understanding & drafting irrevocable trusts presented by: wealthcounsel, llc bill conway
TRANSCRIPT
Understanding & Drafting Irrevocable Trusts
Presented By:
WealthCounsel, LLC
Bill Conway www.wealthcounsel.com
Good Morning!
EP 203 significantly overhauled Overview
WealthDocx IRT Module Insurance-Related IRT Issues Sale Transactions with Defective IRTs Asset Protection & Self-Settled Trusts Split-Interest Trusts
Irrevocable Trusts Generally
Gifts are completed Trust assets are removed from estate Grantor trust?
Maybe Maybe not
Selecting the Type of IRT (Page 4)
2503(c) Trust FBO Minor Outright at 21 Included in estate Alternative to UGMA/UTMA
Asset Protection Self-Settled Trust Delaware Distribution advisor suggested
Selecting the Type of IRT (Page 5)
Family Bank Trust / BERT Trust Inter Vivos Bypass Trust
Gifting Trust Receptacle for lifetime gifts
HEET Trust Health and Education Exclusion Trust Appropriate where no GST exemption left
Intentionally Defective Grantor Trust Grantor trust set to yes Warning re: Crummey
Selecting the Type of IRT (Page 5)
Inheritor’s Trust Settled by non-beneficiary Only one beneficiary allowed
Life Insurance Trust (Single) Doesn’t ask if insurance is appropriate
investment Life Insurance (2nd to Die)
Crummey rights automatically included
Other IRTs in WealthDocx
Charitable Trusts CRTs, CLTs, Foundations
Split-Interest Trusts GRATs, QPRTs, QTIPs (Later)
Special Needs Trusts (3rd Party) Retirement Trusts
Crummey Withdrawal Rights (Page 8)
Annual Gift Tax Exclusion Saves $5 million lifetime credit Future Interest Rule Crummey Solution
Gifting to Irrevocable Trust
Crummey Solution (Page 9)
No notice required or given Tax Court - withdrawal rights were illusory 9th Circuit reversed – present interest as long
as the withdrawal right is enforceable IRS acquiesced in Rev Rul 81-7; Reasonable
notice required
Crummey Issues
Minor Beneficiaries (Page 9)
Guardian may exercise Should not be donor/parent
Inconsistent positions by IRS WD precludes donor/parent from exercising
Non-guardian nominee??
Crummey Issues
Grantor’s Control Over Withdrawal Rights (Page 10)
WD defaults Withdrawal rights exist Pro rata among all benes
Invert defaults?
Crummey Issues
Contingent Beneficiaries (Page 12)
Cristofani (Tax Court)
2 children as current benes 5 grandchildren as contingent benes Tax Ct said no vested interest required
Crummey Issues
Contingent Beneficiaries (Page 12)
Cristofani (Tax Court)
Kholsaat (Tax Court)
16 contingent benes No withdrawal rights exercised IRS argued implicit understanding Tax Court said no evidence of an understanding
and none would be inferred
Crummey Issues
Contingent Beneficiaries (Page 13)
Cristofani (Tax Court)
Kholsaat (Tax Court)
Holland (Tax Court)
Family meeting to discuss not exercising IRS argued implicit understanding Tax Court said meeting evidenced knowledge of
rights and conscious decision not to exercise
Crummey Issues
Notice of Withdrawal Right (Page 14)
Oral vs. Written Frequency
“Current” notice Schedule of contributions sufficient WD requires notice upon each contribution
Crummey Issues
Notice of Withdrawal Right (Page 14)
Oral vs. Written Frequency Duration
Reasonable period of time Cristofani was 15 days 4 days has been approved; 3 days disapproved ETIP if spouse has withdrawal right
Crummey Issues
Notice of Withdrawal Right (Page 16)
Oral vs. Written Frequency Duration Accuracy Waiver
Crummey Issues
Maintaining Sufficient Assets (Page 16)
Satisfy from other trust assets Distribute fractional portion of policy (if
applicable) WD provides for grant of line of credit from
grantor
Crummey Issues
Estate Tax Treatment (Page 16)
Withdrawal Right = GPOA GPOA included in power holder’s estate
Gift-Over Problem (Page 17)
