5G1 - Types of Trusts

complex

If the trust is not a simple trust, it is a complex trust. Complex trusts can include charitable gifts, income made after the taxpayer passes, or other capital distributions. Some requirements of a complex trust include the following: it must retain current income, it must provide amounts for charitable gifts, and it must distribute an amount allocated to the principal of the trust.

Arno plans to establish a spendthrift trust naming Ford and Sims as life income beneficiaries, Trip as residuary beneficiary, and Bing as trustee. Arno plans to fund the trust with an office building. Assume that an enforceable trust was formed. Sims has the following personal creditors: Bank holding a home mortgage note deficiency judgment Judgment creditor as a result of an automobile accident To which of these creditors can Bing pay Sims's share of trust income?

Neither I nor II A spendthrift trust is created for a beneficiary that is wasteful with money. The trust prevents the beneficiary from selling the funds or property and bars seizure from creditors of the beneficiary. Bing cannot pay Sims's share of trust income to either the bank holding a home mortgage note deficiency judgment or the judgment creditor as a result of an automobile accident. This trust is being funded with an office building, making it an express trust of real property; it must be in writing under the statute of frauds.

Pat created a trust, transferred property to this trust, and retained certain interests. For income tax purposes, Pat was treated as the owner of the trust. Pat has created which of the following types of trusts?

Grantor

In a written trust containing no specific powers, the trustee will have all of the following implied powers except:

accumulate income.

To properly create an inter vivos trust funded with cash, the grantor must:

transfer the cash to the trustee. The written trust instrument would be the starting place for creating any trust. The written trust instrument would provide for payment of fees to the trustee and designate any and all beneficiaries. Transferring the cash to the trustee would complete the creation of the trust.

complex trust.

trust in which all income does not have to be distrusted on an annual basis

living

A living trust informs others of the wishes of the taxpayer (grantor), much like a will. However, a living trust does not include a probate like a will. The trust gives the successor trustee (person in charge of the trust) permission to implement the taxpayer's wishes on the financial situations, dependents, and affairs if the taxpayer becomes incapacitated.

revocable

A revocable trust is a trust that can be changed at any time. This trust can be completely canceled or completely changed through a restatement or trust amendment. Assets in the revocable trust are distributed once the taxpayer has passed.

simple

A simple trust is put in place to take the taxpayer's income and distribute it once the taxpayer has passed. This trust does not pertain to the income that is made once the taxpayer has passed and does not include charitable gifts. A simple trust can be a revocable or an irrevocable trust.

simple trust is

that the trust not distribute principal (corpus).

Testamentary Trust

A testamentary trust is created to distribute annual payments to a beneficiary after the death of the taxpayer. A testamentary is created through a will. The will includes appropriate language to set up the trust, will go through probate, and must be in compliance with will statutes. Since the testamentary is a part of the will, it also must stay in compliance.

generation-skipping trust.

A trust agreement in which the contributed assets are passed directly to the grantor's grandchildren, not the grantor's children,

describes a testamentary trust

A trust created by an individual's will at or following the date of the grantor's death

describes a simple trust

A trust in which all net income must be distributed on an annual basis

Dart created an irrevocable trust naming Larson as trustee. The trust provided that the trust income would be paid to Frost for 15 years, with the principal then reverting to Dart. Larson died after 10 years, Frost died after 20 years, and Dart died after 22 years. When does the trust terminate?

After 15 years

charitable remainder trust

An irrevocable trust established by a donor to provide an income stream to the income beneficiary, which the public charity or private foundation receives the remainder value when the trust terminates

irrevocable

An irrevocable trust is a trust that cannot be changed after the trust has been created, but can be changed or canceled with the consent of the beneficiary. Any contributions to the trust may not be removed by the grantor (person who created the trust). A revocable trust may become irrevocable at some particular time in the future or when the taxpayer passes.

Generally, a trustee making any high-risk investment with trust property would be violating his fiduciary responsibility.

An unsecured loan would be considered a high-risk investment. Low-risk investments would include secured mortgages, tax-exempt municipal bonds, and guaranteed savings certificates.

Which of the following fiduciary duties may be violated by the trustee if the trustee, without express direction in the trust instrument, invests trust assets in unsecured loans to a co-trustee? Duty to invest prudently Duty of loyalty to the trust

Both Generally, a trustee has a fiduciary duty to the beneficiaries of a trust to make prudent decisions, including the investing of trust assets according to the instructions in the trust document. If the trust instructions are not explicitly followed, then there will be a breach of fiduciary duty, and the trustee can be held liable for any adverse results.

Type of trust would the rule against perpetuities not apply

Charitable The rule against perpetuities does not apply to charitable trusts. The rule was created to restrict the trustor's power to perpetually control the funds or property in the trust after death plus 21 years and to ensure transferability of the funds or property.

rusts would the rule against perpetuities not apply

Charitable The rule against perpetuities does not apply to charitable trusts. The rule was created to restrict the trustor's power to perpetually control the funds or property in the trust after death plus 21 years and to ensure transferability of the funds or property.

Trust exemption amounts are:

Complex Trust: $300 Simple Trust: $100

Cord's will created a trust to take effect on Cord's death. The will named Cord's spouse as both the trustee and personal representative (executor) of the estate. The will provided that all of Cord's securities were to be transferred to the trust and named Cord's child as the beneficiary of the trust. Under the circumstances:

Cord has created a testamentary trust. An inter vivos trust is created during the grantor's lifetime. A testamentary trust will begin when the grantor dies and he has provided for a trust in his will. The testamentary trust becomes valid at Cord's death. Cord's spouse can serve as both the trustee and personal representative of the trust.

An irrevocable testamentary trust was created by Park, with Gordon named as trustee. The trust provided that the income will be paid to Hardy for life with the principal then reverting to Park's estate to be paid to King. The trust will automatically end on the death of:

The trust will automatically end on the death of Hardy. A trust terminates when the beneficiary has died. Hardy is the only beneficiary, so the trust expires when he passes.

An irrevocable trust that contains no provision for change or termination can be changed or terminated only by the:

courts An irrevocable trust is a trust that is set up and the funds or property are transferred to a trustee. Once the person signs the trust, he or she has surrendered his or her control over the funds or property. Since the trust is conclusive, it cannot be changed except by the courts.

A distinguishing feature between the making of an inter vivos gift and the creation of a trust is that:

generally, a gift is irrevocable whereas a trust may be revoked in certain cases. For a gift to be complete, the donor must give up all control over the property transferred to the donee. Thus, a gift is irrevocable. (Regulation 25.2511-2) It is best to put both gifts and trusts in writing. Any trust can be revocable. A valid trust does not require the creator to receive any form of consideration, nor must the beneficiary of a trust be notified of the trust's creation.

A grantor trust is one

in which the grantor retains beneficial enjoyment or substantial control over the trust property or income. The grantor (Brown) of this trust retains no powers over the trust and is not the trustee.

A revocable trust is one

in which the grantor retains the power to revest all or part of the trust property. Brown retained no powers over the trust.

When a trust instrument is silent regarding a trustee's powers, the trustee has the implied power to

lease trust property to third parties, but does not have the implied power to make distributions of principal to income beneficiaries. An implied power is the power a trustee needs to perform such acts as are necessary to achieve the objectives of the trust.

Any trustee must use at least the same degree of

skill, judgment, and care in managing the trust assets as reasonably prudent persons would exercise in managing their own affairs. Trustees have a fiduciary duty to the trust regardless if they are beneficiaries or not.