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.

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

(anti-) SLAPP Back; Don’t Turn the Other Cheek

This anti-SLAPP blog post should be an item you keep on your litigation check-list in the event you are a defendant in a lawsuit. If anti-SLAPP applies, it can significantly short-circuit and give you an early-end to the litigation in your favor, stop costly discovery, and put you in a strong position to obtain attorneys’ fees and expenses of litigation from the person who sued you. “SLAPP” stands for “strategic litigation against public policy.”  A number of states, including Georgia, have anti-SLAPP laws that provide the above relief to defendants in certain situations.

Two days ago, June 24, 2019, the Georgia Supreme Court issued an opinion for the first time that deals with Georgia’s 2016 broad revision of its anti-SLAPP statutes under O.C.G.A. Section 9-11-11.1. The case is Wilkes & McHugh, et al. v. LTC Consulting, L.P. et al., No. S19A0146 (Ga. June 24, 2019). Click here for this opinion, which also has an excellent discussion by the Georgia Supreme Court setting forth the history and operation of Georgia’s anti-SLAPP statutes (and Georgia cases prior to the 2016 change in these statutes).

This is part one of three blog posts I will provide on this anti-SLAPP topic.

A 15-second short summary of anti-SLAPP is that if you are in litigation that enables you to file a defensive anti-SLAPP motion, the person suing you (the plaintiff) has to convince the court in response to your anti-SLAPP motion that the plaintiff’s lawsuit claims against you (his or her Complaint) are both (i) legally sufficient and (ii) supported by a sufficient prima facie showing of facts to sustain a favorable judgment in favor of the plaintiff.

Now, for a slightly longer introductory summary. Another substantial benefit of you filing an anti-SLAPP motion is that all discovery and pending hearings or motions in your lawsuit are stopped (“stayed” in lawyer jargon).  And, the court generally is required to conduct a hearing on your anti-SLAPP motion within 30 days after you file it.

The above June 24 Georgia Supreme Court opinion, in its opening paragraph, states the 2016 revision of the Georgia anti-SLAPP statutes substantially mirrors California’s anti-SLAPP statutes. Wilkes & McHugh at 1.  In expressly acknowledging that California has developed a considerable body of case law interpreting its anti-SLAPP statutes, the Georgia Supreme Court states that it may look to California case law for interpreting the Georgia anti-SLAPP statutes.  Id. at 15.  [I have experience with the California anti-SLAPP statutes and their litigation application.]

For this first blog post on Georgia’s anti-SLAPP statutes, I purposely do not get into the weeds on the details as to what these laws are and how they apply procedurally in litigation. However, a threshold point in any potential anti-SLAPP situation is to determine whether you, as a defendant, can take advantage of these favorable provisions. The general rule, and I state this broadly, is that the lawsuit you are facing must involve the plaintiff’s claims against you that arise from facts or actions stemming from your constitutional right of “free speech” or “petition”.  I will address these two elements in my next blog post.

My other key take-away points here are:

• The above two free-speech / petition categories as to when you might be able to get the benefit of anti-SLAPP are much broader than one might initially think. Existing California case law is replete with numerous issues that fall within these favorable anti-SLAPP free speech and petition requirements; and
• The California courts have effectively seen-through efforts by plaintiffs who, with artful drafting of a plaintiff’s Complaint, attempt to evade the reach of anti-SLAPP provisions by including mixed, unprotected non-SLAPP assertions in their Complaint to try and derail an anti-SLAPP challenge. See, for example, Baral v. Schnitt, 1 Cal. 5^th 376 (2016).  I assume this drafting scrutiny will be an important focus the Georgia Supreme Court will follow as more of these anti-SLAPP cases make their way through the Georgia courts.

Whoops. The No-Contest Clause Backfired!

This blog post is in response to a recent April 2019 California case dealing with disgruntled siblings and an “in terrorem” (or no-contest) clause in their late mother’s revocable trust document.  I use the California case to make the following broader comments for this blog post and tie my comments to a Georgia point.

An in terrorem clause (no-contest clause) in a Will or trust document is to prevent beneficiaries from raising issues as to the Will or trust in order, in most cases, to try and increase their share. The provisions under Georgia law for no-contest clauses are under O.C.G.A. Section 53-4-68 (for Wills) and Section 53-12-22 (for trusts).

