N
E
W
S
L
E
T
T
E
R
Trusts and Estates
Published by the Virginia State Bar Trusts and Estates Section for its members
Volume 21, No. 1
Letter from the Chair
The Board of Governors of the Trusts and Estates
Section of the Virginia State Bar is pleased to bring to
its members the Fall 2006 newsletter.
The first article, by Katherine Ramsey, discusses the
charitable giving provisions under the Pension
Protection Act of 2006. Katherine covers the new
rules with respect to making tax-free distributions from
IRAs to charity for 2006 and 2007. She also discusses
the new deductibility rules for conservation easements
and other changes in tax law with respect to
conservation easements. Finally, Katherine covers the
deductibility rules for gifts of tangible property, as well
as the recordkeeping and substantiation requirements
for gifts to charity.
The second article, by Mark Cohen, discusses the law
of insurable interests in trusts in light of the Chawla
decisions, and how states, such as Virginia, have
enacted statutes to address the concerns raised by
Chawla.
The third article, by Jay Turner, covers the new early
termination provisions for trusts under the Virginia
Uniform Trust Code. Jay discusses the practical
considerations in distributing assets upon early
termination of a trust, as well as the tax considerations
in terminating a trust early. Jay also discusses some
special issues that may arise in early termination of life
insurance trusts, QTIP trusts and charitable trusts.
Winter 2007
I hope that you find the articles in this newsletter
informative. If you would like to write an article for
an upcoming newsletter, or have ideas for topics for
future articles, please contact Julie King, our
newsletter editor. If you should have any questions or
comments about this newsletter or the Trusts and
Estates Section, please contact me, the newsletter
editor or any of the other members of the Board of
Governors. Our contact information is listed at the end
of this newsletter.
Donna Esposito Fincher, Chair
TABLE OF CONTENTS
Congress Giveth and Congress Taketh Away:
Charitable Giving Provisions of the Pension
Protection Act of 2006
Katherine E. Ramsey .................Page 2
Insurable Interest in Trusts
Mark Cohen ...............................Page 7
Practical Considerations in Terminating Trusts
Under Virginia’s Uniform Trust Code
John H. Turner, III ....................Page 11
If you are reading this newsletter and are not a member
of the Trust and Estates Section, please join us. You
can become a member by contacting the Virginia State
Bar and paying a minimal additional fee.
The Trusts and Estates Newsletter is published by the Virginia State Bar Section on Trusts and Estates for its members to provide information to attorneys
practicing in these areas. Statements, expressions of opinion, or comments appearing herein are those of the editors or contributors and not necessarily those of
the Virginia State Bar or the Section on Trusts and Estates.
CONGRESS GIVETH AND CONGRESS TAKETH AWAY:
Charitable Giving Provisions of the Pension Protection Act of 2006
by
Katherine E. Ramsey
Hunton & Williams LLP
“Real charity doesn’t care if it’s taxdeductible or not.” – Dan Bennett
deductions or whose deductions are subject to
phase-out can benefit.
Mr. Bennett may be right, but it is of course
essential for professionals to be able to advise
their clients properly regarding the deductibility of
a charitable gift for income and transfer tax
purposes. On August 17, 2006, President Bush
signed the Pension Protection Act of 2006
(“PPA”), P.L. 109-280, into law. Among its many
provisions are new rules pertaining to the
deductibility of certain charitable gifts. This
article describes the most significant of these
changes. Although many of them are applicable
only to gifts made in 2006 or 2007, others are not.
Practitioners should be familiar with all of them if
they hope to help their clients avoid an unpleasant
surprise.
It is important to note that a distribution from a
donor’s Roth IRA, SEP, SIMPLE IRA or 401(k)
plan is not eligible for the special treatment, nor is
one made to a private foundation, supporting
organization or donor-advised fund. Furthermore,
the donor must be the individual for whose benefit
the IRA is maintained (that is, the owner or the
owner’s spouse, if he or she has rolled the IRA
over into his or her own IRA or elected to treat the
deceased spouse’s IRA as his or her own), and the
gift must pass directly from the IRA administrator
to the charity. Gifts to a split-interest trust or gifts
of funds distributed to the taxpayer do not qualify.
Also, the entire distribution must be otherwise
includible in gross income and deductible under
Section 170 of the Internal Revenue Code (the
“I.R.C.”), determined without regard to applicable
percentage limitations.
When applying this
requirement in cases where only part of the
distribution would normally be included in
income under I.R.C. Section 72 (for example, if
the donor has previously made non-deductible
contributions to the IRA), the entire distribution is
generally treated as coming first from the taxable
portion.
Tax-Free IRA Distributions
A taxpayer who has attained age 70½ (at the time
of the gift) may give up to $100,000 per year from
his or her individual retirement account (“IRA”)
to charity in 2006 or 2007 without having to
include the distributed amount in his or her gross
income for tax purposes. The distribution counts
toward the minimum distribution requirements.
Because the distribution is excluded from income
rather than deducted, it does not affect the donor’s
ability to make other, deductible charitable gifts
subject to the usual percentage limitations. It also
does not increase the donor’s income for social
security purposes or for applying the itemized
deduction floors for medical and miscellaneous
expenses. Even donors who do not itemize
Lastly, the donor may not receive anything from
the charity in exchange for the gift. This
restriction prevents a taxpayer from using an
excluded distribution to satisfy a binding pledge.
Page 2
Incentives for Conservation Easements
A corporate taxpayer does not benefit from the
higher 50% AGI limit, but it may deduct the value
of an easement given in 2006 or 2007 up to 100%
AGI if (1) its stock is not publicly traded; (2) it is
a qualified farmer or rancher; (3) the easement is
placed upon property used in (or available for)
agriculture or livestock production; and (4) the
easement requires that the property remain
available for such use. The deduction is limited
by the corporation’s taxable income, reduced by
the amount of any other deductible charitable
contributions (that is, those subject to the usual
10% taxable income limit) made during the year.
Like an individual, a corporate donor may carry
forward any unused deduction related to a farm
conservation easement for up to 15 years.
Generally, an individual may deduct charitable
gifts of long-term capital gain property (including
real estate) to a public charity up to 30% of his or
her adjusted gross income (“AGI”), with a fiveyear carryover period. In the case of corporations,
the charitable contribution deduction for all
charitable gifts is limited to 10% of the
corporation’s taxable income, with a five-year
carryover period.
However, for qualified conservation easements
made in 2006 or 2007, the PPA allows individuals
to deduct the value of the easement up to 50% of
AGI. For individuals who are also “qualified
farmers or ranchers” for the tax year in which the
easement is placed (that is, he or she receives
more than one half of his or her gross income for
the year from the trade or business of farming),
the AGI limit is increased to 100%. If the
easement is placed on property that is used in (or
available for) agriculture or livestock production,
then the 100% AGI limit applies only if the
easement requires that it remain available for such
use. If the property is used in (or available for)
agriculture or livestock production, but the
easement does not ensure that it will remain
available for that use, then the 50% AGI cap is
applied to that donation before the 100% AGI is
applied to any other donation. An individual
taxpayer may carry forward any unused deduction
for up to 15 years.
Advisors should also be aware of important
related changes to the Virginia Land Preservation
Tax Credit program. Effective for conservation
easements granted on or after January 1, 2007, the
Virginia tax benefits associated with conservation
easements will become less generous. Among
other provisions:
For example, assume an individual qualified
farmer has AGI of $200,000. In 2006, he grants a
$150,000
easement
on
non-agricultural,
beachfront property and a $150,000 easement on
his farm. Unfortunately, he does not preserve the
right to continue farming in the latter case. The
$150,000 non-qualifying farm easement is subject
to the 50% AGI cap, so only $100,000 of that
contribution is deductible for 2006 (the remaining
$50,000 carries forward). This allowed $100,000
deduction reduces the total amount deductible
under the 100% AGI cap for 2006. Consequently,
only $100,000 of the beachfront easement is
deductible in 2006 under that provision.
