Drafting California Irrevocable Trusts

Chapter Outlines

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1

Overview of Irrevocable Trusts

John R. Cohan

I.  DRAFTING IRREVOCABLE TRUSTS

A.  Overview of Trust Planning  §1.1

B.  Types of Irrevocable Trusts  §1.2

C.  Relationship Between Revocable and Irrevocable Trusts  §1.3

II.  OBJECTIVES IN CREATING IRREVOCABLE TRUSTS  §1.4

A.  Reconciling Beneficiary Needs With Management Concerns  §1.5

B.  Obtaining Tax Savings

1.  Transfer Tax Benefits  §1.6

2.  Income Tax Benefits  §1.7

3.  Effect of Circular 230  §1.7A

C.  Asset Protection  §1.8

1.  Fraudulent Transfers  §1.9

2.  Limited Protection in Bankruptcy  §1.10

3.  Discretionary Trusts  §1.11

4.  Offshore Trusts  §1.12

5.  Asset Protection for Beneficiaries  §1.13

a.  Third Party Trustees  §1.14

b.  Foreign State Trusts  §1.15

6.  Using Special Powers of Appointment for Asset Protection  §1.16

7.  Reciprocal Trusts  §1.17

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2

Estate and Gift Tax: A Drafter’s Guide

Ann C. Harris

I.  TAXABLE TRANSFERS

A.  Unified System of Estate and Gift Taxation  §2.1

1.  Pre-1977 Gifts  §2.2

2.  Removing Post-Gift Appreciation From Tax Base  §2.3

3.  Tax-Exclusive Versus Tax-Inclusive Tax Base  §2.4

B.  Computing Gift and Estate Taxes

1.  Gift Tax  §2.5

2.  Estate Tax  §2.6

3.  Sample Computations of Gift and Estate Taxes  §2.7

II.  TAX CONSEQUENCES OF LIFETIME TRANSFERS

A.  Determining Transfer of Property Interest for Gift Tax Purposes  §2.8

1.  Indirect Transfers  §2.9

2.  Below-Market Rate Loans  §2.10

3.  Powers of Appointment  §2.11

a.  Powers Limited by Ascertainable Standard  §2.12

b.  Powers Held Jointly With Person Having an Adverse Interest  §2.13

4.  Transfers of Less Than Entire Interest  §2.14

B.  Determining When Transfer Is Completed

1.  Definition of Completed Transfer  §2.15

a.  Termination or Release of Retained Power  §2.15A

b.  Lapse of Retained Power  §2.15B

2.  Retained Power Over Disposition  §2.16

a.  Income Interest or Power  §2.16A

b.  Power to Vary Beneficial Interests  §2.16B

3.  Consequences of Subsequent Incompetence  §2.17

4.  Powers Exercisable With Third Party  §2.18

5.  Powers Held by Trustee  §2.19

C.  Valuing Transferred Property Interest

1.  General Valuation Rules

a.  When Property Should Be Valued  §2.20

(1)  Contingent Gifts  §2.20A

(2)  Value Definition Clauses  §2.20B

b.  Willing Buyer-Willing Seller Standard  §2.21

c.  Valuing Life Estates, Terms of Years, and Remainder Interests  §2.22

d.  Discounts and Premiums  §2.23

(1)  Blockage Discount and Control Premium  §2.23A

(2)  Minority Interest Discount  §2.23B

(3)  Low-Basis Assets  §2.23C

(4)  Assets Transferred to Family Limited Partnerships (FLPs)  §2.23D

(5)  Undivided Interests in Real Property  §2.23E

(6)  Undivided Interests in Tangible Personal Property  §2.23F

(7)  Lack of Marketability  §2.23G

(8)  Lack of Control  §2.23H

e.  Swing Votes  §2.24

2.  Special Valuation Rules

a.  Overview of Chapter 14  §2.25

b.  Interest in Corporation or Partnership  §2.26

(1)  Value of Transferred Interest  §2.26A

(2)  Corporate Recapitalizations  §2.26B

c.  Interests in Trust  §2.26C

(1)  Qualified Interests  §2.27

(2)  Exceptions to Qualified-Interest Rules  §2.28

d.  Options, Buy-Sell Agreements, Rights of First Refusal, and Leases  §2.29

e.  Treatment of Certain Lapsing Rights and Restrictions  §2.30

f.  Restrictions on Liquidation Disregarded  §2.30A

3.  Determining Gift Tax Liability

a.  Donor Is Primarily Liable  §2.31

b.  Donee Must Pay Gift Tax as Condition of Receiving Gift  §2.32

D.  Payment of Consideration in Exchange for Transfer  §2.33

E.  Gift Tax Annual Exclusion

1.  Number of Donees Unlimited  §2.34

2.  Present-Interest Requirement  §2.35

3.  Trusts in Which Entire Interest Is Present Interest

a.  Crummey Trust Withdrawal Powers  §2.36

b.  Nonmarital Spousal Trust  §2.36A

c.  IRC §2503(c) Trusts  §2.37

4.  Reciprocal Trust Doctrine  §2.37A

F.  Exclusion for Direct Payments of Tuition and Medical Expenses  §2.38

G.  Deductions Available to Determine Taxable Amount of Transfer

1.  Unlimited Marital Deduction  §2.39

a.  Inter Vivos QTIP Trust  §2.39A

b.  Form: Inter Vivos QTIP Trust  §2.39B

c.  Form: Inter Vivos Unitrust QTIP Trust  §2.39C

d.  Estate and Gift Taxation of QTIP Trust  §2.39D

e.  Unitrust Definition of Income  §2.39E

f.  Retained Interests  §2.39F

2.  Charitable Deduction

a.  Unlimited Gift Tax Charitable Deduction  §2.40

b.  Combining Unlimited Marital Deduction With Charitable Remainder Trusts  §2.41

c.  Charitable Gifts of Remainder Interests Not in Trust  §2.42

H.  Split-Gift Election  §2.43

I.  Considerations in Making Gifts  §2.44

1.  Advantages of Lifetime Gifts  §2.45

2.  Disadvantages of Lifetime Gifts  §2.46

3.  Adequate Disclosure of Gifts  §2.46A

III.  TAX CONSEQUENCES OF TRANSFERS OCCURRING AS RESULT OF DEATH

A.  Determining Decedent’s Gross Estate for Federal Estate Tax Purposes  §2.47

B.  Transfers in Which Decedent Retains Enjoyment or Control of Property  §2.48

1.  Retained Life Estate  §2.49

a.  Direct or Implied Right to Use or Occupy Real Property  §2.50

(1)  Right to Receive Rental Income  §2.50A

(2)  Retained Leasehold Interest  §2.50B

b.  Indirect Benefits That Constitute Retained Right to Income

(1)  Assets Available to Creditors  §2.51

(2)  Trustee’s Power to Use Income or Corpus for Decedent’s Benefit  §2.52

(3)  Right to Have Income Used for Support of Dependents  §2.53

c.  Reciprocal Trusts  §2.54

d.  Transfer in Exchange for Annuity  §2.55

e.  Assets Transferred to Family Limited Partnership  §2.55A

2.  Retained Voting Rights  §2.56

3.  Retained Reversionary Interest  §2.57

4.  Retained Right to Designate Person Who Will Possess or Enjoy Property  §2.58

5.  Retained Right, Through Exercise of Power, to Alter, Revoke, or Terminate Transferred Interest  §2.59

6.  Right to Designate Person Who Will Possess Property Compared With Right to Alter, Revoke, or Terminate Transferred Interest  §2.60

7.  Administrative Powers  §2.61

8.  Trustee’s Discretionary Power  §2.62

C.  Life Insurance on Decedent’s Life  §2.63

D.  Transfers Within 3 Years Before Death  §2.64

E.  General Powers of Appointment  §2.65

F.  Annuities  §2.66

G.  Joint Tenancies  §2.67

H.  Exclusion to Extent of Consideration Furnished  §2.68

I.  Determining Value of Assets for Federal Estate Tax Purposes

1.  General Valuation Rule  §2.69

2.  Minority Discounts for Community Property Interests  §2.70

3.  Problems in Applying Premiums or Discounts to Charitable Gifts or Marital Gifts  §2.71

4.  Special-Valuation Provisions for Certain Assets Included in Gross Estate  §2.72

a.  Alternate Valuation Date Election  §2.72A

b.  Special Use Valuation Election  §2.72B

c.  Qualified Conservation Easement Exclusion  §2.72C

d.  Qualified Conservation Contribution Deduction  §2.72D

(1)  Qualifying Conservation Purpose  §2.72E

(2)  Additional Requirements  §2.72F

J.  Deductions From Gross Estate to Arrive at Taxable Estate

1.  Deductions to Arrive at Adjusted Gross Estate  §2.73

2.  Charitable Deduction  §2.74

3.  Marital Deduction

a.  In General  §2.75

b.  Exceptions to Terminable Interest Rule

(1)  Estate Trust  §2.76

(2)  Six-Month Survivorship  §2.77

(3)  General Power of Appointment Trust  §2.78

(4)  Qualified Terminable Interest Property (QTIP) Trust  §2.79

4.  Marital Deduction for Noncitizens  §2.80

a.  Requirements of Qualified Domestic Trust (QDOT)  §2.81

(1)  Inter Vivos Qualified Domestic Trust  §2.81A

(2)  Form: Construction of Trust  §2.81B

(3)  Form: Compliance With Security Requirements  §2.81C

(4)  Form: United States Trustee  §2.81D

(5)  Form: Designated Filer  §2.81E

(6)  Form: Distributions of Principal and Income  §2.81F

(7)  Form: Designation of Successor Trustees  §2.81G

(8)  Alternative Spousal Access Trust  §2.81H

b.  Credit for Prior Transfer Property (PTP)  §2.82

c.  Applicability of Customary Marital Deduction Rules When Spouse Becomes United States Citizen  §2.83

K.  Credits Applicable to Estate Tax

1.  Credit or Deduction for State Death Taxes  §2.84

2.  Credit for Gift Taxes Paid  §2.85

3.  Credit for Prior Transfer Property (PTP)  §2.86

a.  Availability of PTP Credit for QTIP Trust  §2.86A

b.  Amount of PTP Credit  §2.86B

L.  Payment of Estate Tax

1.  When Estate Tax Due  §2.87

2.  Extension of Time for Reasonable Cause  §2.88

3.  Extension of Time for Tax Attributable to Interest in Closely Held Business  §2.89

4.  Extension of Time for Tax Attributable to Vested Remainder Interest  §2.90

5.  Stock Redemptions to Pay Estate Tax  §2.91

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3

Income Tax: A Drafter’s Guide

Ann C. Harris

I.  INTRODUCTION TO TRUST TAXATION

A.  Nongrantor and Grantor Trusts  §3.1

B.  Relationship Between Federal and California Income Tax Rules  §3.2

II.  TAXATION OF NONGRANTOR TRUSTS

A.  Characterization of Nongrantor Trust

1.  Trust Is Treated as Separate Taxpayer, Pass-Through Entity, or Both  §3.3

2.  Trust May Be Treated as Association  §3.4

B.  General Trust Taxation Rules

1.  Determining Taxable Income  §3.5

2.  Trust Income Tax Charitable Deduction  §3.5A

3.  Selecting Tax Year  §3.6

4.  Income Tax Rates Applicable to Trusts  §3.7

5.  Disallowance of Certain Capital Losses  §3.8

6.  Alternative Minimum Tax  §3.9

C.  Determining Distributable Net Income (DNI)  §3.10

D.  Simple Trusts

1.  Definition of Simple Trust  §3.11

2.  Taxation of Simple Trust and Its Beneficiaries  §3.12

a.  Definition of “Income”  §3.12A

b.  Taxation of Beneficiaries  §3.12B

c.  Distributions in Kind  §3.12C

3.  Estimated Tax Payments for Simple Trusts  §3.13

E.  Complex Trusts

1.  Definition of Complex Trust  §3.14

2.  Taxation of Complex Trusts  §3.15

3.  Estimated Tax Payments for Complex Trusts

a.  Determining Liability for and Amount of Estimated Tax Payments  §3.16

b.  Problems in Determining Estimated Tax Using Annualized Income Method  §3.17

(1)  Trustee Problems  §3.17A

(2)  Beneficiary Problems  §3.17B

4.  Taxation of Beneficiaries of Complex Trusts  §3.18

a.  First-Tier Distributions  §3.18A

b.  Second-Tier Distributions  §3.18B

c.  The Intermediate Tier  §3.18C

d.  The Variable Tier  §3.18D

5.  Separate Share Rule  §3.18E

F.  Impact of “Kiddie” Tax

1.  Operation of “Kiddie” Tax  §3.19

2.  Avoidance of “Kiddie” Tax  §3.20

G.  Tax Consequences of Termination of Nongrantor Trusts  §3.21

H.  Medicare Tax on Net Investment Income  §3.21A

III.  TAXATION OF GRANTOR TRUSTS

A.  Definition of Grantor Trust  §3.22

B.  Grantor Trusts Subject to Different Rules  §3.23

C.  Use of Grantor Trusts as Planning Device  §3.24

D.  Grantor as Owner of Trust

1.  Retained Powers That Cause Grantor to Be Treated as Owner

a.  Right to Reversionary Interest  §3.25

b.  Right to Control Enjoyment of Trust  §3.26

c.  Administrative Powers  §3.27

d.  Power to Revest Title to Trust Property  §3.28

e.  Power to Use Income for Grantor’s Benefit  §3.29

2.  Retained Powers That Do Not Cause Grantor to Be Treated as Owner  §3.30

a.  Power to Apply Income and Principal to Support of Dependents  §3.31

b.  Power to Distribute Corpus Under Certain Circumstances  §3.32

c.  Power to Accumulate Income Under Certain Circumstances  §3.33

d.  Power to Distribute or Accumulate Income for Minor Beneficiary  §3.34

e.  Trustee’s Power to Distribute Income and Principal That is Limited by Ascertainable Standard  §3.35

