Inheritance Trust Implementation and Planning

INHERITANCE TRUST IMPLEMENTATION AND PLANNING

Thursday, July 16, 2020 12:30-1:00 P.M. EDT (30 minutes)

Kenneth J. Crotty, J.D., LL.M. [email protected] Assure as best possible that inheritances will be received under protective trusts where the Client may be the sole Trustee.

Child is your client and would like for her inheritance from Mom and Dad to go into a trust for her health, education, and maintenance (and for her descendants). She can be the Trustee and have a limited power of appointment.

It will be protected from creditors, loss in divorce, and federal estate tax.

It may be difficult or impossible to have Mom and Dad properly amend their planning documents to facilitate this.

Why not have Child establish a free standing Inheritance Trust and then Mom and Dad can simply amend their will or trust to name the inheritance trust instead of Child as beneficiary.

During both Life Insurance Trust spouse’s First Dying Spouse’s Surviving Spouse’s (Irrevocable and Owns Life Insurance on First lifetimes: Dying Spouse) Revocable Trust Revocable Trust

Upon first Remaining death in 2020: $11,580,000* Assets

During surviving spouse’s Family QTIP Non- Held for Surviving (By-Pass) Surviving Spouse’s Revocable Trust Spouse & Children remaining GST Trust Generation Skipping Trust (Marital Deduction Trust that is (Will include assets owned jointly on first death) lifetime: (Not taxed in surviving spouse’s estate) not generation skipping)

Surviving spouse can $6,500,000? Upon have the right to $15,000,000 redirect how assets Remaining Assets second are distributed on Who knows? death: second death.

May be Generation After deaths Generation Skipping Skipping to be held as Generation Skipping Children’s Trust Trusts for Children Children’s Trust Separate Trusts for of both Trusts for Children (or distributions) (Will merge with first dying spouse’s (or distributions) Children spouses: Generation Skipping Trusts shown on left)

Benefits children and grandchildren. Benefits children. Benefits children and grandchildren. Not estate taxable in their estates. Taxable in their estates. Benefits children. Not estate taxable in their estates. Taxable in their estates.

*Assumes first spouse dies in 2020 when the exemption is $11,580,000. The estate tax exemption is $11,580,000, less any prior reportable gifts, for those that die in 2020, and increases with the chained Consumer Price Index in $10,000 increments.

If the first spouse does not use the entire exemption amount, what remains may be added to the surviving spouse’s allowance under the “portability rules” but will not grow with inflation, and will be lost if the surviving spouse remarries and the new spouse dies first, leaving no exemption.

Child or Children

529 Plans SINGLE (NON- UGMA Accounts (Subject to Creditors of the MARRIED) Child) INDIVIDUAL Child’s or Children’s Automobiles? (Who signed for driving privileges?) Offshore Trust IRA Account Automobile Company, as Nevada Trust Parent, 401k/Pension Account HOMESTEAD Trustee or Co- Company, as Trustee Trustee Annuity Contracts Co-Trustee Life Insurance Can deposit into a wage account. TRUST OFFSHORE NEVADA FORMED BY LIVING ASSET ASSET GIFTING CHILD WITH TRUST PROTECTION PROTECTI TRUST EXCESS TRUST ON TRUST ASSETS

3% 97% 99% 3% S 1% Corporation 97% Stock PROFESSIONAL PROFESSIONAL BUILDING WAGE Wages SECURITIES REAL PRACTICE AND/OR ACCOUNT? FLP ESTATE FLP CORPORATION Long EQUIPMENT Term LLC Lease

Brokerage Furniture, equipment, Accounts accounts receivable LLC LLC LLC

Building 1 Lot 1 Condo 1

[email protected] Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 6 07.16.2020 – Inheritance Trust 3.8% Medicare tax begins to apply at 3.8% Medicare tax begins to $12,750+ of AGI apply at $12,750+ of AGI

