This article will discuss a surviving spouse’s Elective Share in North Carolina after the death of a deceased spouse.
North Carolina law gives a surviving spouse a guaranteed share of their deceased spouse’s net assets, which a surviving spouse can elect to receive if the election results in a larger share of a deceased spouse’s assets than he or she would otherwise have received under the deceased spouse’s will or – if there is no will – under the state inheritance laws.
The Elective Share statute is intended to protect a surviving spouse from being disinherited or left too small a share of a deceased spouse’s assets, by requiring a minimum percentage of the deceased spouse’s net assets to pass to or for the benefit of the surviving spouse. The minimum percentages are determined by the length of the marriage.
NC Gen. Stat. Section 30-3.1 gives a surviving spouse the right to take an Elective Share, which is a certain percentage of a deceased spouse’s “net assets,” (a) if the deceased spouse’s will leaves the surviving spouse less than his or her Elective Share, (b) if the surviving spouse’s share under the N.C. Intestate Succession Act (applicable when the deceased spouse has no will) is less than the surviving spouse’s Elective Share, or (c) if part of the deceased spouse’s assets pass under the will and other assets pass outside the will, In the last case, the surviving spouse would receive a guaranteed share of the combined value of the assets passing under the will and the assets passing outside the will.
If you find it odd that a spouse’s Elective Share might be larger than their share under the Intestate Succession Act, please note that a spouse’s “net assets,” which are taken into consideration in determining an Elective Share, include assets which are not part of a deceased spouse’s probate estate, i. e. the assets to which the Intestate Succession Act applies. We discuss this comparison in more detail below, under the heading, “Intestate Share vs. Elective Share.”
Elective Share issues often arise when a spouse has children from a prior marriage, to whom the parent wants to leave assets, in which case the parent often struggles to find a balance between providing for the surviving spouse and simultaneously making provision for the children. Fortunately, the use of Marital Trusts for the surviving spouse during his or her lifetime, followed by distributions (or further trusts) for the children and their families after the death of the spouse, can count as part of the surviving spouse’s Elective Share. Thus, a Marital Trust can address both a desire to provide for the surviving spouse and a desire to provide for the children and their families. See the topic below, titled “Use of Marital Trust to Satisfy Elective Share.”
A Pre-Nuptial Agreement (also sometimes called a Premarital Agreement or Pre-Marriage Agreement), signed by both parties to a marriage, can address these issues prior to the marriage, or a Post-Nuptial Agreement executed after the marriage, can address these issues, with input from both spouses. See topic below titled “Waiver of Elective Share.”
Comparison of Intestate Share with Elective Share in North Carolina
The percentages applicable to an Elective Share and to a surviving spouse’s share under the North Carolina Intestate Succession Act are completely different, and a comparison of those shares might be helpful.
We have another Article on our law firm’s Blog, titled “What Happens if You Die Without a Will?” to which you might refer for a longer, more detailed description of a surviving spouse’s share under the Intestate Succession Act, but for this article, let us just say:
Where there is a spouse and no children, the surviving spouse receives all the deceased spouse’s estate, if neither parent of the deceased spouse is surviving.
However, if one or both parents are then living, then the surviving spouse receives (i) the first $100,000 in personal property (assets other than real property), (ii) one-half of the remaining assets (i.e., personal property in excess of $100,000 in value, if any, and real property) are allocated to the surviving spouse, and the remainder to the parents.
With a spouse and one child surviving, nothing goes to the parents and the surviving spouse receives the first $60,000 in personal property; everything else is divided one-half to the spouse and one-half to the child. If the child is a minor, the child’s share goes to the guardian of his or her property, for the child’s benefit. The surviving parent is often the guardian.
With a spouse and two or more children surviving, the spouse receives the first $60,000 in personal property and one-third of the remainder. The remaining two-thirds share is divided equally among the children.
The Elective Share, on the other hand, is determined strictly by the length of the marriage. If the surviving spouse was married to the deceased spouse for less than 5 years, his or her Elective Share is 15% of the deceased spouse’s “net assets.” If married between 5 years and 10 years, the surviving spouse’s share is 25%. If married between 10 and 15 years, the surviving spouse’s share is 33%, and if married for more than 15 years, the share is 50%.
Just as important – or perhaps even more important – than the applicable percentages, is the distinction between the assets counted and against which any percentage is applied. The Intestate Succession Share includes only real property and probate property owned by a decedent at death, which does not automatically pass to someone else at death, and does not include certain assets described below, which are not part of the probate estate, but which are taken into consideration in determining an Elective Share.
In determining an Elective Share, the following assets are included, in addition to assets in the probate estate:
Assets held in a revocable trust created by the deceased spouse;
Assets over which the decedent had an unlimited power of withdrawal;
Depository accounts owned by the decedent, but payable on death to a beneficiary or beneficiaries named by the decedent;
Securities owned by the decedent (either in certificate form or in an account) which are transferable at death to a named individual or individuals.
Life insurance owned by the decedent, over which the decedent had the power to designate beneficiaries;
IRAs, pension or profit-sharing plans, or deferred compensation payable to a beneficiary;
Private orgovernment retirement plans.
Since assets under these types of ownership are not part of a decedent’s probate estate, those types of ownership, or powers to designate beneficiaries, are often used to avoid court administration of a decedent’s probate estate, to which the Intestate Succession laws are applicable, so the Elective Share Statute includes many more assets than are included in the deceased spoue’s probate estate.
Use of Marital Trust to Satisfy Elective Share
If you do not want to satisfy the Elective Share by leaving property outright to the surviving spouse, a Marital Trust (as described in NCGS Sections 30-3.2(3c)g and 30-3.3A) satisfies the Elective Share requirement. The Marital Trust must be for the exclusive benefit of the surviving spouse during his or her lifetime. That is, there may not be any other beneficiaries during that time, even discretionary ones. The following terms are applicable:
The surviving spouse must generally receive all the trust’s income, but the Trustee may be given the power to make discretionary distributions ofincome to the spouse, subject to a legally-enforceable “ascertainable standard,” for health, education, maintenance and support, in which case the unneeded income must be retained in the trust and cannot be distributed to others.
The Trustee may also have the discretionary power to distribute trust principal for the spouse’s health, support and maintenance.
In exercising the Trustee’s discretion, the Trustee may be allowed or required to take into consideration the surviving spouse’s other means of support.
The Trustee must be a “non-adverse” Trustee as defined under NCGS Section 30-3.2(3)
Please note that no distributions – not even distributions based on need – may be made to anyone other than the spouse, including children or other descendants of the deceased spouse. If a parent wants to make provision for distributions to descendants based on need, the parent needs to make such provision for them in his or her other estate planning documents other than the marital share and not as part of the Marital Trust, which is intended to count towards the Elective Share of the surviving spouse.