f.  Independent Trustee’s Powers  §3.36

g.  Power to Use Income to Discharge Grantor’s Support Obligations  §3.37

E.  Person Other Than Grantor Treated as Owner  §3.38

F.  Tax Treatment of and Reporting for Grantor Trusts  §3.39

1.  Trust Owned Entirely by One Person Who Is a Trustee  §3.39A

2.  Trust Owned Entirely by One Person Who Is Not a Trustee  §3.39B

3.  Trust Owned Entirely by Two or More Persons  §3.39C

4.  Grantor Trust Reporting in All Other Cases  §3.39D

G.  Creating “Defective” Grantor Trusts

1.  IRC §674(c) Provisions  §3.40

2.  IRC §675(4)(C) Provisions  §3.41

3.  Other IRC §675 Provisions  §3.41A

4.  IRC §677(a)(3) Provisions  §3.42

5.  IRC §678 Provisions  §3.43

6.  Special Concerns and Considerations  §3.44

H.  Former Grantor Trust Taxed As Estate  §3.44A

I.  Installment Sale to “Defective” Grantor Trust  §3.44B

J.  Sale to Grantor Trust Versus GRAT  §3.44C

K.  Beneficiary Defective Irrevocable Trust (BDIT)  §3.44D

L.  Grantor Irrevocable Life Insurance Trust (GILIT)  §3.44E

M.  Termination of Grantor Trust Status  §3.44F

IV.  CHARITABLE REMAINDER TRUSTS AND CHARITABLE LEAD TRUSTS

A.  Charitable Remainder Trusts (CRTs)  §3.45

1.  Taxation of CRTs  §3.46

2.  Taxation of Noncharitable Beneficiaries  §3.47

3.  Taxation of Charitable Beneficiaries  §3.48

B.  Charitable Lead Trusts (CLTs)  §3.49

1.  Grantor CLTs  §3.50

2.  Nongrantor CLTs  §3.51

V.  TRUSTS HOLDING S CORPORATION STOCK

A.  General S Corporation Trust Rules  §3.52

B.  Grantor Trusts Holding S Corporation Stock

1.  Eligible Grantor Trusts  §3.53

2.  Crummey Trusts  §3.54

3.  Tax Treatment After Deemed Owner’s Death  §3.55

4.  Areas of Particular Concern  §3.56

C.  Qualified Subchapter S Trusts (QSSTs)

1.  General QSST Rule  §3.57

2.  Basic Requirements for QSST  §3.58

3.  Requirement to Distribute All Income  §3.59

4.  One-Beneficiary Requirement  §3.60

5.  QSST Election  §3.61

6.  Tax Consequences of QSST  §3.62

7.  Creative Use of S Corporations and Trusts  §3.63

D.  Electing Small Business Trusts (ESBTs)

1.  General ESBT Rule  §3.64

2.  Basic Requirements for ESBTs  §3.65

3.  Determining Number of S Corporation Shareholders  §3.66

4.  Taxation of ESBTs  §3.67

VI.  FOREIGN TRUSTS

A.  Definition of Foreign Situs Trust  §3.68

1.  Court Test  §3.68A

a.  Safe Harbor for Court Test  §3.68B

b.  Automatic Migration Rule for Court Test  §3.68C

2.  Control Test  §3.68D

a.  Twelve-Month Grace Period After Inadvertent Change in Trust Residence  §3.68E

b.  Automatic Migration Rule for Control Test  §3.68F

B.  Taxation of Foreign Trusts; Reporting Requirements  §3.69

1.  Annual Reporting Required for Foreign Trust With United States Grantor  §3.69A

a.  Appointment of United States Agent  §3.69B

b.  Owner Reporting Requirements  §3.69C

2.  Reporting Establishment of and Transfers to Foreign Trust  §3.69D

a.  Reportable Event  §3.69E

b.  Gratuitous Transfer  §3.69F

c.  Responsible Party  §3.69G

3.  Penalties for Failure to Comply With Foreign Trust Reporting Obligations  §3.69H

4.  Foreign Trust Considered Foreign Financial Institution Under FATCA  §3.69I

a.  When FFI Trust Has Substantial U.S. Owner  §3.69J

b.   Withholding Requirements for FFI Trust With Substantial U.S. Owner  §3.69K

C.  Special Grantor-Trust Rules Applicable to Foreign Trusts  §3.70

1.  United States Beneficiary of Foreign Grantor Trust  §3.70A

2.  Application of Foreign Grantor-Trust Rules  §3.70B

D.  FBAR Reporting Requirements for Trustees and Beneficiaries of Foreign Trusts  §3.71

E.  When Foreign Trust Is Not Taxed as Grantor Trust  §3.72

F.  Taxation of Beneficiaries of Foreign Trust  §3.73

1.  Distributable Net Income (DNI) of Foreign Trust  §3.73A

2.  Distributions From Foreign Trust  §3.73B

G.  Consequences of Using Foreign Trusts to Defer or Avoid Tax  §3.74

1.  Deferral of Tax on Foreign Source Income  §3.74A

2.  Application of Throwback Rules  §3.74B

H.  Gain on Transfers of Appreciated Property to Foreign Trusts  §3.75

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4

Generation-Skipping Tax Problems of Irrevocable Trusts

Jon J. Gallo

I.  INTRODUCTION TO GENERATION-SKIPPING TRANSFER (GST) TAX

A.  GST Tax Dangers  §4.1

B.  Scope of Chapter  §4.2

II.  GST TAX FUNDAMENTALS FOR IRREVOCABLE INTER VIVOS TRUSTS

A.  Purpose of GST Tax  §4.3

B.  GST Tax Definition of Transferor  §4.4

1.  Effect of Reverse QTIP Election  §4.4A

2.  Effect of Lapse of Withdrawal Powers  §4.4B

C.  Generation Assignments  §4.5

D.  Rates of Tax: Tax-Exclusive Versus Tax-Inclusive Taxation  §4.6

E.  GST Tax Events Involving Irrevocable Trusts  §4.7

1.  Direct Skips on Creation of Trust  §4.8

2.  Taxable Distributions  §4.9

a.  Taxable Distributions Involving General Powers of Appointment  §4.10

(1)  GST Tax Consequences of Lapse  §4.10A

(2)  Gift Tax Consequences of Lapse  §4.10B

b.  Trustee Payment of GST Tax Attributable to Taxable Distributions  §4.11

3.  Taxable Terminations  §4.12

F.  Multiple Skips: GST Tax at Each Generation  §4.13

III.  AVOIDING GST TAX

A.  Qualified Tuition or Medical Expenses  §4.14

B.  Limited GST Tax Annual Exclusion  §4.15

C.  Predeceased Ancestor Exception  §4.16

D.  GST Exemption

1.  Amount of GST Exemption  §4.17

2.  Inclusion Ratio Concept  §4.18

3.  Relevance of GST Tax Transferor  §4.19

4.  Determination of Number of Trusts; Division of Trusts  §4.20

a.  Qualified Severance  §4.20A

b.  Nonqualified Severance  §4.20B

5.  Allocation of GST Exemption; Need for Action  §4.21

6.  Allocation Procedure: Lifetime Direct Skips  §4.22

7.  Allocation of Exemption to Transfers to Trusts That Are Not Direct Skips; Notice of Allocation  §4.23

a.  Timely Allocations  §4.24

b.  Late Allocation on IRS Form 709  §4.25

c.  Late Allocation to Lifetime Transfer on IRS Form 706  §4.26

d.  Deemed Allocation to Lifetime Transfer to GST Trust  §4.26A

e.  Retroactive Allocation to Lifetime Transfer  §4.26B

f.  Default Post-Death Late Allocation to Lifetime Transfer  §4.27

g.  Special Rules for Charitable Lead Annuity Trusts  §4.28

h.  Estate Tax Inclusion Period (ETIP) Exception to General Rules  §4.29

(1)  When ETIP Rules Apply to Withdrawal Powers  §4.29A

(2)  When ETIP Rules Do Not Apply  §4.29B

8.  Recalculation of Inclusion Ratio  §4.30

IV.  FILING RETURNS AND PAYING TAX

A.  Direct Skips  §4.31

B.  Taxable Distributions and Terminations  §4.32

V.  GST TAX STRATEGY FOR IRREVOCABLE TRUSTS  §4.33

A.  Maximizing Use of Limited Annual Exclusion  §4.34

B.  Making Trusts Fully Exempt or Fully Nonexempt  §4.35

C.  Maximizing Benefits of Exempt Trusts  §4.36

D.  Layering Nonexempt Trusts  §4.37

E.  Paying Medical Expenses and Tuition From Nonexempt Trusts; HEET Trusts  §4.38

F.  Paying Estate Tax Instead of GST Tax: General Power of Appointment Causes Inclusion in Child’s Estate  §4.39

1.  Trustee’s Power to Confer General Power  §4.39A

2.  Child’s Power to Confer General Power  §4.39B

G.  Using Wait-and-See Allocation Strategy  §4.40

H.  Avoiding Creation of ETIPs  §4.41

I.  Planning for GST Exemption Allocation  §4.42

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5

Trust Planning: Permanent Trusts

John R. Cohan

I.  INTRODUCTION TO TRUST PLANNING

A.  Permanent Trusts Distinguished From Other Trusts  §5.1

1.  Spousal Lifetime Access Trust (SLAT); Nonqualified Grantor Retained Interest Trust (GRIT)  §5.1A

2.  Revocable Trusts, Trust for Minors, and Other Specialized Trusts  §5.1B

B.  Purposes Served by Permanent Trusts

1.  General Purposes of Permanent Trusts; Family Trusts  §5.2

2.  Balancing Personal and Tax Objectives  §5.3

3.  Tax Purposes of Permanent Trusts

a.  Reducing Settlors’ Taxable Estate  §5.4

(1)  Benefits of Exclusion from Settlor’s Estate  §5.4A

(2)  When Property Will Be Included in Settlor’s Estate  §5.4B

b.  Preventing Inclusion of Trust Property in Beneficiaries’ Taxable Estates  §5.5

c.  Planning for Generation-Skipping Transfer Tax  §5.5A

(1)  Provisions of GST Tax  §5.6

(2)  Effect of GST Tax on Irrevocable Trust  §5.7

d.  Reducing Settlors’ Income Tax  §5.8

e.  Achieving Grantor Trust Status

(1)  Grantor Trust Powers  §5.9

(2)  Power Granted to Special Trustee to Add Beneficiaries of Named Class  §5.10

C.  Funding the Trust  §5.11

D.  Reciprocal Trusts  §5.12

E.  Permanent Trust Gifting Strategy  §5.12A

II.  BASIC PRINCIPLES VERSUS SETTLORS’ HOPES

A.  Clients’ Pipe Dream  §5.13

B.  Pipe Dream Trust  §5.14

C.  Diagnosis of Pipe Dream Trust

1.  Basic Estate Tax Principles  §5.15

2.  Basic Gift Tax Principles  §5.16

3.  Basic Income Tax Principles  §5.17

a.  Origin of Grantor Trust Rules  §5.17A

b.  Power to Designate Beneficial Enjoyment  §5.17B

4.  Road to Reality  §5.18

5.  Support of Dependents and Payment of Legal Obligations  §5.19

a.  Scope of Obligation to Support

(1)  Support of Minors  §5.20

(2)  Education Expenses  §5.21

(3)  Support of Parents and Adult Children  §5.22

(4)  Statutory Limits on Trustee’s Powers to Discharge Support Obligations  §5.23

b.  Estate Tax Principles  §5.24

c.  Gift Tax Principles  §5.25

d.  Income Tax Principles  §5.26

e.  Independent Trustee’s Discretionary Power to Discharge Support Obligation  §5.27

D.  Flexibility Versus Control  §5.28

E.  Single Versus Multiple Trusts  §5.29

1.  Considerations Favoring Single Trust  §5.30

2.  Considerations Favoring Multiple Trusts  §5.31

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6

Valuing Interests in Property

Belan K. Wagner
Paul E. Hoelschen, Jr.

I.  INTRODUCTION TO VALUATION

A.  Scope of Valuation Chapter  §6.1

B.  Trusts With Interests Requiring Valuation  §6.2

C.  Necessity for Valuing Interests  §6.3

D.  How to Value Interests

1.  Use of IRS Valuation Tables  §6.4

2.  Locating Tables and Publications

a.  List of Valuation Tables  §6.5

b.  IRS Publications Containing Valuation Tables  §6.6

c.  Requests for Actuarial Computation by IRS  §6.7

3.  Components of Valuation Tables  §6.8

a.  Interest Rates  §6.9

b.  Mortality Factor  §6.10

4.  Example of Valuation of Life Estate  §6.11

5.  Procedures for Transfers After November 30, 1983, and Before May 1, 1989  §6.12

6.  Procedures for Transfers After April 30, 1989, and Before May 1, 1999  §6.13

7.  Procedures for Transfers After April 30, 1999, and Before May 1, 2009  §6.13A

II.  GUIDE TO CHAPTER SECTIONS DISCUSSING VALUATION OF SPECIFIC INTERESTS  §6.14

III.  SINGLE LIFE REMAINDER FACTORS (TABLE S)

A.  Overview of Single Life Remainder Factors  §6.15

B.  Example of Computation of Present Value of Single Life Annuity, Income, and Remainder Interests  §6.16

C.  Annuities  §6.17

D.  Life Interests  §6.18

E.  Remainders or Reversionary Interests  §6.19

F.  Charitable Gifts  §6.20

IV.  TERM CERTAIN REMAINDER FACTORS (TABLE B)

A.  Overview of Term Certain Remainder Factors  §6.21

B.  Example of Computation of Present Value of Annuity, Income, and Remainder Interests for Term Certain  §6.22

C.  Annuities  §6.23

D.  Income for Term Certain  §6.24

E.  Remainders or Reversionary Interests  §6.25

F.  Contingent Remainder Interests  §6.26

G.  Charitable Contribution Deductions  §6.27

V.  ADJUSTMENT FACTORS FOR ANNUITIES (TABLE K)

A.  Overview of Annuity Adjustment Factors  §6.28

B.  Examples of Computations Using Table K Factors  §6.29

VI.  CHARITABLE REMAINDER UNITRUST SINGLE LIFE REMAINDER FACTORS—ADJUSTED PAYOUT RATES (TABLES U(1), F)

A.  Overview of CRUT for Single Life  §6.30

B.  Example of Computation of Charitable Remainder Unitrust Interest—Single Life, Adjusted Payout  §6.31

VII.  CHARITABLE REMAINDER UNITRUST; TERM OF YEARS (TABLES D, F)

A.  Overview of CRUT Remainder Factors for Term of Years  §6.32

B.  Example of Computation of Charitable Remainder Unitrust Interest Postponed for Term of Years; Adjusted Payout Rate  §6.33

VIII.  CHARITABLE REMAINDER UNITRUST; TWO MEASURING LIVES (TABLES U(2), F)

A.  Overview of CRUT Remainder Factors for Two Measuring Lives  §6.34

B.  Example of Computation of Charitable Remainder Unitrust With Two Measuring Lives  §6.35

IX.  LIMITATIONS ON APPLICATION OF STANDARD VALUATION FACTORS

A.  Limitations on Valuing High Yield Annuities, Unproductive Property, Inadequately Preserved Property, and Transfers to Trust in Cases of Terminal Illness  §6.36