SPOUSE 1 SPOUSE 2

Spouse 2 is Trustee

SPOUSE 1 DYNASTY REVOCABLE SPOUSE 2 TRUST TRUST REVOCABL E TRUST

Other Assets? 1% GP 99% LP 1. Investments controlled by Spouse 1 as GP of Limited Partnership. **Gift to Dynasty Trust 2. Spouse 1 can replace the Trustee of the Dynasty FAMILY may be based upon 65% Trust. LIMITED of 99% of $5,000,000, 3. Dynasty Trust can be used for Spouse 2 and PARTNERSHIP after taking discounts descendants as needed for health, education and into account - maintenance. $3,217,500. 4. Dynasty Trust can loan money to family $5,000,000 in assets members. 5. Dynasty Trust should be exempt from estate tax, creditor claims, and divorce claims of both spouses and descendants.

1. Grantor can replace the Trustee at any time and for Trustee any reason. 2. Protected from creditors of Grantor and family members. 3. Can benefit spouse and descendants as needed for DYNASTY health, education and maintenance. WEALTH 4. Per Private Letter Ruling 200944002 the Grantor may be a discretionary beneficiary of the trust and PROTECTION not have it subject to estate tax in his or her estate. But be very careful on this! The Trust would need TRUST to be formed in an asset protection jurisdiction and there is no Revenue Procedure on this. 5. Should be grandfathered from future legislative Assets gifted to trust and restrictions. growth thereon. 6. May loan money to Grantor. 7. May own limited partnership or LLC interests that are managed at arm’s-length by the Grantor. Note: Nevada gets a gold star for having a law 8. May be subject to income tax at its own bracket, or the Grantor may be subject to income tax on the that says there cannot be an assumed or an oral income of the trust, allowing it to grow income-tax agreement between the Grantor and the Trustee of free unless or until desired otherwise. If the Grantor is a beneficiary it must remain a disregarded a dynasty trust; because of this, the IRS has a Grantor Trust. weaker argument that the grantor retains “secret” control.

Liabilities generally not cancelable in Liabilities generally not covered by insurance bankruptcy include the following: include the following:

Civil rights violations committed by (i) Government student loans (i) employees or others Environmental liabilities, including sick (ii) Trust fund tax liability (ii) building syndrome and lead paint issues

(iii) Hazardous waste liability (iii) Criminal acts

(iv) Breach of fiduciary duty liabilities (iv) Charitable and religious board activities

Jet skis normally cannot be insured for over (v) Child support and alimony (v) $250,000 per occurrence Medicare, Medicaid, and sometimes private Acts of terrorism: Most casualty insurance pay refund liabilities of physicians: Carriers clauses exempt acts of terrorism. The (vi) (vi) have been suing doctors for not following industry has been paying claims on goodwill referral laws for significant refunds up until now

• IRS

• Department of Justice – when pursuing under federal statutes that allow injunctions or expropriation.

• FTC

• SEC • The 2010 case of SEC v. Solow, 682 F. Supp.2d 1312 (S.D. Fla. 2010) permitted the SEC to enforce a Disgorgement Order despite the otherwise applicable Florida creditor exemptions.

• Medicare – for when penalties and fines are due for improper billing or conduct

• Family Law Judges – but when homestead or tenancy-by-the-entireties is owned with next spouse – can it be invaded?

1.Charging order protection.

2.Trusts where state law does not allow creditor access and a Trustee is not required to make distributions to the debtor.

3.Foreign assets protected by foreign laws.

4.Assets not owned by the debtor.

1. Child can sign on behalf of parents and as nominal Grantor.

2. Child may want the right to amend the trust at any time before it is funded by parents.

3. Child can make distributions for her descendants, but what about for her spouse?

4. Allow Child to transfer situs to state that will not permit exception creditors (ex-spouses, child support, etc.) to reach into the trust.

5. Have overflow provision so that if funding would exceed Parent’s available GST exemption a Non-GST Exempt Trust will be formed the Child can appoint to creditors of Child’s estate from.

6. Independent Fiduciaries clause to allow bestowing a general power of appointment upon the child if estate tax is not a concern and capital gains tax will be.

