October 6, 2022

Volume XII, Number 279

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Husband's Failure to Properly Fund Trusts After Wife's Death Caused Gross Inclusion of the Entire Balance of Wife's Revocable Trust in His Gross Estate

In 1994, husband and wife created revocable trusts identical to one another. The trusts provided that upon the first spouse's death, a credit shelter trust (the "Family Trust"), a GST exempt QTIP trust and a GST non-exempt QTIP trust (the two QTIP trusts, the "Marital Trusts") would be created. The Marital Trusts provided that income was to be paid to the surviving spouse on an annual basis.  The Family Trust also provided an inter vivos power of appointment for the surviving spouse to appoint property to any one or more of their descendants and charitable organizations.

The wife died in 1998 with a gross estate large enough that all three trusts were to be created and funded. The husband never segregated the trust assets into the three trusts. During the husband's lifetime, he made three significant withdrawals from the trust. He withdrew about $250,000 and then about $830,000 which he used to make a charitable contribution to a university. He also withdrew about $400,000 which he deposited into one of his accounts.

When the husband died, his Personal Representative could find no record of funding the three trusts, so he deemed all of the distributions to have come from the Marital Trusts. These distributions would have exhausted the assets of the Marital Trusts so that only the Family Trust, which did not have to be included in the husband's gross estate, was left.

The Service argued that the amounts later contributed to the university could only have come from the Family Trust because that was the trust with an inter vivos limited power of appointment in favor of charities and that the contributions were made directly from the wife's trusts to the university (rather than being distributed to the husband first). The amount that the husband withdrew from the trust account and then deposited into his own account was deemed to have come from the Marital Trusts.

In summary, it is important to segregate assets and fund trusts correctly at the appropriate time. While it can be attractive to leave assets in one trust account for ease of administration, the trusts must be funded correctly to achieve estate tax planning objectives.

© 2022 Proskauer Rose LLP. National Law Review, Volume IV, Number 136
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About this Author

Albert W Gortz, Proskauer Rose Law Firm, Personal Planning Attorney
Partner

Albert W. Gortz is a Partner in the Personal Planning Department and has been with the firm since 1970 and in the Florida office since he opened it in 1977.

561-995-4700
George D Karibjanian, Proskauer Rose Law Firm, Personal Planning Attorney
Senior Counsel

George D. Karibjanian is a Senior Counsel in the Personal Planning Department, resident in the Boca Raton office. George is Board Certified by the Florida Bar in Wills, Trusts & Estates and is a Fellow in the American College of Trust and Estate Counsel.

561-995-4780
David Pratt, Personal Planning Attorney, Proskauer Rose Law Firm,
Partner

David Pratt is a Partner in the Personal Planning Department and head of the Boca Raton office. His practice is dedicated exclusively to the areas of trusts and estates, estate, gift and generation-skipping transfer, fiduciary and individual income taxation and fiduciary litigation. He has extensive experience in estate planning and post-mortem tax planning. He has been asked to serve as an expert witness on several occasions, and has been referred to as a “seasoned trusts and estates lawyer” in a Florida Third District Court of Appeals Opinion

561-995-4777
Mitchell M Gaswirth, Proskauer Rose Law Firm, Tax Attorney
Partner

Mitchell M. Gaswirth is a Partner in the Tax Department. His practice focuses primarily on income, gift and estate tax and related business planning. Mitchell counsels individuals, entrepreneurs and business entities in connection with the various income and other tax issues which arise in sophisticated business transactions.

310-284-5693
Andrew M Katzenstein, Proskauer Law Firm, Personal Planning Attorney
Partner

Andrew M. Katzenstein is a Partner in the Personal Planning Department in the Los Angeles office where he assists high net worth individuals, companies and charitable organizations with all aspects of tax and estate planning. He focuses his practice on tax planning matters, which include estate, gift and generation-skipping tax planning, as well as income tax of trust planning, probate and trust administration matters, resolving disputes between fiduciaries and beneficiaries, and charitable planning

310-284-4553
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