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

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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.   Evaluating Clawback Arguments   §2.5A

                     3.   Triage Approach to Gifts in 2012   §2.5B

                           a.   Limited Taxable Gifts   §2.5C

                           b.   Zero-Tax Estate Plan   §2.5D

                           c.   Taxable Estate Plan   §2.5E

                           d.   Marital Deduction Problem   §2.5F

                     4.   Estate Tax   §2.6

                     5.   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 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, Lack of Marketability, Lack of Control   §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

                           e.   Swing Votes   §2.24

                     2.   Special Valuation Rules

                           a.   Overview of Chapter 14   §2.25

                           b.   Interest in Corporation or Partnership   §2.26

                           c.   Interests in Trust

                                  (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

                     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

                           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

                           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

                     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 Three 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 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 Family-Owned Business interest (QFOBI) Deduction   §2.72C

                           d.   Qualified Conservation Easement Exclusion   §2.72D

                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 for State Death Taxes   §2.84

                     2.   Credit for Gift Taxes Paid   §2.85

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

               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.   Selecting Tax Year   §3.6

                     3.   Income Tax Rates Applicable to Trusts   §3.7

                     4.   Disallowance of Certain Capital Losses   §3.8

                     5.   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

        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 Trust   §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 Trusts   §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

               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 Postdeath 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

                     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.   Making Maximum 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.   Determining Responsibility for Allocating GST Exemption and Electing Automatic 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); Evaluating Permanent Trust Planning Opportunities in 2012   §5.1A

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

               B.   Purposes Served by Permanent Trusts

                     1.   General Purposes; 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

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

                           c.   Planning for Generation-Skipping Transfer Tax

                                  (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

                     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 One 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

        XI.    SELECTED IRS VALUATION TABLES   §6.41

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7

Structuring the Trust Instrument

Jeffrey A. Dennis-Strathmeyer

          I.    RECOMMENDED TRUST DESIGN   §7.1

         II.    DRAFTING CONSIDERATIONS

               A.   The Audience   §7.2

               B.   Required Formalities   §7.3

               C.   Clauses Mandated by Tax Laws   §7.4

               D.   Narrow Focus—Comparison With Revocable Trusts   §7.5

               E.   Tax-Sensitive Powers   §7.6

               F.   California Trust Law   §7.7

        III.    PROPOSED ORGANIZATION   §7.80

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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.   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

          I.    DISTRIBUTION CLAUSES

               A.   Outright Distribution of Trust Assets on Termination of Trust

                     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 When Trust Is Small

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

                           b.   Form: Distribution When Trust Is Small   §9.7

               B.   Sprinkling Trust

                     1.   Description of Sprinkling Trust   §9.8

                     2.   Form: Sprinkling Trust   §9.9

                     3.   Sprinkling Power Exercised by Special Trustee

                           a.   Purpose of 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 Trust Income   §9.14

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

                     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 Trust Income   §9.19

               D.   Single Trust With Discretion to Distribute Principal

                     1.   Description of Discretionary Trust   §9.20

                     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 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