7. Ability to deem capital gains out.

[email protected] Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 13 07.16.2020 – Inheritance Trust [email protected] Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 14 07.16.2020 – Inheritance Trust [email protected] Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 15 07.16.2020 – Inheritance Trust [email protected] Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 16 07.16.2020 – Inheritance Trust [email protected] Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 17 07.16.2020 – Inheritance Trust MANDATORY DISTRIBUTIONS ARE EXPOSED TO CREDITORS

• Under Florida Statute Section 736.0506, once a mandatory distribution should have been made, then a creditor of a beneficiary may reach the distribution to the extent that the distribution has been withheld by the trustee.

• WHAT ABOUT CRUMMEY POWERS? Florida Statute Section 736.0505 provides that a lapsed Crummey power will not be exposed to creditors to the extent that the lapse doesn’t exceed $15,000 based upon the Internal Revenue Code Section 2503(b) present interest exclusion. But what if there are two Grantors or gift splitting is used? Read literally the Statute may only exclude up to $15,000 per Crummey power holder, even where a trust is funded using split gifts or dual Grantors. This law will hopefully be clarified in the future.

[email protected] Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 18 07.16.2020 – Inheritance Trust CREDITORS CANNOT ATTACH “ASCERTAINABLE STANDARD” DISTRIBUTION RIGHTS EVEN WHERE THE TRUSTEE IS THE BENEFICIARY

• Whether or not a trust contains a spendthrift provision, under Florida Statute Section 736.0504 the creditor of a beneficiary who has not been considered a contributor to the trust (other than by having withdrawal powers that are not counted as contributions by the beneficiary as described above) will not be able to compel a distribution that is subject to the trustee’s discretion, or even subject to an “ascertainable standard” distribution right (a right in the debtor beneficiary to receive amounts as reasonably needed for health, education and/or maintenance, which under the Internal Revenue Code and applicable regulations would not result in the trust assets being subject to estate tax in the beneficiary’s estate). • This protection for health, education and maintenance powers applies even if the beneficiary is the sole trustee, so long as the beneficiary trustee’s discretion to make a distribution for his or her benefit is limited by an ascertainable standard.

(3) Health, Education, Maintenance and Support. A power to consume, invade, or appropriate income or principal, or both, for a beneficiary’s “health, education, maintenance and support” shall be construed so as to be limited by an ascertainable standard within the provisions of Sections 2041 and 2514 of the Code and the regulations thereunder. The term “health” shall include medical, dental, hospital and nursing expenses and the expenses of invalidism. The term “education” shall be broadly defined to include primary and secondary education at public or private schools, college, post graduate and professional education at an institution of the beneficiary’s choice, and any general or special course of study of academic, vocational or musical pursuit of the beneficiary’s choice (whether or not institutional). In determining payments to be made for such education, the Trustee shall take into consideration the beneficiary’s related living expenses to the extent that they are reasonable. The Trustee shall be aware that it is the Grantor’s express desire that all beneficiaries hereunder be afforded the opportunity to attain the highest degree of education that said beneficiary may desire including expenses incidental to the educational expenses of any beneficiary hereunder such as tuition, room and board, fees, books, supplies and transportation in order to be productive members of society. The term “maintenance and support” is not limited to the bare necessities of life, and shall include maintenance in health, and reasonable support in the beneficiary’s accustomed manner of living. Unless otherwise expressly provided, the Trustee shall take into consideration other income and resources available to the beneficiary, and it is my intent that each Trust beneficiary should be encouraged to be a productive member of society, and should not be rewarded for inactivity or lack of effort before retirement age. The Trustee is encouraged to withhold the payment of distributions that would otherwise be unwisely spent, would disqualify the beneficiary from receiving public assistance, or might be seized by creditors, a spouse, or former spouse of the beneficiary. Except, and to the extent that, a Trust beneficiary other than the Grantor's spouse has a bona fide physical or mental disability preventing the Trust beneficiary from being a productive member of society, it is my desire that no Trust beneficiary who is a descendant shall become “trust dependent” or otherwise induced or encouraged by the availability of “easy money,” to not have a work ethic, to not contribute appropriately to society, to not work, to not raise their family, to not teach appropriate ethical and economic values to their descendants and loved ones, to not be rewarded for inactivity, to not be habitually dishonest, and to not lead a non-productive life in regard to society or the Trust beneficiary’s family. Each of the aforementioned negative characteristics shall be considered as signs that a beneficiary is “Trust dependent.” If a beneficiary becomes “Trust dependent,” the Trustee is encouraged to withhold distributions to such Trust beneficiary on a permanent or temporary basis at the discretion of the Trustee until the Trustee determines that such Trust beneficiary is no longer “Trust dependent.”