Page 3

The 50% Virginia tax credit for
conservation easements is reduced to 40%
of the fair market value of the easement.
Va. Code Section 58.1-512.A.

The total amount of credits that may be
issued to all taxpayers for 2007 is
$100,000,000 (to be adjusted for inflation
in future years). Credits will be issued in
the order that each complete application is
received, until the cap is reached. Va.
Code Section 58.1-512.D.4.a.

Claimed tax credits of over $1,000,000
(including the value of credits allowed in
the past 11 years to the same or related
taxpayers with respect to the same parcel)
will be subject to “verification” by the
Department
of
Conservation
and
Recreation, based on criteria adopted by
the
Virginia
Land
Conservation
Foundation.
Va. Code Section 58.1512.D.3.

presumably apply because the gift was not
completed “before” the donor’s death.
A sale or distribution of tax credits will
incur a fee of 2% of the easement value or
$10,000, whichever is less. Va. Code
Section 58.1-513.C.2.

Non-profit land conservation organizations
holding one or more conservation
easements will no longer be permitted to
obtain credits. Va. Code Section 58.1512.C.5.

However, the five-year carry-forward
period is extended to 10 years. Va. Code
Section 58.1-512.C.1.
Third, any income or gift tax deduction previously
allowed will be recaptured (together with interest
and a 10% penalty) if the charity does not retain
“substantial” physical possession of the property
and use it in a manner related to its exempt
purposes during the period beginning on the date
of the contribution and ending on the earlier of 10
years after the initial gift or the donor’s death.
Lastly, the PPA makes gifts of appreciating
property much less attractive. If a taxpayer makes
a deductible gift of an undivided fractional interest
in tangible property and then later donates part or
all of the remainder, the tax deduction for the
second gift is limited to the lesser of (i) the value
used for determining the deduction for the initial
gift and (ii) the property’s fair market value at the
time of the additional contribution. Presumably,
then, in the case of a partial interest gift where the
donor dies before the gift can be completed, not
only will the income tax deduction be recaptured
(together with interest and a 10% penalty), but the
donor’s retained interest will also be included in
his or her gross estate at its full fair market value.
However, assuming that the donor leaves the
remainder of the property to the charity under his
or her will, the estate tax deduction associated
with the bequest will be limited to the value of the
property at the time of the initial gift.
Gifts of Undivided Fractional Interests in
Tangible Property
Perhaps in response to taxpayers who claimed
charitable deductions for gifts of undivided
fractional interests in artwork or other tangible
property in situations that did not require the
donor to give up any actual enjoyment of the
property, The PPA severely restricts the
deductibility of any such gifts made after August
17, 2006 in several ways.
First, in order to qualify for an income or gift tax
deduction, the tangible property must be owned
entirely by the donor (or the donor and the
charitable donee). Future Treasury regulations or
IRS guidance may extend the donation to gifts of
tangible property owned by multiple individuals
(for example, a donor and his or her spouse),
provided all owners contribute a pro rata share of
their interests.
Gifts of Exempt-use Tangible Property
Generally, the allowable charitable deduction for a
gift of a donor’s entire interest in tangible
personal property that is to be used by the donee
charity in a manner related to its exempt purpose
is its fair market value. If the charity will not put
the property to a related use, the deduction is
limited to the donor’s adjusted basis. I.R.C.
Section 170(e)(1)(B)(i).
Second, any income or gift tax deduction
previously allowed will be subject to recapture
(plus interest and a 10% penalty) if the donor does
not contribute the remainder to the same charity
(or if it is no longer existing, to another charity)
before the earlier of (i) 10 years after the initial
gift and (ii) the donor’s death. As drafted, the
PPA creates a potential trap for the unwary if the
donor dies unexpectedly within 10 years of
making the gift. Even if the donor’s will
bequeaths the remainder of the property to the
correct charity, the recapture provisions
However, applicable to returns filed after
September 1, 2006 (which could include
donations made in 2005, if the donor’s income tax
return was put on extension), if a donor gives a
charity “exempt use” tangible property worth
Page 4
more than $5,000, but the charity either (i) sells or
disposes of such property in the year of
contribution or (ii) fails to certify under oath how
the property will be used to further its exempt
purposes, the donor’s deduction is limited to his or
her adjusted basis. (The charity is subject to a
$10,000 penalty if it certifies property as exempt
use, if it knows that it is not.)
However, for tax years beginning after August 17,
2006, any donor wishing to claim a deduction for
any donation by cash, check or other monetary
instrument, regardless of amount, must maintain a
bank record or written communication from the
charity showing the charity’s name, the date of the
contribution and the amount.
Charitable Gifts by S Corporations
If the charity provides the donor with the required
certification, but then sells or disposes of the
claimed “exempt use” property after the last day
of the year in which the gift was made but before
the last day of the three-year period beginning on
the date of contribution, the donor must recapture
the difference between the claimed fair market
value and the donor’s basis in the property.
Effective for contributions made by S
corporations in taxable years beginning in 2006 or
2007, a shareholder’s basis in his or her stock is
reduced only by his or her pro rata share of the
corporation’s adjusted basis in the donated
property. Prior to the enactment of the PPA, the
shareholder’s basis would have been reduced by
the donated property’s fair market value.
So, if the donor makes a gift on December 31,
2006, a three-year recapture period runs from
January 1, 2007 through December 31, 2009. On
the other hand, if the donor makes the gift on
January 1, 2007, there is a two-year recapture
period from January 1, 2008 through December
31, 2009; any sale or disposition of the property
during 2007 would simply limit the initial claimed
deduction to basis.
Gifts of Clothing and Household Items
Although enforcement of existing valuation rules
would disallow any deduction for worthless
property, Congress seemed to find it necessary to
address donations of used clothing or household
items of questionable value specifically.
Referenced by some practitioners as the “used
underwear” provision, the PPA requires all items
of clothing or household goods donated after
August 17, 2006 to be in “good condition.” If an
item is not in good condition and the claimed
deduction is more than $500, the donor must
attach a qualified appraisal to his or her tax return.
In addition, Congress has authorized the Secretary
to issue regulations denying any deduction for
items of “minimal” value. Of course, it remains to
be seen what will be considered “good condition”
or “minimal” value.
Fortunately, the taxpayer may avoid recapture if
the charity certifies under oath to the IRS that it
intended to use the donation for its exempt
purposes at the time of the contribution (and
presumably, its earlier certification of such use),
but that it later became impossible or infeasible
actually to use it as such.
Recordkeeping and Substantiation Requirements
Donors have always been required to keep reliable
written records of their charitable contributions in
order to support their claimed deductions. For
contributions of $250 or more, the donor must
obtain contemporaneous written acknowledgment
of the gift from the charity. I.R.C. Section
170(f)(8).
Additional requirements regarding
appraisals, etc. apply for contributions of highvalue property. I.R.C. Section 170(f)(11).
Katherine E. Ramsey, an associate at Hunton &
Williams LLP, in Richmond, Virginia, practices
primarily in the areas of estate planning and
administration and exempt organizations. After
earning her B.A. in International Studies from
Virginia Tech and an M.S. in Management from
Boston University, she received her J.D. from the
University of Virginia Law School in 1998. In
addition to many writing projects, Ms. Ramsey has
presented Virginia continuing legal education
Page 5
seminars on various estate planning topics and
guest-lectured at the T.C. Williams School of Law
at the University of Richmond. Ms. Ramsey is a
member of the Virginia Gift Planning Council, the
Richmond Estate Planning Council and the
Richmond Trust Administrators’ Council, as well as
the Legislative Committee of the Virginia Bar
Association’s Section on Wills, Trusts and Estates
and the Virginia Museum of Fine Arts Planned
Giving Advisory Committee.
