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I have a trust document where the unified credit trust is funded with the maximum amount as to which there will be no federal estate tax. The marital trust receives the remainder. A “reverse pecuniary formula bequest”.
The clause for the credit trust states that the trustee may satisfy the gift in cash or in kind with assets valued at their finally established net federal estate tax value. There is nothing in the marital trust clause addressing the funding values.
There is no wording regarding allocating assets fairly representative of appreciation or depreciation at the time of distribution.
1. If the allocation doesn’t fairly represent appreciation or depreciation do I have to worry about losing the marital deduction or is that a factor only if the marital trust is the pecuniary beneficiary?
2. If question 1 is ok and the allocation doesn’t fairly represent appreciation and depreciation, is it only distributions to the credit trust (the pecuniary beneficiary) that would result in gain or loss on distribution?
3. If the answer to the first part of question 1 is yes, and appreciation and depreciation is fairly allocated, do we still have a problem with the marital deduction because the document doesn’t address the issue? Rev Proc 64-19 seems to imply that it needs to be stated in the document or imposed by state law. Does California state law require this? (My confusion, in part, stems from not understanding if and how the rule applies when the the marital trust is the residual beneficiary).
4. If the allocation is fairly representative of appreciation and depreciation it is my understanding that there is no gain or loss recognized on the distribution. I’m right on that aren’t I?
Thanks so much for your help and input.
Richard Cassidy
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| I am not going to completely answer your question because there are some legal issues that I'm not strictly clear on. I had a situation where husband died when the exemption equivalent was $1 million. The gross estate was >$2 million but no taxes were due because of liabilities and expenses. The 706 was delinquent and when the funding was done, the estate had gone up in value by ~400k. Because we had a pecuniary Bypass trust, the appreciation went to the Survivor's trust and was taxable. Presumably, if the Bypass trust was not pecuniary, the trust would have been funded with 1.4 million and the trust would have been taxable.
Mary Kay Foss
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Fortunately, Probate Code Section 21118 appears to bail out your client (and the drafter):
21118. (a) If an instrument authorizes a fiduciary to satisfy a
pecuniary gift wholly or partly by distribution of property other
than money, property selected for that purpose shall be valued at its
fair market value on the date of distribution, unless the instrument
expressly provides otherwise. If the instrument permits the
fiduciary to value the property selected for distribution as of a
date other than the date of distribution, then, unless the instrument
expressly provides otherwise, the property selected by the fiduciary
for that purpose shall fairly reflect net appreciation and
depreciation (occurring between the valuation date and the date of
distribution) in all of the assets from which the distribution could
have been made.
(b) As used in this section, "pecuniary gift" means a transfer of
property made in an instrument that either is expressly stated as a
fixed dollar amount or is a dollar amount determinable by the
provisions of the instrument.
Fyi for everyone, there are lots of useful provisions in Divisions 1 and 11 of the Probate Code for those administering estate planning documents. It helps to scan both every so often. You never know when one will come in handy, like now.
This link (http://files.ali-aba.org/old/aliaba/aliaba_pdf/bk36-ch16.pdf) talks about your other questions.
John Jacobson
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Mary Kay, I guess the $400,000 appreciation in your example might have been split up differently depending not necessarily on which was the pecuniary beneficiary but on the actual funding formula. True Worth, or Fairly Representative right?
John, That probate code section was just what I was looking for and the article at the link is very helpful.
Its interesting that so much of federal trust and estate tax is dependent on state law. I need to get better at researching it.
Thank you both for taking the time to reply.
Richard Cassidy
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I was at a CalSociety estate conference many years ago where Bill Ludlum (Sp?) from the examiner's office spoke on the subject. He said it his practice to see if a bypass trust was funded upon the death of the surviving settlor. He said if considerable time had passed between the two deaths, then he better see a funded trust, or the trustee better have a good excuse of why it wasn't funded. He said he would give serious consideration to adding assets that should have been sheltered, back into the taxable estate.
Bottom line is don't sit on your hands and expect the trustee to do this. Besides, there are additional billable fees to be earned by proposing what is to be allocated.
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