It is my intention that any beneficiary with reasonable aptitude and ability should obtain a reasonable education, including college and graduate school, and have a career or productive child raising or full-time vocational or professional job or occupation before receiving substantial benefits, and therefore request that trust benefits be limited to those amounts as are reasonably necessary to provide educational expenses and support until the beneficiary has become educated and is productively applying himself or herself, as opposed to having access to "easy money" during his or her teenage years, 20's, 30's, and thereafter. It is my intention that my Trustee shall reward beneficiaries who attain college and graduate school degrees, professional designations, and similar achievements by providing them with funding for housing, automobiles, and similar luxuries as and when they have proven themselves with reference to their personal self development and productive and respected stature in society.

Notwithstanding the above, no power to consume, invade, or appropriate income or principal for a beneficiary’s “health, education, maintenance, and support” shall permit any distribution that would not be considered consistent with the term “ascertainable standard” under Florida Statute Section 736.0504 and Internal Revenue Code Sections 2041(b)(1)(A) and 2514(c)(1) so as to maintain protection from creditors and estate tax as permitted under such laws.

Many trusts provide for distributions to or for the benefit of a beneficiary based upon that beneficiary’s health, education, maintenance and support. The following language accomplishes this objective, while providing additional detail as to the Trustee’s considerations when making distributions to or for the benefit of a beneficiary, and also allows the Trustee to use a certain percentage of assets for entrepreneurial purposes of the beneficiary:

During the lifetime of the Primary Beneficiary, the Trustee may pay to or for the benefit of the Primary Beneficiary and/or such Beneficiary's descendants, at any time and from time to time, such sums from income and/or principal as are reasonably necessary for their health, education, maintenance and support, provided that no distribution to or for the benefit of any descendant of the Primary Beneficiary shall be in satisfaction of any legal obligation, including obligation of support of any Trustee or any beneficiary hereunder. Notwithstanding the preceding sentence, in the event that the Trustee determines that the Primary Beneficiary and/or one or more of the Primary Beneficiary's descendants has an addiction or special needs situation, then the distribution standard described above shall not apply for such beneficiary and the distribution standard described in Section 5.02 below shall apply for any beneficiary having a special needs situation as determined by the Trustee and the distribution standard described in Section 5.03 shall apply for any beneficiary having an addiction situation as determined by the Trustee. Any distributions shall come first from income and then from principal. Any undistributed income shall be added to principal. The Trustee shall exhaust the remaining property in any separate share of the Children's Trust held for the benefit of the Primary Beneficiary before making any distribution to such Primary Beneficiary from his or her separate share of this Generation Skipping Trust. In lieu of making cash distributions to or for the benefit of the beneficiaries, the Trustee is specifically authorized to purchase assets (including one or more residences) and hold such assets in trust for the use and benefit of any beneficiary of such separate trust for his or her health education, maintenance or support. The Trustee is further authorized to make loans to a beneficiary and to purchase assets to be used by a beneficiary as a home, or for establishing a trade or business, provided that any such expenditure or use must be related to the beneficiary's health, education, maintenance or support, and may not be in satisfaction of any legal obligation, including support obligation, of any beneficiary or Trustee. With respect to each Trust established for a descendant of the Grantor, except for legitimate and appropriate education expenses and living expenses incurred during sincere efforts of a beneficiary to obtain an appropriate education, it is requested that distributions be limited so as to facilitate the trust principal maintaining its value once the beneficiary has been fully educated. The Grantor desires that the assets of the Trust be considered a tree, and that the income from the Trust be considered the fruit of the tree, with an objective that the tree should grow or at least maintain its size in order to allow the fruit to not be diminished in the future. The Grantor requests that the Trust be conducted so that the trust assets may grow and prosper, except to the extent that reduction thereof is necessary based upon extenuating circumstances. The Grantor, by means of example, would suggest that distributions be equivalent to what can conservatively be expected to allow for the remaining trust assets, and growth thereon, to at least keep up with inflation over time. By means of example and illustration, with reference to the economic conditions as of the date of execution of this trust, Grantor would suggest a 4% distribution amount, taking into consideration a conservative potential investment return of 7% and a potential inflation rate of 3%. If significant portions of the trust portfolio consists of assets that appreciate in value but pay nominal or very low income, the principal may be used to satisfy the intentions described above.

