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An update on key planning developments.
State legislatures have been very busy on a number of trust- and estate-related fronts. Here’s an update on some key planning developments across the country, through Nov. 15, 2017.
Estate and Gift Tax
To be more competitive, some jurisdictions with separate estate taxes have been increasing the amount that’s exempt from state estate taxes or even phasing out their estate or inheritance taxes. What happens at the federal level will be key in determining the trickle-down effect for those states that tie their exemption amounts to the federal exemption. If the federal exemption amount doubles (or is repealed) and the intent wasn’t to mimic such a dramatic change in the state exemption amount, it’s likely that state legislatures will need to act. Here’s some of the latest state-level activity:
Connecticut. Connecticut remains the only jurisdiction in the country with a true gift tax. Connecticut had a $2 million gift and estate tax exemption amount in 2017.1 On Oct. 31, 2017, Governor Daniel P. Malloy signed the state’s budget into law, increasing the estate and gift tax exemption amount to $2.6 million for those dying on or after Jan. 1, 2018 and to $3.6 million for those dying on or after Jan. 1, 2019.2 In 2020, the exemption amount will match the federal exemption, and legislative action will be necessary to decouple. More importantly for planning purposes, Connecticut doesn’t impose a tax on gifts of tangible or real property located outside the state.3 The new legislation4 also provides for a $15 million estate and gift tax cap effective Jan. 1, 2019, meaning no further estate or gift tax will be owed once the cap is reached. This cap reduces the current legislative cap of $20 million.5 Using current rates, the new cap will generally kick in for estates exceeding $130 million (the old cap applied to estates exceeding $170.5 million). For a nonresident decedent who owns real or tangible property in Connecticut, beware that the state can impose an estate tax on that Connecticut property, even if the value of the property is less than the state exemption amount. This is due to the fractional tax apportionment computation. The amount of tax due is computed as if the decedent was a resident of the state, multiplied by a fraction equal to the percentage of estate property located in Connecticut.6 For example, if the nonresident decedent owned real property located in Connecticut that was valued at 10 percent of the size of the entire estate, the tax payable will be 10 percent of the tax that would have been payable had the decedent been a Connecticut resident. Connecticut also imposes a 0.5 percent probate fee on all estate assets over $2 million.7 The probate fee can’t be avoided even if an individual has no probate property, because the fee is imposed on the taxable estate. For estates of individuals dying on or after July 1, 2016, a $40,000 probate cap applies, which freezes the fee for estates over $8.877 million.8
Delaware. On July 2, 2017, Gov. John Carney Jr. enacted legislation that repeals the estate tax, effective for individuals dying after Dec. 31, 2017.9 The repeal of the Delaware estate tax also benefits out-of-state residents who own real or tangible property located in Delaware. Previously, the estate of a nonresident who owned a vacation home in Delaware could have been liable to pay Delaware estate tax. Additionally, Delaware has become a favored jurisdiction in which to store artwork, due in part to the absence of a sales tax. Delaware will likely become even more attractive in this regard, as nonresidents won’t owe a Delaware estate tax if they die while owning tangible property physically located in the state.
District of Columbia. Following recommendations issued by the D.C. Tax Revision Commission in February 2014, this jurisdiction’s current $1 million exemption was slated to increase to $2 million as early as Jan. 1, 2016 and then to match the federal exemption if certain revenue surplus targets were met.10 The revenue targets that would have triggered the increase to $2 million in 2016 weren’t met, so the $1 million exemption remained in effect for that year. As a result of revenues raised in 2016, the exemption amount increased to $2 million in 2017. The 2018 budget bill,11 projected to become law on Dec. 9, 2017, aligns the D.C. estate tax exemption with the federal estate tax exemption effective Jan. 1, 2018 for decedents dying after Dec. 31, 2017.
Hawaii. This state’s exemption amount is linked to the federal exemption amount.
Maine. For individuals dying on or after Jan. 1, 2016, Maine’s estate tax exemption is linked to the federal exemption.12
Maryland. On May 15, 2014, this state increased its estate exemption amount from $1 million in 2014 to $1.5 million in 2015, $2 million in 2016, $3 million in 2017 and $4 million in 2018.13 Beginning in 2019, the state exemption amount will be linked with the federal exemption amount. In addition, Maryland continues to impose an inheritance tax of 10 percent, which is triggered based on the relationship of the decedent to a beneficiary.
