Estate Planning

A Trust Must Go On

Cosden’s revocable trust became irrevocable at her death in 2010. The trustees of the trust were Yvonne’s only child, Christopher, and Yvonne’s personal assistant and friend, Joseph Horgan. The trust provided for an immediate distribution of $250,000 to Horgan and the payment of all trust income to Christopher at least quarterly for life. At Christopher’s death, the remainder will be divided among several charities.

After five years of payments, Christopher grew dissatisfied with his income interest. He negotiated a termination of the trust with the charitable remainder beneficiaries, under which he would receive some 
$2 million immediately and the charities would get the balance, about $1 million.

Unfortunately, Horgan refused to go along with the plan so Christopher sued. The trial court found for Christopher, and ordered the trust to be terminated, essentially to avoid the expenses of additional trust administration. The Florida Court of Appeals then reversed.

The intent of Yvonne was clearly expressed in the design of the trust—she wanted to protect her son with an income for life, and she may not have trusted him with a lump sum distribution. What’s more, the trust included spendthrift provisions to protect the income interest. There was no waste of trust assets, and the expenses of administration have not been extraordinary. Early trust termination would contradict Yvonne’s purpose. Although there was no trust provision prohibiting early termination, the other provisions make clear that termination would frustrate the settlor’s intentions.

Expanded protection for older trusts

The “blue book” explanation of the Tax Cuts and Jobs Act, released by the Joint Committee on Taxation last December, included a footnote that says the temporarily increased exemption from the generation-skipping transfer tax may be applied to transfers in trust that occurred before the legislation was enacted. In the footnote, Taxpayer created a $6 million GSTT trust at a time when the exemption was $5.4 million, so that the inclusion ratio for the trust was 0.1. According to the blue book, Taxpayer may now apply his expanded exemption to that trust, to reduce the inclusion ratio to zero. (Having an inclusion ratio of zero means that transfers from the trust will never be subjected to the 40% tax on generation-skipping transfers; it is fully protected from future transfer taxation.) If the trust assets have gone up in value, more of the exemption will have to be used up to provide this protection.

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