[WSBAPT] Community Property/Marital Trust Questions

[Joshua McKarcher]

Wonderful outline, Diane, thank you! My clients in these categories have presented even more lopsided scenarios: like Natalie’s, with the surviving spouse holding far more than half the estate’s value in qualified funds. Ugh. A promissory note may work, but she’ll have to “see” if so in the given case.

If the legislature dislikes lawyers, it should enact portability like the federal government has; but then it would lose tons of estate tax revenue from those who do not plan to “use” the exemption of the first spouse to die intestate or with “simple” “I love you” wills.

In this case, the IRA beneficiary designations left much to be desired. Although I may be burned at the stake for saying this, I actually prefer the option in these lopsided cases of directing IRA assets to a properly built trust, with the option for a disclaimer out (to a different subtrust or the surviving spouse individually) if that option is undesirable when the day comes. (Who knows the future well enough to know that an income-tax hit won’t in some cases be preferable to a future estate (or other) tax hit. Options are good.)

With the IRA designations Natalie is faced with, she will indeed have fewer options. Taking Diane up on the call is a good start. Good luck! 😊

Best, Josh

Joshua D. McKarcher
McKarcher Law PLLC
537 6th Street
Clarkston, WA 99403
(509) 758-3345
(509) 758-3314 (fax)
josh at mckarcherlaw.com<mailto:josh at mckarcherlaw.com>
www.mckarcherlaw.com<http://www.mckarcherlaw.com>



From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Diane J. Kiepe
Sent: Thursday, June 23, 2022 3:34 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] Community Property/Marital Trust Questions

Natalie and Phil,

The joys of community property laws!

You cannot ignore community property laws – let me give the most elementary of examples:

H&W have a 3.0M combined Estate.  Wife (CEO of Going Places Inc.;)) has a retirement plan at 1.5M accumulated during the course of the marriage, they have a home worth 1.0 and an investment account of $500,000.  H dies and Will directs Marital Trust.  How much is the trust funded with?  1.5M – but the amount should be funded on a non-pro rata basis  see below:

Property              H CP Share          Outright to SS     To Trust

House                  $500,000.00       $0.00                   $1,000,000.00
Investments       $250,000.00       $0.00                   $500,000.00
QP                        $750,000.00       $1,500,000.00

You say, Diane that’s terrible, a house in the trust – what a pain and of course you potentially loose Code Section 121 Income Exclusion.  You’re right so, in the above, I would recommend by spouse buy the property from the trust – no gain and now trust still has amount it’s supposed to (1.5M), ss  has benefits (and burdens of ownership), any future appreciation has the benefit of Code Section 121 income exclusion, etc. etc.

Note, what is key above is that the QP is in the survivor’s name and thus the decedent’s ½ interest “counts” towards the value of his estate and as such greater funding (which is usually a good thing right now and especially in blended families where first to die  has a true desire to keep corpus for first kids).

We never want to  uses any type of pre-tax QP for funding a trust and I have even used promissory notes from the survivor to the trust  to avoid having to liquidate a plan in part to fund.

Natalie, still happy to have a visit – I’m open some this weekend – and various times next week.



Diane J. Kiepe

Diane J. Kiepe
Douglas Eden
717 W. Sprague Ave.
Suite 1500
Spokane, WA  99201
djkiepe at depdslaw.com<mailto:djkiepe at depdslaw.com>
509-455-5300

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 Natalie Kuehler
Sent: Thursday, June 23, 2022 12:23 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Community Property/Marital Trust Questions

Yes, Phil, that’s the question!

And the same question applies for W’s own IRA (since if she is required to place 50% of all community assets in the trust then that would include a portion of her IRA, too, since that IRA alone holds more than half the value of all of the community assets).

Natalie N. Kuehler

CONFIDENTIALITY STATEMENT: This message contains information that may be confidential and protected by the attorney-client privilege. If you received this message in error, please notify the sender immediately and delete the message.