A tax benefit of using a Marital Trust to comply with the above requirements is that the entire value of the trust assets will qualify for the Estate Tax Marital Deduction in determining the deceased spouse’s federal estate tax, if any, but if used to qualify for the marital deduction for the deceased spouse’s estate taxes, those assets would be considered as part of the surviving spouse’s taxable estate (and could utilize the surviving spouse’s estate tax exclusion, if applicable, to minimize federal estate tax at that time.
Waiver of Elective Share
A spouse or prospective spouse may waive his or her right to an Elective Share by Pre-Nuptial or Post-Nuptial Agreement.
NCGS Section 30-3.6 provides that a surviving spouse may waive his or her right to an Elective Share, in writing, either wholly or partially, with or without consideration, either before the marriage or afterwards.
Such a waiver is often included in Pre-Nuptial Agreements, particularly when one or both spouses have children from their prior marriages. Although the waiver is often a full waiver, frequently a partial waiver is more appropriate, and provides that the surviving spouse will get a specific dollar amount or percentage of the deceased spouse’s assets, instead of waiving all their rights to receive any portion of the decedent’s assets. The waiver often provides that the deceased spouse can make provision for a larger inheritance for the surviving spouse, in which case the waiver will not preclude the deceased spouse from making larger provision for the surviving spouse, and will not prevent the surviving spouse from receiving the larger amount.
Post-Nuptial Agreements can be executed, whereby a surviving spouse waives, partially or completely, his or her Elective Share rights. Practically, however, there is often little incentive for a spouse to execute such a document after the marriage.
A written waiver may not be enforceable if the surviving spouse can prove that he or she did not receive a fair disclosure of the other spouse’s financial information prior to executing the waiver document, even though a party to the waiver agreement specifically waives the right to a disclosure. See NCGS Section 30.36(c). We have heard that Ivana Trump was presented with a Pre-Nuptial Agreement and signed it, literally at the church and with the organ playing the Wedding March. When she was later divorced, the Pre-Nuptial Agreement was set aside. We also understand that Jackie Kennedy signed a waiver without a full financial disclosure from Aristotle Onassis. After his death, she was awarded a much larger amount that was provided in the waiver document, even though it was common knowledge by everyone, including Jackie Kennedy, that he was extremely wealthy.
Consequently, it is very important that the parties be represented by separate counsel in the negotiation of a Pre-Nuptial or Post-Nuptial Agreement which waives the right to an Elective Share. It is recommended that a party be represented by an attorney or attorneys with expertise in both domestic relations law and estate planning law, to ensure that the procedures are strictly followed, to avoid a later challenge by the surviving spouse after the deceased spouse’s death.
Review of Old Waiver Documents
North Carolina’s current Elective Share Act was adopted effective October 1, 2013, which significantly changed our statutory law and increased the Elective Share of a surviving spouse. If you have a Pre-Nuptial or Post-Nuptial Agreement which was executed before that date, or if your estate planning documents are at least partially based on that Agreement, we suggest that you have your document reviewed by a knowledgeable attorney or attorneys. Unless the document provides otherwise, the surviving spouse may be entitled to a larger percentage or amount than provided in your documents. If you were made aware of that possibility, you may be able to up-date your estate plan to address your concerns more effectively.
If you want to discuss a surviving spouse’s Elective Share under North Carolina law, please contact our law firm at (336) 725-2900.
What is a “Trust Protector” and what is the purpose of a Trust Protector?
A Trust Protector is someone other than a Trustee who is appointed to oversee the administration of a trust, to ensure that unanticipated changes of law or changes in circumstance do not adversely affect the trust beneficiaries.
There can be a number of reasons for appointing a Trust Protector. Irrevocable trusts cannot be changed by the Trust Grantor (i.e., the Settlor) after the trust has been created. In North Carolina, an irrevocable trust may be modified during the lifetime of the Grantor by a Court without beneficiary consent, or by all the beneficiaries with the consent of the Grantor, but not by the Grantor alone. Such a modification, if allowed, may be expensive to accomplish.
After the death of the Grantor, it is necessary to have Court involvement, even if all the beneficiaries agree.
On the other hand, a Trust Protector can be given the power in a trust agreement to make changes in the terms of the trust – for example to adapt to factual changes or changes in the law which occur after the trust has been created, such as an unexpected death or a divorce or remarriage. This can be especially important in a long-term trust which is likely to last for many years or even decades. Also, a beneficiary may develop a personal problem, such as dependency of drugs, which was not originally anticipated.
A Trust Protector may be given broad powers over a trust, such as:
Removing or replacing a Trustee;
Directing, consenting to, or vetoing investment decisions;
Amending a Trust Agreement to reflect changes in state law or the tax laws;
Resolving disputes between Co-Trustees, if applicable, or between Trustees and Beneficiaries;
Changing distributive provisions of a trust to reflect changing needs of a Beneficiary;
Creating a power of appointment, whereby a new beneficiaries or beneficiaries can be added, even including as persons born or adopted years after the Trust was originally created; or
Changing the state, the laws of which are the governing laws for the trust.
A Trust Grantor should be careful in setting out the powers of a Trust Protector in a trust agreement. The more specific the powers of the Trust Protector are, the more likely that the Grantor’s wishes will be carried out.
Article 8A of N.C. Gen. Stat. Chapter 36C describes the powers, duties and liability of power holders other than trustees, and that of trustees of trusts for which there are outside power holders, see G.S. Sec. 36C-8A-1 et seq.
The selection of a Trust Protector is very important. Sometimes a Trust Grantor may wish to select someone with special skills or experience, or who is familiar with the family or with beneficiaries. Sometimes it may be preferable to appoint a committee to serve as Trust Protector. Anyone named by the Trust Grantor can be a Trust Protector, but it is generally better to have someone outside the family to serve in that capacity, who may be more objective than a family member. Often an accountant or attorney, or even a corporate fiduciary which provides trust protector services, is named as the Trust Protector. If you have questions about using a Trust Protector, please contact an attorney with our firm who practices in trust and estate planning or trust administration. Please contact our firm at (336) 725-2900.
As a general rule, parents of minor children are legally responsible for the “necessary expenses” of those children, including medical expenses, under the “Doctrine of Necessaries” (sometimes called the Doctrine of Necessities). Also, a spouse may be responsible for medical and certain other expenses of the other spouse.