Lapse of Withdrawal Right IRC 2514 (vs. 2503) Lapse over 5/5 = Release Release = transfer to other beneficiaries (if
any) Transfer is of a future interest
Gift-Over Problem
Gift-Over Solutions (Page 18)
Limit withdrawal right to 5/5 Separate trusts Common trust with hanging powers Contribute assets so that 5/5 = $12,000 Loans in lieu of contributions
Gift-Over Solutions
Common Trust (Page 19)
Limits withdrawal right to 5/5 No lapse greater than 5/5 Donee has to aggregate gifts for 5/5
Gift-Over Solutions
Common Trust (Page 19)
Annual Premium:$5,000
Beneficiaries:2-Son & Daughter
Dad Mom$2,500 $2,500
$5,000
2514(e) lapse of $2,500 each
(no gift)
No Giftover Problem
Gift-Over Solutions
Common Trust (Page 19)
Beneficiaries:2-Son & Daughter
Dad Mom$26,000 $26,000
$52,000
2514(e) lapse of $5,000 each
(no gift)
Deemed gift of $21,000 from
each beneficiary to the other
Annual Premium:$52,000
Gift-Over Solutions
Separate Subtrusts (Page 19)
Allows for full utilization of annual exclusion Lapse in excess of 5/5 gifts over to no one Beneficiary becomes grantor for GST
purposes over released portion Separate accounts must be funded
Gift-Over Solutions
Separate Subtrusts (Page 19)
Annual Premium:$52,000
Beneficiaries:2-Son & Daughter
$26,000
$52,000
No Giftover because no other beneficiaries to
whom to gift over
Dad Mom$26,000
Lapse to Separate Trust for Son of
$26,000
Lapse to Separate Trust for Daughter of
$26,000
Gift-Over Solutions
Hanging Powers (Page 21)
Allows for full utilization of annual exclusion Amounts in excess of 5/5 continue to be
withdrawable Estate inclusion in event power holder
predeceases Best of both worlds
Gift-Over Solutions
Hanging Powers (Page 21)Annual Premium:
$52,000
Beneficiaries:2-Son & Daughter
Dad Mom$26,000 $26,000
$52,000
2514(e) lapse of $5,000 each
(no gift)
Remaining $42,000 continues to “hang,”
therefore no gift over
Gift-Over Solutions
Hanging Powers (Page 21)
Beneficiaries:2-Son & Daughter
$26,000
$260,000
Balance of $177,200 “hangs”
Year 5:Aggregate
Contributions of $260,000
Dad Mom$26,000
Year 1 $10,000 lapseYear 2 $10,400 lapseYear 3 $15,600 lapseYear 4 $20,800 lapseYear 5 $26,000 lapse
Grantor Trust Provisions (Page 23)
Overview & History IRC 671-679 Created to eliminate income tax abuses
involving (then-lower) trusts brackets Grantor trust as to:
Income Principal Both
Grantor Trust Opportunities (Page 24)
Tax free sale of appreciated assets Tax burn as non-taxable contributions Removal of assets from estate Tax free distribution to trust beneficiaries Permissible transferee of life insurance
policy outside of transfer for value rules
Achieving Grantor Trust Status
672 Definitions (Page 24)
Adverse = beneficial interest that is substantial and whose interest is adversely affected by exercise or nonexercise
Nonadverse = Not adverse Related or Subordinate = Nonadverse +
parent/issue/sibling/employee/corp Spousal Attribution
Achieving Grantor Trust Status
672 Definitions (Page 24)
Adverse = beneficial interest that is substantial and whose interest is adversely affected by exercise or nonexercise
Nonadverse = Not adverse Related or Subordinate = Nonadverse +
parent/issue/sibling/employee/corp Spousal Attribution
Achieving Grantor Trust Status
674 Power to Affect Beneficial Enjoyment 674(c) – Power to Distribute Income or
Principal, or to add beneficiaries
Grantor holding power = inclusion
Achieving Grantor Trust Status
674 Power to Affect Beneficial Enjoyment 674(d) – Power to allocate income
Power granted to someone other than grantor or “spouse living with grantor” to distribute, apportion or accumulate income to or for beneficiaries if limited by reasonably definite external standard
Power creates grantor trust as to income only Possible to switch grantor trust status on and off
merely by spouse moving out and back in?
