Anticipated issues with estate taxes for RAQT trusts
A tax lawyer is warning about some adverse tax consequences for surviving spouses in many states across the country due to the use of so-called “QTIP trusts”.
Seymour Goldberg, a senior partner at the law firm Goldberg & Goldberg in Woodbury, NY, contacted Treasury Secretary Jacob Lew and Internal Revenue Service officials earlier this year about the issue. In his letter to the Treasury, Goldberg, who is a CPA, warned of how the issue could undermine the tax treatment of qualified Terminating Interest Property Trusts, or QTIPs.
“It appears, based on certain changes to state trust laws in many jurisdictions, that state trust laws as amended may adversely affect estate plans across the United States. “, he wrote.
He noted that the problem can arise when a QTIP trust owns an interest in a limited liability company or a partnership and suggested that it could be resolved by the IRS through a tax ruling so that practitioners can inform their clients accordingly.
Goldberg pointed out that many estates practitioners provide for a decedent’s interest in a limited liability company or an interest in a partnership to be held in trust. The trust thus provides that mandatory income interest must be paid to the surviving spouse at least annually for the treatment of the RAQT trust.
Compulsory income interest under the Uniform Principal and Income Act, or UPAIA, which has been adopted by most jurisdictions nationwide, “means the right of an income recipient to receive net income that the terms of the trust require the trustee to distribute.” According to the UPAIA, if a limited liability company or partnership makes a distribution to a trust, it is for the most part considered income, except when the money is received in partial liquidation, Goldberg noted, while money received in partial liquidation is considered primary.
“The issue is triggered when the trustee receives a K-1 from an equity interest in a limited liability company or partnership in an amount greater than the actual cash distribution of the equity interest in said entities,” he said. -he writes. “For example, a K-1 for $100,000 is issued to the trust by a limited liability company and the cash distribution is only $30,000. In many, but not all, jurisdictions, the $30,000 distribution is not paid to the income beneficiary and is used by the trustee to pay income tax owing on the $100,000 K-1. In other jurisdictions, the $30,000 is paid to the beneficiary of the trustee’s income and the trustee pays income tax on $70,000 while the beneficiary pays tax on the distribution amount of $30,000. . What concerns me is that most jurisdictions change their laws to prevent the $30,000 from being paid to the recipient of the mandatory income. This may compromise the trust treatment of the QTIP in these jurisdictions.
If the beneficiary of the mandatory income is the surviving spouse, a spouse in most jurisdictions would not receive the $30,000 of book income, Goldberg pointed out, which appears to conflict with RAQT trust rules.
“As a practical matter, the majority of jurisdictions are concerned that the trustee does not have a sufficient sum of money to pay the income tax payable on the notional income which is triggered when K-1 and cash distributions are not the same,” he added.
On Thursday, the American Bar Association released a book by Goldberg, “Can You Trust Your Confidence?” What You Need to Know About the Advantages and Disadvantages of Trusts and Trust Compliance Issues,” which examines the advantages and disadvantages of creating and administering a trust for an estate, particularly when states revamp their trust laws in response to the UPAIA and other laws.