Winter 2007 Newsletter
PRACTICAL CONSIDERATIONS IN TERMINATING TRUSTS UNDER VIRGINIA’S UNIFORM TRUST CODE
by John H. Turner III
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 55-19.4provided 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 Similarly, repealed Section 55-31.1 provided statutory authority for the court to order termination of charitable trusts.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 non-charitable trust,4 (ii) all of the beneficiaries agree to terminate a non charitable 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 achieved, or the purposes of the trust have become unlawful, contrary to public policy or impossible to achieve.11
1. Termination of Non charitable 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 Non charitable 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 55-544.11 (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 55-544.12, 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 made to the qualified beneficiaries in proportion to the actuarial value of their interests.”
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
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 non-exercise 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 potential gift tax implications of such distributions (see discussion at C.2 below).
B. Additional Distribution Considerations.
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 non qualified 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 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’ 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 “grand fathered trust,” it is unclear whether an “early” termination of the trust would be considered a “modification” of the trust’s governing instrument jeopardizing the grand fathered status of the trust.28 Therefore, early termination of grand fathered 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. Section 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 self-dealing 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 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 life-threatening 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 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.
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. 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.
19See 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).
21See 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.” Seealso Revenue Ruling 75-550, 1975-2 C.B. 357.
24See 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.
26See 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.
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).
29See 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. 88-27.
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.
33See 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.
34See 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.”