B.  Example of Computation Involving Application of Limitations to Valuation of High Yield Annuity  §6.37

X.  SELECTING COMPUTER SOFTWARE PROGRAMS  §6.38

A.  Desirable Features of Estate Planning Software  §6.39

B.  Use of Electronic Spreadsheets  §6.40

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7

Structuring the Trust Instrument

Jeffrey A. Dennis-Strathmeyer

I.  RECOMMENDED TRUST DESIGN  §7.1

II.  DRAFTING CONSIDERATIONS

A.  The Target Audience  §7.2

B.  Drafting Suggestions  §7.3

C.  Required Formalities  §7.4

D.  Clauses Mandated by Tax Laws  §7.5

E.  Narrow Focus—Comparison With Revocable Trusts  §7.6

F.  Tax-Sensitive Powers  §7.7

G.  California Trust Law  §7.8

III.  PROPOSED ORGANIZATION  §7.9

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8

Introductory and Basic Clauses

Sandra J. Chan
Diana Hastings Temple

I.  INTRODUCTORY CLAUSES

A.  Creation of Trust  §8.1

1.  Form: Trust Agreement  §8.2

2.  Form: Declaration of Trust  §8.3

3.  Form: Transfer Document  §8.4

B.  Form: Name of Trust  §8.5

II.  IRREVOCABILITY

A.  Statutory Presumption of Revocability  §8.6

B.  Form: Irrevocability of Trust  §8.7

III.  CONCLUDING CLAUSES

A.  Signatures

1.  Form: Signature When Agreement of Trust Is Used  §8.8

2.  Form: Signature When Declaration of Trust Is Used  §8.9

B.  Spouse’s Consent to Transfer

1.  Purpose of Spouse’s Consent to Transfer  §8.9A

2.  Form: Spouse’s Consent to Transfer  §8.10

C.  Acknowledgments

1.  Purpose of Acknowledgment  §8.11

2.  Form: Acknowledgment  §8.12

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9

Dispositive Clauses

John R. Cohan
Bruce Givner

I.  DISTRIBUTION CLAUSES

A.  Outright Distribution of Trust Assets on Trust Termination

1.  Termination and Distribution on Settlor’s Death  §9.1

a.  Survivorship Period  §9.2

b.  Multiple Beneficiaries  §9.3

c.  Minor Beneficiaries  §9.4

d.  Form: Distribution on Settlor’s or Surviving Settlor’s Death  §9.5

2.  Termination and Distribution of Small Trust

a.  When Termination and Distribution Are Appropriate for Small Trust  §9.6

b.  Form: Distribution When Trust Is Small  §9.7

3.  Preliminary Considerations

a.  Clients’ Reluctance to Use Irrevocable Trusts  §9.7A

b.  Settlors as Trustees  §9.7B

c.  Beneficiaries as Trustees  §9.7C

B.  Sprinkling Trust

1.  Description of Sprinkling Trust  §9.8

a.  Distribution Guidelines for Sprinkling Trust  §9.8A

b.  Distributions to Children, Grandchildren, and Spouses  §9.8B

2.  Form: Sprinkling Trust  §9.9

3.  Sprinkling Power Exercised by Special Trustee

a.  Purpose of Special Trustee Sprinkling Power  §9.10

b.  Form: Sprinkling Power Exercised by Special Trustee  §9.11

c.  Form: Power Granted to Special Trustee to Add Beneficiaries of Named Class  §9.11A

4.  Tax Considerations for Sprinkling Trust

a.  Estate Tax on Sprinkling Trust  §9.12

b.  Gift Tax on Sprinkling Trust  §9.13

c.  Income Tax on Sprinkling Trust Income  §9.14

d.  Generation-Skipping Transfer Tax on Sprinkling Trust Distributions  §9.14A

e.  Substitution of Independent Trustee  §9.14B

f.  Explaining Grantor Trusts  §9.14C

g.  Avoiding or Deferring California Income Tax  §9.14D

5.  Form: Substitution of Independent Trustee  §9.15

C.  Sprinkling Trust (Income Only, Ascertainable Standard)

1.  Description of Income-Only Sprinkling Trust  §9.16

2.  Form: Sprinkling Trust (Income Only, Ascertainable Standard)  §9.17

3.  Tax Considerations for Income-Only Sprinkling Trust

a.  Estate, Gift, and Generation-Skipping Transfer Tax on Sprinkling Trust  §9.18

b.  Income Tax on Sprinkling Trust Income  §9.19

D.  Single Trust With Discretion to Distribute Principal

1.  Description of Discretionary Trust  §9.20

a.  Single Trust (Discretion to Distribute Principal)  §9.20A

b.  Separate Shares of Single Trust  §9.20B

2.  Form: Single Trust (Discretion to Distribute Principal)  §9.21

3.  Form: Separate Shares (Discretion to Distribute Principal)  §9.21A

4.  Tax Considerations for Discretionary Trust

a.  Estate Tax on Discretionary Trust  §9.22

b.  Gift Tax on Discretionary Trust  §9.23

c.  Income Tax on Discretionary Trust Income  §9.24

d.  Generation-Skipping Transfer Tax on Discretionary Trust  §9.24A

E.  Separate Trust for Each Beneficiary

1.  Description of Separate Trust  §9.25

2.  Forms for Separate Trusts  §9.25A

a.  Form: Separate Trust for Each Beneficiary  §9.26

b.  Form: Distribution of Income and Principal or Accumulation of Income During Child’s Minority  §9.27

c.  Form: Distribution After Child Reaches Age 21  §9.28

3.  Tax Considerations for Separate Trusts

a.  Estate and Gift Tax on Separate Trust  §9.29

b.  Income Tax on Separate Trust Income  §9.30

c.  Generation-Skipping Transfer Tax on Separate Trust Distributions  §9.30A

F.  Accumulation Trust

1.  Description of Accumulation Trust  §9.31

2.  Forms for Accumulation Trust

a.  Form: Income Accumulation  §9.32

b.  Form: Distribution if No Issue  §9.33

3.  Tax Considerations for Accumulation Trust

a.  Estate and Gift Tax on Accumulation Trust  §9.34

b.  Income Tax on Accumulation Trust Income  §9.35

c.  Escape Hatch From Trust Rate Compaction  §9.36

d.  Form: Special Power of Invasion  §9.37

G.  Less Significant Exceptions to Grantor Trust Rules  §9.38

1.  Power to Apply Income to Satisfy Support Obligation  §9.38A

2.  Power Affecting Beneficial Enjoyment Only After Occurrence of Event  §9.38B

3.  Testamentary Power of Appointment  §9.38C

4.  Power to Allocate Among Charitable Beneficiaries  §9.38D

5.  Power to Withhold Income During Disability of Beneficiary  §9.38E

6.  Power to Allocate Between Corpus and Income  §9.38F

H.  Hybrid Trusts

1.  Income Tax Considerations for Hybrid Trust  §9.39

a.  Segregation of Income and Principal Accounts  §9.39A

b.  Accumulation of Income While Beneficiary Under Age 21  §9.39B

2.  Estate and Gift Tax Considerations for Hybrid Trust  §9.40

I.  Annuity Trusts and Unitrusts

1.  Purpose of Annuity Trust and Unitrust  §9.41

2.  Forms for Annuity Trust and Unitrust

a.  Form: Annuity Trust  §9.42

b.  Form: Unitrust  §9.43

3.  Tax Considerations for Annuity Trust and Unitrust

a.  Estate and Gift Tax on Trust  §9.44

b.  Income Tax on Trust Income  §9.45

J.  “Five or Five” Withdrawal Powers

1.  Taxation of Five or Five Powers  §9.45A

2.  Uses of Five or Five Powers  §9.45B

3.  Form: Five or Five Withdrawal Power  §9.45C

4.  Form: Trustee’s Notice to Beneficiaries of Withdrawal Right  §9.45D

5.  Form: Beneficiary’s Acknowledgment of Notice of Withdrawal Right  §9.45E

II.  ADDITIONAL CLAUSES FOR PERMANENT TRUSTS

A.  Miscellaneous Trust Distribution Clauses  §9.46

1.  Form: Preventing Outright Distributions to Minors and Others  §9.47

2.  Form: Survivorship Clause  §9.48

3.  Form: Distribution of Remainder  §9.49

4.  Form: Distribution to CUTMA Custodian  §9.49A

B.  Beneficiary as Trustee

1.  Problems of Nonsettlor Beneficiary  §9.50

2.  Form: Beneficiary as Trustee  §9.51

3.  Tax Considerations for Nonsettlor Beneficiary

a.  Estate and Gift Tax on Trust  §9.52

(1)  Exercise of Power to Support Minor Children  §9.52A

(2)  Hidden Powers of Appointment  §9.52B

(3)  General and Limited Powers Distinguished  §9.52C

b.  Income Tax on Trust Income  §9.53

4.  Beneficiary-Controlled Trust  §9.53A

5.  Form: Beneficiary-Controlled Trust  §9.53B

C.  Powers of Appointment

1.  Purpose of Appointment Powers  §9.54

2.  Form: Power of Appointment Created  §9.55

3.  Tax Considerations in Creating and Exercising Power of Appointment

a.  Estate and Gift Tax on Power of Appointment Trust  §9.56

b.  Income Tax on Power of Appointment Trust Income  §9.57

4.  Perpetuities Savings Clause for Power of Appointment Trust

a.  Relevance of Rule Against Perpetuities  §9.58

b.  Form: Perpetuities Savings Clause for Power of Appointment Trust   §9.59

5.  When Generation-Skipping Transfer Tax Applies to Power of Appointment Trust  §9.60

6.  Retention of Reversionary Interest in Trust Property  §9.61

7.  Using Powers of Appointment in Marital Deduction Trusts  §9.62

D.  Discretionary Distribution Guidelines  §9.63

1.  Questions Addressed by Distribution Guidelines  §9.63A

2.  Desirable Qualities of Distribution Guidelines  §9.63B

3.  Communicating Distribution Guidelines  §9.63C

E.  Spendthrift Protection

1.  When Spendthrift Protection Necessary  §9.64

2.  Form: Spendthrift Settlor Clause  §9.65

3.  Tax Considerations in Spendthrift Trust

a.  Estate and Gift Tax on Trust  §9.66

b.  Income Tax on Trust Income  §9.67

F.  When Beneficiary Disclaimers Effective  §9.68

1.  Federal Law Disclaimer Requirements  §9.69

2.  Application to Transfers Made Before 1977  §9.70

3.  Form: Sample Disclaimer Document  §9.71

G.  Trust Protector  §9.72

1.  Use of Trust Protector  §9.73

2.  Trust Protector Defined  §9.74

3.  Powers of Trust Protector  §9.75

4.  Appointment of Trust Protector  §9.76

5.  Form: Appointment of Trust Protector  §9.77

6.  Form: Powers of Trust Protector  §9.78

H.  Decanting Trust  §9.79

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10

Trust Administration and Trustee’s Powers

Sandra J. Chan
Diana Hastings Temple

I.  INTRODUCTION TO TRUST ADMINISTRATION  §10.1

A.  Selection of Trustee

1.  Tax Considerations in Trustee Selection  §10.2

2.  Settlor or Nonadverse Party as Trustee  §10.3

a.  Estate Tax Consequences of Settlor-Trustee  §10.4

b.  Income Tax Effects of Settlor-Trustee  §10.5

3.  Beneficiary as Trustee  §10.6

a.  Beneficiary Removal Power  §10.6A

b.  Beneficiary Administrative Powers  §10.6B

c.  Beneficiary Distribution Power  §10.6C

4.  Independent Trustee  §10.7

5.  Cotrustees and Special Trustees  §10.8

a.  Cotrustee Relationship  §10.8A

b.  Special-Trustee Relationship  §10.8B

6.  Drafting Attorney as Trustee  §10.9

B.  Limitations on Trustee’s Exercise of Discretion

1.  Independent Trustee Powers  §10.10

2.  “Tax-Sensitive” Trustee Powers  §10.11

II.  CLAUSES RELATING TO TRUSTEES

A.  Cotrustees or Special Trustees  §10.12

1.  Trustee’s Authority to Act  §10.13

a.  Form: Cotrustee Unanimity Not Required  §10.14

b.  Form: Cotrustee Delegation of Powers  §10.15

c.  Form: Cotrustee Action When Other Cotrustee Incapacitated  §10.16

d.  Form: Corporate Cotrustee to Have Custody of Assets  §10.17

e.  Form: Authority of Corporate Trustee to Expend No More Than Fixed Amount  §10.18

f.  Form: Appointment of Special Trustee  §10.19

g.  Form: Compensation of Special Trustee; No Effect on Powers of Trustee  §10.20

2.  Cotrustee Investment Powers  §10.21

a.  Form: Corporate Trustee’s Right to Propose Purchases and Sales  §10.22

b.  Form: Power to Invest Vested Solely in Individual Trustee  §10.23

3.  Discretionary Powers Relating to Principal and Income

a.  Form: Power to Invade Principal Vested Solely in Individual Cotrustee  §10.24

b.  Special Trustee to Make Payments to Beneficiary-Trustee Other Than Settlor

(1)  Avoiding Adverse Tax Consequences  §10.25

(2)  Form: Special Trustee to Make Payments to Beneficiary-Trustee  §10.26

(3)  Form: Trustee to Appoint Special Trustee to Make Payments to Beneficiary-Trustee  §10.26A

