identity of the beneficiaries and their interests); or 3) administration (matters dealing with trustees).3
The Uniform Trust Code, which has been enacted in modified form in 21 states (including Florida), provides that in the absence of a designation in the trust, the “meaning and effect” of the terms of the trust will be determined by the laws of the jurisdiction “having the most significant relationship to the matter at issue.”4 Common law, which varies from state to state, relies on location of real estate, domicile of the testator, and place of administration in determining in which states governing law applies.5 However, a determination of whether any specific issue involving a trust fits within the definition of validity, construction, administration, or meaning and effect can be difficult at best.
State Income Tax Issues
In dealing with state income tax issues, each state has its own separate rules for determining whether trusts are taxed, and general rules applicable to governing law do not apply.
Florida is one of seven states that impose no fiduciary income tax. The remaining states impose tax at top rates from three percent to 10.3 percent. The state fiduciary income tax will usually apply to accumulated income and capital gains on intangible assets of nongrantor trusts, because income of grantor taxable trusts will generally be taxed to the grantor for income tax purposes. Distributed income and capital gains of nongrantor trusts will generally be taxed to the recipient and deductible by the trust and accumulated source income, (consisting of income from real estate, or the operation of a business in the original state), will normally be taxed in the original state regardless of what actions may be taken with respect to the trust.
All states that tax the income of trusts base their jurisdiction to tax resident trusts on a combination of one or more of the following factors: 1) residence of the testator of the trust at death for a testamentary trust (resident testator), or residence of the settlor at the time the trust becomes irrevocable for a living trust (resident settlor); 2) residence of the trustee; 3) place of administration; or 4) residence of the beneficiaries. Accordingly, unlike matters relating to validity, construction, or administration, the governing law of the trust is usually irrelevant to the state income tax issues.6
States basing their taxing jurisdiction on the residence of the trustee, or the place of administration, will afford the best opportunity for planning, since changing trustees to those residing in Florida, moving tangible and intangible personal property to Florida, and assuring that books and records of the trust are kept in Florida can be readily achievable goals.7 Conversely, states basing their tax solely on resident testators or resident settlors will be difficult or impossible to plan for,8 unless accumulated income or capital gains can be distributed to beneficiaries who do not reside in the original state.9
A survey of some of the prominent northeastern states that the Florida lawyer is likely to encounter follows:
New York/New Jersey. New York will generally tax a trust on the sole basis of the resident testator or “resident settlor, with an important exception for a resident trust where all of the following conditions are satisfied: 1) all trustees are domiciled outside of New York; 2) all trust assets are located outside of New York; and 3) there is no New York source income.”10 This would require the replacement of all acting New York trustees with trustees who reside in Florida and the movement of any and all personal property (both tangible and intangible) to Florida.11 Further, since one dollar of New York source income may be fatal, a portfolio review should be made to be sure that there is no New York source income from private equity funds or real estate investment trusts.12 If there is both New York real property and personal property in the trust, it may be possible to divide the trust,13 allowing the divided trust containing the real estate to continue to be taxed in New York, and moving the trustees and assets of the divided trust containing the personal property to Florida to enjoy tax-exempt status.14
New Jersey has a similar taxing rule (and accordingly, similar planning) as New York.15
Illinois/Pennsylvania. Illinois and Pennsylvania will tax the fiduciary income of a trust if the sole connection to the trust is a resident testator in the case of a testamentary trust, or a resident settlor in the case of a living trust.16 The only options in these states, aside from a costly judicial proceeding to challenge the constitutionality of this basis for taxation,17 would include investments in assets producing tax-free income or growth, or distributing accumulated income and capital gains of the trust, if at all possible. If distributions to beneficiaries cannot be achieved (where the beneficiaries are minors or suffer from disabilities), distributions to court appointed guardians for beneficiaries residing outside of these states should be considered.
Michigan/Massachusetts/Connecticut. Michigan taxes a testamentary trust solely on the basis of a resident testator, and taxes a living trust on the basis of a resident settlor unless all beneficiaries, all trustees, and all administration of the trust takes place outside of the state.18 Accordingly, planning steps for Michigan testamentary trusts are limited in the same manner as Illinois and Pennsylvania. In the case of living trusts, replacement of existing Michigan trustees and the movement of all administration and recordkeeping to Florida should accomplish tax-exempt status. Any beneficiaries who reside in Michigan will pose a serious hurdle to the planning since Michigan does not have a statute specifically authorizing trust division, and a court proceeding to divide the trust solely on the basis of avoidance of Michigan state income tax might not be well received.
