Trust Alphabet Soup

Question 1

Types of Charitable Trusts

Answer 1

1. Charitable Remainder Trusts (split interest trusts)
   
   1. CRATs & CRUTs
2. Charitable Lead Trusts (split interest trusts)
   
   1. CLATs & CLUTs

Question 2

Types of Grantor Retained Trusts

Answer 2

1. GRTs (estate freeze technique)
   
   1. GRATs & GRUTs
   2. Zeroed Out GRATs

Question 3

Chartiable Remainder Trust

1. Definition
2. CRT Term
3. Requirements
4. Taxes
   
   1. Settlor Deduction
   2. Trust Itself

Answer 3

1. Definition - A CRT involves a trust with a split interest – income to current B’s during term of trust and remainder to charitable organization.
2. CRT Term - current B’s term may be a life in being or a fixed term not to exceed 20 years.
3. Requirements
   
   1. charitable remainder interest must be at least 10% of initial trust value
   2. must give trustee ability to generate income
4. Taxes
   
   1. Settlor’s Deduction - settlor gets present tax write-off for amount going to charitable remainder.
   2. Trust itself is exempt from taxes
   3. no gift/estate tax if settlor and/or spouse is current income B.

Question 4

Two Types of Charitable Remainder Trusts

Answer 4

1. CRAT (annuity trust)– the amount distributed to current B’s is fixed dollar amount
   
   1. No later contributions are permitted
   2. 5% rule - no income tax deduction if 5% or more chance B survives exhaustion of principal.
   3. Most beneficial for grantor with appreciated property
2. CRUT (unitrust) – The value trust assets are valued each yr, and a % of that is paid to the income B’s each year. Variable payment each year.
   
   1. Must distribute no less than 5% or more than 50%.
   2. Later additions to corpus are permitted.

Question 5

Charitable Lead Trust -

1. Definition
2. Taxes

Answer 5

1. Definition - a fixed or variable annuity is paid to charity for a determinable period and the remainder passes to non-charitable Beneficiary.
2. Taxes -
   
   1. grantor gets charitable deduction for money donated each year
   2. —If non-grantor trust, then complex trust gets charitable deduction for amt donated to charity each yr
   3. Remainder interest does not qualify for gift tax exclusion

Question 6

Two Types of Charitable Lead Trusts

Answer 6

1. CLATs – sum certain to be paid annually to charity.
   
   1. Unlike CRAT, there is no prohibition against additional contributions.
2. CLUT – a fixed % of the net FMV of the assets valued annually is distributed to charity each year. The % may not vary over life of CLUT.
   
   1. No prohibition against additional contributions.

Question 7

Estate Freeze Techniques

1. Definition
2. Grantor Retained Trust
3. GRT Taxes
   
   1. Gift Tax
4. Zeroed Out GRATS

Answer 7

1. Definition - freezes the estate tax value of a property interest when frozen and passes any subsequent appreciation in the value of the interest to a member of a younger generation without any transfer tax.
2. Grantor Retained Trusts - grantor transfers assets to irrevocable trust retaining income interest on any interest with children as remainder B’s
   
   1. at end of term, remaining value of trust passes to B
   2. must be GRAT (fixed amount paid annually) or GRUT (fixed percentage paid annually)
3. GRT Taxes
   
   1. Gift Tax - grantor pays present value on remainder interest
      
      1. doesnt’ qulaify for 15k annual exclusion.
   2. Estate Tax - if grantor dies before end of term, entire value pulled back into estate.
   3. Income Tax - disregarded as grantor trust.
4. Zeroed Out GRAT - if FMV of assets contributed is equal to or less than the value fo the annuity retained by the grantor - no gift tax

Question 8

Qualified Persona Residence Trusts

1. Creation
2. Taxes
3. Requirements
   4.

Answer 8

1. Creation - Settlor transfers personal residence into irrevocable grantor trust for term of years with remainder to beneficiaries (usually children).
2. Taxes
   
   1. Income Tax - ignored as grantor trust for income tax
   2. Gift Tax - must pay gift tax on remainder interest.
   3. estate tax - if grantor dies during term, QPRT pulled back into estate.
   4. Exemption - doesn’t qulaify for 15k annual exclusion but can contribute 11.7M lifetime gift/estate tax exemption
3. Requirements
   
   1. one residence at a time
   2. can’t hold furniture or other assets except cash
   3. only present interest allowed is grantor and grantor’s spouse
   4. settlor must move out at end of term or lease. can’t sell back to settlor

Question 9

Trusts that can hold S-Corp Stock

Answer 9

1. Electing Small Business Trust (ESBTs)
2. Qualified Subchapter S Trust (QSSTs)
3. Grantor Trusts
4. 2Yr Death Exception – any trust to which S corporation stock is transferred pursuant to a shareholder’s will, but only for a period of two years beginning on the date of transfer

Question 10

Grantor Trusts and S-Corp Stock

1. Death of Grantor
2. Termination by Other Reason
3. Who Pays Taxes on S-Corp Income?

Answer 10

If the grantor dies and the trust continues in existence, the S corporation election continues to apply for up to two years from the grantor’s death.

However, if the trust loses its grantor trust status other than by reason of the death of the grantor, the trust is immediately disqualified as a shareholder and the corporation’s S election may be immediately terminated.

Grantor pays the tax on the trust income – including the income attributable to the S-corp.

Question 11

Court Created Trusts

1. 142 Trusts
2. 1301 Trusts

Answer 11

1. 142 Trust (Sec 142 of Property Code) – is a court-created trust for minors or incapacitated person winning award from lawsuit.
   
   1. Bond is required unless corporate trustee.
   2. no annual accounting required
   3. trustee compensation reasonable
2. 1301 Trust (Sec 1301 of Estates Code - Old sec 867 of Probate code) – is a court-created trust implemented for managing assets of a minor or someone physically or mentally disabled individual.
   
   1. Bond required unless corporate trustee or only physically handicapped B
   2. annual accounting required
   3. trustee compesnation same as for guardianships