Problem Areas
in
Trust Administration
Jim Lamping
The Law Office of James P. Lamping
San Francisco – Marin County
(415) 992-3100
jim@jimlamping.com
Topic One:
Stale
Trusts
Understand the Formula
Identify the Subtrusts
 Identify the Formula
 What is the Method of Funding Assets?
 Is There a GST Division?

Two Trust Division
Administrative
Trust
Survivor’s
Trust
Credit
Trust
Three Trust Division
Administrative
Trust
Survivor’s
Trust
Credit
Trust
Marital
Trust
Identifying the Formula in a
Three Trust Division
Pecuniary
Fractional
Pecuniary Formulas




Pecuniary Marital – Residual Credit (3 Trust)
Pecuniary Credit – Residual Marital (3 Trust)
Pecuniary Survivor – Residual Credit (2 Trust)
Pecuniary Credit – Residual Survivor (2 Trust)
Methods of Funding Pecuniary
Amount with Assets in Kind
 Date
of Distribution
 Date of Death
 Default is Date of Distribution
 If Date of Death, “Fairly
Representative Funding”
 Probate Code § 21118
Methods of Funding for
Fractional Share Formula
Strict
Fractional
Fractional Pick and
Choose
Which Trusts
Receive
Appreciation or
Depreciation?
Kenan Gain
 Pecuniary
Bequest
 Date of Distribution Funding
 Satisfied in Kind with Appreciated
Assets
The Payment of
Interest on
Pecuniary Gifts
Payment of Interest on Pecuniary
Amount
Probate Code § 12003
 Does the Document Waive Interest?
 Rate is Three Percent Less Than the Legal
Rate (Probate Code § 12001)
 10% - 3% = 7%
 GST Trusts

Non Pro Rata
Allocation of
Community Property
Hypothetical




Allocation of trust assets between the credit and
survivor's trusts upon the death of the first
spouse
Blackacre has a value of $1 million
Whiteacre has a value of $1 million
IRA (a non-trust asset) has a value of
$1 million
Pro Rata Allocation
Administrative
Trust
$2 million
Blackacre ($1 million)
Whiteacre ($1 million)
Survivor’s Trust
Credit Trust
$1 million
50% of Blackacre ($500,000)
50% of Whiteacre ($500,000)
$1 million
50% of Blackacre ($500,000)
50% of Whiteacre ($500,000)
Non Pro Rata Allocation
Administrative
Trust
$2 million
Blackacre ($1 million)
Whiteacre ($1 million)
Survivor’s Trust
Credit Trust
$1 million
100% of Blackacre ($1,000,000)
$1 million
100% of Whiteacre ($1,000,000)
Determining
the
Targets
Hypothetical
 Husband
Dies in 2002
 $1 Million Applicable Exclusion
Amount
 $2 Million of Community Property
Assets (Date of First Death)
 $12 Million Current Value of Those
Assets
Date of Death
Community Property
$2 million
Survivor’s Share
$1 million
Deceased Spouse’s
Share
$1 million
Allocation of Current Value
Community Property
$12 million
Survivor’s Share
$6 million
Deceased Spouse’s
Share
$6 million
Examples
of Various
Formulae
Assumptions for Examples







First Death in 2002
$1 Million Applicable Exclusion Amount
The Trust Held $6 Million at Date of Death
The Current Value of Trust Assets is $12 Million
All Community Property
The Surviving Spouse Used Only the Income Since the
Date of Death
The Document Waives Interest on Pecuniary Bequests
Values as of the First Death
Administrative
Trust
$6 Million
Survivor’s
Trust
$3 million
Credit
Trust
$1 million
Marital
Trust
$2 Million
Pecuniary Marital – Residual Credit
Date of Distribution
Administrative
Trust
$12 Million
Survivor’s
Trust
$6 million
Credit
Trust
$4 million
Marital
Trust
$2 million
Pecuniary Credit – Residual Marital
Date of Distribution
Administrative
Trust
$12 Million
Survivor’s
Trust
$6 million
Credit
Trust
$1 million
Marital
Trust
$5 Million
Fractional Share or
Fairly Representative
Administrative
Trust
$12 Million
Survivor’s
Trust
$6 million
Credit
Trust
$2 million
Marital
Trust
$4 Million
Assumptions for Examples







First Death in 2002
$1 Million Applicable Exclusion Amount
The Trust Held $1.5 Million at Date of Death
The Current Value of Trust Assets is $10 Million
All Community Property
The Surviving Spouse Used Only the Income Since the
Date of Death
The Document Waives Interest on Pecuniary Bequests
Values as of the First Death
Administrative
Trust
$1.5 Million
Survivor’s
Trust
$750,000
Credit
Trust
$750,000
Marital
Trust
$0
Pecuniary Credit – Residual Marital
Date of Distribution
Administrative
Trust
$10 Million
Survivor’s
Trust
$5 million
Credit
Trust
$5 million
$750,000?
Marital
Trust
Nothing or
$4,250,000 Million?
What
About
Depreciation?
Consider
Terminating
the Trust
California Trust
Administration (CEB)
Chapter 14A
Topic Two:
The
645
Election
History:
What Is It and
Why Is It?
The Trust is Taxed as Part of
Decedent’s Probate Estate
for Income Tax Purposes,
Even if No Probate
Qualified
Revocable
Trust
Who Makes
the Election?
Fiscal
Year
End
Advantages of Fiscal Year:
Timing Income and
Expenses;
Maybe Fewer Tax Returns
Deadline:
First Timely Filed Return,
th
15 Day of Fourth Month
After End of Tax Year
(Just Like April 15)
P.S. Don’t Miss
the
Filing Deadline
Duration:
Two Years or
Six Months From
Closing Letter
S Corporation
Stock Holding
Period
Kenan Gain
Offset
by Losses
The 645
Election Means
a Complex
Trust
Separate
Share
Rule
The Separate Share Rule
$200,000
Trust Income
Beneficiary A
50 Percent
($100,000)
Beneficiary B
50 Percent
($100,000)
Topic Three:
The Surviving Spouse’s
Purchase of an Interest in
the Residence from
Credit Trust
The Family Residence Problem
Administrative Trust
$1 Million Home
Survivor’s Trust
50 Percent
($500,000)
Credit Trust
50 Percent
($500,000)
Why This is Bad
 No
Section 121 Exclusion
 No Step Up in Basis at Second Death
 No Home Mortgage Interest
Deduction
 The Emotional Reaction
 It’s Kind of a Mess
The Family Residence Problem
Administrative Trust
$1 Million Home
Survivor’s Trust
$1 Million Home Minus
$500,000 Debt to Credit Trust
Credit Trust
$500,000 Debt
From Survivor
Fiduciary
Duties
Income Tax Consequences
 Capital
Gains on Buyback
 Imputed Interest?
 Phantom Income?
 Social Security and AMT?
 Does the Surviving Spouse Itemize?
Drafting
to Allow
Buyback
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with
requirements imposed by the IRS, we advise you that any tax advice
contained in this document cannot be used for the purpose of (i)
avoiding federal tax penalties or (ii) promoting, marketing, or
recommending to another party any transaction or matter addressed
in this document.