                           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 Trust   §9.29

                           b.   Income Tax on Trust Income   §9.30

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

               F.   Accumulation Trust

                     1.   Description of Accumulation Trust   §9.31

                     2.   Forms for Accumulation Trust

                           a.   Form: Accumulation of Income   §9.32

                           b.   Form: Distribution if No Issue   §9.33

                     3.   Tax Considerations for Accumulation Trust

                           a.   Estate and Gift Tax on Trust   §9.34

                           b.   Income Tax on Trust Income   §9.35

                     4.   Escape From Trust Rate Compaction

                           a.   Desirability of Escape Hatch   §9.36

                           b.   Form: Special Power of Invasion   §9.37

                     5.   Less Significant Exceptions to IRC §674   §9.38

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

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

                           c.   Testamentary Power of Appointment   §9.38C

                           d.   Power to Allocate Among Charitable Beneficiaries   §9.38D

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

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

               G.   Hybrid Trusts

                     1.   Income Tax Considerations for Hybrid Trust   §9.39

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

               H.   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

                 I.   “Five or Five” 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

         II.    OTHER CLAUSES FOR PERMANENT TRUSTS

               A.   Miscellaneous Trust 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

                           b.   Income Tax on Trust Income   §9.53

               C.   Additional Considerations

                     1.   Powers of Appointment

                           a.   Purpose of Powers of Appointment   §9.54

                           b.   Form: Power of Appointment Created   §9.55

                           c.   Tax Considerations in Creating and Exercising Power of Appointment

                                  (1)  Estate and Gift Tax on Trust   §9.56

                                  (2)  Income Tax on Trust Income   §9.57

                     2.   Perpetuities Clause

                           a.   Rule Against Perpetuities   §9.58

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

                     3.   Generation-Skipping Transfer Tax   §9.60

                     4.   Retention of Reversionary Interest   §9.61

                     5.   Marital Deduction   §9.62

               D.   Guidelines for Exercising Discretion to Distribute   §9.63

               E.   Protecting the Spendthrift

                     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 Disclaimers Effective   §9.68

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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   §10.4

                           b.   Income Tax Effects   §10.5

                     3.   Beneficiary as Trustee   §10.6

                     4.   Independent Trustee   §10.7

                     5.   Cotrustees and Special Trustees   §10.8

                     6.   Drafting Attorney as Trustee   §10.9

               B.   Limitations on Trustee’s Exercise of Discretion

                     1.   Independent Trustee   §10.10

                     2.   “Tax-Sensitive” Trustee   §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; Effect of Powers of Special Trustee 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 Resigning   §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: Trustee Removal Due to Trustee Incapacity or Illness   §10.31

                     3.   Form: Certificate of Independent Review   §10.31A

               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

               F.   Commingling Undivided Interests

                     1.   Nature of 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

               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 Is 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

               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

                                  (1)  Authority to Manage Securities   §10.71

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

                                  (3)  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   §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

                           a.   Explicit Grant May Be Required   §10.79

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

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

                     3.   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

                     4.   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

                     5.   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 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

                           a.   Authority   §10.91

                           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.   Throwback Rules   §10.95

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

                     4.   Form: Authority to Pay Estate Taxes   §10.97

                     5.   Generation-Skipping Transfer Taxes   §10.98

               H.   Tax Consequences

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

                     2.   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.   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   §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

         V.    POWERS RELATING TO PRINCIPAL AND INCOME

               A.   Purpose of Clauses   §10.110

               B.   Tax Considerations   §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

        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 Clause   §10.121

                     2.   Form: Clause Authorizing Additions to Trust   §10.122

               C.   Spendthrift Clause

                     1.   Purpose of Clause   §10.123

                     2.   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

                           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

               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

               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

               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

        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

                     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

                     1.   Legal and Tax Aspects   §12.12

                     2.   Advantages and Disadvantages   §12.13

               B.   Direct Payments for Health and Education (IRC §2503(e))   §12.14

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

                     1.   Legal and Tax Aspects   §12.15

                     2.   Advantages and Disadvantages   §12.16

               D.   Joint Tenancy

                     1.   Legal and Tax Aspects   §12.17

                     2.   Advantages and Disadvantages   §12.18

               E.   Guardianships

                     1.   Legal and Tax Aspects   §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.   Powers of Custodian   §12.24

                     3.   Liability of Custodian   §12.25

                     4.   Substitute Custodians and Successor Custodians

                           a.   Designation of Substitute Custodian   §12.26

                           b.   Designation of Successor Custodian   §12.27

                     5.   Form: Creation of Custodianship by Transferor   §12.28

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

                     7.   Termination of Custodianship   §12.30

                           a.   Gift Tax   §12.31

                           b.   Estate Tax

                                  (1)  When Donor Is Custodian   §12.32

                                  (2)  Under Reciprocal Trust Doctrine   §12.33

                           c.   Generation-Skipping Transfer Tax   §12.34

                           d.   Income Tax   §12.35

                     8.   Advantages of Custodianship   §12.36

                     9.   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 Minor’s 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

