9. Trusts Flashcards
1
Q
Trust purposes
A
-Arrangement when trustee holds legal title to property for benefit of beneficiaries
-Ensures beneficiairies have assistance in managing and investing funds
-financial management tool for grantor to coordinate investment/dist of property during lifetime and after death
2
Q
Beneficiary types
A
-Income beneficiary- receives income for life/fixed period/until event
-Remainder person- ultimate beneficiary of trust property (can be income beneficiary)
3
Q
Inter Vivos Trust
A
Takes effect and funded during lifetime of grantor, may be revocable/irrevocable
4
Q
Testamentary trust
A
revocable until creator dies => irrevocable
5
Q
Trust elements
A
-specific property
-1+ ascertainable beneficiaries
-trustee who holds legal title (may be appointed by court)
-intention to create a trust, separate legal and equitable titles, while one party serves as fiduciary
- written requirements
- terms/conditions for termination/failure- trust cannot last longer than life of beneficiary who was a live when it was created and 21 years and 9 months after beneficiary has died
-must be legally funded
-grantor and trustee must be legally competent
-permits accumulation of income and choice of situs for the management of multi-state assets
6
Q
Income structure
A
7
Q
Advantage of irrevocable trust
A
as opposed to grantor trust, the irrevocable trust is liable and has a higher tax bracket than the beneficiaries, so by the trustee distributing to the beneficiaries, reduce tax liability
8
Q
If non-grantor trust
A
need to know if
-simple: all income to beneficiaries, subject to income tax at their rates
-a complex trust - income may be accumulated, for which we need to use the DNI calculation to determine the tax liabilities. DNI stands for Distributable Net Income and will be defined under the Tax Treatment of Trusts.
9
Q
Special Needs Trust/Supplemental Needs/Craven trust
A
trust arrangement can provide extra amenities to a disabled person in a way that would not disqualify the disabled beneficiary from receiving public assistance benefits, such as Medicaid/Medicare, Social Security disability benefits, or other forms of supplemental assistance
10
Q
General Powers of a Trustee
A
-Power to collect trust property, settle claims, sue, or be sued.
-Power to sell, acquire or manage trust property in a manner that is in the best interests of the trust.
-Power to vote corporate shares.
-Power to borrow money and use the trust corpus as collateral.
-Power to enter into contracts and leases that do not exceed the trust’s duration.
-Power to make payments to a beneficiary of the trust.
-Power to make required divisions and distributions of the trust property.
-Power to receive additional assets into the corpus of the trust.
11
Q
Living/Inter Vivos Trust
A
takes effect during the grantor’s lifetime.
12
Q
Testamentary Trust
A
takes effect upon the death of the grantor
- may be a part of a decedent’s last will and testament and are always in writing.
13
Q
Revocable Trusts
A
flexible and easily amendable, become irrevocable upon death/incapacity. Disadvantage includes costs: attorney fees. costs for changing title, trustee fees, no creditor protection since grantor retains rights/powers
14
Q
Irrevocable Trusts
A
more rigid but reduces grantor’s estate tax liability as long as grantor retains no incidents of ownership over property, unless grantor dies within 3 years of transfer with these exceptions:
-If grantor retains right to income for life/right to use/enjoy trust property.
-If grantor retains reversionary interest > 5%. Only value of the reversionary interest will be included in the grantor’s estate.
-If grantor retains a general power of appointment or a testamentary general power of appointment over trust assets.
-If grantor dies within 3 years of transferring a life insurance policy or retains any incidents of ownership in the policy transferred into the trust.
15
Q
Pour-over Trusts
A
decedent’s assets from the estate, pension assets, life insurance proceeds and out-of-state property are transferred into this existing trust at death, for asset management purposes.
16
Q
GRAT and GRUT
A
trusts into which the Grantor makes an irrevocable transfer yet retains the right to income from the property for a period of time. The income from the GRAT is fixed while the income from the GRUT is variable.
17
Q
QPRT
A
irrevocable trust that holds a personal residence and permits a person to live there for a term of years. Transferring a home into a QPRT reduces the gift tax value to the PV of the home’s remainder interest.
18
Q
Discretionary Trust
A
-vests the distribution of income/ corpus to beneficiaries according to the trustee’s discretion, usually taxed at maximum marginal rate (MMR).
19
Q
Spendthrift Trust /spendthrift provisions in irrevocable trusts
A
- discretionary trust that affords some creditor protection to beneficiaries, esp if established solely for a beneficiary’s supplemental support
(self-settled trust where grantor is the beneficiary, would not receive creditor protection in most states)
20
Q
Sprinkling or Spray Trust
A
allows trustee to distribute income/ corpus among various beneficiaries, based upon the needs of the beneficiaries: allows flexibility
-Since beneficiary has no right to annual income, doesn’t have present interest, so grantor cannot take annual exclusions for transfers into trust
21
Q
Generation-skipping Trust
A
designed to transfer assets to skip people and provide for interim generations prior to the distribution. Properly structured, no or minimal GST tax will be required when the assets pass to the skip person.