In Massachusetts, the tax can be avoided by assuming that all trustees reside in Florida. For corporate trustees, a transfer of the trusteeship to a trust company with its principal place of business in Florida would be necessary.19
Connecticut will tax the state income of a testamentary trust in the same manner as Illinois (based on a resident testator). However in the case of a living trust, with a resident settlor, the trust must also have a resident beneficiary who is not “contingent” in order for the Connecticut tax to be imposed.20 Accordingly, where income tax is an issue in a Connecticut trust, resorting to the Illinois/Pennsylvania planning steps (above) would be necessary only in the case of a testamentary trust. In the case of a living trust where there are resident and nonresident beneficiaries entitled to a distribution which is not discretionary with the trustee, steps might be able to be taken to divide the trust under the Connecticut statute.21
Other Issues Involving Modification or Change of Governing Law
Aside from state taxation, a revision of the original trust and/or a change in the place of administration or governing law from the original state to Florida may be desirable.22
Revision of the trust will necessarily take one of the forms discussed below.
Decanting. Decanting, which involves the transfer of assets from an existing trust to a new trust (either one in existence or newly created), can often be accomplished by the trustee’s action alone, without obtaining court approval or consent of the beneficiaries. Unfortunately, express authority in the original trust is highly unlikely in the case of older trusts and statutory authority is limited. Only seven states currently have enacted decanting statutes23 and all of them impose conditions, most notably a significant amount of discretionary authority with the trustee to make distributions,24 and the restriction that the beneficiaries of the new trust must include (although not necessarily all) the beneficiaries of the original trust.25
It has been suggested that if a decanting statute is not available, a particular state’s common law may be used as the basis for decanting, assuming the original trust gives the trustee discretion to distribute principal, under the theory that such a power to distribute principal is the equivalent of a power of appointment allowing distributions in further trust.26
Another possibility (assuming the original state trust contains the absolute discretion necessary to decant under the Florida statute) would be to 1) change the place of administration from the original state to Florida, by replacing trustees with Florida trustees, moving the assets, books, and records to Florida; and 2) once the place of administration is changed to Florida, use Florida’s decanting statute to transfer assets to a newly created trust containing the desired provisions. In this regard, the Uniform Trust Code provides that a trustee “may transfer the trust’s principal place of administration to another state or to a jurisdiction outside of the United States.”27 It is not clear whether a mere change of the place of administration would necessarily authorize a revision of the trust beyond administrative matters (such as the right to delegate investment authority and avoid liability for same).
Governing law as to matters other than administration (such as creditors’ rights against the trust or perpetuities limitations) would continue to be the law of the jurisdiction, having “the most significant relationship to the matter at issue.”28 However, if a trustee is willing to obtain court approval, there is authority for the proposition that a decanting statute can authorize the change of jurisdiction beyond mere administrative matters.29 In addition, a change of administration may be enough to accomplish the transfer of governing law as it relates to the desired revisions in the new trust.30
Modification/Reformation. If decanting is unavailable and a change of place of administration or governing law is not necessary, a modification of the trust might be considered. Modification under the Uniform Trust Code31 will usually require varying degrees of beneficiary consent as well as court approval, and if the settlor’s consent is not obtained, the modification cannot be contrary to the material terms of the trust.32 However, if the appropriate consents can be obtained, modification can often be the simplest method of revising the original trust. Reformation33 may be of limited utility because of the necessity of showing a court that the settlor’s intent and the terms of the trust were affected by a mistake of fact or law.
Merger. The ability to create a new trust and merge the old trust may be a remedy for trust revision in the absence of decanting or modification. The Uniform Trust Code authorizes the combination of separate trusts “after notice to qualified beneficiaries” into a single trust “if the result does not impair rights of any beneficiary or adversely affect the achievement of the purposes of the trust.”34 Accordingly, if a state has adopted a merger provision similar to the Uniform Trust Code and the rights of the beneficiaries in both the existing and new trust remain the same, a new trust might be created (perhaps in Florida if a change in administration or governing law is desired, and the original trust could be combined with the Florida trust as the surviving trust after the merger). The terms of the two trusts do not need to be identical. However, if the terms of the trusts vary to such a degree that the interests of any beneficiary may be negatively impacted, the remedy of merger will be unavailable. In addition, the same limitations as to the ability to change governing law as they relate to validity and construction, will apply in a similar fashion to those discussed under the discussion of decanting.
