BUSINESS - SPECIALIZED RETURNS Flashcards
A Trust
A trust is a fiduciary relationship with respect to a person’s property in which one person (the trustee) holds the title to the property for the benefit of another person (the beneficiary).
A Trustee holds _____ ______ of a Trust
Legal Ownership
This is because the Trustee actually has the Title.
The Beneficiary holds ______ ______ of a Trust
Equitable Title
This is because they will actually receive the benefit (income) from the property.
Formation of a Trust
In order to create a trust, the settlor (the person who “settles” property in a trust) must clearly show intent to create a trust.
This is done by demonstrating intent to separate legal and equitable ownership of the property between two people.
Usually done in writing, but not necessary unless it is real estate.
The Settlor of a Trust
This is the person who creates the trust. Also called the GRANTOR.
The settlor may also be a trustee and/or a beneficiary of the trust, but the settlor is NOT allowed to be the only trustee and the only beneficiary.
The Trustee of a Trust
This is the person who holds the legal title to the trust property that will provide benefit to others.
As trustee, the trustee has a fiduciary responsibility to the beneficiaries.
The trustee is supposed to manage the trust and distribute the income of the trust to the beneficiaries in the manner set out in the trust instrument.
Implied Powers of a Trustee
The power to sell assets
The power to lease assets
The power to incur and pay reasonable expenses in the administration of the trust.
NOTE: They don’t have the right to do anything contrary to their implied duties.
Trust Property must be:
- EXISTING
- IDENTIFIABLE(described in enough detail that it can be identified with certainty)
- CAPABLE of OWNERSHIP and to be transferred
Note: Property that doesn’t yet exist ca NOT be used as Trust Property. (ie. an expected inheritance)
The Beneficiary of a Trust
The person (or persons) for whose benefit the trustee is holding the property.
The beneficiary holds the equitable title in the trust property and is able to enforce the terms of the trust.
Any person or group (ie. club, church, etc) may be a beneficiary.
Active vs. Passive Trusts
An active trust is one that requires the trustees to manage and administer the trust.
A passive trust imposes no duties on the trustees; they simply hold the legal title.
Charitable vs. Private Trusts
A charitable trust is one that provides benefit to the public or at least to a large segment of the public.
All other trusts are private trusts.
NOTE: Requirements of charitable trusts are easier to meet, and the courts work to help get them done.
And they are not subject to the Rule of Perpetuities = they can last forever.
Express vs. Implied Trusts
An express trust is specifically created by the settlor’s expression of their intent.
An implied trust is created by an action of law based on the intention of the settlor to create a trust. But NOT specifically expressed
Inter Vivos and Testamentary Trusts
An inter vivos trust is created while the settlor is living and comes into existence during their lifetime.
A testamentary trust comes into existence only upon the death of the settlor.
A Spendthrift Trust
This type of trust prohibits the beneficiary from transferring their rights to others, including creditors, which prevents creditors of the beneficiary from laying claim to the principal or income of the trust.
To protect a beneficiary from themselves. It can NOT be terminated by the beneficiaries.
Real Estate Investment Trust
A REIT is created by transferring the title to real estate to a trustee, who then manages the property for the beneficiaries.
A qualifying REIT does not need to pay corporate taxes, and income is taxed only at the level of the beneficiary.
Termination of a Trust
Generally, trusts are terminated either by a method outlined in the trust agreement or by an operation of law.
When there are no income beneficiaries a trust automatically terminates.
Parties to the trust can terminate the trust, but only if the power to do so is granted to them in the trust.
If all of the beneficiaries (including future beneficiaries) agree to terminate the trust, the trust will be terminated if it does not defeat a purpose of the trust.
The trust terminates itself if the trust states that it will exist only for a certain period of time.
A trust can also terminate if all of the purposes for which it was created are completed or become impossible to complete.
Allocation of Trust Income
If money coming into the trust is allocated to INCOME then it will be distributed to the beneficiaries.
If it is allocated to the PRINCIPAL then it will be retained as trust PROPERTY. And it will be distributed when the Trust terminates.
The Remainderman
The person to whom the trust PROPERTY will be transferred upon termination of the trust is called the remainderman.
Note: A Remainderman is not required.
Allocation of Income
If the trust instrument states that the trustee has the rights to determine where income is allocated, then the decision of the trustee is usually final.
However, if the trust agreement is silent regarding allocation, then allocation to income and principal is governed by the Uniform Principal and Income Act.
Uniform Principal and Income Act.
(UPAIA) is one of the uniform acts that have been promulgated in an attempt to harmonize the law in all fifty U.S. states. The Act was completed by the Commissioners on Uniform State Laws in 1997, and amended in 2000.
Ordinary and Extraordinary
Under the UPAIA generally, ordinary receipts are treated as distributable income and extraordinary receipts are allocated to the principal.
Similarly, ordinary (current) expenses needed to keep the property productive are allocated to the income of the trust, while extraordinary expenses and those that will benefit the remainderman are allocated to the principal.
Receipts and Expenses Related to INCOME in a Trust
This is a common Test Question
RECEIPTS to INCOME
- Rent received from property owned by the trust
- Cash dividends
- Distributions of stock and stock rights in other corporations
- Interest on notes or bonds
- Royalties
EXPENSES from INCOME:
- Cost of insuring property of the trust
- Interest on loans or mortgages secured by trust property
- Ordinary income taxes, property taxes, and estate taxes
- Cost of repairing and preserving trust property
- Depreciation allowance
Receipts and Expenses Related to the PRINCIPAL in a Trust
This is a common Test Question
RECEIPTS to PRINCIPAL
- Stock dividends and stock splits
- Proceeds from the sale of trust assets
- Amounts received in settlements of claims on behalf of the trust
- Income earned on property prior to the formation of the trust
EXPENSES from PRINCIPAL:
- Cost of capital (permanent) improvements
- Losses sustained in operation of business
- Mortgage and loan principal payments
- Costs incurred in purchase or sale of trust property
- Real estate taxes on improvements
Schedule F (Form 1040)
Used by Farmers to figure their net profit or loss from Regular Farming Operations.
Includes operation of a:
Stock Dairy Poultry Fish Fruit Truck Farm Plantation Ranch Range Orchard Crop Shares Nursery