An example of a no-contest clause in a Will is:

“If any beneficiary, alone or along with any other person or persons, directly or indirectly, contests or initiates proceedings to contest this Will in any court with a challenge to its validity of all or any part of my Will or in any manner, attacks or seeks to impair or invalidate any of the provisions of my Will or prevent any provision of my Will from being carried out in accordance with its terms, that contesting beneficiary shall be deemed to have predeceased me and as a result shall forfeit his or her interest under this Will in its entirety with his or her forfeited share passing to my other children, per stripes, as though the contesting beneficiary and his or her descendants all predeceased me.”

This blog post is not for the purpose of an extensive discussion about the design and use of a no-contest clause.  But, rather, it helps illustrate that no-contest clauses are not just simply boilerplate provisions that one can, or should, without careful thought merely cut-and-paste into a Will or trust.

Below are a couple broader comments as to no-contest clauses:

I start with reference to a recent 2019 California court opinion dealing with a no-contest clause. This case has an extremely interesting and surprising twist that one of the litigious sisters likely never expected, to her detriment. This case is Key v. Tyler, 2019 Cal. App. LEXIS 358 (April 19, 2019).  Click here for a copy.  The core facts are that three adult sisters are beneficiaries of their deceased parents’ 1999 family trust.  The family trust essentially provides for an equal split among the three sisters after their parents’ deaths. As of January 2006, the family trust was worth over $72 million.  Lawyer-sister Tyler was the trustee.

A 2007 amendment to the 1999 family trust surfaced after the mother’s 2011 death (the mother was the second parent to die). After their mother’s death, sister Key asserted that her lawyer-sister Tyler had unduly influenced their mother in 2007 to amend the 1999 family trust. The 2007 trust amendment was apparently orchestrated by Tyler and resulted in Tyler increasing her own trust share substantially in excess of her other two sisters (including Key). The 1999 family trust and 2007 amendment each included a no-contest clause.

Sister Key, after the mother’s death, filed a California court action and asserted the 2007 trust amendment was the result of undue influence over their mother by lawyer-sister Tyler . The California court agreed with sister Key, with the result that the 2007 trust amendment was essentially disregarded. Although this California opinion is rich with an abundance of procedural details, factors, concepts, and other elements in this sister- v.-sister litigation, I make only the following three comments stemming from this California case (my knowledge of the facts in this case are based solely on information in the court opinion):

One. This point centers on the 1999 family trust and the 2007 trust amendment, each having a no-contest clause.  One might reasonably ask:  With the trust document having a no-contest clause, how was sister Key (the non-lawyer sister) able to attack the 2007 trust amendment, without triggering the clause against herself (Key)?

The reason is that California law, as with some other states (but not Georgia), has an exception to the challenge to a Will or trust with a no-contest clause, if the person making the challenge can show probable cause at the time of filing the challenge, such as probable cause of undue influence, or mental incapacity, etc.

In other words, without probable cause a person cannot simply file a challenge to a no-contest clause Will or trust and hope during the discovery phase of the litigation to luck-up or stumble across evidence of undue influence, or mental incapacity, etc.  Probable cause up front reduces fishing-game litigation. Absent probable cause, the person making the challenge to the Will or trust also risks losing, with the result of being penalized by the no-contest clause.

Two. This next move in this litigation by sister Key is what greatly sparked my interest in this California case.  Here it is:  After sister Key successfully challenged and obtained the set-aside of their mother’s 2007 trust amendment, Key then filed a petition to enforce — against her lawyer-sister Tyler — the no-contest clause as to the 1999 family trust. This is the backfire.

Here the reader might say “Wait a minute, it was sister Key who challenged the 2007 trust amendment.  Lawyer-sister Tyler never asserted any challenge.  So, why now is lawyer-sister Tyler facing loss of her inheritance based on her (Tyler’s) violation of the no-contest clause? “

There are two primary reasons.  First, the California court concluded sister Key had sufficient probable cause of undue influence to file her challenge to the 2007 amendment, even with the no-contest clause.  The probable cause exception under California law provided an exception for Key to the trust amendment’s no-contest clause.  Second, and this is the part of the California court opinion that really grabs my interest.  The court, in concluding sister Key can seek to enforce the no-contest clause against Tyler, states:

“By [lawyer-sister] Tyler obtaining the 2007 Amendment through undue influence and then defending that amendment in court, Tyler sought to ‘impair’ and ‘invalidate’ the provisions of the original Trust that the 2007 Amendment purported to replace.  The No-Contest Clause therefore disinherits Tyler if it is enforceable against her.”