Page 6
INSURABLE INTEREST IN TRUSTS
by
Mark Cohen
Cohen and Burnett, P.C.
Before the first Chawla1 decision came down, I
had never been concerned over whether a trust, as
an entity unto itself, would need to have an
insurable interest on the life of the insured. After
all, we have been putting life insurance into trusts
for years without such problems. Nevertheless,
the district court in Chawla shocked us by
construing Maryland law to require that a trust,
not the beneficiaries of the trust, have an insurable
interest in the life of the insured. On appeal,2 the
Fourth Circuit vacated that part of the district
court’s holding because it was unnecessary to the
decision, but did not refute its rational. Thus, we
now have a district court opinion that, although
vacated as unnecessary, can still be cited as
authority for the proposition that a trust as an
entity is required to have an insurable interest in
the insured, independent of the beneficiaries.
in which the procurer lacks an insurable interest in
the insured are mere gambling contracts and as
such are against the public interest. The theory is
that “the public has an interest, independent of the
consent and concurrence of the parties,” in
discouraging one party from wagering upon the
life of another.5 In light of the strong public
policy which underlies the insurable interest
doctrine, courts have held that “[t]he parties to a
contract of insurance cannot, even by solemn
agreement, override the public policy which
requires the beneficiary to have an insurable
interest.”6 While the courts and legislatures of
this country have generally agreed that an
insurable interest is required for an individual to
procure insurance upon the life of another, they
have experienced some difficulty in determining
what interest constitutes an insurable interest.
If true, it would be the rare insurance trust that has
an insurable interest in the life of the insured. In
Chawla, for example, the district court held that
the trust did not have an insurable interest in the
insured, even though the insured was the sole
lifetime beneficiary of the trust.3 Generally, when
there is no insurable interest, the insurance
company may rescind the policy, or, in some
states, the proceeds are held in resulting trust for
the benefit of the insured’s estate. This article
discusses the law of insurable interest, the Chawla
cases, and concludes with the statutory fix that is
being considered in Virginia’s 2007 legislative
session.
The Supreme Court defined insurable interest 124
years ago as:
Common Law of Insurable Interest
The Texas Supreme Court in Drane v. Jefferson
Standard Life Ins. Co.,8 provided a more definitive
explanation of what is meant by an insurable
interest that is based on a reasonable expectation
of pecuniary benefit or advantage from the
continued life of another. The court stated that it
[s]uch an interest, arising from the relations of
the party obtaining the insurance, either as
creditor of or surety for the assured, or from
the ties of blood or marriage to him, as will
justify a reasonable expectation of advantage
or benefit from the continuance of his life . . . .
there must be a reasonable ground, founded
upon the relations of the parties to each other,
either pecuniary or of blood or affinity, to
expect some benefit or advantage from the
continuance of the life of the assured.7
Under the common law, “[b]efore a person can
validly procure insurance upon the life of another,
he must have an insurable interest in that life.”4
This rule is premised upon the view that contracts
Page 7
is an interest determined by monetary
considerations, viewed from the standpoint of the
beneficiary - would the beneficiary regard
himself as better off from the standpoint of
money, would he enjoy more substantial
economic returns should the insured continue to
live, or would he have more in the form of the
proceeds of the policy should the insured die.9
statutes then typically add a third part, which is
really an expansion of the second (economic
interest) for buy/sell agreements, partnership and
operating agreements, and pensions.11 A small,
but growing number of states are enacting statutes
that address insurable interest in trusts.12
Whether an individual has an insurable interest in
another also may be determined by examining the
“loss or disadvantage [which] will naturally and
probably arise, to the party in whose favor the
policy is written, from the death of the person
whose life is insured.”10
Vera Chawla was a close friend of Harald
Giesinger, who, by age 72, when he filled out the
insurance application, was not in good health. He
was suffering from a significant alcohol-abuse
problem, as well as a slowly growing brain tumor
that had required surgeries in both Austria and at
George Washington University Hospital. On the
insurance application, which was signed by both
Giesinger and Chawla, he lied about these and
other serious medical conditions. Transamerica
denied coverage at first because it correctly
concluded that Mrs. Chawla did not have an
insurable interest in Giesinger. Chawla then
resubmitted the application as trustee of the
“Harold Giesinger Special Trust,” of which
Harold Giesinger was the sole lifetime
beneficiary, remainder to Chawla, and the policy
was issued.
Chawla, A Simple Insurance Fraud Case That
Went Too Far
To summarize the common law, an insurable
interest falls into three broad categories:
(i) The insured. The insured has an unlimited
insurable interest in his or her life, and can
designate anyone as the beneficiary;
(ii) Someone who has a close relationship,
either by blood or marriage, with the
insured. In this case, there is no need to
show monetary needs associated with the
insured’s continued life; and
Giesinger died a year later from heart failure and
Chawla filed a claim to collect the proceeds
($2.45 million). Transamerica refused to pay and
rescinded the policy on the grounds that (i) there
were material misrepresentations in the policy,
and (ii) the trust did not have an insurable interest.
Chawla sued to collect the death benefits. The
district court held for Transamerica on both
grounds, finding that either one alone would be a
sufficient ground to rescind the policy.
(iii) A person or entity that gains some
monetary benefit or avoids some loss from
the continued life of the insured. The
value of the monetary benefit or loss
determines the amount of the insurable
interest. This is typical of business buy/sell
agreements and pension trusts.
Insurable interest must exist at the time the policy
is procured, but it need not exist thereafter.
The rationale for the second ground is what
shocked us. The district court, construing the
Maryland statute on insurable interests,
determined that, in order to procure an insurance
policy, the benefits must be payable to a person
with an insurable interest at the time the policy
was issued. Since the trust procured the insurance
policy, the court held that the trust, not the
beneficiary of the trust, must have an insurable
Statutory Definitions
An informal survey of the state statutes on
insurable interest shows that they tend to track the
common law rule by breaking down the definition
of insurable interest into two parts: the first being
a close relationship; the second being an economic
interest in the insured’s continued life. The
Page 8
interest in the life of the insured. The court then
reviewed the Maryland statute on insurable
interest and found in each case that the trust did
not have an insurable interest:
of the doctrine of judicial restraint has
particular application when a federal court is
seemingly faced with a state-law issue of first
impression.15
Plaintiff fails to demonstrate the existence of an
insurable interest as defined by statute.
Maryland law creates various classes of
insurable interests. For example, one has an
insurable interest in those “related closely by
blood or law, a substantial interest engendered
by love and affection is an insurable interest.”
Md. Code Ann., Ins. Section 12-201(b)(2)(i).
An insurable interest may also exist where one
has “a lawful and substantial economic interest
in the continuation of the life, health, bodily
safety of the individual.” Md. Code Ann., Ins.
Section 12-201(b)(3)… 13
Unfortunately, the Fourth Circuit did not reverse
the district court’s second holding; it merely
vacated it, without determining whether the
district court judge’s opinion was good law. Thus,
there is now an argument that an insurer may deny
a trustee’s claim for policy proceeds on the
grounds that the trust did not have, and in most
cases, cannot have an insurable interest.
The potential problem is compounded in states
that impose a constructive trust on the proceeds in
favor of the estate of the insured. First, the
proceeds are included in the estate of the insured
for estate-tax purposes under Internal Revenue
Code Section 2042(1). Second, they may be taxed
as ordinary income. Only payments in the nature
of insurance proceeds qualify for the exclusion
from gross income, and if there is no insurable
interest, the payments are not “insurance.”