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 <pjones at duffykekel.com<mailto:pjones at duffykekel.com>>
Date: Thursday, June 23, 2022 at 12:17 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Community Property/Marital Trust Questions
I would like to ask a dumb question.
In this case, can the wife use part of H’s IRA to fund the marital (bypass) trust, or is she required to do that?
Or can she simply look the other way and accept the benefits of husband’s IRA as the beneficiary and postpone the withdrawals to the extent permitted by the RMD rules?
I guess what I am asking is whether wife can ignore the community property laws?
Is that the question?
Phil Jones

Philip N. Jones
Duffy Kekel LLP
900 S.W. Fifth Ave. Suite 2500
Portland, OR 97204
pjones at duffykekel.com<mailto:pjones at duffykekel.com>
(503) 226-1371 – office
(503) 853-1482 – cell
(503) 226-3574 - fax

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 Diane J. Kiepe
Sent: Thursday, June 23, 2022 10:11 AM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Community Property/Marital Trust Questions

Natalie,

I have dealt with this issue several times and it would be difficult to explain by e-mail but I would be happy to chat with you on my approach.  The Limited Power of Appointment in favor of spouse has no bearing on Marital vs Bypass but, if the language allows for the Martial Trust to make varying QTIP elections you are going to want to consider (based on make up of other assets) a 100% Federal QTIP and 0% State QTIP since you have a filing requirement for the state anyway.

If you’d like to dialogue, let me know.

Diane J. Kiepe

Diane J. Kiepe
Douglas Eden
717 W. Sprague Ave.
Suite 1500
Spokane, WA  99201
djkiepe at depdslaw.com<mailto:djkiepe at depdslaw.com>
509-455-5300

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 Natalie Kuehler
Sent: Wednesday, June 22, 2022 5:52 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Community Property/Marital Trust Questions

Thank you!

Yes, all income to W; discretionary principal to W under HEMS standard.
Yes, the limited power of appointment is testamentary only, i.e. exercisable at death.

Does W still need to fund the Marital Trust with a full $3m, which will include part of W’s IRA, or is there a way to get around that?

Natalie

Natalie N. Kuehler

CONFIDENTIALITY STATEMENT: This message contains information that may be confidential and protected by the attorney-client privilege. If you received this message in error, please notify the sender immediately and delete the message.


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 <pjones at duffykekel.com<mailto:pjones at duffykekel.com>>
Date: Wednesday, June 22, 2022 at 5:46 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Community Property/Marital Trust Questions
What are the other terms of the marital trust?  All income to W?  Discretionary principal to W under a HEMS standard?
Does the limited power of appointment apply only after W dies?  In other words, is it testamentary, exercisable at her death?
I believe that the marital trust can be used as a bypass trust.  Just don’t make a QTIP election, except perhaps for the portion in excess of the Washington exemption.
Phil Jones


Philip N. Jones
Duffy Kekel LLP
900 S.W. Fifth Ave. Suite 2500
Portland, OR 97204
pjones at duffykekel.com<mailto:pjones at duffykekel.com>
(503) 226-1371 – office
(503) 853-1482 – cell
(503) 226-3574 - fax

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 Natalie Kuehler
Sent: Wednesday, June 22, 2022 4:14 PM
To: wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>
Subject: [WSBAPT] Community Property/Marital Trust Questions

Hello all,

I am sure the answers to this are straightforward, but I can’t seem to think this one through properly:

I have an estate that consists entirely of community property valued at $6m. Of that, $4m is held in IRAs, $3.6m of which is in an IRA in W’s name only; the remaining $400k in an IRA in H’s name only. The IRAs name the other spouse as a beneficiary. H dies, and in his Will leaves all of his interest in the couple’s community property to a Marital Trust, the initial beneficiary of which is W. The Marital Trust contains a limited power of appointment for W (to H and W’s daughter or charitable organizations only). This raises the following questions:


  1.  Does the limited power of appointment prevent treatment of the Marital Trust as a bypass trust for WA estate tax purposes?
  2.  Does the Marital Trust need to funded with $3m in assets (1/2 of all of the community property), or can it be funded with less? Specifically, can all of W’s IRA stay in her name, or does a portion of that need to be transferred to the Marital Trust because that IRA alone makes up more than 50% of the community property? I am trying to avoid that result given the negative tax consequences that would be triggered.

Any pointers – or referrals – would be greatly appreciated.
Thank you!

Natalie


Natalie N. Kuehler
THE KUEHLER LAW FIRM PLLC
PO Box 3059 – 1112 State Route 20
Winthrop, WA 98862
o: (509) 996-2832 x1 – c (509) 557-5769
www.kuehlerlaw.com<https://nam11.safelinks.protection.outlook.com/?url=http%3A%2F%2Fwww.kuehlerlaw.com%2F&data=05%7C01%7Cpjones%40duffykekel.com%7C97972a5fcf554677f08908da553bb345%7C2d66ed5354fa4c2f8c4dbff1aca5479d%7C0%7C0%7C637916012210095654%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=D3Mq%2FgqU2GtrtqlGgduReixkv5%2BIPGo4IVO7m78INXM%3D&reserved=0>

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