2019 Cal. App. LEXIS, *29.

I assume lawyer-sister Tyler was completely blindsided by now finding herself the subject of a possible no-contest clause violation, and never for a moment considered that her court fight as trustee to defend and uphold the 2007 trust amendment would (or could) be the basis of Tyler herself violating the no-contest clause. Tyler now stands to lose her share of the trust if the court ultimately concludes Tyler violated the no-contest clause [the court has not yet arrived at a conclusion].

Three. This final point ties my Georgia discussion to the above California case. Georgia does not have a probable cause exception that allows a beneficiary with probable cause to challenge a no-contest clause Will or trust. My view is that Georgia (and all other states) needs a probable cause exception.  This is up to the legislature.

Here also is my concern, merely as an example, of there being no probable cause exception in Georgia.  Assume a family friend, business associate, or even a lawyer, becomes a close friend of an elderly widow or widower.  And that person persuades the elderly person to change his or her Will to include him or her as a substantial beneficiary (or gets the elderly person to add his or her church or other charitable institution as a substantial beneficiary). Assume also that person persuades the elderly person to include a strong, no-contest clause in their Will or trust.

This could be a tragedy and, in my view, would prevent another beneficiary or family member from challenging a Will or trust that now benefits the family friend, business associate, or lawyer, even if the challenging beneficiary has probable cause. The person influencing the elderly person, therefore, shields himself or herself by influencing the person to include the no-contest clause.

My final general point is to make sure you know what documents your elderly parents have in place, and whether they are making changes, influenced by others, etc. Don’t end up with no options to challenge their situation where someone influences your parents to include him or her in the Will or trust, and also influences your parents to include a strong no-contest clause.  This person may likely end up with your inheritance,  unscathed.

One last comment for readers who wish to read the attached California court opinion.  That is, the court opinion provides a great deal of discussion about this California sister case being a SLAPP case [“Strategic Litigation Against Public Participation”]. SLAPP is essentially a procedural speed-up option available for certain litigation cases, that I also find is an extremely interesting, evolving court development.  I will write a blog post soon about what SLAPP is and why I find it a compelling and positive development in litigation.  [California has a much broader range of SLAPP options compared to Georgia.]

The 2017 Gibson Opinion. Divorce? Squirreling Away Assets in Trust?

This blog post is about whether the 2017 Georgia Supreme Court opinion in Gibson now opens the door wider for one spouse more easily – while married — to squirrel away his or her assets in a trust, and then later use that trust as a shield in a divorce proceeding. It does not.

In Gibson,the husband during his marriage funded two trusts with $3.2 million of property; the husband prevailed in keeping the $3.2 million out of his divorce proceeding without the trust assets being subject to equitable division. This is $3.2 million that otherwise would likely have been marital property in the divorce, absent the trust planning. Click here for a copy of Gibson v. Gibson, 801 S.E.2d 40, 301 Ga. 622 (2017).

The key factual distinction laying the foundation for the husband to prevail in Gibson was the lower trial court’s conclusion that the husband retained no interest in the trusts, including no interest as a trustee or beneficiary.  As I touch on again below, my experience is that most spouses who unilaterally create and fund a trust during marriage do retain interests in the trust, albeit as part of the purposeful, stealth design of certain opaque, highly-technical trust provisions.

Back to the Gibson opinion. My sense in talking with other lawyers is that some have an over-optimism leading them to conclude Gibson opens the door wider now enabling one spouse to keep his or her trust out of the divorce arena. For the reasons I state below, I disagree. The backdrop to this misplaced optimism is the following portion of the Gibson opinion:

This is not an issue of first impression for our Court, which has permitted property placed in certain types of trusts to be exempt from equitable division.  . .  . Therefore, property that has been conveyed to a third party is not subject to equitable division absent a showing of fraudulent transfer. See id. If a spouse places property in a trust of which he is the sole beneficiary, that property may be subject to equitable division. See Speed v. Speed , 263 Ga. 166, 430 S.E.2d 348 (1993). But if a spouse is not the sole beneficiary of a trust, the corpus of the trust is not subject to the other spouse’s claim of distribution. See McGinn v. McGinn, 273 Ga. 292, 292, 540 S.E.2d 604 (2001).

Excerpt from the Gibson opinion (I added the bolding and underlining).

The optimists read Gibson (and the “sole beneficiary” excerpt above) to support the notion that a spouse who funds a trust – where that spouse is not a sole beneficiary of the trust –  can now exclude the trust from claims in a divorce. This is a misreading of the above Gibson reference to sole beneficiary.