Minnesota. As part of a larger bill signed into law on March 21, 2014,14 this state increased the estate tax exemption amount in 2014 from $1 million to $1.2 million, to be increased by $200,000 annually until 2018, when it would reach $2 million, where it was slated to remain. However, Gov. Mark Dayton signed legislation on May 30, 2017 that further increases these exemption amounts to: $2.1 million for decedents dying in 2017; $2.4 million for decedents dying in 2018; $2.7 million for decedents dying in 2019; and $3 million for decedents dying in 2020 and thereafter.15
New Jersey. This state is phasing out its estate tax over two years.16 Specifically, for individuals dying after Jan. 1, 2017, the exemption amount increased from $675,000 to $2 million, and the estate tax is fully repealed for those dying after Jan. 1, 2018. Note, however, that New Jersey still imposes an inheritance tax at rates between 11 percent and 16 percent.
Some practitioners have expressed skepticism that the estate tax will remain repealed.
New York. As a result of enacting the Executive Budget on March 31, 2014, New York increased its exemption amount from $1 million to $2,062,500 for those dying on or after April 1, 2014, to $3.125 million for those dying on or after April 1, 2015, to $4,187,500 for those dying on or after April 1, 2016 and to $5.25 million for those dying on or after April 1, 2017 and on or before Dec. 31, 2018. For those dying on or after Jan. 1, 2019, state and federal exemption amounts will be linked to the 2010 federal exemption amount of $5 million, as indexed for inflation, so a potential doubling of the federal amount won’t affect the New York exemption amount.17 However, the New York estate tax regime has a built-in “cliff:”18 Only estates that are less than or equal to the exemption amount on the date of death will pay no tax; for those estates that are between 100 percent and 105 percent of the exemption amount, there’s a rapid phase-out of the exemption; and those estates that exceed 105 percent of the exemption amount will lose the benefit of the exemption amount entirely and be subject to tax from dollar one. Note, however, that nonresidents who own real or tangible property located in New York won’t owe any New York estate tax if the value of their New York property is below the New York exemption amount at the date of death. There’s no longer a requirement to calculate the estate tax as if the nonresident was a resident and apportion the tax based on the percentage of property located in the state.
On the income tax front, however, New York Tax Law Section 631 imposes a personal income tax on a nonresident’s New York source income. New York source income is defined to include gains from the sale of real property or co-operative apartment interests located in New York.19 Real property located in the state was further defined to include interests in certain legal entities20 if the value of the real property located in New York was at least 50 percent of the entity’s value.21 Notably, this rule omitted co-operative apartment shares from the definition of real property, thereby enabling a nonresident to exclude from source income the gain from the sale of a New York co-operative apartment that was held in an entity. As a result of legislation enacted on April 10, 2017,22 as part of New York’s 2017-18 Executive Budget, if more than 50 percent of an entity’s value consists of co-operative apartment shares, gains from the sale of an ownership interest in that entity will be taxable to a nonresident as source income.
Rhode Island. Pursuant to a law signed on June 19, 2014, this state increased its estate tax exemption amount to $1.5 million in 2015, indexed for inflation.23 For 2017, the estate tax exemption amount increased to $1,515,156.
Washington State. There’s a $2 million exemption, indexed for inflation, which was $2.129 million in 2017.
Use it or lose it! Portability—the ability of one spouse to pass the unused exemption amount to the survivor—generally isn’t available at the state level. That means state exemption amounts are usually use-it-or-lose-it propositions. If one spouse simply leaves everything to the other, the exemption of the first to die is wasted. If state exemption amounts dramatically rise as a result of being linked to an increased federal exemption amount, the state amount that potentially will be wasted if not used also dramatically increases.
Beware of formula bequests for tax reasons. With the proposals to double the federal exemption amounts, the gap between state and federal exemption amounts could potentially widen significantly. In those jurisdictions where the federal exemption exceeds the state exemption, care must be taken in pegging a credit shelter bequest to take advantage of the full federal exemption. In New York, for instance, the combination of the disparity between state and federal exemption amounts and the cliff effect might trigger substantial state taxes. For example, if the New York exemption is $5.25 million, a credit shelter disposition of the state exemption amount wouldn’t generate any New York tax. However, if the credit shelter disposition was tied to a federal exemption amount of $11.2 million, that would generate a state estate tax of over $1.25 million. One solution to avoid this result is to define a formula credit shelter bequest to mean the maximum amount that can pass free of both federal and state taxes.