In the instant case, the Trust had title to the
decedent's residence. During his lifetime, the
decedent possessed the right to receive all
income from the Trust and the right to occupy
the residence. However, upon the death of the
decedent, the Trust assets were distributed to
Plaintiff who sold them for an amount in excess
of the mortgage. Consequently, the Trust
promised to gain more assets upon the
decedent's death, i.e. death benefits under the
policy, than it would have in the event that
decedent had lived. Further, the Trust suffered
no detriment, pecuniary or otherwise, upon the
death of the decedent. As such, the Trust
maintained no insurable interest in the life of
the decedent.14
State Law to the Rescue
If the district court’s rational is correct, a simple
solution is to have the insured procure the policy
first and then assign it to the trust. Assuming the
purchase and immediate assignment is not held to
be a purchase by the trust through the insured as
its agent; the trust will have no issue with
insurable interest. The draw back, of course, is
that the proceeds will be brought back into the
estate of the insured, if the insured dies within
three years of the transfer.16 Unfortunately, that
approach will not help with existing irrevocable
life insurance trusts.
On appeal, the Fourth Circuit affirmed the district
court’s first holding, rescission of the policy on
the ground of material misrepresentation. With
respect to the second holding, the court stated:
A better approach is to create the trust and procure
the insurance policy in a state that has enacted a
statute giving a trust an insurable interest. As
indicated above, a number of states have such
statutes and more are considering them. States
which have not already done so should seriously
consider enacting such statutes to clear up any
uncertainty in the law.
Because the district court correctly awarded
summary judgment to Transamerica on the
misrepresentation issue, its alternative ruling
appears to have unnecessarily addressed an
important and novel question of Maryland law.
And, as a general proposition, courts should
avoid deciding more than is necessary to
resolve a specific case. This important aspect
Page 9
Virginia, in its 2007 legislative session will be
considering the following amendment to its
insurable interest rules, Section 38.2-301, which is
patterned after the law in the State of Washington:
5. In the case of a fiduciary, as defined in Section
64.1-196.1, other than the trustee of a domestic
business trust or foreign business trust, as defined
in Section 13.1-1201, the lawful and substantial
economic interest required in subdivision 2 shall
be deemed to exist in (i) the individual insured
who established the fiduciary relationship or for
whose benefit the fiduciary holds the insurance
policy, and (ii) each individual in whom the
individual insured who established the fiduciary
relationship or for whose benefit the fiduciary
holds the insurance policy has an insurable
interest; This paragraph shall determine the lawful
and substantial economic interest required in
subdivision 2, with respect to life insurance
policies, whether owned by a fiduciary before or
after the date of enactment.
Conclusion
Thanks to the district court’s decision in Chawla,
and the lack of direction from the Fourth Circuit,
the life insurance industry has been presented with
a rational for rescinding virtually all policies
currently held in irrevocable life-insurance trusts.
One can only imagine the trouble such an
approach would create. All states should enact
legislation, such as that under consideration in
Virginia, to resolve the uncertainty created by the
Chawla cases.
Mark Cohen is the founder of Cohen and Burnett,
P.C. and Legacy Analytics, L.L.C. Mark received
his Bachelor of Arts Degree in Political Science
from California State University, Long Beach in
1980. He received his Juris Doctor from the
University of Arizona in 1984. In 1989 he
received his Master of Laws in Taxation from
William and Mary. Mark also received his
Certified Financial Planning License in 2000.
From 1984 until 1988 Mark served as a Judge
Advocate for the United States Navy. He then
became a tax manager at Goodman & Company,
and later became an associate for Adams, Porter
& Radigan before opening his own firm in 1991.
Mark is a past president of the Northern Virginia
Estate Planning Council, and currently serves on
the Legislative Committee for the Wills, Trusts,
and Estates Section of the Virginia Bar
Association. He is a member of the Virginia Bar
Association, Arizona Bar Association, and the
American Bar Association Mark is the Virginia
Reporter to the UTC, and is a popular speaker at
estate planning seminars.
1
Chawla, ex rel Geisinger v. Transamerica Occidental Life
Ins. Co., No. Civ. 03-1215, 2005 U.S. Dist. LEXIS 3473
(E.D. Va. 2005), aff’d in part, vac’d in part, 440 F.3d 639
(4th Cir., 2006).
2
440 F.3d 639 (4th Cir., 2006).
3
Chawla, Id. at 19-20.
4
2 J. Appleman, Insurance Law and Practice Section 761,
at 101 (1966).
4
Interstate Life & Accident Co. v. Cook, 19 Tenn. App.
290, 86 S.W.2d 887, 889 (1935), quoting 1 Couch, Cyc. of
Insurance Law, Section 295, at 769-70.
5
Interstate Life & Accident Co. v. Cook, 19 Tenn. App.
290, 86 S.W.2d 887, 889 (1935), quoting 1 Couch, Cyc. of
Insurance Law, Section 295, at 769-70.
6
Id. See also Rubenstein v. Mutual Life Ins. Co. of New
York, 584 F. Supp. 272, 279 (E.D. La. 1984) ("[b]ecause an
insurable interest is required by law in order to protect the
safety of the public by preventing anyone from acquiring a
greater interest in another person's death than in his
continued life, the parties cannot, even by solemn contract,
create insurance without an insurable interest").
7
Warnock v. Davis, 104 U.S. 775, 779, 26 L. Ed. 924, 926
(1882).
8
Drane v. Jefferson Standard Life Ins. Co., 139 Tex. 101,
104, 161 S.W.2d 1057, 1058-59 (1942).
9
Id. 161 S.W.2d at 1059.
10
Cooper's Adm'r v. Lebus' Adm'rs, 262 Ky. 245, 250, 90
S.W.2d 33, 36 (1935) quoting Adams' Adm'r v. Reed, 38
S.W. 420, 422, 18 Ky. L. Rep. 858, (App.1896).
11
See Leimberg Information Services, Inc. at
www.leimbergservices.com for a recently updated,
comprehensive collection of state insurable interest statutes.
12
See, e.g., 18 Del. C. Section 2704 (Delaware); Rev. Code.
Wash. (ARCW) Section 48.18.030 (Washington).
13
Chawla, supra, 2005 U.S. Dist. LEXIS 3473, 17 (4th Cir.
2006).
14
Id. at 18.
15
440 F.3d 639, 648 (4th Cir., 2006).
16
IRC Section 2035. To pay the tax in such a case, many
policies now offer a rider to double the coverage if the
insured dies within three years of the purchase of the policy.
Page 10
PRACTICAL CONSIDERATIONS IN TERMINATING TRUSTS
UNDER VIRGINIA’S UNIFORM TRUST CODE
by
John H. Turner III
SunTrust Bank
I. Introduction.
Virginia’s version of the Uniform Trust Code (the
“UTC”)1 has been in effect since July 1, 2006, and
provides much needed clarification to Virginia’s
trust law. The UTC applies to most trusts,
whether created under a trust agreement or under a
will. However, for trusts under will, the UTC
does not apply where there are other specific
provisions made for them in Title 26 or elsewhere
in the Virginia Code or where clearly not
applicable to such trusts.2
With very few exceptions, the UTC is a set of
default rules. Therefore, to the extent there is a
conflict between the UTC and the trust instrument,
the language in the trust instrument will generally
prevail over the UTC. There are a number of
limited exceptions to the default rule within the
UTC that deal primarily with the requirements for
creating a valid trust and the broad power of
courts over trusts.3 In most cases, a settlor may
include specific termination provisions within the
trust instrument which will prevail regardless of
the terms of the UTC.
Several of the UTC provisions deal directly with
termination of trusts. This article will discuss the
UTC requirements and identify practical concerns
in terminating trusts under these provisions.
II. The Early Termination Rules.
A. Pre-UTC Virginia Law.
Prior to its repeal with the enactment of the UTC,
Section 55-19.4 provided statutory authority for
the court (on petition) to approve termination of a
non-charitable trust. Under this section, the
circuit court could terminate (or otherwise
modify) a trust on a showing of good cause. The
court could not order termination under this
section where the trust included a spendthrift
clause unless the court found that the costs of
administration would impair the trust purposes.