-After Grantor’s Death: The trust provides income for the rest of the grantor’s spouse’s lifetime.
-After Death of the Spouse: The children of the grantor receive income for the rest of their lives.
-After Death of All Children: The grantor’s grandchildren receive the outright title to the property in the corpus.
22
Q
UGMA is
A
custodial account, which is used for the benefit of minor children.
If donor is also custodian and dies before child reaches majority (usually 18), then value of custodial account will be included in donor/custodian’s estate
23
Q
UTMA
A
- similar to a UGMA, but also allows transfers of cash and other property to be placed into the minor’s custodial account- also allow for testamentary transfers into the minor’s account, age of majority usually 21/25
24
Q
2503(b) Trust
A
provides a beneficiary with a stream of income during the trust term and also qualifies for the annual gift tax exemption.
annual exclusion cannot be used to offset the donor’s gift tax for the present value of the remainder interest passing to any remainder beneficiaries. The corpus of a 2503(b) trust need not be distributed to the beneficiary when the beneficiary reaches the age of majority. The corpus will be excluded from the gross estate of the donor who is not a trustee. The corpus will also be excluded from the gross estate of the income beneficiary if the income interest terminates at the beneficiary’s death.
25
2503(c) Trust
accumulates income and principal for minor to withdraw at 21 (magic age regardless of which state) and allows an annual gift tax exclusion for transfers to the trust
Gifts reduce value of estate and income is taxed to trust (if accumulated) / beneficiaries (if distributed)
-Often used to start children on LI program by providing trusts with sufficient cash to pay premiums for ins on kids lives; or could be used to purchase non-necessities when kids reach college age
26
Section 2702
-Retained interests that are not qualified are valued at zero. Qualified payment is fixed in time and amount, eg annuity and unitrust payments
-If grantor retains an annuity or a unitrust payment, then the gift of the remainder interest is valued as the PV of the remainder interest on the date the property is transferred into the trust.
- If the grantor can receive all income from the trust the payment is not a "qualified payment" and the value of the remainder interest gift to family members is based on the entire amount transferred into the trust.
Does not apply to:
Sales to family members
Gifts to non-related persons
Incomplete gifts
A transfer of the entire property to family members
Partial interests bequeathed to family members
Remainder interests in trusts if income can only be distributed at the sole discretion of an independent trustee
Certain property settlement agreements
Charitable lead trusts
Personal residence trusts
27
Grantor Retained Trust - GRAT, GRUT
Purpose:
-Transfer property to family in trust at a reduced (or zero) gift tax value.
-Pass appreciation in the GRAT to beneficiaries without incurring additional gift tax.
-Reduce the value of the grantor's gross estate.
-GRAT: Annuity payments may increase up to 20%/yr (preferred when difficult to value, eg closely-held stock or real estate that is expected to appreciate). Annuity interest can be structured to equal up to 100% of the trust's value to avoid taxable gifts. This is known as "zeroing-out" the GRAT, should be funded with assets likely to outperform federal Section 7520 rate/when asset values are low, which lowers gift tax
- GRUT: right to payment of a fixed percentage of the value of the trust property (determined annually) for a fixed period. Unaffected by lower interest rates since income distributions are based on variable payments and does not "freeze" grantor's interest, less effective in passing appreciation to beneficiaries
grantor pays taxes on income distributed/PV of remainder interest, but tax payments will reduce gross estate. Beneficiaries receive grantor's carryover basis, instead of stepped-up at death.
28
Grantor Retained Trust - GRIT
split-interest trust that distributes all of the trust's income to a grantor for a specified number of years and then distributes the trust's remainder interest to beneficiaries, limited to transfers of personal residence/certain tangible property eg painting where grantor retains use of property during lifetime
29
Qualified Personal Residence Trust
irrevocable trust that holds a person's residence, allowing rent-free living at property for a specified period of time. At the end of the term, the home will pass gift-tax free to the trust beneficiaries. Transfer into the trust is taxed at pv of home's remainder interest, rather than FMV
freezes value of home when placed in trust and pass future appreciation to beneficiaries
- can be structured as grantor trusts with income tax deductions taken for mortgage interest payments and property taxes paid.
30
When are GRAT, GRUT, or QPRT useful
- GRAT/ GRUT/ QPRT is particularly useful when the client is single and has a substantial estate upon which federal estate taxes are certain to be paid. Wealthy widows or widowers, divorced individuals, or other unmarried persons can use such a trust as a "marital deduction substitute."
- married couple with an estate above the couple's combined unified credit equivalent can use a GRAT, GRUT, or QPRT to eliminate or reduce taxes on the death of the second spouse to die. The larger and more rapidly appreciating these estates are, the more effective such a trust would be.
- GRAT, GRUT, or QPRT is effective where the income-producing property is located in more than one state and unification and probate savings are desired. The GRAT, GRUT, or QPRT would serve to transfer ownership in a manner that would avoid ancillary administration.
