Tax Consequences of a Power to Terminate a Nonmarital Trust

Trust documents often include a provision to end the trust if it becomes too small to manage or if its purpose is achieved before the stated end date. This power can have tax consequences, so it’s important to consider before including it in a trust document. There are two types of powers to terminate a trust: one that allows the power holder to end the trust at any time, and one that can only be exercised if a certain event occurs. In this article, we assume the wife is the sole trustee and income beneficiary of the trust, and her children are the remaindermen. It is also assumed that the surviving spouse has a separate estate worth $600,000 and has not used her unified credit. A power of appointment is the power to decide who gets property. There are two types of powers: general and limited. A general power allows the holder to benefit themselves, their estate, or their creditors. A limited power does not allow this. If a power to terminate a trust can only be exercised if a certain event or contingency occurs, it is not considered a power at the time of the holder’s death. If a surviving spouse has the power to end a trust and receive all the money in it, that money will be included in their estate and could be subject to a 37 percent estate tax. Even if the trust is currently worth more than $50,000, if it ever drops below that amount, the power to terminate could still result in a high estate tax. It’s important to be careful when setting up a trust with this kind of termination provision, because the future value of the trust is unpredictable. In some cases, a trustee of a trust can decide to end the trust if they think the amount of money in the trust is not worth the cost of keeping it. The money in the trust would then be given to the people who are supposed to get it. This power of the trustee is not considered a general power under the law, because the trustee has to follow certain rules and make a fair decision based on the amount of money in the trust. The court case we’re discussing is about a trust and whether a specific termination provision in the trust should be considered a general power under the law. The court followed a rule that says if a specific event or condition must happen before the termination power can be used, then it’s not considered a power at the time of the person’s death.

But it’s important to understand that the termination provision in the trust could still be considered a general power under the law. If the person with the power to terminate the trust will get the money from the trust when it’s terminated, then it’s considered a general power. So, it’s important to be careful when including this type of power in a trust because it could lead to certain legal issues.

If someone is writing a termination provision for a trust, they should be careful not to give the trustee too much power to decide when the condition for termination has been met. This could cause problems later on. So, it’s important to think about these things carefully when creating a trust. When a trustee has the power to end a trust, it’s important to use specific and clear language to describe the circumstances under which the power can be exercised. If the language is not clear and definite, it can cause issues with the IRS. The surviving spouse should not be able to bring about the event or contingency that allows them to end the trust, as this could cause tax consequences. It’s important to be careful when drafting this kind of power. In the Kurz case, the court ruled that a spouse’s power to withdraw money from a trust, even if it was contingent on certain conditions, was still subject to estate tax. This ruling could apply to any similar situation with trusts. For example, if a spouse had the power to terminate a trust if the trust’s income didn’t cover its expenses, this power could also be subject to estate tax. However, if the power to terminate was based on events like having a child or getting remarried, it might not be subject to estate tax. This shows that the specifics of how a power is written can have a big impact on estate tax. If a trust allows the surviving spouse to end the trust and give the money to someone else, like their children, then it doesn’t count as a power that lets them benefit themselves. But there’s an exception if the spouse has to support those people. However, if the trust is for the spouse, don’t include this kind of power because it can cause tax problems. If the spouse can end the trust and get the money, it counts as a power that triggers gift tax consequences. So, if the spouse doesn’t use the power, it’s still considered a gift for tax purposes. If a spouse has the power to end a trust and give the money to someone other than themselves, they may have to pay gift taxes on the income from the trust. If a child learns about this power, they might ask their parent to use it, and this could lead to a large gift tax. This is only a problem if the trust is paying out income to someone other than the spouse. If all the income is being saved or given to someone else, then the spouse won’t have to worry about gift taxes. An attorney might be tempted to draft a power to terminate a trust in a certain way to avoid taxes, but they need to be careful. In Florida, there’s a law that restricts trustees who are also beneficiaries from making distributions to themselves that are not for their health, support, education, or maintenance. So, attorneys need to be mindful of this law when creating trust termination powers. A law called §737.402(4) stops trustees from using certain powers that they would normally have. This law is meant to prevent tax issues with improperly written trusts. But it might not apply to the power to end a trust. The law only talks about giving money to the trustee, not ending the trust completely. We’ll have to wait for a court to decide for sure. When someone dies and their spouse brings in a will with a trust that can be ended, the attorney should consider advising the spouse to give up that power if it’s still possible. If it’s too late for that, the attorney might suggest that the spouse step down as the trustee of the trust. This could be a good idea if, for example, the trust is close to a certain value and the spouse has the power to end it, or if the money in the trust will go to the spouse’s kids once it’s ended. If the spouse steps down and a child takes over as trustee and ends the trust, it may not have tax consequences for the spouse if it’s planned correctly. But not every problem has a solution, so it’s important to have a well-written power to end the trust from the start. Peter B. Tiernan is a lawyer who works in Margate. He helps people with planning their wills, handling estates, dealing with taxes, and issues related to elderly people.

Source: https://www.floridabar.org/the-florida-bar-journal/tax-consequences-of-a-power-to-terminate-a-nonmarital-trust/