Please note that, as a general rule, a spouse is not generally responsible for the debts of his or her spouse, and a surviving spouse is not responsible for the debts and expenses of a deceased spouse – unless they have co-signed or expressly guaranteed those debts. Instead, the estate of the deceased spouse is responsible for paying those debts out of the assets of the deceased spouse’s estate, and the decedent’s spouse and family are not responsible.
However, there is an exception to that rule, which is an outgrowth of the old common law Doctrine of Necessaries, under which a husband was responsible for the debts and expenses of his wife. Not surprisingly, that law has become outdated (and gender-neutral) for some time. Current North Carolina law and the laws of many other states include somewhat similar rules, applicable to both spouses and limited to medical and other necessaries, such as nursing home care and funeral or cremation expenses.
This issue can arise while both spouses are living, such as when one spouse seeks to discharge his or her medical bills through bankruptcy but finds that both spouses are responsible for each other’s medical bills. Perhaps more often, a surviving spouse may be personally liable for medical and funeral and burial expenses of a deceased spouse, if the deceased spouse’s estate does not have sufficient funds with which to pay those bills.
There is an exception to the current Doctrine of Necessaries when a married couple are legally separated, but only (1) if the spouses were legally separated at the time the services were rendered, and (2) the provider of medical services had actual notice of the separation at the time the services were provided.
Prenuptial agreements and postnuptial agreements can provide that one spouse shall not be liable for the debts of the other spouse, but those provisions would not necessarily provide protection from liability under the Doctrine of Necessaries, because medical providers are not parties to such an agreement and therefore the agreement would not be binding against a medical provider.
If you are anticipating a second marriage and are concerned about becoming liable for the debts and expenses of your second spouse, you can get a limited amount of protection through the use of such legal devices as irrevocable trusts, and you can address other such liabilities through life insurance, medical insurance and long-term care insurance. If you are in need of legal advice concerning a spouse’s medical and burial expenses or other necessary expenses, please contact our law firm at (336) 725-2900.
This article will not go into the ABCs of Charitable Remainder Trusts (CRT’s). We will assume that the readers are already somewhat familiar with CRTs, and the pros and cons of using CRTs in their personal planning.
Most of the time CRTs are created for an individual or married couple to make planned gifts to charitable organizations, whereby the trusts terminate upon the death of the Trust’s Settlor or Grantor (hereinafter called the “Grantor”) and/or, if applicable, the Grantor’s spouse. The immediate benefits to the Grantor include (1) a charitable deduction for income tax purposes in the year of the gift to the CRT, (2) the assets can be diversified and reinvested by the trust without immediate income tax consequences on all the capital gains realized if the assets are sold, and (3) there is no gift or estate tax consequence for a gift to the Grantor’s spouse, because of the gift and estate tax marital deduction.
Any charitable deduction would not be for the full value of the assets transferred to the CRT, but would be reduced by the likely value of the retained life interest of the Grantor (and the spouse, if applicable), using federal actuarial tables to determine their life expectancies along with other factors, such as prevailing interest rates (Applicable Federal Rate or AFR), the percentage payout during their lifetimes, and the frequency of distributions – whether monthly, quarterly, semi-annually or annually.
The ages of the life beneficiaries and the applicable payout percentage set forth in the trust agreement (it must be at least 5%), in addition to the value of the assets transferred to the trust, are the primary factors in determining the value of the charitable remainder, i.e., the amount of the Grantor’s charitable deduction upon the transfer of assets to the CRT,
Although not done often, it is also possible to name others (other than the Grantor and the Grantor’s spouse) as CRT beneficiaries prior to the ultimate charitable distribution, but there are a specific set of rules which must be strictly complied with, if the trust is to qualify as a CRT, most notably “The 10% Test,” which requires that the actuarial value of the charitable remainder be at least 10% at the time when the trust is created.
That is, the Grantor will not get the tax benefits described above if the CRT does not meet The 10% Test.
If a grandparent wanted to name a 5-year-old grandchild as a successor life beneficiary after the death of the Grantor and Grantor’s spouse, the trust would not pass The 10% Test, because that grandchild would have a 70-plus year life expectancy, and a CRT is generally required to distribute at least 5% per year to the individual beneficiaries prior to the termination of the CRT. Taking those factors into consideration, the trust would not pass The 10% Test. Consequently, it is not possible to use a 5-year-old grandchild as a measuring life for the term of a CRT.
The 10% Test prevents many people from using the lifetimes of their children and/or grandchildren as measuring lives for the term of a CRT. At the time this article is written, the Applicable Federal Rate (AFR) is still low by historical standards, but with inflation surging, the AFR is likely to go up as a percentage, which will affect the actuarial value of a charitable remainder interest. In May 2022, a new CRT for a married couple and their three children, using their five lives to measure the term of the CRT, would not meet the 10% Test unless the children were in their mid-forties, or older.
If someone wants to create a CRT for beneficiaries who are much younger than the Grantor, a CRT could possibly be created for a term of 20 years or less, instead of being created for the lifetimes of the young beneficiaries. In that case, a CRT for a term for a maximum of 20 years could meet The 10% Test.
Another possibility would be to create a CRT which used the lifetimes of older individuals as the measuring lives for the CRT term, but which named younger beneficiaries to receive the distributions. An example would be to create a CRT for a term ending with the death of the Grantors’ last living child, assuming that such trust term would satisfy the 10% Test, but would name the Grantors’ grandchildren as beneficiaries or successor beneficiariues during the lifetimes of the children whose lives were the measuring lives for the CRT. That way, the grandchildren might receive distributions for perhaps 20 or 30 years, but not for their lifetimes.
A good practical example of how a trust could benefit grandchildren would be: Suppose the Grantor had two children and created a CRT for the joint lifetimes of the Grantor and the two children, to terminate upon the last death of the three of them – and suppose that the Grantor and one child died, but that the surviving child lived for a number of additional years. The CRT could continue in effect until the second child’s death, but during the remaining trust term, the trust agreement could provide that the trust distributions would be one-half to the surviving child and one-half to the Grantor’s grandchildren by the deceased child. That way, the deceased child’s children would continue to receive distributions until the death of the Grantor’s second child.
Even when The 10% Test is met, there are other tax drawbacks to naming younger beneficiaries as non-spousal beneficiaries of a CRT: (i) the charitable deduction would be smaller at the time the trust is created; and (ii) the gift tax value of any individual beneficiaries other than the spouse, would use up part of the Grantors’ lifetime gift tax exemption or exemptions, and later, the estate tax exemption at the Grantors’ deaths. Notwithstanding those tax drawbacks, it might be worthwhile for someone to consider such a CRT. If you would like to consider the possibility of creating a CRT including other beneficiaries than you and your spouse prior to termination of the trust, please call our firm at (336) 725-2900 to arrange a planning conference with one of our attorneys.
