Here is a pdf copy of my: “The inter-vivos QTIP Trust: Is it Saturday’s Child”

You can get a pdf copy of my outline by clicking here.

I gave the above comprehensive inter-vivos QTIP planning presentation a couple weeks ago with the California based “The Tax and Estate Planning Forum” live virtual 43rd annual seminar. The five-day seminar included some very good presentations, including, but not limited to, attorney Naomita Yadav, with Withers Bergman in San Francisco, on state income tax and trust planning; and Sam Donaldson, Georgia State University Law School, with his always entertaining (and always substantive) federal tax update. I continue to be a great fan of inter-vivos QTIP planning.

“The Inter-Vivos QTIP Trust: Is it a Saturday Child?”

Two points for this brief blog post.

One. I will be speaking October 18, 2023 at the California based “The Tax and Estate Planning Forum” live virtual 43rd annual seminar. This five-day seminar includes 21 credit hours of legal specialization in Estate Planning, Trust and Probate Law; and in Taxation Law. My presentation is “The Inter-Vivos QTIP Trust: Is it a Saturday Child?”. The inter-vivos (created during life) QTIP trust is a workhorse and among my favorite planning options for married couples, especially those in the “bottom” 98% who often do not need more complex planning heavily marketed for the super wealthy. Click here for a link to this forum that begins Monday, October 16, 2023.

Two. I am available, generally within the metropolitan Atlanta area, for lunch presentations on this inter-vivos QTIP trust planning. Please contact me if interested. james@ktlawllc.com

IRS Rev. Rul. 2023-2. Sales to Defective Grantor Trusts; Dead in the Water?

For readers who may not yet have read IRS Revenue Ruling 2023-2, here is a link. Click here. In short, the IRS ruled that property in a completed-gift irrevocable trust will not get a stepped-up cost basis for income tax purposes at the time of the trust grantor’s death. My impression is that some business news services have been reporting this IRS ruling too broadly to convey a notion simply that there can be no stepped-up cost basis for property in an irrevocable trust. Therefore, the following points might be helpful for anyone digesting Rev. Rul. 2023-2:

One. I believe a death FMV stepped-up basis still applies for property in an incomplete-gift irrevocable trust, unchanged by this IRS ruling. To that end, I read Rev. Rul. 2023-2 as applying only in a narrower situation where the trust property at issue (owned within the trust) was a completed gift transfer to the trust, coupled with the trust agreement having certain income tax provisions that make the trust “defective” for income tax purposes. In everyday terms, this intentionally “defective” trust itself is not subject to its own income tax, but rather the person (the trust “grantor”) who transfers the property into the trust continues to be taxable on the trust income, gains, etc. All reported on the grantor’s own personal income tax return Form 1040;

Two. The primary impact of Rev. Rul. 2023-2 targets “sales to defective grantor trusts” with an irrevocable trust / completed-gift design. In other words, this “sale” to the trust is reported on a gift tax return Form 709 as a completed transaction, typically as part of a partial gift or “non-sale” gift transaction. Essentially, and for example, the grantor sells to this “defective grantor trust” the grantor’s property with a current FMV of $500,000, with the grantor taking back a note from the trust for $500,000. This “sale” transaction is reported on the gift tax return Form 709. The trust pays the debt service to the grantor on the $500,000 note.

Here is the kicker for this point Two. When the grantor thereafter dies, some (a minority in my view) tax practitioners believe there is a supportable argument that the trust property at the time of the grantor’s death should get a (date of death) FMV stepped-up cost basis under the estate tax rules, but also without that FMV property being included in the value of the grantor’s estate for estate tax purposes. This FMV stepped-up cost basis result does apply, generally without issue, to property owned by an individual at his or her death when included in the value of that individual’s estate for estate tax purposes. But, here this “defective trust” owns the property at the grantor’s death.

Assume, in the above example, the trust property increases (within the trust) from its $500,000 purchase value to $2.0 million FMV at the grantor’s later death. The above practitioners believe the trust property gets a death FMV stepped-up basis to this $2.0 million FMV, with no inclusion of this $2.0 million value in the grantor’s estate for purposes of computing estate tax. Keep in mind the basis of the property in the hands of the trust is $500,000 in this example at the time of the grantor’s death. The above IRS ruling takes the position there is no death FMV stepped-up basis; therefore, the trust property continues after the death of the grantor with its unchanged $500,000 cost basis;

Three. I purposely am not including in this blog post my own deeper view as to Rev. Rul. 2023-2. But keep in mind the trust owns the property at the grantor’s death, not the grantor. This trust ownership point, in my general view. creates the steepest slope in this debate. The arguments on both sides of this question also are densely complex, well beyond my simple blog post here; and

Four. My broader, general reaction to Rev. Rul. 2023-2 is that there possibly may be remedial options available in some instances to address a response to this ruling. I do not believe lawyers typically read any pronouncement or rulings without sensing an immediate faint glint of potentially remedial possibilities.

