Professional Documents
Culture Documents
Week 5-6
Spring 2015
Trusts
Creator (Grantor/Settlor/Trustor)
Trustee Legal Title
Property (Corpus/Res/Principal)
Beneficiaries Equitable Title
Provisions/Terms (Trust Instrument/Deed
of Trust)
Trust Instruments
Wills trust is setup via language within
the will Testamentary Trusts
Trust Agreements a contract entered into
between the settlor and the trustee, who
are not the same person, to create a trust
Declaration of Trust a written document
creating a trust in which the settlor is also
the trustee
Crummey Clause
Spendthrift Clause
The purpose of this trust is to protect Sam Spender from his own
financial mismanagement and to provide him with a reasonable
means of support, free from the claims or interests of others. Any
and all distributions from the trust shall be paid directly to the
beneficiary, Sam Spender, and to no other person or entity. The
beneficiary shall not have the power to transfer, assign, or pledge
his interest in the principal or income of this trust prior to receipt.
Savings Clause
Termination of Trusts
Terms of the trust mandate termination
after a specified time or completion of a
task
Trust purpose has been fullfilled
Precatory trust
Settlor revokes the trust (Revocable Trust)
Trustees decision, if the trust terms grant
him such power
Classification/Characteristics of
Trusts
Inter Vivos Trust or Testamentary Trusts
Revocable Trusts or Irrevocable Trusts
Simple or Complex
Pour-Over Trust
Irrevocable Trusts
Irrevocable Trusts = Grantor retains NO right or power to change the trust and
gives up control over the trust property permanently.
Can be testamentary or inter vivos
Trust assets are NOT included in the Grantors probate estate
Tax consequences:
Value of the trusts assets are NOT included in the grantors gross estate
for Estate Tax purposes
Grantors transfer of assets to an irrevocable trust can be a completed gift
for Gift Tax purposes.
Income from the trust assets is generally taxed to the trust or to its
beneficiaries.
Crummey provision allows Grantor to use their gift tax annual exclusion, BUT
gives the Beneficiary a general power of appointment that will place the
covered property into the Beneficiarys gross estate 5/5 Lapse rule for
multiple beneficiaries
Pour-Over Trust
Assets poured from another source (e.g.
will, IRA, insurance contract) into the trust
Or can pour out of the trust and into the
estate
Where the trust owns the life insurance policy, but the Grantor/insured pays the
premiums
Life insurance procedes will be included in an insureds estate for Estate Tax
purposes if:
the insured owns the insurance policy at death, or
if while alive held any ownership in the policy (ie. right to change a
beneficiary or cancel the policy), or
insureds estate is named as the beneficiary of the policy
An ILIT removes the life insurance proceeds from the Grantor/insureds Gross
Estate for Estate Tax Purposes UNLESS
trustee is instructed to pay Grantor/insured estate taxes or administrative
expenses of the estate, or
policy is transferred within 3 years of Grantors death
Grantor can make annual gifts to the trust (qualify for the annual gift tax
exemption) that will cover policy premiums if a Crummey provision is included
Purpose of ILIT:
Remove proceeds of life insurance from insureds estate
Provide liquidity at death
Provide for beneficiaries
Marital trust that qualifies for the unlimited marital deduction and
gives a general power to appoint remainderman to surviving spouse
GPOA is needed so the unlimited marital deduction can be
utilized
Surviving spouse is entitled to all trust income and must be paid
at least annually
Trust corpus included in surviving spouses taxable estate; if
surviving spouse exercises their power of appointment during
their life then the surviving spouse has made taxable gifts
Marital trust that qualifies for the unlimited marital deduction and
gives the power to Grantor to name the remainderman
Grantor (first spouse to die) does not pay any Estate or Gift tax on
the transfer of property to the QTIP
Requirements for a QTIP:
Surviving spouse is entitled to all trust income and must be paid
at least annually
Only spouse can be appointed income
Trust corpus taxed (Estate Tax) at last surviving spouses death
Often used to pay income to spouse with remainder to children
Included in the surviving spouses taxable estate
Trust pays its pro rata share of estate tax for surviving spouse
Gift is a future interest (no annual exclusion), but can subtract from
the applicable exclusion amount
This is an irrevocable trust
May require extensive valuation at time of the trusts initial creation
GRAT Example
Jason contributes $1.3M in securities to an
irrevocable trust. He retains the right to receive
$80,000 per year from the trust for the next 10
years. At the end of 10 years, the trust will
terminate and the remainder will be paid in equal
shares to his grandchildren. The retained
interest is a qualified annuity interest and will be
given full actuarial value under Sec. 7520
valuation rules. Thus the value of the gift is
equal to $1.3M minus the value of a 10-year
$80,000 annual annuity.
GRUT Example
Assume the same facts as the previous
GRAT example. However, Jason instead
retains the right to receive payments equal
to 7% of the trust based on its current
value each year. The retained interest is a
qualified unitrust interest and will be given
full actuarial value under Sec. 7520
valuation rules. Thus, the value of the gift
is equal to $1.3M minus the value of a 10year unitrust interest.
QPRT Hypothetical
Virginia, a 70 year old widow, is in the maximum estate
tax bracket. She places her $100,000 personal
residence into a QPRT that provides for her to live there
10 years, and then the property passes to her children.
Virginia will calculate the present value of her right to live
in the house and subtract it from the FMV of her house
to calculate the remainder gift to her children. If Virginia
dies before 10 years, the FMV of the property at her
death will be included in her estate. After 10 years,
Virginia could be permitted to remain in the residence
provided there is an agreement and rent is charged at
market value.
Dynasty Trusts
Designed to last for a very long time
No set ending date
Set up in state that does not have the RAP
(South Dakota, Idaho, Alaska, and a few
others)
Blind Trusts
Revocable trusts
Set up where grantor may have a conflict
of interest
Used by political officials while in office
Marys husband died 2 years ago. His will included 3 testamentary trusts: a
trust for the benefit of Marys children, but giving Mary a general power of
appointment over the trust assets (GPOA), a bypass trust for the benefit of
Marys children, but giving Mary a power to invade the trust for an
ascertainable standard health, education, maintenance and support - for
the remainder of her life (Bypass Trust), and a charitable trust for the benefit
of Marys alma mater (Charitable Trust). At Marys death, which of the trusts
assets will be included in her gross estate?
1. GPOA Trust
2. Bypass Trust
3. Charitable Trust
A) 1 only
B) 1 and 2
C) 2 and 3
D) None
Answer
A. Only the GPOA Trust would be
included in Marys gross estate, because
the withdrawal right of the Bypass Trust
was limited to an ascertainable standard,
its assets are not included in Marys gross
estate.
CRAT Example
Dan Donor transfers property valued at
$400,000 to a CRAT that provides for a
5% of the initial value of the principal
payout for a 20-year term; consequently
$20,000 will be distributed annually to the
noncharitable income beneficiary.
Test Example
On January 20, Jason Transfers property to a trust over
which he retains a right to revoke of the trust. The
trust is to pay Jill 3% of the trust assets valued annually
for her life with the remainder to be paid to a qualified
charity. On October 9, Jason dies and the trust becomes
irrevocable. Which of the following trusts does this
qualify as?
A. CRAT
B. CRUT
C. Pooled Income Fund
D. None of these
Answer
Answer is D. At the trusts creation it is
revocable; therefore, it does not qualify as
a CRAT, CRUT or a Pooled Income Fund.