What happens if you have a will or revocable trust agreement which leaves some or all of your assets at death to a beneficiary who predeceases you? To whom do assets pass at your death, which are earmarked for the deceased beneficiary?
The answer is more complicated than you might imagine, and it can be dependent on a number of factors.
Beneficiary designations in a well-drafted will or revocable trust agreement will anticipate unexpected events, such as the death of a beneficiary prior to the death of the testator or the Grantor of a revocable trust agreement. For example, wills commonly provide that a deceased beneficiary’s share will either lapse at death or will be distributed to other beneficiaries.
North Carolina has an anti-lapse statute, NC Gen. Stat. Section 31-42, which determines what happens to certain property under a will if the intended beneficiary predeceases the testator, and no successor beneficiaries are named for a specific devise.
That statute provides that a beneficiary under a will is deemed to have predeceased the testator unless the beneficiary survives for at least 120 hours after the testator’s death (a deadline set by the NC Uniform Simultaneous Death Act), in which case the predeceased beneficiary’s share will pass as follows:
If the deceased beneficiary is a close relative, i. e, a grandparent of the testator or a descendant of a grandparent, that the descendants of the deceased beneficiary will take the deceased beneficiary’s share, to be divided into further shares as set forth under the North Carolina intestacy laws (the laws which apply when there is no will).
If the beneficiary is not a close relative as described above, the share of the deceased beneficiary will pass as part of the testator’s residuary estate under the will. Most wills drafted by attorneys leave any assets which were not left by specific devise, under a catch-all provision, called the “residuary estate.”
If there is no residuary estate provision in the will, then the deceased beneficiary’s share will pass under the North Carolina intestacy laws, which are often a decedent’s spouse and children first, if any, but they could be more distant kin of the testator if he or she is not married and/or doesn’t have children or grandchildren.
Please note that the anti-lapse statute by its terms is applicable only to wills. Presumably that statute would not apply to revocable trust agreements or to other forms of property ownership or to beneficiary designations.
Examples of other forms of ownership which provide for survivorship include ownership as joint tenants with right of survivorship, accounts with transfer-on-death (TOD) or payable-on-death (POD) provisions, life insurance policies or retirement accounts, payable on death to named beneficiaries, etc. These forms of ownership should provide for successor beneficiaries.
Please be advised that the default provisions of some accounts may be determined by the internal documents of the financial firm, which forms control the disposition of those assets and which are not necessarily identical to the North Carolina intestate succession laws. Often the default beneficiary would be the deceased owner’s estate, in which case the account would ultimately pass under the deceased owner’s will, if any, or under the North Carolina intestacy laws, along with other probate assets, if the decedent had no will.
Perhaps the most important purpose of estate planning is to designate the persons who will receive the decedent’s assets after death.
Consequently, we recommend that you gather your asset ownership and beneficiary designation documents when doing your estate planning, to make sure that they dispose of your assets exactly as you want, and that they make proper provision for the possibility that beneficiaries may predecease you. Your estate planning attorney can name alternate beneficiaries for each devise under your will and for your residuary estate, and can verify the survivorship or beneficiary provisions of assets not passing under your will.
The federal gift tax and estate tax exclusion was doubled from $5 million, indexed for inflation, to $10 million, indexed for inflation, by the Tax Cuts and Jobs Act of 2017, which is currently scheduled to expire in 2026. Including the index for inflation, the total exclusion for 2021 is $11.7 million per person, or $23.4 million per married couple.
Because of the high exclusion under the Tax Cuts and Jobs Act, very few people are currently required to pay federal estate tax.
The Tax Cuts and Jobs Act of 2017 was passed during the Trump administration, and the Biden administration has proposed significant cuts to the exclusion, which many anticipate as going back to the pre-Trump level of $5 million, indexed for inflation, which would be $5.85 million in 2021, if applicable this year, or $11.7 million for a married couple.
Generally, a decedent’s taxable estate is computed by combining the assets constituting his or her taxable estate at death, with the total of his or her lifetime taxable gifts. The decedent’s gross taxable estate is then calculated on that amount, reduced by a credit equal to the date-of-death estate tax exclusion amount. If any federal gift tax has actually been paid by the decedent on any taxable lifetime gifts, then an additional credit is allowed for gift taxes paid.
If a decedent made $1 million in taxable gifts (not including annual exclusion gifts) and thereby used $1 million of his or her lifetime gift tax exclusion to avoid paying gift tax on those gifts, the full $1 million would be added into the decedent’s taxable estate on Form 706, Federal Estate Tax Return, but the decedent’s estate would be entitled to the full amount of the estate tax exclusion on the date of death, unreduced by the gift tax exclusion which had been used during the decedent’s lifetime.
If that decedent’s assets were worth $6.5 million on the date of death, and if he or she had made $1 million in lifetime taxable gifts, then his or her taxable estate would total $7.5 million, and the estate would be entitled to the full estate tax exclusion applicable on the date of death. Under the $11.7 million exclusion in effect in 2021, there would be no estate tax payable at the decedent’s death.
If, however, the estate tax exclusion amount is lowered to pre-Tax Cut and Jobs Act levels by the time of a decedent’s death, and if the adjustment for inflation is $1.1 million at that time, the date-of-death exclusion amount would be $6.1 million ($5 million base amount plus $1.1 million adjustment for inflation). If we further assume that the taxable estate totaled $7.5 million under the facts described in the above paragraph, then there would be federal estate tax on the difference between the gross taxable estate of $7.5 million and the date-of-death exclusion of $6.1 million – a difference of $1.4 million, since the lifetime taxable gifts would total less than the date-of-death exclusion.
In contrast, let us suppose that the decedent had made taxable lifetime gifts utilizing his or her full $11.7 million gift tax exclusion prior to his or her death in 2021, instead of the $1 million gifts assumed in our example above, and further suppose that the estate tax exclusion is later lowered to $6.1 million on the date of death. Would the $5.6 million difference between the gift tax exclusion of $11.7 million reported on the decedent’s gift tax returns and the date-of-death estate tax exclusion of $6.1 million, be included in the decedent’s taxable estate?