Beware of formula bequests for dispositive reasons. In states that have rising exemption amounts, a formula bequest pegged to the state exemption amount may produce distorted results if the state exemption amount has risen beyond what was originally envisioned. Clearly, the dispositive distortion will become magnified if estate tax exemption amounts double. In New Jersey, for example, a formula bequest pegged to the largest amount that can pass free of state estate taxes would have produced a bequest of $675,000 in 2016, a bequest of $2 million in 2017 and a bequest of the entire estate in 2018 when the New Jersey estate tax is slated to be eliminated.
Flexibility Is Key
The bottom line is that building flexibility into plans to deal with a variety of outcomes is the key. Even if changes are made to federal tax laws, the permanence of any changes can’t be predicted with any confidence.
Flexibly drafted documents. Many practitioners now rely on techniques that maximize flexibility after death, enabling family and fiduciaries to make a post-mortem determination regarding trust funding amounts. Some of these techniques include:
- Disclaimer trusts: The first spouse to die leaves everything outright to the survivor, who can disclaim an appropriate amount, considering the tax laws, amount of wealth, family situation and specific needs, into a disclaimer marital and/or credit shelter trust.
- Partial qualified terminable interest property election: The first spouse to die leaves assets to the survivor in a QTIP marital trust, and the fiduciary can make a partial QTIP election to use the exclusion amount of the first spouse to die. Because the trust must be drafted to qualify for the marital deduction, there isn’t any ability in this scenario to accumulate income or make distributions to any beneficiaries other than the spouse. However, the trust can be invested to maximize growth if the spouse doesn’t require a high income yield.
- Clayton QTIP: The first spouse to die provides that the estate is eligible to pass into a QTIP marital trust, but only if the executor makes a QTIP election. To the extent the QTIP election isn’t made, property typically passes into a credit shelter trust. To avoid adverse tax consequences, practitioners generally recommend that a Clayton QTIP election be made by a fiduciary other than the surviving spouse, often an independent corporate trustee.
Decanting. There’s been continued state-level activity regarding “decanting,” which allows the trustee of an otherwise irrevocable trust potentially to appoint the trust assets into a new trust with different terms. The rationale behind decanting is that, if a trustee has the ability to make discretionary distributions to or for the benefit of a beneficiary, the trustee should also be permitted to exercise that discretion to distribute trust assets into another trust for that beneficiary. More than half the states now have statutory authority to decant trusts.
Some states have adopted the Uniform Trust Decanting Act, which creates a complete model set of rules intended to allow decanting for appropriate purposes, while preventing abuse. Since its promulgation in July 2015, Colorado,24 New Mexico,25 North Carolina,26 Virginia27 and Washington28 have enacted the UTDA. The legislation has been introduced in Illinois29 and Nevada.30 Under the UTDA, how broadly a trustee can exercise a decanting power depends on the breadth of the trustee’s discretionary distribution power. The UTDA bifurcates a trustee’s discretion into two categories: limited or expansive. Limited distributive discretion is subject to an ascertainable standard or reasonably definite standard. Under the UTDA, this standard requires the trustee to decant so that each beneficiary’s interest is “substantially similar” in the second trust. Accordingly, limited discretion usually allows only for administrative, not dispositive, changes. UTDA provides broader rules for decanting under an expanded distributive discretion. For example, although the fiduciary may not add new beneficiaries or eliminate vested interests, the fiduciary may grant a power of appointment to a beneficiary of the second trust that’s exercisable among a class of permissible appointees that’s broader or different from beneficiaries of the first trust. Further, the fiduciary can also remove beneficiaries, omit POAs and eliminate rights that aren’t vested interests. Court approval of a decanting isn’t required, nor is beneficiary consent, but there’s a 60-day notice requirement to interested persons.
Decanting can be an invaluable tool for trustees in dealing with changed circumstances, correcting mistakes or optimizing a trust’s administration.