- GRIT is a useful technique when a client wants to purchase certain tangible assets such as a work of art, retain the right to display it in his or her own home, and have it pass to a specified person immediately and without probate at death. (However, if the grantor is unable to establish the value of the retained interest through comparable rentals, the gift of the transferred remainder will equal 100% of the value of the transferred property).
- GRAT, GRUT, or QPRT can be an alternative to (or be used in conjunction with) a recapitalization or other freezing technique with the added advantages of gift tax leverage and possible estate tax savings.
-When there is a high probability that the client will outlive the trust term that is needed to obtain a low present value gift to the remainder person. When the client has assets so substantial that a significant portion can be committed to a remainder person without compromising his financial security, and when the client has a high-risk tolerance and a strong incentive to achieve gift and estate tax savings (rather than taking the safer but more costly approach of making an immediate gift).
31
Beth is a five-year-old child. She inherits a trust property that is structured so that she has the right to claim a maximum amount under a five and five power that is 5% of the value of the corpus. Choose the type of trust with such a provision:
Crummey trust- If a trust is properly structured a minor beneficiary can demand the lesser of the amount transferred annually to the trust or the maximum amount allowed under a five and five power which works out to be the greater of $5,000 or 5% of the value of the corpus. In such a case the minor beneficiary has a right, better known as a Crummey right. Such a trust is termed a Crummey trust.
32
Charitable Lead Trust
pays a fixed income stream to a qualified charity for years, usually <20. After lead period expires, the remainder interest passes to one or more non-charitable beneficiaries.
immediate income tax deductions for charitable lead trust established during grantor's lifetime when grantor is the owner of trust income and remainder interest will revert back to donor/donor's spouse, measured by PV of income stream passing to charity ; but must also include income earned on grantor's tax return. Remainder interest is taxable gift if given to someone other than donor/donor's spouse- no annual exclusion would apply
-if structured to take effect upon death, the grantor's estate will receive charitable deduction for PV of income stream passing to charity
-
33
Charitable Remainder Annuity Trust (CRAT)
trust designed to pay a fixed amount annually to a non-charitable beneficiary with the remainder going to charity. Donor transfers money/preferably low basis stock to a trust where charity can sell without incurring capital gains, and reinvest to pay donor higher fixed amount
-A fixed amount/percentage (5-50%)of the initial value of the trust must be payable to the noncharitable beneficiary at least annually to the noncharitable beneficiary out of income and/or principal.
- must be irrevocable and not subject to a power by either the donor, the trustee, or the beneficiary to invade, alter, or amend, the trust.
- must be for the benefit of a named individual or individuals who must be living at the time of the transfer in trust, and their interests must consist of either a life estate or a term of years not exceeding 20 years.
-The entire remainder must go to charity: at least 10% of the assets transferred to the trust.
-donor will be entitled to an income tax deduction equal to the value of the remainder interest assuming his contribution base is sufficient to utilize the full amount of the deduction.
-no additional contributions may be made to a CRAT once created and funded
34
Charitable Remainder Unitrust (CRUT)
pays a variable amount to a non-charitable beneficiary with the remainder to charity. The payment is based on asset performance which is revalued annually.
-A fixed percentage of the net FMV of the principal, revalued annually, must be payable to the noncharitable beneficiary.
- percentage payable to the noncharitable beneficiary must be 5% - 50% of the annual value.
-The unitrust may provide that the noncharitable beneficiary can receive the lesser of: (a) the specified fixed percentage, or (b) the trust income for the year, plus any excess trust income to the extent of any deficiency in the prior years.
-The noncharitable income beneficiaries must be living at the time of transfer in into the trust, and their interests must be for a life estate or a term of years not exceeding 20 years.
-The entire remainder must go to charity and must equal at least 10% of the assets transferred into the trust.
-If allowed, an income tax deduction is permitted in the year funds are irrevocably placed in trust and is measured by the present value at the date of the gift of the charity’s right to eventually receive the unitrust’s assets, subject to percentage limitation. The portion of the deduction disallowed may generally be carried forward for five years.
-at least 10% of the value of the assets contributed on the day of transfer will go to the charity.
35
Irrevocable Life Insurance Trust (ILIT)
vehicle for holding life insurance policies which removes them from the grantor and the spouse's gross estates
36
Use of Life Insurance Trust
Whenever an individual (or a couple) faces a death tax in his or her generation and wishes to provide liquidity for payment of those taxes- also used to provide funds for spouses, children, and future generations.
Trustee given discretionary powers to lend funds from insurance proceeds to the estate (should be secured and structured as "arms-length" transaction
Gifts of whole life insurance policies to ILIT are valued @interpolated terminal reserve value (close to cash surrender value)- face value for policy is usually >>gift tax value
Unfunded ILIT only contains LI policy, transfers into trust to pay premiums is subject to gift taxes, need to include Crummey provisions to give beneficiaries present interest
Funded ILIT means grantor has transferred LI policy + income producing property into trust to pay premiums. No need for Crummey power since beneficiaries don't need to have a present interest in trust
37
Marital/Non-marital Trust/"A-B trust"/ "A-B-Q" trust
gives the surviving spouse the use of the family's economic wealth, while at the same time minimizing, to the extent possible, the total federal estate tax payable at the deaths of both spouses.
