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Saturday, March 23, 2019

Qualified Beneficiaries–Recent Case is Puzzling in its Logic and Scope [Florida]

A recent 4th DCA opinion on who is a “qualified beneficiary” under Florida’s Trust Code is a puzzler, at least to me. Status as a qualified beneficiary is important – it determines who is entitled to receive an accounting for a trust.

To simplify the facts, 3 separate trusts were held for 3 daughters – each daughter was the current income and principal beneficiary of their own separate trust. At the death of a daughter, the assets of her trust would be transferred to the trusts of her surviving siblings. At the death of the last daughter, the trust assets would go outright to 3 named charities.

Fla.Stats. §736.0103(16) provides general rules on when a living beneficiary is a qualified beneficiary. Generally, the rules include the current beneficiaries, and the next level of persons who would take if the trust then terminated or the current beneficiaries then ceased to be beneficiaries. Because a charitable organization is not a “living beneficiary,” Fla.Stats. §736.0110 applies similar rules when the beneficiary is a charitable organization. Relevant to the above facts, the statute provides “A charitable organization expressly designated to receive distributions under the terms of a charitable trust has the rights of a qualified beneficiary under this code if the charitable organization, on the date the charitable organization’s qualification is being determined:. . .  (b) Would be a distributee or permissible distributee of trust income or principal on termination of the interests of other distributees or permissible distributees then receiving or eligible to receive distributions.”

The trial court held that the charities were not qualified beneficiaries, since if a current trust terminates, they do not become a current distributee – instead it passes to the trusts for the other daughters. Presumably, the trial court would have ruled differently as to the last of these trusts after the other 2 daughters passed away, since then the charities would be next in line to benefit.

The 4th DCA reversed and found the charities were qualified beneficiaries. The court held that all the trusts should be viewed together and the rules should be applied as if all the individual beneficial interests terminated at the same time (and not sequentially). This is questionable to me, since it seems to disregard the word “then” in the statute. That is, the statute says call the new distributee a qualified beneficiary if the interests of a distributee THEN receiving or eligible to receive distributions has her interest terminated. The charities take only if the other non-beneficiary daughters have their interests terminated by death – but on the testing date they are not THEN receiving distributions from the subject trust because the current beneficiary of the trust is still living.

It is difficult to decipher what the court is saying. It appears to me that they are instead saying that the phrase “then receiving” is not applied just in the present moment, but also to future moments. That is, if the list of beneficiaries is A, then B, then C, then outright to D, the court appears to be saying that D is a qualified beneficiary under the above rules because D “would be a distributee. . . on termination of the interests of other distributees [our C]. . . then receiving” if we apply the rules prospectively to the point in time where C would be a current distributee even though C is not presently a current distributee. Under this logic, C would also be a qualified beneficiary. If this is the court’s theory, then I think it is nonsensical since effectively it makes everybody in the line of succession as a present OR FUTURE distributee a qualified beneficiary which is clearly not the purpose of the statute.

Note that if correct the analysis may apply equally to determining whether living persons are qualified beneficiaries – that is, the case may expand beyond the limited charitable beneficiary scenario and impact all trusts. If one compares the above language in Fla.Stats. §736.0110 with the general rules of Fla.Stats. §736.0103(16), there is little difference. The 4th DCA’s decision would seem to apply equally to that statute, and thus allow contingent beneficiaries who are more than one death away from becoming an active beneficiary (either by reason of transfers to different trusts at the death of a beneficiary or perhaps are in line of succession in one trust) may be qualified beneficiaries.

Hadassah, The Women’s Zionist Organization of America, Inc. v. Stephen G. Melcer, Trustee, et al, 2019 WL 141039 (4th DCA 2019)

Saturday, March 09, 2019

Bernie Sanders’ Tax Proposals

We all know that come 2025 the aggregate transfers covered by the unified credit for estate and gift taxes will revert to pre-Trump levels (subject to adjustments for inflation), thus ensnaring more taxpayers in the estate and gift tax web. Of course, should a Democrat be re-elected in 2020, changes in taxes to the higher side may occur even sooner than 2025.

A recent tax bill filed by Senator Bernie Sanders, a candidate for President, gives some insight about what tax legislation might look like if a Democrat is elected – more so if he is elected, but perhaps also as to other Democratic candidates.

Some key changes he would make to the high side include:

a. Increases in estate, gift and GST rates, to a maximum of 77% for members of the billionaire’s club;

b reduction in the unified credit exclusion amount to $3,500,000;

c. elimination of entity valuation discounts as to entity assets that are not business assets;

d. imposing a 10 year minimum term for grantor retained annuity trusts;

e. subjecting grantor trusts to estate tax inclusion at the death of the deemed owner;

f. limiting the GST exemption to a 50 year term; and

g. reduction in the annual gift tax exclusion.

These changes would be good news for tax planners, and bad news for those of moderate or higher wealth.

The old Chinese curse says – may you live in interesting times. I think most of us can agree, at least from a tax perspective if not a political perspective, we are all cursed under that measure.

S.309 — 116th Congress (2019-2020)

Sunday, March 03, 2019

Beneficiaries Hit with Transferee Liability Suit for Estate Taxes 19 Years After Date of Death

A recent case illustrates how beneficiaries and recipients of property from a decedent do not receive the property free and clear from estate tax liabilities. If estate taxes are not paid, the IRS can seek collection of the taxes from such beneficiaries and recipients as transferees under Code §6324(a)(2). And it may be a long, long time before the IRS ‘comes a knocking.’

The case illustrates to us that:

a. Transferee liability is not limited to those who receive a gift or bequest pursuant to a last will or disposition of property being administered under a revocable trust. Instead, it extends to recipients of all property included in the gross estate including:

     1. Transferees who received lifetime gifts that are included in the gross estate under Section 2035 because made within 3 years of death;

     2. Gift recipients whose gift was a discharge of indebtedness to the decedent;

     3. Transferees who receive the property as surviving joint tenants;

     4. Property passing to remaindermen when the decedent had a life tenancy in the property;

     5. Life insurance proceeds on the life of the decedent;

b. The IRS may take a long time before asserting transferee liability. The statute of limitations is 10 years from the date the assessment of tax is made against the estate. Here, the IRS filed suit in the 9th year of that 10 year period (and 19 years after the date of death).

c. The IRS will pursue transferee liability even when the estate tax liability is not that significant. Here, the unpaid tax was $28,939 (but with interest and penalties the amount sought was $65,874.80.

There are numerous Code provisions and procedures for relieving a fiduciary from liability for such taxes - but this is not the case for beneficiaries. Conservative recipients of property may not want to spend their inheritances or received property until they know the 3 year assessment period has expired without an assessment.

U.S. v. Ringling, 123 AFTR2d 2019-XXXX (DC SD 2/21/19)