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Wills, Trusts, and Estates

Week 5-6
Spring 2015


Creator (Grantor/Settlor/Trustor)
Trustee Legal Title
Property (Corpus/Res/Principal)
Beneficiaries Equitable Title
Provisions/Terms (Trust Instrument/Deed
of Trust)

Requirements for a Valid Trust

Settlor manifests an intention to create a
Trust must be created for a legal purpose
and not be against public policy
Trust must accurately identify beneficiaris
EXCEPT charitable trusts
Trusts SHOULD be in writing

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

General Drafting Guidelines

Identify the settlor

Appoint the trustee
Identify the purpose of the trust
Identify the property that will be held in trust
Set out the duties of the trustee
Grant power to the trustee
Compensation for trustee
Name the beneficiaries and successor beneficiaries of the
Provide for the termination of the trust
Governing law
Signature, attestation, notarization

Specialized Trust Provisions

Trustees level of discretion (Sprinkling)
Trustee decides when to distribute or accumulate the trust

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
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
Inter Vivos Trust or Testamentary Trusts
Revocable Trusts or Irrevocable Trusts
Simple or Complex
Pour-Over Trust

Inter Vivos and Testamentary

Inter Vivos (Living Trust) = Trust
established during the settlors life
Property in an inter vivos trust is NOT subject
to probate

Testamentary = Trust established at death

through ones will
Property is subject to probate
Estate Taxes are due when the property
passes to a testamentary trust

Revocable Trusts (Living Trusts)

Revocable Trusts = The trust can be revoked or changed
by the grantor at any time.
All revocable trusts are inter vivos trusts
Not included in Grantors probate estate
Spouse can claim an elective share from the assets of
the trust.
Tax consequences:
Value of the trusts assets are included in the grantors gross
estate for Federal Estate Tax purposes
Incomplete gift, therefore no Federal Gift Tax liability
The Grantor is generally responsible for paying the income tax on
all of trust income.
Creditors can generally reach the trust assets during Grantors
lifetime and at death.

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
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

Transfers to an Irrevocable Trust that will be

Included in Grantors Gross Estate for
Federal Estate Tax Purposes

Grantor retains a life income or life estate

Grantor retains a reversionary interest
Grantor has a general power of appointment to direct whom the
assets will pass
Grantor dies within 3 years of transferring life insurance policies to
the trust
Grantor transfers life insurance policies to the irrevocable trust and
retains incidents of ownership - ex. naming himself trustee
Grantor retains an interest in the trust property ex. right to pledge
it for loans

Simple v. Complex Trusts

Federal Income Tax laws categorize trusts as:

Simple Trust = requires all income be distributed currently (i.e.,
in the tax year in which it is earned; trust instrument must
provide that no amounts are to be paid, permanently set aside,
or used for charitable purposes; and, the trust must not distribute
any amounts that are allocated to the corpus (principal) of the
Entitled to a personal exemption of $300
Complex = all trusts that are not considered Simple Trusts
Entitled to a personal exemption of $100

An estate is entitled to a $600 exemption

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

Specific Types of Trusts

Irrevocable Life Insurance Trusts (ILITs)

Bypass/Credit Shelter/A-B/Family Trust
Marital Trusts

Power of Appointment Trusts

Qualified Terminable Interest Property Trusts (QTIP)

Grantor Retained Interest Trusts (GRITs)

Grantor Retained Annuity Trusts (GRATs)
Grantor Retained Unitrusts (GRUTs)
Qualified Personal Residence Trusts (QPRTs)
Tangible Personal Property Trusts (TPPTs)
Dynasty Trusts
Trusts for Minors Sections: 2503(b) [Mandatory Income Trust] and 2503(c) Trusts
Blind Trusts
Charitable Remainder Trust (CRT)
Charitable Remainder Annuity Trust (CRAT)
Charitable Remainder Unitrust (CRUT)
Charitable Lead Trust (CLT)
Pooled Income Funds (PIF)

Irrevocable Life Insurance Trusts


Where the trust owns the life insurance policy, but the Grantor/insured pays the
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

Bypass/Credit Shelter/AB/Family Trust

Testamentary or Inter vivos trust
Designed to take advantage of the applicable
credit amount of 1st decedent spouse
No marital deduction, assets included in 1st
decedent spouses gross estate and taxable
estate, but bypasses surviving spouses estate
Often used to provide income to surviving
spouse and remainder to children
Spouse may be income beneficiary
Spouse may hold a limited power of appointment
Marital Trusts: POA trust and QTIP

Power of Appointment Trusts

Testamentary or Inter vivos irrevocable trusts

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
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

GSTT can be avoided by granting a non-skip person a GPOA over a

trust that will distribute assets to a skip person

Qualified Terminable Interest

Property Trusts (QTIP)

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

Grantor Retained Interest Trusts

Grantor reserves right to income from a
trust or the right to use trust assets
Value of the taxable gift is FMV minus the
grantors retained interest this = the
remainder interest that is considered a gift
Give this temporal discount

Grantor Retained Annuity Trusts


Special type of GRIT where Grantor retains a right to receive a fixed

percentage of the initial contribution on an annual basis for a
specified term (usually 2-5 yrs)
Income taxed to grantor during lifetime for income tax purposes
Not taxed in grantors estate unless grantor dies within time they are
receiving income from the trust (trust term)
If grantor dies within the trust term, the value of the assets required to
produce the annuity is included in the grantors gross estate at the FMV
at the date of death unless a QPRT, then full FMV of residence is
included in gross estate

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.