The goal is to avoid "overqualification" of the estate for the marital deduction because of the "underutilization" of the applicable credit in the estate of the first spouse to die.
38
The "B" or Bypass Non-marital (family) Trust
receives property that is not allocated to the power of appointment trust, the estate trust, or the QTIP trust, generally funded with the applicable credit amount ($12,920,000), and as no transfer of property is includable in the estate of the surviving spouse=> called a Credit Equivalent Bypass Trust (CEBT)
Surviving spouse may be given LPOA to distribute assets, can use unused portion of most recently deceased spouse's unused exclusion amount (DSUEA)
To take advantage of the DSUEA, an executor must take the following actions on the decedent's estate tax return, Form 706.
-File a timely return or file timely extensions
-Compute the DSUEA
-Make an irrevocable election to utilize the DSUEA
For estate planning purposes, the By-Pass trust may still be useful because:
-The appreciation on assets transferred to the trust escape estate taxation in the surviving spouse's estate.
-The decedent can control who will receive the assets in the trust by selecting the beneficiaries. If assets are given outright to the surviving spouse and the spouse remarries, the assets may not be used as the decedent spouse intended.
-The decedent's GST exemption is not portable, therefore the decedent's GST exemption could be allocated to a By-Pass trust if skip persons are trust beneficiaries.
-Couples who live in states that impose an estate tax may use the trust and other techniques to reduce or avoid paying state estate taxes.
The drawbacks:
-Assets in the trust do not receive a step-up in basis, yet assets bequeathed directly to the surviving spouse are stepped up to FMV.
-The value of the assets transferred to the bypass trust will reduce the amount of the decedent's unused exemption that is available to the surviving spouse.
39
Qualified Domestic Trust (QDOT)
marital deduction in a US citizen's estate for property passing to a non-citizen spouse. Section 2506A can be established by citizen spouse as a living trust or through will, or by non citizen spouse before decedent's estate tax return is due:
-must retain sufficient assets to cover the non-citizen's spouse's estate taxes,
-must be set up as a QTIP trust or an Estate Trust, and
- trustee must approve all distributions of principal, and withhold estate taxes from principal distributions that are not subject to an ascertainable standard (HEMS). Emergency or hardship distributions are possible and are exempt from transfer tax.
-assets remaining in the trust at the non-citizen spouse's death are taxed as if they had been included in the citizen spouse's estate. non-citizen spouses can use their applicable credit to offset their own estate tax liability
40
Disclaimer Trust
allows surviving spouse, or any other beneficiary, the opportunity to do post-mortem (after death) estate planning.
property that is disclaimed remains in taxable estate of decedent , usually passes to someone other than the surviving spouse to take advantage of applicable credit on the disclaimed portion and the marital deduction on the property on which the spouse has postmortem controll
41
Totten Trust
revocable bank account or money market account that automatically transfers on death (TOD) to the account beneficiary, therefore avoiding probate. checking/savings account owner = trustee, included in gross estate, but passes automatically to beneficiary
42
Resulting Trust
occurring in favor of the grantor, when beneficiaries have died or trust voided, then grantor becomes beneficiary in this trust
43
Standby Trust
structured to take effect when the owner can no longer manage the assets, when grantor becomes disabled or leaves the country for extended time, usually revocable inter vivos trust, where grantor is trustee and beneficiary, names successor trustee in case of incapacitation
44
Trust that Avoids Probate
funded with assets prior to the death of the grantor
45
QTIP
Any excess amounts over the $12.92MM that is placed in the bypass trust can be given directly to the surviving spouse or transferred into other marital trusts, so that the decedent's estate will receive a marital deduction to offset a potential estate tax liability. Examples of marital trusts that qualify for the marital deduction are general power of appointment trusts (A trusts) and Estate trusts.
QTIP trusts can be subject to the marital deduction in the decedent's estate if the executor qualifies the terminable interest property "QTIP" for the marital deduction. Can result in no estate tax at first spouse's death. All income must be paid at least annually and spouse can have 5x5 power in corpus (deductible)
The value of the assets remaining in the QTIP will be included in the surviving spouse's estate. Any assets remaining in this trust at the survivor's death will be distributed as the grantor decided.
Trust Q-E: Will contain property to which some of the GST exemption will be allocated.
Trust Q-N: Will not be exempt from the GST tax and, therefore, will often have different terms than the trust Q-E.
46
Sharing concept of tax treatment of trusts
Beneficiaries are taxed on the trust income that is or can be distributed to them, while income that is accumulated in the trust is taxed to the trust.
