Types, Features and Taxation of Trusts

Question 1

Elements of a trust

Answer 1

• must be trust property (corpus)
• must be grantor (transfers property and dictates terms of trust)
• must be trustee (legal title to property and manages trust)
• must be at least one beneficiary (benefit of trust, equitable title)
• grantor must be competent at creation, trustee must be competent always

Question 2

Per capita distribution

Answer 2

• if one kid dies, grandkids from that parent get equal shares split with everyone else
• reduces kids share

Question 3

Per stirpes distribution

Answer 3

• if one kid dies then grandkids from that parent get parents share and have to split it among themselves
• kids shares dont reduce

Question 4

Simple trusts

Answer 4

• conduit for forwarding income to beneficiaries
• passes income through to beneficiaries who report on income (pay own marginal rates)
• DNI
• income must be distributed and its taxed to beneficiary
• no distribution of corpus
• no charitable gifts

Question 5

Distributable Net Income (DNI)

Answer 5

• accounting rule that limits amount that beneficiaries must report as gross income
  purposes
• provide trust with deduction for amount distributed to beneficiaries
• limit portion of distribution that is taxable to beneficiaries
• ensure character of distributions remains same between beneficiary and trust
• trust deduction = lesser amount actually distributed or DNI

Question 6

Complex trust

Answer 6

• trust taxed as separate entity on income earned
  -requirements
  1. irrevocable and grantor hasnt retained control
  2. income is accumulated
• income accumulated taxed to trust, income distributed taxed to beneficiary
• corpus can be distributed
• may make charitable gifts

Question 7

Revocable trust

Answer 7

• trust created during life
• reserves power to alter trust
• becomes irrevocable at death
• included in gross estate of grantor

Question 8

Irrevocable trust

Answer 8

• cannot be altered
• not included in grantors estate
• grantor cannot terminate or reclaim assets

Question 9

Crummey trust

Answer 9

• irrevocable trust with demand rights
• gift of future interest into present interest
• can be used for minor beneficiary
• demand rights can be granted to minor
• each time contribution is made to trust, beneficiary has temporary right (30days) to demand withdrawal
• withdrawal right is equal to lesser of annual exclusion or value of current year contribution

Question 10

Inter-vivos trusts

Answer 10

• revocable living trust becoming irrevocable at death
• at death can terminate with corpus distributed to remaindermen or continues to later date
• no income tax during life (not complete gift)
• taxed to grantor

Question 11

Advantages of inter-vivos trust

Answer 11

• organization of property during life
• lower cost than probate
• alternative to guardianship/conservatorship
• more privacy than will
• speedy disposal of property
• avoidance of probate

Question 12

Disadvantages of inter-vivos trust

Answer 12

• legal fees
• funding burden
• longer creditor period

Question 13

Testamentary trusts

Answer 13

• created through will
• can protect property from estate tax levies as it passes money

Question 14

Spendthrift provisions

Answer 14

• prohibits transfer of beneficiaries interest
• not subject to claims of beneficiary creditors

Question 15

Bypass trust

Answer 15

• first spouse to die controls property of trust
• trust contains property transferred to trust at time of decedents death
• gives decedent postmortem control over transferred property
• amount transferred equals estate tax exemption
• provides income stream to surviving spouse
• income can be split among spouse and other individuals
• trust wont be included in spouses estate unless it included 5 or 5 provision or HEMS withdrawal right
• at second spouse death, remaining assets pass to other beneficiaries tax free

Question 16

Portability of unused exemption

Answer 16

• executor of deceased spouse estate can transfer cany amount of unused exemption to surviving spouse

Question 17

Marital trust

Answer 17

• second spouse to die controls property of trust, has right to all income
• funded with property transferred from surviving spouse at decedents death
• property passes estate tax free under unlimited marital deduction
• surviving spouse has postmortem control over this trust
• included in gross estate of surviving spouse

Question 18

Qualified Terminal Interest Property Trust (QTIP)

Answer 18

• first spouse to die controls property of trust
• when decedent wishes to provide the surviving spouse with income paid only for life and wishes to qualify property for marital deduction
  LAME
• Lifetime income for spouse
• Annual payments to spouse
• Mandatory payments to spouse
• Exclusively for spouse
• decedent can decide who remaindermen are not surviving spouse
• included in estate of second spouse

Question 19

Estate trust

Answer 19

• marital trust that does not provide the surviving spouse an income stream
• holds non income producing assets

Question 20

Pour-over trust

Answer 20

• to catch any assets the client owns but not yet controlled by revocable trust at death
• revocable trust set up first and pour over will is executed

