Chapter 8 - Trusts

Question 1

Define a 2503(b) Trust

Answer 1

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.

Question 2

Define a 2503(c) Trust

Answer 2

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.

Question 3

Define Beneficiary

Answer 3

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.

Question 4

Define Blind Trust

Answer 4

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.

Question 5

Define Bypass Trust

Answer 5

A trust created to ensure that an individual makes use of his applicable estate tax credit.

Question 6

Define Charitable Lead Trust

Answer 6

A trust in which a charitable organization receives the income interest and a non-charitable beneficiary receives the remainder interest.

Question 7

Define Charitable Remainder Trust

Answer 7

A trust in which a non-charitable beneficiary receives the income interest and a charitable organization receives the remainder interest.

Question 8

Define Complex Trust

Answer 8

A trust that does not meet the definition of a simple trust.

Question 9

Define Distributable Net Income

Answer 9

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.

Question 10

Define Estate Trust (General Power of Appointment Trust)

Answer 10

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.

Question 11

Define Fiduciary

Answer 11

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.

Question 12

Define Grantor

Answer 12

The person who creates and initially funds a trust. (AKA settlor, trustor, or creator)

Question 13

Define Grantor Retained Income Trust (GRIT)

Answer 13

A trust in which the grantor retains an income or use interest in the trust.

Question 14

Define Income Beneficiary

Answer 14

The person or entity who has the current right to the income from a trust, or the right to the the trust assets.

Question 15

Define Inter Vivos Trust

Answer 15

A trust that is created during the grantor’s lifetime.

Question 16

Define Irrevocable Life Insurance Trust

Answer 16

An irrevocable trust that owns and holds life insurance on its grantor’s life.

Question 17

Define Irrevocable Trust

Answer 17

A trust created by a grantor that cannot be revoked. The grantor cannot take back that property that was transferred to the trust.

Question 18

Define Pourover Trust

Answer 18

A trust that receives assets that “pour” into it from another source, generally the grantor’s estate at the grantor’s death.

Question 19

Define Prudent Man Rule

Answer 19

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.

Question 20

Define QTIP Trust

Answer 20

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.

Question 21

Define Remainder Beneficiary

Answer 21

The individual or entity entitled to receive the assets that remain in the trust at the date of the trust’s termination.

Question 22

Define Revocable Living Trust

Answer 22

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.

Question 23

Define Rule Against Perpetuities

Answer 23

A common law rule which requires that all interests in a trust must vest, if at all, within lives in being plus 21 years.

Question 24

Define Self-Settled Trust

Answer 24

Trust where the beneficiary is also the grantor of the trust.

Question 25

Define Simple Trust

Answer 25

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.

Question 26

Define Spendthrift Clause

Answer 26

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.

Question 27

Define Standby Trust

Answer 27

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.

Question 28

Define Testamentary Trust

Answer 28

A trust created after the death of the grantor. The grantor’s will generally includes all of the trust provisions.

Question 29

Define Totten Trust

Answer 29

Not a trust, but rather a bank account with beneficiary clause. (POD Designation)

Question 30

Define Trust

Answer 30

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.

Question 31

Define Trustee

Answer 31

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.

Question 32

Define Uniform Statutory Rule Against Perpetuities

Answer 32

A legislatively created alternative to the common law Rule Against Perpetuity that typically sets the perpetuities period at 90 years.

Question 33

Define Corpus

Answer 33

Money or property transferred to a trust. The trust principal.

Question 34

How are capital gains treated in a trust and who do they benefit?

Answer 34

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.

Question 35

How is income taxation shared between trusts and beneficiaries?

Answer 35

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.

Question 36

When are the assets transferred to an irrevocable trust included in the grantor’s gross estate? (6)

Answer 36

When the grantor retains…

1. the right to receive income from the trust
2. the right to use the trust assets
3. the ability to exercise voting rights on stock transferred to the trust
4. a revisionary interest with a value greater than 5% of the trust
5. the right to terminate, alter, amend or revoke the trust
6. the right to control beneficial enjoyment of the trust

Question 37

What is the purpose of an ILIT?

Answer 37

To prevent an insured party from having incidents of ownership in the life insurance policy on his life.

Question 38

What is the difference between a QPRT and a TPPT?

Answer 38

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.

Question 39

Define Grantor Trusts

Answer 39

A trust that when created the grantor is subject to income tax on income interest, and not the beneficiaries.

Question 40

What is a defective provision?

Answer 40

For income tax purposes, there is a defective provision in the trust requiring the grantor to pay tax on the trust income.

Question 41

What are the 6 circumstances that require the grantor to be treated as owner of the trust for income tax purposes (defective provision)?

Answer 41

1. The grantor has a revisionary interest in the trust that exceeds 5% of the value of the trust.
2. The grantor can revoke the trust acting alone or with the consent of a non-adverse party.
3. The grantor or a non-adverse party (or both) can control the beneficial enjoyment of the trust.
4. The grantor retains certain administrative powers.
5. 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.
6. 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.

Question 42

What clause protects trust assets from a beneficiaries creditors?

Answer 42

Spendthrift clause

Question 43

How long is the perpetuities period set for by the uniform statutory rule against perpetuities?

Answer 43

90 years

Question 44

If a grantor retains the right to receive income from a trust what happens to the value of the trust when the grantor dies?

Answer 44

The value is included in his gross estate

Question 45

Which trusts are most commonly used by politicians?

Answer 45

Blind trusts