The statute also required the court to find, as a
prerequisite to ordering a termination, that the
termination would not materially impair the
accomplishment of the trust purposes or adversely
affect any beneficiary. Similarly, repealed Section
55-31.1 provided statutory authority for the court
to order termination of charitable trusts.
B. New Termination Provisions under the
UTC.
The UTC greatly expands the manner in which
trusts may be terminated. Under the UTC, a court
may terminate a trust where: (i) the settlor and all
of the beneficiaries agree to terminate a noncharitable trust,4 (ii) all of the beneficiaries agree
to terminate a noncharitable trust and continuance
of the trust is not necessary to achieve any
material purpose of the trust,5 (iii) because of
unanticipated circumstances, termination will
further the purposes of the trust,6 (iv) the purposes
of a charitable trust have become unlawful,
impracticable, impossible to achieve or wasteful,7
or (v) the value of the trust property is insufficient
to justify the costs of continuing to administer the
trust.8
In addition, a trustee may terminate the trust
without court approval9 where the market value of
the trust property is less than $100,000 and the
trustee concludes that the value of the trust
property is insufficient to justify the costs of
continuing to administer the trust.10
In addition, under the UTC a trust terminates to
the extent it is revoked or expires pursuant to its
terms, no purpose of the trust remains to be
Page 11
achieved, or the purposes of the trust have become
unlawful, contrary to public policy or impossible
to achieve.11
1. Termination
of
Noncharitable
Irrevocable Trust by Consent. On a petition under
Section 55-544.11, the court shall terminate a trust
where the settlor and all of the beneficiaries12
consent to the termination, even if the termination
is inconsistent with a material trust purpose. If the
settlor is unwilling or unable to consent, a
noncharitable irrevocable trust may be terminated
with consent of all of the beneficiaries if the court
concludes that continuance of the trust is not
necessary to achieve any material purpose of the
trust. If all of the beneficiaries of a trust do not
consent, the court may still terminate the trust if
the court is satisfied that: (i) if all of the
beneficiaries had consented, the trust could have
been terminated under Section 55-544.11, and (ii)
the interests of the beneficiary who does not
consent will be adequately protected. Upon
termination under Section 55-544.11, the trustee
shall distribute the trust property as agreed by the
beneficiaries. Note that Section 55-542.06
provides the methods for representation in judicial
proceedings and will be particularly helpful in
determining who may represent minor or
incapacitated beneficiary.
2. Termination Because of Unanticipated
Circumstances or Inability to Administer Trust
Effectively. Under Section 55-544.12, the court
may terminate a trust if, because of circumstances
not anticipated by the settlor, termination will
further the purposes of the trust. Upon termination
of a trust under this section, the trustee shall
distribute the trust property in a manner consistent
with the purposes of the trust.
3. Termination of a Trust by Virtue of the
Cy Pres Doctrine. Under Section 55-544.13, if a
charitable
purpose
becomes
unlawful,
impracticable, impossible to achieve, or wasteful,
a court may apply the doctrine of cy pres to
modify or terminate the trust by directing that the
trust property be applied or distributed, in whole
or in part, in a manner consistent with the settlor’s
charitable purposes.
4. Termination of Uneconomic Trusts.
Under Section 55-544.14, the trustee of a trust
consisting of trust property having a total value of
less than $100,000 may terminate the trust without
a judicial proceeding.13 In order to terminate a
trust under this section, the trustee must give
notice to all of the qualified beneficiaries14 and
must conclude that the value of the trust property
is insufficient to justify the cost of administration.
The court may also terminate a trust of any size if
it determines that the value of the trust property is
insufficient to justify the cost of administration.
Upon termination, the trustee must distribute the
trust property to or for the benefit of the
beneficiaries in a manner consistent with the
purposes of the trust.
The virtual representation sections of the UTC
(Section 55-543.01 through Section 55-543.05)
are particularly helpful in giving notice to minor
or incapacitated beneficiaries.
III. Practical Considerations.
A. Distribution of Trust Assets.
If termination is being pursued under Section 55544.11 (by consent), the trustee will distribute the
trust property as agreed by the beneficiaries. If
termination is being pursued under either Section
55-544.12 (by the court) or Section 55-544.14 (by
the trustee), the trustee must distribute the trust
assets in a manner consistent with the purposes of
the trust. For terminations pursuant to Section 55544.12, the trustee will need to consider what the
settlor would have intended had the settlor been
aware of the unanticipated circumstances resulting
in the trust’s termination.
For terminations of uneconomic trusts under
Section 55-544.14, the National Conference of
Commissioners on Uniform State Laws
(“NCCUSL”) Comments to the corresponding
provision of the uniform act suggest that
“distribution under this section will typically be
Page 12
made to the qualified beneficiaries in proportion
to the actuarial value of their interests.”
potential gift tax implications of such distributions
(see discussion at C.2 below).
One method for calculating the actuarial value of
life and remainder interests is provided by Internal
Revenue Code (the “I.R.C.”) Section 7520.15
Section 7520 of the I.R.C. can be used to
determine the present value of annuities,
remainder interests, life estates, term of years and
reversionary interests. The calculations under that
section are performed using a “discounted rate”
that is revised each month (published by the
Internal Revenue Service) and a mortality table
which is revised every 10 years (currently the
1999 table). While the actual calculations under
I.R.C. Section 7520 are quite complex, there are
several software programs that can perform these
calculations.16
B. Additional Distribution Considerations.
Actuarial calculations will not work neatly in all
situations. For example, an “income” beneficiary
may have discretionary rights to principal for
health, support, education or other standards, may
have a 5 and 5 power, or may have a limited or
general power of appointment over the trust
assets. In such situations, an actuarial calculations
based on I.R.C. Section 7520 may be
impractical.17
In such cases, the trustee may need to make
adjustments to the “actuarial” values or may have
to determine values based solely on the history of
principal distributions, likelihood of future
principal distributions, apparent exercise or nonexercise of powers of appointment and other
relevant factors. In these cases, or in other cases
where the beneficiaries have asked that the trust
be distributed in a manner other than through an
actuarial division, it is important for the trustee to
consider requiring a distribution agreement from
the beneficiaries. If the trustee can secure a
distribution agreement from all of the
beneficiaries (see discussion at B.5 below), there
will generally be little risk to the trustee in making
such distributions. However, if the distributions
will not or cannot be done actuarially (using the
methods required under I.R.C. Section 7520) it is
imperative for the beneficiaries to understand the
1. Timing.
Under Section 55-548.17,
upon the occurrence of an event terminating or
partially terminating a trust, the trustee must
expeditiously distribute the trust property to the
persons entitled to it, subject to the right of the
trustee to retain a reasonable reserve for the
payment of debts, taxes and other expenses
including the preparation of the final income tax
returns.
2. Termination Report to Beneficiaries.
Under Section 55-548.13, for irrevocable trusts
created after July 1, 2006 (or revocable trusts that
become irrevocable after that date), at the
termination of the trust a trustee must send to the
distributees or permissible distributees of trust
income or principal, and to other qualified or
nonqualified beneficiaries who request it, a report
of the trust property, liabilities, receipts, and
disbursements, including the source and amount
of the trustee's compensation, a listing of the trust
assets and, if feasible, their respective market
values.
3. Proposed Distribution Schedule. Upon
termination or partial termination of a trust,
Section 55-548.17 allows the trustee to send the
beneficiaries a proposal for distribution. So long
as the proposal informs the beneficiaries of their
rights to object to the proposed distribution and
informs the beneficiaries that they only have thirty
days within which to lodge an objection, they will
be bound by the proposal if they fail to object
within that period. The trustee should send the
proposal by certified mail/return receipt in order
to establish the 30 day period.