47
Simple trusts
-required to distribute all net income to the beneficiaries in the year the income is earned
-beneficiaries are taxed at marginal tax brackets and trust receives deduction for income distributed
-trust corpus can't be distributed and no charitable gift
- separate tax entity and $300 personal exemption
48
Complex trusts
-corpus can be distributed
-cap gains are not considered trust income and treated as additions to corpus, trusts can't take deductions on cap gains distributed
-when income doesn't need to be distributed, then sprinkling trusts
-can make gifts to charities
-trust takes deductions for income distributed to beneficiaries but is taxed on income that remains in the trust
-separate tax-paying entity that has a $100 personal exemption
-Trust income is taxed to the trust at the highest 37% bracket when trust taxable income exceeds $14,440 (as opposed to $578,126 at individual level)
49
Distributable Net Income (DNI)
taxable income prior to applying the personal exemption for trusts and deductions for distributions and after the exclusion of capital gains and losses:
-Provides a limit for the deductions a trust or estate can take for the amounts distributed to beneficiaries (lesser of amount distributed to beneficiary or the DNI).
-Limits the amount of trust income taxable to beneficiaries.
-Determines the types of distributions made to beneficiaries.
50
Throwback Rule
tax the beneficiary of a trust that accumulates income, only where the actual distributions from the trust exceed the amount of the DNI.
51
Grantor Trust Rules
grantor has unexpired interest or residual control/reversionary interest over the trust assets, and is treated as the owner of a trust- income earned within the trust will be taxed back to the Grantor
52
Income Tax Payment by grantor
Grantor is liable for income tax if:
-receives the income directly.
-have the income payable to self, under terms of the trust.
-income from the trust is to be paid to the grantor's spouse.
-income is to accumulate for the benefit of the grantor, or the grantor's spouse.
-income is to be used to pay life insurance premiums for a policy owned by the grantor or the grantor's spouse.
-income is to be used to satisfy a legal obligation of support for a family member of the grantor (for example, minor children) or for the grantor's spouse.
-ability to revoke the trust or alter its terms so that the trust terminates or reverts back to the grantor at any time.
- retains the power to control the beneficial enjoyment of the trust property, including the power to determine who shall receive the property and the terms under which the property can be enjoyed. (For example, "$20,000 per year to my son, Charles, aged 24, as long as he achieves good grades in his medical studies, but if he does not achieve good grades in his medical studies then the income terminates upon the discretion of the grantor.")
- possesses specific administrative powers over the trust. He is allowed to borrow against the trust and use the trust corpus as collateral.
53
Trusts and Estate Tax Liability of a revocable living trust
Assets in a revocable living trust are included in grantor's gross estate, and is not a great saver of estate tax
54
Revocable-to-Irrevocable Living Trust
When a trust becomes irrevocable, then gifts that are transferred to the trust are taxable; unless the client retains a life interest in the trust's assets, delaying the taxation on the remainder interest, may work when grantor in mentally incompetent since may regain competency
55
Gift Tax Implications of Trusts
Although a revocable trust would not be subject to gift tax liability, it would be part of the grantor's estate, even if trust is a life insurance trust
In an irrevocable living trust, value of the gift is the fair market value of the property at the time it is transferred, so good idea to transfer highly appreciable asset to avoid future appreciation included in gross estate, as long as 5x5 rule is satisfied , then qualifies for annual gift tax exclusion amount and can reduce grantor's gift tax liability
56
Termination Conditions
-Termination of Trust: Most trusts terminate in an orderly fashion, according to the terms of the trust agreement/ when stated condition in the trust agreement occurs. Eg, a non-marital trust may last as long as the surviving spouse is alive. Upon the surviving spouse's death, the trust terminates and the remainder interest in the property passes to the children of the decedent and spouse (the income recipient of the non-marital trust). When the specified condition occurs upon which the trust will terminate, the corpus and all undistributed income must be distributed to one or more designated remaindermen. Conversely, all undistributed income and corpus must be distributed to the grantor as a reversionary interest.
- Trusts that Violate the Rule Against Perpetuities: A trust that is established for a noncharitable beneficiary must be capable of being measured. The trust cannot be perpetual but can only last for a period of time that is measured by the lives of any persons alive at the time the trust is created (plus any life in vitro) plus 21 additional years. Thus, a trust can only last for a time period that does not exceed the life of any person in existence at the time the trust is created, plus a period of 21 years and 9 months (to account for any lives in vitro). If the trust is structured to last longer than this time period, then the trust is in violation of the rule against perpetuities and is regarded as void from its inception. Note that some states have legislatively modified or done away with the rule against perpetuities.
-Termination by Agreement of the Beneficiaries: If all the beneficiaries are legally and mentally competent, they can agree to terminate the trust and distribute the corpus and undistributed income, provided the material purpose of the trust has first been achieved. In most states, the grantor's intentions take precedence over the beneficiaries' wishes. However, if the grantor has a specific purpose for creating the trust and that purpose is yet to be achieved or has not been substantially achieved, then the decision by the beneficiaries to terminate the trust will not be binding. Where the material purpose has already occurred ("to provide financial assistance to my children and grandchildren so that they may attend college"), then the beneficiaries of the trust by agreement may terminate the trust and receive the corpus and undistributed income.