B.  Resignation of Trustee

1.  Methods of Resignation  §10.27

2.  Form: Resignation of Trustee  §10.28

C.  Removal of Trustee  §10.29

1.  Form: Trustee Removal and Replacement by Beneficiary or Third Party  §10.30

2.  Form: Replacement of Incapacitated Trustee  §10.31

3.  Form: Certificate of Independent Review  §10.31A

4.  Tax Consequences of Beneficiary’s Removal Power  §10.31B

D.  Designation of Successor Trustees  §10.32

1.  Form: Designation of Successor Trustees  §10.33

2.  Form: Remaining Cotrustee Acts as Sole Trustee; Settlor Designates Succession Thereafter  §10.34

3.  Form: Settlor Designates Successor Trustees When Corporate Fiduciary Unwilling or Unable to Serve  §10.35

4.  Form: Trustee’s Power to Designate Successor  §10.36

5.  Form: Beneficiaries’ Power to Designate Successor  §10.37

E.  Exculpating Trustee  §10.38

1.  Form: Nonliability of Trustee  §10.39

2.  Form: Nonliability for Cotrustee’s Acts  §10.40

3.  Form: Successor Trustee’s Nonliability for Predecessor’s Acts  §10.41

4.  Purpose and Effect of Exculpatory Clause  §10.41A

F.  Commingling Undivided Interests

1.  Commingled Interests Problem  §10.42

2.  Form: Authorization of Commingling of Undivided Interests  §10.43

G.  Self-Dealing

1.  Potential for Self-Dealing  §10.44

2.  Form: Authorization of Self-Dealing  §10.45

3.  Form: Conflicts of Interest; Self-Dealing (Broad Powers)  §10.46

4.  Form: Nonliability of Trustee or Special Trustee for Conflicts of Interest  §10.47

5.  Investment in Common Trust Funds Permitted  §10.47A

H.  Trustee’s Bond

1.  Bond Generally Not Required  §10.48

2.  Form: Trustee’s Bond  §10.49

I.  Trustee’s Compensation

1.  When Compensation Allowed  §10.50

2.  Form: Reasonable Compensation (Individual Trustee)  §10.51

3.  Form: Percentage of Net Value of Principal Plus Reasonable Compensation (Individual Trustee)  §10.51A

4.  Form: Reasonable Compensation (Cotrustees)  §10.51B

III.  SETTLOR’S CONTROL OF INVESTMENTS

A.  Settlor’s Power to Control Trust Investments  §10.52

B.  Form: Settlor’s Veto Power Over Investments  §10.53

C.  Form: Settlor’s Power to Direct Investments  §10.54

D.  Form: Settlor’s Powers Personal to Settlor  §10.55

E.  Form: Investment Counsel  §10.56

F.  Form: Investment Consultant  §10.56A

IV.  CLAUSES GOVERNING TRUSTEE’S POWERS AND ADMINISTRATION

A.  Form: Introduction to Trustee’s Powers  §10.57

B.  Form: Trustee’s Powers  §10.58

C.  Trustee Duties Regarding Investments  §10.59

D.  General Investment Powers

1.  Broad or Restricted Investment Powers

a.  Form: Broad Investment Powers Under Prudent Investor Rule  §10.60

b.  Form: Limited Investment Powers  §10.61

2.  Power to Retain Property and Operate a Business

a.  Retaining Property and Operating a Business  §10.62

b.  Form: Power to Retain Property and Operate a Business (Standard Clause)  §10.63

c.  Form: Power to Retain or Purchase Unproductive or Underproductive Property  §10.64

3.  Diversification of Assets

a.  Duty to Diversify Assets  §10.65

b.  Form: Diversification Not Required  §10.66

4.  Power to Sell, Exchange, Manage, Encumber, and Grant Options on Property

a.  Disposing of and Managing Property  §10.67

b.  Form: Power to Sell, Exchange, Manage, Encumber, and Grant Options on Property (Standard Clause)  §10.68

5.  Power to Lease, Including Oil and Mineral Development (Standard Clause)

a.  Leasing Property  §10.69

b.  Form: Power to Lease, Including Oil and Mineral Development (Standard Clause)  §10.70

6.  Securities Ownership

a.  Managing Securities  §10.71

(1)  Form: Power to Manage Securities (Standard Clause)  §10.72

(2)  Form: Power to Register Shares for Sale (Closely Held or Controlled Public Corporation)  §10.73

b.  Holding Stocks and Other Securities in Nominee’s, Broker’s, or Street Name

(1)  Authority to Hold Stocks and Other Securities  §10.74

(2)  Form: Authority to Hold Trust Property as Nominee  §10.75

7.  Power to Employ Agents or Investment Counsel

a.  Use of Power to Employ  §10.76

b.  Form: Power to Employ Agents  §10.77

c.  Form: Individual Trustee’s Power to Employ Investment Counsel  §10.78

E.  General Management Powers

1.  Power to Borrow or Lend  §10.79

a.  Form: Power to Borrow (Standard Clause)  §10.80

b.  Form: Power to Make Loans (Standard Clause)  §10.81

2.  Power to Lend to, Buy From, and Sell to Trust

a.  Allowing Trustee as Individual to Purchase Assets or Make Loans to Trust  §10.82

b.  Form: Power to Lend to, Buy From, and Sell to Trust Individually  §10.83

3.  Power to Initiate and Defend Litigation and to Compromise Claims

a.  Explicit Grant of Power Reinforces Trustee’s Duty to Preserve Trust Property  §10.84

b.  Form: Power to Initiate and Defend Litigation and Power to Compromise (Standard Clause)  §10.85

4.  Power to Insure

a.  Power to Insure Assets and Insure Against Liability  §10.86

b.  Form: Power to Insure (Standard Clause)  §10.87

F.  Powers to Deal With Settlor’s Probate Estate

1.  Use of Probate Estate Powers  §10.88

2.  Form: Power to Lend to Settlor’s Probate Estate  §10.89

3.  Form: Power to Purchase Property From Settlor’s Probate Estate  §10.90

G.  Powers Relating to Taxes

1.  Trustee’s Disclaimer, Release, or Restriction of Administrative Powers  §10.91

a.  Selective Disclaimer or Release of Powers  §10.91A

b.  Form: Disclaimer, Release, or Restriction of Administrative Powers  §10.92

2.  Power to Adjust for Consequences of Tax Elections and Other Decisions

a.  Trustee Tax Elections  §10.93

b.  Form: Power to Adjust for Tax Consequences  §10.94

3.  Power to Consider Tax Consequences of Distributions

a.   Limited Scope of Throwback Rules  §10.95

b.  Form: Power to Consider Tax Consequences of Distributions  §10.96

4.  Authority to Pay Estate Taxes

a.  Form: Payment of Estate Taxes  §10.97

b.  Payment of Generation-Skipping Transfer Taxes  §10.98

H.  Tax Consequences of Powers

1.  Avoiding Adverse Tax Consequences to Settlor or Beneficiary-Trustee  §10.99

2.  Administrative Powers  §10.99A

3.  Form: Trustee Prohibited From Exercising Certain Powers  §10.100

I.  Miscellaneous Management Clauses

1.  Power to Consolidate or Divide Trusts  §10.101

a.  Form: Physical Division of Separate Trusts Created in Single Instrument Not Required; Division Into Separate Trusts Permitted (Standard Clause)  §10.102

b.  Form: Consolidated Administration of Trusts  §10.103

2.  Form: Power to Move Situs  §10.104

3.  Form: Payments to Beneficiary Under Disability or to Minor Beneficiary  §10.105

4.  Distribution on Termination of Trust

a.  Distribution Issues to Consider  §10.106

b.  Form: Broad Powers of Distribution (Standard Clause)  §10.107

5.  Power to Delay Distribution Until Resolution of Claims or Liability

a.  Use of Power to Delay Distribution   §10.108

b.  Form: Power to Withhold Payment if Conflicting Claims Arise  §10.109

J.  Notice of Proposed Action

1.  When Notice May Be Used  §10.109A

2.  Notice Procedure  §10.109B

3.  Form: Notice of Proposed Action  §10.109C

4.  Required Information in Notice of Proposed Action  §10.109D

V.  POWERS RELATING TO PRINCIPAL AND INCOME

A.  Purpose of Allocation Clauses  §10.110

1.  Relevance of Adjustment Power  §10.110A

2.  Using Discretionary Power  §10.110B

B.  Tax Considerations in Allocation Clauses  §10.111

C.  Allocation Clauses  §10.112

1.  Form: Uniform Principal and Income Act to Govern  §10.112A

2.  Form: Broad Power to Determine Principal and Income (Standard Clause)  §10.112B

3.  Form: Power to Make Allocations Between Principal and Income With Limited Discretion (Tax-Sensitive Trustee)  §10.112C

D.  Allocation of Income and Expenses Among Successive Beneficiaries

1.  Allocation of Income  §10.113

2.  Form: Undistributed Income Payable to Successive Beneficiaries  §10.114

3.  Allocation of Expense Items  §10.115

4.  Form: Allocation of Expenses Among Successive Beneficiaries  §10.116

E.  Conversion of Income Interest to Unitrust Interest  §10.116A

F.  Reconversion of Unitrust Interest  §10.116B

VI.  ACCOUNTING BY TRUSTEE

A.  Purpose of Accounting  §10.117

B.  Form: Accounting by Trustee  §10.118

VII.  MISCELLANEOUS ADMINISTRATIVE CLAUSES

A.  Notice of Births, Deaths, and Other Events Affecting Interests

1.  Purpose of Clause  §10.119

2.  Form: Notice to Trustee of Births, Deaths, and Other Events Affecting Interests  §10.120

B.  Additions to Trust

1.  Purpose of Additions Clause  §10.121

2.  Form: Clause Authorizing Additions to Trust  §10.122

C.  Spendthrift Clause

1.  Purpose of Spendthrift Clause  §10.123

2.  Using Long-Form Spendthrift Clause  §10.123A

3.  Form: Spendthrift Clause  §10.124

D.  Choice-of-Law Clause

1.  Enforceability and Desirability  §10.125

2.  Form: Specifying Law to Govern Validity, Construction, and Administration of Trust  §10.126

E.  Construction of Commonly Used Terms  §10.127

1.  Form: Gender and Number  §10.128

2.  Form: Trustees and Fiduciaries  §10.129

3.  Form: Distribution Among Beneficiaries  §10.130

4.  Form: “Shall” and “May”  §10.131

F.  Commonly Included Definitions

1.  Form: Education  §10.132

2.  Issue and Children

a.  Defining “Issue” and “Children”  §10.133

(1)  Natural Parent-Child Relationship Under Uniform Parentage Act  §10.133A

(2)  Conclusive Marital Presumption for Children of Spouses or Registered Domestic Partners  §10.133B

(3)  Adopted Children  §10.133C

b.  Form: Issue and Children (California Law of Intestate Succession Applies)  §10.134

