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The 2013 Trust Act, Washington Marriage Equality, DOMA, and House Bill 2075 and What These Changes Mean for Your Estate

From the Trusts and Estates Department of Karr Tuttle Campbell

Kirsten L. Ambach
Johanna M. Coolbaugh
William J. Cruzen
Alan D. Judy
Douglas A. Luetjen
John E. Poffenbarger
Elizabeth W. Rasmussen
Kenneth E. Rekow
Charles A. Robinson
James K. Treadwell
George S. Treperinas

Changes to Washington Trust Law – Washington Trust Act 2013

In May 2011, Washington adopted the 2011 Trust Act which made major revisions to Washington trust law. As discussed in our “2011 Washington Trust Act” Alert, the 2011 Trust Act had broad-reaching implications for the creation and administration of almost all trusts. On May 16, 2013, the Legislature adopted the 2013 Washington Trust Act which substantially changed the 2011 Act. The 2013 Act went into effect on July 28, 2013 and applies to all trusts created before, on, or after January 1, 2013.

The 2011 Trust Act imposed strict duties upon trustees to provide certain notices and information to beneficiaries of the trust.  It placed an unwaivable duty on the trustee to inform all interested persons of the existence of an irrevocable trust within 60 days of either the trust’s creation or the trustee’s acceptance of the trust. The statutory duties placed on the trustee also included a requirement that the trustee keep all interested persons reasonably informed about the administration of the trust. The 2013 Act has substantially revised these requirements.

(1) Trustee Duty to Notify Beneficiaries of the Existence of the Trust

Under the 2013 Act, the trustor may now waive the trustee’s duty to notify beneficiaries of the existence of a trust within 60 days. The notice requirements may be waived in the trust document itself or in a separate writing delivered to the trustee at any time. If the notification requirements are not waived by the trustor, the trustee remains obligated to provide notice to the qualified beneficiaries regarding specific information, including: (1) the existence of the trust; (2) the identity of the trust or trustors; (3) the trustee’s contact information; and (4) the qualified beneficiaries’ right to request reasonably necessary information.  Even if the initial notice requirement is waived, a trustee must still keep all qualified beneficiaries of a trust reasonably informed about the administration of the trust. This requirement may not be waived or modified by the trustor.

(2) Beneficiaries Entitled to Notice and Information

The 2013 Act has adopted the term “qualified beneficiaries” and made other changes which restrict the class of beneficiaries entitled to receive notice of an irrevocable trust or otherwise be kept reasonably informed of the trust’s administration. Qualified beneficiaries include beneficiaries that are currently eligible to receive distributions from a trust and beneficiaries who would become eligible to receive distributions if the trust terminated or if the interest of the permissible distribution is terminated.

The 2013 Act also adds two important exceptions to the trust reporting requirements.  First, while the   trustor of a revocable trust is living, no beneficiary other than the trustor is entitled to information.  Second, no notice or information is required to be provided to any beneficiary other than the trustor’s spouse if the spouse is  (1) not incapacitated; (2) the only current beneficiary of the trust; and (3) all of the other qualified beneficiaries of the trust are descendants of the trustor and the trustor’s spouse.  This exception will not apply where there are children from prior marriages or prior relationships, and clients with such situations should consider reviewing their plans for this change.

The 2013 Act now also allows parents to virtually represent both a minor and an unborn child. Additionally, a person with a substantially identical interest with respect to a particular question or dispute regarding the trust is authorized to represent a minor, an incapacitated or unborn individual, or a person whose location is unknown and not reasonably ascertainable. Virtual representation is only allowable to the extent there is no conflict of interest.

If you were concerned about the 2011 Trust Act notice and reporting requirements on trusts involved in your estate plan, we recommend contacting us to review your plan in light of the waivers, exceptions, and other changes made available to trustors under the 2013 Act.

State and Federal Recognition of Same-Sex Marriage

As of December 6, 2012, Washington State’s Marriage Equality Act revises the rules of domestic partnerships and permits same-sex partners to marry within the state.  Effective June 30, 2014, most domestic partnerships will be automatically converted into marriages.  Prior to that date, domestic partners may elect to dissolve their partnership by either becoming a non-legal couple or by formally getting married.  The exception to this change is for couples in which one of the partners is 62 years of age or older.  Those partnerships will not be automatically converted on the June 30 deadline.

Same-sex partners who are registered as domestic partners in Washington and who are legally married in another state or country have the option of simply informing the Secretary of State that their status should be changed from “domestic partners” to “married,” giving retroactive effect to their marriage for purposes of the vital statistics marriage certificate registration records.

