In April, I wrote how a U.S. District Court held that a beneficiary’s discretionary interest could be liened by the IRS for tax liabilities of the beneficiary. The interest was “halfway” between a purely discretionary interest and a mandatory HEMS ascertainable standard interest (health, education, maintenance, support) clause - it provided for HEMS-like distributions, but only in the “sole discretion” of the trustee. You can read my post here.
The District Court has now issued an order relating to enforcement of the lien. The IRS sought an order forcing a distribution to pay the beneficiary’s liabilities. The District Court denied the IRS’ request.
The IRS’ rights under its lien only extend as far as the beneficiary’s right to trust funds. Here, that right “has no permanently fixed dollar value” and “is variable according to [his] needs.” The amount of the beneficiary’s interest is equal to “payments the withholding of which would constitute an abuse of discretion in applying an ascertainable standard.” This could vary from $0 to some other dollar amount.
The Court noted that the beneficiary’s right can be “assigned a reasonably accurate dollar value by assessing [his] current needs and living demands.” The problem was that the IRS provided no evidence of the beneficiary’s needs or demands and therefore there is no reason to think the lien extends to all the trust funds.
Is this last part true - can a dollar value be assigned? If the clause was a mandatory HEMS clause, the answer should be yes (albeit difficult to calculate) because of the judicial and IRS fiction that HEMS standards are capable of being calculated and enforced. But here, the trustee had “sole discretion” to determine the distribution within the authorized standard for distribution. Typically, a trustee with sole discretion still has a duty to operate with good faith. Per the reference above to abuse of discretion, the court appears to be saying that there is some number that can be calculated - it is not the amount that a mandatory distribution under the standard would require but that minimum amount the trustee would need to distribute without being deemed to violate his or her discretion. If that is what the court is saying, then I would agree with the analysis. But heaven knows how a trial court in a tax case will determine that!
The government also argued that it should be able to force a distribution since at the death of the beneficiary the remaining trust assets would pass to the beneficiary’s estate. An interesting argument, but one which the court did not entertain since it was raised too late in the procedural process.
Duckett v. Enomoto, Et Al., 117 AFTR 2d 2016-XXXX, (DC AZ), 06/06/2016