c.  Form: Issue and Children (Lineal Descendants)  §10.134A

3.  Form: Spouse, Husband, or Wife  §10.135

4.  Form: Spouse or Registered Domestic Partner  §10.135A

G.  Form: No-Contest Clause  §10.136

1.  Need for Caution in No-Contest Clause  §10.136A

2.  Optional Addition to No-Contest Clause  §10.136B

H.  Form: Annual Distributions of Income  §10.137

I.  Form: Distribution of Disclaimed Property  §10.138

J.  Form: Power to Distribute if Power of Appointment Not Exercised  §10.139

VIII.  IMPLEMENTING THE TRUST  §10.140

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11

Life Insurance Trusts

Jon J. Gallo

I.  FUNDING TRUSTS WITH LIFE INSURANCE  §11.1

A.  Life Insurance Trust Objectives  §11.2

B.  Special Considerations  §11.3

II.  PLANNING AND DRAFTING CONSIDERATIONS

A.  Partitioning Community Property  §11.4

B.  Avoiding Application of Reciprocal Trust Doctrine  §11.5

1.  Reciprocal Trust Doctrine Applied  §11.5A

2.  Reciprocal Trust Doctrine Not Applied  §11.5B

C.  Selecting and Changing Trustee  §11.6

1.  Fiduciary Incidents of Ownership  §11.6A

2.  Settlor’s Power to Appoint Trustee  §11.6B

3.  Settlor’s Spouse as Trustee  §11.6C

D.  Transferring Property to Trust

1.  Inclusion of Pre-Owned Policy in Insured’s Estate Under IRC §2035  §11.7

2.  Form: Contingent Marital Deduction Gift  §11.8

3.  Avoidance of Estate Tax Inclusion of New Policy  §11.9

a.  Insurable Interest Problem  §11.9A

b.  Effect of Substitute Application  §11.9B

4.  Gift Tax Value  §11.10

5.  Gift Tax Exclusions  §11.11

E.  Removing Policy From Trust  §11.12

1.  Exceptions to Transfer-for-Value Rule  §11.12A

2.  Power to Acquire Policy Held in Trust  §11.12B

F.  Choosing Method of Premium Payment  §11.13

1.  Funded Insurance Trust  §11.13A

2.  Periodic Gifts to Trust  §11.13B

G.  Holding Sufficient Liquid Assets to Satisfy Crummey Withdrawal Demands  §11.14

1.  When Present Interest Issue Arises  §11.14A

2.  Recommended Precautions   §11.14B

H.  Addressing Generation-Skipping Transfer Tax Problems  §11.15

1.  Avoiding ETIP Periods  §11.16

2.  Planning for Exemption Allocation  §11.17

3.  Allocating Exemption by Formula  §11.18

I.  Exercising Trustee Powers  §11.18A

III.  FORMS

A.  Form: Power to Invest in Life Insurance  §11.19

B.  Form: Power to Remove and Replace Trustee  §11.20

IV.  SELECTING APPROPRIATE INSURANCE PRODUCT  §11.21

A.  Selecting Company  §11.22

B.  Understanding Insurance Products and Illustrations  §11.23

1.  Risk Factors  §11.24

a.  Mortality Experience  §11.25

b.  Investment Experience  §11.26

c.  Lapse Rates  §11.27

d.  Company Expenses  §11.28

2.  Insurance Products  §11.29

a.  Term Insurance  §11.30

(1)  Annual Renewable Term  §11.31

(2)  Level Term  §11.32

(3)  Decreasing Term  §11.33

(4)  Modified Term  §11.34

b.  Whole Life Insurance  §11.35

(1)  Limited-Pay Whole Life Insurance  §11.36

(2)  Current Assumption (Interest-Sensitive) Whole Life Insurance  §11.37

(3)  Blended Whole Life/Term Insurance  §11.38

(4)  Joint Lives Life Insurance  §11.39

(5)  Universal Life Insurance  §11.40

(6)  Variable Life Insurance  §11.41

(7)  Variable/Universal Life Insurance  §11.42

(8)  Secondary Guarantee Universal Life (SGUL) Insurance  §11.42A

(9)  Modified Endowment Contract (MEC) Income Tax Consequences  §11.42B

(10)  Flexible Cash Value (FCV) Contract  §11.42C

3.  Life Insurance Illustrations  §11.43

a.  Term Insurance  §11.44

b.  Whole Life Insurance  §11.45

c.  Blended Insurance  §11.46

d.  Second-to-Die Insurance  §11.47

e.  Variable Insurance  §11.48

4.  Obtaining Information  §11.49

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12

Trusts for Minors

Monica Dell’Osso
Betty J. Orvell

I.  TRANSFERS TO MINORS

A.  Scope of Chapter  §12.1

B.  Tax Aspects of Gifts to Minors  §12.2

1.  Gift Tax  §12.3

2.  Estate Tax  §12.4

3.  Income Tax  §12.5

4.  Generation-Skipping Transfer Tax  §12.6

C.  Nontax Aspects of Gifts to Minors  §12.7

1.  Minor’s Legal Disability  §12.8

2.  Child’s Ability to Manage Assets  §12.9

3.  Impact on Child’s Incentive  §12.10

4.  Donor’s Loss of Control Over Assets  §12.11

II.  OUTRIGHT GIFTS AND DIRECT PAYMENTS FOR EDUCATION AND HEALTH

A.  Outright Gifts to Minors

1.  Legal and Tax Aspects of Gifts  §12.12

2.  Advantages and Disadvantages of Outright Gifts  §12.13

3.  Legal Obstacles in Exercising Control of Outright Gifts  §12.13A

B.  Direct Payments for Educational and Medical Expenses (IRC §2503(e))  §12.14

C.  Pay on Death (POD) and Totten Trust Accounts

1.  Legal and Tax Aspects of POD Accounts  §12.15

2.  Advantages and Disadvantages of POD Accounts  §12.16

D.  Joint Tenancy

1.  Legal and Tax Aspects of Joint Tenancy  §12.17

2.  Advantages and Disadvantages of Joint Tenancy  §12.18

3.  Estate and Gift Tax Consequences of Joint Tenancy  §12.18A

E.  Guardianships

1.  Legal and Tax Aspects of Guardianship  §12.19

2.  Advantages of Guardianship  §12.20

3.  Disadvantages of Guardianship

a.  Termination at Age 18  §12.21

b.  Transfer of Property if Minor Dies  §12.22

F.  Custodianships Under California Uniform Transfers to Minors Act

1.  Establishment of Custodianship  §12.23

2.  Transfer to Custodian  §12.23A

3.  Powers of Custodian  §12.24

4.  Liability of Custodian  §12.25

5.  Substitute Custodians and Successor Custodians

a.  Designation of Substitute Custodian  §12.26

b.  Designation of Successor Custodian  §12.27

6.  Form: Creation of Custodianship by Transferor  §12.28

7.  Form: Designation of Successor Custodian by Current Custodian  §12.29

8.  Termination of Custodianship  §12.30

a.  Gift Tax Consequences of Custodianship  §12.31

b.  Estate Tax Inclusion in Donor’s Estate

(1)  When Donor Is Custodian  §12.32

(2)  Under Reciprocal Trust Doctrine  §12.33

c.  Generation-Skipping Transfer Tax Implications of Custodial Gifts  §12.34

d.  Income Taxation of Custodianship  §12.35

9.  Advantages of Custodianship  §12.36

10.  Disadvantages of Custodianship  §12.37

G.  Qualified Tuition Programs  §12.37A

H.  Coverdell Education Savings Accounts  §12.37B

III.  TRUSTS FULLY QUALIFYING UNDER IRC §2503(c) (MINORS’ TRUSTS)

A.  Introduction to Minors’ Trusts  §12.38

B.  Requirements for Qualification

1.  No Substantial Restriction on Trustees’ Power to Distribute Property to Minor  §12.39

a.  Consideration of Minor’s Other Resources  §12.40

b.  Prohibition Against Use of Property for Legal Support  §12.41

c.  Discretionary Sprinkling Power  §12.42

2.  Distribution of Property at Age 21  §12.43

3.  Distribution of Property on Minor’s Death  §12.44

a.  Distribution to Minor’s Estate  §12.45

b.  General Power of Appointment  §12.46

c.  Taker in Default  §12.47

d.  Limited Power of Appointment  §12.48

C.  Tax Aspects of §2503(c) Trusts

1.  Gift Tax; Need for Separate Trusts  §12.49

2.  Estate Tax Inclusion of Trust

a.  Death of Beneficiary  §12.50

b.  Death of Settlor

(1)  Trust Assets Generally Not Included in Settlor’s Estate  §12.51

(2)  Inclusion When Assets Used to Meet Settlor’s Duty of Support  §12.52

(3)  Risks When Settlor Has Power to Appoint Successor Trustee  §12.53

(4)  Inclusion When Settlor-Trustee Has Broad Discretion Over Income Distribution  §12.54

3.  No Generation-Skipping Transfer Tax on Assets Included in Minor’s Estate  §12.55

4.  Income Taxation of §2503(c) Trust  §12.56

5.  Trusts Continuing After Age 21  §12.57

6.  Gift Tax Consequences on Lapse of Termination Right  §12.57A

D.  Distribution of Income and Principal to Living Child

1.  Form: Division of Trust Estate  §12.58

2.  Form: Discretionary Payment of Income and Principal Before Child Attains Age 18 or 21  §12.59

3.  Form: Outright Distribution to Living Child at Age 18 or 21  §12.60

4.  Form: Child’s Power to Terminate Trust After Attaining Specified Age  §12.61

E.  Distribution When Child Dies

1.  Form: Distribution to Child’s Estate  §12.62

2.  Form: Distribution According to Beneficiary’s Power of Appointment  §12.62A

F.  Advantages and Disadvantages of §2503(c) Trust  §12.63

G.  Form: Complete IRC §2503(c) Minor’s Trust  §12.63A

IV.  SECTION 2503(b) TRUSTS (INCOME INTERESTS ONLY QUALIFYING FOR ANNUAL EXCLUSION)

A.  Introduction to §2503(b) Trust

1.  “Income Interest Only” Qualification  §12.64

2.  Valuing the Income Interest  §12.65

3.  Tax Benefits Versus Nontax Objectives  §12.66

4.  Taxable Gift of Remainder Interest  §12.66A

B.  Features of §2503(b) Trusts

1.  Standard Trust: Current Income Interest Combined With Post-Age-21 Principal Distribution  §12.67

2.  Herr Trusts: Accumulation of Pre-Age-21 Income for Single Beneficiary  §12.68

a.  Description of Herr Trust  §12.69

b.  Tax Aspects of Herr Trust  §12.69A

c.  Qualification of Post-Age-21 Income Interest  §12.70

C.  Combination of §2503(b) Trust and CUTMA  §12.71

1.  Income Distributions Required  §12.71A

2.  Distribution to Custodian  §12.71B

D.  Tax Aspects of §2503(b) Trusts

1.  Gift Tax on §2503(b) Trust  §12.72

2.  Estate Tax on §2503(b) Trust  §12.73

3.  Income Taxation of §2503(b) Trust  §12.74

4.  Generation-Skipping Transfer Tax on §2503(b) Trust  §12.75

E.  Form: Herr Trust—Distribution of Income by Age 21  §12.76

F.  Form: Distribution of Post-Age-21 Income  §12.77

G.  Form: Distribution of Balance if Beneficiary Dies Before Age 21  §12.78

H.  Form: Discretionary Early Distribution of Principal  §12.79

V.  CRUMMEY TRUSTS

A.  Description of Crummey Trust  §12.80

1.  Expiration of Withdrawal Powers  §12.80A

2.  Exercise of Withdrawal Powers  §12.80B

B.  Requirements for Annual Exclusion

1.  Guardian for Minor Beneficiaries  §12.81

2.  Right of Withdrawal  §12.82

a.  Notice of Withdrawal Rights

(1)  Importance of Written Notice  §12.83

(2)  Persons Receiving Notice  §12.84

(3)  Form: Notice to Beneficiary  §12.85

b.  Period of Withdrawal Right  §12.86

c.  Lapse of Withdrawal Right  §12.86A

d.  Amount of Withdrawal Right  §12.87

(1)  Split-Gift Problem  §12.87A

(2)  Spouse’s Crummey Power  §12.88

(3)  Analyzing Excess Lapse Issues  §12.89

(a)  When Excess Lapses Must Be Avoided  §12.89A

(b)  When Excess Lapses May Be Acceptable  §12.89B

(4)  Avoiding Excess Lapses  §12.90

e.  Multiple Trust Problems  §12.91

f.  Liquid Assets to Satisfy Withdrawal Power  §12.92

g.  Naked Crummey Powers  §12.93

(1)  Cristofani Ruling: Exclusion Allowed Despite Remote Remainder Interest  §12.94

(2)  Post-Cristofani: IRS Renewed Challenge to Naked Crummey Power  §12.95

(3)  Revised Acquiescence in Cristofani; Kohlsaat Decision  §12.95A

C.  Withdrawal Provisions for Crummey Trust

1.  Form: No Excess Lapse Protection  §12.96

2.  Form: Withdrawal Right Limited to “Five or Five” Amount  §12.97

3.  Form: “Hanging” Crummey Power  §12.98

D.  Tax Consequences of Crummey Trusts

1.  Income Taxation of Crummey Trusts

a.  Settlor Income Tax  §12.99

b.  Beneficiary Income Tax  §12.100

2.  Beneficiary Gift Tax  §12.101

a.  “Five or Five” Limitation  §12.102

b.  No Gift if Powerholder Is Beneficiary or Has General Power of Appointment  §12.103

c.  Avoiding Gift Taxation by Use of “Hanging” Crummey Power  §12.104

3.  Estate Tax Inclusion of Crummey Trust

a.  Beneficiary Estate Tax  §12.105

b.  Settlor Estate Tax  §12.106

4.  Generation-Skipping Transfer (GST) Tax; Application to Crummey Trust

a.  Beneficiary GST Tax  §12.107

b.  Settlor GST Tax  §12.108

5.  Gift Tax; Lapse of Withdrawal Power  §12.109

6.  Use as Sprinkling Trust  §12.110

VI.  INCENTIVE TRUSTS

A.  Description of Incentive Trusts  §12.111

B.  Nontax Incentive Planning With Trusts for Children  §12.112

C.  Income Tax Aspects of Incentive Trusts  §12.113

D.  Exceptions to Grantor Trust Treatment  §12.113A

E.  Transfer Tax Aspects of Incentive Trusts

1.  Gift Tax on Trust Transfers  §12.114

2.  Estate Tax Inclusion of Incentive Trust  §12.115

3.  Generation-Skipping Transfer (GST) Tax; Application to Incentive Trust  §12.116

F.  Incentive Trust Provisions

1.  Form: Conditions for Distribution  §12.117

2.  Form: Distributions for Medical Emergency  §12.118

3.  Form: Right of Withdrawal at Specified Ages When Child Has Complied With Incentive Provisions  §12.119

4.  Form: Manner of Distribution to Child Exercising Right of Withdrawal and When Child Dies Without Exercising Right of Withdrawal  §12.120

5.  Form: Child Not in Compliance With Incentive Provisions at Specified Ages  §12.121

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13

Special Needs Trusts

Sterling L. Ross, Jr.
Ruth A. Phelps

I.  PLANNING AND DRAFTING SNTs

A.  Purpose of Special Needs Trust (SNT)  §13.1

B.  Types of SNTs  §13.2

1.  Third Party SNT  §13.3

2.  Funding Third Party SNT  §13.4

3.  First Party SNT  §13.5

C.  Public Benefits

1.  Overview of SSI and Medi-Cal  §13.6

2.  SSI Benefits  §13.7

a.  Eligibility for Disabled and Aged Poor  §13.8

b.  Limitation on Resources  §13.9

c.  SSI Benefits Reduced by Income  §13.10

d.  Reduction for In-Kind Support and Maintenance  §13.11

e.  SSI Transfer Rules  §13.12

3.  Medi-Cal Benefits  §13.13

a.  Eligibility for Medi-Cal Benefits  §13.14

b.  Medi-Cal Transfer and Recovery Rules  §13.15

4.  Social Security and Medicare Distinguished  §13.16

D.  SSI Special Needs Trust Rules

1.  Third Party SNTs  §13.17

2.  First Party SNTs  §13.18

a.  Need for Irrevocability Clause  §13.19

b.  Avoiding Attack on Irrevocability Clause  §13.20

E.  Medi-Cal Special Needs Trust Rules

1.  Federal Medicaid Law  §13.21

2.  Medi-Cal Trust Regulations  §13.22

a.  Third Party Trusts  §13.23

b.  First Party Trusts  §13.24

F.  Statutory “Spendthrift” Protection  §13.25

G.  Income Taxation of SNTs  §13.26

H.  Chart: Summary of SNTs  §13.27

II.  ESTABLISHING LSNTs

A.  Overview of LSNTs  §13.28

1.  Substantial Impairment  §13.29

2.  Unmet Special Needs  §13.30

3.  Amount Reasonably Necessary  §13.31

B.  Procedure for Obtaining Court Approval  §13.32

C.  Petition to Terminate Trust  §13.33

D.  Claims by Government Agencies  §13.34

E.  Disabled Adults With Capacity  §13.35

F.  Continuing Court Supervision  §13.36

G.  Estate and Gift Tax Consequences of Funding and Termination of LSNTs  §13.37

III.  INTER VIVOS THIRD PARTY SNT CLAUSES

A.  Introductory Clauses for Third Party SNT  §13.38

1.  Form: Table of Contents; Trust Agreement  §13.39

2.  Form: Irrevocability; Limited Power of Amendment for Third Party SNT  §13.40

3.  Purpose of Third Party SNT  §13.41

B.  Distribution Provisions for Third Party SNT  §13.42

1.  Form: Distribution for Special Needs  §13.43

2.  Form: Trust Advisory Committee  §13.44

3.  Form: Requirement to Seek Public Benefits  §13.45

4.  Form: Trust Estate to Supplement Public Benefits  §13.46

C.  Termination Provisions for Third Party SNT  §13.47

1.  Form: Termination of Third Party SNT on Death of Beneficiary  §13.48

2.  Form: Backstop Termination Clause for Third Party SNT  §13.49

3.  Form: Payment of Expenses of Third Party SNT  §13.50

D.  Form: Office of Trustee; Trustee Powers; Governing Law; Description of Transferred Property  §13.50A

IV.  OTHER INTER VIVOS FIRST PARTY SNT CLAUSES

A.  Introductory Clauses for First Party SNT  §13.51

B.  Distribution Provisions for First Party SNT  §13.52

C.  Termination of First Party SNT on Death of Beneficiary  §13.53

D.  Trust Protector Clause  §13.54

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13A

Dynasty Trusts

Richard S. Kinyon

I.  INTRODUCTION TO DESCENDANTS TRUSTS  §13A.1

II.  BASIC FEATURES OF A GST-EXEMPT DYNASTY TRUST

A.  GST Exemption Allocated to Trust  §13A.2

B.  Discretionary Accumulation Trust  §13A.3

C.  Trust Divided Into Separate Trusts in Each Generation  §13A.4

D.  Duration of Trust Limited by Rule Against Perpetuities  §13A.5

III.  ADDITIONAL FEATURES OF A GST-EXEMPT DYNASTY TRUST

A.  Intentionally Defective Grantor Trust  §13A.6

B.  Using Valuation Discounts to Enhance Trust  §13A.7

C.  Leveraging the Trust  §13A.8

D.  Example of Leveraged Intentionally Defective Grantor, GST-Exempt Dynasty Trust  §13A.9

1.  Income Tax Treatment of Sale to Trust  §13A.10

2.  Annual Exclusion Gifts of Remaining LLC Units to Issue  §13A.11

3.  Grantor Trust Status Ends on Death of Settlor  §13A.12

E.  Alternative Example—Bargain Installment Sale to Descendants Trust  §13A.13

F.  Private Annuity Alternative to Promissory Note  §13A.14

IV.  FORM OF DESCENDANTS TRUST AND RELATED INSTRUMENTS

A.  Form: Generation-Skipping Descendants Trust  §13A.15

B.  Form: Unsecured Installment Promissory Note  §13A.16

C.  Form: Secured Installment Promissory Note  §13A.17

D.  Form: Secured Annually Renewable Demand Promissory Note  §13A.18

E.  Form: Security Agreement for Limited Liability Company Units  §13A.19

F.  Form: Deed of Trust with Assignment of Rents  §13A.20

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14

Grantor Retained Income Trusts (GRITs)