In rendering a decision regarding distributions to the Primary Beneficiary under subparagraph (1) of this Section 4.02(e), and in order to promote conduct acceptable by Grantor, the Trustee may also consider, without limitation, the following:

(A) Whether or not such Primary Beneficiary is suffering from a substance abuse (including alcohol) or compulsive behavior disorder (such as a gambling problem) or is affiliated with a cult;

(B) Whether or not such Primary Beneficiary is incarcerated or a criminal trial is pending the penalty for which the Primary Beneficiary may be incarcerated;

(C) Whether or not such Primary Beneficiary is engaged in illegal activities, as determined in the sole discretion of the Trustee;

(D) Whether or not such Primary Beneficiary is gainfully employed, as determined in the sole discretion of the Trustee; provided, however, that a Primary Beneficiary need not be gainfully employed if any of the following apply:

(i) The Primary Beneficiary is a full-time student and is progressing towards the completion of a degree;

(ii) The Primary Beneficiary works at least thirty-five (35) hours per week (“full-time”), with or without compensation, in a socially useful vocation (examples of such a vocation include, but are not limited to, the fields of social work, teaching, religious service, and charitable work);

(iii) The Primary Beneficiary is either occupied on a full-time basis caring for other family members such as children or disabled or elderly relatives, or married and being the homemaker for the family, and, in either case, the Primary Beneficiary’s spouse, if any, works full-time or is unable to work full-time for medical or other reasons;

(iv) The Primary Beneficiary is employed in or pursuing a career in the fine arts (examples of such careers include, but are not limited to, careers in the fields of art, dance, music, theater and creative writing);

(v) The Primary Beneficiary is unable to work full-time for medical reasons as determined by one or more physicians, selected by the Trustee, who have an appropriate expertise and have examined the Primary Beneficiary; or

(E) Whether or not such Primary Beneficiary is a productive member of society, as determined in the sole discretion of the Trustee;

(F) Whether or not such Primary Beneficiary has demonstrated the capability of managing his or her financial affairs, as determined in the sole discretion of the Trustee; and

(G) Whether or not such Primary Beneficiary is a safe driver as evidenced by lack of driving violations and lack of at-fault traffic accidents.

(2) Entrepreneurial and Professional Career Risk Capital. The Trustee shall take into consideration that up to ______(15% if left blank) of the value of trusts held for the primary benefit of any particular descendant of mine may be made available to facilitate entrepreneurial endeavors, credit enhancement, start up expenses for a professional or entrepreneurial endeavor, or similar uses, provided hat such endeavors are based upon advice given by reputable consultants, certified public accountants, or persons well respected and successful in a particular industry, and are provided under situations where the Primary Beneficiary has shown appropriate maturity, dedication, and understands that only up to the percentage described above (15% if left blank) of total cumulative trust assets may be used during such Primary Beneficiary's life time for such endeavors.

