Fiduciaries will remember 2012 as one of the busiest years in recent memory. Numerous changes occurred or were anticipated to occur, many of which impact trusts.
French Wealth Tax
Because fiduciaries don’t have enough U.S. tax law compliance issues, the French decided to add an additional burden on U.S. fiduciaries. In simple terms, the trustee of any trust that was created by a French resident, owns French assets or has a French resident beneficiary must disclose the trust to the French Tax Administration. The disclosure must include a detailed inventory of assets and information regarding the identity of the settlor, trustees, beneficiaries and the terms of the trust. Additionally, notice must be given to the French Tax Administration if there’s a variation in any of the trust’s terms or if the trust terminates. Unfortunately, there’s no clear guidance as to what, for this purpose, constitutes: (1) a trust; (2) a beneficiary; (3) a settlor; (4) French assets; (5) a variation in a trust’s terms; or (6) a trust termination. Nevertheless, failure to comply with the reporting requirements gives rise to a penalty equal to the higher of €10,000 or 5 percent of the fair market value of the trust fund. And, trustees are jointly liable with beneficiaries for the fine. Although the reporting was initially due on June 15, 2012, the deadline was postponed until Sept. 30, 2012, so that the French Tax Administration could create a form to file.
About mid-year 2012, the public began to realize that our country was headed toward a fiscal cliff—a combination of the cutting of significant benefits and the expiration of tax cuts leading to significantly higher federal income tax. As of this writing, no legislation to help avoid this cliff has been enacted. For fiduciaries, the looming expiration of tax breaks—especially the potential elimination of the $5.12 million applicable exclusion amount—resulted in a virtual blizzard of activity at the end of the year. So many individuals began to realize how beneficial it was to create a trust to shelter their entire applicable exclusion amount and allocate their generation-skipping transfer tax exemptions to it that attorneys had to turn away clients, trustees had to institute cut-off dates after which they wouldn’t accept new trusts and many valuation firms stopped accepting valuation assignments in November.
Repeal of DOMA
Finally, another flurry of activity that’s kept fiduciaries busy is the myriad of cases arising out of the various federal courts that have held the Defense of Marriage Act (DOMA) to be unconstitutional, thereby granting federal recognition to same-sex marriages.1 Currently, nine states2 plus the District of Columbia allow same-sex marriage, but federal law doesn’t. DOMA impacts 1,138 federal laws that discriminate against same-sex spouses. The successful challenges to the constitutionality of DOMA have come fast and furious—in 2012 alone, there have been more than seven cases that have found DOMA to be unconstitutional. In addition, the November 2012 election saw the first time that voters have approved state laws allowing same-sex marriage, as well as voting down state constitutional amendments that would have banned same-sex marriage.
Fiduciaries must be mindful of the status of DOMA. If the U.S. Supreme Court finds DOMA unconstitutional, executors must consider filing protective claims for refunds of estate taxes imposed on estates of individuals who were married to same-sex partners, but for which no federal marital deduction was allowed. Additionally, if a “spouse” is included in a class of trust beneficiaries or is a permissible appointee of a power of appointment, the class may now include same-sex spouses, depending on state law and the constitutionality of state laws that ban same-sex marriage. (For more information, see David J. Simmons, “Planning for the Demise of DOMA,” Trusts & Estates, November 2012 at p. 22.)
Let It Snow
No one knows how or when Congress will act to avoid or minimize the impact of the looming changes. We do know, however, that change is coming. These changes will undoubtedly bring new challenges, as well as new opportunities. Fiduciary professionals must be flexible to adapt to these changes and respond to the consequences.
1. See, e.g., Massachusetts v. U.S. Dept. of Health & Human Services, et al. 682 F.3d 1 (1st Cir. 2012).
2. Connecticut, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont and Washington state.