6 Trusts Flashcards
Type of trust? how to qualify? consequences?
Simple Trust
- reqs
- consequences (how taxed?)
Typically non-grantor & irrevocable
To qualify as a Simple Trust, it must…
1. Distribute income annually
2. Make no principal distributions
3. Make no distributions to charity
Then:
1. income is taxable to benes (so it’s a non-grantor trustº)
2. it gets a $300 “income exemption” (basically a standard deduction)
Type of trust? how to qualify? consequences?
Complex Trust
Any irrev. non-grantor trust that doesn’t qualify as a Simple Trust because it either:
1. Doesn’t distrib all income annually
2. Distribs principal
3. Distribs to charitable orgs
Then…
1. Income must be distrib’d before principal each year (first ord income, then dividends, then cap gains)
2. Distrib’d income is taxable to benes (deducted on trust’s tax return Form 1041), other income taxed to trust
3. Gets a $100 income exemption (basically a standard deduction)
Are revocable trusts or irrevocable trusts always grantor trusts?
Revocable trusts are always grantor trusts, but some irrevocable trusts can also be grantor trusts.
Reversionary Interest
When a donor(/gifter/grantor) retains some level of rights to re-acquire/inherit the gifted property and therefore retains some level of interest in the gift, and so it isn’t considered a complete gift
another name? included in probate? compare to…
Living Trust
aka Inter-Vivos Trust
* Est. & funded in grantor’s lifetime and takes immed. effect
* Funds pass outside will & probate process, saving costs & time
* Contrast with “Testamentary Trust”
How created? Purpose? Included in probate? compare to…
Testamentary Trust
- Created through a will, funded w/ assets after death
- Included in probate
- Making sure estate ends up in right hands
- Compare to inter-vivos/living trusts
Could be used for Professional invmt mgmt or to reduce estate tax
What happens to revocable trusts when grantor dies?
Becomes irrevocable (this also happens if grantor gives up rights to amend/revoke or reclaim the property)
But if you convert rev -> irrev within 3 years of death, trust property is clawed back
Do trusts need to be funded to legally exist?
- Revocable - can be funded or unfunded
- Irrevocable - needs to be funded
Grantor trust
(what 6 features will make it a grantor trust?)
A trust is classified as a GRANTOR trust with income taxable to the grantor if they retain any of certain benefits such as rights to…
1. Revoke or amend
2. Benefit from trust income
3. Control investments or distributions
4. Borrow without market interest or collateral
5. Substitute assets (common in intentionally defective grantor trusts, IDGTs)
6. Reversionary interests
2-3 other terms for each of:
1. Grantor
2. Trustee
3. Beneficiary
4. Principal
- Settlor, Trustor, Trustmaker
- Trustee, Fiduciary
- Beneficiary, Remainderman
- Corpus, Res
65-day rule
(for trusts)
Allows fiduciaries (trustees) to make distributions ≤ 65 days of the end of the tax year (by March 6, or March 5 for leap years)
Section 645 Election
(for revoc. trusts)
Executor of a state and trustee of a revocable trust can elect to treat them as one for tax purposes on a single tax return (election made on form 8855)
Remember: 6 (for Executor) & 4 (for Trustee) meet in the middle at 5!
Standby Trust
- definition?
- who fills 3 roles?
- probate?
A revocable trust that remains unfunded or minimally funded until a triggering event, e.g. the grantor’s incapacity or death. Can bypass probate if properly funded before death.
The Grantor is also the Trustee & Beneficiary (until a successor takes over when the Grantor is incapacitated)
What happens to undistributed income and cap gains in a trust?
- “retained income” is NOT part of the corpus/res/principal
- cap gains: also NOT part of the corpus/res/principal
Accounting Income vs Taxable Income for Trusts
- Accounting income: Specified by trust docs or otherwise state law. Determines the amount that benes are entitled to receive
- Taxable income: Subtract deductions and appropriate personal exemption
What Trusts need to file a tax return?
File Form 1041 if taxable domestic trust with:
1. any taxable income for the year
2. gross income > $600 or more (regardless of taxable income)
3. a non-resident alien beneficiary
DNI (for trusts)
Distributable Net Income
- the max income that can be taxed to benes
- bene is responsible for taxes on the lesser of (a) DNI allocation or (b) the amt required to be distributed per the trust docs
I think this is just saying that if principal is distributed to fulfill distribution requirements in the trust docs, the benes can’t be taxed more than just the income portion (the DNI).