Marc M. Stern

I.  OVERVIEW OF GRANTOR RETAINED INCOME TRUSTS (GRITs)

A.  Objectives of GRIT  §14.1

1.  Valuation of Remainder Gift  §14.1A

2.  Valuation of Retained Interests  §14.1B

B.  Advantages of GRIT  §14.2

1.  “Member of the Family” Defined  §14.2A

2.  Application to Domestic Partners  §14.2B

C.  Valuation Benefits of GRIT  §14.3

D.  Selecting GRIT Term  §14.4

E.  Lack of Statutory Requirements  §14.5

F.  Permissible Provisions

1.  Trust Assets  §14.6

2.  Fractional Interests  §14.7

II.  TAX CONSIDERATIONS

A.  Income Tax Issues  §14.8

1.  Settlor Payment of Capital Gains Taxes  §14.8A

2.  Grantor Trust as S Corporation Shareholder  §14.8B

B.  Spousal Interests  §14.9

C.  Repurchase/Exchange Strategy for Obtaining New Basis  §14.10

D.  California Real Property Tax Considerations  §14.11

E.  Integration Into Settlor’s Estate Plan  §14.12

III.  CALCULATING VALUE OF GRIT GIFT  §14.13

IV.  WHEN TO USE GRIT  §14.14

V.  DRAFTING CONSIDERATIONS  §14.15

VI.  GRANTOR RETAINED INCOME TRUST PROVISIONS

A.  Form: Table of Contents; Declaration of Transfer to Trustee  §14.16

B.  Form: Trust Name  §14.17

C.  Form: Trust Estate  §14.18

D.  Form: Irrevocability of Trust  §14.19

E.  Form: Trust Term  §14.20

F.  Form: Payment of Income  §14.21

G.  Form: Limitation on Trust Distributions  §14.22

H.  Form: Distribution if Settlor Survives Trust Term  §14.23

I.  Form: Distribution if Settlor Fails to Survive Trust Term  §14.24

J.  Form: Distribution on Termination  §14.25

K.  Form: Office of Trustee  §14.26

L.  Form: Trustee Powers  §14.27

M.  Form: Applicable Law; Execution  §14.28

N.  Form: Description of Transferred Property  §14.29

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15

Grantor Retained Annuity Trusts (GRATs)

Marc M. Stern

I.  OVERVIEW OF GRANTOR RETAINED ANNUITY TRUSTS (GRATs)

A.  Objectives and Design of GRAT  §15.1

1.  Qualified Annuity Interest  §15.1A

2.  GRAT Compared to CRAT  §15.1B

B.  Valuation Benefits of GRAT  §15.2

C.  Expressing Annuity Amount  §15.3

D.  Selecting GRAT Term

1.  General Considerations  §15.4

a.  Advantages of Short-Term GRAT  §15.4A

b.  Advantages of Longer-Term GRAT  §15.4B

c.  Alternative GRAT for Settlor’s Life  §15.4C

d.  High-Payout GRAT  §15.4D

2.  “Zeroed-Out” GRAT  §15.5

3.  Walton GRATs  §15.6

4.  “Rolling” GRATs  §15.6A

5.  ETIP Problem for GRATs  §15.6B

6.  Sale of GRAT Remainder Interest  §15.6C

7.  Marital Deduction Qualifying GRAT Remainder Interest   §15.6D

E.  GRAT Requirements and Permissible Provisions  §15.7

1.  Assets Used to Fund GRAT  §15.8

2.  Required Governing Instrument Provisions  §15.9

3.  Fractional Interests  §15.10

II.  TAX CONSIDERATIONS

A.  Income Tax Issues  §15.11

1.  Settlor Payment of Capital Gains Taxes  §15.11A

2.  Grantor Trust as S Corporation Shareholder  §15.11B

3.  Nonrecognition Transactions Between Settlor and Grantor Trust  §15.11C

B.  Spousal Interests  §15.12

1.  Revocable Spousal Annuity  §15.12A

2.  Separate Property GRATs  §15.12B

C.  Repurchase/Exchange Strategy for Obtaining New Basis  §15.13

D.  California Real Property Tax Considerations  §15.14

E.  Integration Into Settlor’s Estate Plan  §15.15

F.  Qualifying for Marital Deduction If Settlor Dies During GRAT Term  §15.15A

III.  CALCULATING VALUE OF GRAT GIFT  §15.16

IV.  WHEN TO USE GRAT  §15.17

V.  DRAFTING CONSIDERATIONS  §15.18

VI.  GRANTOR RETAINED ANNUITY TRUST PROVISIONS

A.  Form: Table of Contents; Declaration of Transfer to Trustee  §15.19

B.  Form: Trust Name  §15.20

C.  Form: Trust Estate  §15.21

D.  Form: Irrevocability of Trust  §15.22

E.  Form: Trust Term  §15.23

F.  Form: Operation During Trust Term  §15.24

1.  Form: Payment for Each Year of Trust  §15.25

2.  Form: Annuity Amount  §15.26

3.  Form: Short Taxable Year  §15.27

4.  Form: Trust Income  §15.28

5.  Form: Limitation on Trust Distributions  §15.29

6.  Form: Commutation Prohibited  §15.30

G.  Form: Distribution on Expiration of Trust Term  §15.31

H.  Form: Distribution on Termination  §15.32

I.  Form: Office of Trustee  §15.33

J.  Form: Trustee Powers  §15.34

K.  Form: Applicable Law  §15.35

L.  Form: Statement of Intent; Execution  §15.36

M.  Form: Description of Transferred Property  §15.37

N.  Form: GRAT Client Memorandum  §15.38

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16

Grantor Retained Unitrusts (GRUTs)

Marc M. Stern

I.  OVERVIEW OF GRANTOR RETAINED UNITRUSTS (GRUTs)

A.  GRUT Objectives and Design  §16.1

1.  Qualified Unitrust Interest  §16.1A

2.  GRUT Compared to CRUT  §16.1B

3.  GRUT Compared to GRIT  §16.1C

B.  GRUT Valuation Benefits  §16.2

C.  Selecting GRUT Term  §16.3

D.  GRUT Requirements and Permissible Terms  §16.4

1.  Assets Used to Fund GRUT  §16.5

2.  Required Governing Instrument Provisions  §16.6

3.  Fractional Interests  §16.7

II.  TAX CONSIDERATIONS

A.  Income Tax Issues  §16.8

B.  Spousal Interests  §16.9

1.  Revocable Spousal Unitrust Interest  §16.9A

2.  Separate Property GRUTs  §16.9B

C.  Repurchase/Exchange Strategy for Obtaining New Basis  §16.10

D.  California Real Property Tax Considerations  §16.11

E.  Integration Into Settlor’s Estate Plan  §16.12

III.  CALCULATING VALUE OF GRUT GIFT  §16.13

IV.  WHEN TO USE GRUT  §16.14

V.  DRAFTING CONSIDERATIONS  §16.15

VI.  GRANTOR RETAINED UNITRUST PROVISIONS

A.  Form: Table of Contents; Declaration of Transfer to Trustee  §16.16

B.  Form: Trust Name  §16.17

C.  Form: Trust Estate  §16.18

D.  Form: Irrevocability of Trust  §16.19

E.  Form: Trust Term  §16.20

F.  Form: Operation During Trust Term  §16.21

1.  Form: Payment for Each Year of Trust  §16.22

2.  Form: Unitrust Amount  §16.23

3.  Form: Correcting Distributions  §16.24

4.  Form: Short Taxable Year  §16.25

5.  Form: Trust Income  §16.26

6.  Form: Limitation on Trust Distributions  §16.27

7.  Form: Commutation Prohibited  §16.28

8.  Form: Distribution if Settlor Survives Trust Term  §16.29

G.  Form: Distribution on Termination  §16.30

H.  Form: Office of Trustee  §16.31

I.  Form: Trustee Powers  §16.32

J.  Form: Applicable Law  §16.33

K.  Form: Statement of Intent; Execution  §16.34

L.  Form: Description of Transferred Property  §16.35

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17

Qualified Personal Residence Trusts (QPRTs)