In November 2019, the IRS published final “Anti-Clawback” Regulations, Regs. Sec. 20.2010-1(c), under which the $5.6 million difference between gift tax exclusion at the time of the gifts and the date-of-death estate tax exclusion would not be “clawed back” into the decedent’s taxable estate. Instead of adding all lifetime taxable gifts to the decedent’s taxable estate on Form 706, the Federal Estate Tax Return, the difference between the higher gift tax exclusion at the time of the gift and the lower estate tax exclusion on the date of the decedent’s death would not be included in the decedent’s taxable estate. Under the above example, $5.6 million of the lifetime gifts (the difference between the $11.7 million gift tax exclusion and the $6.1 million date-of-death exclusion) would not be added into the decedent’s taxable estate. There would be no gift or estate tax on those gifts totaling $5.6 million which had been made under the gift tax exclusion in excess of the date-of-death estate tax exclusion.
The Anti-Clawback Regulations are applicable if the Tax Credit and Jobs Act of 2017 expires in 2026 or if the exclusion is reduced by legislation prior to that deadline.
The Anti-Clawback Regulations are applicable only when the value of total lifetime taxable gifts exceeds the date-of-death exclusion. Taxable gifts totaling less than the date-of-death exclusion amount are added back, in computing the decedent’s taxable estate, but gifts in excess of that amount, up to the gift tax exclusion at the time of the gift, are not included in the decedent’s taxable estate.
Even if the Anti-Clawback Regulations are not applicable, there can be some tax advantages to making lifetime taxable gifts totaling less than the date-of-death estate tax exclusion. For example (1) income earned on gifted assets is taxable to the donee, instead of the donor, and that income is not included on the donor’s federal estate tax return; and (2) post-gift capital appreciation on the gifted property, if any, also is not included on the donor’s estate tax return. However, there would be no advantage under the Anti-Clawback Regulations.
Not many taxpayers can afford to make lifetime gifts which are large enough to take advantage of the Anti-Clawback Regulations, but those few taxpayers who can and do make such gifts could reap large transfer tax benefits for their family.
One possibility is that a person who has a very short life expectancy might make large lifetime gifts to take advantage of the Anti-Clawback Regulations, which they might otherwise not consider because of fear of outliving their assets. With only weeks or months to live, this might not be such a concern. If that person is unable to act for himself or herself at that time, and if that person has a durable power of attorney which expressly permits his or her Agent under the power of attorney to make gifts, then the Agent should consider making those large gifts on behalf of that person.
If you’ve heard of a “three year rule” under which “deathbed” gifts, made within three years prior to a decedent’s death, were disregarded for estate tax purposes, that is not a problem! That rule was the law at one time, but the law has been changed. At the time of the three-year rule, federal gift taxes and federal estate taxes were separate tax systems. Estate taxes were payable only on assets either owned at death or subject to certain powers retained by a decedent. To keep taxpayers from avoiding estate taxes by making gifts shortly before death, Code Section 2035 at that time treated all transfers made within three years of death as “gifts in contemplation of death,” and disallowed those gifts in the calculating a decedent’s taxable estate.
Congress later adopted an integrated gift/estate tax system, whereby all taxable lifetime gifts are added to a decedent’s taxable estate for estate tax purposes, whether or not made within three years prior to death. Consequently, the Anti-Clawback Regulations make no distinction between deathbed gifts or gifts made years earlier, and large deathbed gifts could reap the benefits of the Anti-Clawback Regulations, even if the estate tax exclusion is lowered after the date of the gift and before the death of a decedent.
Another tip: If a husband and wife want to make large lifetime gifts to their children and/or grandchildren – to take advantage of the Anti-Clawback Regulations – but they are not able to make large enough gifts to utilize both spouses’ full exclusions – they should not make joint gifts, which would be deemed to be one-half each. It would be more tax-efficient for the gifts to be from one spouse only, to enable the gifts by that spouse to utilize his or her gift and estate tax exclusion as much as possible, without splitting the gifts with the other spouse.
For married taxpayers with total assets of several million dollars or more, it is important to consider whether the estate tax exclusion of the first spouse to die should be utilized to minimize federal estate taxes upon the death of the surviving spouse.
Anything which a decedent leaves outright to his or her surviving spouse will qualify for the deceased spouse’s estate tax marital deduction and will pass to the spouse, tax-free. However, that property will become part of the surviving spouse’s taxable estate and will therefore be subject to potential transfer tax (gift tax/estate tax) for the surviving spouse, unless a portability election is made on a federal estate tax return for the deceased spouse.
A portability election is made in Part 6 of the deceased spouse’s federal estate tax return, unless the surviving spouse intentionally opts out of portability under Section A of Part 6.
Until 2011 the only way to take advantage of the estate tax exclusion of the first spouse to die was to leave assets in a manner which would not qualify for the deceased spouse’s marital deduction and thereby would use the deceased spouse’s estate tax exclusion, instead of his or her marital deduction, to avoid or reduce estate tax at the first death. That is, using the exclusion at the first spouse’s death was a “use it or lose it” proposition. If the first spouse to die did not provide for a portion of his or her estate to be set aside in a manner which did not qualify for the marital deduction, then his or her estate tax exclusion would be lost forever and could not later be used to reduce federal estate taxes at the death of the surviving spouse.
Let us assume that a deceased spouse in 2010 had a taxable estate of $6 million, and that the estate tax exclusion was $3.5 million at that time. Estate taxes at the first death could have been completely avoided if the deceased spouse left at least $2.5 million to the surviving spouse in a manner which qualified for the estate tax marital deduction, in which case up to $3.5 million in value could be set aside at the first death which would not be subject to estate tax at the surviving spouse’s death. Thus, only $2.5 million would become part of the taxable estate of the surviving spouse.
Often the first priority of a deceased spouse is to provide for the surviving spouse, in which case the $3.5 million share (under the above fact situation) which was intended not to qualify for the estate tax marital deduction was often left in trust for the surviving spouse’s lifetime benefit, but the terms of the trust would keep the assets from being included in the taxable estate of the surviving spouse. The undistributed trust assets would remain outside the surviving spouse’s taxable estate and would pass to the secondary beneficiaries after the surviving spouse’s death, free of estate tax.
Prior to 2011, when the law was changed, a common method used to minimize estate taxes at the surviving spouse’s death, was a “shelter credit” trust created by the deceased spouse, sometimes called a “family” trust (which is a friendlier-sounding name). A trust funded at the first spouse’s death, could make income and/or discretionary principal distributions to or for the benefit of the surviving spouse for life, but upon the death of the surviving spouse, the trust assets would pass on to the remainder beneficiaries, often the deceased spouse’s children and grandchildren, free of federal estate tax.
Starting in 2011, however, a different set of rules became applicable. After that date it became possible for the deceased spouse’s unused exclusion at the time of his or her death to be preserved, even if assets were left outright to the surviving spouse. If the deceased spouse’s exclusion was preserved, the exclusion could be used for gifts subsequently made by the surviving spouse, or on the surviving spouse’s estate tax return.