GST. Care must be taken to assure that any decanting or modification of a trust does not destroy exempt status for those trusts that are permanently exempt from generation-skipping tax because they are either 1) grandfathered (trusts that were irrevocable on September 25, 1985, and wills executed before October 22, 1986, if death occurred prior to January 1, 1987); or 2) those trusts to which GST exemption has been allocated.35 As a practical matter with limited exceptions, modifications to trusts which extend the vesting of beneficial interests to later ages than those contained in the original trust or otherwise cause a shift in beneficial interests to beneficiaries in lower generations would not be possible for GST-exempt trusts without destroying the GST exemption and would negate the ability to extend the time for outright distributions to beneficiaries in those trusts.36
Gift and Estate Tax. Decanting or modification (including a reformation or merger) could be a taxable gift if there is a shift in beneficial interest from one beneficiary to another.37 However, decanting or modification by a trustee is not an act of the beneficiary and would not seem to cause a gift to occur, even if there is a shift in beneficial interest, on the theory that a voluntary act is required for a taxable gift to occur.38 In the event the beneficiary’s consent is required (or even if not required, if the beneficiary fails to object) and a shift in beneficial interest occurs, the issue is less clear, although the voluntary act required to impose a taxable transfer would still appear to be absent. If there is no gift because of a lack of shift of beneficial interest or lack of voluntary action by the beneficiary, there should be no estate tax unless the new trust otherwise gives the beneficiary taxable powers that would cause inclusion. It would also appear that an IRS argument that a settlor who exercised defacto control over the trustee causing a change in the trust would create inclusion under §2038 would not be successful, because such a power would have to be present in the document and the mere authority to persuade others to act, should not rise to the level of a §2038 power.39
Gift or estate tax will also occur in the unusual event when a beneficiary exercises a power of appointment granted under the original trust to appoint in further trust (including decanting) and the appointment in further trust extends the vesting of any interest in a new trust for a period ascertainable without regard to the date of the creation of the first power (in a state which does not measure the vesting period by reference to the original trust), also known as the “Delaware tax trap.”40 Since the code sections imposing gift and estate tax were enacted before perpetual trusts came into effect, they are difficult to apply when a trust is moved from a state with a perpetual trust law. How does one extend the duration of a trust that had an unlimited duration to begin with? It appears that if the second trust provides that interests are tested with reference to the creation of the first trust, the risk of a gift or estate tax inclusion should be minimized.41
Income Tax. Decanting to a further trust or modification (including merger) should not result in a recognition event for income tax purposes since there is no exchange of interests.42 In the event of a decanting, or moving assets, as opposed to a modification or merger, it would appear that the transfer to the new trust should carry out distributable net income from the old trust to the new trust.43
Should the Florida lawyer find that the client’s irrevocable trust from the former jurisdiction requires either revision, change of governing law, or both, and there is an absence of appropriate provisions in the trust instrument which would authorize such a revision, there are steps that might be taken to achieve this result. However, since each state imposes different requirements, there will be no substitute for a careful review of the tax and trust laws of the original state before proceeding with this planning.
1 Florida experienced substantial net immigration compared to other states during the period 1990 to 2006. During the same period, northeastern states experienced substantial annual net outmigration. There are no signs that the trend of migration from northeastern states to Florida will not continue. Population Reports, US Census Bureau, Population Divisions Journey-to-Work & Migration Statistics Branch, October 21, 2008, Domestic Migration Across Regions, Divisions and States, U.S. Census Bureau Census – 2000 Special Report.
2 See Fla. Stat. §736.0107 providing that the meaning and effect of terms will be governed by the law of the jurisdiction designated in the terms of the trust provided there is a sufficient nexus to the designated jurisdiction at the time of the creation of the trust or during the trust administration, including but not limited to the location of real property held by the trust or the residence or location of an office of the settlor, trustee, or any beneficiary.
