Transfers with Retained Powers Over Beneficial Enjoyment Flashcards
Compare/Contrast this and transfers with retained beneficial enjoyment re goals
Both achieve transfer tax goals of taking on transfer tax on tax-exclusive basis of gift taxes and removing future appreciation from transfer tax base. Previous concerns were of clients who give stuff away but don’t want to remove from economic benefic. Once they are willing to stomach that, they are not always willing to release control over who else gets to enjoy it. Clients may be ok making gifts to kids but don’t want them to enjoy the money, at least not yet.
Primary provisions capturing gross estate property over which decedent has impermissible level of control
2036(a)(2)
Includes in estate transferred property if transferor retained right to designate enjoyment.
2038(a)(1)
Looks back from date of death whether transferred property was subject to any change throught he power to alter, amend, revoke, or terminate transfer at the time of death or within 3 years.
Unlike 2036, power need not be held through entire 2036 period or be created in original transfer so long as power is held at time of death.
2036 include
Archetypal example of 2036(a)(2) involving trusts
Parent creates trust that provides discretionary payments to child and serves as trustee.
Is power to change mere timing of distributions to designated beneficiary sufficient to trigger 2036(a)(2)?
Yes. Even in a trust with only a single beneficiary that distributes principal at a designated age or at death, the ability to control timing of income payments will trigger 2036(a)(2).
Distributions of principal under 2036(a)(2)
If single beneficiary who has all rights to income, accelerated distribution of principal does not trigger 2036(a)(2). [check 2038 implications]. If multiple beneficiaries that have equal right to income involved, the right to distribute principal that changes the right to income will trigger 2036(a)(2).
Must the “right” to designate enjoyment under 2036(a)(2) be a legal right or is a de facto right sufficient?
For 2036(a)(2), must be a legal right. Landmark case ruled that controlling the corporation whose shares were trust property did not count as “ascertainable and legally enforceable power” to control enjoyment of property even though his power of shareholder could restrict dividends which would restrict trust income [United States v. Byrum S.C.].
Did Estate of Powell mess this up?
Note difference from 2036(a)(1) which does include informal agreements.
Quick Compare/Contrast of impact of 2036/2038
2036 requires power to be held throughout entire 2036 period whereas 2038 only requires power to be held at death.
2036 power created at time of transfer whereas 2038 need not be created at time of transfer so long as decedent possesses it at time of death.
2036 includes all property whereas 2038 includes only portion of property subject to power.
2036(a)(2) right to designate exists even if exercise of power was subject to contingency beyond decedent’s control and which did not in fact occur prior to decedent’s death such as serving as contingent trustee of a discretionary trust for children in the event the named trustee dies, whereas 2038 does not apply if the power was subejct to contingency beyond decedent’s control and did not occur prior to decedent’s death.
Primary Applications of 2038
(1) Revocable Transfers; (2) Power to Alter or Amend beneficial interests; (3) Power to accelerate distributions; (4) Superseded Transfers.
Revocable Transfers that implicate 2038(a)(1)
Revocable inter vivos trusts that allow grantors to alter or amend trust terms or revoke trust altogether cause entire trust to be included in gross estate under 2038(a)(1).
Irrevocable trust can also be included under this to extent trust property is reachable by settlor’s creditors since this is effectively the same as being able to terminate trust. Be careful making settlor discretionary beneficiary.
Gifts by agents of decedent may be challengeable as being revocable by principal which causes 2038(a)(1) inclusion. Can be avoided by expressly granting agent power to make gratuitous transfers on principal’s behalf, although it should have a cap to avoid messes.
Effect of Power to Accelerate Distribution and Landmark Case
Lober v. United States S.C. Involved trust created for the benefit of decedent’s children which distributed principal of trust at 25 or death if earlier. Decedent possessed right to distribute trust principal to child as he saw fit including at death. Court ruled that this was retained power to control enjoyment.
Effect of Superseded Transfers with example
While creation of power does not need to occur in original transfer, it seems as though decedent must have been the one to set the wheels in motion.
If Husband unconditionally transfers property to Wife, who later devises property to a trust under her will and makes Husband trustee, it will not be included in Husband’s estate if he dies with this power.
However, it may be included if Husband made the original transfer in trust to Wife with Wife as trustee, but upon Wife’s death, Husband becomes trustee.
Primary powers over beneficial enjoyment of transferred property excluded from 2036(a)(2) and 2038(a)(1)?
(1) Powers relating to administration or management of trust property
(2) Powers limited by an ascertainable standard.
(3) 529 plans
Common justification for first two is that both are subject to judicial review and enforcement by court in equity.
Primary example of excluded administrative/managerial powers
The power to choose investments generally falls outside the scope of 2036 and 2038 because it does not constitute “control” over beneficial enjoyment and is already governed by fiduciary duty to exercise discretion evenhandedly.
Effect of Ascertainable Standard exclusion
HEMS and other ascertainable standards restrict discretion enough that transferor can’t act on whim which is basis of inclusion statutes.
Standards to avoid are any involving “necessary”, “happiness”, or “best interests”.
Only potential downside is HEMS standard may make it difficult to justify NOT making a distribution but this can be combatted in large part by directing trustee to consider other resources available to beneficiary.
Effect of UGMA and Section 529 Plans
Transferor of UGMA account should designate someone else as custodian because not limited by ascertainable standard and will be included in gross estate.
Transfers to 529 plan will not be included in transferor’s gross estate even when transferor continues to control beneficial enjoyment as account owner. Statutory exclusion.
