Exam # 9921

Trust #1

Wendy established an irrevocable trust in 2002.

There is a completed gift to Dee of the present interest in the income on the trust. Wendy does get the annual exclusion of $11,000 on this completed gift. She gets this even thought the Trustee had the power to invade the corpus and income interest. Under 2503 where there has been a transfer to a person of a present interest, the possibility that the present interest may be diminished by the exercise of a power shall be disregarded if no part of such interest will at any time pass to any other person.

The remainder interest in the corpus will go to Dee or her estate depending on if she lives past 25. This is a future interest in the corpus and the annual exclusion will not be available at the time the trust is set up. Under 2503(c) if the trust had been set up to pass to Dee when she reached 21 instead of 25, then no part of the gift would have been considered a future interest.

Ben, as trustee, had the power to invade the corpus and income for the ascertainable standard of Dee's education comfort and support. This was a right to change the time or manner of enjoyment of the trust but sooner or later Dee was going to get the entire amount. Under Reg. 25.2511-2(d) this is still a completed gift.

Wendy had the power to replace Ben as trustee if he was unable or unwilling to continue. She could make herself the trustee.

Wendy died in 2006 - 4 years after she established the trust.

There is no 2035 gift tax problem - because she died more than three years after she would have paid the tax - it is not coming back in to her gross estate.

An argument could possibly be made that there is a 2036 problem. The trust was set up to support Dee. Wendy had a support obligation for Dee established by the divorce decree. The income interest that Dee has could be seen as being paid to fulfill Wendy's support obligation. If that is the case, then it would come back into her gross estate under 2036.

In addition, there is a 2036 problem because if Wendy became trustee she could effect the distribution of income. Even if she was not the trustee when she died, over the lifetime of the trust it was possible she would have the power so under 2036 the value of the trust will go back into her gross estate. This is true even though the income and remainder person is the same person. She could control the distribution of income.

Under 2038 if you have the right to alter, amend, revoke or terminate an interest on the date of death, that interest is included in your gross estate. When she died, Wendy was not a trustee. Therefore the value of the interest will not be included in Wendy's gross estate under 2038.

Trust #2

She established an irrevocable trust.

The gift of the income interest to Sara for her life was a completed gift even though it was subject to the trustee's power to invade the corpus at any time for Dee's "maintenance in the style to which she has become accustomed." This language is similar to the ascertainable standard's listed in the regulations. Because Sara's right to current enjoyment of the income was subject to being lost only if the need meet an ascertainable standard, the gift is complete. The $11,000 annual exclusion would be available. 

The value of the income interest will be determined taking into account the rules in 2702. Because the members of the trust are "family members" under the definition in 2704 the value of Sara's interest will be determined as if Wendy's contingent reversionary interest was zero. This will result in a clear overpayment of gift tax.

Wendy kept a contingent reversionary interest in the corpus. It was contingent on her outliving Sara. 

Wendy did not outlive Sara. The contingency vanished when she died so under 2033 there is nothing in her estate. Under 2036 there is nothing back in the gross estate because she didn't keep an income interest for herself. Under 2037 the value of the corpus that passes to Dee or Dee's estate will be in Wendy's estate. This is because, as a result of her death, someone that might have been cut out, got this property. This transfer is subject to the limitation that the value of the reversionary interest immediately before Wendy's death must exceed 5 % of the value of the property.

Dee or Dee's estate had a contingent remainder interest. The contingency was outliving Wendy. This was not a completed gift when the trust was set up. Because it was a future interest, there was no annual exclusion available for this gift. 

The trustee had the power to invade for Dee's "maintenance in the style to which she had become accustomed." The trustee was Ben but if he was unable or unwilling to continue, Wendy had the power to replace him, including replacing him with herself. Because Wendy had the power to replace Ben with herself, she will be treated as having the powers that the trustee was given. The question becomes whether invading for "maintenance in the style…" is an ascertainable standard. Under Reg 25.2511-1(g)(1) a standard "to enable him to maintain his accustomed standard of living" would be considered such an ascertainable standard. In that case even though she had the power to effect whether Sara would get the income or whether the corpus would be invaded for Dee's benefit, it will not go into her gross estate.
 
 

Exam # 9922

Money paid under a divorce decree is not a gift, even if no adequate consideration in money or money's worth is received, under Harris and 2516(2). Insofar as the trusts are used to discharge W's support obligations under the divorce decree, they are not gifts. I assume for most of the rest that her support payments are separate.

On setting up T1 - T1 seems to be irrevocable. It should be a complete gift. But there are two issues: 1) right to invade for "comfort"; 2) W's ability to appoint herself Trustee. However, since D will be getting the funds regardless of whether the trustee invades or not, and regardless of who the trustee is, the gift is complete. The trustee only has the ability to affect the timing of the distribution, not the identity of the beneficiary. "Education" and "support" are both ascertainable standards, as is "reasonable comfort" 25.2511-1g2. but again, since it's all going to Dee anyway, the gift is complete and fully taxable. 25.2511-2d.

