Trust and Estate Planning
•Download as PPTX, PDF•
0 likes•20 views
The document summarizes a tax update seminar on trust and estate planning. It discusses recently enacted Arkansas legislation including the Arkansas Uniform Directed Trust Act, Arkansas grantor trust rules, and Arkansas qualified spousal trusts. It also discusses potential implications of the proposed SECURE Act including changes to RMD ages, 529 plans, and stretch IRAs. Common errors in trust accounting, Form 990 filing, missed elections, grantor trust reporting, and GST exemption allocation are identified as the top 5 bungles in estate planning.
Recommended
More Related Content
What's hot
What's hot (20)
Similar to Trust and Estate Planning
Similar to Trust and Estate Planning (20)
More from Friday, Eldredge & Clark
Recently uploaded
Recently uploaded (20)
Trust and Estate Planning
- 1. www.FridayFirm.com TAX UPDATE SEMINAR November 13, 2019 Trust and Estate Planning Attorney Panel – An Update On Recently Enacted Legislation and A Look At The Top 5 Bungles You Might Be Making Katie Watson Bingham & Katie M. Eaves
- 2. www.FridayFirm.com - Ark. Code Ann. §§ 28-76-101 through 28-76-118 - Enacted April 15, 2019 (2019 Ark. Acts 1021) - Effective January 1, 2020 - Purpose: codify and clarify the fiduciary duties of trustees and trust directors. The Arkansas Uniform Directed Trust Act
- 3. www.FridayFirm.com What is a Directed Trust? - A directed trust includes terms that grant a person other than a trustee a power over some aspect of the trust’s administration. - Terminology: - Power over a trust held by a non-trustee is called a “power of direction.” - The holder of a power of direction is called a “trust director.” - A trustee that is subject to a power of direction is called a “directed trustee.”
- 4. www.FridayFirm.com Duty and Liability of Directed Trustee Arkansas Uniform Directed Trust Act Fiduciary Duties - Take reasonable action to comply with a trust director’s direction that falls within the scope of the powers expressly granted. - No mention of duty to avoid willful misconduct. Liabilities AUDTA provides provisions where a directed trustee is not liable, unless otherwise provided in the trust instrument: - Not liable for any loss that results directly or indirectly from any act or omission as of result of the directed trustee’s reasonable action to comply with the direction of the trust director or the failure of the trust director to provide consent; and - If trust director has authority to direct the making or retention of any investment, to the exclusion of the directed trustee, the directed trustee shall not be liable for any loss resulting from the making or retention of any investment under such direction. Burden of Proof Provides that in an action against a directed trustee, the burden to prove the matter by clear and convincing evidence is on the person seeking to hold the directed trustee liable.
- 5. www.FridayFirm.com Arkansas Grantor Trust Rules - Effective January 1, 2020, new subsection (f) is added to A.C.A. § 26-51-201. - The federal grantor trust rules (as set forth in Title 26 U.S.C. §§ 671-679) are adopted for purposes of determining whether the grantor or another person shall be treated as the owner of a portion of a trust for Arkansas income tax purposes. - A grantor is subject to the general tax reporting requirements under Arkansas law.
- 6. www.FridayFirm.com Arkansas Qualified Spousal Trusts Ark. Code Ann. § 28-72-601 through § 28-72-605 - Effective July 16, 2019 - To expand tenancy by the entirety protection to all assets held in a joint revocable trust created by a husband and wife, regardless of whether such assets were previously characterized as separate property. - Tenancy by the entirety: a form of property ownership between husband and wife where creditors of an individual spouse may not attach.
- 7. www.FridayFirm.com SECURE Act - Passed the House - Currently before the Senate - Estate planning implications: - Would push back the RMD age from 70 ½ to 72. - 529 plans could be used to pay back some student loan debt. - Could contribute to IRA past age 70 ½. - Part time employees would be eligible to participate in work retirement vehicles.
