Chapter 8 - Trusts Flashcards
Define a 2503(b) Trust
A trust for the benefit of a minor designed to qualify the present value of the income interest of the trust for the annual exclusion. The trust must pay its income annually to the minor, but may hold the trust property for the life of the minor.
Define a 2503(c) Trust
A trust for the benefit of a minor designed to qualify the contribution to the trust for the annual exclusion. The Trust must give the minor the right to receive the trust assets when he reaches age 21, but is not required to pay the income to the minor at any earlier time.
Define Beneficiary
The person(s) entitled to receive the death of a life insurance policy at the insured’s death. Also, the person(s) who hold(s) the beneficial title to a trust’s assets.
Define Blind Trust
A revocable trust arrangement whereby an individual transfers property to the trust for management purposes when self-management of the assets might be deemed to be a conflict of interest.
Define Bypass Trust
A trust created to ensure that an individual makes use of his applicable estate tax credit.
Define Charitable Lead Trust
A trust in which a charitable organization receives the income interest and a non-charitable beneficiary receives the remainder interest.
Define Charitable Remainder Trust
A trust in which a non-charitable beneficiary receives the income interest and a charitable organization receives the remainder interest.
Define Complex Trust
A trust that does not meet the definition of a simple trust.
Define Distributable Net Income
A tax concept that allocates taxable income between the trust and beneficiaries to ensure the trust income is subject to only one level of tax.
Define Estate Trust (General Power of Appointment Trust)
A trust which grants the surviving spouse a testamentary general power of appointment over the trust assets. Because of the spouse’s general power of appointment over the trust’s assets, the FMV of the trust will be eligible for the UMD at the death of the first-to-die spouse.
Define Fiduciary
A person who has legal duty to act in the best interest of another as a result of holding a position of trust and confidence.
Define Grantor
The person who creates and initially funds a trust. (AKA settlor, trustor, or creator)
Define Grantor Retained Income Trust (GRIT)
A trust in which the grantor retains an income or use interest in the trust.
Define Income Beneficiary
The person or entity who has the current right to the income from a trust, or the right to the the trust assets.
Define Inter Vivos Trust
A trust that is created during the grantor’s lifetime.
Define Irrevocable Life Insurance Trust
An irrevocable trust that owns and holds life insurance on its grantor’s life.
Define Irrevocable Trust
A trust created by a grantor that cannot be revoked. The grantor cannot take back that property that was transferred to the trust.
Define Pourover Trust
A trust that receives assets that “pour” into it from another source, generally the grantor’s estate at the grantor’s death.
Define Prudent Man Rule
A rule which requires a trustee, as a fiduciary, to act in the same manner that a prudent person would act if the prudent person were acting for his own benefit.
Define QTIP Trust
A trust that grants the surviving spouse a lifetime right to the income of the trust while transferring the remainder interest to individual(s) of the grantor’s choosing, typically created at the death of the first spouse to die.
Define Remainder Beneficiary
The individual or entity entitled to receive the assets that remain in the trust at the date of the trust’s termination.
Define Revocable Living Trust
A revocable trust that is managed by the grantor and is for the benefit of the grantor during his lifetime. The property transferred to the trust avoids the individual’s probate estate, but is included in the gross estate.
Define Rule Against Perpetuities
A common law rule which requires that all interests in a trust must vest, if at all, within lives in being plus 21 years.
Define Self-Settled Trust
Trust where the beneficiary is also the grantor of the trust.
Define Simple Trust
Trust that requires all of the trust income to be distributed on an annual basis to the beneficiaries and does not have a charitable organization as one of its beneficiaries.
Define Spendthrift Clause
A clause in a trust document which states that a beneficiary may not anticipate distributions from the trust, and may not assign, pledge, hypothecate, or otherwise promise to give distributions from the trust to anyone. If such a promise is made, it is voice and may not be enforced against the trust.
Define Standby Trust
A trust created during the grantor’s lifetime that is either unfunded or minimally funded. A standby trust is also known as a contingent trust.
Define Testamentary Trust
A trust created after the death of the grantor. The grantor’s will generally includes all of the trust provisions.
Define Totten Trust
Not a trust, but rather a bank account with beneficiary clause. (POD Designation)
Define Trust
A structure that vests legal title (the legal interest) to assets in one party, the trustee, who manages those assets for the benefit of the beneficiaries (who hold equitable title) of the trust.
Define Trustee
The individual or entity responsible for managing the trust assets and carrying out the directions of the grantor that are formally expressed in the trust instrument.
Define Uniform Statutory Rule Against Perpetuities
A legislatively created alternative to the common law Rule Against Perpetuity that typically sets the perpetuities period at 90 years.
Define Corpus
Money or property transferred to a trust. The trust principal.
How are capital gains treated in a trust and who do they benefit?
Capital gains, or gains derived from the appreciation in value of trust property, are considered corpus of the trust and are retained for the benefit of the remainder beneficiaries.
How is income taxation shared between trusts and beneficiaries?
A trust or estate pays income tax on the amount of the income it retains, and the beneficiaries pay income tax on the distributions of trust income they they receive.
When are the assets transferred to an irrevocable trust included in the grantor’s gross estate? (6)
When the grantor retains…
- the right to receive income from the trust
- the right to use the trust assets
- the ability to exercise voting rights on stock transferred to the trust
- a revisionary interest with a value greater than 5% of the trust
- the right to terminate, alter, amend or revoke the trust
- the right to control beneficial enjoyment of the trust
What is the purpose of an ILIT?
To prevent an insured party from having incidents of ownership in the life insurance policy on his life.
What is the difference between a QPRT and a TPPT?
QPRT - GRAT in which a personal residence is placed as the trust asset.
TPPT - GRAT in which personal tangible property is placed as the trust assets.
Define Grantor Trusts
A trust that when created the grantor is subject to income tax on income interest, and not the beneficiaries.
What is a defective provision?
For income tax purposes, there is a defective provision in the trust requiring the grantor to pay tax on the trust income.
What are the 6 circumstances that require the grantor to be treated as owner of the trust for income tax purposes (defective provision)?
- The grantor has a revisionary interest in the trust that exceeds 5% of the value of the trust.
- The grantor can revoke the trust acting alone or with the consent of a non-adverse party.
- The grantor or a non-adverse party (or both) can control the beneficial enjoyment of the trust.
- The grantor retains certain administrative powers.
- The income of the trust, at the discretion of the grantor or non-adverse party, is or may be distributed to the grantor, accumulated for future disbursement to the grantor, or applied to the payment of premiums on insurance policies on the life of the grantor.
- The income of the trust is distributed to the grantor’s spouse, or held for accumulation for future disbursement of the grantor’s spouse, or applied to the payment of premiums on the insurance policies on the life of the grantor’s spouse.
What clause protects trust assets from a beneficiaries creditors?
Spendthrift clause
How long is the perpetuities period set for by the uniform statutory rule against perpetuities?
90 years
If a grantor retains the right to receive income from a trust what happens to the value of the trust when the grantor dies?
The value is included in his gross estate
Which trusts are most commonly used by politicians?
Blind trusts