There have been significant 2016 developments in the probate and trust area at both the federal and Minnesota level.
Charitable Remainder Annuity Trusts (“CRATs”). The IRS issued Rev. Proc. 2016-42 on August 22, 2016, which provides revised sample language for a charitable remainder annuity trust, and is intended to slightly expand the universe of clients that can benefit from this tool. The old rules had provided that if there was a more than 5% probability that the charity would not receive any benefit after payment of the annuity stream, the trust would not qualify for a charitable deduction upon funding. The new procedure allows a charitable deduction for the present value of the charitable interest if the trust instrument requires termination of the trust (and payment of the residue to the charity) when the trust is worth less than 10% of the initial trust value. Because of the current low interest rate environment, such trusts have typically only been available to clients age 72 or older.
Valuation Discounts. The IRS, in Prop. Treas. Reg. §25.2704 issued August 2, 2016, is implementing further restrictions on valuation discounts for transfers of interests in family-owned businesses. The new rules are intended primarily to significantly reduce or eliminate discounts that had been taken for lack of marketability or lack of control, typically achieved by putting transfer or liquidation restrictions in the entity documents. The new regulations would expand the list of restrictions that will be ignored when valuing the transfer of business interests among family members. A hearing has been scheduled for December 1, and Treasury has stated that the final regulations won’t be effective until at least 30 days after they become final, which could be as early as January 1, 2017. This gives us an opportunity for discount planning prior to that effective date for business owners who have been intending to make lifetime transfers of part of their business to their descendants.
For clients with estates below the federal estate tax exemption threshold (currently $5.45 million per person, indexed for inflation and portable from one spouse to the other at the first death), valuation discounts may in any case be a detriment, since the discount results in a lower basis to the recipient for income tax purposes, which may be a bigger concern for tax planning purposes. The top federal income tax rate is currently 39.6%. Where discounts do result in estate tax reduction (40% flat rate on taxable estates), the rules will provide more clarity, and provide some relief for operating businesses. There is much uncertainty and controversy swirling around these proposed rules, and there is certain to be some modifications and changes before the rules become final.
Minnesota Legislation. Despite the publicized gridlock at the State Capitol, there was bi-partisan support for several changes in the probate and trust area. Perhaps the most prominent was the recognition of pet trusts, making Minnesota the last of the 50 states to allow the creation of trusts for the benefit of pets. The new law allows a trust for the care of an animal that was alive during the settlor’s lifetime, and that terminates upon the death of the animal (or the last surviving animal). In order to avoid problems with the “Rule Against Perpetuities”, the trust may not continue for more than 90 years. A person can be appointed to enforce the trust, and although there is no dollar limit, the court is permitted to determine “that the value of the trust property exceeds the amount required for the intended use.” Upon termination, the remaining assets can pass to designated beneficiaries.
Digital Assets. The state enacted the Revised Uniform Fiduciary Access to Digital Assets Act which clarifies a fiduciary’s access to the digital assets of a disabled or deceased individual. The law clarifies that a catalog of electronic communications received and sent, and other information related to the decedent’s digital assets, may be disclosed unless the user prohibited such disclosure. On the other hand, the contents of those electronic communications can not be disclosed unless the decedent specifically consented to the disclosure (or was approved by the court). A similar provision applies to an agent acting on behalf of the principal under a financial power of attorney. A prior version of the Act had been opposed by the tech industry and was almost universally rejected in most states, prior to its revision in the summer of 2015.
Uniform Probate Code in Minnesota. The most significant change was adjustment of many thresholds based on inflation over the past 25 years. The significant changes include (1) allowing the surviving spouse the first $225,000 of an intestate estate (i.e. no Will; was $150,000); (2) increasing the supplemental elective share (generally when a spouse has been disinherited) to $75,000; (3) increasing the spouse’s exempt property to $15,000 (was $10,000); (4) increasing the family allowance to $2,300 per month (was $1,500); and (5) increasing the threshold for the collection of personal property by affidavit to $75,000 (was $50,000). The threshold for an expedited probate proceeding (“summary administration”) was increased to $150,000 (was $100,000). Besides other technical changes to the probate code, there was the addition of transfer on death designations for watercraft (avoiding probate upon death), and a Revisor’s bill that conforms the Uniform Probate Code to the recently enacted Minnesota version of the Uniform Trust Code (which was effective in Minnesota on January 1, 2016). There were some proposed bipartisan changes in the tax bill and judiciary bill that would have impacted the probate and trust area, but these will not be enacted unless there is a special session yet in 2016, or if they are re-introduced in the 2017 session (January 3 – May 22).