[WSBAPT] Walking Back Survivor's Funding Choices

[Tara M. Roberts]

Hello everyone.  I'm working on a joint living trust after the death of the
second domestic partner (not registered).  We are trying to figure out what
the remainder heirs may do to fix some administrative missteps made by the
Survivor after the first death.  After the First Partner died, the Survivor
ignored the division to the Decedent's Trust.

 

The planning documents are a bit strange to me from the outset, as it seems
to ignore the fact that this was an unmarried, cohabitating same-sex couple.
The trust uses a martial/credit shelter trust scheme and focuses a great
deal on the marital deduction and QTIP election, neither of which would even
have been applicable.

 


The trust document specifies that after the first death, the fractional
share of the Decedent's assets that does not qualify for the marital
deduction passes to the Decedent's Trust and the balance to the Survivor's
(often referred to in the document as Marital) Trust.  The Survivor's own
trust share also transferred to the Survivor's Trust.  The Survivor could
appoint an independent special trustee to reduce the fractional share.
There was never any special trustee appointed.  It seems that since there
were never any assets that could have qualified for the marital deduction
that all the First Partner's contributed assets should go to the Decedent's
Trust.  The Decedent's Trust provided distributions to the Survivor of net
income and discretionary principal for HEMS, with a limitation that it was
"recommended, but not required" that the principal of the Survivor's Trust
be exhausted before any principal was distributed from the Decedent's Trust.


 

Shortly after the first death, the Survivor executed an "affidavit of need"
that recited that he had determined that he would require the entire
principal of the Decedent's Trust for his lifetime support and therefore was
electing not to fund the Decedent's Trust at all and was distributing the
entire trust estate to the Survivor's Trust.  Deeds were recorded and
accounts retitled to the Survivor's Trust.  After completing these first few
administrative steps, the Survivor just stopped administering the estate and
the trust, probate was never closed.  No probate inventory was done.  Only
the original joint trust asset schedule has been found.

 

Now after the second death, the combined assets of the couple bring the
Survivor's Estate well over the Washington estate tax threshold.  If the
Survivor had followed the plan and funded Decedent's Trust, then there would
be a significant Washington Estate tax savings for the Survivor's Estate.
There is no difference for Federal purposes.

 

The heirs and shares are the same under both remainder schemes, so from that
perspective the failure to divide doesn't really matter for distribution
purposes.

 

Is there anything that the remainder heirs can do now to try to set aside
the "affidavit of need" or to fund the Decedent's Trust to achieve some
estate tax savings in the Survivor's Estate?  I was wondering if a TEDRA
agreement could still be used in such a case to walk back the over-reaching
allocation of trust principal?  If there were different beneficiaries or
shares for the Decedent's Trust versus the Survivor's Trust, then I think
there would be serious issues of breach by the Survivor for failing to fund
the Decedent's Trust and ignoring the limitation on principal distributions.
Based on the assets in this case, I think it would be a very hard stretch
for the Survivor to have actually contemplated needing some of the property
for support.  Assets included non-income producing real estate, like their
primary residence and a family cabin that is specifically gifted to one of
the remainder heirs.  It looks like this was done to give the Survivor more
direct control and convenience.  However, since the remainder heirs don't
have competing pecuniary interests a TEDRA doesn't seem to have any legs.
Would a TEDRA agreement fail for lack of substantive consideration or be
considered a strawman that wouldn't pass muster to reduce the taxable
Estate?

 


Also, on the other hand, pulling assets back into the Decedent's Trust would
also pull back the step-up in basis on the second death that those assets
may receive via the Survivor's Trust.  The step-up in basis may be more
desirable, we'd have to run the numbers to see.

 


I'm wondering if this would be futile from the outset.

Thanks in advance.

 

Tara M. Roberts

Puget Sound Law pllc

152 3rd Ave S Ste 107

Edmonds, WA 98020

Phone 206-285-3361

 <mailto:roberts at pugetsoundlaw.com> roberts at pugetsoundlaw.com

 

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