Making the Election or NotMaking the Election or Not

Is the value of the estate (including prior taxable gifts) impacted by aggressive discounts or deductions?

If the gross estate will require the filing of a federal estate tax return under the default estate tax regime that will reflect aggressive discounts or deductions, remaining within the estate tax regime may not be beneficial, regardless of the tax calculation.

Will the tax election impact how assets are distributed or allocated?

You may see the impact of the election reflected in which (or whether) trusts are funded; in different terms for income and principal rights among the trusts; in different beneficiaries; in different powers of appointment to which such trusts are subject; and in different withdrawal rights.

We've already seen several situations in which the election impacts whether only a family trust is funded (as would occur under the modified carryover basis approach from the Economic Growth and Tax Relief Reconciliation Act of 2001) or whether both a family and marital trust are funded (as would occur under the 2010 Tax Act). In many cases, the surviving spouse is the sole beneficiary of both trusts, but is given a broad limited power of appointment over any marital trust and a very narrow limited power of appointment over the family trust. Depending on the family situation, this difference may be significant to the surviving spouse and to the children, whether they're children of the decedent, the surviving spouse or both. Of course, this situation may be exacerbated if the descendants are beneficiaries of the family trust, either exclusively or with the surviving spouse. In those situations, either a family settlement agreement or a court proceeding may be necessary to resolve the conflict.

Does the governing instrument or state law allow for equitable adjustments?

Were such adjustments between principal and income permitted to compensate for the impact of tax elections? If so, we may consider making an adjustment, subject to approval from all impacted beneficiaries.

Does the attorney for the estate or trust agree with our proposed approach?

We request and review the written opinion from the attorney prior to implementing the election decision to ensure that we've considered the issues from all angles before we proceed.

The challenges inherent in these decisions are just beginning to come into focus as we review each of our accounts. As we move through our own process of settling 2010 decedents' estates, new issues will continue to emerge, but will be met with the care and thoughtfulness required of all fiduciaries who are emerging from a year in the trenches.