Not all Sec. 67(e) expense are subject to 2% haircut. The greater the 67(e) expenses that can reduce gross income by avoiding the limitation, make more likely to benefit from a deduction. Also, impacts trusts AMT. Final regulations apply for all years beginning after May 9, 2014. Investment advisory fees incurred for an investment objective unique to a trust may be protected. Fiduciary costs, such as probate and accountings, are not commonly incurred by individuals. Regulations don’t address how ordinary estate transmission expenses should be treated for IRC Sec. 67(e) purposes. How do you handle costs of deeds and assignment documents? What about sales expenses if a sale is made to pay taxes that would not have to be paid if we were not dealing with an estate? There may be future guidance to address this. SEC vs. Wyly. This was not a tax case but rather an SEC Disgorgement case. In 1990s two brothers created an Isle of Mann trust and intended the trusts to be non-grantor trusts. They took this position and did not report income on US tax returns. Advisers recommended not to make required SEC disclosures. They didn’t. The SEC eventually considered these provisions and won a civil enforcement action against the brothers. The problem the SEC faced was that there were no investment profits so how could they punish the brothers? The court decided if the brothers had filed as required with the SEC and the tax savings would not have occurred had they reported properly. So the amount of tax savings was determined to be the amount of profits to be reached as a result of the SEC violation, and the amount to be disgorged. If similar facts came before the court in a tax case, as to whether a trust is a grantor trust or whether trust property should be included in the grantor’s estate, it could be problematic. The basis for concluding that the trust was a grantor trust was based on the degree of control the grantors exercised over the trust decisions even though they had no legal right to do so. The trustees were required to take direction from trust protectors
2043 cases in the context of life estates. A 2043 offset may mitigate much of a 2036 argument. Exhaustion issue. IRC Sec. 7520. If annuity is paid from limited fund cannot use standard tables to value unless there are enough assets that will satisfy the annuity if the individual lived to age 110. This is an important limitation. Commentators argue that this test is unreasonable. Because of the income tax effects you will use a grantor trust to avoid immediate up front income recognition. So the trust may violate the exhaustion test. Idea is that if you live long term you win on the bet so you need a lot of assets. To satisfy the exhaustion test how much as to be in the trust to address it. It takes a substantial amount in the trust before the transaction can pass the exhaustion test. If you fail the exhaustion test you calculate the gift. Gift can be significant. Regulations may not be valid. The assumption of age 110 is not realistic. Can you ignore the exhaustion test? IRS logic is that there should be sufficient assets in trust to pay for stated term. Use a sufficiently prefunded trust which might be a previously created grantor trust. Use guarantees to shore up trust. See Trombetta above. Use a private annuity with a stated term that will change the calculation of the exhaustion test. Use a term longer than life expectancy. See GCM. If longer than tables annuity tables have to be used. IRC Sec. 1275 OID rules. There is an exception for annuities. Do we have to worry about this? Deferred SCIN. Kite case. “Juices” the transaction. Sale of assets from QTIP. 2519 issue.