- 8. www.FridayFirm.com SECURE Act (cont.) - Estate planning implications (cont.): - Following the birth or adoption of a child, each spouse could pull out $5,000 from their respective retirement account without paying the 10% early withdrawal penalty (income tax would still be owed). - Elimination of stretch IRAs. Non-spouse beneficiaries would have to pull out over 10 years. Exception for minor and disabled beneficiaries.
- 9. www.FridayFirm.com Frequently Seen Bungles - Trust accounting issues - Form 990 and public support test - Commonly misinterpreted and overlooked elections - Grantor trust reporting issues - Allocation of GST exemption on gift tax returns
- 10. www.FridayFirm.com Bungle #1 – Trust Accounting Issues - Fiduciary accounting income – what is it and why does it matter? - Flowing capital gains out of a trust - Year of termination - Pursuant to trustee power to adjust (must be treated consistently during a given tax year) - If required by trust instrument
- 11. www.FridayFirm.com Bungle #1 – Trust Accounting Issues (cont.) Treatment of distributions received by a trust from an entity - Money typically allocated to income unless received in partial or total liquidation of the entity OR received in exchange for the trust’s interest in the entity. - Other property allocated to principal.
- 12. www.FridayFirm.com Bungle #2 – Form 990 All charitable tax exempt organizations must file an annual information report with the IRS by May 15th (calendar year taxpayer) with the ability to extend to November 15th. - 990N (e-postcard): public charity with gross receipts normally less than $50,000 - 990-EZ: public charity with gross receipts normally less than $200,000 and assets less than $500,000 - 990: any public charity - 990PF: all private foundations - 990T: Unrelated business taxable income
- 13. www.FridayFirm.com Bungle #2 - Public Support Test - All public charities filing a 990 must include Schedule A: the Public Charity Status and Public Support. - There are two public support tests. Both tests measure public support over a 5 year period. - § 509(a)(1) Charities: the entity must receive at least 1/3 of its support from contributions from the general public or meet the 10% facts and circumstances test. - § 509(a)(2) Charities: the entity must receive more than 1/3 of its support from contributions from the general public and/or gross receipts from activities related to its tax-exempt purpose and receive no more than 1/3 of its support from gross investment income and unrelated business taxable income.
- 14. www.FridayFirm.com Bungle #3 – Frequently Missed Elections - 754 election (inside basis step-up) – purchase of partnership interest or death of owner of partnership interest – written statement must be submitted with partnership return in year of sale/death - 645 election – revocable trust can use fiscal year reporting for two years following grantor’s death
- 15. www.FridayFirm.com Bungle #3 – Frequently Missed Elections (cont.) Portability - Can preserve deceased spouse’s unused exemption. - Return must be filed within two years of the deceased spouse’s death. - Stack deceased spouse’s unused exemption on top of surviving spouse’s exemption. - Pecking order when making gifts: DSUE then SSUE.
- 16. www.FridayFirm.com Bungle #3 – Frequently Missed Elections (cont.) 65-day distribution rule - Applicable to estates and trusts. - Distributions made by March 15th from an estate or trust can be treated as if made in the preceding tax year.
- 17. www.FridayFirm.com Grantor Trusts: - Include all revocable trusts and certain irrevocable trusts with grantor- retained powers, such as IDGTs, QSSTs and ESBTs. - Governed under I.R.C. §§ 671-679 for income tax purposes - The Grantor is, typically, the taxpayer (similar to a disregarded entity) for all income generated within a grantor trust. - However, grantor trusts that are irrevocable typically file a 1041 with basic information about the trust and furnish a separate statement to the “deemed owner” of the trust with all items of income and deductions to be reported on such “deemed owner’s” 1040. Bungle #4 - Grantor Trust Reporting Options
- 18. www.FridayFirm.com QSSTs - Must file Form 1041. - Provide separate statement to beneficiary showing items of income (like with a typical grantor trust). - Note that if the S-corporation stock held by the QSST is sold, the sale will be reported on the 1041. ESBTs - Must file Form 1041. - The “S portion” of the trust is reported through a separate statement. - The rest of the trust activity is reported on Form 1041. Bungle #4 - Grantor Trust Reporting Options (cont.)