                           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.   Generation-Skipping Transfer Tax   §12.55

                     4.   Income Tax   §12.56

                     5.   Trusts Continuing After Age 21   §12.57

               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.   Form: 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   §12.63

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

               A.   Introduction

                     1.   “Income Interest Only” Qualification   §12.64

                     2.   Valuing the Income Interest   §12.65

                     3.   Tax Benefits Versus Nontax Objectives   §12.66

               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 and Tax Aspects   §12.69

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

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

               D.   Tax Aspects of §2503(b) Trusts

                     1.   Gift Tax   §12.72

                     2.   Estate Tax   §12.73

                     3.   Income Tax   §12.74

                     4.   Generation-Skipping Transfer Tax   §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.   Introduction and Description   §12.80

               B.   Requirements for Annual Exclusion

                     1.   Minor Beneficiaries   §12.81

                     2.   Right of Withdrawal   §12.82

                           a.   Notification 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.   Amount of Withdrawal Right   §12.87

                                  (1)  Spouse’s Crummey Power   §12.88

                                  (2)  Analyzing Excess Lapse Issues   §12.89

                                  (3)  Avoiding Excess Lapses   §12.90

                                  (4)  Multiple Trust Problems   §12.91

                           d.   Liquid Assets to Satisfy Withdrawal Power   §12.92

                           e.   “Naked” Crummey Powers

                                  (1)  IRS Disapproval of Naked Powers   §12.93

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

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

               C.   Withdrawal Provisions

                     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

                     1.   Income Tax

                           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

                           a.   Beneficiary Estate Tax   §12.105

                           b.   Settlor Estate Tax   §12.106

                     4.   Generation-Skipping Transfer (GST) Tax

                           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.   Transfer Tax Aspects of Incentive Trusts

                     1.   Gift Tax   §12.114

                     2.   Estate Tax   §12.115

                     3.   Generation-Skipping Transfer (GST) Tax   §12.116

               E.   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: Title of Third Party SNT   §13.39

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

                     3.   Form: 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 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

        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 DYNASTY 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 Settlor’s Death   §13A.12

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

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

        IV.    FORM OF DYNASTY TRUST AND RELATED INSTRUMENTS

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

               B.   Form: 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: 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: Operation During Trust Term   §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: Distributions on Termination   §14.25

               K.   Form: Trustees   §14.26

               L.   Form: Trustee Powers   §14.27

               M.   Form: Applicable Law   §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

                     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

               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 Grantor’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: 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: Distributions on Termination   §15.32

                 I.   Form: Trustees   §15.33

                J.   Form: Trustee Powers   §15.34

               K.   Form: Applicable Law   §15.35

               L.   Form: Statement of Intent   §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

               A.   Calculation Under Current Law   §16.13A

               B.   Calculation Under Former Law   §16.13B

        IV.    WHEN TO USE GRUT   §16.14

         V.    DRAFTING CONSIDERATIONS   §16.15

        VI.    GRANTOR RETAINED UNITRUST PROVISIONS

               A.   Form: 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 on Expiration of Trust Term   §16.29

               G.   Form: Distributions on Termination   §16.30

               H.   Form: Trustees   §16.31

                 I.   Form: Trustee Powers   §16.32

                J.   Form: Applicable Law   §16.33

               K.   Form: Statement of Intent   §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

                    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

           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 Expenses   §17.23

                           a.   Counselling   §17.23A

                           b.   Appraisal   §17.23B

                           c.   Loan   §17.23C

                           d.   QPRT Documents   §17.23D

                           e.   Deeds   §17.23E

                            f.   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 Expenses   §17.24

                           a.   Sale of 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

       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

                2.   Required Governing Instrument Provisions   §17.30

                3.   Summary of Governing Instrument Regulations   §17.31

                4.   Required Conversion to GRAT   §17.32

           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 Motivation   §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