A Holy Grail Inter-Vivos QTIP Client-Memo

Click here for my recent Leimberg Information Services newsletter about the inter-vivos QTIP trust (qualified terminable interest property). One of the best estate and trust planning tools available for a broad range of clients, with also the benefit of powerful asset protection. It is among my favorite trust planning options. The newsletter link also includes information about my upcoming May 24 Leimberg webinar on inter-vivos QTIP trusts.

Irrevocable Trusts are No Longer Carved in Stone

For my continuing legal education (CLE), I attended recently the 2023 University of Miami Heckerling Institute on Estate Planning. It is always a great week of very informative presentations. [I am the ultimate nerd who attends every presentation and who writes notes throughout every presentation. Although I generally do not refer again to the notes, the note-taking process helps burn numerous points into mind.]

One of the key presentation points at Heckerling that continues to resound more loudly each year is the notion of how — in some cases essentially easily — one now can change or rewrite an otherwise existing irrevocable trust by decanting, or distributions in further trust, non-judicial settlement agreements, etc. In my view, the idea of an irrevocable trust substantively no longer has powerful relevance. By contrast, in my first year of law practice many years ago, following my first meeting then in which our client signed an “irrevocable” trust document, I felt as though that document had at that moment become carved in stone.

Bottom line. And consistent with a recommendation from one of the Heckerling speakers, you should consider including a provision in your trust document that helps protect against eliminating beneficiaries as a result of a decanting, non-judicial settlement agreement, etc., such as my own sample language below:

Except as to an exercise of the powers of appointment under Article XX of this trust agreement, no statutory powers in any jurisdiction, including but not limited to decanting or by non-judicial settlement agreement, nor by operation of any other provisions included hereinafter, may be exercised in any manner with the result of removing or eliminating any individual’s beneficial interest under this trust agreement, whether or not such interest is at such time vested or contingent.

You can email me at james@ktlawllc.com or text me at our law firm central phone number (470) 401-0100.

Join me for my somewhat contrarian Leimberg SLAT webinar

Most marketable, mnemonic sales-oriented trust and estate planning efforts (e.g., SLATs [spousal limited access trusts)] are greatly oversold, in my opinion. I am not opposed to the use of SLATs, but believe strongly they are being marketed with over-weighted accolades that fail to reflect crucial tax and non-tax checklist items and other important considerations. As a practitioner, I try my best to review trust and estate sales efforts from the perspective of an informed customer, rather than simply from a seller’s view. My upcoming Leimberg webinar will cover an array of these different SLAT factors and issues that can help you better serve each particular client; and touch on the potential alternative or complimentary use of inter-vivos QTIP trusts. Click here for details about my upcoming webinar.

Most SLATs are Oversold

The popularity of SLATs (spousal limited access trust) is, in my view, a great marketing spin. But, in most cases, SLATs are being oversold.

Oversold for the following three key reasons:

(1) A Secondary Interest for the Settlor Spouse? How can (or will) the settlor spouse who creates and funds the SLAT obtain any interest in the SLAT in the event of the early death of the beneficiary spouse? Other than possibly inclusion of an unpredictable limited power of appointment under the terms of the SLAT, I simply cannot find an effective way to protect the settlor spouse. Also, in my view it is only by using an inter-vivos QTIP trust can the settlor spouse retain a secondary interest in the QTIP trust in the event the beneficiary spouse predeceases the settlor spouse without that retention triggering later estate inclusion for the settlor spouse for estate tax purposes. See Treas. Reg. Section 25.2523(f)-1(d)(1); see, for example, IRS Private Letter Rulings 200406004 and 200413011.

In addition, even if one can find tax-law support to avoid estate tax inclusion for the settlor spouse’s secondary interest in, e.g., a SLAT or inter-vivos QTIP trust, that tax planning becomes painfully illusory and ineffective if local state law treats the settlor spouse’s secondary interest as a self-settled trust for creditor claim purposes; thus likely triggering estate inclusion for estate tax purposes. See, for example, Rev. Proc. 76-103.