-Illegal Purpose of the Trust: Should the trust or any of its purposes be designed for illegal activities, so that the trustee or any of the beneficiaries must commit an act that is illegal or that would be considered an example of tortious conduct, the trust is illegal and will terminate on the occurrence of the act deemed illegal or tortious. A trust that is designed for the sole purpose of evading the grantor's creditors is an act of fraud (a tort) and the creditors may reach the assets in trust or the court may declare the trust to be invalid. Subsequently, the trust terminates when the grantor attempts to use it in an attempt to defraud a creditor.
-Merger of Legal and Equitable Title in the Same Beneficiary: In some states, when the trustee and beneficiary of the trust are the same individual, there may be a merger of legal and equitable title in the individual. When this occurs, the trust may terminate by the operation of law. For a trust to be recognized, there should be vesting of the legal title in the trustee. The equitable title should be in possession of the trust beneficiary. When these titles merge in the same person, there may no longer be a reason to have a trust. Therefore, in some states, when merger occurs, the trust terminates. As long as there are multiple trustees and multiple beneficiaries, the trust will still be operative. Also, if there is one trustee but several beneficiaries, or there are several trustees and one beneficiary, the trust is still an operative instrument. It is when the sole trustee is also the sole beneficiary that the merger doctrine applies and at that point the trust may cease to exist.
-Termination Due to Impossibility of Purpose: If the purpose for which a trust was created cannot be performed due to impossibility of the purpose, then the trust will terminate if a similarly related purpose cannot be found. For example, if a private trust (noncharitable trust) were created for the sole purpose of providing a stream of income to a disabled beneficiary to provide that beneficiary with living expenses and assistance, but the beneficiary died shortly after the trust was created, the trust would terminate unless the terms of the trust specifically provided either:
The trust would continue in the event of the death of the beneficiary, or
The trust would continue for the express purpose of providing living expenses and assistance to other disabled persons living within the same metropolitan area.
If neither of these provisions existed in the terms of the trust agreement, then the trust could fail because of impossibility of purpose.
57
The Throwback Rule is designed to:
-Tax the beneficiary of a trust that accumulates income.-
-Tax that portion of the accumulated income as if the income has been distributed.
-applies only in certain situations, however, and applies only where the actual distributions from the trust exceed the amount of the DNI.
58
Which of the following distributions are not subject to the throwback rules:
-Gifts or bequests of a specific sum of money or property that do not exceed trust's accounting income/A specific amount set aside, paid or used for specific charity alone qualifies for non-imposition of throwback rules.
-Distribution of income that accumulates before the beneficiary's birth and before the beneficiary reaches the age of 21 are not subject to throwback rules
-Distributions that do not exceed the trust's accounting income
59
The grantor pays the income tax on any income produced by the trust, provided the following conditions occur
grantor pays income tax on any income produced by the trust when the grantor indicates that the income is to be used to pay life insurance premiums for a policy owned by the grantor or the grantor's spouse. If the grantor receives the income, then the grantor pays income tax returns.
60
By establishing a QDOT, a U.S. citizen spouse transfers property into a trust upon death for benefit of the surviving non-citizen spouse and qualifies the estate for the
marital deduction- also requires that there are safeguards to ensure that the trust property (if not used up by the alien survivor) is eventually subjected to the U.S. estate tax.
61
A __________ is an irrevocable trust that holds a person's residence, allowing couples or individuals to live in the house rent-free for a specified period of time.
A qualified personal residence trust (QPRT) is an irrevocable trust that holds a person's residence, allowing couples or individuals to live in the house rent-free for a specified period of time.
62
Choose the correct characteristic(s) of Uniform Transfers to Minors Act (UTMA) trusts.
UTMAs are a flexible type of trust that can be used for the benefit of a minor.
They allow for testamentary transfers into the minor's account & terminate at age 21 or 25, depending on the state.
UTMAs permit the use of various investments, including transfers of real estate, partnership interests, and oil and gas interests.
63
Terrance set up a CLUT in the current year. The trust was funded with $1,250,000 of assets and a rate of 8% was selected for the term of 15 years. Terrance selected UNICEF as the qualified charity.
How much annual income will the remainder beneficiaries receive in this year?
CLUTs pay an income stream to a qualified charity for a period of years. At the expiration of the lead period, the remainder interest passes to one or more noncharitable beneficiaries. This year, Terrance’s CLUT will pay $100,000 to UNICEF. The remainder beneficiaries will receive $0.
64
Select the feature that applies to 2503(b) trusts.
All or portions of gifts to 2503(b) trusts will qualify as gifts of present interest for the income beneficiaries, and thus are eligible for the annual gift tax exclusion. The annual exclusion cannot be used to offset the donor's gift tax for the present value of the remainder interest passing to any remainder beneficiaries. For 2503(b) trusts, the annual exclusion amount is limited to the income interest.
65
When implementing an A-B trust, the surviving spouse has ____________________.
income on an as-needed basis from the A-trust
the right to all income and corpus from the B-trust
66
A trustee may also be referred to as which of the following?
the fiduciary and must follow a formal written agreement (i.e., terms of the trust) for the benefit of the beneficiaries.
