Every fall most estate planning professionals start looking for the release of the annual Revenue Procedure that announces federal inflation-adjusted numbers for the coming year. These include the estate tax applicable exemption amount, the gift tax annual exclusion, and the income tax rates, among others.
For the first time, this past year also brought us a state number to look for.
July 1, 2019, marked the fifth anniversary of the effective date of our new trust code, Wis. Stat. chapter 701. Wis. Stat. section 701.0414 addresses the termination of an uneconomic trust, and the threshold for determining which trusts fall within this statute is an inflation-adjusted number.
Specifically, sub. (2) provides that the trustee of a trust consisting of trust property having a total value of less than $100,000 or a revised applicable figure as determined under sub. (3), may terminate the trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration.
Consent of interested parties is not required, but the trustee is required to give notice to the settlor, if living, each trust protector, each directing party, and the qualified beneficiaries. Sub. (3) contains the instructions for calculating the inflation adjustment and provides that an adjustment becomes effective on July 1, 2019, and every five years thereafter.
Sub. (3) is technical but well laid out. Step 1 is to calculate the percentage change between the base reference number (per sub. (1)(b) the consumer price index for all urban consumers, as published by the United States Bureau of Labor Statistics, in effect on Jan. 1 of the base year, i.e., 2014) and the adjustment reference number for the year in which the adjustment is being made (per sub. (1)(a), the same consumer price index for January 2019 in this case).
com dfenlon ruderware David Fenlon, U.W. 2002, is an attorney with Ruder Ware in Green Bay, where he focuses on estate and business planning.
com philip.miller huschblackwell Philip J. Miller,
Marquette 1987, is an attorney with Husch Blackwell in Milwaukee, where he focuses on estate and business succession planning.
Consulting the Bureau of Labor Statistics published tables, the base reference number is 233.916 and the adjustment reference number is 251.712, a positive difference of 17.796. The percentage change is calculated as 17.796/233.916 = 0.07607859.
Step 2 is to multiply that percentage by $100,000 (0.07607859 x $100,000 = $7,607.86), and Step 3 is to round the product to the nearest $1,000, which in this case is $8,000.
Finally, Step 4 is to add the rounded product to $100,000, which gives us an inflation-adjusted threshold for an uneconomic trust of $108,000. Note that if the difference between the adjustment reference number and the base reference number is a negative number, sub. (3)(b)2 provides that the rounded product is to be subtracted from $100,000, so it is possible for the number to fluctuate in both directions over time.
What does this adjustment mean? Simply put, from July 1, 2019, through June 30, 2024, if the trustee concludes that the value of a trust having a total value of less than $108,000 does not justify the cost of administration, and provided that the trustee gives notice to the settlor, if living, each trust protector, each directing party, and the qualified beneficiaries, the trustee can terminate the trust as being uneconomical.
If a trust perceived as uneconomical equals or exceeds $108,000, sub. (4) provides that a court may modify or terminate the trust, or remove the trustee and appoint a different trustee.
Section 701.0414 provides a method for terminating a trust that is in addition to the methods provided by 0.0411 (by consent) and 0.0412 (unanticipated circumstances or inability to administer trust effectively).
Because it only requires notice but not consent, and because the numerical threshold is objective and easy to identify versus determining what circumstances the settlor did or did not anticipate, it is perhaps the easiest method of terminating a trust under the trust code.