Achieving Grantor Trust Status
675 Administrative Powers (Page 28)
675(2) – Power given to nonadverse party to make loans to grantor without adequate interest or security
N/A if trustee has authority to make loans to anyone without regard to interest or security
Power alone will cause grantor trust status, even if no loan is made
Achieving Grantor Trust Status
675 Administrative Powers 675(3) – Actual borrowing of funds
Direct or indirect loan to grantor or grantor’s spouse which is unrepaid at the end of year
N/A to loans with adequate interest and security Creates grantor trust to extent amounts are
unrepaid at year end, but . . . IRS has apparently ignored requirement that loan
remain outstanding until year end
Achieving Grantor Trust Status
675 Administrative Powers (Page 30)
675(4) – General Right exercisable in a non-fiduciary capacity by
any person to reacquire trust corpus by substituting other property
Grantor can hold
Achieving Grantor Trust Status
675 Administrative Powers (Page 30)
675(4) – General Right exercisable in a non-fiduciary capacity by
any person to reacquire trust corpus by substituting other property
Service’s position is that power alone isn’t sufficient, and applies a facts and circumstances analysis
Defective as to both income and principal Grantor can release Protector can re-grant
Achieving Grantor Trust Status
677 Power to Use Income for Benefit of Grantor (Page 34)
Grantor treated as owner of any portion of trust, whether or not under §674, the income of which, without the approval or consent of adverse party is, or in discretion of grantor or nonadverse party may be, distributed to or for benefit of grantor or spouse
Or used to pay premiums on life insurance on the life of grantor or spouse
Achieving Grantor Trust Status
677 Power to Use Income for Benefit of Grantor Trust should disallow use of income to satisfy
obligation of support Discretionary power to pay income to grantor
may cause inclusion under state law Some states have changed their laws to not
cause inclusion (Alaska, Delaware, and others)
Achieving Grantor Trust Status
678 Persons other than Grantor Treated as Owner (Page 35)
ONLY Code section attributing ownership to someone other than the actual grantor
Power to vest corpus or income exercisable solely by that person
surviving spouse as sole trustee of bypass trust? limitation to ascertainable standard (HEMS)
prevents estate tax inclusion switch on/off grantor trust status by
appointing/firing co-trustee
Achieving Grantor Trust Status
678 Persons other than Grantor Treated as Owner (Page 36)
Power to distribute income or principal which is “partially released or otherwise modified” that would cause grantor trust status under 671-677 5/5 power holder, until released, modified, or allowed
to lapse, is treated as grantor over portion of trust subject to power
Upon lapse, power holder is treated as grantor of amount in excess of 5/5
Crummey
Achieving Grantor Trust Status
§ 678 vs. §§ 671-677 (Page 36)
§ 678 N/A with respect to power over “income” during any period actual grantor is treated as owner under §§671-677
Service has interpreted §678(b) as applying to principal as well as income
Income Tax Reimbursement (Page 37)
Silence = prohibition? Mandatory = inclusion Discretionary = ??
Prearrangement?
Terminating Grantor Trust Status
Maintain Flexibility Power to terminate grantor trust status
should not be in hands of grantor
Reporting for a Grantor Trust
To File or Not to File (Treas. Reg. 1.671-4)
Option 1: No EIN or 1041 Provide payors with Grantor/owner’s TIN Grantor provides W-9 to Trustee Trustee statement for Grantor/owner
Option 2: EIN and 1041 Provide payors with Trust’s TIN Trust files Forms 1099 Trustee statement for Grantor/owner
Page 134 – Letter to CPA
Removing & Replacing Trustees (Page 37)
Right to Remove and Replace RR 77-182: No inclusion if trustee resigned RR 79-353: Inclusion if grantor removed
without cause PLR 9303018: Facts and circumstances Wall: No inclusion where replacement was
corporate fiduciary
Removing & Replacing Trustees (Page 41)
Right to Remove and Replace (con’t)
Vak: 8th Circuit said power to change trustee did not prevent gift from being complete, contrary to Tax Court’s position
RR 95-58: 79-353 revoked, 77-182 modified; No inclusion if successor was not “related or subordinate” under §672(c)
Related or Subordinate – A Review
Not adverse AND Any one of
Spouse, if living with grantor Parent Issue Sibling Employee Corporation where grantor has significant
voting control
Related or Subordinate – A Review
Does not include issue of siblings (nieces and nephews, etc.)
Spousal attribution Typically related or subordinate Literally adverse but not technically due to
spousal attribution
Removing & Replacing Trustees (Page 42)
Power to remove and replace retained by the grantor?
Yes
No
Is person being removed acting in a fiduciary capacity?
No
Yes
No 2036(a)(2) or 2038(a)(1) concern.
Must replacement be not related or subordinate to grantor with IRC
672?
2036(a)(2)/2038(a)(1) concern. Beyond Wall
logic.