Indeed, in a case decided in Connecticut last August, Ferri v. Powell-Ferri and Powell-Ferri v. Ferri,31 a trust created for the benefit of a husband was decanted into a new trust with different terms, putting the trust assets (valued between $69 million to $98 million) out of reach of the divorcing wife, though the trust assets were considered for alimony purposes. The decanting was successful even though the husband had a right to request 75 percent of the trust assets under the terms of the original trust and, during the course of the legal proceedings, his right matured to 100 percent. The new trust into which the assets were decanted extinguished the husband’s power to request trust assets at stated ages, making distributions solely discretionary with the trustees. The trusts were settled in Massachusetts, and the wife had filed to dissolve the marriage in Connecticut. The Connecticut Supreme Court asked the Supreme Judicial Court of Massachusetts to determine whether the trustees, one of whom was the husband’s brother, validly exercised their powers under the original trust to distribute the trust property to the new trust. The SJC determined that decanting was authorized under the trust instrument. According to the SJC, because the husband’s father, who created the original trust, intended to convey to the trustees almost unlimited discretion to act, the conclusion that he intended to authorize decanting seemed to follow necessarily. The Connecticut Supreme Court adopted the opinion of the Massachusetts SJC and held that the decanting was proper. It was important that the decanting occurred without the husband’s permission, knowledge or consent. Query if the same result would follow if a beneficiary was given notice of the decanting, or whether notice alone wouldn’t detract from the Connecticut Supreme Court’s holding that the husband took “no active role in planning, funding or creating the 2011 Trust” (emphasis added). Including decanting provisions in trust instruments may maximize flexibility without resort to state default law.
Indeed, many practitioners include their own decanting provisions in their trust documents, tailored to the desires of the trust creator, so there’s no need to rely on state default law. In a recent New York case, In re Hoppenstein,32 the trustees successfully relied on their powers under a trust document to distribute a life insurance policy on the settlor’s life to a new trust that excluded an estranged daughter of the settlor and her issue. Dismissing an objection that the transfer didn’t satisfy the requirements of the New York decanting statute, the Court held that the New York decanting statute had no bearing on the case because the trustees relied on their powers under the document to effectuate a transfer.
Gifting via trusts with flexible terms. Gifting is a strategy that remains attractive. If the federal gift tax exemption does double, that will create added incentive for some to make significant lifetime gifts.
Many people are choosing to fund irrevocable trusts up to the federal gift tax exclusion amount to facilitate their succession planning goals, while building in flexible terms, designed to adapt to possible future tax regimes. Generation-skipping transfer tax exemption can also be allocated to these trusts to protect against the future imposition of those taxes, potentially in perpetuity in jurisdictions like Delaware that permit perpetual trusts. The trust can be drafted flexibly to allow the trust assets to remain outside the creator’s estate and minimize estate tax or be included back in the creator’s estate if a step-up in basis is preferred. The power for the creator to substitute existing trust assets with other assets can maximize this type of basis versus estate tax consideration. The power to substitute assets would also potentially make the trust a so-called grantor trust, which is taxable to the trust’s creator. This enables the trust to essentially grow tax-free for the trust beneficiaries, who are relieved of the tax burden, significantly magnifying the value of the transfer to family members. Grantor trust status also allows the grantor to engage in sale or other transactions with the trust without gain recognition. In addition, with inheritances often delayed due to much longer life expectancies nowadays, many people find pleasure in transferring assets to family members while they’re still around to watch their family enjoy use of those assets.
Many individuals choose to set up these trusts under Delaware law. Some of the reasons Delaware is often a jurisdiction of choice include:
- Directed trusts: The settlor may continue to control the trust’s investments, often particularly attractive for business owners, who want the benefit of trust planning while continuing to manage their businesses.
- Tax advantages: The trust might avoid state income taxes on accumulated income and capital gains.
- “Quiet” trusts: You can restrict beneficiary access to information under certain circumstances.
- Delaware “tax trap”: More aptly named the Delaware tax “opportunity,” this gives the donee of a non-general POA the option of exercising the power to produce a stepped-up income tax basis.
- Asset protection: Delaware trusts can be designed to protect trust assets from creditors, even if the settlor is a beneficiary of the trust.
- Unlimited duration: You can create perpetual dynasty trusts that may be exempt from federal gift and estate taxes, allowing the settlor to create a legacy for generations to come.
- Investment flexibility: Trustees have broad flexibility in selecting investment vehicles.