If you have estate planning documents which were executed before 2011 which include a shelter credit trust (a “family trust”) for the surviving spouse, you are advised to review these documents with your estate planning attorney, to see that such a trust is still appropriate for you, especially with the higher threshold for estate taxes likely to be available at your death.
The federal and gift tax exclusion has been increased substantially since 2011 on two occasions, first to $5 million indexed for inflation, then to $10 million indexed for inflation. The latter was under The Tax Cuts and Jobs Act of 2017, which is scheduled to expire in 2026, but which could be reduced at an earlier date by act of Congress.
If a deceased spouse does not utilize the opportunity in his or her estate planning documents to preserve some or all of his or her estate tax exclusion, the surviving spouse now has the option of filing a federal estate tax return and electing the portability option to preserve the Deceased Spousal Unused Exclusion (DSUE) on that return, which allows the surviving spouse to apply the deceased spouse’s DSUE against any gift and estate tax liability of the surviving spouse, including future lifetime gifts and transfers upon the death of the surviving spouse.
In order to take advantage of the portability of the deceased spouse’s DSUE, the personal representative of the deceased spouse’s estate must file a federal estate tax return (Form 706) in a timely manner, on which the DSUE is computed, and must elect to claim a DSUE portability election. That election may be made in Part 6 of the federal estate tax return. Once made, that election is irrevocable.
Estate tax returns are due nine months after the date of death, but a six-month extension is available, if requested on or before the original due date of the return.
Sometimes a personal representative fails to file a federal estate tax return claiming the portability election in a timely manner. If so, Rev. Proc. 2017-34 provides a fairly simple procedure for relief in certain circumstances. If the personal representative, after the return’s due date, wants to file an estate tax return to claim portability, he or she may be allowed to do so under that Revenue Procedure, but only if all the following requirements are met: (1) The decedent must have died after 12/31/2010, and must have been a U.S. citizen who was survived by his or her spouse; (2) The personal representative must not have been required to file a federal estate tax return (other than to claim portability); (3) An estate tax return must not have been filed before the filing date for the return; and (4) The personal representative must include the following statement at the top of Form 706: FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER SECTION 2010(a)(5)(A).
This method of filing for relief is available only if filed within two years from the date of death, and only if all the requirements listed above have been met. If those requirements have not been met, the personal representative may request a private letter ruling from the IRS, which is more cumbersome and expensive procedure, but which may provide relief.
Please note that the DSUE does not apply to generation-skipping-tax. The deceased spouse’s GST exemption is lost if not used by the deceased spouse.
Also please note that, although the exemption for gift and estate tax for the surviving spouse is indexed for inflation, the DSUE amount for the deceased spouse’s exclusion is frozen as of the deceased spouse’s date of death, and is not indexed for inflation which occurs after the deceased spouse’s death.
If the surviving spouse makes taxable lifetime gifts after the death of the first spouse to die, and if a portability election has been made after the first spouse’s death, the DSUE of the deceased spouse is first applied to those gifts, before the surviving spouse’s gift tax exclusion is used.
On page 1 of Form 709, U.S. Gift Tax Return, Item #19 asks whether the surviving spouse has applied for a DSUE exemption from a predeceased spouse to a gift or gifts reported on the surviving spouse’s gift tax returns; if so, the surviving spouse is instructed to complete Schedule C on the Form 709.
If a surviving spouse has more than one deceased spouse who made DSUE elections, the exemption of the last predeceased spouse at the time of the gift shall be applied first, if available. That is, the DSUE of more than one predeceased spouse, if applicable, may be applied in succession, starting with the most recently-deceased spouse.
There is a limit on the total DSUE amount which can be applied for a surviving spouse, however. The total DSUE amount claimed by a surviving spouse or by his or her estate cannot exceed the overall exclusion set out for gifts or estates for a single individual.
There are a number of factors which should be considered when determining whether or not to use portability at the first spouse’s death, both in pre-death planning and after the death of the first spouse to die, including: (a) the size of the combined estates of both spouses; (b) the age of the surviving spouse; (c) the surviving spouse’s ability to manage assets, and his or her spending habits and needs; (d) protecting the eventual inheritances of the children and grandchildren; (e) other likely inheritances by the surviving spouse; and (f) the possibility of remarriage by the surviving spouse.
If considering whether to make a portability election after the first spouse’s death, the safest approach – based on the theory that one never knows what will happen – would be to have the surviving spouse make a portability election, no matter what the circumstances, but the cost of preparing an estate tax return and making the election is often impractical, given the financial situation of the surviving spouse. Each case and each family financial situation is different, so we recommend that you review your circumstances with an experienced estate planning attorney, both while both spouses are living and again after the death of the predeceased spouse, to decide what’s best for you.
What do you do if someone wrote a will, but the will cannot be found after the testator’s death?
Will that person’s estate pass to his or her heirs according to the North Carolina intestacy laws, which are applicable when a person dies without a will?
No. It is possible in North Carolina to probate either a lost will or a will which has been inadvertently destroyed without the testator having the intent to revoke the will.
In North Carolina the Clerk of Superior Court has jurisdiction to probate a lost or destroyed Will. The North Carolina General Statutes do not provide a special procedure to be followed, but the right to probate a lost will is established by case law. See In re Hedgepeth, 150 N.C 245 (1909), concerning the probate of a Will in common form, i.e. the informal procedure under which most wills are probated. Also see In re Will of Herring 19 N.C. App. 357 (1975) where a lost will was probated in solemn form, which is a formal and binding procedure.
There are no printed forms furnished by the clerk’s office for the probate of a lost or destroyed will, so we recommend that an application for probate be drafted by an attorney.
There is no case law or statutory law concerning who may apply for probate of a lost or destroyed Will, but the persons who may apply for the probate of an existing will include the executor named in the will or, if the named executor fails to apply for probate within 60 days after the date of death, any person interested in the estate – whether under the will or under the intestate succession laws – may apply.
The person propounding the lost or destroyed will for probate must provide evidence of the following:
The death and domicile of the testator. This is usually done by a sworn statement that the testator has died, accompanied by a certified copy of the death certificate and a sworn statement that the testator was a resident of the county at death.
Evidence that the will was properly executed. A photocopy of the will would provide evidence, if available, but if not available, this can be proven by affidavits from subscribing witnesses, if living and available. The Clerk of Court determines whether the evidence is sufficient.
The contents of the will. Usually a copy of the will, if available, is admitted into evidence, but if a copy is not available, the contents may be proven by the testimony of witnesses (not necessarily by subscribing witnesses on a witnessed will).
