• Oregon Supreme Court upholds including out-of-state QTIP trust in surviving spouse’s estate—In Estate of Evans v. Dept. of Rev. (368 OR 430, July 29, 2021), the estate of Helene Evans appealed from the Oregon Tax Court’s determination that a qualified terminable interest property (QTIP) trust established by Helene’s late husband in Montana was taxable in her estate.
Helene had moved to Oregon one month before her husband Gillam passed away in 2012. Gillam’s will provided for a testamentary trust for Helene and other beneficiaries. The trust was governed by Montana law and administered by his son, a Montana resident. Originally, the will provided that the trust was for the benefit of multiple beneficiaries. However, the executor petitioned a Montana court to modify the trust to allow for a QTIP election. The court approved, and the trust was reformed so that Helene was entitled to the trust income during her life, and principal could be distributed to her in the trustee’s discretion for her health, education, maintenance and support in her accustomed manner of living. She didn’t have a power of appointment (POA).
Gillam’s estate filed a federal estate tax return and made a QTIP election for the trust. Montana didn’t have an estate tax. The trust was administered for Helene’s benefit, but in 2014, she sought additional distributions and, under Montana law, settled with the trustee for one lump sum payment and then a fixed monthly annuity.
When Helene died in 2015, her estate filed an Oregon estate tax return and included the value of the QTIP trust on the return, as required by Oregon law. However, later, the estate sought to exclude the value of the trust assets and filed for a refund. The estate claimed that Oregon’s tax on the trust assets violated the due process clause.
The Tax Court disagreed, and the estate appealed to the Oregon Supreme Court. For estate tax purposes, the due process clause requires that a state have a minimum connection to the person or property it’s taxing. Helene’s estate argued that the due process clause doesn’t permit a state to impose estate tax on a trust holding intangible assets solely because the resident of the state was an income beneficiary during her life, without any practical control of the trust assets.
The court confirmed that the question of whether a state has necessary connections depends on the nature of the resident’s interest in the intangible property. The court distinguished the recent case of North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trusts, 139 S. Ct. 2213 (2019), in which the U.S. Supreme Court held that North Carolina couldn’t, under the due process clause, tax trust income over a 4-year period when: (1) the trust was administered under New York law by a New York trustee, and (2) all beneficiaries lived in North Carolina but no distributions were actually made to any beneficiaries. Other cases the court reviewed involved trusts in which the beneficiaries had some form of POA—which was determined to be sufficient control to allow the beneficiary’s state of residence to tax the trust.
Ultimately, the Oregon Supreme Court held that while a POA may be sufficient to establish a connection that permits taxation, it’s not a prerequisite. Other forms of “possession, control or enjoyment” may also satisfy the due process clause. It found that Helene’s beneficial interest in the trust, both income and principal, qualified as a substantial measure of enjoyment that allowed Oregon to tax the trust as part of her estate.
• Priority Guidance Plan released—The Department of Treasury released its Priority Guidance Plan on Sept. 9. Regarding estates, gifts and trusts, the following items were listed as top priority for the administration.
The administration wishes to finalize regulations establishing a user fee for estate tax closing letters (proposed regulations were published on Dec. 31, 2020) and for the following Internal Revenue Code sections:
- IRC Sections 1014(f) and 6035 regarding basis consistency between the estate and the person acquiring property from the decedent (proposed and temporary regulations were published on March 4, 2016).
- IRC Section 2642(g) concerning the extensions of time to allocate the generation-skipping transfer (GST) tax exemption.
- IRC Section 2801 regarding U.S. citizens and residents who receive gifts or bequests from certain expatriates (proposed regulations were published on Sept. 10, 2015).
- IRC Section 2032(a) regarding restrictions on estate assets during the 6-month alternate valuation period (proposed regulations were published on Nov. 18, 2011).
In addition, the Priority Guidance Plan listed these IRC sections as the Treasury Department’s focus for issuing new proposed regulations:
- IRC Section 2010 regarding whether gifts that are includible in the gross estate should be excepted from the special rule of Treasury Regulations Section 20.2010-1(c).
- IRC Section 2053 concerning personal guarantees and the application of present value concepts in determining the deductible amount of expenses and claims against the estate.
- IRC Section 2632 providing guidance governing the allocation of GST tax exemption in the event the Internal Revenue Service grants relief under Section 2642(g), as well as addressing the definition of a GST trust under Section 2632(c) and providing ordering rules when GST tax exemption is allocated in excess of the transferor’s remaining exemption.
- IRC Section 7520 regarding the use of actuarial tables in valuing annuities, interests for life or terms of years and remainder or reversionary interests.
• IRS issues private letter ruling approving early division of trust without income or GST tax consequences—In PLR 202133005 (Aug. 20, 2021), the trustee of an irrevocable trust petitioned a local state court for an early division of an irrevocable spray trust a married couple had established for the benefit of their children and more remote descendants. The trust was entirely GST tax exempt through the application of the couple’s GST tax exemption.
The trust provided that on the death of the surviving grantor, the trust would split into equal shares for each child who was living or had descendants living. Each share would be held in a separate ongoing trust for the benefit of the child and/or their descendants. One of the grantors died, but during the survivor’s life, due to the growing number of family members and divergent financial and personal needs of the beneficiaries, the trustees decided it would be beneficial to administer the trusts separately for each family line. The trust instrument itself didn’t explicitly permit early division but state law allowed division of trusts as long as it wasn’t prohibited by the trust instrument. The beneficiaries and trustees entered into a settlement agreement, and the court approved the trustees’ petition for reformation to structure the early division, pending IRS approval.
The IRS ruled that the early division of the trust assets, pro rata, into separate sub-trusts for each family line wouldn’t have any income tax or GST tax consequences: The sub-trusts would keep the basis of the assets as they were prior to the trust funding, there would be no recognition of gain, the holding period would remain the same and the GST status would be unaffected. The GST ruling was dependent on the holding that beneficial interests weren’t shifted to lower generations or wouldn’t extend the time for vesting (because the original rule against perpetuities period was retained in the sub-trusts). There was little explanation for the income tax rulings, just a confirmation that division into separate trusts for each family line didn’t cause a material change in the beneficiaries’ interests. The court noted that the assets were allocated pro rata to the equal shares for each family line’s sub-trust.