[email protected] Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 24 07.16.2020 – Inheritance Trust Requiring the Trustee to Step Down Because of Divorce, Creditor Claims or Under Other Proper Circumstances

Notwithstanding any provision in this Article Six to the contrary, if a Primary Beneficiary is serving as sole Trustee of a separate trust established for such Primary Beneficiary’s benefit, and if such Primary Beneficiary is insolvent or is unable to satisfy any financial or court or arbitration ordered obligation, or is in the process of being divorced, or if such Primary Beneficiary resides in a jurisdiction where a co-trusteeship is or may be required in order to have a better chance of preventing creditors or marital claims from being made in a manner that would prevent the creditor or marital claim holder to receive assets from the Trust, then such Primary Beneficiary shall be automatically removed as Trustee, and replaced with an Independent Trustee chosen by such Primary Beneficiary. The Independent Trustee chosen as a replacement shall be a descendant of Grantor (other than the applicable Primary Beneficiary) who has attained the age of thirty-five (35), a licensed attorney who has represented the Grantor or who specializes in estate and trust law with an “AV” rating in the Martindale-Hubbell directory, a certified public accountant who has done the Grantor's accounting work or has extensive experience preparing estate and income tax returns for a reputable trust company, or a licensed trust company. A Trustee Beneficiary who has been forced to no longer serve by reason of this provision shall have the right to regain the trusteeship when circumstances have clearly changed such that there is no longer an insolvency and/or the applicable divorce has been resolved or withdrawn and there is no imminent threat of creditor claims or claims of a family nature that could cause loss of trust assets. Further, if applicable state law where a beneficiary resides, or other applicable law, would make the Trust for such beneficiary creditor accessible if such beneficiary were the sole Trustee, then such beneficiary shall be required to choose an Independent Trustee meeting the requirements as described above with respect to trusteeship of such Trust and shall be required to serve with an independent Co-Trustee so long as the state law where such beneficiary resides requires a Co-Trustee to facilitate creditor protection. Further, no power vested in a Grantor to change trustees or to exchange assets with the Trust, even if exercisable solely in a fiduciary and arms- length manner, may be exercised by a Grantor if and when a Grantor is insolvent, or is unable to satisfy any financial or court or arbitration ordered obligation.

[email protected] Copyright © 2020 Gassman, Crotty & Denicolo, P.A. 25 07.16.2020 – Inheritance Trust Invite Estate Tax Inclusion to Cause a Step-Up in Income Tax Basis if the Clients Are Not Concerned with the Estate Tax

Utilize general powers of appointment to trigger estate tax

Joint trusts (i.e., community property trusts, JESTs, etc.) can help get a basis step-up on the death of the first dying spouse

Amend irrevocable trusts to give the original grantor or grantors testamentary powers to appoint trust assets to creditors of their estate

Also consider installing the Grantors as Trustees or Trust Protectors

Unwind previous estate tax avoidance transaction where the original purpose is no longer applicable

Give senior family members put rights and use other mechanisms to reduce valuation discounts

Sell assets to a grantor trust established by the grantor, which affords a senior family member a testamentary general power of appointment

A concept developed by Edwin Morrow is the “Optimal Basis Increase Trust” where an older relative or friend of the grantor is made a beneficiary of an irrevocable trust, and is given a testamentary general power of appointment in order to cause a step-up in basis on assets upon the death of the older individual. Such general powers of appointment can be drafted where they are expressly provided to the older individual under the terms of the trust document, they can bestowed as an independent committee (such as trust protectors) determines in their discretion, or they can be drafted as a formula general power of appointment clause that only applies only to appreciated assets.

Therefore, an individual who is under the estate tax exemption levels can sell appreciated assets to a defective grantor trust in exchange for an installment note, where the trust provides an older relative or friend with a general power of appointment upon the individual’s death. Upon the older beneficiary’s death, the assets in the trust will receive a new, increased basis that can provide income tax savings upon ultimate liquidation of the asset, or an increased depreciation allowance, if the property is depreciable.

The trust document can provide that the beneficiary holding the general power of appointment can assign the assets to or for the benefit of the creditors of his or her estate, and also include the grantor’s family (or even the grantor in certain situations) as potential appointees of the trust assets. The trust can further provide that, if such power of appointment is not exercised by the power holder, then the assets in the trust will be held for the grantor’s family.

If the power holder exercises the power of appointment, the power holder will likely be considered the grantor of the trust containing assets subject to the power of appointment, which would trigger income tax on any outstanding amounts payable under the promissory note owed back to the grantor, which are in excess of the greater of $5,000 or 5% of the value of the trust assets.