On June 26, 2013 the United States Supreme Court issued a landmark decision concerning same-sex marriage.  In United States v. Windsor, the Court found that Section 3 of the Defense of Marriage Act (DOMA) violated the Equal Protection Clause of the Fifth Amendment to the Constitution.  This section of DOMA explicitly defined marriage as being between one man and one woman, prohibiting the federal government from recognizing any same-sex marriages, regardless of state laws.  The effect of this is that same-sex married couples did not receive the same federal benefits as opposite-sex married couples.

In the aftermath of Windsor, the federal government will now recognize all legal same-sex unions and grant federal marriage benefits to all married couples.  Among the rights and benefits now afforded to same-sex spouses are: (1) the right to file a joint federal tax return; (2) tax-free employer health coverage for a spouse; (3) the use of the marital deduction when transferring money by gift or death; (4) the ability of surviving spouses to add the deceased spouse’s unused federal estate tax exclusion to their own federal estate tax exclusion; (5) spousal gift-splitting; (6) spousal rules for stretching out distributions from a qualified retirement plan or IRA; (7) the right to succeed to the greater of their deceased spouse’s social security; (8) the right of minor children to succeed to same sex parents’ social security; (9) spousal bankruptcy protection; and (10) immigration rights for non-citizen spouses.

Same-sex couples should examine their estate plans in light of these important changes.

House Bill 2075

House Bill 2075, effective July 28, 2013, makes four significant changes to Washington estate tax law: (1) the estate tax deduction will be adjusted for inflation; (2) the statute will reverse the Washington Supreme Court’s decision in Bracken and give retroactive effect to the law; (3) there is a deduction from the taxable estate for certain family owned businesses; and (4) there will be an increase in tax rates for large estates.

(1) Estate Tax Deduction Adjusted for Inflation

Washington law provides for an estate tax deduction of $2 million. This amount will be indexed for inflation for deaths occurring in 2014 or later.

(2) Provision for Taxation of QTIP Trusts

Washington created a stand-alone estate tax that took effect May 17, 2005. The measure of the tax is determined by the value of the taxable estate under federal law. Federal law allows an unlimited marital deduction for property passed outright to a surviving spouse. Federal law also allows for certain transfers of property into marital trusts, referred to a qualified terminable interest property (QTIP). The Washington Supreme Court ruled in the 2012 Bracken case that QTIP trusts created prior to May 17, 2005 were not subject to the Washington estate tax on the death of the surviving spouse.

HB 2075 provides that all QTIP trusts that are subject to federal estate tax at the death of the surviving spouse are included in the definition of the “Washington taxable estate” of a surviving spouse. The bill specifies that this applies to QTIP trusts created before or after May 17, 2005, which retroactively reverses the Bracken decision, but provides an exception for the parties involved in that suit. We expect this decision to be challenged as unconstitutional due to concerns about equal protection and the retroactive effect of the decision. It is uncertain what the ultimate impact will be until expected litigation of the matter is complete.

(3) Taxable Estate Deduction for Certain Family Owned Businesses

HB 2075 creates a new deduction from the Washington taxable estate if the decedent owned a qualifying family owned business. The deduction is limited to $2.5 million, increasing the total deduction to $4.5 million for qualifying estates. There are many limitations imposed to qualify for this deduction, including a restriction that the company be an active trade or business, and that the decedent’s interest in that business be less than $6 million. This deduction is available beginning in 2014. There is an additional deduction for the transfer of a farm. This deduction is only applicable if the value of the land and equipment is at least half the value of the estate, among other requirements.

(4)  Increases in Large Estate Tax Rates

The bill also increases the rates of Washington estate taxes for high-valued estates. The marginal tax rates for a decedent’s Washington taxable estate will increase by 1% for estates greater than $4 million. The highest marginal tax rate for estates greater than $9 million will increase from 19% to 20%. This increase is effective for deaths beginning in 2014.

For more information about the 2013 Trust Act, DOMA, Washington’s Marriage Equality Act, and HB 2075 and the effects they might have on your personal estate plan, please contact any of the Karr Tuttle Campbell Tax, Trusts, and Estates attorneys or your personal Karr Tuttle Campbell attorney, all of whom can be reached at (206) 223-1313 or by visiting the firm’s website.

IRS Circular 230 Disclaimer:  To ensure compliance with requirements imposed by the IRS, we inform you that to the extent this communication contains advice relating to a federal tax issue, it is not intended or written to be used, and it may not be used for (i) the purpose of avoiding any penalties that may be imposed on you or any other person or entity under the Internal Revenue Code or (ii) promoting or marketing to another party any transaction or matter addressed herein.

Copyright © 2013

Alerts are published by Karr Tuttle Campbell to present information on legal matters which may be deserving of clients’ immediate attention. The information contained in this Alert should not be regarded as legal advice or opinion, but it is attorney-client privileged.