67
Several years ago, Curtis’s estate planning team implemented a charitable lead annuity trust and placed securities valued at $250,000 into the trust. The year-end balance of the trust assets last year was $250,000. The trust payout rate is 10%. This year, however, the trust assets returned 5%. If Curtis is in a 24% marginal income tax bracket, how much income will the charity receive from his CLAT?
The income amount from a CLAT does not change year-to-year, even if the trust assets do not generate enough income to support that year’s income payout.
68
Select the trust(s) in which the grantor contributes appreciated property, and the taxable gift is the FMV – PV of the annuity stream.
GRAT
GRUT
In both a GRAT and a GRUT, the grantor contributes appreciated property, and the taxable gift is the FMV – PV of the annuity stream.
69
Identify the type of trust that is effective immediately & contains property that passes outside the will and probate process.
An inter-vivos trust is characterized by the following:
Established and funded during the grantor's lifetime and takes effect immediately.
Funds pass outside the will and the probate process, saving costs & time.
Title to property inside is held in the name of the trust.
70
Johanna recently received a financial windfall from her deceased Uncle Hugo. She would like to set up a trust to generate a predictable stream of annual income for a duration of 10 years. After the expiration of the trust term, Johanna would like the assets within the trust to pass to Habitat for Humanity. She will use the entire windfall to make one lump sum contribution to the trust and has no intention of adding additional assets.
Select the trust that best meets Johanna’s needs.
With a CRAT, the grantor receives either a fixed payment or a percentage of the initial FMV of the transferred property. No additional assets can be contributed to the trust. After the expiration of the trust term, the assets pass to a qualified charity (e.g., Habitat for Humanity).
Based on Johanna’s income needs, desire to transfer assets to a charity, and the funding method (lump sum payment), a CRAT is the best choice available.
71
Josef and Yolanda recently completed a risk tolerance questionnaire for financial planning and their results suggested a moderate tolerance for investment risk. During a recent meeting, Josef noted that he is concerned with the family’s income keeping track with the costs of living. The following economic trends were released today:
A significant sell-off of utility stocks.
Factory capacity utilization is currently at 88%.
The prices of copper and lumber have continued to increase over 3 quarters.
Based on the client’s risk tolerance, stated concerns, and current economic conditions, which of the following grantor trusts is MOST appropriate?
The grantor retained unitrust (GRUT) is the most appropriate option. Investors generally sell off utility stocks and invest in higher-yielding bonds when inflationary pressures set in. Additionally, factory capacity utilization above 84% and price increases in commodities, specifically, copper & lumber (used in new construction) indicate increasing inflation. Josef expressed concerns with income keeping pace with inflation. Therefore, the GRUT is the only viable solution since trust assets are revalued annually, and the income stream may serve as an ‘inflation hedge’ as a result.
72
Chad has $100MM of assets and would like to establish an A-B trust for his spouse, Colleen. If he were to predecease Colleen, Chad wants her to have a stable income stream plus an additional source of income to be used, as needed, for health, education, maintenance, or support. Ideally, he’d like the value of his estate to be $0 by designing a transfer strategy using trusts.
Calculate the amount that should be transferred into a Power of Appointment trust using an A-B trust strategy (Assume Chad has not used any of his lifetime gift and estate tax exemption).
In an A-B trust, the Bypass Trust, is first funded by using the unified exemption amount (i.e., the lifetime gift and estate tax exemption of $12.92MM in 2023). Since Chad has $100MM of assets and he had no previous taxable gifts, he can fund the Bypass Trust with $12.92MM (the maximum unified exemption amount).
Next, to achieve an estate value of $0, the remainder should be used to fund a Power of Appointment trust (A-Trust). In Chad’s case this amount is calculated as follows:
$100MM (Chad’s original estate value) - $12.92MM (maximum unified exemption amount to fund B-Trust) = $87.08MM (Funding for an A-Trust).
73
Rhonda is working with an estate planning attorney to configure a GRAT that will provide an income stream, offer protection of her contributed assets, and pass to her beneficiaries. An initial proposal shows that upon implementation, Rhonda will have gift tax exposure.
What adjustments will result in a reduction of the gift taxes in the
The remainder interest to beneficiaries is subject to gift taxes. This figure is calculated by reducing the amount transferred into the GRAT by the present value of the retained annuity to the grantor.
The ways to reduce the remainder interest are as follows:
Increase the value of the retained annuity,
Extend the trust term
Use a lower interest rate to make the PV calculation of the retained annuity
74
When an ILIT has Crummey powers attached, the beneficiary is given the right to withdraw the lesser of:
The annual exclusion.
The annual contribution made to the trust.
The greater of $5,000 or 5% of the amount transferred into the trust.
The Crummey powers withdrawal amount is usually limited to the lesser of:
The annual exclusion.
The annual contribution made to the trust.
The greater of $5,000 or 5% of the amount transferred into the trust.
75
Which of the following statements about Power of Appointment Trusts (A-Trusts) is NOT true?
The surviving spouse must receive all income generated within the trust.
Income disbursement must occur at least annually.