Pre-mortem validation procedure: The trust can be validated before death, with the goal of precluding a contest after death, allowing the person who created the trust to defend the plan while alive. - Confidentiality: Delaware courts are sensitive to a grantor’s right to confidentiality and don’t require some of the court filings required in other jurisdictions.
- Court system: Delaware’s Court of Chancery has over 200 years of history developing legal precedent in trust and corporate law.
Delaware trusts are increasingly popular with multi-national families to bring family wealth into the United States for future generations or prior to immigration. They’re also used to hold real estate or tangible personal property to escape federal estate taxes that may apply if nonresident aliens hold this property directly.
Children Conceived After Death
With advances in medical technology, a child can be conceived with stored genetic material after the death of one or both of the child’s genetic parents.
As state legislatures struggle to keep pace with an area in which technology has fast outpaced the law, we’re confronted with the question: How should posthumously conceived children, or PCC, be treated for inheritance, intestacy and other purposes? Intestacy statutes drafted long before the new technologies could have been contemplated are often ambiguous in this context. Competing interests clash: those of the children born of these new technologies and those of existing beneficiaries in certainty and finality. To strike a balance, many jurisdictions have responded with legislation that requires an individual to consent to posthumous reproduction specifically, and some impose time limits within which a child must be conceived or born after death. Those time periods typically range from requiring birth within one to four years after death.33
To date, 26 states34 have enacted statutes dealing with those conceived posthumously.
Here are the latest developments for 2017:
Illinois. On Aug. 11, 2017,35 this state enacted a law that permits a child who wasn’t in utero at the decedent’s death to inherit in intestacy if all of the following conditions are met:
1. The child is born of the decedent’s gametes.
2. The child is born within 36 months of the decedent’s death.
3. The decedent had provided written consent to be a parent of any child born of such gametes posthumously.
4. The administrator of the estate receives notice within six months of the decedent’s death from the person to whom such consent applies that: (a) decedent’s gametes exist; (b) the person has the intent to use the gametes so that a child could be born within 36 months of the decedent’s death; and (c) the person has the intent to raise any child as his own.
For the purpose of determining the property rights of any person under an instrument, the law provides that a child in utero at the time of a decedent’s death is entitled to inherit unless a contrary intent is evident. For those not in utero at the time of death to inherit under an instrument, one of the following conditions must be met:
1. The intent to include the child is demonstrated by clear and convincing evidence; or
2. The fiduciary or other property holder, in good faith, treated the child as the decedent’s for purposes of a property division or distribution made before Jan. 1, 2018.
Ohio. Ohio’s statute, which dated back to 1953, provided that descendants of an intestate “begotten” before the intestate’s death, but born after the intestate’s death, would inherit as if born during the intestate’s lifetime; but in no other case could a person inherit unless living at the time of the death of the intestate. While 1953 obviously predates posthumous conception technology, Ohio’s statute was amended in 2012 to make it gender neutral, without amending its substance. However, this state passed legislation on Dec. 13, 2016, which, effective as of March 14, 2017,36 amends the substance of this statute by providing that “[n]o descendant of an intestate shall inherit ... unless born within three hundred days after the death of the intestate and living for at least one hundred twenty hours after birth.” It also provides that when a decedent dies testate, the decedent’s will must specifically provide for any child born more than 300 days after the decedent’s death. That heir can inherit only if born within one year and 300 days from the decedent’s date of death. A separate provision applies to trusts, the exercise of a POA or any other power to expand the class of beneficiaries under a trust instrument. A PCC born more than 300 days after the death of the settlor won’t be considered the settlor’s child under the trust agreement or the exercise of a POA unless the terms of the trust clearly provide otherwise. The settlor can select a time period within which the PCC must be born to benefit from the trust, subject to a maximum period of five years. If the trust doesn’t provide for a specific time period, the PCC must be born within one year and 300 days.
Planning considerations in light of rapidly advancing technology. As assisted reproductive technology continues to advance and become more widespread, practitioners might consider incorporating these suggestions in their practices:
Advise clients with stored genetic material to properly document their intent regarding use of that material posthumously, or in the event of divorce, including in the agreement the fertility clinic, estate planning documents and other memoranda.
Consider drafting specific provisions to address how a client wants to treat PCC. Many states have no laws regarding the inheritance rights of PCC. Even if there’s a relevant statute, clients may wish to modify the statutory default provisions. Some may wish to exclude PCC; others may want to include them subject to certain conditions, such as specific consent to posthumous reproduction, a time frame within which birth must occur, birth to a surviving spouse or life partner and proof of maternity or paternity.