This sole beneficiary reference is merely a passing remark by the Georgia Supreme Court (what lawyers call obiter dictum) in stating the Gibson case was not a case of first impression on the question of how a trust created during marriage fares later in a divorce action. This sole beneficiary element also was not a fact for consideration as to the Gibson husband’s trusts and not part of the holding in Gibson.  [I have not seen the Gibson trust documents.]

Here are my broader Gibson points for this blog post:

One. I am called upon from time to time to assist divorce lawyers with attacking a trust in a divorce proceeding. My job is to help attack the trust and keep it in the divorce proceeding. My attack at times is directed at the deficiency and shortcomings in the trust document itself, where the drafter failed to cross the “t”s and dot the “i”s. My attack also gets into the various quasi-hidden, stealth trust powers purposely built into the design and framework of the trust that do not easily – merely on the face of the trust document – alert a non-trust lawyer to the existence of continuing powers and potential benefits the spouse retained in the trust (such as powers of appointment held by a friend or other family member; powers to decant the trust to another trust; using someone other than the spouse as the purported settlor of the trust document giving the diversionary appearance the spouse did not create the trust, etc.).

One might ask “Why would a spouse hold these stealth ties to the trust?” The answer, in my experience, is that it is a rare instance where one spouse creates and funds a trust during marriage without making sure he or she still possesses indirect options either to get back the property after the divorce situation ends or ultimately later control the property for that spouse’s own benefit.  Thus, arguably most unilateral trusts are not third-party trusts.  I use the term unilateral for when one spouse puts this trust planning in place without the knowledge of the other spouse.

Two. Whether a trust is or is not a third-party trust is not merely an easy simple ‘yes’ / ‘no’ question. The status and nature of any trust depends in most cases (divorce and non-divorce cases) on the effect of the opaque, stealth technical provisions in the trust document, as part of the purposeful design of the trust. This opaque-stealth question, in my opinion, is where the heart of the fight lies when dealing with a trust in a divorce setting.

Three.  When the trust at issue in a divorce is a third party trust (as in Gibson), that trust under the Gibson opinion will still be subject to a fraudulent transfer analysis in the divorce proceeding, as is the case with virtually any other third-party transfer of property prior to divorce.

The procedural rub is that the law requires, as generally in any fraudulent transfer attack, that the opposing party (the non-trust spouse in a divorce) bears the burden of proof for the fraudulent transfer attack.

Four. But, by contrast, I read Gibson as not changing the existing law or theories in divorce proceedings for trusts that are not third-party trusts. Those trusts are still subject to attack, but without the non-trust spouse bearing the burden of proof under a fraudulent transfer attack.  Here the burden is on the spouse who created the trust — during the marriage – to prove the trust is not marital property.

I Am Proud of Georgia (trust / estate law revisions)

Georgia’s newly enacted revisions to certain trust and estate law provisions bring Georgia up to speed with many other states with similar provisions.  The changes are effective July 1, 2018.  This is a good move for Georgia.  Click here for a link to the legislative bill with the numerous changes.

As an important first aside, I will blog later on how these changes add even greater benefit to my favorite trust – the inter-vivos QTIP marital trust (created during the lifetime of the spouses).  I also will provide other short blog posts from time to time with certain commentary about these law changes.

For today’s post, I include the following discussion about how long trusts can now last under Georgia law:

360-Year Trusts. The allowable duration for a trust changes from 90 years to 360 years.  This is referred to under trust law as the “rule of perpetuities”, and applies generally as a duration limitation for non-charitable trusts.  A trust can now operate for 360 years before the rule of perpetuities law mandates its termination.

However, as a practical matter, I do not think 360 years in and of itself is significant. But, now having a period longer than the previous 90-year limitation helps make sure a trust can run long enough to cover (at a minimum) the trust creator’s (settlor’s) grandchildren’s entire lives.

In other words, making sure the grandchildren get the asset protection benefit of the continuing trust for their entire lifetimes (rather than the trust having to terminate in 90 years, possibly before the deaths of the grandchildren; thus, the earlier termination removing the protective effect of the trust set-up for their benefit).

The reason I think the entire 360-year period is not significant is that the number of downstream descendants a settlor will have if his or her trust lasts 360 years will be geometrically expanded beyond anyone’s realistic ability to keep up with all the descendants. I have seen various projections indicating, on average for example, a person will have approximately 115,000 descendants in 350 years. This adds another level to the notion of “laughing heirs”.

The Delaware Tax Trap.  This point relates to the new 360-year change.  The Delaware Tax Trap is a complex part of trust tax law.  It essentially triggers potentially punitive gift and GST tax results if a trust is changed where the duration of the trust is extended longer than the trust’s initial governing rule of perpetuities.