4. Payments to Minor or Incompetent
Beneficiaries. If upon termination an interest in
the trust is payable to a minor or incapacitated
person and the trust does not otherwise provide for
such distributions, Section 55-548.16(A)(21)
permits the trustee under certain circumstances to
distribute the assets to: (a) a conservator or
Page 13
guardian, (b) a custodian under the Uniform
Transfers to Minors Act, (c) a custodial trustee
under the Uniform Custodial Trust Act, (d) an
adult relative or other person with custody of the
beneficiary, or to retain the assets as a separate
fund for the beneficiary, subject to the
beneficiary's withdrawal rights.
5. Distribution Agreement. Where early
termination is being performed without a court
order (i.e., termination of uneconomic trusts), the
trustee should consider having the beneficiaries
enter into a distribution agreement.
Under
Section55-548.17(C), a beneficiary may release a
trustee from liability for termination if: (i) the
release was not obtained by improper trustee
conduct and (ii) the beneficiary was aware of the
beneficiary’s rights and of all material facts
relating at the time of such release.18 The
beneficiary should be given the opportunity to
seek separate counsel to review the agreement.
The representation sections of the UTC (Section
55-543.01 through Section 55-543.05) are also
useful here for binding minor and incapacitated
beneficiaries to the agreement. A properly
executed distribution agreement will provide the
trustee protection against later claims arising out
of the trust termination.
C. Tax Considerations.
1. Income Taxation. Generally, the early
termination of a trust does not result in additional
income taxation to the trust or beneficiaries.19
However, the Internal Revenue Service (the
“Service”) has issued several private letter
rulings20 where early termination of a charitable
remainder trust results in the recognition of capital
gain. Under these rulings, the distribution of the
present value of the income interest is treated as
the sale or exchange of the income interest itself.
The income beneficiary is treated as having a zero
basis and the entire amount realized by the
beneficiary is long-term capital gain.
A trust does not typically pay taxes in its final
year as all income, including capital gains which
would ordinarily be taxed to the trust, is allocated
to the beneficiaries. If a trust has deductions in
excess of gross income in its final year, the excess
deductions may also pass out to the
beneficiaries.21 However, charitable deductions
and the trust’s personal exemption are not allowed
as excess deductions to be passed out in the final
year.
2. Gift Taxation. I.R.C. section 2501
imposes a tax on transfers of property by gift. The
method selected for dividing the assets can affect
the gift tax treatment of the trust termination.
When possible, the safest approach is to select a
division of the trust based on the actuarial
calculation of the beneficiaries’ interests.22 An
actuarial calculation may not be available or
desirable in all situations. For example, an
“income” beneficiary may have discretionary
rights to principal for health, support, education or
other standards, may have a 5 and 5 power, or
may have a limited or general power of
appointment over the trust assets. In such
situations, an actuarial calculation under I.R.C.
Section 7520 may be inapplicable.23
In such cases, the trustee may want to secure a
distribution agreement among the beneficiaries
whereby all of the beneficiaries (or their
representatives) agree to the methodology for the
division of the trust. Under Treasury Regulation
Section25.2512-8, a sale, exchange or other
transfer of property made in a transaction which is
bona fide, at arms’ length, and free from any
donative intent will be considered as made for
adequate and full consideration in money or
money’s worth and, therefore, not a gift. Where
parties give up some present or future interest in a
trust in an exchange that is free from donative
intent, such transactions should not be treated as
gifts. However, the Service does not generally
consider intra-family agreements to be at arms’
length unless the parties’ claims were bona fide
and a division made, to the extent possible, on an
economically fair basis.24 Therefore, where a trust
division agreement is made between family
members, it will be particularly important that the
division be made on an economically fair basis.25
If the parties agree to divide the assets in a manner
that is clearly inconsistent with the beneficiaries’
Page 14
interests in the trust, a gift may occur.26 Likewise,
if the termination and division is approved by the
circuit court, arguably there would be no “gift” if
the court ordered division was based on arms’
length negotiations between the parties and results
in an economically fair division.27 Even if there
were a “gift” made upon termination, that gift
would be of a present interest in property and
would therefore qualify for the annual gift tax
exclusion under I.R.C. Section 2503 (currently
$12,000 per donee).
3. Generation-Skipping
Taxation.
Certain trusts may be subject to a generation
skipping transfer (“GST”) tax on the distribution
of assets or termination of the trust. If the trust is
GST tax exempt by its terms or because of an
allocation of GST tax exemption, early
termination of the trust should not affect the GST
tax status of the trust. If a trust is exempt from
GST tax due to its status as a “grandfathered
trust,” it is unclear whether an “early” termination
of the trust would be considered a “modification”
of the trust’s governing instrument jeopardizing
the grandfathered status of the trust.28 Therefore,
early termination of grandfathered GST tax
exempt trusts should be pursued cautiously. If the
trust is not fully exempt from generation-skipping
taxation, the termination would be considered a
“taxable termination” and GST tax would be
owed. This tax is required to be reported on Form
706-GS(T) by April 15th of the calendar year
following the year in which the termination
occurred and is payable by the trustee of the trust
out of the trust assets.
4. Excise Taxation.
Charitable trusts
treated as private foundations are subject to
certain excise tax provisions found in I.R.C.
SectionSection 4941 through 4947. The Internal
Revenue Service (the “Service”) has ruled in
several private letter rulings29 that an early
termination of a charitable remainder trust30 and
the distribution of trust property based on the
actuarial interest of the respective beneficiaries
under I.R.C. Section 7520 will not be a
termination of a private foundation, an act of selfdealing under I.R.C. Section 4941, or a taxable
expenditure under I.R.C. Section 4945. The
Service considered several factors in determining
that there were no excise tax violations, including:
(i) there were no known medical conditions or
other circumstances likely to result in a shorter life
expectancy of the income beneficiaries (as
supported by a statement from the beneficiaries
and their doctors), (ii) the termination was
permitted under state law, (iii) all of the
beneficiaries favored early termination, (iv) the
trustees will use the formulas provided under
I.R.C. Section 7520 for determining the income
and remainder interest valuations and (v)
distributions will be made in a pro rata manner.
Note, however, that the Service has recently
“revoked” one of its prior rulings in this area and
has apparently put a temporary hold on issuing
letter rulings dealing with early terminations of
CRUTs. It is also reported that the Service is
considering changing its position going forward
and will only rule favorably on the termination of
a CRUT where the charitable beneficiary is a
public charity and not a private foundation.31
5. Delayed Inheritance Taxation. While
becoming less and less common, a trustee should
be aware that distributions from a trust created
prior to 1980 could be subject to a deferred
Virginia inheritance tax (sometimes referred to as
an “in-remainder tax”). The best method for
determining whether a deferred Virginia
inheritance tax is due is to review the inheritance
tax return32 filed at the settlor’s death.
IV. Miscellaneous Issues.
A. Terminating Life Insurance Trusts.
Terminating life insurance trusts that maintain
current life insurance policies creates additional
considerations for the trustee.
1. Other Policies or Estate Planning. In
terminating a life insurance trust it is prudent to
confirm in writing with the settlor(s) that there are
no other life insurance policies in force that are
payable to the trust and that the trust being
terminated is not otherwise intended to be part of
Page 15
settlor’s estate plan at death. A trustee does not
want to terminate a trust only to find out later that
other policies were payable to the trust or that
assets pour over to the trust upon someone’s
subsequent death.
2. Split-Dollar Agreement. The trustee
should make sure that the policy is not subject to a
current split-dollar agreement. If the trust is
subject to a split-dollar agreement, the trustee may
need to make payment from the trust for release of
the collateral assignment prior to termination.33
3. Accrued Withdrawal Rights (Hanging
Powers). The trustee should be cognizant of
hanging powers held by Crummey withdrawal
beneficiaries and the effect any accrued
withdrawal right might have on the proper
division of the trust assets.
4. Consider Taking a Life or Viatical
Settlement. In determining whether to distribute
the policy to the beneficiaries or to “cash out” the
policy, a trustee should also consider whether a
“life settlement” or “viatical settlement” is
appropriate.
