2014 Developments in Trusts and Estates

New State Laws

No Need to Go on a Cruise to Get Married by the Ship’s Captain

     City clerks of charter cities are now able to perform marriage ceremonies. (Family Code section 400.1)

New Tax Cases

Better Late Than Never, But Never Late is Better

     All too often, the surviving spouse fails to divide the trust into subtrusts (e.g., a QTIP Trust and an Exemption/Bypass Trust) on the death of the deceased spouse. In Letter Ruling 201429009, the IRS reviewed a situation where, long after her husband’s death, the widow went to a new lawyer who advised her to divide the trust and fund the new subtrusts. However, before she could complete this, the widow died. The IRS ruled that the portion that should have been allocated to the Exemption Trust would be treated as if the process had been completed: “Corrective measures were immediately taken during [the widow’s] life and continued after [her] death to properly allocate assets . . . . Through a forensic review of the historical financial records, [the widow] was able to ascertain and track the assets which should have been allocated to the [Exemption] Trust . . . . It is further represented that distributions of principal made to [the widow] were from sufficient funds allocated to the Survivor’s Trust and no principal distributions were made from the [Exemption] Trust.”

Same-Sex Marriages and the IRS

     In response to the widespread recognition of same-sex marriages, the IRS stated that the terms “marriage” and “spouse” are “gender-neutral” and that it would recognize the validity of same-sex marriages regardless of whether or not the taxpayers’ state of residence recognizes the marriage. (Rev.Rul. 2013-17.)

My Dog Ate My Tax Return is Not an Excuse

Consistent with prior cases in California, the Court of Appeals held that reliance on expert advice does not constitute reasonable cause (and thus eliminate penalties) for failure to timely file an estate tax return. (Knappe v. U.S., 713 F.3d 1164 (9th Cir. 2013.)

The Bigger They Are The Harder They Fall

The IRS is asserting a gift tax deficiency against Sumner Redstone (with an estimated net worth of $6.2 billion) in connection with the settlement in 1972 of a lawsuit among his family members. That’s over 40 years ago. Think you can get rid of your financial records after 3 years? Think again. (Sumner Redstone, U.S. Tax Court case no. 8097-13.)

Back to the Future – Not

As part of his proposed budget, President Obama will ask Congress to roll back estate, gift and generation-skipping transfer tax rates and exemptions to 2009 levels. Specifically, he proposes a 45% top rate (it’s currently 40%) and exemptions of $3.5 million for estate and generation-skipping transfer taxes and $1 million for gift tax (it’s currently $5.43 million for all three taxes). President Obama will also propose eliminating “Crummey Trusts.” Instead of being able to shield up to $14,000 of gifts in trust per beneficiary each year, transfers to a trust with multiple beneficiaries would only be allowed a combined $50,000 exemption. Left untouched would be outright gifts and transfers to a trust with a single beneficiary.