Remember that provisions governing PCC can be applicable both to the testator/grantor and to the descendants. Even if not applicable to a given client’s situation, the client’s descendants may use reproductive technology. In the context of a dynasty trust, for example, set up to last for future generations when available technologies can’t currently be contemplated, it will be important to define the class of potential beneficiaries.
Digital Assets
As technology continues to expand, the ownership, transfer and disposition of digital assets present unique challenges. Family members can face many hurdles in unlocking a decedent’s digital information, which can include social media accounts, email accounts and other personal and financial accounts. Practical obstacles include retrieving confidential user IDs and passwords. Establishing rights to access that information is complicated by Terms of Service agreements with individual providers, which typically are entered into by clicking “I agree” on account opening. The TOS agreements usually govern the fate of an account upon the owner’s death. They can provide that all rights to the account cease on death and that all data will be deleted. State and federal privacy laws and laws that criminalize unauthorized access to computers and prohibit the release of electronic account information present further obstacles.37 The Uniform Law Commission approved a revised Uniform Fiduciary Access to Digital Assets Act,38 on July 15, 2015, that uses a three-tiered approach:
I. Directions given via an online tool provided by a custodian that can be modified or deleted at all times prevail over any other direction in a will, trust, power of attorney or other record;
2. In the absence of availability or use of an online tool, a user’s direction in a will, trust, power of attorney or other records prevails; and
3. In the absence of any direction, the TOS agreement controls.
RUFADAA has been introduced or enacted in at least 49 jurisdictions. The following jurisdictions have enacted some version of RUFADAA: Alabama,39 Alaska,40 Arizona,41 Arkansas,42 California,43 Colorado,44 Connecticut,45 Florida,46 Hawaii,47 Idaho,48 Illinois,49 Indiana,50 Iowa,51 Kansas,52 Maryland,53 Michigan,54 Minnesota,55 Mississippi,56 Montana,57 Nebraska,58 Nevada,59 New Mexico,60 New Jersey,61 New York,62 North Carolina,63 North Dakota,64 Ohio,65 Oregon,66 South Carolina,67 South Dakota,68 Tennessee,69 Texas,70 Utah,71 Vermont,72 Virginia,73 Washington,74 Wisconsin75 and Wyoming.76 Jurisdictions where RUFADAA has been introduced include: Georgia,77 Louisiana,78 Maine,79 Massachusetts,80 Missouri,81 New Hampshire,82 Oklahoma,83 Pennsylvania,84 Rhode Island,85 Washington, D.C.86 and West Virginia.87
Advisors should consider speaking with clients about their digital assets, in particular:
1. Creating inventories of electronic data, with log-in IDs and passwords.
2. Ensuring the inventories are stored in a secure and private location and are kept up-to-date.
3. Using providers’ online tools regarding disclosure of digital information, such as Google’s “Inactive Account Manager” or Facebook’s “Legacy Contacts.” Although these tools require individuals to give separate directions to each custodian, RUFADAA defers first to the direction given via a custodian’s own online option.
4. As to the critical second-tier direction that will be respected if an online tool isn’t available or used, including provisions in: (a) wills and trust agreements that expressly deal with disposition of and access to digital assets and (b) powers of attorney regarding access to digital assets, including content, if that’s desired.
Power to Adjust/Unitrust Regimes
The precepts of the prudent investor rule govern the investment of trust assets. Pursuant to those precepts, a trustee is required to invest for “total return.” That is, a trustee is required to invest in a way that benefits both income and principal beneficiaries. However, when beneficial interests clash, the source of return becomes critical, and the tension between investing for income and investing for growth can become more pronounced. Fortunately, the power to adjust and unitrust regimes provide trustees with the means to implement the mandate of total return investing, in effect, by preempting the definition of fiduciary accounting income. Under a power to adjust regime, the trustee is permitted to make adjustments between income and principal to be fair and reasonable to all beneficiaries. Under the unitrust regime, the trustee can convert the income beneficiary’s interest into a unitrust payout of a fixed percentage of the trust’s principal.
