Estate Planning: Chapter 8

29. List the requirements of a 2503(b)

A 2503(b) trust may hold property in trust for the lifetime of the beneficiary, but must make income distributions to the beneficiary on an annual basis.

16. Describe a Crummey provision and explain why a trust would contain a Crummey provision

A Crummey provision allows the beneficiaries of the trust to withdraw a contribution made to the trust within a certain period of time. A trust would contain a Crummey provision so that any transfer to the trust could qualify for the annual exclusion.

22. What is the primary reason to use a GRAT for estate planning purposes

A GRAT is an effective tool to transfer future appreciation on an asset to a third party at a reduced gift tax cost. The remainder interest in a GRAT is valued by subtracting the value of the grantor's retained annuity from the fair market value of the property contributed to the GRAT as of the date of the contribution. As such, the gift tax value of the transfer is the value of the remainder interest.

23. List the primary difference between a GRAT and a GRUT

A GRUT is a Grantor Retained Unitrust which pays the grantor a fixed percentage of the trust's assets as valued at the same point each year, whereas the GRAT pays the grantor a fixed dollar amount each year, regardless of the value of the trust's assets.

30. Describe a Totten Trust and its benefits

A Totten Trust is a bank account that has a beneficiary clause. A Totten Trust avoids probate but is included in a decedent's gross estate.

35. What is the purpose of a trusteed IRA

A Trusteed IRA provides for management of investments and mitigates the risk of sudden liquidation of IRA assets by the beneficiary. Also, Trusteed IRAs provide the beneficiary with some creditor protection.

Spendthrift Clause

A clause in a trust document which does not allow the beneficiary to anticipate distributions from the trust, assign, pledge, hypothecate, or otherwise promise to give distributions from the trust to anyone. If such a promise is made, it is void and may not be enforced against the trust.

Rule Against Perpetuities (RAP)

A common law which requires that all interests in a trust must vest, if at all, within lives in being plus 21 years.

26. What is a dynasty trust and what is its primary purpose

A dynasty trust is a trust that is designed to last for a very long period of time. Its primary purpose is to avoid transfer taxation at the death of each generation of a family.

14. Explain the differences between an unfunded trust and a funded trust

A funded trust is a trust that has been drafted and has received a transfer of property from the grantor. An unfunded trust has been drafted, but has not received a transfer of property from the grantor.

Uniform Statutory Rule Against Perpetuities

A legislatively created alternative to the Common Law RAP that typically sets the perpetuities period at 90 years.

Fiduciary

A person who has a legal duty to act in the best interest of another as a result of holding a position of trust and confidence.

Blind Trust

A revocable trust arrangement whereby an individual transfers property to the trust for management purposes when self-management of the assets might be deemed to be a conflict of interest.

15. At the death of the grantor of a revocable trust, what controls the disposition of the trust's property

A revocable trust becomes irrevocable at the death of the grantor, and the trust's assets are distributed per the trust document. The grantor's will does not control the disposition of the revocable trust's assets.

12. What are the most common reasons for using a revocable trust

A revocable trust is most commonly used to avoid probate and to provide for management of a grantor's assets should he become incapacitated.

Revocable Living Trust

A revocable trust that is managed by the grantor and is for the benefit of the grantor during his lifetime. The property transferred to the trust avoids the individual's probate estate, but is included in the individual's gross estate.

Prudent Man Rule

A rule which requires a trustee, as a fiduciary, to act in the same manner that a prudent person would act if the prudent person were acting for his own benefit.

Simple Needs Trust

A specific type of trust that is used to provide benefits to persons or beneficiaries with special needs.

8. What is a spendthrift clause and why is it included in a trust

A spendthrift clause states that the beneficiary of a trust may not anticipate distributions from the trust and may not assign, pledge, hypothecate, or otherwise promise to give distributions from the trust to anyone. If such a promise is made, it is void and may not be enforced against the trust. A spendthrift clause protects the assets of a trust from the claims of the beneficiary's creditors.

Trust

A structure that vests legal title (the legal interest) to assets in one party, the trustee, who manages those assets for the benefit of the beneficiaries (who hold the equitable title) of the trust.

