Often we think of tax planning as something done once, when
the attorney drafts the documents, and that the process ends there.
But a recent Tax Court case drives home how important it is to follow
through on your plan after it is drafted to make sure the plan actually achieves
its expected result. In the case of Estate of Melvine B. Atkinson v. Commissioner
(115 T.C. No. 3) a perfectly drafted charitable remainder trust was rendered non
qualified when the trustee and donor made mistakes in executing the day to day
activities of the trust.
Ms. Atkinson funded a charitable remainder trust with just
under $4 million worth of stock. The
trust was to pay Ms. Atkinson a 5% annuity payment each year for her life. The
trust could continue to pay out to four other beneficiaries after her death if
they elected to do so and paid all estate and death taxes on the annuities.
Ms. Atkinson died less than two years after creating the trust.
The first problem was that Ms. Atkinson never actually
received the annuity payments that were due to her. The estate did show the
nearly $400,000 due to Ms. Atkinson as an asset of her estate, but the Tax Court
found that insufficient to fix the problem.
After Ms. Atkinson died, only one of the heirs elected to
receive her payments on the annuity. However,
that heir refused to pay the tax reimbursement.
She claimed to have a notarized statement from the the donor stating that
this particular heir didn't have to pay the taxes due.
The trustee, after a heated series of exchanges, elected to settle with
the heir and agreed not to seek the tax from her.
However, eventually it was found there were not sufficient assets in the
estate aside from the trust from which to pay the taxes, so a portion of the
estate taxes were eventually paid from the charitable trust.
The Tax Court found that these actions as well disqualified
the trust as a charitable remainder trust, because funds were paid other than to
the designation beneficiaries and the charity. Upon finding that the trust was not a charitable remainder
trust, the court denied the estate a charitable deduction resulting in a tax
bill of over $2.6 million!
The tax planning wasn't the problem.
As the Tax Court noted in its opinion:
"Here the trust was validly formulated, and its terms
were within the statutory threshold requirements."
Yet, the estate still lost the benefit of the charitable
contribution because the operation of the trust failed to meet the requirements
in two key areas.
Be sure you ask questions when you have an estate plan created so you know what you must do and then be sure to follow those instructions carefully. As this case shows with regard to the annuity payments, having your accountant merely try to apply a "band aid" solution by making bookkeeping entries may not be sufficient to save the tax benefits.
You also to consult all members of your estate
planning team before taking any actions that might change the plan. Changes that appear minor to the you may destroy the plan.