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PLR 199925033 and the non-pro rata partition of community property (in


Guest Bob Goff
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Guest Bob Goff

Does the availability of a non-pro rata partition and allocation of community property in a revocable trust as discussed in PLR 9925033 dictate that estate plans for taxable estates which are heavily weighted with retirement benefits always opt for a revocable trust(as contrasted with a testamentary) estate plan? I am just now working on the non-pro rata language discussed in the PLR and I am wondering if there is an effective way to reach a similar result in a testamentary estate plan. Any thoughts from you community property state practitioners?

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I am not an attorney and can only give you an insight based upon what I see in my CPA practice.

The trust was not the reason that the non-pro rata parition was allowed. In fact the Rev Rul cited 76-83 relates to a divorce situation. A community property agreement is fairly common in CA whether you have a trust or note.

One of the difficulties that the ruling was trying to get around was the inability of the surviving spouse to accomplish a spousal rollover because the trust rather than the spouse was the designated beneficiary. If the spouse (rather than the trust) was the beneficiary, no ruling would have been necessary.

For flexibility we recommend that each IRA have a primary beneficiary and a secondary beneficiary. If there is a need to do a disclaimer, a trust as a contingent beneficiary gives some flexibility. One may be able to name a testamentary trust as a contingent beneficiary if you want to stay away from living trusts.

I may not be answering your question, but I couldn't tell what you were trying to accomplish.

Mary Kay Foss CPA

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Guest Bob Goff

Mary Kay,

Thanks for the response. I have regularly used custom beneficiary designations designating the surviving spouse as the primary beneficiary and trusts for children as the secondary beneficiaries with a disclaimer provision for the surviving spouse which defaults any disclaimed proceeds to the bypass trust. The surviving spouse thus has the option of disclaiming and funding the bypass trust with some portion of the IRA proceeds if the other c/p assets are insufficient and circumstances warrant.

However, I am beginning to encounter more and more estates in which one spouse has a significant value in an IRA or a qualified pension or profit sharing plan but the aggregate fair market value of the other community property of the spouses is not sufficient when divided in half to fund fully the bypass trust on the death of the first spouse. (I am presuming the deceased spouse does not have separate property sufficient to make up the difference.) Hence the approach in PLR 9925033 is a way to make a non-pro rata partition of c/p assets and possibly fund the bypass trust without allocating IRA proceeds to the bypass trust. I guess my query is whether a similar non-pro rata partition of c/p is possible when Wills rather than a revocable trust are involved?

Can a surviving spouse as executor of the deceased spouse's estate make a non-pro rata partition of the spouses' community property (including specifically the IRA) when the IRA is a non-probate asset? Obviously the IRA proceeds cannot be paid to the deceased spouse's estate (in much the same way as the PLR allowed the proceeds to be paid to the spouse as trustee of the revocable trust) or federal income tax will be triggered and the survivor will lose his or her right to a tax-free rollover. I was actually trying to find a way to accomplish the result in PLR 9925033 without utilizing a revocable trust. However,I just don't see how it can be accomplished without first directing the IRA proceeds to a revocable trust and then having the surviving spouse as trustee carefully follow the PLR to partition all of the spouses' community property between the decedent's trust (i.e., the bypass trust) and the survivor's share or trust, as the case may be. I guess revocable trust estate planning will become more routine in Texas for those estates with sizeable retirement benefits and rather modest other assets if the goal of fully funding the bypass trust with assets other than the IRA is to be accomplished when the participant spouse dies first.

Sorry to drone on but I hope this gives you a better idea of my original question. Please let me know if you have any additional thoughts on this subject. Thanks again.

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I understand your problem in my area we have many clients who retire with a large rollover IRA and an expensive house but very little in liquid assets.

Our strategy has been to try to create more liquid assets by taking more than the RMD from the IRA each year and having the revocable trust either the primary or contingent beneficiary of the IRA. Often part or all of the residence winds up in the Bypass Trust (at least until the spouse can buy it back for an interest free note secured by the house).

We love revocable trusts here in CA and hope you'll join the parade.

Mary Kay Foss CPA

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  • 2 months later...
Guest rwhaugan

Forgive me for this late reply, but (a) I just joined the discussion group, and (B) I just can't keep my mouth (or my keyboard) shut.

It seems to me that you have to look to state law for whether or not you can make a non- pro rata distribution. Under CA law, or at least as I understand it, there is a "item theory" for community property. Just as it sounds, each spouse owns 1/2 in each "item". Using a aggregate community property agreement (discussed by Stephen Trytten in California Trusts and Estates quarterly, Fall 1999) you can allocate all of one particular asset (including IRA proceeds) to one spouse.

Using this process would not depend on having a trust (though this was specifically contemplated in the article), because the agreement was in effect pre-death. You wouldn't need to worry about doing anything with the IRA (because of the beneficiary designation), and would list list all the non-IRA assets in the probate estate of the deceased spouse.

I would love to hear anyone's else's thoughts on the subject.

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