Estate Planning in 2024

“Estate Planning in 2024,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Travis Hayes, ACTEC Fellow from Naples, Florida. The trusts and estates fields continue to evolve, and there are many new developments and trends that practitioners should consider when looking towards the future of our profession. ACTEC Fellow Steve Akers of Dallas, Texas, will fill us in on the hot topics and highlights of estate planning for this year. Welcome, Steve.

Steve Akers: Thank you, Travis. I’m going to, in particular, discuss two issues that are hot topics for 2024.

Grantor Trusts and Income Tax Reimbursement

The first of those is a Chief Counsel Advice that came out the last week of 2023, Chief Counsel Advice 202352018. As background on this, let me start with grantor trusts. We know that one of the advantages of a grantor trust is that the grantor pays the income tax with respect to the income of the trust, allowing the trust to grow a lot faster. Over a period of time, that can be a huge difference. But, it can get to be too much of a good thing. The grantor may get to the point that he or she just doesn’t want to continue paying the income tax, or it may be that there’s one particular year, there’s a big sale in that year, and it is not appropriate to pay all that huge income tax in one year. For whatever reason, the grantor would like not to pay the income tax for a year. What do you do?

Well, one observation would be maybe someone could turn off the grantor trust status. And indeed, I think in every well-drafted grantor trust, somebody should have the flexibility and the ability to get rid of the triggers that cause grantor trust treatment. But, another alternative might be for the trustee to reimburse the grantor for all or some of the income tax in that year. Well, that’s what happened in this CCA. The trust agreement, though, did not have a provision authorizing the trustee to reimburse the grantor at its discretion. And so the parties went to court to get a judicial modification of the trust to allow the trustee to have the right in its discretion to reimburse the grantor for income tax for that year.

As a part of that judicial modification proceeding, there was a requirement of consent of the beneficiary and, on behalf of the issue – of the children – of that beneficiary. The CCA concluded that when they consented, that constituted a “gift by the children.” It would have been a gift, in effect, to the grantor. That was literally what the CCA said. That was a surprising result in that we very often have judicial modifications of trusts. We pay a lot of attention to whether or not that will impact the GST, Generation-Skipping Transfer Tax, effect of the trust. Typically, we don’t give a lot of thought to the gift tax implications of it.

This takes the position it would be a gift. Even, it says, if the beneficiary’s consent was not required in an action, but the beneficiary was given notice of the action and failed to object. The CCA said the same result would happen. It observed that it may be difficult to value the amount of the gift, but that does not keep it from being a gift. It also observed that the IRS had previously taken a different approach. Private Letter Ruling 201647001 said in a similar situation that that change would be a mere “administrative change” and would not result in a gift by the beneficiaries.

Gift Tax Implications of Trust Modifications

A lot of consternation about this. And in part, going to that issue of the value, it’d be very, very difficult to value that gift. A lot of specular factors would enter into that. What is the size of the trust? What’s the anticipated income? And of course, you’ve got to do this, think this out for each year going into the future and for each of those years, what might the income be? What would the trustee reimburse, et cetera? What’s the likelihood that the grantor would even ask for reimbursement in a year? What’s the likelihood that the trustee would exercise the discretion to grant reimbursement? Would it be for all the income tax or some of it? The age and life expectancy of the grantor certainly have an impact on how much the gift might be. Just a lot of various factors going into this.

Some question, is this suggesting a new trend by the IRS that it’s going to be looking at this more in the future? We don’t really know. A Chief Counsel Advisory arises in an actual matter that is ongoing with the IRS. In this case, two agents who are very experienced sent a request to the national office, asking the national office: “What position should we take?” That’s all this is. Very often, these come back kind of in an advocacy role of the IRS taking, the national office taking, a strict position. And maybe that’s all this is – it’s a one-off. You know, maybe not, though.

We remember a Letter Ruling about a year ago, 202206008, when someone sought a judicial modification to add a formula general power of appointment to a trust. The goal, I’m sure, was to get a basis increase to the extent that it would not cause estate tax for the beneficiary. Well, that’s one. Beneficiaries had vested rights. Now you’re giving somebody a general power of appointment to upset those vested rights. It sure sounds like a gift if they’re going to take the same position. So we don’t know.

Section 2519 and QTIP Trusts

The other issue that I want to mention that I think is a “hot topic” deals with Section 2519 of the Code for a QTIP trust, Qualified Terminable Interest Property Trust. With that, there is no estate tax paid at the first spouse’s death. At the second spouse’s death, whatever’s in the trust is subject to estate tax. 2519 provides relief against just being able to get rid of everything in the trust. It says that if the beneficiary relinquishes any of the income interest, there will be a deemed gift of all of the remainder interest. A case several years ago, the Kite case, K-I-T-E, has raised confusion.

In that case, beneficiaries were named as, changed to be, the trustees of the trust. They immediately distributed all of the trust out to the surviving spouse. The surviving spouse then sold those assets for a deferred private annuity – no payments will be made for 10 years. But, the value of the private annuity was equal to what the spouse received from the trust. Well, the spouse died before 10 years and didn’t receive anything. I think it was just too much for the court to stomach – no transfer tax being paid on that. So the court held that the distribution to the spouse followed by that purchase of the private annuity triggered 2519.

Well, now with that, there seems to be a number of situations where the IRS is making that argument. One of the recent ones is now in the McDougall case. This was a Chief Counsel Advisory 202118008. It’s one where the parties got together and agreed that all the assets in the QTIP trust would go to the spouse, which was the surviving husband. And the husband thereafter sold those assets, sales, rent, or trust transaction, I’m sure. The CCA said that resulted in a gift from the children to the spouse, a 2519 gift of the remainder interest from the spouse and then the spouse would own the note that would be subject to estate tax later. So three transfer taxes on the assets in the QTIP trust – a terrible result. That is now in litigation. That is the McDougall case.

I’ve heard of other cases as well, similar to 2519. There is a regulation providing that, and this is Regulation 25.2519-19(e), that says if someone exercises a power of appointment over a QTIP trust to appoint the assets to the spouse, that does not trigger 2519, even if the spouse subsequently disposes of the assets. Despite that regulation, the IRS seems to be very aggressive at this point in going after these sorts of “2519 transactions” where there are big distributions from the QTIP trust to the spouse, and then the spouse does something with those assets. So, two big issues that seem to be hot buttons with the IRS at this point.

Travis Hayes: Thank you, Steve, for discussing hot estate planning topics for this year and for highlighting new developments and trends that practitioners need to be aware of.

You may also be interested in:

• The IRS is Here to Help: How Does That Happen? (Oct 2023)
• Reimbursement of Grantor for Income Tax Paid on a Grantor Trust’s Income (Capital Letter 61, Jan 2024)

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