      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   §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: 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 on Expiration 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   §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

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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 Time of Its 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

        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 Unitrusts   §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   §18.25

                     2.   Unitrust   §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.   Governing Law   §18.31

                     2.   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

         V.    DRAFTING CHARITABLE REMAINDER TRUSTS

               A.   Drafting Sources   §18.37

                     1.   Basic Approach of Regulations and Rulings   §18.38

                     2.   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

                                  (1)  Payments   §18.46

                                  (2)  Valuation   §18.47

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

                                  (4)  Joint and Survivor Recipients

                                        (a)   Form: Introduction   §18.49

                                        (b)   Form: Payment During Joint Lifetimes   §18.50

                                         (c)   Form: Payment After First Death   §18.51

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

                           b.   Unitrust

                                  (1)  Payment of Fixed Percentage   §18.53

                                  (2)  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; From Income, Then Principal   §18.57

                           c.   Income-Only Unitrust

                                  (1)  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.   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.   Requirements   §18.62

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

                     4.   Distribution to Charitable Remainder Beneficiaries

                           a.   Requirements

                                  (1)  On Termination of Noncharitable Interest   §18.64

                                  (2)  Alternative Charitable Organizations   §18.65

                           b.   Tax 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.   Requirements   §18.70

                           b.   Form: Adjustment for Incorrect Valuation   §18.71

                     6.   Additions After Initial Contribution   §18.72

                           a.   Annuity Trust

                                  (1)  Requirements   §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

                                  (1)  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.   Rules   §18.79

                           b.   Exceptions   §18.80

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

                     8.   No Investment Restrictions on Trustee

                           a.   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)  Requirements   §18.89

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

                           b.   Testamentary Charitable Remainder Trusts

                                  (1)  Requirements   §18.91

                                  (2)  Form: Deferred Payments   §18.92

               G.   Optional Clauses   §18.93

                     1.   Sprinkling Powers Among Members of a Class

                           a.   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.   Requirements   §18.96

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

                     3.   Partial Distributions in Kind to Charitable Organizations

                           a.   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   §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.   Requirements of Reformation Rules   §18.105

       VII.    ALTERNATIVES TO CHARITABLE REMAINDER TRUST

               A.   Pooled Income Fund   §18.106

                     1.   Comparison With Charitable Remainder Trusts   §18.107

                     2.   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

                     3.   Use of Sample Document   §18.117

               B.   Charitable Gift Annuity

                     1.   Contractual Gift to Charity   §18.118

                     2.   Comparison 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.   Remainder Interest in Personal Residence or Farm With Retained Estate   §18.123

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18A

Nongrantor Charitable Lead Annuity Trusts

Jeffrey A. Dennis-Strathmeyer

          I.    INTRODUCTION   §18A.1

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

        III.    ASSESSING THE NONGRANTOR CLT

               A.   Overview of Historical Evolution   §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 CLAT

               A.   In General   §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 TRUSTEE   §18A.18

        VI.    CLAT DRAFTING REQUIREMENTS

               A.   Overview   §18A.19

               B.   Required and Highly Desirable Provisions

                     1.   Guaranteed Annuity Interest   §18A.20

                     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

                     7.   Other Provisions   §18A.26

       VII.    AVOIDING GRANTOR TRUST STATUS   §18A.27

      VIII.    NONQUALIFIED CHARITABLE LEAD TRUSTS   §18A.28

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19

Issues Related to Nature of Trust Assets

Diana Hastings Temple
Sandra J. Chan

          I.    INTRODUCTION   §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

        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

               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

               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 in Trust   §19.32

                     2.   Form: Power to Abandon Property   §19.33

        IV.    UNDERPRODUCTIVE PROPERTY

               A.   Duty to Make Property Productive

                     1.   Trustee Has Duty to Make Property Productive, But Investment in Underproductive Property May Be Prudent   §19.34

                     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 of 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.   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.   Chapter 14   §19.74

