1. Problem Areas in Trust Administration Jim Lamping The Law Office of James P. Lamping San Francisco – Marin County (415) 992-3100 jim@jimlamping.com

2. Topic One: StaleTrusts

3. Understand the Formula Identify the Subtrusts Identify the Subtrusts Identify the Formula Identify the Formula What is the Method of Funding Assets? What is the Method of Funding Assets? Is There a GST Division? Is There a GST Division?

4. Two Trust Division Administrative Trust Survivor’s Trust Credit Trust

5. Three Trust Division Administrative Trust Survivor’s Trust Credit Trust Marital Trust

6. Identifying the Formula in a Three Trust Division Pecuniary Pecuniary Fractional Fractional

7. Pecuniary Formulas Pecuniary Marital – Residual Credit (3 Trust) Pecuniary Marital – Residual Credit (3 Trust) Pecuniary Credit – Residual Marital (3 Trust) Pecuniary Credit – Residual Marital (3 Trust) Pecuniary Survivor – Residual Credit (2 Trust) Pecuniary Survivor – Residual Credit (2 Trust) Pecuniary Credit – Residual Survivor (2 Trust) Pecuniary Credit – Residual Survivor (2 Trust)

8. Methods of Funding Pecuniary Amount with Assets in Kind Date of Distribution Date of Distribution Date of Death Date of Death Default is Date of Distribution Default is Date of Distribution If Date of Death, “Fairly Representative Funding” If Date of Death, “Fairly Representative Funding” Probate Code Probate Code § 21118

9. Methods of Funding for Fractional Share Formula Strict Fractional Strict Fractional Fractional Pick and Choose Fractional Pick and Choose

10. Which Trusts Receive Appreciation or Depreciation?

11. Kenan Gain Pecuniary Bequest Pecuniary Bequest Date of Distribution Funding Date of Distribution Funding Satisfied in Kind with Appreciated Assets Satisfied in Kind with Appreciated Assets

12. The Payment of Interest on Pecuniary Gifts

13. Payment of Interest on Pecuniary Amount Probate Code 12003 Probate Code § 12003 Does the Document Waive Interest? Does the Document Waive Interest? Rate is Three Percent Less Than the Legal Rate (Probate Code 12001) Rate is Three Percent Less Than the Legal Rate (Probate Code § 12001) 10% - 3% = 7% 10% - 3% = 7% GST Trusts GST Trusts

14. Non Pro Rata Allocation of Community Property

15. Hypothetical Allocation of trust assets between the credit and survivor's trusts upon the death of the first spouse Allocation of trust assets between the credit and survivor's trusts upon the death of the first spouse Blackacre has a value of $1 million Blackacre has a value of $1 million Whiteacre has a value of $1 million Whiteacre has a value of $1 million IRA (a non-trust asset) has a value of IRA (a non-trust asset) has a value of $1 million

16. Pro Rata Allocation Administrative Trust $2 million Blackacre ($1 million) Whiteacre ($1 million) Survivor’s Trust $1 million 50% of Blackacre ($500,000) 50% of Whiteacre ($500,000) Credit Trust $1 million 50% of Blackacre ($500,000) 50% of Whiteacre ($500,000)

17. Non Pro Rata Allocation Administrative Trust $2 million Blackacre ($1 million) Whiteacre ($1 million) Survivor’s Trust $1 million 100% of Blackacre ($1,000,000) Credit Trust $1 million 100% of Whiteacre ($1,000,000)

18. DeterminingtheTargets

19. Hypothetical Husband Dies in 2002 Husband Dies in 2002 $1 Million Applicable Exclusion Amount $1 Million Applicable Exclusion Amount $2 Million of Community Property Assets (Date of First Death) $2 Million of Community Property Assets (Date of First Death) $12 Million Current Value of Those Assets $12 Million Current Value of Those Assets

20. Date of Death Community Property $2 million Survivor’s Share $1 million Deceased Spouse’s Share $1 million

21. Allocation of Current Value Community Property $12 million Survivor’s Share $6 million Deceased Spouse’s Share $6 million