Bruce Givner
Owen Kaye
Bruce D. Whitley

I.  OVERVIEW OF QUALIFIED PERSONAL RESIDENCE TRUSTS (QPRTs)

A.  Purpose and Use of QPRTs  §17.1

1.  Applicable Statute and QPRT Regulations  §17.2

2.  Note on Using Acronyms With Clients  §17.3

3.  Example of QPRT  §17.4

4.  Are QPRTs Underused?  §17.5

B.  Advantages of QPRTs  §17.6

1.  Tax Advantages of QPRTs  §17.7

a.  Gift Tax Advantage of QPRT  §17.8

(1)  Potential Valuation Advantages  §17.8A

(2)  Examples of Valuation Advantages  §17.8B

b.  Estate Tax Advantage of QPRT  §17.9

c.  Income Tax Advantage of QPRT  §17.10

2.  Creditor Advantages of QPRT  §17.11

a.  Diminishing Value of Retained Interest  §17.12

b.  Fraudulent Transfer Limitations  §17.13

(1)  Limitations Period  §17.13A

(2)  Badges of Fraud  §17.13B

(3)  Alter Ego Liability  §17.13C

c.  Bankruptcy Protection  §17.14

(1)  Importance of Motive  §17.14A

(2)  Mechanical Problems  §17.14B

C.  Disadvantages of QPRTs  §17.15

1.  Tax Disadvantages of QPRTs  §17.16

2.  Financial Disadvantages of QPRTs  §17.17

a.  When Encumbered Property Used  §17.18

b.  Effect on Financial Statements  §17.19

c.  Reduced Ability to Borrow  §17.20

d.  Payment of Rent After Term Ends  §17.21

D.  Candidates for QPRTs  §17.22

E.  Expenses of QPRTs

1.  Initial QPRT Expenses  §17.23

a.  Counseling Client  §17.23A

b.  Review Appraisal  §17.23B

c.  Review Loan Documents  §17.23C

d.  QPRT Documents  §17.23D

e.  Prepare Deeds  §17.23E

f.  New Title Insurance  §17.23F

g.  Other Insurance  §17.23G

h.  Initial Federal Gift Tax Return  §17.23H

i.  Amend Family Trust  §17.23I

2.  Ongoing QPRT Expenses  §17.24

a.  Sale of the Residence  §17.24A

b.  Termination of QPRT Term  §17.24B

c.  Refinance  §17.24C

d.  Later Federal Gift Tax Returns  §17.24D

e.  Maintenance Program  §17.24E

F.  Ethical Considerations

1.  When Grantors May Have Adverse Interests  §17.24F

2.  When Trustee May Need Representation  §17.24G

3.  When Beneficiaries May Need Separate Counsel  §17.24H

II.  TAX CONSIDERATIONS

A.  Requirements of QPRT Regulations  §17.25

1.  Personal Residence Requirement  §17.26

a.  Appurtenant Structures  §17.27

b.  Fractional Interests  §17.28

c.  Community Property  §17.29

d.  Separate Property  §17.29A

2.  Required Governing Instrument Provisions  §17.30

3.  Summary of Governing Instrument Regulations  §17.31

4.  Required Conversion to GRAT  §17.32

5.  When Favorable Tax Status Lost or Not Achieved  §17.32A

B.  Gift Tax Considerations for QPRT

1.  Transfer of Residence as “Completed Gift”  §17.33

2.  No Qualification for Gift Tax Annual Exclusion  §17.34

C.  Estate Tax Treatment of QPRT

1.  Treatment if Grantor Survives  §17.35

a.  Gift of Further Term Interest  §17.36

b.  Power to Extend QPRT Term  §17.37

2.  Treatment if Grantor Fails to Survive  §17.38

3.  Transfer Tax Apportionment  §17.39

D.  Income Tax Issues Related to QPRT  §17.40

1.  Need for Grantor Trust Status  §17.41

2.  Loss of Preferential Tax Basis Treatment  §17.42

3.  Grantor Trust Status Strategies  §17.43

4.  Grantor Trust Status for GRAT  §17.44

E.  GST Tax Considerations  §17.45

F.  State Tax Considerations  §17.46

1.  Real Property Tax  §17.47

2.  Documentary Transfer Tax  §17.48

III.  STRUCTURING THE QPRT  §17.49

A.  Selecting QPRT Term  §17.50

1.  Pure Estate Tax Motive  §17.51

2.  Fear of Paying Rent  §17.52

3.  Creditor Concerns  §17.53

B.  Calculating Value of QPRT Gift  §17.54

C.  How Many QPRTs?  §17.55

D.  How Many Residences?  §17.56

E.  Naming Trust as Remainder Beneficiary  §17.57

F.  Example of “Reverse” QPRT  §17.58

G.  Retained Right to Rent Residence for Fair Market Value After QPRT Term  §17.58A

IV.  ALTERNATIVES TO QPRT  §17.59

A.  Outright Gift  §17.60

B.  Sale-Leaseback  §17.61

C.  Part-Gift, Part-Sale  §17.62

D.  Family Limited Partnership or Limited Liability Company  §17.63

E.  Grantor Retained Annuity Trust  §17.64

F.  Joint Purchase  §17.65

G.  “Zeroed-Out” QPRT  §17.66

H.  Intentionally Defective QPRT  §17.67

I.  Summary of Alternatives to QPRT  §17.68

V.  DRAFTING QPRT  §17.69

A.  Form: Table of Contents; Declaration of Transfer to Trustee  §17.70

B.  Form: Trust Name  §17.71

C.  Form: Trust Estate  §17.72

D.  Form: Limit on Additions to Trust Estate  §17.73

E.  Form: Irrevocability of Trust  §17.74

F.  Form: Trust Term  §17.75

G.  Form: Operation During Trust Term  §17.76

1.  Form: Limitations on Trust Property  §17.77

2.  Form: Separate Account for Cash Additions  §17.78

3.  Form: Exclusive Use of Residence  §17.79

4.  Form: Trust Income to Settlor  §17.80

5.  Form: Distribution of Excess Cash  §17.81

6.  Form: Limit on Trust Distributions  §17.82

7.  Form: Payment of Trust Expenses  §17.83

8.  Form: Sale of Residence  §17.84

9.  Form: Damage to or Destruction of Personal Residence  §17.85

10.  Form: Cessation of Use as Personal Residence  §17.86

11.  Form: Cessation of QPRT Status  §17.87

12.  Form: Prohibition on Transfer to Settlor  §17.88

H.  Form: Distributions on Termination  §17.89

1.  Form: Trust Operations Account  §17.90

2.  Form: Trust Income  §17.91

3.  Form: Remaining Trust Estate  §17.92

I.  Form: Conversion to Annuity Trust  §17.93

1.  Form: Payment of Annuity  §17.94

2.  Form: Beginning Date/Deferral of Payment  §17.95

3.  Form: Payment for Each Year of Trust  §17.96

4.  Form: Annuity Amount  §17.97

5.  Form: Short Taxable Year  §17.98

6.  Form: Value of Trust Estate  §17.99

7.  Form: Prohibition Against Additions  §17.100

8.  Form: No Distributions to Other Persons  §17.101

9.  Form: Commutation Prohibited  §17.102

10.  Form: Distribution at End of Trust Term  §17.103

J.  Form: Office of Trustee  §17.104

K.  Form: Trustee Powers  §17.105

L.  Form: Governing Law  §17.106

M.  Form: Statement of Intent; Execution  §17.107

N.  Form: Description of Transferred Property  §17.108

O.  Form: Distribution on Termination if Settlor Survives  §17.109

P.  Form: QPRT Client Memorandum  §17.110

Q.  Form: Sample Letter Transmitting Draft QPRT to Client  §17.111

R.  Form: QPRT Diagrams for Husband and Wife  §17.112

S.  Form: QPRT Maintenance Program  §17.113

T.  Form: Special Appointment of Agent  §17.114

U.  Form: Preliminary Change of Ownership Report  §17.115

V.  Form: Claim for Reassessment Exclusion for Transfer Between Parent and Child  §17.116

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18

Charitable Remainder Trusts

Lynda S. Moerschbaecher

I.  GOALS OF CHARITABLE REMAINDER TRUSTS  §18.1

II.  BASIC CHARACTERISTICS OF CHARITABLE REMAINDER TRUSTS  §18.2

A.  Deduction Must Be Allowable  §18.3

B.  Must Be Annuity Trust or Unitrust  §18.4

C.  Provisions to Restrict or Control Trustee Prohibited  §18.5

D.  Must Function Exclusively as Charitable Remainder Trust From Creation  §18.6

E.  Payment and Term Limitations for CRATs and CRUTs  §18.6A

F.  Spousal Waiver of Any Right to Trust Property on Donor’s Death  §18.6B

G.  Satisfaction of Waiver Requirements  §18.6C

III.  OVERVIEW: TYPES OF QUALIFIED CHARITABLE REMAINDER TRUSTS

A.  Charitable Remainder Annuity Trust  §18.7

B.  Charitable Remainder Unitrust

1.  Standard Type Unitrust  §18.8

2.  Income-Only Unitrust  §18.9

3.  Flip Unitrust  §18.9A

4.  Accelerated Charitable Trust  §18.9B

C.  Summary of Differences Between Annuity Trust and Unitrust  §18.10

IV.  PLANNING CONSIDERATIONS  §18.11

A.  Choice of Form of Trust

1.  Donor Considerations  §18.12

2.  Nature of Funding Asset

a.  Effect on Choice of Type of Charitable Remainder Trust  §18.13

b.  Specific Assets  §18.14

3.  Needs of Beneficiary  §18.15

B.  Beneficiaries and Their Payments

1.  To Whom Payments Will Be Made; Length of Payment Period  §18.16

2.  Valuation for Computing Payment Amount  §18.17

3.  Division of Trust Into Separate Trusts for Individual Recipients  §18.17A

C.  Who May Serve as Trustee  §18.18

D.  Selection of Remainder Beneficiary  §18.19

E.  Tax Treatment of Transaction Creating Charitable Remainder Trust

1.  Settlor’s Income Tax Deduction  §18.20

2.  Settlor’s Gift Tax Deduction  §18.21

3.  Estate Tax Treatment in Settlor’s Estate

a.  Trust Must Be Includable in Decedent’s Gross Estate for Deduction  §18.22

b.  Determination of Estate Tax Charitable Deduction  §18.23

F.  Computing Amount of Deduction  §18.24

1.  Annuity Trust Deduction  §18.25

2.  Unitrust Deduction  §18.26

a.  Maximizing the Deduction  §18.27

b.  Using Special Factor for Payout Frequency  §18.28

c.  Method of Calculation  §18.29

3.  Commercial Software  §18.30

G.  Income Taxation of Recipients

1.  Four-Tier System  §18.31

2.  Application to Income-Only Unitrusts  §18.32

H.  Taxation of Charitable Remainder Trusts and Trustees  §18.33

1.  Definition of Unrelated Business Taxable Income (UBTI)  §18.34

2.  Tax Treatment of Unrelated Business Taxable Income (UBTI)  §18.35

3.  Excise Taxes on Prohibited Transactions  §18.36

4.  Tax Treatment on Termination of Trust  §18.36A

5.  Abusive Transactions  §18.36B

V.  DRAFTING CHARITABLE REMAINDER TRUSTS

A.  Drafting Sources  §18.37

1.  Basic Approach of Regulations and Rulings  §18.38

2.  IRS Sample Forms  §18.39

B.  Need for Initial and Continued Qualification  §18.40

C.  Form: Trust Is Irrevocable  §18.41

D.  Savings Clause

1.  Effect on Qualification of Trust  §18.42

2.  Form: Savings Clause  §18.43

E.  Overview: Mandatory Clauses for Instrument  §18.44

F.  Specific Mandatory Clauses

1.  Payment to Recipient: Annuity Trusts and Unitrusts  §18.45

a.  Annuity Trust Payments

(1)  Fixed Annuity Payments  §18.46

(2)  Valuation of Trust Assets  §18.47

(3)  Form: Payment of Sum Certain (One Life)  §18.48

(4)  Annuity Trust Payment to Joint and Survivor Recipients

(a)  Form: Payment of Annuity Amount  §18.49

(b)  Form: Payment During Joint Lifetimes  §18.50

(c)  Form: Payment After First Death  §18.51

(5)  Form: Time of Payment; Payment From Income, Then Principal  §18.52

b.  Unitrust Payments

(1)  Payment of Fixed Percentage  §18.53

(2)  Unitrust Payment to Joint Recipients  §18.54

(3)  Form: Payment of Fixed Percentage (One Life)  §18.55

(4)  Form: Joint and Survivor Recipients  §18.56

(5)  Form: Time of Payment; Payment From Income, Then Principal  §18.57

c.  Income-Only Unitrust

(1)  Income Requirements  §18.58

(2)  Form: Income-Only Unitrust  §18.59

2.  Valuation of Unitrust if Other Than First Day of Trust’s Taxable Year

a.  Valuation Requirements  §18.60

b.  Form: Unitrust Mandatory Clause (Valuation Date Does Not Occur on First Day of Each Taxable Year)  §18.61

3.  Proration of Annuity or Unitrust Amount

a.  Proration Requirements  §18.62

b.  Form: Proration of Annuity or Unitrust Amount  §18.63

4.  Distribution to Charitable Remainder Beneficiaries

a.  Distribution Requirements

(1)  On Termination of Noncharitable Interest  §18.64

(2)  Alternative Charitable Organizations  §18.65

b.  Charitable Deduction Considerations  §18.66

c.  Form: Charitable Remainder Beneficiaries and Alternative Remainder Beneficiaries  §18.67

d.  Form: Power to Amend Charitable Remainder Beneficiary Designation  §18.68

e.  Form: Restricted Purpose  §18.69

5.  Adjustment for Incorrect Valuation of Trust Assets

a.  Adjustment Requirements  §18.70

b.  Form: Adjustment for Incorrect Valuation  §18.71

6.  Additions After Initial Contribution  §18.72

a.  Annuity Trust Additions

(1)  Additional Contributions Prohibited  §18.73

(2)  Form: Additional Contributions Prohibited  §18.74

(3)  Form: Assets From Testamentary Trust Are One Contribution; No Additional Contributions Permitted  §18.75

b.  Unitrust Additions

(1)  Additional Contribution Requirements  §18.76

(2)  Form: Formula for Determining Unitrust Amount If Additional Contributions Permitted  §18.77

(3)  Form: Additional Contributions at Death  §18.78

7.  Prohibited Transactions: Private Foundation Restrictions

a.  Private Foundation Rules  §18.79

b.  Relevance of State Law Prohibitions  §18.80

c.  Form: Annuity Trust or Unitrust Mandatory Clause (Private Foundation Prohibitions)  §18.81

d.  Self-Dealing  §18.81A

8.  No Investment Restrictions on Trustee

a.  Investment Requirements  §18.82

b.  Form: Investment of Trust Assets  §18.83

9.  No Payment of Gift, Estate, or Generation-Skipping Transfer Taxes From Trust

a.  Disqualification of Trust  §18.84

b.  Form: No Taxes Payable From Trust  §18.85

10.  Form: No Other Noncharitable Payments  §18.86

11.  Form: Taxable Year  §18.87

12.  Form: Governing Law  §18.88

13.  Charitable Remainder Trusts Created at Death

a.  Revocable Trusts

(1)  Revocable Trust Requirements  §18.89

(2)  Form: Charitable Remainder Trust Created in Revocable Trust  §18.90

b.  Testamentary Charitable Remainder Trusts

(1)  Testamentary Trust Requirements  §18.91

(2)  Form: Deferred Payments  §18.92

G.  Optional Clauses  §18.93

1.  Sprinkling Powers Among Members of a Class

a.  Allocation Requirements  §18.94

b.  Form: Allocation Among Class of Noncharitable Beneficiaries in Discretion of Trustee  §18.95

2.  Testamentary Power to Revoke Recipient’s Interest

a.  Revocation Requirements  §18.96

b.  Form: Annuity Trust or Unitrust (Testamentary Power to Revoke)  §18.97

3.  Partial Distributions in Kind to Charitable Organizations

a.  Partial Distribution Requirements  §18.98

b.  Form: Annuity Trust (Partial Distributions to Charitable Organization)  §18.99

