5. Understanding Trusts

Question 1

Living Trust

Answer 1

A Trust created during the lifetime of the Trustor.

Question 2

Testamentary Trust

Answer 2

Established at one’s death, generally by the demand of a Will.

Question 3

Revocable Trust

Answer 3

Or Grantor Trust. Grantor retains rights and powers over the Trust assets and income. Grantor has the tax liability and can be held liable for legal actions flowing to or from the Trust. (Uses SS# and income reported on Grantor’s 1040.)

Question 4

Irrevocable Trust

Answer 4

Or Non-Grantor Trust. Trustor must give up all rights to the assets. Trust receives gross income, deducts expenses, then pays net income to the beneficiary via K-1 distribution. Trust has its own Tax ID and files its own 1041.

Question 5

The five specific elements of a valid Trust

Answer 5

Grantor, Trustee, Beneficiary, Corpus, and Intent

Question 6

The four stages in the life of a RLT

Answer 6

-Formation (signed, witnessed, notarized)
-Management prior to disability (all transactions completed in the Trust’s name)
-Upon disability (successor trustee takes over, and the agent acting under DGPOA should transfer to the Trust any assets the client owns that were not already transferred)
-After the client dies (might include outright distribution of property to intended beneficiaries or the continuation of one or several Trusts)

Question 7

HEMS

Answer 7

Health, Education, Maintenance, Support

Question 8

A Trust

Answer 8

Left to the surviving spouse with no restrictions or qualifications or it won’t qualify for the unlimited marital deduction. They have a General Power of Appointment. Unless they are incompetent or incapacitated, they will likely be named trustee as well.

Question 9

AA Trust

Answer 9

Single A Trust written for a single/unmarried individual. Two unmarried people who want to reciprocally provide for one another at death of the first may have an AA Trust structure, which is actually two Single A Trusts.

Question 10

B Trust

Answer 10

Bypass Trust or Credit Shelter Trust. Intended to take full advantage of federal (and state) estate tax exemptions.

First spouse to die leaves the exemption amount in an Irrevocable Trust for the children or grandchildren, carefully naming the surviving spouse as the life beneficiary or the income (HEMS and annual right to 5% or $5K of the principal, whichever is greater).

Question 11

C Trust

Answer 11

QTIP. Surviving spouse has a life interest in all income from all QTIP property while principal is guaranteed to pass to certain designated heirs (and subject to estate taxes) when spouse passes.

Executor designates QTIP assets by listing them on Form 706.

Question 12

Item-by-Item vs Aggregate Basis

Answer 12

In both community property and separate property states, the item-by-item theory is premised on the concept that each spouse owns an undivided one-half interest in every item or asset of the marital estate.

Under the aggregate theory, each spouse is entitled to a half interest of all the estate’s assets, but not necessarily on an asset by asset basis.

In virtually every case, the aggregate theory makes economic and practical sense.

Question 13

Generation-Skipping Transfer Tax

Answer 13

The GST tax is figured on the amount of a gift or bequest to a skip person (two or more generations below donor). Each individual has a GST exemption equal to the basic exclusion amount. No portability.

-direct skip
-taxable termination (at the end of a Trust’s interest and property is transferred to a skip person)
-taxable distribution (from a Trust but not a termination)

Question 14

The application of the Federal gift tax and the annual exclusion amount

Answer 14

You can gift up to the annual exclusion amount per person, as well as split gifts with a spouse to give double.

If a split gift is made or you exceed the annual amount and use some of your unified credit, you must file Form 709.

Question 15

The unified credit

Answer 15

Applies to both gift and estate tax and it equals the tax on the applicable lifetime exclusion amount.

Unified credit available to a person is equal to your basic exclusion amount plus any DSUE.

Question 16

Which IRS codes govern Grantor Trusts

Answer 16

IRC Codes 671-677

Question 17

Which tax forms Grantor and Non-Grantor Trusts file

Answer 17

Grantor Trust reports all income on the annual 1040 tax return of the Grantor.

Non-Grantor Trust pays net income to the beneficiary in the form of a K-1 distribution and files its own annual 1041 tax return.

Question 18

What is included in one’s taxable estate

Answer 18

-cash and securities
-real estate
-Trusts
-life insurance proceeds payable to your estate or, if you owned the policy, to your heirs
-the value of certain annuities payable to your estate or your heirs
-business interests
-the value of certain property you transferred within 3 years before your death

Question 19

What is not included in one’s gross estate

Answer 19

-unlimited marital deduction
-mortgages and debts
-administration expenses
-losses during estate administration
-funeral expenses
-the charitable deduction
-the state death tax deduction

Question 20

The reverse QTIP election

Answer 20

If you have not used up your GSTT exemption, the reverse QTIP election allows you to divert the unused portion toward the QTIP trust for the benefit of your final beneficiaries who qualify as skip persons instead of allowing it go to waste, regardless of whether or not the primary beneficiary’s exemption would be available to them.

Question 21

The duties, rights, and powers of a Trustee

Answer 21

The Trust exists exclusively for the benefit of the beneficiary, with the trustee being responsible for the management of assets as explicitly stated in the Trust.

Every person serving as trustee is entitled to compensation, and most state laws have set maximum fees.

Trusts may name an institution as a final successor trustee or give the trustee the right to name a successor.