[WSBAPT] Using TEDRA to divert funds from overfunded credit shelter trust to fund QTIP trust

Sat Jan 18 09:00:18 PST 2020

The question requires a serious development of all the facts and circumstances. Do most clients really intend to fund a Credit Shelter Trust to the maximum allowed under federal law, for example, or are they struggling to follow our explanation at the time that this is the right design to minimize federal and state estate taxes on both estates while deferring them on the first (in almost all cases)? If the current motivation is to secure a second step up in basis, I would be less likely to consider that a mistake has occurred. But here it sounds like there is an old, or perhaps mistaken (by the attorney) design that fails to consider the differential between federal and WA estate tax exemptions. 

We don’t know all the facts. Perhaps the attorney actually made a mistake? I just think these possibilities need to be considered.

Best regards, 

JOHN J. SULLIVAN, 
ATTORNEY

LYONS | SULLIVAN
10655 NE 4TH STREET, SUITE 704
BELLEVUE, WA 98004
425·451·2400 TEL 425-451-7385 FAX
WWW.DLJSLAW.COM <http://WWW.DLJSLAW.COM> 

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From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Philip N. Jones
Sent: Saturday, January 18, 2020 7:23 AM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] Using TEDRA to divert funds from overfunded credit shelter trust to fund QTIP trust

Interesting point.  We could speculate that the will was written when the unified credit was much smaller, and the dramatic increases in the unified credit over the last decade or so threw the will out of kilter.  If so, is the inability to predict the future tax laws a mistake of law or fact?  Is it a mistake of law or fact that the testator did not have his estate plan reviewed more often? 

If so, perhaps our clients need not update their estate plans as often as we previously thought.  And we need not build into our estate plans formulas that adjust for future changes in the unified credit or other aspects of the tax laws.

In this particular example, it would be interesting to know what differences there are in the dispositive provisions of the credit shelter trust and the QTIP trust.  (Oftentimes, they are very similar.)  Then we would know what the motivation is to fund one trust and defund the other.  And we would know what the tax consequences (and dispositive consequences) might be if the change is allowed or disallowed.

Or is the motivation the acquisition of a second basis step-up at the time of the second death that would not be attained if the funds were not in the QTIP Trust?

Inquiring minds want to know . . . . . 

Phil Jones

Philip N. Jones 

Duffy Kekel LLP

Portland, OR

pjones at duffykekel.com <mailto:pjones at duffykekel.com> 

(503) 226-1371

On Jan 18, 2020, at 12:07 AM, John J. Sullivan, Esq. <sullaw at comcast.net <mailto:sullaw at comcast.net> > wrote:

Is it possible that there was a mistake of fact or law involved in the design of the estate plan?

If so, you might consider the application of RCW 11.96A.125 to reform it to conform with the testator/testatrix intent:

https://app.leg.wa.gov/RCW/default.aspx?cite=11.96A.125

Best regards, 

JOHN J. SULLIVAN, 
ATTORNEY

LYONS | SULLIVAN
10655 NE 4TH STREET, SUITE 704
BELLEVUE, WA 98004
425·451·2400 TEL 425-451-7385 FAX
WWW.DLJSLAW.COM <http://WWW.DLJSLAW.COM> 

Confidentiality Notice

This email transmission is intended only for the addressee named above. It contains information that is privileged, confidential, or otherwise protected from use and disclosure. If you are not the intended recipient, you are hereby notified that any review, disclosure, copying, or dissemination of this transmission or the taking of any action in reliance on its contents or other use is strictly prohibited. If you have received this transmission in error, please destroy the original and notify us by telephone immediately. Thank you for your cooperation

From: wsbapt-bounces at lists.wsbarppt.com <mailto:wsbapt-bounces at lists.wsbarppt.com>  <wsbapt-bounces at lists.wsbarppt.com <mailto:wsbapt-bounces at lists.wsbarppt.com> > On Behalf Of Philip N. Jones
Sent: Friday, January 17, 2020 8:46 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com <mailto:wsbapt at lists.wsbarppt.com> >
Subject: Re: [WSBAPT] Using TEDRA to divert funds from overfunded credit shelter trust to fund QTIP trust

For ethical reasons, we are not allowed to give tax advice based on the likelihood of an item being discovered or challenged on audit.  See, for example, IRS Circular 230.  If the question were whether the WDOR would be successful in raising that issue, the answer would be that the odds of success for the WDOR would be high.  A divergence from the will (even through a binding agreement) requires that it must be based on a bona fide enforceable cause of action, and the remedy must be supported by local law, even if a probate court judge were to approve it.  If those two factors are not present, the result will be ignored for tax purposes.  Lots of rulings and cases support those two requirements. Neither of those factors appear to be present under these facts.  

Phil Jones

Philip N. Jones 

Duffy Kekel LLP

Portland, OR

pjones at duffykekel.com <mailto:pjones at duffykekel.com> 

(503) 226-1371

On Jan 17, 2020, at 4:09 PM, Jose L Sanchez <jose at joselsanchez.com <mailto:jose at joselsanchez.com> > wrote:

An estate with $6M has all of the funds going to a credit shelter trust and no funds going to the marital QTIP trust. How likely is the WA DOR to challenge a nonjudicial binding agreement that funds the marital deduction QTIP trust instead of the credit shelter trust? 

Thanks for your feedback.

Jose L. Sanchez

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