A statement that the will was lost or was destroyed without the testator’s intent to revoke the will. The application may describe the circumstances that resulted in the loss or destruction of the will, such as a fire or a move by the testator to another house, or perhaps to a home for the elderly.
The evidence must be sufficient to overcome a presumption that the will was revoked. Sometimes a will may be given to someone else for safekeeping, but that person later loses the will.
Evidence that there was a diligent search performed for the original Will, in places where it would be likely to be found. We recommend that the propounder describe the places searched and the description of the search.
If the testator had a safe deposit box at his or her bank – that would be an important place to look. If the name of the attorney or law firm that drafted the will is known, their office should be checked. Also, wills are occasionally filed for safekeeping with the office of the Clerk of Superior Court of the county where the testator resided at the time the will was written. Searches should include the testator’s valuable papers, copies of tax returns, or sometimes special places, such as a family Bible.
With a probate in common form, the evidence will often be filed with the application, and the Clerk will rule on the evidence informally. Normally, if the propounder submits sufficient evidence, the Clerk will admit the will to probate. However, some Clerks will require a hearing.
A caveat or will contest may be filed for a lost or destroyed will, following statutory procedures. A caveat proceeding is heard in Superior Court and not before the Clerk. If a will has already been admitted to probate in common form, the matter will be transferred to Superior Court to determine whether the will was properly the testator’s will – even is the caveat is not filed until after the probate in common form.
A probate in solemn form is a procedure in which the clerk issues summonses to all persons interested in the estate and holds a hearing. A probate in solemn form will be binding and will not be appealable if no will caveat is filed before or during the hearing. That is, if someone wants to challenge the validity of a will submitted for probate in solemn form, they must either file a caveat before the probate hearing or raise the issue at the hearing, because the probate will otherwise be final and binding. If the caveat is filed in a timely manner, however, the matter will be transferred to Superior Court to determine whether the Will is valid, without a ruling by the Clerk.
Consequently North Carolina law provides that a Will may be probated which has been lost or inadvertently destroyed.
Qualified Disclaimers can be useful tools to alter the way property passes at death, and are often used as a method to reduce transfer taxes, such federal estate tax or gift tax.
Simply stated, a qualified disclaimer is a refusal to accept a gift, bequest, devise or beneficiary designation, done in a manner which meets certain statutory requirements.
Disclaimers may be made of lifetime gifts, but that is extremely rare, and this article will focus on transfers after a transferor’s death.
A qualified disclaimer after a transferor’s death must be in writing, it must clearly identify the property which is being disclaimed, and it must be signed by the person making the disclaimer, or his or her legal representative. The written disclaimer must be delivered to the transferor’s legal representative, such as the executor of an estate, and in North Carolina to the probate court, within nine months after the transferor’s death, with the exception of a disclaimer by a minor disclaimant, which may be made within nine months after the minor disclaimant’s twenty-first birthday.
Property cannot be disclaimed after it has first been accepted by an individual. For example, if an individual accepts stock dividends, he or she cannot later disclaim the shares of stock which paid those dividends.
The disclaimed property passes as though the disclaimant had predeceased the transferor. If there is a will, it passes to the successor devisees or beneficiaries under the will, after it has been disclaimed by the primary devisee or beneficiary. If there is no will, the property must pass to the secondary heirs under state law, who would have inherited the disclaimed property if the disclaimant had predeceased the decendent.
The person making the disclaimer cannot direct that a disclaimed devise or inheritance be passed to someone else, other than the person or persons who would have received the property if the disclaimant had predeceased the transferor. For example, a will leaves property to the transferor’s brother if he survives the transferor, and if he does not survive the transferor, the will leaves the property to the transferor’s sister. The disclaimant cannot disclaim the property and direct that is passes to his or her children, instead of to the sister.
The disclaimed property passes to the successors without any tax consequences to the person making the disclaimer, provided that the disclaimer is “qualified.” That is, the qualified disclaimer is not subject to gift tax, which would have been applicable if the person making the disclaimer had accepted the property and subsequently made a gift of that property to the transferees.
Generally, a disclaimant cannot disclaim property to a trust that names the disclaimant as a beneficiary of the trust or gives the disclaimant the power to direct the further disposition of the disclaimed property. For example, if the disclaimant is also the trustee of the trust to which the disclaimed property passes because of a disclaimer, and, as Trustee, has the discretionary power to direct its further disposition then the disclaimer would not be qualified unless the disclaimant also disclaimed his discretionary power.
There is an exception for a spouse, who can be a beneficiary of a trust, but the spouse cannot have the power to further direct the disposition of the trust property after the disclaimer, unless the spouse also disclaims his or her right to direct such disposition.
It is possible to disclaim partial interests in property, but not interests which cannot be severed into separate shares at the time of the disclaimer. For example, a person may disclaim 1,000 out of a total 2,000 shares of stock in an estate, but he or she cannot accept the dividends for life and disclaim the “remainder interest” in those shares after his or her death. In that case, a “vertical” disclaimer of half the shares will work, but a “horizontal” disclaimer would not work.
If the disclaimant is the trustee of the trust into which property is disclaimed, but as trustee is given the authority to make distributions among several beneficiaries, then the disclaimant must also disclaim his or her fiduciary power to direct the disposition among those beneficiaries.
Generally, a person cannot disclaim property in order to become qualified for Federal Title XIX assistance, such as Medicaid. The person must disclose all of his or her property to qualify or to remain qualified, including any property the person has disclaimed or wishes to disclaim.
Disclaimers are very technical in nature and you should not try to disclaim property without the assistance of a qualified attorney.
Charitable Remainder Trusts can be useful tools to avoid or to postpone capital gains tax on the sale of appreciated assets, for someone who wants to make a charitable gift after the termination of the trust. A person (the trust “grantor”) creates a trust which pays a stream of distributions each year to one or more beneficiaries (the “income beneficiary”) for life or for a term of years, after which the trust terminates and the remaining trust assets are distributed to a tax-exempt organization or organizations (the “remainder beneficiary”). Since the remainder beneficiary is a charitable organization, any capital gains which are retained in the trust are not subject to capital gains tax.
There are two types of charitable remainder trusts, called Charitable Remainder Annuity Trusts or CRATs and Charitable Remainder Unitrusts or CRUTs. A CRAT pays fixed distributions to the income beneficiary based on the original value of the trust assets, whereas a CRUT adjusts the distributions each year to reflect any increases or decreases in the value of the trust assets.