Distributable Net Income

A tax concept that allocates taxable income between the trust and beneficiaries to ensure the trust income is subject to only one level of tax.

20. In the ideal estate plan, what amount would be transferred to a testamentary bypass trust

A testamentary bypass trust is a trust created at the death of an individual, usually in his will. The decedent's will would direct the executor to fund the bypass trust with assets totaling the lesser of $11,580,000 (for 2020) or the decedent's remaining applicable estate tax credit equivalency.

13. How is a testamentary trust created

A testamentary trust is created after the death of the grantor. The decedent's will instructs the executor of the estate to create and fund the trust.

32. Describe a third-party special needs trust

A third party SNT is sometimes referred to as a family trust because the trust is a receptacle for funds from a parent, guardian or other family member. The assets of these trusts, if properly structured, are not counted or considered for purposes of available benefits for the beneficiary, thus making possible federal, state, and local funds.

7. List three reasons the use of a trust is beneficial to an estate plan

A trust can provide property management or creditor protection. A trust can also be used to take a single property interest and split it up into different interests. Property placed in trust is also not included in a decedent's probate estate and the appreciation of property placed in an irrevocable trust may avoid estate taxes.

33. What are some of the requirements for a special needs trust under 42 USC Sec 1396

A trust containing the assets of an individual under age 65 who is disabled ... and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan.

Testamentary Trust

A trust created after the death of the grantor. The grantor's will generally includes all of the trust provisions.

Irrevocable Trust

A trust created by a grantor that cannot be revoked. The grantor cannot take back the property that was transferred to the trust.

Standby Trust

A trust created during the grantor's lifetime that is either unfunded or minimally funded. A standby trust is also known as a contingent trust.

Bypass Trust

A trust created to ensure that an individual makes use of his applicable estate tax credit.

Revocable Trust

A trust created where the grantor of the trust retains the right to revoke the trust at any time prior to his incapacity or death.

Trusteed IRAs

A trust established within the United States that holds IRA assets, which is an alternative to a custodial IRA. It allows for ultimate control over the distribution of the IRA assets by the owner after his or her death and provides creditor protection for the beneficiaries.

2503(c)

A trust for the benefit of a minor designed to qualify the contribution to the trust for the annual exclusion. A 2503(c) trust must give the minor the right to receive the trust assets when he reaches age 21, but is not required to pay the income to the minor at any earlier time.

2503(b) Trust

A trust for the benefit of a minor designed to qualify the present value of the income interest of the trust for the annual exclusion. A 2503(b) trust must pay its income annually to the minor, but may hold the trust property for the minor's lifetime.

Charitable Lead Trust

A trust in which a charitable organization receives the income interest and a non-charitable beneficiary (usually a family member) receives the remainder interest.

Charitable Remainder Trust

A trust in which a non-charitable beneficiary receives the income interest and a charitable organization receives the remainder interest.

Grantor Retained Income Trust (GRIT)

A trust in which the grantor retains an income or use interest in the trust.

2. What is a trust

A trust is a structure that vests legal title to assets in one party, the trustee, who manages those assets for the benefit of the beneficiaries of the trust. The beneficiaries hold the beneficial, or equitable, interest in the trust.

Complex Trust

A trust that does not meet the definition of a simple trust.

QTIP Trust

A trust that grants the surviving spouse a lifetime right to the income of the trust while transferring the remainder interest to individual(s) of the grantor's choosing, typically created at the death of the first spouse to die.

See-Through Trust

A trust that is the beneficiary of a custodial IRA. It provides for more control over distribution of IRA assets after the owner's death, as well as providing increased creditor protection for the beneficiaries of the trust.

Simple Trust

A trust that requires all of the trust income to be distributed on an annual basis to the beneficiaries and does not have a charitable organization as one of its beneficiaries.

Self-Settled Trust

A trust where the beneficiary is also the grantor of the trust.

Estate Trust

A trust which grants the surviving spouse a testamentary general power of appointment over the trust assets. Because of the spouse's general power of appointment over the trust's assets, the fair market value of the trust will be eligible for the unlimited marital deduction at the death of the first-to-die spouse.