Trust taxable income formula
Trust income
– Deductions
(distribs,
charitable contribs,
invmt interest expenses eg on margin loans,
invmt advisor fees)
– Personal exemption ($100 or $300)
= Trust taxable income
4 ways to reduce estate tax in a GRAT or GRUT
To reduce gift tax exposure:
- Reduce remainder interest
- Same as increasing the retained annuity
- Could use a lower interest rate to discount back to NPV Of annuity and thereby increase the remainder interst (IRS sets min)
- Extend the trust term
Who receives income vs remainder interest in a:
- GRAT/GRUT
- CRAT/CRUT
- CLAT/CLUT
- GRAT/GRUT - grantor, then non-charitable bene
- CRAT/CRUT - non-charit bene or grantor, then charity
- CLAT/CLUT - charity, then non-charit bene
Who receives what in a…
- GRAT
- GRUT
- GRIT
Grantor receives…
- GRAT - a fixed annuity
- GRUT - a fixed % of trust value
- GRIT - all income annually
If grantor doesn’t survive trust term in a GRAT/GRUT/QPRT, then…
FMV of trust property on DOD (or AVD) is included in their gross estate, blowing up the estate tax savings.
CRATs/CRUTs
- term?
- allowable payment %s?
- income tax deduction?
- Term: ≤ 20 yrs or ≤ life
- Pymt minimum: 5-50% of trust val
- Initial funding is income tax deductible using charity’s remainder interest (i.e., FMV – PV of income stream) and can be carried forward a max of 5 yrs
Is A-Trust or B-Trust funded first?
B-Trust
(fill up decedent spouse’s lifetime exemption to bypass survivor’s estate)
(B stand for Bypass or “Before”)
Q-Tip Trust
- Stands for?
- Why “Q”?
- Could also be called?
- Scenario used in?
- Who receives income?
- Who receives corpus?
- Where elected?
- Stands for “Qualified Terminable Interest Property” Trust
- Q = Qualifies for marital deduction
- Could also be called? C-TRUST
- E.g., used to support second spouse while kids from a previous marriage still inherit the property. Don’t trust spouse to have “power of appt”
- Income - All must be distrib’d to spouse annually
- Corpus - Trustee can give spouse some corpus, but final benes (eg kids) receive rest
- Elect Q-Tip treatment on Form 706
(assets included in surviving spouse’s estate)
Disclaimer Trust
Irrev trust funded only if the surviving spouse chooses to “disclaim” the outright distribution of certain assets from the deceased spouse
Ascertainable Standard
Clear standards for the trustee on making distributions to benes (eg, HEMS)
QDOT
- stands for?
- Q for what?
- what 2 kinds of trust can it use?
- stands for Qualified Domestic Trust (QDT)
- Qualifies decedent’s transfer into trust for marital deduction even when surviving spouse is a non-US citizen
- Set up as either a QTIP Trust or an Estate Trust
Estate tax is paid on distribs of principal (or at surviving spouse’s death). The purpose of the QDOT is to defer U.S. estate tax — not eliminate it — when the surviving spouse is not a U.S. citizen and therefore wouldn’t otherwise qualify for the unlimited marital deduction.
Special Needs Trust
- Benefit?
- Pay for?
- 1st-party, 3rd-party, pooled
- can fund with..
- how taxed?
- Preserve disabled’s eligibility for gov benefits by not pushing income past the caps for SSDI, SSI, or Medicaid
- Basic stuff
- 1st party - funded by bene
- 3rd party - funded by donor (most common)
- pooled - managed by a non-profit
- can fund with Assets or Life Insur Premiums
- taxed as passthrough ents; distribs taxed to bene, undistributed income taxed at nongrantor trust rates
ILIT
- stands for?
- stands for: Irrevocable Life Insurance Trust (ILIT)
Crummey Powers
A special feature in irrevocable trusts that allow beneficiaries to temporarily withdraw contributions, making the gifts qualify for the annual gift tax exclusion