Question 21

Gifts to minors - future interest

Answer 21

2503b (bad boy) trust
- interest distribution only
- use applicable credit to fund
- income may be subject to kiddie tax

Question 22

Gifts to minors - present interest

Answer 22

Subject to kiddie tax
- UGMA: funded with cash type assets, distributed at 18, in custodians estate, cannot be testamentary
- UTMA: funded with any asset (real estate), distributed at 21, in custodians estate, can be testamentary

Trust tax rate (37% > 14k+)
- 2503c trust: funded with any asset, distributed at 21, costs to set up and maintain, in grantors estate

529: specific funds, flexible distributions, lump sum 85k, donor can retain control, k-12 10k/yr, 10k to student loans

Question 23

UGMA

Answer 23

• property transferred in name of adult custodian for minor
• securities, cash, LI, annuities allowed
• cannot hold real property (except in 2 states)

Question 24

UTMA

Answer 24

• real estate, partnership interest, patents, royalty interest, intellectual property allowed
• allows gifts at death by permitting fiduciary to establish custodianship if authorized by trust

Question 25

UGMA and UTMA rules and purposes

Answer 25

- gift created for only one person (minor) - not separate legal entity - income taxable to minor (kiddie tax) - custodian can distribute income and principal at any time - if donor is custodian and dies before minor, included in donors estate - if minor dies first, goes to executor of their estate - minor receives property outright at 18 or 21 - cannot be used in obligation to support minor

Question 26

2503b (bad boy) trust

Answer 26

- can be used for minor, more often used for adult children - stream of income can result in kiddie tax problem before 24 y/o - 2 parts to the gift 1. income interest: present interest (annual exclusion), subject to tax 2. remainder interest: future interest - only income needs to be distributed, not corpus

Question 27

2503c trust

Answer 27

- gift to minor and still receive annual exclusion conditions - property and income may be used before 21 - any property not used will pass to donee at 21 - if donee dies before 21, payable to donee estate - gets $100 deduction for kiddie tax calculation - first 2,900 taxed at 10%

Question 28

When to establish 2503c trust

Answer 28

- trust doesnt have to die at 21 if adult keeps putting money in, as long as donee can withdrawal at 21 - grantor can designate initial and successor trustees - if donor dies before donee is 21, included in donors estate

Question 29

2503c vs 2503b

Answer 29

Investments - C: any reasonable investment - B: income producing investment Transferred - C: principal at 21 or sooner - B: mandatory income but not corpus Gift tax - C: present interest, exclusion allowed - B: future interest for corpus, present for income Taxation - C: trust tax ruled - B: maybe kiddie tax

Question 30

Kiddie tax

Answer 30

- unearned income greater than $2,500 with at least one living spouse at year end - counts if under 18 - counts if 18 and receiving less than half of support - counts 19-23 if full time student and receiving less than half of support through earned income Step 1: 1,250 deduction Step 2: next 1,250 taxed at 10% (125) Step 3: over 2,500 taxed at parents rate * if there is earned income, standard deduction is earned income + 400

Question 31

Long term gains

Answer 31

- children over 18 can still take advantage of lower capital gains tax

Question 32

529

Answer 32

- 85k max in one year (170k if married and splitting) - if doing lump sum then cannot use gift exclusion for 5 years - if donor dies before 5 years, portion of gift allocated for future years in included in estate - donor retains control of gift and can take money back - completed gift

Question 33

Sprinkling or spray provisions

Answer 33

- power to direct (distribute) income at the discretion of the trustee for the benefit of the beneficiary - provision in trust or estate - income

Question 34

Discretionary provision

Answer 34

- provides beneficiary with only as must trust income or principal as the trustee alone sees fit to distribute - income or principal

Question 35

Support trust

Answer 35

- distributes only the amount of income and principal the trustee deems necessary for the support or education of the beneficiary

Question 36

Income and remainder beneficiaries

Answer 36

- remainder interest is future interest - typically trust corpus goes to another beneficiary after termination of the prior interest for the first beneficiary

Question 37

Rule against perpetuities (RAP)

Answer 37

- no interest in property is valid unless the interest must vest no later than 21 years and 9 months after the youngest life when trust was created - some states - dynasty trust

Question 38

Dynasty trust

Answer 38

- B trust that benefits multiple generations - free of estate, gift, GST tax - can last for the lives in being plus 21 years and 9 months or as long as law allows - distributed at end of period

Question 39

Section 2503c trust - taxation

Answer 39

- income is gift of present interest (qualifies for annual exclusion) - remainder interest is future gift - donor pays gift tax or future interest and present over exclusion - donee pays income tax (possibly at kiddie tax rules)