- 19. www.FridayFirm.com Bungle #5 – Allocation of GST Exemption on Gift Tax Returns - Affirmative allocation on gift tax return (safest method) - Deemed allocation to direct skips - Automatic allocation to indirect skips (be wary of general powers of appointment buried in trust document) - Annual exclusion gifts and whether they qualify for the GST annual exclusion - Tracking use of GST exemption (even for gifts not reported on a gift tax return)
- 21. www.FridayFirm.com www.FridayFirm.com 400 West Capitol Ave. Suite 2000 I Little Rock, AR 72201 3425 North Futrall Dr. Suite 103 I Fayetteville, AR 72703 3350 South Pinnacle Hills Pkwy. Suite 301 I Rogers, AR 72758 KATIE M. EAVES Trust & Estate Planning 479-695-6059 keaves@fridayfirm.com www.fridayfirm.com/attorney/keaves
- 22. www.FridayFirm.com www.FridayFirm.com 400 West Capitol Ave. Suite 2000 I Little Rock, AR 72201 3425 North Futrall Dr. Suite 103 I Fayetteville, AR 72703 3350 South Pinnacle Hills Pkwy. Suite 301 I Rogers, AR 72758 KATIE WATSON BINGHAM Trust & Estate Planning 501-370-3334 kwatson@fridayfirm.com www.fridayfirm.com/attorney/kwatson
Editor's Notes
- KE
- KE Summary of the AUDTA: Compared to a non-directed trust in which a trustee holds all power over the trust, a directed trust subject to this act provides for more aggregate fiduciary duties owed to a beneficiary. Under the AUDTA, a trust director has the same default and mandatory fiduciary duties as a trustee in a like position and under similar circumstances (Ark. Code Ann. § 28-76-108). Under the AUDTA, a beneficiary’s main recourse for misconduct by a trust director is an action against the director for breach of the director’s fiduciary duty to the beneficiary (Ark. Code Ann. § 28-76-113). Beneficiary also has recourse against a directed trustee, but only to a certain extent. Key Differences from Uniform Directed Trust Act and Arkansas Uniform Directed Trust Act: Principal place of administration: Ark. Code Ann. § 28-76-103: “Without precluding other means to establish a sufficient connection with the designated jurisdiction in a directed trust, terms of the trust which designate the principal place of administration of the trust are valid and controlling if: (1) a trustee’s principal place of business is located in or a trustee is a resident of the designated jurisdiction; or (2) a trust director’s principal place of business is located in or a trust director is a resident of the designated jurisdiction; or (3) all or part of the administration occurs in the designated jurisdiction.” Duty to provide information to trust director or trustee: Ark. Code Ann. § 28-76-110(c): “A trustee that acts in reliance on information provided by a trust director is not liable for a breach of trust to the extent the breach resulted from the reliance.” “…unless by so acting the trustee engages in willful misconduct.” Ark. Code Ann. § 28-76-110(d): “A trust director that acts in reliance on information provided by a trustee or another trust director is not liable for a breach of trust to the extent the breach resulted from the reliance.” “…unless by so acting the trust director engages in willful misconduct.” Duty and liability of directed trustee: See next slide
- KE
- KB
- KE Tenancy by the entirety is a unique form of property ownership between husband and wife, whereby each owns the undivided of the whole of such property. They are seen as one person. Because of this characteristic, neither spouse can dispose of any part of the property held as TBE without the consent or joinder of the other spouse. It is also a form of survivorship – so, the survivor is entitled to the entirety of the property. Why does this matter? Because creditors of an individual spouse may not attach the interest of such spouse in assets held as TBE. That is why you see commercial loan documents with a personal guaranty on both spouses – in the event of default, the creditor may attack TBE property. This is especially important for those individuals with high malpractice potential – doctors and lawyers – such that creditors cannot attack any personally owned property held as TBE. In AR – it does not matter if the property was TBE immediately prior to distributing the property into the trust. In Arkansas, you can distinguish on different Schedules of the trust the separate property of each spouse, so, should the married couple divorce, the property may return to being “separate property” for divorce purposes. Essentially, the entire purpose of the new legislation is to allow married persons in Arkansas that hold property within a revocable trust receive expanded creditor protection on their assets, regardless of whether those assets were separate prior to the transfer to the trust, but retain the separate “flavor” should those individuals divorce.
