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Problem AreasProblem Areasin in
Trust Trust AdministrationAdministrationJim LampingJim Lamping
The Law Office of James P. LampingThe Law Office of James P. LampingSan Francisco – Marin County San Francisco – Marin County
(415) 992-3100(415) [email protected]@jimlamping.com
Topic One:Topic One:Stale Stale TrustsTrusts
Understand the Formula
Identify the SubtrustsIdentify the Subtrusts Identify the FormulaIdentify the Formula What is the Method of Funding What is the Method of Funding
Assets?Assets? Is There a GST Division?Is There a GST Division?
Two Trust DivisionTwo Trust Division
Administrative Trust
Survivor’sTrust
CreditTrust
Three Trust DivisionThree Trust Division
AdministrativeTrust
Survivor’sTrust
CreditTrust
MaritalTrust
Identifying the Identifying the Formula in a Formula in a
Three Trust DivisionThree Trust Division
PecuniaryPecuniaryFractionalFractional
Pecuniary FormulasPecuniary Formulas
Pecuniary Marital – Residual Credit (3 Pecuniary Marital – Residual Credit (3 Trust)Trust)
Pecuniary Credit – Residual Marital (3 Pecuniary Credit – Residual Marital (3 Trust)Trust)
Pecuniary Survivor – Residual Credit (2 Pecuniary Survivor – Residual Credit (2 Trust)Trust)
Pecuniary Credit – Residual Survivor (2 Pecuniary Credit – Residual Survivor (2 Trust)Trust)
Methods of Funding Methods of Funding Pecuniary Amount with Pecuniary Amount with
Assets in KindAssets in Kind Date of DistributionDate of Distribution Date of DeathDate of Death Default is Date of DistributionDefault is Date of Distribution If Date of Death, “Fairly If Date of Death, “Fairly
Representative Funding”Representative Funding” Probate Code Probate Code § 21118
Methods of Funding Methods of Funding for Fractional Share for Fractional Share
FormulaFormula
Strict FractionalStrict FractionalFractional Pick and Fractional Pick and ChooseChoose
Which Trusts Which Trusts Receive Receive
Appreciation or Appreciation or Depreciation?Depreciation?
Kenan GainKenan Gain
Pecuniary BequestPecuniary Bequest Date of Distribution FundingDate of Distribution Funding Satisfied in Kind with Satisfied in Kind with
Appreciated AssetsAppreciated Assets
The Payment The Payment of Interest on of Interest on
Pecuniary Pecuniary GiftsGifts
Payment of Interest on Payment of Interest on Pecuniary AmountPecuniary Amount
Probate Code Probate Code § 12003 12003 Does the Document Waive Does the Document Waive
Interest? Interest? Rate is Three Percent Less Than Rate is Three Percent Less Than
the Legal Rate (Probate Code the Legal Rate (Probate Code § 12001)12001)
10% - 3% = 7%10% - 3% = 7% GST TrustsGST Trusts
Non Pro Rata Non Pro Rata Allocation of Allocation of Community Community
PropertyProperty
HypotheticalHypothetical
Allocation of trust assets between Allocation of trust assets between the credit and survivor's trusts upon the credit and survivor's trusts upon the death of the first spousethe death of the first spouse
Blackacre has a value of $1 millionBlackacre has a value of $1 million Whiteacre has a value of $1 millionWhiteacre has a value of $1 million IRA (a non-trust asset) has a value of IRA (a non-trust asset) has a value of
$1 million$1 million
Pro Rata AllocationPro Rata Allocation
Administrative Trust
$2 millionBlackacre ($1 million)Whiteacre ($1 million)
Survivor’s Trust$1 million
50% of Blackacre ($500,000)50% of Whiteacre ($500,000)
Credit Trust$1 million
50% of Blackacre ($500,000)50% of Whiteacre ($500,000)
Non Pro Rata AllocationNon Pro Rata Allocation
Administrative Trust
$2 millionBlackacre ($1 million)Whiteacre ($1 million)
Survivor’s Trust$1 million
100% of Blackacre ($1,000,000)
Credit Trust$1 million
100% of Whiteacre ($1,000,000)
Determining Determining the the
TargetsTargets
HypotheticalHypothetical
Husband Dies in 2002Husband Dies in 2002 $1 Million Applicable $1 Million Applicable
Exclusion AmountExclusion Amount $2 Million of Community $2 Million of Community
Property Assets (Date of First Property Assets (Date of First Death)Death)
$12 Million Current Value of $12 Million Current Value of Those AssetsThose Assets
Date of DeathDate of Death
Community Property$2 million
Survivor’s Share$1 million
Deceased Spouse’s Share
$1 million
Allocation of Current Allocation of Current ValueValue
Community Property$12 million
Survivor’s Share$6 million
Deceased Spouse’s Share
$6 million
ExamplesExamplesof Various of Various FormulaeFormulae
Assumptions for Assumptions for ExamplesExamples
First Death in 2002First Death in 2002 $1 Million Applicable Exclusion Amount$1 Million Applicable Exclusion Amount The Trust Held $6 Million at Date of DeathThe Trust Held $6 Million at Date of Death The Current Value of Trust Assets is $12 The Current Value of Trust Assets is $12
MillionMillion All Community PropertyAll Community Property The Surviving Spouse Used Only the Income The Surviving Spouse Used Only the Income
