In the estate-tax-apportionment space, Trust A's beneficiary and Trust B's can be in an involuntary debtor-creditor relationship and one trust's trustee in an involuntary agency relationship

Charles E. Rounds, Jr.
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Assume the settlor of a funded domestic revocable inter vivos trust has just deceased. There being no personal representative in the picture, it falls to the trustee to prepare and file the estate-tax return. Assume assets of an offshore trust comprise a part of the “apportionable estate” for estate-tax purposes, and that the offshore assets are physically inaccessible to the domestic trustee. The Uniform Probate Code provides that the domestic trustee may satisfy the offshore trust’s domestic estate-tax obligation with domestic-trust property. See UPC §3-9A-106(c). The non-consenting disadvantaged beneficiary of the domestic trust then becomes a personal, direct creditor of the advantaged beneficiary of the offshore trust to the extent of the forced advancement. See UPC §3-9A-106; §3-9A-110. The disadvantaged beneficiary may elect to compel the domestic trustee on behalf of the disadvantaged beneficiary to seek enforcement of the personal right of reimbursement against any future distributions from offshore. See UPC § 3-9A-110(b). This forced property-advancement statutory scheme is in derogation of two core principles of fiduciary doctrine: (1) An agency is voluntary on the part of both principal and agent and (2) A trustee, qua trustee, is not an agent of the beneficiary.

How the trustee is to be compensated for his services as collection agent is unclear. Under the Uniform Trust Code, the trustee is entitled to be reimbursed out of the trust property for expenses properly incurred “in the administration of the trust.” See UTC § 709(a)(1). The UPC, however, would seem to make the rights and liabilities incident to the forced advancement a matter that is external to the trust’s administration. As there is no statutory time limitation on the disadvantaged beneficiary’s statutory right to compel the trustee to “take reasonable steps” to enforce this private and personal right of reimbursement, presumably laches doctrine somehow comes into play. The disadvantaged beneficiary who delays in directing the domestic trustee to act as the disadvantaged beneficiary’s personal collection agent until after final distributions have been made from the domestic trust, for example, may have waited too long in the eyes of equity to force the trustee to be his personal collection agent.

The apportionment of an estate tax liability between and among trust beneficiaries is taken up generally in §8.20 of Loring and Rounds: A Trustee’s Handbook (2019), which section is reproduced with enhancements below:

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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