22. Examples of Various Formulae

23. Assumptions for Examples First Death in 2002 First Death in 2002 $1 Million Applicable Exclusion Amount $1 Million Applicable Exclusion Amount The Trust Held $6 Million at Date of Death The Trust Held $6 Million at Date of Death The Current Value of Trust Assets is $12 Million The Current Value of Trust Assets is $12 Million All Community Property All Community Property The Surviving Spouse Used Only the Income Since the Date of Death The Surviving Spouse Used Only the Income Since the Date of Death The Document Waives Interest on Pecuniary Bequests The Document Waives Interest on Pecuniary Bequests

24. Values as of the First Death Administrative Trust $6 Million Survivor’s Trust $3 million Credit Trust $1 million Marital Trust $2 Million

25. Pecuniary Marital – Residual Credit Date of Distribution Administrative Trust $12 Million Survivor’s Trust $6 million Credit Trust $4 million Marital Trust $2 million

26. Pecuniary Credit – Residual Marital Date of Distribution Administrative Trust $12 Million Survivor’s Trust $6 million Credit Trust $1 million Marital Trust $5 Million

27. Fractional Share or Fairly Representative Administrative Trust $12 Million Survivor’s Trust $6 million Credit Trust $2 million Marital Trust $4 Million

28. Assumptions for Examples First Death in 2002 First Death in 2002 $1 Million Applicable Exclusion Amount $1 Million Applicable Exclusion Amount The Trust Held $1.5 Million at Date of Death The Trust Held $1.5 Million at Date of Death The Current Value of Trust Assets is $10 Million The Current Value of Trust Assets is $10 Million All Community Property All Community Property The Surviving Spouse Used Only the Income Since the Date of Death The Surviving Spouse Used Only the Income Since the Date of Death The Document Waives Interest on Pecuniary Bequests The Document Waives Interest on Pecuniary Bequests

29. Values as of the First Death Administrative Trust $1.5 Million Survivor’s Trust $750,000 Credit Trust $750,000 Marital Trust $0

30. Pecuniary Credit – Residual Marital Date of Distribution Administrative Trust $10 Million Survivor’s Trust $5 million Credit Trust $5 million $750,000? Marital Trust Nothing or $4,250,000 Million?

31. WhatAboutDepreciation?

32. Consider Terminating the Trust

33. California Trust Administration (CEB) Chapter 14A

34. Topic Two: The645Election

35. History: What Is It and Why Is It?

36. The Trust is Taxed as Part of Decedent’s Probate Estate for Income Tax Purposes, Even if No Probate

37. Qualified Revocable Trust

38. Who Makes the Election?

39. FiscalYearEnd

40. Advantages of Fiscal Year: Timing Income and Expenses; Maybe Fewer Tax Returns

41. Deadline: First Timely Filed Return, 15 th Day of Fourth Month After End of Tax Year (Just Like April 15)

42. P.S. Don’t Miss the Filing Deadline

43. Duration: Two Years or Six Months From Closing Letter

44. S Corporation Stock Holding Period

45. Kenan Gain Offset by Losses

46. The 645 Election Means a Complex Trust

47. SeparateShareRule

48. The Separate Share Rule $200,000 Trust Income Beneficiary A 50 Percent ($100,000) Beneficiary B 50 Percent ($100,000)

49. Topic Three: The Surviving Spouse’s Purchase of an Interest in the Residence from Credit Trust

50. The Family Residence Problem Administrative Trust $1 Million Home Survivor’s Trust 50 Percent ($500,000) Credit Trust 50 Percent ($500,000)

51. Why This is Bad No Section 121 Exclusion No Section 121 Exclusion No Step Up in Basis at Second Death No Step Up in Basis at Second Death No Home Mortgage Interest Deduction No Home Mortgage Interest Deduction The Emotional Reaction The Emotional Reaction It’s Kind of a Mess It’s Kind of a Mess

52. The Family Residence Problem Administrative Trust $1 Million Home Survivor’s Trust $1 Million Home Minus $500,000 Debt to Credit Trust Credit Trust $500,000 Debt From Survivor

53. FiduciaryDuties

54. Income Tax Consequences Capital Gains on Buyback Capital Gains on Buyback Imputed Interest? Imputed Interest? Phantom Income? Phantom Income? Social Security and AMT? Social Security and AMT? Does the Surviving Spouse Itemize? Does the Surviving Spouse Itemize?

55. Drafting to Allow Buyback

56. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we advise you that any tax advice contained in this document cannot be used for the purpose of (i) avoiding federal tax penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this document.