- KB
- KB
- KB
- KB
- KE If you don’t file the correct return with the correct accounting year, you will be deemed to have failed to file the return. Make sure you get a copy of the entity’s approval exemption letter from the IRS – if the client does not have it, you can ask the IRS for an additional copy. The e-postcard is incredibly easy to prepare. You have to have an online account with the IRS, but the “return” simply asks if the entity information has changed and whether the entity made more than $50,000 in total gross receipts during the tax year. Churches are exempt from filing, except the 990-T. 1st amendment privilege. However, many churches file for transparency. **Failure to file for three consecutive years results in an automatic revocation of your tax exempt status.** This is AUTOMATIC – meaning, the computer automatically revokes your status and you cannot get it back until you file a 1023 all over again.
- KE Note: the Schedule A is not required for those organizations that only file a 990-N. Technically, those organizations still are required to meet the public support test, but filing Schedule A is not required. Unless the entity is a church, school, or hospital, you will likely select that the charitable organization that “normally receives a substantial part of its support from a governmental unit or from the general public under I.R.C. § 170(b)(1)(A)(vi).” This is also known as a § 509(a)(1) public charity. Note: “support” does not include exempt function income (income derived in the activity that is not an unrelated trade or business). Definition of the “general public” = a donor that is unrelated to the organization AND such donor has contributed less than 2% of the TOTAL gross support amount during the donor’s life. Note that the family attribution rules come into play here. Example: Organization has $600,000 of gross income for 2019. My husband gives $10,000, I give $15,000, my mom gives $50,000, and my dad gives $100,000. We, as a conjunctive group, are no longer considered members of the “general public” and we cannot be included in the 33 1/3% calculation. **This is super difficult for entities to understand when they are giving you all of their receipts and information for the public support test. The 10% facts and circumstances test requires at least 10% of the gross receipts come from the general public + the entity must show in Schedule O that it meets a majority of the requirements with specific facts and circumstances. You may also have entities that fall under § 509(a)(2): “Organization that normally receives more than 33 1/3% of its support from contributions, membership fees, and gross receipts from activities related to its exempt functions and no more than 33 1/3% of its support from gross investment income and unrelated business taxable income.” These entities fill out Part III of Schedule A – a different public support test. If you are a 509(a)(1) charity and you don’t meet the required public support test, but you do meet the 509(a)(2) public support test, you can change the status on the 990 and fill out the correct public support test calculation. Note: entities described in 501(e), (f), (j), (k), and (n) and nonexempt charitable trusts not treated as private foundations also need to file Schedule A. Please also note that we are not diving into the Type I, II, and III Supporting Organizations here, but they are on Schedule A as well.
- KB
- KB
- KB
- KE Example: Client John Smith and wife Betty Smith create separate IDGTs for their 3 children. John and Betty gift 99% of their interest in their previously wholly owned - XYZ Business in 33% equal shares to each trust. Because the trust is an IDGT – the K1s generated from the XYZ Business are actually reported on John and Betty’s 1040 income tax return – and, therefore, PAID by John and Betty. The K1s will designate the three IDGTs as the “owners” of the 33%s, but the actual income will flow through to John and Betty. HOWEVER: two items to consider: If John and Betty decide XYZ Business has appreciated in value so much that the income generated is greater than they anticipated, the trustee (and children, as beneficiaries), may be willing to, out of the goodness of their hearts, pay the tax directly to the IRS (NOT to John and Betty – we have a gift). They can send in a check separately with a voucher for John and Betty’s 1040 with their portion of income tax. If John and Betty decide that the IDGTs are doing really well and they no longer want to ever pay the income tax again, they can turn off the grantor trust status altogether. CAUTION: this may be permanent. Be careful to review this with an estate tax lawyer before you consider this an option.
- KE
- KB
- KE&KB