On March 22, 2011 Governor McDonnell signed into law Senate Bill 1072, which facilitates and enhances two popular estate planning techniques – the creation of an inter vivos marital trust, and the making of annual exclusion gifts. The bill makes changes to Virginia Code section 55-545.05 (part of the Virginia Uniform Trust Code) which deals generally with the ability of creditors to reach trust assets. It takes effect July 1, 2011.
An inter vivos marital deduction trust (either in the form of a qualified terminal interest property, or “QTIP” trust, or in the form of a general power of appointment trust) is a popular estate planning technique where a donor spouse makes an irrevocable gift to a trust for the lifetime benefit of the other donee spouse. At the death of the donee spouse, the assets commonly pass to a trust for the donor spouse’s benefit.
The purpose of the gift is to ensure that the donee spouse has sufficient assets to use the donee spouse’s estate tax exemption amount (currently $5 million), without the potential disadvantages of an outright gift of that amount to the donee spouse. In order for the planning technique to work, upon the death of the donee spouse, the donee spouse (and not the original donor spouse) must be treated as the transferor of the trust assets. The change to Virginia Code section 55-545.05(B)(3) confirms that upon the donee spouse’s death, the donee spouse will be deemed to be the transferor of the assets of an inter vivos marital trust.
Another popular estate planning technique is to make annual exclusion gifts to a trust, and to give the trust beneficiaries a power to withdraw the contributions to the trust. The purpose of the power of withdrawal, known as a Crummey power, is to ensure that the gifts to the trust qualify for the annual exclusion from gift tax under Internal Revenue Code section 2503(b) pursuant to Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1954).
The Virginia Uniform Trust Code previously provided that the creditors of a holder of a withdrawal power cannot reach the amount of the gift covered by the annual exclusion (currently $13,000 per year per donee). The VUTC, however, did not take into account that Crummey gifts to trusts are often made by married persons in the amount of double the annual exclusion amount (i.e., $26,000 per year per donee), and that those gifts are also exempt from gift tax by an election to “split” the gift between the donor and the donor’s spouse.
In order to maintain and fully implement the policy of protecting Crummey gifts covered by the annual exclusion from the claims of creditors of beneficiaries holding a withdrawal right, the change to Virginia Code section 55-545.05(B)(2) provides that the holder of a withdrawal right with spendthrift protection up to two times the annual exclusion amount if the donor was married at the time the transfer to the trust was made (and therefore the donor was able to make a split-gift election).
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