joint revocable trusts update

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  1. 1. Melinda Merk, Esq. Regional Trust Advisor SunTrust Bank Private Wealth Management Vienna, VA Logan Helman Winn, Esq. Family Wealth Strategist GenSpring Family Offices Chevy Chase, MD Jeannette Roegge, Esq. Counsel Baker Hostetler Washington, DC
  2. 2. 2 What are joint revocable trusts (JRTs)? Potential planning benefits and pitfalls Drafting considerations Post-mortem administrative issues
  3. 3. 3 Single revocable trust to which a married couple transfers their assets for asset management, probate avoidance, and tax planning purposes Most commonly used in community property states to preserve the community property character of the couples assets Appealing to couples in non-community property states who are reluctant to sever/divide their jointly owned assets between separate revocable trusts for each spouse
  4. 4. 4 Avoids probate of assets owned by the decedent/grantor (provided trust is properly funded during grantors lifetime) Including ancillary probate of assets owned outside of the grantors state of domicile Provides for ongoing management of assets in the event of incapacity during the grantors lifetime Provides for the disposition of assets at the grantors death, including any ongoing trusts for the benefit of the grantors spouse, children and/or other beneficiaries
  5. 5. 5 Under current law, each spouse has a federal estate tax exemption of up to $5 million (different exemption amount may apply for state estate tax purposes) In non-community property states, generally one-half of the joint spousal property (JSP) is included in the deceased spouses estate Tracing rules apply if surviving spouse is a non-US citizen Under the typical marital estate plan, up to $5 million of the deceased spouses taxable estate is directed to a credit shelter trust (CST) to which the deceased spouses estate tax exemption is allocated any excess assets are directed to the marital share Results in zero estate tax at the first spouses death CST is generally not includible in the surviving spouses estate Only assets titled in the deceased spouses sole name or revocable trust are generally available to fund the CST JSP passes automatically to the surviving spouse by right of survivorship Surviving spouse can disclaim the deceased spouses one-half interest in any JSP by filing a qualified disclaimer within 9 months of the deceased spouses death If all or most of the couples assets are titled jointly, the CST will be underfunded at the first spouses death, and 100% of the couples combined assets will be includible/taxable in the surviving spouses estate The new concept of portability of exemption between spouses, enacted under the 2010 Tax Act, may alleviate the bunching problem - but the mechanics of this election can be problematic and probability is set to expire at the end of 2012
  6. 6. 6 Traditionally, for couples with combined assets in excess of the estate tax exemption, some or all of the JSP is divided and transferred to each spouses separate revocable trust, to more fully utilize each spouses estate tax exemption Both spouses are typically named as co-trustees of each separate revocable trust In VA and MD, tenancy by entirety protection can generally be maintained, even if not equally divided between each spouses revocable trust
  7. 7. 7 Disclaimer Trust Qualified disclaimer of any JSP must be filed within 9 months of deceased spouses date of death Surviving spouse cannot accept any benefits of the disclaimed property, and cannot have a power of appointment over its disposition No guarantee that the surviving spouse will disclaim Joint Revocable Trust
  8. 8. 8 No separate shares are maintained during spouses joint lifetime - each spouse is presumed to own one-half of the trust assets Both spouses are co-grantors and co-trustees of the trust Trust can be amended by the couples mutual consent Each spouse retains the right to income and principal from the trust as the spouses jointly direct during their lifetime Each spouse typically retains a unilateral right to revoke and acquire one- half of the trust Results in a completed gift of one-half of any separately owned property upon transfer to the trust Generally qualifies for marital deduction under IRC Section 2523(e) (life estate with power of appointment in donee spouse) If one spouse partially revokes and withdraws less than one-half of the trust assets, the trustee is directed to distribute the same value to the other spouse Maintains each spouses share at the same percentage (50%)
  9. 9. 9 Scenario #1: No Tax Planning First spouse to die retains a general power of appointment over one-half of the trust assets; in default of such exercise, entire trust continues for surviving spouse Surviving spouse has right to revoke/amend over entire trust Results in a stepped-up basis of of the trust assets at the first spouses death 100% of trust assets are includible in the surviving spouses estate
