by Linda Suzzanne
Griffin
Homestead, Allowed in Revocable Trust
In the continuing saga of homestead, otherwise known
as the "legal chameleon," the appellate court in Cutler v. Cutler, 32 Fla. L. Weekly D583 (3rdDCA 2007),
answered the question of whether a specific devise of protected homestead held in an irrevocable trust
trumps the residuary direction in a decedent's will to pay estate debts and expenses. The court refers
to the homestead issue as Athe leading cause of cerebral herniation" for probate lawyers and judges.
Edward Cutler, a child and a beneficiary under of Edith Alice Cutler's Last Will and Testament (the "Will"),
appealed from a lower court order determining homestead vesting the homestead in the decedent's daughter,
Cynthia Cutler, because the homestead was devised to her under Mrs. Cutler's Will. (The homestead was
distributed from Mrs. Cutler's irrevocable trust to Mrs. Cutler's estate) Mrs. Cutler's will provided that
if assets were unavailable to satisfy creditors and expenses the residue of Mrs. Cutler's estate would pay
those expenses.
The lower court rejected Edward Cutler's contention that the devised property was not protected homestead
because title to the homestead was held in an irrevocable trust at the time of Mrs. Cutler's death. The homestead
had been placed in the irrevocable trust for estate planning purposes. Mr. Cutler argued that because the
residence was owned by the trust at the time of her death it was not owned by "a natural person." The court
disagreed and determined that the property, although in an irrevocable trust, was homestead. The court stated that "we
find it immaterial that legal title to the residence in this case was held in an irrevocable trust during
Edith's lifetime. The conveyance to Cynthia fulfills all of the legal requirements entitling her to the
claim that it is "protected homestead" in her."
The court also determined that homestead could not be used to pay the decedent's final expenses as the
homestead was constitutionally exempt from sale and the constitutionally created benefit was personal to
Cynthia. The court also stated that although "of little comfort to Edward, creditors in this state have been
on notice for many years that the plain language of the constitution protects homestead property from most creditors
and is construed liberally to achieve that purpose whatever may be the equities of the individual circumstance."
Advice:
This case appears to once again confirm that a homestead placed in a revocable trust
will retain its homestead status (as to descent and devise). You should still be aware of Medicaid issues, title insurance issues
and bankruptcy (the Bosonetto Case is still out there) issues of putting the homestead in a revocable trust.
Disclaimer, Planning
In many situations a post mortem disclaimer can solve many estate tax issues. A recent article in Federal
Taxes of RIA points out the possibility of overfunding a credit shelter trust and paying extra estate taxes when there is a formula clause
coupled with a disclaimer. In the Tax Court cases of Estate of Katz, TC Memo 2004-166, and the Estate of Nix, TC Memo 1996-109, the court
addresses whether a disclaimer by the surviving spouse would reduce the marital deduction. In Estate of Nix the decedent devised to the spouse
the least assets that would qualify for marital deduction and would result in the lowest federal estate tax. After the decedent's death the
surviving spouse disclaimed an interest in certain properties passed to her under the will. She believed exercising the disclaimer would result
in the substitution of certain properties for other properties. The Internal Revenue Service argued that part of the property disclaimed should be
deducted from the marital deduction causing the decedent's gross estate to be increased by the property disclaimed and therefore estate tax would be due.
The court agreed with the Service and stated that the intent of the decedent was paramount and the surviving spouse did not have the right to
choose which assets would fund the marital deduction.
Formula clauses may lull you into determining that a disclaimer by a surviving spouse will automatically adjust to compensate for the marital
deduction. In the Estate of Katz the formula clause was drafted to minimize the tax liability and the court determined that the disclaimed
property would be added to the residuary trust and estate taxes were incurred.
Advice:
Be sure that if you anticipate a disclaimer and the will or trust provides a
formula clause that you provide language in the document as to what happens if there is a disclaimer and if there is an increase
in estate taxes, whom would pay that amount. Explicitly stipulate that the calculation of the marital deduction would be made
after taking into account the effect of the disclaimer. Alternatively there could be a provision that gives the surviving spouse
flexibility to keep desired property funding the marital deduction. Carefully read Estate of Katz and Estate of Nix.
A Disclaimer That Works
In Private Letter Ruling 200649023, the decedent's will left the residue of his estate to his trust and his daughter was given a limited
power of appointment under the trust. If she failed to exercise the power then the assets were passed to a private foundation. The daughter
also served as successor trustee of the private foundation. There was concern that if the daughter disclaimed the limited power, the disclaimer
would not work because as a result of the disclaimer the property would be distributed to the private foundation of which the disclaimant
(the daughter) was the trustee. The daughter amended the private foundation document to provide that she had no rights with respect to the
disposition of the property passing from the trust to the foundation as a result of the disclaimer. The private foundation would have a
special trustee as to such property. The Internal Revenue Service ruled that the disclaimer would be effective.
Advice:
Anytime you have a situation where there is a private foundation
or charity which will benefit as a result of a disclaimer and the disclaimant is a trustee or otherwise benefits,
review this ruling and also look at multiple disclaimers.
Capital Gains Tax
Starting in 2008 the long term capital gains tax rate for taxpayers in the 10% and 15% bracket drops from 5% to 0%. Thus, any sales
of appreciated stock would have 0% tax. If you gift stocks to lower bracket taxpayers (your children) and those taxpayers sell the stock,
then capital gains tax may be avoided. Some planning to think about.
Advice:
Be careful to avoid the Akiddie tax for donees under the age of 18 and the ability of the
donees to obtain financial aid if the donees have assets in their name.
Notice 2007-7 Pension Protection Act of 2006
Notice 2007-7 was recently issued to provide further clarification regarding the Pension
Protection Act of 2006 regarding qualified charitable distributions ("QCD").
A few of those provisions are as follows:
- SEP and SIMPLE IRA's may make QCD's as long as those plans are ongoing.
- Beneficiaries of inherited IRA's are eligible for QCD if over 70 1/2.
- IRA owners not required to have taxes withheld.
Advice:
There are other provisions in this notice so if you work in this area be sure and review all of the provisions.
Reminder on non-US citizen spouses
This author has had experience with trusts which were drafted without addressing citizenship (the question was never asked).
You must remember that under Section 2056 of the Internal Revenue Code the unlimited marital deduction is not allowed for
assets distributed to a non-US citizen unless the assets are distributed to the spouse via a qualified domestic trust or if
the spouse becomes a citizen by the time the estate tax return if filed. Further, pursuant to Section 2503 of the Internal
Revenue Code the annual tax exclusion of $12,000 is $125,000 for gifts to non-U.S. citizen spouses.
All
Contents © Copyright Linda Suzzanne Griffin,
P.A.