Example: $1,000,000 in assets are transferred to a charitable remainder annuity trust, or CRAT. The Grantor is to receive 5% of that value, or $50,000, per year, until the trust terminates. The income beneficiary frequently is a married couple and the trust term may be for their joint lifetimes and for the lifetime of the survivor. If the trust is funded with appreciated assets, no capital gains tax will be payable upon the sale of those assets. If the assets are worth $1,000,000 at the time of the gift and if they are sold for that amount, assuming that they were originally acquired for $100,000, the trust would not pay income tax on the $900,000 capital gain when the assets are sold. In addition to avoiding capital gains tax at that time, the grantor gets a charitable deduction on his or her income tax return for the value of the charitable remainder interest, calculated by Treasury actuarial tables applicable when the contribution to the trust is made. When the trust terminates – often after the death of the second spouse to die, the remaining trust assets are paid to a tax-exempt organization or organizations (the “charitable remainder beneficiary”) as set forth in the trust agreement.
A charitable remainder “unitrust” or CRUT is similar to an annuity trust, except that the distributions are adjusted annually, to reflect any increase or decrease in the value of the trust assets. If a 5% Unitrust was originally funded with $1,000,000 in assets, but grows in value to $1,100,000, the unitrust distributions for the following year would be 5% of the new value, or $55,000. This is different from a CRAT or annuity trust, for which the distributions would remain the same, even if the value of the trust assets increases or decreases.
Please note that the distributions from a CRT to the income beneficiary are taxable, to the extent that (a) the trust has taxable income, including capital gains, and/or (b) the trust had , in previous years, taxable income which has not been distributed to the income beneficiary. The trust cannot avoid income tax by investing in tax-free bonds until all taxable income has first been distributed, which makes this strategy impractical.
The general rule is that a CRAT or CRUT is required to distribute at least 5% annually, but there are exceptions for certain types of unitrusts. For example a “net income” CRUT (sometimes called a NICRUT) is not required to distribute more than its net income, and a “net income” CRUT with makeup provisions” (sometimes called a NIMCRUT) may make up income arrearages from past years (i.e., from years in which the trust was allowed to distribute less than the unitrust percentage), until the excess distributions have caught up with those arrearages. Thus a 5% NIMCRUT which earns only 1% in a given year would distribute only 1% currently and would accrue a 4% arrearage, which may be distributed only from excess income in subsequent years, i.e., income in excess of the 5% unitrust percentage. If 7% income is earned in a subsequent calendar year, the 2% overage for that year in excess of 5% may be distributed to the income beneficiary as a make-up distribution.
There are certain types of investments which enable the trustee to have some control over the realization of taxable income of a trust, in which case the trustee may minimize taxable income in one year and maximize taxable income in another year.
Occasionally someone creates a CRT which he or she later desires to exit. Circumstances can change over time, and sometimes there is an unanticipated major life event, which causes a change of mind. The trust itself is irrevocable, but there are alternatives which permit an income beneficiary of a CRT to obtain a more suitable result.
Let us suppose that the spouse of the trust grantor unexpectedly dies and later the grantor remarries and wants to make the new spouse an income beneficiary. Since the original trust was irrevocable, it cannot be changed to substitute the new spouse as a replacement beneficiary. In that case the grantor may want to exit the original trust in a manner permitted by law and to enter into a new trust agreement under which the new spouse is an income beneficiary.
There are several alternative methods for exiting an existing charitable remainder trust:
Temination of a CRT. One option is for the trustee simply to terminate the trust, in which case the trust assets must be divided between the charitable beneficiary and the income beneficiary strictly according to Treasury actuarial tables, following procedures established by the IRS. Care must be taken to avoid “self-dealing” under Code Section 4941, which could subject the trust to severe penalties.
Sale of income interest. Another option would be for the income beneficiary to sell the income interestin the trust to a third-party buyer. An important benefit from this alternative is that it frequently results in getting more money to the income beneficiary than would be received in a straightforward trust termination. Please note that the income interest in a CRT is considered a capital asset for income tax purposes, and if the sale of that capital asset results in a higher price than the actuarial value of that asset under the Treasury actuarial tables, there would be a taxable capital gain for the income beneficiary.
The original CRT would continue to exist under this alternative, under the same terms and conditions, but with a different income beneficiary – but please be aware that if the original term of the trust was measured by the life of the original income beneficiary, there would be no change in the term of the trust and the original income beneficiary’s life would continue to be the measure for the remaining term of the trust.
The proceeds received by the income beneficiary from the sale of the income interest could be contributed to a new charitable remainder trust if the Grantor so desired, with income tax benefits applicable to a new CRT, but the new trust would be scaled down in size as compared to the original trust unless additional assets were added to the new trust. The new trust could have different beneficiaries than the original trust, such as a spouse by a second marriage or other family members.
CRT Rollover. A third option could be a charitable remainder trust “rollover,” where the income beneficiary rolls over his or her income interest to a new CRT. Initially, the new CRT would have no assets other than the right to receive unitrust distributions from the old trust, which would continue to exist. However, an important benefit of this alternative is that the income interest from the old trust can be sold by the new CRT to a third-party buyer, and if the sale price is higher than its actuarial value under the Treasury tables, there will be no capital gains tax on the sale of that income interest, as long as the gain is retained by the trust. The proceeds of sale could be invested by the new CRT differently than the assets of the old trust, which investment strategy may be more appropriate for the new trust. The income beneficiary from the old trust would be the grantor of the new CRT and would get income tax benefits applicable upon the creation of a new CRT. New beneficiaries could be named for the new trust.
The original CRT would continue to exist and the charitable beneficiary would still receive the remainder distribution on termination of the trust under the original terms of the trust. Please note that if remaining term of the old trust was based on the measuring life of the original income beneficiary, that same person’s life would continue to be the measuring term for the old trust, even if that person is no longer receiving the unitrust distributions from the old CRT.
Distribution to charitable beneficiary. Lastly, an income beneficiary who no longer needs or wants the income distributions from the CRT may want to terminate his or her trust by giving the income interest to a charitable remainder beneficiary. If that is done, then the charitable remainder beneficiary would own both the income interest and the remainder interest, and the trust could be terminated. A beneficiary who gives his or her income interest to a charitable organization will get a charitable deduction for giving that income interest to charity, based on the value of the income interest under the Treasury actuarial tables at the time the trust is terminated.
Charitable remainder trusts often last for one or more decades. Although the original reasons for creating the trust were presumably valid at the time the trust was created, circumstances can change over time. Whatever the reason for the exiting a CRT, the procedure is complicated and in some states may even require court action. You need to consult with an experienced professional to discuss your situation and to determine the best option available for you.