Until 2017, every state, except North Dakota, had enacted one or both of these regimes. On March 21, 2017, North Dakota enacted power to adjust and unitrust legislation.88 Under the power to adjust regime, a trustee may adjust between income and principal if the trustee is managing the assets pursuant to the prudent investor rule, the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust’s income and the trustee determines he can’t administer the trust impartially without making an adjustment. Under the unitrust regime, a payout between 3 percent and 5 percent is permissible.
Every jurisdiction in the country now has some form of total return legislation, and every trustee and advisor should be aware of these powerful tools.
A trustee’s ability to allocate capital gains to income has become increasingly important, given the rise in capital gains tax rates, including the 3.8 percent tax on undistributed income, which includes realized capital gains. To achieve reasonable and impartial results, a trustee must be able effectively to determine whether to tax gains to the income beneficiaries or the trust. A proposal pending in New York89 clarifies that a trustee can, in a reasonable and impartial exercise of discretion, allocate gains to income when exercising the power to adjust. The power to do so would apply when the trustee is investing for total return pursuant to the power to adjust,90 or if the trustee has unlimited discretionary power to distribute principal, which in effect permits total return investing because the power to distribute principal can be used in a similar manner as the power to adjust. A Nevada91 law permits gains to be taxed to income that’s been increased by an adjustment from principal to income, a unitrust distribution or a distribution of principal to a beneficiary.
Portability
With federal portability, a deceased spouse’s executor can transfer the deceased’s unused exemption amount to the surviving spouse. Hawaii appears to be the only state that allows portability of the state exemption amount.92 Portability in Hawaii applies only to individuals dying after Jan. 25, 2012 if the personal representative of the predeceased spouse files a Hawaii estate tax return.93 Maryland’s estate tax exemption will be portable, beginning in 2019.94 Illinois,95 Massachusetts96 and Rhode Island97 currently have portability proposals pending.
The author would like to thank her colleague Alex E. Waxenberg, a private client advisor at Wilmington Trust, N.A. in New York, for his assistance with this article.
This article is for general information only and isn’t intended as an offer or solicitation for the sale of any financial product, service or other professional advice. Wilmington Trust is a registered service mark. Wilmington Trust is a wholly owned subsidiary of M&T Bank Corporation.
Endnotes
1. CT. Gen. Stat. §§ 12-391(d)(1)(D), 12-391(e)(1)(C).
2. CT. SB 1502 (2017).
3. CT. Gen. Stat. § 12-641.
4. CT. SB 1502 (2017).
5. Connecticut HB 7061 (2015).
6. CT. SB 1502 (2017) § (e)(1)(D).
7. CT. Gen. Stat. § 45a-107.
8. CT. Gen. Stat. § 45a-107(b)(2).
9. Delaware HB 16 (2017).
10. See www.dcfpi.org/wp-content/uploads/2014/03/Tax-toolkit-FY-2015-budget-Approved.pdf.
11. District of Columbia LB 244 (2017).
12. 36 MRSA § 4102, sub-§ 5.
13. Md. Tax Code § 7-309(b)(3)(i).
14. Minnesota HF 1777 (2014).
15. Minn. 1st Sp. Sess. Ch. 1 (H.F.1).
16. N.J. P.L. Ch. 57 and N.J. P.L. Ch. 56.
18. N.Y. Tax Law § 952(c)(2)(A).
17. N.Y. Tax Law § 952(c)(1).
19. N.Y. Tax Law § 631(b).
20. This includes an interest in a partnership, limited liability corporation, S corporation or non-publicly traded C corporation with 100 or fewer shareholders.
21. N.Y. Tax Law § 631(b)(1)(A)(1).
22. New York A.3009-C/S.2009-C (2017).
23. R.I. Gen. Law § 44-22-1.1(a)(4).
25. Colo. Rev. Code §§ 15-16-901–15-16-931.
25. NM Stat § 46-11-102.
26. N.C.G.S. § 36C-8-816.1.
27. Va. Code Ann. §§ 64.2-779.1–64.2-779.25.
28. Washington SB 5012.
29. Illinois HB 2526 (2017).
30. Nevada AB 197 (2017).
31. Ferri v. Powell-Ferri, SC 19432, SC 19433 (Sup. Ct. Conn. Aug. 8, 2017) and Powell-Ferri v. Ferri, SC 19434 (Sup. Ct. Conn. Aug. 8, 2017). Notably, the trial court ordered the husband to pay the wife $300,000 in alimony annually, despite the fact that when the action was commenced he’d been earning only $200,000 annually.
