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Yes! I'll Order That Trust Fully Loaded: a Report of the ACTEC Task Force On YES, I'LL ORDER THAT TRUST FULLY LOADED: A REPORT OF THE ACTEC TASK FORCE ON TRUST DRAFTING1 MICKEY R. DAVIS, Houston DAVIS & WILLMS, PLLC State Bar of Texas 41ST ANNUAL ADVANCED ESTATE PLANNING & PROBATE June 7-9, 2017 Houston CHAPTER 35 1 Copyright Mickey R. Davis, 2017. This outline is based on an outline entitled "Yes, I’ll Order that Trust Fully Loaded" by Jonathan Blattmachr, Mickey Davis, Steve Gorin, and Steve Trytten, presented at the 51st Annual Heckerling Estate Planning Institute (2017). Used with permission. MICKEY R. DAVIS Davis & Willms, PLLC Board Certified - Estate Planning and Probate Law Texas Board of Legal Specialization 3555 Timmons Lane, Suite 1250 Houston, Texas 77027 Phone (281) 786-4500 Fax (281) 742-2600 [email protected] EDUCATION: · University of Texas School of Law, J.D. with High Honors, 1982. Chancellors; Order of the Coif; Associate Editor, TEXAS LAW REVIEW; Member, Board of Advocates · University of Arizona, B.B.A. with High Distinction, 1979. Beta Alpha Psi; Beta Gamma Sigma OTHER QUALIFICATIONS: · Fellow, The American College of Trust and Estate Counsel (ACTEC), (Regent, 2017- ; Member: Business Planning, Estate & Gift Tax, and Fiduciary Income Tax Committees; Chair: Estate & Gift Tax Committee, 2013-2016) · Board Certified, Estate Planning and Probate Law, Texas Board of Legal Specialization · Adjunct Professor, University of Houston School of Law, 1988–present, teaching Income Taxation of Trusts and Estates and Postmortem Estate Planning · Best Lawyers in America, Trusts and Estates; Texas Super Lawyer, Texas Lawyer and Super Lawyers Magazine · Named Best Lawyers' 2013 Houston Trusts and Estates "Lawyer of the Year" · Named by Texas Lawyer as a 2013 "Top Notch Lawyer" for Trusts and Estates · Admitted to Practice: State Bar of Texas; Federal District Court for the Southern District of Texas; United States Tax Court · Certified Public Accountant, Texas, Certified 1983 PROFESSIONAL ACTIVITIES: · Member of the Board of Directors, ACTEC Foundation (Chair: Grants Committee) · Editor, ACTEC LAW JOURNAL (2012-2013) · Member, State Bar of Texas (Sections of Real Estate, Probate and Trust Law; Tax); Houston Bar Association (Probate, Trusts and Estates Section); The College of the State Bar of Texas; Houston Estate and Financial Forum · Member, Texas Society of Certified Public Accountants, Houston Chapter · Estate Planning and Probate Law Exam Commission, Texas Board of Legal Specialization (Member 1993-2003, Chair 2000- 2003) RECENT SPEECHES AND PUBLICATIONS: · Author: DAVIS'S TEXAS ESTATE PLANNING FORMS (O'Connor's, 2017, updated annually) · Co-Author: Streng & Davis, RETIREMENT PLANNING–TAX AND FINANCIAL STRATEGIES (2nd ed., Warren, Gorham & Lamont, 2001, updated annually) · Co-Author/Panelist: It's 1:45 P.M. in the Garden of Good and Evil: Now How Do We Deal with Value in Estate and Business Planning and Estate and Trust Administration? State Bar of Texas 23rd Annual Advanced Estate Planning Strategies Course, 2017 · Co-Author/Co-Presenter: All About That Basis: How Income Taxes Have Reshaped Estate Planning, Estate Planning Council of Saint Louis, 2017; Philadelphia Estate Planning Council, 2016; 42nd Annual Notre Dame Tax and Estate Planning Institute, 2016; ALI-CLE, Planning Techniques for Large Estates, 2016, 2017 · Co-Author/Co-Presenter: Planning for Married Clients: Charting a Path with Portability and the Marital Deduction, 42nd Annual Notre Dame Tax and Estate Planning Institute, 2016; ALI-CLE, Planning Techniques for Large Estates, 2016, 2017 · Co-Author/Panelist: Yes, I'll Order That Trust "Fully Loaded", University of Miami 51st Annual Heckerling Institute on Estate Planning, 2017 · Co-Author/Co-Presenter: Maneuvering Among the Mazes and Minefields of Modern Estate Planning: Helping Clients Plan in a High Exemption World, Dallas Jewish Community Foundation 21st Annual Professional Advisors Seminar, 2016 · Co-Author/Panelist: Understanding the New Section 2704(b) Proposed Regulations: Impact on Tax Planning for Family Business Entities, ACTEC-ALI CLE Telephone Seminar/Audio Webcast, 2016 · Author/Speaker: Fiduciary Income Taxation and Subchapter J, American Bar Association Section of Real Property, Trust & Estate Law, Skills Training for Estate Planners – Fundamentals Course, 2015-2016 · Co-Author/Speaker: Tax Issues in Fiduciary Litigation, State Bar of Texas 40th Annual Advanced Estate Planning and Probate Course, 2016 · Co-Author/Speaker: Income Taxation of Trusts and Estates, Florida Fellows Institute of The American College of Trust and Estate Counsel, 2016 · Panelist: Ground Control to Major Tom: Clients Giving up Control, Retaining Control, and Avoiding Being Improperly Controlled, State Bar of Texas 22nd Annual Advanced Estate Planning Strategies Course, 2016 · Author/Speaker: If I Obergefell in Love with You: Same-Sex Marriage and its Impact on Estate Planning in Texas, Houston Business and Estate Planning Council, 2016 Yes, I'll Order That Trust Fully Loaded Chapter 35 TABLE OF CONTENTS 1. OVERVIEW ........................................................................................................................................................... 