Grantor Retained Unitrusts

Grantor receives payments from the trust
at least annually of a fixed percentage of
the net fair market value of the trust assets
as determined annually
Everything else is identical to GRAT

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.

Qualified Personal Residence

Trusts (QPRTs)
Grantor transfers a personal residence to
the trust and the retained interest is the
grantors right to use the residence for
the trust term

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.

Tangible Personal Property Trusts

Similar to QPRT, but personal property
(ex. paintings, jewelry, etc.) is transferred
that has the potential to appreciate in
Hard to place a value on the grantors
retained interest in their right to use a
piece of personal property so watch out for
the IRS

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

Trusts for Minors

Gifts to minors do not qualify for the gift tax
annual exclusion since it is a future gift UNLESS
it qualifies under 2503(b) and 2503(c)
2503(b) = income distributions must be made
annually to a child beneficiary or to a custodian
account or used for minors benefit
Does not end when beneficiary reaches 21

2503(c) = accumulates income in the trust, but

trust property must be made available to
beneficiary once they turn 21 (if minor dies
before turning 21 then trust goes to minors

Blind Trusts
Revocable trusts
Set up where grantor may have a conflict
of interest
Used by political officials while in office

Trusts in the Gross Estate

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

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

Charitable Remainder Trust (CRT)

Irrevocable trust in which the remainder
beneficiary is a qualified charity
Trust can last for life of the Grantor, or for
a term of up to 20 years
Charity does not have to know it was
named as the remainder beneficiary
2 types of CRTs: Charitable Remainder
Annuity Trust (CRAT) and Charitable
Remainder Unitrust (CRUT)

Charitable Remainder Annuity Trust

Value of charitable gift: Total value of the transferred
property minus the present value of the retained interest
Grantor gets a fixed percentage of the initial FMV of the
property transferred to the trust or a fixed dollar amount
When income is insufficient for payout to a Grantor then
must invade corpus
No additional contribution are permitted after trust is set
Very inflexible
Good for clients who desire certainty of fixed income

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.

Charitable Remainder Unitrust

Value of charitable gift: Total value of the transferred
property minus the present value of the retained interest
Grantor receives a fixed percentage of the trusts assets,
valued annually
When income is insufficient for payout of the fixed
percentage to a Grantor then can pay up to income
amount and make up deficiency in a subsequent year
Annual valuation may be expensive if property in trust is
something like a closely held business, real estate etc.
Additional contributions are allowed after the trust is set
Very flexible

Charitable Lead Trust (CLT)

Income from property transferred to a trust is
distributed to the charity. The remainder reverts
to a noncharitable beneficiary (ex. family
If a Grantor trust then Grantor is taxed on the
income and receives the charitable deduction
equal to the amount the trust pays to the charity
Keeps property within the family unit while at the
same time conveying a benefit to charity.

Pooled Income Funds (PIF)

Value of charitable gift: Total value of the transferred
property minus the present value of the retained interest
Grantor makes an irrevocable transfer of property
(including all remainder interest) to a public charity
Property is commingled with the property of other
grantors and pays a return on the basis of earnings from
the fund
Grantor retains an income interest for 1 or more
beneficiaries for life (no term trusts)
Preferred by those who want to avoid having to establish
and maintain a trust Often maintained by universities
Appeals to donors who are not contribute large sums

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?
C. Pooled Income Fund
D. None of these

Answer is D. At the trusts creation it is
revocable; therefore, it does not qualify as
a CRAT, CRUT or a Pooled Income Fund.

Income Taxation of Trusts

Income tax liability can be imposed on:
The trust itself
The beneficiaries
The grantor
A third person
Any combination above

Income Taxation of Grantor

Types of Trusts
Grantor Trusts = construed where the
grantor retains so much control (powers or
ownership interests) Grantor must
include the trust income, deductions, and
credits on his own income tax return.
Part Grantor and part regular trust

A Grantor Trust will be construed if

any of the following powers or
interests have been retained:
Reversionary interest in trust income or
Power to control beneficial enjoyment
Certain administrative powers
Power to revoke
Power to Distribute

Income Taxation of Mallinckrodt

Mallinchkrodt (678 trust) = where a third
person is treated as the owner of the trust
and they must include those items of
income, deductions, and credits
attributable to the portion of the trust he
owns in his own income tax return.

A Third Person will be treated as the

owner of any portion of a trust if he has
any of the following rights or powers:
Power of appointment (GPOA) vest the
corpus or income in herself or for her own
purposes not specifically designated by the
Crummey trust the beneficiary who had
the right of withdrawal will be taxed on the
income attributable to that portion of the

Income Taxation of Taxable

Trusts that are not Grantor or Mallinckrodt trusts.
If the trustee makes no distributions from a trust to the
beneficiaries during a tax year, then the trust is taxed on
its income for that year.
If the trustee distributes income or property to
beneficiaries, the trust gets a deduction for that
distribution and the beneficiaries are required to include
the value of the distributions in their gross income.
Each beneficiary receives a Schedule K-1 from the