A life settlement is the sale, assignment or transfer
of the death benefits or ownership of a life
insurance policy by the owner of the policy where
the insured does not have a catastrophic or lifethreatening illness or condition. Typically, the
owner of the policy receives cash and the life
settlement company becomes the new owner and
beneficiary of the policy and is responsible for the
payment of all future premiums. Men and women
who are at least aged 65 meet the eligibility
requirements for a life settlement. The settlement
typically works best for men 70 and older, and
women 77 and older who have experienced
changes in their health condition since the policy
was issued. There are no maximum policy limits;
however, minimum limits are typically $250,000
in face value. All policy types are accepted as long
as they are past the contestability period.
A viatical settlement is the sale, assignment or
transfer of the death benefits or the ownership of a
life insurance policy by the owner of the policy to
a viatical settlement company where the insured
has a catastrophic or life-threatening illness or
condition. Typically, the owner of the policy
receives cash from the viatical settlement
company; and the viatical settlement company
becomes the new owner and beneficiary of the
policy and is responsible for payment of future
premiums. Upon the death of the insured, the
death benefit is paid to the viatical settlement
company.
B. Terminating Testamentary Trusts.
While Section 55-541.02 makes it clear that the
UTC applies to Virginia testamentary trusts (with
limited exceptions), some Commissioners of
Account have taken the position that the trustee
must have court approval to terminate an
uneconomic trust under Section 55-544.14. While
this position is not supported by the UTC,
prudence suggests discussing the proposed
termination with the commissioner before
terminating a trust under this section. In all cases
where testamentary accountings have been
required, the Commissioner will require that a
final accounting be filed and approved prior to
discharging the trustee.
C. Terminating Marital QTIP Trusts.
Where a trust qualifies for a marital deduction
under I.R.C. Section 2057(b)(7) (a “QTIP Trust”),
the rules under I.R.C. Section 2519 will apply to
an early termination of that trust. Under I.R.C.
Section 2519(a), for gift and estate tax purposes,
any disposition of all or part of a qualifying
income interest for life in any property is treated
as a transfer of all interests in the property other
than the qualifying income interest. Under Section
25.2519-1(a) of the Treasury Regulations, if a
spouse makes a disposition of all or part of a
qualifying income interest for life in QTIP
property, the spouse is treated, for purposes of the
estate and gift tax, as transferring all interests in
property other than the qualifying income interest.
Section 25.2519-1(c)(1) of the Treasury
Regulations provides that the amount treated as a
transfer upon disposition of all or part of the QTIP
Page 16
property is equal to the fair market value of the
entire property, determined on the date of the
disposition less the value of the qualifying income
interest in the property on the date of the
disposition.
The term “disposition” as used in I.R.C. Section
2519 applies broadly to circumstances in which
the surviving spouse’s right to receive the income
is relinquished or otherwise terminated by
whatever means. For purposes I.R.C. Section
2519, a division of qualified terminable interest
property based on the actuarial values of the
spousal life interest and remainder (i.e., a
commutation) is considered a disposition by the
spouse of the qualifying income interest resulting
in a gift of the remainder interest.34
D. Terminating Charitable Trusts
Technically, a charitable organization is not a
“beneficiary.” However, a charitable organization
expressly designated to receive distributions under
the terms of a charitable trust35 that would
otherwise qualify as a qualified beneficiary if it
were an individual has the rights of a qualified
beneficiary. The NCCUSL Comments to the act
provide that (i) charitable organizations that
receive distributions only in the trustee’s
discretion and (ii) organizations having remainder
interests subject to a contingency do not have the
rights of a qualified beneficiary.
The Attorney General of Virginia “has the rights
of a qualified beneficiary with respect to a
charitable trust having its principal place of
administration” in Virginia. However, the
Attorney General need not be given reports or
other information required under the duty to
inform and report (Section55-548.13) or notices
typically required when a trustee resigns, unless
otherwise requested by the Attorney General.
Having the “rights of a qualified beneficiary”
would include the right to receive notice as well as
the right to object or consent to certain
contemplated actions (except as limited above for
the Attorney General). In terminating a charitable
trust, written notice should be delivered to the
Attorney General’s office. The Attorney General’s
office should not need to take any affirmative
action. However, the trustee might want to
incorporate the 30 day right to object language
found in Section 55-548.17 rather than waiting for
an affirmative response from the Attorney
General’s office.
V. Conclusion
The early termination provisions in the UTC can
be very helpful to trustees and beneficiaries
seeking to terminate trusts under a variety of
circumstances. Where a trust is less than $100,000
and the size of the trust no longer justifies the cost
of administration, termination may be especially
attractive as it may be possible to terminate
without court approval. A trustee must, however,
be aware of the tax ramifications of early
termination and of unique issues that can arise in
terminating life insurance trusts, QTIP trusts and
charitable trusts.
John H. Turner III (Jay) serves as Senior Counsel
for SunTrust Bank in Richmond, Virginia where
he provides guidance to trust officers in the areas
of estate and trust administration.
Jay serves on the Board of Governors for the
Virginia State Bar Trust and Estates Section and
the Legislative Committee of the Virginia Bar
Association's Wills, Trusts and Estates Section. He
is also a member of the Trust Administrators
Council and the Estate Planning Council of
Richmond.
Jay received his undergraduate degree from
Hampden-Sydney College, his law degree from
the Thomas M. Cooley School of Law and an
LL.M. in taxation from Georgetown University
Law Center.
1
Section 55-541.01, et seq. of the Virginia Code (references
herein to the “Code” shall mean the Virginia Code). An
excellent overview of Virginia’s Uniform Trust Code by
John E. Donaldson was previously published in Vol. 20, No.
Page 17
2 of the Virginia State Bar Trusts and Estates Newsletter
(Spring 2005).
2
Section 55-541.02 of the Code.
3
Section 55-541.05 of the Code.
4
Section 55-544.11 of the Code.
5
Section 55-544.11 of the Code.
6
Section 55-544.12 of the Code.
7
Section 55-544.13 of the Code.
8
Section 55-544.14 of the Code.
9
The NCCUSL Comments to Section 414(a) of the
Uniform Code [Section 55-544.14.A. of the Code] states
“Subsection (a) assumes that a trust with a value of $50,000
[$100,000 in Virginia] or less is sufficiently likely to be
inefficient to administer that a trustee should be able to
terminate it without the expense of a judicial termination
proceeding.”
10
Section 55-544.14 of the Code.
11
Section 55-544.10 of the Code.
12
Under Section 55-541.03, the term “beneficiary” means a
person that:
a. has a present or future beneficial interest in a trust,
vested or contingent; or
b. in a capacity other than that of trustee, holds a
power of appointment over trust property.
Note that the use of the term “beneficiary” rather than
“qualified beneficiary” is significant. The term “beneficiary”
includes not only the qualified beneficiaries but also the
more remote contingent beneficiaries. The representation
sections found in Section 55-542.06 may be helpful in
determining who can represent whom in such a proceeding.
13
The NCCUSL Comments to Section 414(a) of the
Uniform Code [Section 55-544.14.A. of the Code] states:
“Subsection (a) assumes that a trust with a value of $50,000
[$100,000 in Virginia] or less is sufficiently likely to be
inefficient to administer that a trustee should be able to
terminate it without the expense of a judicial termination
proceeding.”
14
Under Section 55-541.03 of the Code, the term “qualified
beneficiary” means a beneficiary who, on the date the
beneficiary’s qualification is determined:
a. is a distributee or permissible distributee of trust
income or principal;
b. would be a distributee or permissible distributee of
trust income or principal if the interests of the
distributees described above in (a) terminated on
that date; or
c. would be a distributee or permissible distributee of
trust income or principal if the trust terminated on
that date.