32. In re Hoppenstein, 2015-2918/ANYLJ 1202784244139 (Sur. Ct. N.Y. Co., March 31, 2017), 2017 N.Y. Slip Op. 30940(U).
33. Cmt. j to § 15.1 of Restatement (Third) of Property: Wills and Other Donative Transfers provides that a child produced posthumously by assisted reproduction is treated as in being at the decedent’s death, if the child were born within a reasonable time after death. The Uniform Probate Code time frame of a child in utero within 36 months or born within 45 months is referred to as appropriate for a court to adopt as reasonable.
34. Alabama, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Illinois, Iowa, Louisiana, Maine, Maryland, Minnesota, Nebraska, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Texas, Utah, Virginia, Washington and Wyoming. It’s extremely unlikely that North Carolina’s statute applies to posthumously conceived children, although it can be literally read to do so.
35. Illinois SB 883 (2017).
36. Ohio SB 232 (2015).
37. Privacy of Customer Information (47 U.S.C. § 222); Stored Communications Act (18 U.S.C. Ch. 121, §§ 2701–2712); Computer Fraud and Abuse Act (18 U.S.C. § 1030).
38. Revised Uniform Access to Digital Assets Act (2015), http://bit.ly/2nwx4EO.
39. Alabama SB 110/HB 138 (2017).
40. Alaska SB 16/HB 108 (2017).
41. Arizona § 14-13101.
42. Arkansas HB 2253 (2017).
43. Calif. Prob. Code § 870.
44. Colo. Rev. Stat. § 15-1-1501.
45. Conn. Gen. Stat. § 45a-334b.
46. Fla. Stat. § 740.001.
47. Hawaii Rev. Stat. § 556A-1.
48. Idaho Code § 15-14-101.
49. Illinois 755 ILCS 70/1.
50. Ind. Code § 32-39-1-1.
51. Iowa SB 333 (2017).
52. Kansas SB 63 (2017).
53. Md. Estates and Trust Code § 15-601.
54. Mich. § 700.1001.
55. Minn. Stat. § 521A.01.
56. Mississippi HB 849 (2017).
57. Montana SB 118 (2017).
58. Neb. § 30-501-518.
59. Nevada AB 239 (2017).
60. New Mexico SB 60 (2017).
61. New Jersey AB 3433 (2017).
62. New York EPTL § 13-A-1.
63. N.C. Gen. Stat. § 36F-1.
64. North Dakota HB 1214 (2017).
65. Ohio Code § 2137.01.
66. Oregon SB 1554 (2016).
67. S.C. Code § 62-2-1010.
68. South Dakota HB 1080 (2017).
69. Tenn. Code § 35-8-101.
70. Texas SB 1193 (2017).
71. Utah HB 13 (2017).
72. Vermont HB 152 (2017).
73. Virginia SB 903/HB 1608 (2017).
74. Wash. § 11.120.010.
75. Wisc. § 711.01.
76. Wyo. § 2-3-1001.
77. Georgia SB 301 (2017).
78. Louisiana HB 1118 (2016). This legislation has since died.
79. Maine HP 595 (2017).
80. Massachusetts HB 3083 (2017).
81. Missouri SB 129/HB 379 (2017).
82. New Hampshire SB 93 (2017).
83. Oklahoma SB 1107 (2016). This legislation has since died.
84. Pennsylvania SB 518 (2015). This legislation has since died.
85. Rhode Island HB 5443 (2017).
86. Washington, D.C. LB 199 (2017).
87. West Virginia SB 693 (2017).
88. North Dakota HB 1228 (2017).
89. New York S.4866 (2017).
90. N.Y. EPTL § 11-2.3(b)(5).
91. NV-BDR 3-1087.
92. Although Delaware also allowed portability of the estate tax exemption amount between spouses, the repeal of the Delaware state estate tax will render state level portability moot.
93. Hawaii Rev. Stat. § 236D. See Instructions for Form M-6 Hawaii Estate Tax Return (2013), http://files.hawaii.gov/tax/forms/2013/m6ins.pdf.
94. Maryland TAX General § 7-309.
95. Illinois HB 2489 (2017).
96. Massachusetts H.1510/S.1669 (2017).
97. Rhode Island SB 144 (2017).