                     1.   Transfers of Interests in Corporations and Partnerships   §19.75

                     2.   Buy-Sell and Other Restrictive Agreements   §19.76

                     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.   Allocation of Net Receipts and Proceeds of Liquidation   §19.92

                           a.   Form: Definition of “Income”   §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

                     2.   Marital Deduction Trusts   §19.98

                     3.   Qualified Subchapter S Trusts (QSSTs)

                           a.   Requirements   §19.99

                           b.   Form: Qualification of Trust as QSST   §19.100

                     4.   Liquidating Distributions

                           a.   Disparate Provisions in Internal Revenue Code and Regulations   §19.101

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

                     5.   Electing Small Business Trusts (ESBTs)   §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

                 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

        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 Given 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

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20

Multistate Trusts

Joseph L. Wyatt, Jr.
Patrick R. McCabe

          I.    MULTISTATE LIVING TRUSTS

               A.   Scope of Chapter   §20.1

               B.   Conflict of Laws

                     1.   Nature of Problem   §20.2

                     2.   Continuing Change in Conflict-of-Laws Theories   §20.3

                     3.   Interest-Analysis Theory   §20.4

                     4.   Form: Trustee May Apply Principle of Validation   §20.5

               C.   Hypothetical Case: The Jones Trust   §20.6

               D.   Use of Out-of-State Counsel   §20.7

         II.    GENERAL RULES ON VALIDITY, CONSTRUCTION, INTERPRETATION, AND ADMINISTRATION OF LIVING TRUSTS

               A.   Analyzing Conflicts of Laws in Terms of “Characterization”   §20.8

               B.   Validity of Trust   §20.9

                     1.   Real Property   §20.10

                     2.   Equitable Conversion of Real Property   §20.11

                     3.   Personal Property   §20.12

                     4.   Real and Personal Property   §20.13

                     5.   Determining Character of Property as Real or Personal   §20.14

               C.   Interpretation and Construction of Trust   §20.15

                     1.   Real Property   §20.16

                     2.   Personal Property   §20.17

                     3.   Real and Personal Property   §20.18

               D.   Administration of Trust   §20.19

                     1.   Real Property   §20.20

                     2.   Personal Property   §20.21

                     3.   Real and Personal Property   §20.22

                     4.   Change in Place of Administration   §20.23

                     5.   Form: Trust Governed by Law of Place of Administration   §20.24

                     6.   Form: Savings Clause for Unforeseen Tax Consequences   §20.25

               E.   Jurisdiction to Resolve Various Issues   §20.26

                     1.   Jurisdiction to Determine Conflicting Rights and Claims to Trust Property   §20.27

                     2.   When Courts of State Other Than Situs State May Act   §20.28

                     3.   When Federal District Court May Refuse Jurisdiction Despite Existence of Diversity   §20.29

                     4.   Validity of Choice-of-Forum Clauses   §20.30

                     5.   Form: Choice of Forum   §20.31

               F.   Investments   §20.32

               G.   Trustee’s Liabilities; Exculpatory Clauses   §20.33

               H.   Trustee’s Compensation   §20.34

                 I.   Planning for Validity, Construction, Interpretation, and Administration of Trust   §20.35

                     1.   Revocability   §20.36

                     2.   Defining Technical Terms   §20.37

                     3.   Enforceability and Desirability of Choice-of-Law Clause   §20.38

                     4.   Form: Choice of Law (All Real and Personal Property in One State)   §20.39

                     5.   Form: Choice of Law (Real Property in Several States and Personal Property)   §20.40

                     6.   Application to Hypothetical Case   §20.41

        III.    SPECIAL PROBLEMS OF MULTISTATE TRUSTS

               A.   Who Can Act as Trustee   §20.42

                     1.   Application to Hypothetical Case   §20.43

                     2.   Form: Appointing Trustee for Real Property   §20.44

               B.   Validity of Pourover Bequests to Living Trusts

                     1.   When Permitted   §20.45