Sample Power of Appointment Language:

Each of ______and ______(“Parents”) shall have the right to direct how the ownership of the shares owned by each of ______and ______(“Children”) shall be devised, provided that (i) such power may only be exercised under the Last Will and Testament of each of Parents which specifically refers to this Agreement, (ii) the disposition of such shares must be solely to or in trust for the benefit of lineal descendants of Parents or to the creditors of Parents’ estate, and (iii) the exercise of such power must be approved by one (1) of the following individuals in the order named of ______, ______or TRUST COMPANY, and no approving party named above shall have any fiduciary duty to any descendant of parents.

Sample Put Right to Eliminate Discounts:

Each holder of shares that are owned by ______or ______, or by them jointly, or by the ______LIVING TRUST as of the date of execution of this Agreement, shall have a “put right” which will entitle the holder of such share to be redeemed by the Company based upon the percentage of ownership represented by such share (one divided by the number of shares then issued and outstanding) multiplied by the Net Value of the Company. The Net Value of the Company will be based upon the Appraised Value of all assets of the Company, less the amount of all liabilities of the Company, with any contingent liabilities or contractual, legal, or tax obligations to be taken into account to the extent that a Valuation Expert would consider such items to reduce the value of the Company.

Potential Exceptions:

1. Power Acquired Within One Year of Death – IRC 1014(e) and TAM 9308002

In the case of a decedent dying after December 31, 1981, if—

1. Appreciated property was acquired by the decedent by gift during the 1- year period ending on the date of the decedent's death, and

2. Such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor)

The basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.

2. Step Up May Not Apply to Extent the Property Has Been Depreciated – IRC 1014(b)(9)

“…if the property is acquired before the death of the decedent, the basis shall be … reduced by the amount allowed to the taxpayer … for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent.”

NOTE – Section 1014(b)(4) applies when the power is actually exercised and does not include a similar reduction for depreciation taken by the taxpayer

Trust 1 retains a small portion of assets and transfers the remaining assets to Trust A and Trust B

Trust 1 Trust 1 Trust 1

$10,000 $1,000,000

A B A B Swap A B assets $495,000 $495,000 Trust 1 is treated as the owner for Pursuant to the terms of Trust 1, Trust 1 has the income tax purposes of Trust A and B ability to revest the net income of Trust A and Trust B in Trust 1, provided that this power lapses on the last Trust 1 forms Trust A and B day of each calendar year. As a result, Trust A and Trust B can swap assets without The Trust Agreements for Trust A and B provide that income includes (i) any dividends, interest, fees and incurring income tax. other amounts characterized as income under § 643(b) of the Code, (ii) any net capital gains realized with respect to assets held less than twelve months, and (iii) any net capital gains realized with respect to assets held longer than twelve months.

1. Changing asset composition (e.g. gift house in LLC to trust for SALT) 2. Using trust protector powers (changing trust situs) 3. Decanting 4. Non-judicial modification 5. Powers of Appointment within the terms of the instrument 6. Installing Trust Protectors 7. Section 2519

Many people assume that because their trust is irrevocable, that it is impossible to change any of its terms. In Florida, and in many other states around the country, an irrevocable trust can be changed through a method called decanting.

Decanting was first authorized in the state of Florida via case law. In the Florida Supreme Court Case, Phillips v. Palm Beach Trust Company, 196 So. 299 (Fla. 1940) the court allowed a trustee to transfer all of the assets from an existing trust into a new trust. The court held that this was permissible because the second trust did not include any beneficiaries who were not beneficiaries of the first trust and the trustee had the absolute power to invade trust assets.

In 2014 the Florida courts again approved the decanting of an irrevocable trust in Peck v. Peck, 133 So. 3d 587 (Fla. 2d DCA 2014). In this case, the court reasoned that all of the interested parties agreed to the decanting and that the trust’s terms did not prevent decanting in this specific instance.

