[WSBAPT] Walking Back Survivor's Funding Choices

[John J. Sullivan]

Tara:  

 

Interesting question. I had something similar down in Vancouver. Survivor did the split but failed to take mandatory income distributions. It mattered because there was a charitable remainder beneficiary. We negotiated some agreeable numbers and resolved with a judicial TEDRA down in Clark County. 

 

TEDRA is very flexible, especially with the last amendments about correcting errors. I sometimes worry about it being too flexible, for tax purposes. Sounds like a fact specific case. Would be glad to chat about it. 

 

 

Sent from my iPad


On Nov 1, 2017, at 4:50 PM, Tara M. Roberts <pugetsoundlaw at gmail.com <mailto:pugetsoundlaw at gmail.com> > wrote:

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

 

******************************
The information contained in this message may be privileged and confidential information intended only for the use of the individual or entity named above.  If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this message is strictly prohibited.  If you have received this message in error, please notify us immediately and delete the original message and any copies you may have.  Thank you.
******************************

 

 

 

 

 

 

 

 

_______________________________________________
WSBAPT mailing list
WSBAPT at lists.wsbarppt.com <mailto:WSBAPT at lists.wsbarppt.com> 
http://mailman.fsr.com/mailman/listinfo/wsbapt

-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://mailman.fsr.com/pipermail/wsbapt/attachments/20171104/9206307b/attachment.html>