As to these protective state statutes, the North Carolina statute under N.C. Gen. Stat. Section 36C-5-505(c)(1) is an excellent, well-drafted statute for protecting a settlor spouse’s secondary interest. A copy of this NC statute in included in my recent SLAT speech outline I refer to at the end of this blog post. But, again simply having a protective state statute, even this NC statute, is of no value if the settlor’s secondary interest is a retained interest for federal estate tax purposes.

Not all is lost, however.

These excellent, protective state statutes do lay the foundation for some highly effective incomplete-gift SLAT and inter-vivos QTIP trust planning in situations where the settlor spouse’s funding of the trust is purposely designed as an incomplete gift for gift tax purposes. One might ask: so why bother with a SLAT or inter-vivos QTIP as an incomplete gift? My response is because the tremendous benefit of this incomplete-gift irrevocable trust set-up can provide outstanding asset protection and greater assurance the trust property will remain only within the settlor and beneficiary spouse’s family, and ultimately for their children. Reduces, as examples, the risk to the family assets of old-age, widow or widower predatory marriages, mismanagement of assets, Madoff schemes, etc.

(2) Divorce of the Spouses? This opens up numerous potential problems with SLAT planning well beyond the scope of this blog post. I address this topic much more fully in my SLAT outline referenced below. However, various planners who assert the SLAT can simply include a “movable” definition of “spouse”, or can effectively apply by its terms to a new subsequent spouse, are in my view simply wrong. In addition, most of the above protective state statutes I find dealing with a secondary interest for the settlor spouse mandate that the same beneficiary spouse to whom the settlor spouse is married at the time the trust is created must also continue as a beneficiary of the trust until that beneficiary spouse’s death. These statutes typically do not allow creative efforts in support of these shifting definitions of the beneficiary spouse.

(3) Long-Arm Jurisdictional Litigation Statutes. Any effort to create a trust in another state jurisdiction in order to avail the settlor spouse of more favorable laws in that state can quickly sink if the settlor’s home state’s long-arm jurisdiction statute can (easily in many cases) pull the out-of-state trust into the home state’s litigation arena.

This jurisdiction subject is too broad for this blog post. However, I cover this long-arm statute point and the above two preceding points in a comprehensive recent speech I gave on SLATs at the recent 67th Seattle Estate Planning Seminar. Click here for a pdf copy of my SLAT speech outline [this is a box.com link].

Also contact me if you have any questions or wish to discuss any of these points. james@ktlawllc.com

A More Convenient Death Listing for your Tangible Personal Property

NOTE: The supplemental document I discuss below is good for minor changes for lesser-valued tangible personal property. However, I would not use this separate document for tangible personal property with significant value or family sentiment. Instead, make any designations actually in your Will, or prepare a codicil, with the appropriate notary and two witnesses, etc. I see far too many seriously emotional disputes among family members fueled highly by fights over tangible personal property.

Now directly to the topic of this post. Georgia has a revised statute under O.C.G.A. Section 53-4-5 (effective January 1, 2021) that now allows a more convenient method of preparing a listing of your tangible personal property for your named beneficiaries at the time of your death. This statute applies only to tangible personal property; and not cash or intangible property. Tangible personal property is essentially your personal “stuff” that you can actually touch, such as jewelry, art, musical instruments, furniture, household items, clothing, automobiles, etc. Click here for Section 53-4-5.

Under Section 53-4-5 — after you have already signed your existing Last Will and Testament — you can prepare a separate, supplemental written document that describes the tangible personal property and the beneficiary who is to receive that item at your death. This document must: (i) be signed and dated by you (the testator); (ii) describe the items and the beneficiaries with reasonable certainty; and (iii) the option of using this separate document method must already be referenced in your Will. See the sample Will language below.

No notary or other witnesses are required under Section 53-4-5 for the above separate document. Although, the document I use refers to the option (but not a requirement) of including a notary signature. I recommend adding the notary so as to help reduce disputes over your signature, or that you were unduly influenced to sign the document, etc.