15
Note that Section 55-269.1, et seq. of the Code also
address the calculation of a life tenant’s interest upon
commutation. Because the calculations under that section
are based on a set “discounted rate” and annuity table, the
calculations will not typically match the calculations under
I.R.C. Section 7520. Therefore, for Federal gift tax purposes
it would be safer to use the valuation methods provided in
I.R.C. Section 7520.
16
There are numerous programs that perform actuarial
calculations, including:
Number Cruncher (found at www.leimberg.com), Tiger
Tables (found at www.tigertables.com), and Brentmark
Software (found at www.brentmark.com).
17
Some programs will do an actuarial calculation for an
“income” interest coupled with a 5 and 5 power.
18
The NCCUSL Comments to Section 817(c) of the
Uniform Code states that this section is a limited application
of Section 1009 (Section 55-550.09 of the Code) dealing
with releases given upon termination.
19
See P.L.R. 9802031 (October 14, 1997).
20
Please note that unless the Secretary of the Treasury
establishes otherwise by regulations, a “written
determination” such as IRS private letter rulings and
technical advice memorandum may not be used or cited as
precedent by another taxpayer. I.R.C. Section 6110(j)(3).
21
See Treasury Regulation Section1.642(h)-2.
22
Even in situations where the beneficiary holds only an
income interest, I.R.C. Section 7520 may not apply. Under
Treasury Regulation Section 25.7520-3(b), the rules under
I.R.C. Section 7520 may not be used if there is a 50% or
greater possibility that the individual who is the measuring
life will die within one year.
23
In P.L.R. 9802031(October 14, 1997) the Service
addressed an early termination where a surviving spouse
was eligible to receive discretionary distributions of income
and principal in the trustee’s discretion for health, support,
maintenance and education. The surviving spouse did not
want any of the assets upon termination and the assets were
distributed in the same manner as they would have had the
spouse died (between a child and charity). The Service held
that the relinquishment of the spouse’s interest at
termination would be a gift and the value of the gift should
be determined by “all relevant factors such as the projected
needs of the spouse for health, education, support and
maintenance for the remainder of his life.” See also Revenue
Ruling 75-550, 1975-2 C.B. 357.
24
See P.L.R. 8902045 (October 21, 1988).
25
The NCCUSL Comments to Section 411 of the Uniform
Code suggest that no gift tax consequences result from a
termination as long as the beneficiaries agree to distribute
property in accordance with the value of their proportionate
interest.
26
See P.L.R. 9308032 (November 30, 1992).
27
However, the Service could always challenge the
decision based on the Supreme Court’s holding in
Commissioner v. Estate of Bosch, 387 U. S. 456 (1967). In
Bosch, the U.S. Supreme court held that where the Service is
not a party to a proceeding it will only be bound by
underlying state law issues decided by the state’s highest
court. If there is no high court decision, then the federal
authority only has to give “proper regard” to the state trial
court’s determination of state law. Accordingly, a circuit
court decree determining property rights under state law
might not be binding for federal tax purposes.
Page 18
28
P.L.R. 9510071 (December 15, 1994) holding that a
renunciation resulting in early termination did not result in a
modification of the trusts for GST purposes (decided prior to
the issuance of the current GST regulations).
29
See e.g. P.L.R. 200441024 (June 10, 2004), P.L.R.
200403051 (September 30, 2003), P.L.R. 200324035
(March 4, 2003), P.L.R. 200314021(December 24, 2002)
and 200127023 (April 4, 2001).
30
Note that different rules apply to charitable lead trusts
(CLATS and CLUTS) which trusts must prohibit
commutation and therefore may not be terminated early. See
PLR 9734057(May 28, 1997), citing Revenue Ruling. 8827.
31
The Service issued P.L.R. 200525014 (March 30, 2005)
in which it found no problems with the early termination of
a CRUT and division of the assets on an actuarial manner.
However, in P.L.R. 200614032 (January 9, 2006) the
Service revoked its previous ruling in P.L.R. 200525014.
The revocation apparently did not result in an “adverse”
ruling on these types of issues as a whole, but was instead
triggered by the fact that a private foundation was the
ultimate beneficiary of the trust. Under the Service’s
previous rulings, there is a legal fiction that the early
termination of a CRUT results in a sale of the income
beneficiary’s interest. Where there is such a sale between a
private foundation and the beneficiary, there is an issue of
“self-dealing” under the excise tax rules applying to private
foundations. Finally, the Service issued P.L.R. 200616035
(January 25, 2006) which approved the transaction listed in
P.L.R. 200525014 when the charitable beneficiary was
changed from a private foundation to public charities. See
Lawrence P. Katzenstein, Internal Revenue Service Revokes
2005 Private Letter Ruling on Early Termination of
Charitable Remainder Trust –PLR 200614032, ALI-ABA
Advanced Estate Planning and Practice Update—Spring
2006.
32
Virginia Department of Taxation Form Inh. 44.
33
See American Law Institute - American Bar Association
Continuing Legal Education, July 16, 1998 Estate Planning
for the Family Business SPLIT DOLLAR LIFE INSURANCE
Charles L. Ratner SD10 ALI-ABA 325 for a discussion of
options to be considered in releasing the collateral
assignment.
34
See Section 25.2519-1(f) of the Treasury Regulations;
Revenue Ruling 98-8, 1998-7 I.R.B. 24.
35
The term “charitable trust” is a defined term meaning “a
trust, or portion of a trust, created for a charitable purposes”.
Page 19
VIRGINIA STATE BAR TRUSTS AND ESTATES SECTION
2006-2007 BOARD OF GOVERNORS
Donna Esposito Fincher
Chair
Vaughan, Fincher & Sotelo, PC
Suite 400
8619 Westwood Center Drive
Vienna, VA 22182
(703) 506-1810
dfincher@vfspc.com
Julie A. King
Newsletter Editor
McGuireWoods LLP
Suite 300
310 4th Street, NE
Charlottesville, VA 22902
(434) 980-2207
jaking@mcguirewoods.com
Victoria Jean Roberson
Vice Chair
Suite 100
13702 Village Mill Drive
Midlothian, VA 23114
(804) 423-5700
vroberson@cavtel.net
Neal Paul Brodsky
Asst. Newsletter Editor
LeClair Ryan, P.C.
Suite 2525
999 Waterside Drive
Norfolk, VA 23114
(757) 624-1454
nbrodsky@leclairryan.com
Laura Okin Pomeroy
Immediate Past Chair
11804 Shadow Run Drive
Glen Allen, VA 23059
(804) 353-7384
laura.pomeroy@comcast.net
John Thomas Midgett
Secretary
Midgett & Preti, PC
477 Viking Drive, Suite 430
Virginia Beach, VA 23452
(757) 687-8888
john.midgett@midgettpreti.com
Farhad Aghdami
Williams Mullen
1021 East Cary Street
P. O. Box 1320
Richmond, VA 23218-1320
(804) 783-6440
aghdami@williamsmullen.com
John Anthony DiJulio
Williams Mullen
Suite 1700
222 Central Park Avenue
Virginia Beach, VA 23462-3035
(757) 499-8800
jdijulio@williamsmullen.com
Suzanne Wightman Doggett
3315 Martha Custis Drive
Alexandria, VA 22302
(703) 671-9187
gmgsd@aol.com
Erin Sheehey Downs
Jones, King & Downs, P.C.
P. O. Box 1689
Bristol, VA 24203
(423) 764-5535
erin@jkdlaw.com
William A. Truban, Jr.
Owen and Truban, PLC
103 N. Braddock Street
Winchester, VA 22601
(540) 678-0995
btruban@owentruban.com
John H. Turner, III
SunTrust Bank
CS-HDQ-6418
919 East Main Street
Richmond, VA 23219
(804) 782-5812
Jay.H.Turner@SunTrust.com
Thomas D. Yates
Yates, Campbell & Yates
4155 Chain Bridge Road
Fairfax, VA 22030
(703) 273-4230
tyates@ycynet.com
Newsletter Editor – Julie A. King, McGuireWoods LLP
.