  10. 10. 10 Scenario #2: Disclaimer Trust First spouse to die retains a general power of appointment over one-half of the trust assets; in default of such exercise, entire trust continues for surviving spouse, but he/she can make a qualified disclaimer of up to one-half of the trust assets to Disclaimer Trust Surviving spouse has not right to revoke, amend or appoint over the Disclaimer Trust Surviving spouses interest in Disclaimer Trust is limited to an ascertainable standard Results in stepped-up basis of of the trust assets at the first spouses death Disclaimer Trust is not includible in surviving spouses estate
  11. 11. 11 Scenario #3: Equalizing Joint Trust First spouse to die retains a general power of appointment over one-half of the trust assets; in default of such exercise, the decedents one-half share of the trust assets (up to his/her remaining exemption amount) is directed to CST Surviving spouse has not right to revoke or amend CST Surviving spouses interest in the CST is limited to an ascertainable standard Generally, results in stepped-up basis of of the trust assets at the first spouses death Unless the grantor who contributed the lesser amount of property dies within 1 year of funding [IRC Section 1014(e)] CST is not includible in surviving spouses estate
  12. 12. 12 Scenario #4: Fully Funded CST First spouse to die retains a general power of appointment over 100% of the trust assets Results in 100% inclusion of the trust assets in the deceased spouses estate Assets up to the deceased spouses remaining estate tax exemption are allocated by formula to a CST Surviving spouse has not right to revoke or amend CST Surviving spouses interest in the CST is limited to an ascertainable standard Same approach could be used using two separate revocable trusts
  13. 13. 13 Scenario #4: Fully Funded CST (contd) IRS has denied full basis adjustment under IRC Section 1014(e), based on position that the deceased spouse acquired the survivors contribution by gift at his/her death, and the survivor then simultaneously reacquired such property from the decedent See PLRs 2001-01-021 and 2002-10-051 Stepped-up basis is only available for the trust assets allocable to deceased spouses contribution to the trust Hard to determine if separate property/unequal contributions are made to the trust, and separate shares are not maintained 1st spouse to die is considered the transferor of 100% of the trust assets as a result, the above rulings held that CST assets were not includible in surviving spouses estate
  14. 14. 14 Separate shares/schedules are maintained for joint property and for any separate property transferred to the trust Both spouses are co-grantors and co-trustees of the trust Trust can be amended by the couples mutual consent Each spouse retains the right to income and principal from the joint property, as well as from his or her share of separate property Each spouse typically retains a unilateral right to revoke and acquire one-half of the joint property, as well as her or her respective share of separate property Renders any interspousal gift of separate property incomplete for gift tax purposes, so long as separate shares are maintained
  15. 15. 15 JRT is typically divided into Survivors Trust and Exemption Trust Survivors Trust consists of the surviving spouses one-half interest in the joint property, as well as his or her separate property Exemption Trust consists of the deceased spouses one-half interest in the joint property, as well as his or her separate property up to the decedents remaining exemption amount Any amount in excess of the exemption amount is directed to the Survivors (Marital) Trust Either entire trust becomes irrevocable, or surviving spouse retains right to revoke/amend Survivors Trust only Typical credit shelter and marital trust provisions apply to each respective share
  16. 16. 16 Why do clients (and attorneys) like JRTs? Married couples generally believe their assets are owned by both spouses (they may object to dividing them to fund two separate revocable trusts) Suggestion: make the spouses co-trustees of the two separate revocable trusts Preservation of community property under applicable state law (important for step-up in basis issues) Some practitioners believe that a JRT is simpler to draft and administer because its easier to contribute assets (dont have to split assets and then contribute to fund two separate revocable trusts) Issue: only true if there is no estate tax planning, because JRTs require detailed and careful accountings of each spouses contributions to avoid adverse tax consequences
  17. 17. 17 When to use a JRT? Community Property Clients w/Existing Joint Trusts Clients have an existing JRT from a community property state Current Community Property States: Alaska (optional), Arizona

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