inter vivos trust by joshgill

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									Inter Vivos Trust Update
by Thomas M. Davies


his is an addendum to the November 1997 issue of The Nebraska Lawyer, which published an article by this author entitled, “The Revocable Inter Vivos Trust in Nebraska: A Practitioner’s Guide.” That article analyzed the differences in application and treatment as between a will and probate estate and an estate represented by a Revocable Inter Vivos Trust (RIVT). In discussing the deductibility of administrative expenses in computing taxes, that article stated: “All administrative expenses are deductible in an estate — for federal and state estate tax, federal and state income taxes, and Nebraska inheritance tax. However, administra-

tive expenses of an RIVT are only deductible to the extent the trust assets are subject to the debts and claims of the estate, and as allowable by the law of the jurisdiction. Reg. §20.2053-1(a)(1). If the assets of a revocable trust are not available to satisfy estate claims and expenses, the only deductible trust administration expenses are those engendered by the decedent’s death, incurred in vesting good title in the trust’s beneficiaries and paid within three years of filing the estate tax return.” In a decision decided June 21, 2002, the U.S. Court of Appeals for the Second Circuit, In the Estate of Constance R. Grant, Deceased, vs. Commissioner of Internal Revenue, 2002 U.S. App. LEXIS 12370, the Second Circuit affirmed the United States Tax Court in the same case, T.C. Memo 1999-396; 1999 Tax Ct. Memo LEXIS 452; 78 T.C.M. The Second Circuit addressed the question of deducting expenses of administration where there is a small probate estate and a large trust estate. The circuit court stated the facts in the Grant case as follows: “The factual background to this appeal is easily summarized. In 1991, Constance R. Grant conveyed most of her property to a trust which provided that the property would be distributed to her two children upon her death. Grant died in April 1994 in Montgomery County, Maryland, leaving her children as her sole heirs and the personal representatives of her estate. In December 1994, the estate filed a federal estate tax return valuing the estate at $865,480 in trust assets and $11,253 in non-trust assets. The estate claimed administration expenses of $48,102, which included $16,875 in personal representatives’ fees.

Thomas M. Davies is a partner in the law firm of Mattson, Ricketts, Davies, Stewart & Calkins in Lincoln. He is a 1937 graduate of the Nebraska College of Law, and practices in the fields of taxation law, estates and trusts. He is a former state senator, past president of the Nebraska State Bar Association and Nebraska State Bar Foundation, and Fellow of the American College of Trust and Estate Counsel. He has authored several articles that have appeared in The Nebraska Lawyer.
The Nebraska Lawyer March 2003

Three years later, the Commissioner of Internal Revenue issued a statutory notice of deficiency determining that the estate owed additional tax because the personal representatives’ fees, as well as some other administrative expenses, were not deductible in the amount claimed. The estate petitioned the United States Tax Court for a redetermination. The [Tax] Court reasoned that under 26 U.S. C. § 2053 and Maryland law, the estate could claim personal representatives’ fees only on the non-trust assets of the estate, but was entitled to trustee commissions on the trust assets. The court also limited the amount of miscellaneous expenses that could be deducted by the estate because most of the expenses claimed were not necessary to administering the estate’s assets. The court, therefore, concluded that the estate was entitled to deduct $1,012.77 in personal representatives’ fees, $5,720 in trustees’ commissions, and $3,100 in additional administrative expenses. The estate has appealed this determination. The primary issue raised by the estate’s appeal is whether in order to be deductible under § 2053 an administration expense must meet the requirements of both state and federal law, or, in the alternative, simply be allowed under state law. The Tax Court found that it was not sufficient for the personal representatives’ fees simply to be allowable under Maryland law, and that those expenses must also meet the requirements of § 2053. We agree.” The circuit court affirmed this as follows: “Today we hold explicitly what we implicitly determined in Estate of Smith (510 F.2d 479, 2d Cir 1975): that in order for an expense to be deductible under § 2053, it must qualify as an ‘administration expense’ under both the applicable state law and the federal law as delineated in the Treasury regulations. In so holding, we join the consistent position taken by the other circuits that have examined this issue.” (emphasis added) The Tax Court case reported in detail the terms of the Will and trust, and set out in detail the assets of the estate. The Tax Court found that under § 20.2053-3 of the

estate tax regulations: “The only expenses in administering property not subject to claims which are allowed as deductions are those occasioned by the decedent’s death and incurred in settling the decedent’s interest in the property or vesting good title to the property in the beneficiaries. Expenses not coming within the description in the preceding sentence but incurred on behalf of the transferees are not deductible.” The Tax Court found that the time spent on trust assets by the personal representative did not qualify as “necessary” for the administration of the estate under § 2053. The circuit court affirmed this. The circuit court stated: “By choosing to convey the bulk of her assets through a trust, Grant limited the amount of her property that was transferred in her estate and consequently limited the estate’s tax deduction for administration expenses. We think the court’s decision to allow the maximum amount of personal representatives’ fees based on the value of the estate assets as well as the maximum amount of trustees’ fees based on the value of the trust assets was an appropriate determination.” How does the Grant decision apply to Nebraska residents? Nebraska Inheritance Tax There is a Nebraska law on the deductibility of administration expenses on property not subject to probate, in computing the Nebraska inheritance tax: Section 77-2018.04, Reissue Revised Statutes of Nebraska 1995: “(2) All expenses of administration which accrue as a result of the death of the decedent, including, but not limited to, attorney’s fees, court costs, and expenses concerning property not subject to probate.” (emphasis added) See also § 30-2476(18), R.R.S., 1995, which states that the personal representative of an estate “acting reasonably for

the benefit of the interested persons” may properly “pay taxes, assessments, compensation of the personal representative, and other expenses incident to the administration of the estate.” Assume there is a Nebraska estate with a date of death as of 2002 in which the probate estate was $30,000 and the nonprobate, or trust, assets were $1,200,000. What expenses would be allowed in determining Nebraska inheritance tax? Attorney’s fees would be deductible considering the entire estate. But do the duties of a personal representative include time spent on the trust assets? The Grant decision said no. There has been no recorded Nebraska case on this point. Federal Estate Tax The Eighth Circuit Court of Appeals has not passed on this, but under the Grant decision, the administrative expenses allowable under the federal estate tax, Form 706, would be limited to the amount of personal representative’s fees in handling an estate of $3 0,000, and possibly the same as to attorney’s fees, plus the additional fees for preparing the Nebraska inheritance tax worksheet and the federal estate tax return. Attorney’s fees of $1,865 were claimed and allowed in the Grant case without further discussion. The fact that higher fees might be allowed by a Nebraska probate court would not be accepted on the federal estate tax return, for in 706. The Grant case held that in order for an administrative expense to be deductible for federal estate tax under 26 U.S.C. § 2053, it must qualify as an “administrative expense,” under both the applicable state law and the federal law as delineated by the treasury regulations. The author’s law partner, Lawayne L. Feit, has raised the following question: Suppose the trust provides that if the estate assets are insufficient to pay expenses of administration and debts, then those expenses shall be paid out of the trust. Would those expenses paid out of the trust be treated as “property subject to claims?” TNL

The Nebraska Lawyer March 2003

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