Since the Date of DeathSince the Date of Death The Document Waives Interest on Pecuniary The Document Waives Interest on Pecuniary
BequestsBequests
Values as of the First DeathValues as of the First Death
AdministrativeTrust
$6 Million
Survivor’sTrust
$3 million
CreditTrust
$1 million
MaritalTrust
$2 Million
Pecuniary Marital – Pecuniary Marital – Residual CreditResidual Credit
Date of DistributionDate of DistributionAdministrative
Trust$12 Million
Survivor’sTrust
$6 million
CreditTrust
$4 million
MaritalTrust
$2 million
Pecuniary Credit – Residual Pecuniary Credit – Residual MaritalMarital
Date of DistributionDate of DistributionAdministrative
Trust$12 Million
Survivor’sTrust
$6 million
CreditTrust
$1 million
MaritalTrust
$5 Million
Fractional Share orFractional Share orFairly Representative Fairly Representative
AdministrativeTrust
$12 Million
Survivor’sTrust
$6 million
CreditTrust
$2 million
MaritalTrust
$4 Million
Assumptions for Assumptions for ExamplesExamples
First Death in 2002First Death in 2002 $1 Million Applicable Exclusion Amount$1 Million Applicable Exclusion Amount The Trust Held $1.5 Million at Date of DeathThe Trust Held $1.5 Million at Date of Death The Current Value of Trust Assets is $10 The Current Value of Trust Assets is $10
MillionMillion All Community PropertyAll Community Property The Surviving Spouse Used Only the Income The Surviving Spouse Used Only the Income
Since the Date of DeathSince the Date of Death The Document Waives Interest on Pecuniary The Document Waives Interest on Pecuniary
BequestsBequests
Values as of the First DeathValues as of the First Death
AdministrativeTrust
$1.5 Million
Survivor’sTrust
$750,000
CreditTrust
$750,000
MaritalTrust
$0
Pecuniary Credit – Residual Pecuniary Credit – Residual MaritalMarital
Date of DistributionDate of DistributionAdministrative
Trust$10 Million
Survivor’sTrust
$5 million
CreditTrust
$5 million$750,000?
MaritalTrust
Nothing or$4,250,000 Million?
What What About About
DepreciationDepreciation??
Consider Consider Terminating Terminating
the Trustthe Trust
California Trust California Trust Administration Administration
(CEB) (CEB) Chapter 14AChapter 14A
Topic Two:Topic Two:The The 645645
ElectionElection
History:History:What Is It What Is It and Why Is and Why Is
It?It?
The Trust is Taxed as Part of The Trust is Taxed as Part of Decedent’s Probate Estate Decedent’s Probate Estate for Income Tax Purposes, for Income Tax Purposes,
Even if No ProbateEven if No Probate
Qualified Qualified Revocable Revocable
TrustTrust
Who Makes Who Makes the the
Election?Election?
FiscalFiscalYear Year EndEnd
Advantages of Fiscal Advantages of Fiscal Year:Year:
Timing Income and Timing Income and Expenses;Expenses;
Maybe Fewer Tax Maybe Fewer Tax ReturnsReturns
Deadline:Deadline:First Timely Filed First Timely Filed
Return,Return,1515thth Day of Fourth Month Day of Fourth Month
After End of Tax YearAfter End of Tax Year(Just Like April 15)(Just Like April 15)
P.S. Don’t Miss P.S. Don’t Miss the the
Filing DeadlineFiling Deadline
Duration:Duration:Two Years or Two Years or
Six Months FromSix Months FromClosing LetterClosing Letter
S Corporation S Corporation Stock Holding Stock Holding
PeriodPeriod
Kenan GainKenan GainOffset Offset
by Lossesby Losses
The 645 The 645 Election Election Means a Means a
Complex TrustComplex Trust
SeparateSeparateShare Share RuleRule
The Separate Share RuleThe Separate Share Rule
$200,000Trust Income
Beneficiary A50 Percent($100,000)
Beneficiary B50 Percent($100,000)
Topic Three:Topic Three:The Surviving The Surviving
Spouse’s Purchase Spouse’s Purchase of an Interest in the of an Interest in the
Residence from Residence from Credit TrustCredit Trust
The Family Residence The Family Residence ProblemProblem
Administrative Trust$1 Million Home
Survivor’s Trust50 Percent($500,000)
Credit Trust50 Percent($500,000)
Why This is BadWhy This is Bad
No Section 121 ExclusionNo Section 121 Exclusion No Step Up in Basis at Second No Step Up in Basis at Second
DeathDeath No Home Mortgage Interest No Home Mortgage Interest
DeductionDeduction The Emotional Reaction The Emotional Reaction It’s Kind of a MessIt’s Kind of a Mess
The Family Residence The Family Residence ProblemProblem
Administrative Trust$1 Million Home
Survivor’s Trust$1 Million Home Minus
$500,000 Debt to Credit Trust
Credit Trust$500,000 Debt From Survivor
FiduciaryFiduciaryDutiesDuties
Income Tax Income Tax ConsequencesConsequences
Capital Gains on BuybackCapital Gains on Buyback Imputed Interest?Imputed Interest? Phantom Income?Phantom Income? Social Security and AMT? Social Security and AMT? Does the Surviving Spouse Does the Surviving Spouse
Itemize?Itemize?
Drafting Drafting to Allowto AllowBuybackBuyback
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we advise you that any tax advice contained in this
document cannot be used for the purpose of (i) avoiding federal tax penalties or (ii) promoting,
marketing, or recommending to another party any transaction or matter addressed in this document.