TYPES OF TRUSTS. Flashcards
Revocable Lifetime/Inter Vivos Trusts
All trusts are presumed irrevocable unless the trust explicitly authorizes revocation. The main requirement is that at least one beneficiary is named, who is not the settlor.
A revocable trust manages assets efficiently, helps plan for possible incapacity by avoiding a guardianship proceeding and also avoids probate. However, a revocable trust does not avoid taxes. Additionally, if the settlor keeps an income interest, or the power to revoke, the revocable trust assets will be included in the settlor’s gross estate for fed estate purposes.
The settlor cannot be the sole beneficiary when they are also named the sole trustee. The settlor can, however, be a Trustee, an income beneficiary for life, and retain the power to terminate or amend the trust.
Pour Over Gifts.
Testamentary gifts (gifts made in a will) to an existing revocable trust are acceptable provided that the trust is in existence or executed concurrently with the will.
Life insurance proceeds or savings account can name either the trust or trustee.
Totten Trusts
{BANK ACCOUNT TRUST} A Totten Trust is created when a person deposits money in an account in the name of “A in trust for B,” or as “as trustee for” a named beneficiary. A depositor makes the deposits and withdrawals as he or she wishes during the depositor’s lifetime. The Beneficiary has NO interest during the depositor’s lifetime but will get whatever is left in the account upon death.
Totten Trusts: Revocation
There are four ways to revoke a Totten Trust:
(1) Depositor withdraws all funds from account;
(2) express revocation during lifetime by depositor making a writing naming beneficiary and financial institution and having revocation notarized and delivered to the bank;
(3) by will;
(4) death of beneficiary before depositor. Creditors can still reach this before or after death since it is considered a revocable trust.
Totten Trust and Joint Accounts
Trust-like alternative. Each account holder owns ½ of the joint account, no matter who deposits money. If one person makes the entire deposit, it is considered a gift of one half to the other account holder. If you take out the money early, you sever the joint account and owe the amount that was removed in excess what the lifetime gift was.
Uniform Transfers to Minors. {UTMA}
Avoids a trust, tax shelter, qualifies for the 13K per donee for annual exclusion from fed and state gift tax.
Duties: hold, manage, and invest the property under a PRUDENT PERSON standard; pay over to the minor or for the minors need what part of the property custodian deems advisable AND pay what is left of the property to the minor when they turn 21 or 18 if gift made before 1/1/97.
Charitable Trusts.
A charitable trust is created the same way as a private express trust, but the trust must be created for a charitable purpose (health, education and religion) AND must have a reasonably large number of unidentified beneficiaries.
RAP does not apply!
Cy Pres Doctrine: Applied to outright bequests as well as charitable trusts. Court will apply this to modify a charitable trust consistent with and “as near as possible” with the settlor’s intent IF the purpose of the trust or bequest is frustrated.
Spendthrift Trust
A spendthrift trust is a trust where beneficiaries CANNOT transfer their rights of future payments of income or principal AND creditors CANNOT attach to the beneficiaries right to future payments of income or principal. Therefore, a beneficiary cannot ever voluntarily alienate or transfer his right to future payments.
Creditors cannot ever attach to the beneficiaries right to future payments UNLESS:
(1) they are a preferred creditor (common law exception – IRS, Child support, Alimony);
(2) Surplus as measured by the beneficiary’s station in life (what they require to live); OR
(3) a self-settled trust or settlor retains an interest (MAJ rule – trust valid, but spendthrift provisions not recognized for creditors);
(4) 10% levy provided by CPLR.
Support Trusts
A support trust is one in which the trustee is required to pay or apply so much of the income or principal of the trust as is necessary for the support, health, maintenance and education of the beneficiary. The trustee does not have discretion to refuse to pay bills necessary for the beneficiary’s support. A beneficiary CANNOT voluntarily alienate or transfer his right to future payments because this would violate the trustor’s intent.
Discretionary Trusts
In a discretionary Trust, the trustee is given sole and absolute discretion in determining whether to apply or withhold payment of trust property to the beneficiary. This discretion actually limits the rights of the beneficiary to the amounts the trustee decides to give her. The beneficiary cannot interfere with the exercise of the trustee’s discretion UNLESS the trustee abuses her power. What constitutes abuse depends on the extent of discretion conferred on the trustee. Generally, a court will not interfere unless the trustee has acted in bad faith or dishonesty. A beneficiary CANNOT voluntarily alienate or transfer his right to future payments because there might not be any, BUT he can assign his rights to an assignee, who will take the payment if the trustee decides to pay.
Creditors cannot attach to the beneficiary’s right to future payments because there is nothing to attach to.
If the trustee has notice of the debt and the creditor’s judgment against the beneficiary, and the trustee DOES decide to pay, he must pay the creditors or be held personally liable.
