Advanced Trust Drafting for Income Tax Minimization: Including Capital Gains in DNI, Push-Outs and More

Managing the Disparity in Income Tax Treatment Between Beneficiary and Trust

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Wednesday, May 17, 2017
Recorded event now available


This CLE/CPE webinar will provide estate planning counsel with a comprehensive understanding and application of best practices in tax planning and trust document drafting to minimize income tax consequences of trust income. The panelist will provide a thorough review of the rules and practices covering inclusion of capital gains in distributable net income (DNI) for trusts and estates, and other critical considerations for minimizing income taxes on trust receipts through careful structuring of the trust’s governing instrument.

Description

Among the most critical tasks for estate counsel and planners is ensuring that trust documents are drafted in a way that the trust vehicle achieves the settlor’s intent in the most tax-efficient means possible. With the estate tax exemptions now permanent, the larger challenge for many drafters is to avoid or defer income tax on trust assets and accumulation. Estate planners must have thorough knowledge of the drafting techniques and considerations available to reduce income tax consequences on trust income through careful structuring of trust documents.

Estate and trust counsel should always draft trust documents with a view toward clearly delineating between income and principal in a trust document. This is particularly critical in structuring those provisions that define and allocate DNI. Because trusts are essentially a conduit, with distributions generally taxed at the beneficiary level, drafters should always be mindful to include in DNI all income that can be passed through to beneficiaries with a lower tax impact than if retained within the trust.

This is especially true for trusts that anticipate significant capital gains. The current tax treatment of trusts provides a significant incentive for getting capital gains out of a trust. Currently, trusts are taxed at the maximum rate on any capital gains above the statutory threshold ($12,500 in 2016), which results in a trust’s capital gains being taxed at a much higher rate than an individual would pay. Lower overall taxes will often be achieved if capital gains are included in DNI, rather than added to the corpus amount.

Listen as our experienced panelist provides comprehensive and practical details on drafting trust documents to minimize income tax consequences through inclusion of capital gains into DNI, and other drafting practices for income tax minimization.

Outline

  1. Default capital gains treatment inclusion in corpus
  2. Treas. Reg. Section 643(a)-3(b) provisions for including cap gains in DNI
    1. Instrument provides for inclusion in income
    2. Allocated to corpus but treated as distribution
    3. Actually distributed
  3. Push-out provisions and prioritizing distributions
  4. Use of Section 678 withdrawal powers
  5. Non-tax considerations
  6. Drafting provisions for income tax minimization

Benefits

The panelist will review these and other key issues:

  • What are the general requirements of IRC 643 on treatment of capital gains and FAI?
  • How can the trust document be structured—and interpreted—to allow inclusion of capital gains in DNI?
  • What are local and state provisions that may allow capital gains inclusion in DNI?
  • Income push-out provisions
  • What are best practices for income tax minimization on trust accumulation?

Learning Objectives

After completing this course, you will know how to:

  • Identify the Section 643 requirements for including capital gains in a trust's distributable net income
  • Decide on optimal techniques in drafting trust documents to include capital gains as part of DNI
  • Establish drafting and planning tools to structure a complex trust with a view toward minimizing the income tax impact of trust accumulation
  • Recognize the key exceptions to tax on accumulation for grantor trusts and instruments with "Crummey power" provisions
  • Ascertain non-tax considerations in determining whether to include capital gains in DNI.

Faculty

Robert S. Barnett, Partner
Capell Barnett Matalon & Schoenfeld, Jericho, N.Y.

Mr. Barnett practice encompasses business and tax planning, estate planning and federal and state tax dispute resolution, among other engagements. He is a frequent writer on tax topics for professional journals.

Albert Dumaual, Atty
Capell Barnett Matalon & Schoenfeld, Jericho, N.Y.

Mr. Dumaual’s areas of practice focus primarily on tax and estate planning. He received his LL.M. in Taxation from the NYU School of Law and his Juris Doctor from Touro College Jacob D. Fuchsberg Law Center, where he graduated cum laude. 


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Brian M. Annino

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L. Paul Hood, Jr.

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J. Leigh Griffith

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