                     2.   Application to Hypothetical Case   §20.46

               C.   Transfer of Community or Separate Property to Trust in Another Jurisdiction   §20.47

                     1.   Nature of Problems

                           a.   Separate or Community Character of Property Transferred   §20.48

                           b.   Character of Property for Death Tax Purposes   §20.49

                           c.   Marital Rights   §20.50

                           d.   Income Tax Effects of Transfer of Community Property   §20.51

                           e.   Form: Choice of Law for Community Property   §20.52

                            f.   Effect of Agreement and Trust Instrument Between Spouses   §20.53

                     2.   Steps to Take on Transfer   §20.54

                     3.   Effect of Change of Settlors’ Residence   §20.55

                     4.   Application to Hypothetical Case   §20.56

               D.   Trusts in Violation of Family Rights

                     1.   Surviving Spouse’s Rights   §20.57

                     2.   Children’s Rights   §20.58

                     3.   Application to Hypothetical Case   §20.59

               E.   Assignment, Attachment, and Disclaimer of Beneficiary’s Interest; Creditors’ Rights   §20.60

               F.   Powers of Appointment

                     1.   Applicable Law   §20.61

                     2.   Drafting Considerations   §20.62

                           a.   Form: Exercise of Power of Appointment   §20.63

                           b.   Form: Choice of Law Governing Exercise of Power of Appointment   §20.64

                     3.   Application to Hypothetical Case   §20.65

               G.   Charitable Trusts

                     1.   Nature of Problems   §20.66

                           a.   Effect of State Law   §20.67

                           b.   Rule Against Perpetuities   §20.68

                           c.   Marital Rights   §20.69

                           d.   Administrative Problems   §20.70

                     2.   Application to Hypothetical Case   §20.71

        IV.    TAXATION OF MULTISTATE TRUSTS §20.72

               A.   State Death Taxes   §20.73

                     1.   Real Property and Tangible Personal Property   §20.74

                     2.   Intangible Personal Property   §20.75

                     3.   Exemption and Arbitration Statutes   §20.76

                           a.   Characterization of Property   §20.77

                           b.   Multiple Domiciles   §20.78

                     4.   Computation of State Death Tax Credit or Deduction for Federal Estate Tax   §20.79

                     5.   Pick-Up Tax   §20.80

                     6.   Character of Decedent’s Interest   §20.81

               B.   Application to Hypothetical Case; Determining Settlors’ Domicile

                     1.   Avoiding Multiple Domiciles   §20.82

                     2.   Planning to Minimize State Death Taxation   §20.83

               C.   Payment of State Death Taxes and Apportionment

                     1.   Nature of Problem   §20.84

                     2.   Planning for Payment of Death Taxes

                           a.   Problems and Solutions   §20.85

                           b.   Application to Hypothetical Case   §20.86

               D.   State Death Taxation of Beneficiary’s Interest   §20.87

               E.   State Gift Taxation

                     1.   Taxation of Real Property and Tangibles   §20.88

                     2.   Taxation of Intangibles   §20.89

                     3.   Planning for Gift Taxes   §20.90

                     4.   Application to Hypothetical Case   §20.91

               F.   Income Taxes

                     1.   Taxation of Trusts and Beneficiaries   §20.92

                           a.   Income From Sources Within the State   §20.92A

                           b.   Income From Sources Outside the State   §20.92B

                           c.   California Taxation of Trust Income    §20.92C

                     2.   Tax Credit Statutes   §20.93

                     3.   Application to Hypothetical Case   §20.94

                     4.   Planning for Income Taxes   §20.95

               G.   Property Taxes

                     1.   Basic Principles   §20.96

                     2.   Taxation of Intangibles by Settlors’ Domicile   §20.97

                     3.   Taxation of Intangibles by Beneficiary’s Domicile   §20.98

                     4.   Application to Hypothetical Case   §20.99

                     5.   Planning for Property Taxes   §20.100

         V.    CHECKLIST: MULTISTATE TRUSTS   §20.101

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