For example, assume I created an irrevocable trust in 1980 (when the law allowed a 90-year duration which means the trust essentially must end in 2070).  Is this trust now subject to the Georgia 360-year rule?  [There are some extensions to this 90-year period that get into the notion of “lives in being”; but I do not get into that point for this blog. You also can read one of my earlier blog posts on a creative potential use of the Delaware Tax Trap.  Click here for my earlier post.]

Under this Delaware Tax Trap rule, the tax law provides that if I extend the duration of my existing 1980 trust beyond its then-applicable 90-year period, the result is that I am deemed for gift and GST tax purposes to have withdrawn the trust property and re-contributed the property to the extended-duration trust.  In other words, I am treated as making a gift to the extended trust. This Delaware Tax Trap is a very esoteric tax law concept as a practical matter, but is an issue that most trust tax lawyers have many times grappled with (and debated) in great detail as part of their trust planning.

Below is my key comment for this blog post about Georgia and the Delaware Tax Trap.

The legislative act for these Georgia revisions to its trust and estate laws states “All laws and parts of laws in conflict with this Act are repealed.” Does this mean the prior 90-year limitation disappears with no continuing effect for an existing trust?

I am merely raising the above question and have not yet fully examined the scope of an answer.  Nor does a simple, quick answer jump out at me at this time.  More broadly, the question becomes: “How best do trust lawyers deal with this new extended 360-year rule of perpetuities both for existing trusts and in creating new trusts?”

This 360-year rule of perpetuities question needs to be on every trust checklist.

Death in the Midst of a Divorce. What Happens?

Ever think about what happens if you die in the midst of your divorce?   How does that affect the divorce action, alimony, and property division?  Here in short are the resulting possibilities:

(1)  Generally no divorce can occur if one spouse dies prior to the court’s judgment of divorce.  In this situation the spouses are still married post-death;

(2)  However, pending alimony claims at the time of death do not bar the surviving spouse from seeking temporary alimony or support from the estate of the deceased spouse, but only computed for any time period ending up to the date of the deceased spouse’s death.   In other words, no alimony computed and payable for the time period following the death;

(3) Any other post-death property or benefits for the surviving spouse will be based on (i)  the estate planning documents the deceased spouse had in place for the surviving spouse;  and (ii) the statutory surviving spouse provisions (called years’ support under Georgia law;  see O.C.G.A. Section 53-3-1).   These become the post-death claims against the estate for the surviving spouse rather than post-death alimony or property division;

(4) As to the deceased spouse’s estate planning documents, in this situation the surviving spouse is still technically married to the deceased spouse.  Therefore, the deceased spouse’s estate planning documents — to the extent they include benefits or provisions for the surviving spouse — will most likely still apply; and

(5) For couples with a prenuptial agreement, the agreement needs to contemplate the above situation if death occurs mid-stream in the divorce proceeding.   In my experience many prenuptial agreements do not adequately anticipate this situation.

Essentially, the prenuptial agreement needs to provide that if the required payment or division is required under the prenuptial agreement, then both spouses agree under the terms of the prenuptial agreement that they each will be deemed to have predeceased the other so that no other estate planning documents apply.   In other words the prenuptial agreement needs to anticipate and guard against both the prenuptial agreement and the other estate planning documents applying together.   It should be one or the other.

Narrowing this point further.   The prenuptial agreement may provide for its required payment or division of property under the terms of the agreement even if death occurs during the divorce proceeding (triggered, for example by the filing of the divorce action by one of the spouses).   This is fine as long as the agreement is clear on this point.

But, under all circumstance to avoid double payment under the prenuptial agreement and the deceased spouse’s estate planning documents, the following example of a provision in the prenuptial agreement can mandate the above either-or result:

9.1.1.   If the payment is required between the parties under subparagraph 7.1.1 [of this prenuptial agreement], both John and Jane shall as a result of such payment obligation be deemed to have predeceased one another as of the date of the death of either one of them with the result that John and Jane shall each be treated as having  predeceased one another for all other purposes (including predeceased for all purposes as to any estate planning documents of either John or Jane applicable at their respective deaths).

For Georgia readers, and as general background, the following case deals with this topic:  Davenport v. Davenport, 255 S.E.2d 695, 243 Ga. 613 (Ga., 1979).

“empty formalisms of labels” re U.S. Supreme Court and Obamacare

This struck me as a very interesting discussion about the present task before the U.S. Supreme Court to address Obamacare.   Click here for the link from Cornell law school professor Michael C. Dorf.