3 See Richard W. Nenno, Relieving Your Situs Headache: Choosing and Rechoosing the Jurisdiction for a Trust, 40 U. Miami Inst. on Est. Plan. 3-11-13 (2006); Restatement (Second) Conflict of Laws §§267-282 (1971); George G. Bogart and George T. Bogart, The Laws of Trusts and Trustees §§291-301 (Rev. 2d. ed. 1992).
4 See UTC §107. See also Moore, Choice of Law and Trust: How Broad Is the Possible Spectrum, 36 Miami Inst. on Est. Plan ¶6 at 2-5 (2002), suggesting that the term “validity” refers to “substantive matters” while “meaning and effect,” (together with “construction” and “administration”) refer to “dispositive matters,” and admitting some overlap.
5 1) For matters involving validity, where the issue involves real estate, the law of domicile of the testator will govern for testamentary trusts; and the law of the place where the real estate is located will govern for living trusts; and for where the issue involves personal property, the law of the place of administration will govern for both living and testamentary trusts; 2) for matters involving construction, where real estate is involved, the law of the domicile of the testator will govern in the case of a testamentary trust; and the law of the location of the real estate will govern in the case of a living trust; and for personal property, the law of the place of administration will govern for both testamentary and living trusts; and 3) for matters involving administration, the law where real estate is located will govern for both testamentary and living trusts; and for personal property, the domicile of the testator will govern for testamentary trusts, and the place where the trust is administered will govern for living trusts.
See Moore, Choice of Law and Trust: How Broad Is the Possible Spectrum, 36 Miami Inst. on Est. Plan; Restatement (Second) Conflict of Laws §§267-282. See also Fla. Stat. §736.0107 providing that where the trust jurisdiction is not designated in the trust document, the law of the settlor’s residence at the time of trust creation will govern.
6 State-by-state taxing analysis has been well documented by previous authors. See Richard W. Nenno, Planning to Minimize or Avoid State Income Tax on Trusts, 34 ACTEC J. 131 (Winter 2008); Phillip J. Hayes, Opportunity Knocks: Planning Around State Fiduciary Income Tax, Multi-jurisdiction Estate and Income Tax Planning (Florida Bar CLE outline, Oct. 13, 2006); Max Gutierrez, Jr., The State Income Taxation of Multi-jurisdictional Trusts, The New Playing Field, 6 U. Miami Inst on Est. Planning (2004).
7 See Phillip J. Hayes, Opportunity Knocks: Planning Around State Fiduciary Income Tax, Multi-jurisdiction Estate and Income Tax Planning at 3-6 (Florida Bar CLE outline Oct. 13, 2006); Phillip J. Michaels and Laura M. Twomey, How, Why and When to Transfer the Situs of a Trust, 31 Est. Plan. 28, 29 (Jan. 2004).
8 This author handled a recent case involving a testamentary trust created by an Illinois decedent who died in 1981, whose trust had long (approximately 10 years) been thought to have been “moved” to Florida. A Florida trust company had been appointed as sole trustee; the sole income beneficiary (the spouse) had moved to Florida; and all cash flow had been distributed annually to the spouse. (The state tax was imposed on the original issue discount of certain taxable bonds where the OID component was allocated to income under state law).
9 Pursuant to the regulations under I.R.C. 643(b), a trustee can allocate gains to income and distribute these gains as distributable net income and achieve a distribution deduction if the allocation and distribution is pursuant to a reasonable and impartial exercise of discretion by the trustee in accordance with a power granted by the governing instrument or local law, or if allocated to a principal, the trustee treats such gains consistently on the books and records and tax returns of the trust as part of a distribution to the beneficiary. See Treas. Reg. §1.643(a)-(3)(b).
10 N.Y. Tax Law §605(b)(3)(B)-(D).
11 In addition to eliminating New York trustees, any New York advisors or committees having the authority to direct the trustee on investment, distribution, or other matters, or who may have any veto power over the trustee’s actions should be eliminated as well. See TSB-A-04(7)(I) (Nov. 12, 2004).