The required cross-reference to this method within your existing Will can be something along the line of the last sentence in the following sample provision:

4.2 This section 4.2 covers who at my death gets my “tangible personal property,” defined generally as my personal items that are physically movable, such as automobiles, clothing, jewelry, watches, rings, art, household goods, furniture and furnishings, and other personal-use items generally similar to what I just described above that I own at my death.  I give all my tangible personal property outright to Jane, if she survives me, and if Jane does not survive me, [ . . . ] , or in accordance with any separate designation I make in writing subsequent to my execution of this Will with such separate writing referring specifically to this section 4.2 and to my date of execution of this Will.  

No-Contest Clauses; Still Only Slowly Evolving in Georgia

The Georgia court advance sheets recently included Slosberg v. Giller et al., No. S21G1226, Georgia Supreme Court (June 30, 2022) dealing with a no-contest clause in an irrevocable trust. The point of this blog post is that “no-contest clauses” in Georgia are still in a state of uncertain flux. Judicial opinions like this Slosberg case are part of the slow evolution of the body of law in Georgia for the design and use of these clauses.

In Slosberg a settlor created an irrevocable trust that, upon his death, left the bulk of the trust to his two daughters, and only a nominal amount to his son. The trust included a no-contest clause providing that any beneficiary who contested the validity of the trust would lose all benefits under the trust.

The son filed a lawsuit alleging his two sisters unduly influenced their father as to the creation and provisions of the trust document. After some head-spinning motion for summary judgment and jury trial activity in the trial court, a jury ultimately found undue influence existed with a result that the trial court ruled the trust was void.

But, the case then went up on appeal, and the Georgia Court of Appeals declared that the son nonetheless violated the no-contest clause by initiating the litigation, even though the jury found undue influence. See Giller v. Slosberg, 359 Ga. App. 867, 858 S.E.2d 747 (2021).

The Georgia Supreme Court reversed and held that a no-contest clause does not bar a beneficiary from asserting a claim for undue influence, referring to the longstanding Georgia common law rule that the valid formation of a trust may be challenged.

But, now here is the kicker. The Supreme Court went on to state that if an undue influence challenge fails, the challenging beneficiary is then deemed to have triggered against himself or herself the no-contest clause in the trust. A potentially quite costly Pyrrhic victory.

Here is my take. For years I have (and still do) complain that Georgia does not have a “probable cause” exception to filing challenges to a Will or trust that potentially might trigger a no-contest clause. See, for example, Duncan v. Rawls, 345 Ga. App. 345, 812 S.E.2d 647 (2018)(no good faith/probable cause exception exists under O.C.G.A. Section 53-12-22 [trust no-contest clauses]).

A probable cause exception could enable a claimant to challenge the validity of a trust document, but even if the challenger loses would not trigger the no-contest clause as long as the challenger had sufficient probable cause. There will remain a risk for a losing challenger; but a probable cause exception broadens the opportunity for potentially necessary challenges in some cases.

For example, a test case I wait for is a situation where a lawyer, or other close financial advisor with a confidential relationship to the settlor, himself or herself becomes a beneficiary in a trust, or in some other financially beneficial manner, etc., by potentially having unduly influenced the trust settlor.

Under current Georgia law without a probable cause exception, another beneficiary challenging the lawyer’s (or other advisor’s) potential undue influence may well be a risk the beneficiary simply cannot take. Or, more importantly, cannot afford to lose.

By contrast, if Georgia did have a probable cause exception, I would argue that any lawyer, or other advisor, who has placed himself or herself in a financially beneficial position within a client’s trust document — on its face — provides probable cause reasonably warranting a protected no-contest clause challenge.

Email me and I can send you copies of both this Slosberg opinion, and the Duncan opinion. james@ktlawllc.com

CPE / CLE in Seattle. October 24-25, 2022. Join Us.

As part of my shift away from litigation and return predominantly to trust and estate planning, I will be speaking at the 67th Annual Seattle Estate Planning Seminar, October 24-25, 2022 (Seattle, WA). Click here. My topic is “Will Your SLAT Fit the Right Slots?“. Come join us. The seminar blurb for my presentation is:

“The trust planning interest in SLATs (spousal lifetime access trusts) has become exponential over the past several months. Cocktail party fodder. Almost an effortless sell. This presentation touches on certain SLAT checklist items and potential pitfalls that may otherwise get overlooked in the SLAT design, such as the effect of divorce, substantive postnuptial agreement issues, creditor claims, the relation-back doctrine, long-arm litigation (jurisdiction) statutes, potential Code Section 2036 issues, cash-flow needs, and a brief commentary on fundamental differences with an inter-vivos QTIP trust.”