Improper Decanting [Florida]

In a case of first impression, Florida’s 5^th District Court of Appeals interpreted Fla.Stats. §736.04117 relating to the ability of a trustee to decant a trust into a new trust arrangement. A trustee transferred the funds of a trust held for the current beneficiary (the settlor’s son) into a special needs trust also held for the current beneficiary of that same beneficiary. The trustee could do this since the trustee had the right under the first trust agreement to distribute all or part of the principal to the son in his absolute discretion.

The appellate court found two deficiencies with the decanting. First, Fla.Stats. §736.04117(1)(a)1. requires that the “beneficiaries of the second trust may include only beneficiaries of the first trust.” Under the special needs trust the remaindermen after the death of the son were other beneficiaries of the pooled trust. Such other beneficiaries were not beneficiaries of the first trust – instead, the remaindermen under the first trust were other relatives of the settlor. So the new trust arrangement included beneficiaries that were not beneficiaries of the first trust. While not explicitly addressed, this finding implies that the focus on same beneficiaries includes both current beneficiaries, and future beneficiaries such as remaindermen.

The second deficiency was that the trustee did not provide the 60 days adanced notice of the intent to decant to the qualified beneficiaries, as required by Fla.Stats. §736.04117(4).

Pursuant to these violations, the appellate court ordered the funds of the special trust returned to the original trust.

An interesting question is whether failing to give the requisite 60 days notice is enough to void the new trust funding in all events – the statute does not explicitly provide what the penalty is for a violation of that notice provision. This case will not answer that question, since there was also the other violation of including new beneficiaries so we don’t know if the 60 day notice violation would have been enough by itself to void the new trust funding.

Harrell and Dake v. Badger, 5^th DCA, Case Nos. 5D14-1145 and 5D14-3469 (2015)

2013 Gift Tax Assessment for 1972 Gift Upheld by Tax Court - 41 Years of Separation

The IRS has 3 years to assess gift taxes for gifts disclosed in a gift tax return. If a gift tax return is not filed, the statute of limitations never begins to run. Nonetheless, it is rare for the IRS to assess gift taxes relating to gifts that occurred many years in the past.

A recent Tax Court case confirms that the IRS is not legally barred from assessing gift taxes many, many years after the gift when no gift tax return is filed, if it so desires. Here, Sumner Redstone gifted shares of stock in a closely held entity to two trusts for his children in 1972. Due to litigation commencing in 2006, the IRS became knowledgeable of the gifts, and ultimately assessed gift taxes in 2013 for the 1972 tax year.

The Tax Court found that such assessment was valid, despite the 41 year spread between the taxable gift and the tax assessment.

Mr. Redstone argued that the doctrine of laches should bar the assessment. Laches is an equitable concept that will bar actions after an extended period of time, even if a legal statute of limitations is still open. The Tax Court noted that the U.S. is not subject to the defense of laches in enforcing its rights. Further, it found the facts supporting the application of laches are not present here - it would have required that the IRS had been aware of the 1972 gifts but sat on its rights and that the taxpayer suffered undue prejudice as a result. Here, the IRS did not become aware of the gift transfers until 2010.

Interestingly, back in the 1970's the IRS made inquiries of Mr. Redstone relating to gifts made in 1972 in context of political contributions that Congress was investingating. Mr. Redstone argued that this review was an examination, so that a second examination in 2011-2013 violated the one examination rule of Section 7605(b). The Tax Court rejected this, finding that the review in the 1970's did not give rise to an examination. Further, a violation's effect is limited to giving rise to procedural obstacles to the conduct of the second examination, such as blocking the exam or the enforcement of summons. Such a violation does not invalidate a deficiency coming from that second examination.

Note that we first discussed these issues in a posting here back in 2013.

Sumner Redstone v. Commissioner, TC Memo 2015-237

FIRPTA WITHHOLDING RATE BUMPED UP TO 15%

The Protecting Americans from Tax Hikes Act of 2015 was recently signed into law. Section 324 of the Act modifies Code Section 1445 to increase the required withholding amount on dispositions by nonresident aliens and foreign entities of U.S. real property interests from 10% to 15%.

Nonetheless, the prior 10% rate will continue to apply dispositions of a residence if (a) the amount realized is $1 million or less, (b) the transferee will use the property as a residence, and  (c) the $300,000 or less exemption from withholding does not apply.

I guess since the withholding tax is imposed on non-U.S. persons, this provision does not contradict the title of the Act which reads "protecting Americans from tax hikes" (emphasis added), at least if one reads the term "American" as only including tax residents of the USA and excluding tax residents of other countries in the Americas. Technically, this is not a tax hike anyway - just a withholding tax that is subject to refund if the seller's U.S. income taxes are less than the 15% withholding.