12 See Michaels and Twomey, How, Why and When to Transfer the Situs of a Trust, 31 Est. Plan. at 2 (Jan. 2004).
13 See N.Y.E.P.T. §7.1-13 for authority to divide the trust.
14 See Alan S. Halperin, You May Not Need to Whine About Problems with Your Irrevocable Trust: State Law and Tax Considerations in Trust Decanting, 42 U. Miami Inst. on Est. Plan. (2007).
15 See instructions to 2008 Form NJ-1041 at 1, which contains the same exceptions as New York.
16 35 Ill. Comp. Stat. 5/1501(20), Pa. Code §§101-1, 105.4.
17 See Richard W. Nenno, Planning to Minimize or Avoid State Income Tax on Trusts, 34 ACTEC J. 131 (Winter 2008); Phillip J. Hayes, Opportunity Knocks: Planning Around State Fiduciary Income Tax, Multi-jurisdiction Estate and Income Tax Planning (Florida Bar CLE outline, Oct. 13, 2006); Max Gutierrez, Jr., The State Income Taxation of Multi-jurisdictional Trusts, The New Playing Field, 6 U. Miami Inst. on Est. Plan. (2004). Since professionals may have assumed the trust was not liable for state taxes, prior filing of returns for any missed years should be accomplished.
18 Mich. Comp. Laws §206.16, 206.18(1)(c), Instructions to 2008 MI-1041.
19 Mass. Gen. Laws, 62 §§4, and 10, Instructions to 2008 Mass. Form 2.
20 The beneficiary must not be “contingent.” Contingent for this purpose means that the distribution is at the trustees’ discretion. See Conn. Agencies Regs. §12-701(a)(4).
21 See Conn. Gen. Stat. §45-488.
22 Florida’s trust statute provides a directed trust provision (provided a delegation is contained in the trust), which limits the liability of the delegating trustee for acts of the trustee to whom the duty is delegated, Fla. Stat. §736.0703(9); strong creditor protection for trusts settled by third parties, Fla. Stat. §736.0504; a 360-year rule against perpetuities, Fla. Stat. §689.225; provisions allowing conversion to a unitrust, Fla. Stat. §738.1041; and a decanting statute, Fla. Stat. §736.04117, discussed below.
23 Alaska, Delaware, Florida, New Hampshire, New York, South Dakota, and Tennessee, with additional states (most notably Ohio and Pennsylvania) currently considering enactment.
24 Florida and New York require “unfettered” and “absolute” discretion, respectively, see Fla. Stat. §736.04117(1)(a) and E.P.T.L. 10-6.6(b)(1), although in the other states, discretion limited by an ascertainable standard should be sufficient.
25 See Alan S. Halperin, You May Not Need to Whine About Problems with Your Irrevocable Trust: State Law and Tax Considerations in Trust Decanting, 42 U. Miami Inst. on Est. Plan. (2007); and Belcher McCafferey and Schneider, Recent Developments, 43 U. Miami Inst. on Est. Plan. at 27-69 (2008).
26 Restatement (Second) of Prop: Donative Transfers 11.1 cmt.d (1986); Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940); Matter of Wiedenmayer, 254, A.2d 534 (N.J. Super. Ct. App. Div. 1969). See Alan S. Halperin, You May Not Need to Whine About Problems with Your Irrevocable Trust: State Law and Tax Considerations in Trust Decanting, 42 U. Miami Inst. on Est. Plan. (2007). See also Belcher McCafferey and Schneider, Recent Developments, 43 U. Miami Inst. on Est. Plan. at 34 (2008), suggesting that reliance on common law, without the blessing of a court order, would not be recommended.
27 U.T.C. §108 (c), which contains the requirements for moving the place of administration, including the notification of “qualified beneficiaries.” In addition, a court proceeding to change the place of administration of a trust is likely to be successful in the absence of decanting, where there is no contrary intent expressed in the trust instrument and the administration of the trust will be facilitated and the interest of the beneficiaries promoted. See Richard W. Nenno, Relieving Your Situs Headache: Choosing and Rechoosing the Jurisdiction for a Trust, 40 U. Miami Inst. on Est. Plan. at 87 (2006).
28 See comments to U.T.C. §108.
29 See Matter of Dornbush, 627 N.Y.S.2d 232 (N.Y. Sur. 1995). The South Dakota decanting statute §55-2-16 specifically discusses the issue, stating that the second trust may be a trust created or administered under the laws of any jurisdiction, within or without the United States.