No accumulation of income is permitted within the trust.
The trust property is included in the beneficiary’s estate(s).
The trust property is included in the beneficiary’s estate(s).
When using an A-trust, the trust property is included in the surviving spouse’s estate at death.
76
Each of the following is a requirement for establishing a QDOT:
The trustee must be a US citizen or a domestic corporation, or a US bank if trust assets exceed $2 million.
The trust must retain sufficient assets to cover the non-citizen's spouse's estate taxes.
A QDOT must be set up as a QTIP trust or an estate trust.
The trustee must approve all distributions of principal and withhold estate taxes from distributions that are not subject to an ascertainable standard (HEMS).
77
Jaimie, age 15, has a 2503(c) trust that generated $4,000 of retained income and paid out $1,000 of income to her in 2023. Her parent’s highest marginal tax rate is 32%. Calculate the income tax due.
The $4,000 of taxable income retained by the trust is taxed using the Trust & Estate Tax Rates, as follows:
The first $2,900 is taxed at 10% = $290
The remaining $1,100 falls within the 24% bracket = $1,100 x 0.24 = $264
$290 + $264 = $554
Distributed income (i.e., $1,000 to Jaimie) will be subject to the child's rate & may also be subject to the kiddie tax:
$1,000 (distributed income) - $1,250 (child’s deduction) = ($250) = $0 taxes due
78
This year Cynthia’s estate planning team implemented a grantor Charitable Lead Annuity Trust (CLAT) funded with $1,000,000 of appreciating assets. The trust payout rate is 5% for a term of 15 years. This year, $50,000 of income was distributed to the qualified charity of Cynthia’s choice and $5,000 of additional interest income was generated from the trust.
Select the CORRECT tax treatment for the additional interest income.
Charitable Lead Trusts are considered ‘non-tax-exempt entities.’ Income earned by the trusts is taxed to the grantor. In Cynthia’s case, the $5,000 in interest income would be included in her gross income for the year.
79
Maya established a CLUT on January 1st of the current year that was funded with $500,000 of appreciating assets. The trust payout rate is 9% for a term of 10 years. The assets within the trust are revalued on January 1st every year throughout the trust term. On January 1st of the following year, the assets within the trust had appreciated $25,000.
Calculate the total amount of income that will be paid to the qualified charity in the second ye
The amount of income from a CLUT to a qualified charity is calculated by applying the trust payout rate to the trust valuation in a year. In Maya’s situation, her original principal placed into the CLUT was $500,000, and payment was made to the qualifying charity for $45,000 ($500,000 x 0.09 = $45,000). This brought the trust value down to $455,000.
By the end of the first year, the assets in the trust appreciated $25,000. The valuation on January 1st of the second year, therefore, was $480,000 ($455,000 + $25,000).
The total payment to the qualified charity can be found by multiplying the revalued trust amount of $480,000 by the trust rate of 9%. $480,000 x 0.09 = $43,200.
80
In 2023, Lucas established a Grantor Trust that was designed to provide $1,000 of monthly income for his son, Jesse. Jesse has needed special services throughout his life due to autism and is currently 21. The trust income will cover most of Jesse’s basic and supplemental expenses, however, Lucas would like for him to remain eligible for additional assistance through Supplemental Security Income (SSI).
Which of the following is CORRECT?
Income distributions from other trusts to disabled beneficiaries that exceed the government’s income cap for these programs adversely affect benefit amounts. In 2023, a person must have less than $934 a month in unearned income to receive SSI (A couple can get SSI if they have unearned income of less than $1,391 a month in 2023). Jesse’s trust income of $1,000 per month leaves him ineligible for SSI. If his father, Lucas, had established a Special Needs Trust, Jesse would have still been able to receive the income for basic and supplemental expenses, plus, qualify for & receive SSI.
Because a larger portion of earned income isn’t counted, a person who gets SSI can earn up to $1,913 a month in 2023 ($2,827 for a couple) and still get SSI.
81
What is unearned income threshold for SSI
$931/$1,391 couple
82
statements regarding Qualified Personal Residence Trusts (QPRTs)
At the end of the trust term, ownership of the residence passes to the beneficiaries.
If the grantor dies during the trust term, the FMV of the residence is included in their gross estate.
If the grantor survives the trust term, (s)he may continue to live in the residence only if fair market rent is paid to the beneficiaries.
In exchange for placing the residence in a QPRT, the grantor receives possession and access for the duration of the trust term.
83
Each of the following is considered terminable interest property EXCEPT:
Receipt of trust income for one’s life.
Receipt of a 15-Year AAA bond yielding 6.75%.
Receipt of a life estate in a vacation home.
Receipt of trust income for 10-years.
A bond, note, or similar contractual obligation, the discharge of which would not have the effect of an annuity or a term for years, is not a terminable interest. All of the other examples are terminable interest property.
84
With a power of appointment trust, the surviving spouse is given to receive distributions from trust income and corpus.
With an A-Trust (power of appointment trust), the surviving spouse is given a general power of appointment to receive distributions from trust income and corpus.
