• U.S. Supreme Court grants certiorari in case regarding trust nexus—In Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, No. 307PA15-2 (N.C. Sup. Ct. June 8, 2018), a North Carolina state court held that it was unconstitutional for the state to tax trust income solely because trust beneficiaries were residents of the state. The trust was originally established in New York, with New York trustees, and governed by New York law. Ultimately, the trust split into separate trusts, one of which was for the benefit of a North Carolina resident and her three children.
Trust distributions were discretionary: None of the North Carolina beneficiaries were entitled to any distributions of any income or principal and, in fact, no distributions were made. But, North Carolina taxed the accumulated trust income.
At no time did the trust hold any property in North Carolina, nor was any trustee a North Carolina resident.
The state court agreed with the taxpayer that there weren’t sufficient contacts with the state to permit the state to tax the trust. The residency of the beneficiaries wasn’t enough.
The Supreme Court has agreed to hear the case, noting that while four state courts have allowed a state to tax a trust solely because of the residency of its beneficiaries, five states have held such tax violates due process.
• “Sprinkling” charitable remainder unitrust (CRUT) approved—In Private Letter Ruling 201845014 (Nov. 9, 2018), the Internal Revenue Service approved a CRUT in which the unitrust payment was paid to the grantor (or his spouse following his death) and to charities, in a proportion determined by the independent trustee.
The taxpayer established two CRUTs. The first CRUT was for the taxpayer’s life. A certain unitrust percentage was to be paid every year. A fixed portion of the unitrust amount was to be paid to the taxpayer, plus an additional percentage to be determined by the independent trustee to ensure that the total portion paid to the taxpayer wasn’t de minimis. The balance of the unitrust amount was to be distributed to charities the independent trustee selected from a class designated by the taxpayer.
At the end of the trust term, the trustees were directed to distribute the trust property to charities appointed by the taxpayer in his will, otherwise as the trustee would select.
The second CRUT was identical except that its term extended for the taxpayer’s and his spouse’s successive lifetimes, with the taxpayer retaining the right to revoke his spouse’s successor interest.
The IRS ruled that the independent trustee’s power to distribute a portion of the unitrust amount to such one or more of the taxpayer and charities included in the charitable class designated by the taxpayer didn’t interfere with qualifying as a CRUT.
The IRS further ruled that:
• The taxpayer’s and his spouse’s power to remove the independent trustee didn’t prevent the trusts from qualifying as CRUTs because they couldn’t substitute any individual who was subordinate to themselves.
• The taxpayer’s retained power to designate the charitable class of the trusts didn’t prevent the trusts from qualifying as CRUTs.
• The taxpayer’s retained power to revoke the spouse’s successor interest by will in CRUT 2 didn’t interfere with its qualifying as a CRUT.
• The taxpayer’s transfers to the CRUTs weren’t completed gifts due to his retained powers to designate the charitable class. In CRUT 1, the completed gifts occurred only when the distribution of the unitrust amount was actually made to the charities. This was the same for CRUT 2. In addition, with CRUT 2, because the taxpayer retained the right to revoke his spouse’s interest, the gift of the survivor interest was also incomplete until his death.
• For CRUT 2, the entire value of the trust property will be includible in the taxpayer’s estate, subject to charitable and marital deductions, which will completely offset the included value.
This PLR is interesting in that it shows how keeping the gifts incomplete through certain retained powers allows flexibility: There are no completed gifts (and related deductions) until distributions are actually made.
• Disclaimers by trustee and family allow spouse to roll over individual retirement account received through estate—In PLR 201901005 (Feb. 4. 2019), the taxpayer sought IRS confirmation of a transaction involving her husband’s IRA. The taxpayer survived her husband, and his IRA was payable to his revocable trust. No contingent beneficiary was named. Within nine months of his death, the trustee of the trust executed a qualified disclaimer. Under state law, the trustee’s disclaimer caused the IRA to be payable to the estate and therefore subject to the deceased spouse’s will. Furthermore, the spouse’s son and two grandchildren also disclaimed any interest they may have had in the IRA through the estate within the required time period. Under applicable state law, due to the disclaimers by the other family members, the taxpayer was entitled to the entire IRA as a beneficiary of the deceased spouse’s estate.
The taxpayer wished to distribute the IRA to herself, as the sole beneficiary, and roll over the distribution to her own IRA.
The IRS confirmed that the spouse could do so. It held that under the applicable rules of Internal Revenue Code Section 408, the taxpayer would be treated as having acquired the IRA directly from her spouse, and she was eligible to roll it over to her own IRA within 60 days of the distribution without including the distribution in her own gross income.