The Florida Legislature did not codify this rule until 2007, when it enacted Fla. Stat. 736.04117. This statute required a trustee to have absolute discretion to invade the assets of the trust in order for the trust to be decanted. Although this statute may have been beneficial for a few irrevocable trusts, most trusts include language that restrict distributions to health, education, maintenance and support, or some other ascertainable standard. If such a standard was included in a trust (as it is in most trusts) the only option to decant that trust would be to rely on Florida common law.

In 2018, the Florida Senate approved House Bill 413, which modified Fla. Stat. 736.04117 to provide much more flexibility in which trusts could be decanted. Virtually all Florida irrevocable trusts can now be decanted, to varying degrees, without the need to rely on case law.

Updated Fla. Stat. 736.04117 now provides the ability to decant a trust when the trustee does not have absolute power to invade trust assets as long as the new trust grants each beneficiary of the first trust a substantially similar interests. “Substantially similar” is defined in the Statute as meaning “there is no material change in a beneficiary’s beneficial interest or in the power to make distributions and that the power to make a distribution under a second trust for the benefit of a beneficiary who is an individual is substantially similar to the power under the first trust to make a distribution directly to the beneficiary.”

This is a powerful estate planning tool as it allows practitioners to modify irrevocable trusts that may have tax inefficient provisions or to update the trust language to better suit the client’s desires. The new trust cannot grant new powers of appointment, or make any substantial modifications to existing powers of appointment.

If the trustee has an absolute power to invade the principal of the trust, the trust can be amended in any fashion mentioned above, plus a power of appointment can be added or modified for any of the current trust beneficiaries. Here again, only the beneficiaries of the first trust are allowed to be beneficiaries of the new trust. If a beneficiary is not vested, that beneficiary could be completely removed from the new trust.

Practitioners need to consider the effect of this statute when drafting trusts for their clients. If a client wants to make sure that the trust cannot be decanted, language can be added to the trust to prevent application of Fla. Stat. 736.04117. On the other hand, if the grantor of the trust wants to ensure that the terms of the trust can be changed going forward, language could be put in the trust to specify how, and to what extent, the trust may be decanted in the future.

Although the modifications that can be made to a trust through the Florida Decanting Statute are not unlimited, they do provide great flexibility in the modification of irrevocable trusts and give practitioners comfort in knowing that decanting has been blessed by the Florida Legislature.

• First case allowing decanting in Florida was Phillips v. Palm Beach Trust Company, 196 So. 299 (Fla. 1940). The court allowed the transfer of all trust assets from the existing trust to a new trust.

• This was allowed because the second trust did not include any beneficiaries who were not beneficiaries of the first trust, and the trustee had the absolute power to invade trust assets.

• In 2014, the courts again approved the decanting of an irrevocable trust in Peck v. Peck, 133 So. 3d 587 (Fla. 2d DCA 2014).

• The court allowed this decanting because all interested parties agreed to the decanting, and the terms of the trust did not specifically disallow decanting.

• The Florida Legislature first codified this rule in 2007 under Florida Statute 736.04117.

• This statute required the trustee to have absolute discretion to invade the assets of the trust.

• In 2018, the Florida Legislature updated Florida Statute Section 736.04117, significantly broadening the application of the Florida Decanting Statute.

• If the trustee does not have absolute power to invade trust assets, then the new trust must:

• Grant each beneficiary of the first trust a substantially similar interest.

• Cannot grant new Powers of Appointment or make any substantial modifications to existing Powers of Appointment.

• If the trustee does have absolute power to invade the principal of the trust, the trust can be decanted as long as the new trust:

• Only adds or modifies a Power of Appointment for current trust beneficiaries;

• Only the current beneficiaries of the first trust are allowed to be current beneficiaries of the new trust;

• Can only remove a potential beneficiary if that beneficiary is not vested.

• The Statute allows for the grantor of a trust to include language that does not allow a trust to be decanted. Alternatively, if the grantor does want to allow the decanting provisions to apply, the trust document can specifically outline a process to decant the trust.

Thursday, July 16, 2020 12:30-1:00 P.M. EDT (30 minutes)

Kenneth J. Crotty, J.D., LL.M. [email protected]