Types, features, and taxation of trusts Flashcards
Simple versus complex trust
Simple trust:
Income is distributed
Income taxed to the beneficiary
Normally, no distribution of corpus
No charitable gifts
Complex trust:
Income must or may be accumulated
Income accumulated as tax to the trust
Income distributed is taxed to the beneficiary
Corpus can be distributed until the trust terminates
May make charitable gifts
An irrevocable trust is generally a complex trust or a simple trust?
Complex
Crummy trust
- An irrevocable trust
- Crummy withdrawal, right, each time a new contribution is made to the trust, the beneficiary has a temporary right to demand a withdrawal from the trust (typically within 30 days) the right of the withdrawal amount is equal to the lesser of the amount of the annual exclusion or the value of the current year contribution
- If demand right is not exercised an annual transfer for that year remains in the trust for management by the trustee
- If the demand is made trustee must deliver the funds to the beneficiary
What is an Inter-vivos trust?
Also known as a revocable living trust
Most grantors named themselves trustee of their living trust during lifetime at death the trust becomes irrevocable and either terminates with the corpus distributed to the remainder man or continues until a later date
What is a testamentary trust?
Created through instructions contained in a person’s will
What is a bypass trust?
- The first spouse to die controls the property of the trust
- Generally gives the decedent control over the transferred property
- Amount of property transferred to the trust equals the federal estate tax exemption
- Can be structured to provide a stream of income to the surviving spouse only
- The income stream can also be split among the spouse and other individuals if the decedent chooses (can’t be done in a QTIP trust)
- Surviving spouse may be able to exercise limited rights of invasion over corpus of a bypass trust, as long as the spouse is not provided with more than a five or five provision or HEMS withdrawal, right
- Property will not be included in the surviving spouses estate
- Remaining assets pass estate tax free to the beneficiaries
What are other names for a bypass trust?
Non-marital trust
B trust
Non-marital B trust
Family trust
Applicable credit amount trust
Applicable credit amount shelter trust
What is the portability of unused exemption?
Executor of a deceased spouses estate can transfer any amount of the unused exemption to the surviving spouse
What is a marital trust?
- The second spouse to die controls the property of the trust, operates as a power of appointment trust
- Trust with property transferred to the surviving spouse at the decedents death
- Property passes estate, tax free under the unlimited marital estate tax deduction
- Spouse has general power of appointment over this property and transfer it to whomever he she wishes
- Property must be included in the gross estate of the surviving spouse
What are other names of a marital trust?
A Trust
Marital A trust
What is a qualified terminal interest property trust QTIP?
- First spouse to die controls the property of the trust
- Appropriate when decedent wishes to provide the surviving spouse with a stream of income that will be paid for life yet also wishes to qualify the property for the mirror total deduction
- Keywords for a QTIP trust our LAME: L - lifetime income interest for the spouse, A - annual payments to the spouse, M - mandatory payments to the spouse, E - exclusively for a spouse
Qualifies for the marital deduction but must be included in the surviving spouse gross state
What are other names for a qualified terminal interest property trust QTIP?
Income interest trust or a C trust
What is a pour over trust
Main purpose of the trust (will) is to catch any assets that the client owns but are not yet controlled by the revocable trust at death
2503(c) trust vs 2503(b) trust
2503(c):
- Investments: any reasonable investment
- Transferred: principal at age 21 or sooner to child
- Gift tax (corpus): gift of present interest, therefore the exclusion applies
- Taxation: subject to trust tax rules
2503(b): bad boy trust
- Investments: income producing investments
- Transferred: mandatory income distributions, but no mandatory corpus distributions to child
- Gift tax (corpus): gift of a future interest therefore a donor cannot use his or her applicable exclusion. However, the income payout qualifies for a gift of a present interest.
- Taxation: maybe subject to kiddie tax
Section 529 college savings plan
- Can contribute a maximum of $90,000 in one year for each beneficiary selected, can be $180,000 if married and splitting the gift
- The entire $90,000 is considered a completed gift
- Donor must then presume the $18,000 exclusion for the next five years has already been gifted
- Donor dies before the end of of 5 years a portion of the gift that would have been allocated in ensuring years would be included in the estate
What is a sprinkling or spray provision?
Power to direct (distribute) income at the discretion of the trustee for the benefit of the beneficiary
What is a discretionary provision?
Provides the beneficiary with only as much trust, income or principle, if any as the trustee alone sees fit to distribute
What is a support trust?
A trust which distributes only the amount of income and principle the trustee deems necessary for the support or education of the beneficiary
What is a dynasty trust
B trust that benefits multiple future generations can last for the lives in being +21 years and nine months or as long as local law allows
Beneficiaries interest are limited to life states
Gifts in trust lacking crummey provisions are either a present interest gift or future interest gift?
They are a future interest gift if they do not have the crummey provision