c.  Form: Unitrust (Partial Distributions to Charitable Organization)  §18.99A

H.  No-Contest Clause Omitted  §18.100

VI.  REFORMATION OF CHARITABLE REMAINDER TRUSTS  §18.101

A.  Three Categories of Charitable Remainder Trusts  §18.102

B.  Deadlines for Reforming Trust

1.  Category One Trusts  §18.103

2.  Category Two Trusts  §18.104

C.  Reformation Requirements  §18.105

VII.  ALTERNATIVES TO CHARITABLE REMAINDER TRUST

A.  Pooled Income Fund  §18.106

1.  Comparison of Polled Income Fund With Charitable Remainder Trusts  §18.107

2.  Taxation of Pooled Income Fund  §18.107A

3.  Drafting Requirements for Qualification  §18.108

a.  Contribution of Remainder Interest to Charity  §18.109

b.  Creation of Life Income Interest  §18.110

c.  Commingling of Property  §18.111

d.  Prohibition Against Exempt Securities  §18.112

e.  Maintenance by Charitable Organization  §18.113

f.  Prohibition Against Donor or Beneficiary Serving as Trustee  §18.114

g.  Income of Beneficiaries Based on Rate of Return  §18.115

h.  Termination of Life Income Interest  §18.116

4.  Use of Sample Document  §18.117

B.  Charitable Gift Annuity

1.  Contractual Gift to Charity  §18.118

2.  Comparison of Gift Annuity With Charitable Remainder Trust  §18.119

3.  Income Tax Considerations  §18.120

4.  Estate and Gift Taxes  §18.121

C.  Qualified Terminable Interest Property Trust for Spouse With Charitable Remainder  §18.122

D.  Comparison of Charitable Remainder QTIP Trust With Charitable Remainder Trust  §18.122A

E.  Remainder Interest in Personal Residence or Farm With Retained Life Estate  §18.123

VIII.  COMPLETE CHARITABLE REMAINDER TRUST FORMS

A.  Form: Charitable Remainder Annuity Trust  §18.124

B.  Form: Charitable Remainder Unitrust  §18.125

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18A

Nongrantor Charitable Lead Annuity Trusts

Jeffrey A. Dennis-Strathmeyer

I.  INTRODUCTION TO CHARITABLE LEAD TRUSTS  §18A.1

II.  SCOPE OF CHAPTER: NONGRANTOR CLATS VERSUS ALTERNATIVES  §18A.2

III.  ASSESSING THE NONGRANTOR CLT

A.  Evolution of Charitable Lead Trusts  §18A.3

B.  Contemporary Tax Considerations  §18A.4

1.  Grantor’s Income Tax Deduction for Contribution  §18A.5

2.  Trust’s Income Tax Deduction  §18A.6

3.  Estate Tax Deduction  §18A.7

4.  Gift Tax Deduction  §18A.8

5.  Generation-Skipping Transfer Tax

a.  Normal Inclusion Ratio Calculation  §18A.9

b.  Special CLT Inclusion Ratio Rules  §18A.10

(1)  Example of Annuity Inclusion Rules  §18A.11

(2)  Implications of Annuity Inclusion Rules  §18A.12

IV.  WHEN TO USE NONGRANTOR TRUST

A.  Benefits of Nongrantor CLAT  §18A.13

B.  Example of Nongrantor CLAT  §18A.14

1.  Benefits of Leverage  §18A.15

2.  Benefits of a Low Present Value Remainder  §18A.16

C.  Implicit Assumptions of Favorable Scenarios  §18A.17

V.  SELECTION OF CLAT TRUSTEE  §18A.18

VI.  CLAT DRAFTING REQUIREMENTS

A.  Overview of CLAT Requirements  §18A.19

B.  Required and Highly Desirable Provisions

1.  Guaranteed Annuity Interest  §18A.20

a.  Validity of Shark-Fin CLAT  §18A.20A

b.  Distributions for Private Purposes  §18A.20B

2.  Form: Payment of Guaranteed Annuity  §18A.21

3.  Private Foundation Prohibitions  §18A.22

4.  Form: Annuity Trust or Unitrust Mandatory Clause (Private Foundation Prohibitions)  §18A.23

5.  Charitable Deduction Savings Clause  §18A.24

6.  Form: Charitable Deduction Savings Clause  §18A.25

VII.  AVOIDING GRANTOR TRUST STATUS  §18A.26

VIII.  NONQUALIFIED CHARITABLE LEAD TRUSTS  §18A.27

IX.  FORM: NONGRANTOR CHARITABLE LEAD ANNUITY TRUST  §18A.28

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19

Issues Related to Nature of Trust Assets

Diana Hastings Temple
Sandra J. Chan

I.  DRAFTING FOR TRUST ASSETS  §19.1

II.  REAL PROPERTY

A.  Creation and Validity of Trusts Containing Real Property  §19.2

B.  Powers Relating to Real Property Discussed Elsewhere  §19.3

C.  Power to Subdivide and Sell Real Property

1.  Trustees Have Specific Power to Subdivide, Develop, and Sell Land  §19.4

2.  Form: Power to Subdivide and Sell Property  §19.5

D.  Powers Related to Employment of Managers and Brokers

1.  Power to Employ Managers and Brokers  §19.6

2.  Form: Power to Employ Property Managers to Assist Trustee  §19.7

3.  Form: Power to Employ Real Estate Brokers  §19.8

4.  Form: Payment of Managers’ and Brokers’ Compensation  §19.9

5.  Form: Exonerating Trustee for Liability for Acts of Agents  §19.10

E.  Allocation of Items Between Income and Principal

1.  Gains and Losses From Sale of Property  §19.11

2.  Form: Allocation of Gains or Losses Differs From Statute  §19.12

3.  Option Money

a.  Allocation of Gains and Losses Is Similar to Sale of Real Property  §19.13

b.  Form: Allocation of Forfeited Option Money  §19.14

4.  Taxes and Assessments

a.  Allocation of Taxes and Assessments  §19.15

b.  Form: Allocation of Taxes and Assessments  §19.16

5.  Expenses of Rental Property

a.  Allocation of Expenses of Rental Property  §19.17

b.  Form: Creation of Depreciation Allowance to Allocate Extraordinary Repairs or Expenses to Income  §19.18

6.  Allocation of Depreciation, Depletion, or Obsolescence  §19.19

7.  Power to Address Environmental Cleanup Concerns

a.  Fiduciary Liability Limited to Trust Assets  §19.20

b.  Form: Power to Monitor Property and Comply With Environmental Laws  §19.21

c.  Form: Special Trustee to Accept Real Property  §19.22

d.  When Fiduciary May Have Personal Liability  §19.22A

III.  PERSONAL PROPERTY

A.  Powers Relating to Personal Property Discussed Elsewhere  §19.23

B.  Stocks in Publicly Traded Companies

1.  Powers to Deal With Stock   §19.24

2.  Allocations of Corporate Distributions Between Income and Principal  §19.25

3.  Form: Allocations to Income Consistent With Tax Treatment  §19.26

4.  Alternative Characterizations  §19.26A

C.  Bonds and Other Obligations for Payment of Money  §19.27

1.  Form: Power to Purchase Bonds at Premium  §19.28

2.  Form: Power to Purchase Bonds at Discount  §19.29

3.  Premiums and Discounts on Bonds and Other Obligations  §19.29A

D.  Puts, Calls, Margin Accounts, and Other Specialized Investments

1.  No Statutory Authority for Specialized Investments  §19.30

2.  Form: Power to Make Specialized Investments  §19.31

E.  Tangible Personal Property

1.  Difficulties of Holding Tangible Property in Trust  §19.32

2.  Form: Power to Abandon Property  §19.33

IV.  UNDERPRODUCTIVE PROPERTY

A.  Duty to Make Property Productive  §19.34

1.  When Settlors Intend Underproductive Property  §19.34A

2.  Form: Authorization to Acquire and Retain Underproductive Property  §19.35

3.  Form: Power to Permit Beneficiaries to Occupy Residential Real Estate  §19.36

B.  Allocations of Proceeds of Sale of Underproductive Property Between Income and Principal

1.  Definition of “Underproductive Property”  §19.37

2.  Statutory Adjustment Power  §19.37A

3.  Form: Allocation of Proceeds of Sale  §19.38

4.  Form: No Special Adjustments for Underproductive Property  §19.39

C.  Allocation of Expenses Pertaining to Underproductive Property

1.  Ordinary Expenses Allocated to Income  §19.40

2.  Form: Allocation of Ordinary Expenses to Principal  §19.41

3.  Form: Definition of “Ordinary Expenses”  §19.42

D.  Tax Considerations  §19.43

1.  Marital Deduction Trusts  §19.44

2.  Form: Full Beneficial Enjoyment Accorded to Spouse  §19.45

3.  Form: Spouse’s Power to Compel Conversion to Productive Property  §19.46

4.  Estate and Income Tax Implications to Settlor-Trustee or Beneficiary-Trustee

a.  Trust Taxable to Settlor-Trustee  §19.47

b.  Form: Powers Exercisable Only in Trustee’s Fiduciary Capacity  §19.48

5.  Trusts Containing Charitable Interests  §19.49

V.  ENCUMBERED PROPERTY

A.  Settlors Must Provide for Payments on Encumbrance  §19.50

B.  Allocations of Payments on Encumbrances

1.  Payments Divided Between Income and Principal  §19.51

2.  Form: Allocation of Payments  §19.52

C.  Tax Considerations in Transfer of Encumbered Property

1.  Income Tax Implications of Payment of Encumbrance

a.  When Settlors Are Personally Liable on Encumbrance  §19.53

b.  When Settlors Are Not Personally Liable on Encumbrance  §19.54

2.  Capital Gains Tax Implications of Transfer  §19.55

3.  Gift Tax Implications of Transfer  §19.56

4.  Estate Tax Implications of Transfer  §19.57

VI.  TRANSFERS WITH LEASEBACKS  §19.58

A.  Income Tax Treatment of Lease Payments

1.  Income to Nongrantor Trust  §19.59

2.  Deductibility of Lease Payments by Settlors  §19.60

3.  Treatment of Income for Grantor Trust  §19.61

B.  Sale of Property to Trust

1.  Advantages and Disadvantages of Sale to Trust  §19.62

2.  Installment Sale Treatment  §19.63

3.  Realization of Capital Gain  §19.64

4.  Nonrecognition of Capital Loss  §19.65

5.  Nonrealization of Capital Gains When Trust Is “Grantor Trust”  §19.66

VII.  MORTGAGES, DEEDS OF TRUST, AND OTHER SECURED INSTRUMENTS  §19.67

A.  Power to Subordinate

1.  Need for Power to Subordinate  §19.68

2.  Form: Grant of Power to Subordinate  §19.69

B.  Investments in Default

1.  Need for Power to Foreclose  §19.70

2.  Form: Authorization to Foreclose and Bid on Property  §19.71

3.  Allocation of Proceeds on Disposition of Property Acquired by Foreclosure  §19.72

4.  Form: Allocation of Sale Proceeds of Property Acquired by Foreclosure  §19.73

VIII.  BUSINESS INTERESTS

A.  Special Valuation Rules in Chapter 14  §19.74

1.  Transfers of Interests in Corporations and Partnerships  §19.75

a.  Qualified Payment Rights  §19.75A

b.  When IRC §2701 Rules Do Not Apply  §19.75B

2.  Buy-Sell and Other Restrictive Agreements  §19.76

a.  Three-Part Test for Buy-Sell Agreements  §19.76A

b.  Substantial Modification of Buy-Sell Agreement  §19.76B

3.  Family Partnership Income Tax Rules

a.  Family Partnership Test  §19.77

b.  When Donor May Be Treated as Substantial Owner of Interest  §19.78

4.  Partnership Interests in General  §19.79

B.  Power to Retain or Acquire Business Interests  §19.80

1.  Form: Authority to Invest in Partnerships  §19.81

2.  Form: Authority to Incorporate, Continue to Operate Business in Corporate or Unincorporated Form, and Form Corporations  §19.82

3.  Form: Authority to Consent to Corporate Transactions  §19.83

4.  Form: Authority to Retain Specified Business Interest  §19.84

C.  Directions on Management of Business Enterprise  §19.85

D.  Exoneration of Trustee From Liability for Management of Business Interest  §19.86

E.  Trustee’s Compensation in Connection With Management of Business  §19.87

1.  Form: Reasonable Compensation in Connection With Business Interest  §19.88

2.  Form: Compensation as Officer of Corporation Not to Interfere With Trustee’s Compensation  §19.89

F.  Expenses of Ongoing Business

1.  Reimbursement of Trustee  §19.90

2.  Form: Reimbursement of Trustee for Expenses Related to Business  §19.91

3.  Accounting Separately for Business  §19.92

a.  Form: Definition of “Business”  §19.93

b.  Form: Allocation of Net Cash Receipts  §19.94

c.  Form: Allocation of Proceeds of Liquidation  §19.95

G.  Stock in S Corporations  §19.96

1.  Grantor Trusts  §19.97

a.  Using Grantor Trust Status  §19.97A

b.  Marital Deduction Trusts  §19.98

2.  Qualified Subchapter S Trusts (QSSTs)

a.  QSST Requirements  §19.99

b.  Form: Qualification of Trust as QSST  §19.100

c.  Taxation of QSST Beneficiary on Disposition of S Corporation Stock  §19.101

d.  Form: Power to Make Distributions to Pay Capital Gains Tax  §19.102

3.  Electing Small Business Trusts  §19.102A

H.  Stock of “Controlled” Corporations

1.  When Settlors May Retain Right to Vote  §19.103

2.  Form: Power to Vote Stock of “Controlled” Corporation  §19.104

3.  Retained Voting Rights  §19.104A

I.  Stock Subject to Securities Acts Restrictions  §19.105

1.  Rule 10b–5  §19.106

2.  Section 16  §19.107

3.  Securities Act and Rule 144  §19.108

a.  Unrestricted Securities  §19.108A

b.  When Trust Is Affiliate  §19.108B

IX.  ASSETS SUBJECT TO DEPLETION (WASTING ASSETS), INTELLECTUAL PROPERTY, AND RETIREMENT PLANS

A.  Use of Wasting Assets to Fund Trust  §19.109

B.  Allocation of Expenses and Income

1.  Rules for Allocation of Receipts  §19.110

2.  Form: Establishment of Reserve for Depreciation, Depletion, and Amortization  §19.111

C.  Natural Resources

1.  Trust’s Lease or Ownership of Property Containing Natural Resources  §19.112

2.  Form: Trustee to Allocate to Income Specified Percentage of Receipts From Property Containing Natural Resources  §19.113

D.  Intellectual Property  §19.114

1.  Assignment and Licensing of Copyrights  §19.115

2.  Copyright Term and Renewal and Termination Rights  §19.116

E.  Retirement Plans  §19.117

X.  MULTISTATE TRUST FORMS

A.  Validation Clause

1.  Purpose of Validation Clause  §19.118

2.  Form: Trustee May Apply Principle of Validation  §19.119

B.  Change in Place of Administration  §19.120

1.  Form: Trust Governed by Law of Place of Administration  §19.121

2.  Form: Savings Clause for Unforeseen Tax Consequences  §19.122

C.  Choice-of-Forum Clause

1.  Validity of Choice-of-Forum Clause  §19.123

2.  Form: Choice of Forum  §19.124

D.  Enforceability of Choice-of-Law Clause  §19.125

1.  Form: Choice of Law (All Real and Personal Property in One State)  §19.126

2.  Form: Choice of Law (Real Property in Several States and Personal Property)  §19.127

E.  Appointing Trustee for Real Property

1.  Who Can Act as Trustee  §19.128

2.  Form: Appointing Trustee for Real Property  §19.129

F.  Exercising Powers of Appointment  §19.130

1.  Form: Exercise of Power of Appointment  §19.131

2.  Form: Choice of Law Governing Exercise of Power of Appointment  §19.132

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20

Complete Irrevocable Trust Forms

CEB Staff

I.  LONG-TERM FAMILY POT TRUST; INDEPENDENT TRUSTEE

A.  Description of Long-Term Family Pot Trust  §20.1

B.  Form: Long-Term Family Pot Trust  §20.2

II.  SEPARATE TRUSTS FOR CHILDREN OR GRANDCHILDREN (SKIP PERSONS); SENSITIVE TRUSTEE PERMITTED

A.  Description of Separate Trusts for Children or Grandchildren  §20.3

B.  Form: Separate Trusts for Children or Grandchildren  §20.4

III.  LIFE INSURANCE TRUST FOR CHILDREN

A.  Description of Irrevocable Life Insurance Trust for Children  §20.5

B.  Form: Irrevocable Life Insurance Trust for Children  §20.6

IV.  LIFE INSURANCE TRUST FOR SPOUSE AND ISSUE

A.  Description of Irrevocable Life Insurance Trust for Spouse and Issue  §20.7

B.  Form: Irrevocable Life Insurance Trust for Spouse and Issue  §20.8

V.  INTER VIVOS QTIP TRUST

A.  Description of Inter Vivos QTIP Trust  §20.9

B.  Form: Inter Vivos QTIP Trust  §20.10

VI.  INTER VIVOS QUALIFIED DOMESTIC TRUST (QDOT)

A.  Description of Inter Vivos QDOT  §20.11

B.  Form: Inter Vivos QDOT  §20.12

VII.  IRS CHARITABLE REMAINDER ANNUITY TRUSTS

A.  Description of IRS Charitable Remainder Annuity Trusts  §20.13

B.  Form: Annuity Trust Payments During One Life  §20.14

C.  Form: Annuity Trust Payments for a Term of Years  §20.15

D.  Form: Annuity Trust Payments During Two Lives, Consecutive Interests  §20.16

E.  Form: Annuity Trust Payments During Two Lives, Concurrent and Consecutive Interests  §20.17

VIII.  IRS CHARITABLE REMAINDER UNITRUSTS

A.  Description of IRS Charitable Remainder Unitrusts  §20.18

B.  Form: Unitrust Payments During One Life  §20.19

C.  Form: Unitrust Payments for a Term of Years  §20.20

D.  Form: Unitrust Payments During Two Lives, Consecutive Interests  §20.21

E.  Form: Unitrust Payments During Two Lives, Concurrent and Consecutive Interests  §20.22

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