1 2. FLEXIBILITY TO DISTRIBUTE INCOME TO CHARITY ................................................................................ 3 3. FLEXIBILITY TO ALLOCATE ITEMS OF INCOME AND GAIN BETWEEN TRUST AND BENEFICIARY ............................................................................................................................................. 7 4. AVOIDING APPLICATION OF THE 2% FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS ..................................................................................................................................................... 11 5. MINIMIZING EXPOSURE TO THE 3.8% NET INVESTMENT INCOME TAX ............................................ 12 6. GRANTOR TRUST STATUS .............................................................................................................................. 13 7. FLEXIBILITY TO QUALIFY AS ELIGIBLE TRUST TO HOLD S CORPORATION SHARES .................... 20 8. DYNASTY TRUSTS FORMED AT DEATH – POUR OVER FROM REVOCABLE TRUST ........................ 25 9. CONDUIT SEE-THROUGH TRUSTS ................................................................................................................ 26 10. ACCUMULATION SEE-THROUGH TRUSTS .................................................................................................. 34 11. APPORTIONMENT OF EXPENSES AND DEATH TAXES ON RETIREMENT PLANS .............................. 48 12. FLEXIBILITY TO MANAGE STATE FIDUCIARY INCOME TAX ................................................................ 49 13. MANAGING WHETHER DYNASTY TRUST IS SUBJECT TO ESTATE VS. GST TAX AT BENEFICIARY'S DEATH ................................................................................................................................... 52 14. STATE-SPECIFIC DRAFTING CHALLENGES: CALIFORNIA PROP. 13 AND TEXAS TAX CODE SECTION 11.13 .................................................................................................................................................... 55 15. DECANTING AND TRUST PROTECTOR POWERS TO MODIFY ............................................................... 57 16. UNITRUST DISTRIBUTIONS TO INDIVIDUAL BENEFICIARIES............................................................... 65 17. SAMPLE INTER VIVOS DYNASTY TRUST ................................................................................................... 69 i Yes, I'll Order That Trust Fully Loaded Chapter 35 YES, I’LL ORDER THAT TRUST FULLY LOADED 1. OVERVIEW Trusts that last for the lifetime of children or other descendants (sometimes referred to as "dynasty" trusts) are an important element in many estate planning strategies because they have the potential to accomplish several different tax and non-tax objectives: • Multi-generational transfer tax efficiency is fundamental to the design of a dynasty trust and, in some cases, the choice of trust situs. • Protection of trust assets from the beneficiary's creditors can be an important non-tax objective for certain clients. • Income tax efficiency is becoming more and more important as rates increase (including the 3.8% net investment income tax) and estate planners pay more attention to cost basis. • "Stretch-out" of retirement plans2 is another important objective, since more and more clients have significant balances in retirement plans.3 • State-specific objectives may also come into play. For example, the design of a trust may determine whether California property tax is reassessed, or whether the trust is subject to state income tax in one ore more jurisdictions other than the jurisdiction of the grantor's residence. Planning and drafting to accomplish any one of these objectives may be difficult enough, but for the client who "wants it all," planning and drafting to accomplish multiple objectives can be particularly challenging. Task Force – Materials as Practical Guide. A Task Force was formed by two substantive committees of the American College of Trust and Estate Counsel ("ACTEC").4 The charge to the Task Force was to compile sample forms or sample language illustrating how a dynasty trust can be drafted to accomplish different possible objectives, and to address the coordination that may be needed when drafting to accomplish multiple objectives. The resulting materials run well over 300 pages, some of which is reproduced in this outline. These materials
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