ABLE Accounts

Accounts for disabled individuals that provide some of the benefits of a special needs trust without the complexities typically associated with those trusts.

Pooled Trust

An exception that resulted from the Omnibus Budget and Reconciliation Act of 1993; managed by a nonprofit association. While each beneficiary will have their own account, the assets will generally be pooled and managed together.

Wealth Replacement Trust (WRT)

An irrevocable trust that owns and holds life insurance on its grantor's life. A WRT is also known as an Irrevocable Life Insurance Trust (ILIT)

Irrevocable Life Insurance Trust

An irrevocable trust that owns and holds life insurance on its grantor's life. An ILIT is also known as a wealth replacement trust (WRT).

25. Discuss the consequences of a grantor dying during the term of a TPPT

Because a TPPT is similar to a QPRT with a contribution of tangible personal property, similar consequences occur when the grantor dies during the term of the trust. With both QPRTs and TPPTs, the full fair market value (at the decedent's date of death) of the property in the either trust is included in the grantor's gross estate if the grantor dies within the term of the trust.

24. How is a GRAT more effective in reducing the grantor's gross estate that a GRUT

Because the unitrust payment from a GRUT is based on the fair market value of the trust's assets each year, if the value of the trust's assets appreciates, the payment to the grantor would increase. A GRAT payment will not change if the underlying value of the GRAT's property appreciates. Once received, the payment from either a GRAT or GRUT becomes the property of the grantor, and is therefore subject to estate tax at his death; the GRAT payment would keep future appreciation of the trust property out of the grantor's gross estate.

Special Needs Trusts Under 42 U.S.C Sec. 1396

Considered to be self-settled in nature, are typically established by the special needs person's parent, grandparent, legal guardian or by a court and will avoid disqualification of Medicaid and SSI benefits.

9. How can the creation of a trust reduce estate taxes

First, the creation of a trust can reduce estate taxes because any appreciation of the property contributed to an irrevocable trust after the date of the contribution belongs to the beneficiaries of the trust and will not be included in the grantor's estate. Second, the creation of a dynasty trust would allow the beneficiary to benefit from the trust's assets, but at his death, would not include the value of the trust's assets in his gross estate thereby saving transfer taxes. Third, the creation of a grantor trust requires the grantor to pay the income tax on the income from the property transferred to the trust, thereby further reducing the grantor's gross estate.

21. List the various forms of Grantor Retained Income Trusts (GRITs)

Grantor Retained Annuity Trusts (GRAT) Grantor Retained Unitrusts (GRUT) Qualified Personal Residence Trust (QPRT) Tangible Personal Property Trusts (TPPT)

19. Under what circumstances will the death benefit of a life insurance policy owned by an ILIT be included in the insured's gross estate?

If the decedent transferred the policy to the ILIT, or released a retained interest in the ILIT, within three years of the decedent's date of death, the death benefit of the life insurance policy will be included in the decedent's gross estate. Also, if the ILIT is required to pay the decedent's estate tax, or the executor may request that the ILIT pay the estate tax, the death benefit of the life insurance policy will be included in the decedent's gross estate (covered in Chapter 11).

Totten Trust

Not a trust, but rather a bank account with a beneficiary clause

Third Party SNT

Sometimes referred to as a family trust because the trust is a receptacle for funds from a parent, guardian or other family member. The assets of these trusts, if properly structured, are not counted or considered for purposes of available benefits for the beneficiary, thus making possible federal, state, and local funds.

34. Why are IRAs of interest in estate planning

The balances of an IRA may be large and the owner does not need the assets during life and wants to leave it to heirs or legatees.

11. Under what circumstances will the fair market value of the assets of an irrevocable trust be included in the grantor's gross estate

The fair market value of the trust's assets will be included in the grantor's gross estate if a grantor makes an irrevocable transfer to a trust but retains any of the following interests: • The right to receive income from the trust; • The right to use the trust's assets; • The ability to exercise voting rights on stock transferred to the trust; • A reversionary interest with a value greater than 5% of the trust's assets; or • The right to terminate, alter, amend, or revoke the trust. • The right to control beneficial enjoyment of the trust.