W can take an annual exclusion of up to 11K on the income portion of T1 only, since future interests don't get 2503. So there is a Q wh there is 11K (or more) of income in this gift. At 7.0%, the income portion should be well over 11K. The income factor for 15 yrs gives us $637,554 worth of income interest. 7% per year is still 70K the first year. 

If W has not already used up her unified credit, she can apply it to this gift of $1M (OK, 989,000). If she has used it up, she will be gift-taxed accordingly. 

W can not split-gift it b/c she's not married & can't split-gift future interests anyway.

Invasion for D's support may be a gift to Xavier, since it may relieve him of a legal support obligation. But it doesn't matter who the gift goes to for W's taxes; it's a completed gift to the trust.

On setting up T2 - "income to S for life, then to W (me) if alive; if W is dead, then to D or D's estate" T'ee can invade for D's maintenance. "maintenance in the style to which she has become accustomed" is an ascertainable std, though not, perhaps, w/o some argument. In fact, I'm not sure if it is or not, but I think it is. The Q is wh evidence could be produced for the standard, and it could be thus enforceable by a court of equity, so it is ascertainable. Under Gokey, (citing Rock Island), it would be complete in Illinois at least. But it really depends on wh, under state law, the std is enforceable.

The income interest to S is worth $1M x .84777 = 847,770. But, the gift of the income interest to S could be incomplete, b/c W could appoint herself Trustee, then invade corpus for her daughter, for whom W has support obligations, thus essentially exercising her power for her own benefit, and reducing the income interest. Farrel. Even w/o the support obligation, if W can appoint herself, she can change who the beneficiaries are by invading, so it would be incomplete underSanford. But again, if the standard is acertainable, then W's ability to do this will be disregarded, and the gift will be considered complete. Gokey.

The gift of the remainder interest to D is definitely incomplete b/c contingent on D's outliving W. 

What's more, assuming the gift is complete b/c the standard for invasion is ascertainable under state law, both 2702 and Robinette will disallow W from deducting the value of her reversion interest in the trust, Robinnette b/c it is not susceptible to std valuation, 2702 b/c retained interest is valued at zero in trust for family members, unless unitrust or annuity. So assuming it's an ascertainable std, the gift will be valued at $1M. It will be taxed fully, and by now her unified credit must be gone! 

If the gift is not complete, b/c the standard is not ascertainable, then each year that income is paid that income will be gift-taxed, and W can take an annual exclusion each yr for that. Further, invasions for D may be a gift to X, since it will relieve him of his support oblig's. Further, 1/2 the amt of the invasion may not be a gift, b/c it may be seen simply as relieving W of her support obligations.

There are no estate or GST taxes on set-up of either trust

2003 - ben resigns; dad steps in. There are no gift, estate, or gst taxes to W. 

2006 - W dies. No gift tax conseq's.

There are no GST conseq's, even though D's grandfather F is trustee. His duty is just fiduciary. Even if he exercises the right to invade for D's benefit, he is not giving his money, he's distributing trust funds under his fiduciary obligation.

There are some estate taxes. To W's estate. 

2037 will bring the value of her reversion in T2 back into her estate under 2037 b/c of W's reversion, to the extent of that reversion which now will go to D, insofar as the value is more than 5% of the value of the property (must be figured by actuary, not tables). And it will also may back under 2036a2, (if std was not ascertainable) b/c by making herself trustee, she could have determined who (D vs S) got the funds, and 2036 speaks of a period of time ending with her death. It's not really needed, but 2038 might make troubles too. At the date of death she could replace the trustee with herself. 2035 may enter as well, since it may be w/in 3 yrs (I don't know w/o knowing what months in 2003 & 2006 events occurred) that she actually replaced the trustee and actually had the power to do so. So the entire value at the date of death could back into her GE under 2036 or 2035 and be taxed. The reversion definitely does under 2037. Her unified credit must be gone by now, so she'll be taxed at quite a high rate.

As for T1. 2036 fails b/c even if she appointed herself trustee, W could not have affected who got the cash, only when. 2038 may apply though, b/c right to change timing is right to alter under 20.2038-1a. But only the amount subject to the power would go in. If T1 has never been invaded in fact, could make the arg that the amt subject to the power was zero. Further, since it was probably an ascertainable std (depending on whether "comfort" is "reasonable comfort") could argue W in fact had no power to invade. Jernnings

Now there may also be a 2041 GPOA problem, though again, only if the power to invade is determined not to be subject to an ascertainable standard. The power to invade for D, and thus discharge W's support obligations, is a power to invade for W. Since W could appoint herself, that could be a GPOA, which would bring it all back into her GE under 2041.

Here's an argument: when Ben resigned, W could have apointed herself, and thus realized the power that she had to exercise her GPOA. When she instead appointed F, she released her GPOA. OK, it's a stretch.