30 See Moore, Choice of Law and Trust: How Broad Is the Possible Spectrum, 36 Miami Inst. on Est. Plan.; Restatement (Second) Conflict of Laws §§267-282; Fla. Stat. §736.0107. See also Nenno, Relieving Your Situs Headache: Choosing and Rechoosing the Jurisdiction for a Trust, 40 U. Miami Inst. on Est. Plan. 3-11-13 (2006), discussing the difficulty of the original state in attempting to challenge the governing law of the new state.
31 See U.T.C. §411. See also U.T.C. §416 allowing modification of a trust to achieve a settlor’s tax objectives.
32 Fla. Stat. §736.0412 allows for modification without court approval if the trustee and all qualified beneficiaries agree for trusts created after December 31, 2000, after the settlor’s death, which are governed by Florida’s current (360 year) rule against perpetuities.
33 See U.T.C. §415.
34 U.T.C. §417; Fla. Stat. §736.0417.
35 Although there are no regulations defining what actions will taint a trust to which GST exemption has been allocated, the requirements for maintaining GST exempt status should be the similar for both, see PLR 200607015 (Feb. 17, 2006); see also Halperin, You May Not Need to Whine About Problems with Your Irrevocable Trust: State Law and Tax Considerations in Trust Decanting, 42 U. Miami Inst. on Est. Plan. at 33 (2007).
36 Treas. Reg. §26.2601-1(b)(4)(i)(A). Two other safe harbors for safely retaining this exempt status are 1) the exercise of a special power of appointment to a new trust (if one is granted in the original trust) provided the period for measuring the validity of the interest is measured from the date of the creation of the original trust; and 2) decanting or modification pursuant to a trust provision or state statute, not requiring beneficiaries’ consent, which authority was in existence when the trust became irrevocable (this would be impossible in the case of grandfathered trusts and highly unlikely in the case of allocated trusts since the first decanting statute came into existence in 1992); Treas. Reg. §26.2601-1(b)(4)(i)(A).
37 See Treas. Reg. §25-2511-1(c).
38 DiMarco Estate v. Comm’r, 87 T.C. 653 (1986); see also Halperin, You May Not Need to Whine About Problems with Your Irrevocable Trust: State Law and Tax Considerations in Trust Decanting, 42 U Miami Inst. on Est. Plan at 36, 37 (2007). Care should be taken that the trustee not be a beneficiary at the time of the decanting.
39 See BNA Tax Mgt. Portfolio 50-6 §III D. 3(a)(2). See also comments to U.T.C. §411, stating that the settlor’s right to join the beneficiaries in terminating or modifying a trust under the modification section does not rise to the level of a taxable power.
40 I.R.C. §2041(a)(3) and 2514(d).
41 Belcher McCafferey and Schneider, Recent Developments, 43 U. Miami Inst. on Est. Plan. at 54 (2008).
42 See also Halperin, You May Not Need to Whine About Problems with Your Irrevocable Trust: State Law and Tax Considerations in Trust Decanting, 42 U Miami Inst. on Est. Plan. at 11.38-11.43 (2007) (generally discussing that a different rule might apply if the decanting involves the transfer of encumbered property with liabilities in excess of basis, or the modification which changes a trust with a partnership interest with negative capital accounts, from a grantor taxable trust to a nongrantor trust).
43 See I.R.C. §661 and 662. See PLR 200621715 indicating a different result might apply on a complete, as opposed to a partial, decanting.
H. Allan Shore is a partner at Bilzin Sumberg Baena Price & Axelrod, LLP, where he is the co-chair of the firm’s Wealth Transfer Group and a member of the Tax Group. He is board certified in taxation as well as a C.P.A. (Florida) and has authored frequently in his areas of concentration. Mr. Shore earned his J.D. and LL.M. in taxation from the University of Miami School of Law.
Jeffrey A. Kern is a board certified taxation, estate planning, and administration attorney, and of counsel to Akerman Senterfitt. He practices in the areas of estate and charitable planning and advises individuals and closely held businesses. He lectures and authors frequently in his areas of concentration.
This column is submitted on behalf of the Tax Section, David Pratt, chair, and Michael D. Miller and Benjamin A. Jablow, editors.