27. Who is subject to the income tax on the income of a grantor trust

The grantor of a grantor trust is subject to the income tax on the income of the grantor trust.

3. List the common parties of a trust

The grantor, trustee, and beneficiary.

6. Describe the two most common types of beneficiaries

The income beneficiary is the person or entity who has current rights to income from the trust, or the right to use the trust assets. The remainder beneficiary is the individual or entity who is entitled to receive the assets that remain in the trust on the date of its termination. Other types of beneficiaries would include contingent beneficiaries.

Remainder Beneficiary

The individual or entity entitled to receive the assets that remain in the trust at the date of the trust's termination.

Trustee

The individual or entity responsible for managing the trust assets and carrying out the directions of the grantor that are formally expressed in the trust instrument.

5. Explain the legal duties imposed on a fiduciary

The law imposes the duty of loyalty and the duty of care on the fiduciary, or trustee. The trustee must be loyal to the beneficiaries of a trust and must make decisions that are in the best interests of the beneficiaries (and consistent with the terms of the trust) even if those decisions result in a loss to the fiduciary. A trustee owes a duty of care to the beneficiaries and therefore should make decisions only after engaging in a diligent investigation of the facts and thoughtful consideration of the impact on the beneficiaries.

Income Beneficiary

The person or entity who has the current right to income from a trust, or the right to use the trust assets.

Grantor

The person who creates and initially funds a trust. The grantor is also known as the settlor or creator.

Beneficiary

The person(s) entitled to receive the death benefit of a life insurance policy at the insured's death. Also, the person(s) who hold(s) the beneficial title to a trust's assets.

18. What is the purpose of an Irrevocable Life Insurance Trust (ILIT) and why is it created

The purpose of an ILIT is to prevent an insured party from having ownership of the life insurance policy on his life. Only life insurance policies owned by a decedent are included in his gross estate. Since the life insurance policy is owned by the ILIT, the death benefit of the life insurance policy is excluded from the decedent's gross estate. Recall, however, that if the policy was transferred within 3 years of the decedent's date of death, the death proceeds of the policy will be included in the decedent's gross estate.

10. What is the effect of the rule against perpetuities

The rule against perpetuities places a limit on the amount of time that property can be held in trust. The RAP states that all interests in trust must vest, if at all, within lives in being plus 21 years.

4. Who is the fiduciary of a trust

The trustee is the fiduciary of a trust.

31. What are the three types of special needs trusts

Three types of special needs trusts: • Third Party (family) special needs trusts. • Self-Settled Special Needs Trusts Under 42 U.S.C. Sec. 1396p(d)(4)(A). • Pooled Trust (42 U.S.C. Sec. 1396p(d)(4)(C)).

17. List and explain the three methods used to prevent estate tax consequences from the lapsing of a general power of appointment created by a Crummey power

To prevent any estate tax consequences, some trusts will state that the Crummey power is limited to the lesser of the gift tax annual exclusion amount or the greater of 5% or $5,000 of the trust corpus. Another method used to prevent the estate tax consequences is to create a hanging power. A hanging power states that to the extent that a demand beneficiary has a right to withdraw that does not lapse, the non-lapsing portion will hang over to a subsequent year, when it can lapse under the "5-and-5" standard. A third way of dealing with the lapsing issue is to give the demand beneficiary a continuing right to appoint a portion of the trust equal to the non-lapsing amount.

1. Why are trusts used in estate planning

Trusts are used in estate planning to provide for the management of assets and flexibility in the operation of the estate plan.

28. What is the primary purpose of using a 2503(b) or 2503(c) trust

Using a 2503(b) or 2503(c) trust allows a transfer to a trust for the benefit of a minor to be eligible for the annual gift tax exclusion.

36. Does the IRS require the trustee of a see-through trust to provide the complete trust instruments to the custodian

Yes, the trustee must provide the trust instrument by October 31 of the year following the IRA owner's death.

Inter Vivos Trust

a trust that is created during the grantor's lifetime

Pourover Trust

a trust that receives assets that "pour" into it from another source, generally the grantor's estate at the grantor's death