problem areas in trust administration jim lamping the law office of james p. lamping san francisco...

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) 992-3100jim@jimlamping.comjim@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.