No2036(a)(2)/2038(a)(1) concern. Beyond Rev.
Rul. 95-58.
Yes
Within Rev. Rul. 95-58
“Amending” an IRT (Page 44)
Lifetime LPOA Sell assets to new IRT Non-judicial modification per UTC Judicial modification Decanting (later) Trust Protector Other?
Trust Protectors (Page 46)
Common in offshore jurisdictions Little guidance in American law Role is different from trustee
Perspective of trusted family friend or advisor Counter-balance to impersonal institutional
trustee Enhanced flexibility without adverse tax
consequences
Trust Protectors (Page 49)
Removal and Replacement?
Power to remove and replace retained by the grantor?
Yes
No
Is person being removed acting in a fiduciary capacity?
No
Yes
No 2036(a)(2) or 2038(a)(1) concern.
Must replacement be not related or subordinate to grantor with IRC
672?
2036(a)(2)/2038(a)(1) concern. Beyond Wall
logic.
No2036(a)(2)/2038(a)(1) concern. Beyond Rev.
Rul. 95-58.
Yes
Within Rev. Rul. 95-58
Trust Protectors (Page 50)
Fiduciary or Not? Silence vs. express answer Statute? Ability to exercise power if fiduciary?
Bypass(-type) Trust Issues (Page 54)
Mandatory vs. Discretionary Income Trust income tax rates better?
5/5 Powers
Administration of Remaining Trust (Page 55)
Guidelines for discretionary distributions Silences = required?
5/5 Powers Providing for children-in-law
Generation Skipping (Page 57)
Annual GST Exclusion Only for direct-skip gifts (outright or in trust) If in trust:
Only one beneficiary; and Trust assets fully included in donee’s estate
Generation Skipping (Page 57)
Annual GST Exclusion Qualifying Trusts include:
2503(c) Trusts Separate Trusts for skip persons
Non-Qualifying Trusts include: Dynasty trusts Common trusts
Generation Skipping (Page 59)
GST Exemption $5.0M in 2011-2012 $??M in 2013 Can only be allocated by the transferor
Crummey Powers
Generation Skipping (Page 61)
Allocating the GST Exemption Allocation is irrevocable Automatic allocation to:
Lifetime direct skips At death, of any remaining GST exemption to
trusts from which there could be a generation skip Lifetime indirect skips to a “Generation-Skipping
Transfer Trust” Opt Out of Automatic Allocation on 709
IRS Form 709
If you aren’t preparing them …. Part 1 – personal information Schedule A
Part 1 – Gifts Subject Only to Gift Tax Gifts to children
Part 2 – Direct Skips Gifts to grandchildren
Part 3 – Indirect Skips Gifts to trust for children and grandchildren
IRS Form 709
Part 4 Line 1 – total gifts Line 2 – annual exclusions Line 3 – net of the two
Schedule B – Prior returns Schedule C – Computing GST
Part 2 – Allocating Remember to allocate to entire gift, not just taxable
portion!! Use formula allocation just in case
Gift Splitting (Page 63)
A legal fiction Only to third parties (not to spouses) All or nothing annually Consent must be made on Form 709 Gift
Tax Return
Drafting for Lifetime Benefits (Page 64)
Loans to grantor Trustee borrows against policy and re-loans If adequately documented and secured,
should be no incident of ownership No taxable income – trust is grantor trust
under IRC 675(3) Interest accrued is debt against estate (“Tax
Burning”)
Drafting for Lifetime Benefits (Page 65)
Inter-vivos Bypass Trust Spouse has access Danger is spouse’s death
Self-Settled Trust Jurisdictions
Reciprocal Trust Doctrine (Page 65)
Estate of Grace (US Sup Ct.)
Applicable where trusts are interrelated and grantors are left in the same economic position as if no trusts had been created
Reciprocal Trust Doctrine (Page 65)
Estate of Grace (US Sup Ct.)
Estate of Bischoff (Tax Court)
Applied doctrine to trusts established by grandparents for the benefit of grandchildren and naming grandparents as trustees.
Reciprocal Trust Doctrine (Page 65)
Estate of Grace (US Sup Ct.)
Estate of Bischoff (Tax Court)
Estate of Green (2nd Cir)
Refused to follow Bischoff stating that Grace court required benefit to be retained by grantors before doctrine was applicable.
PLR 200426008
ILIT Benefits (Page 67)
Remove death benefits from taxable estate
Control disposition of death proceeds Utilize annual gift tax exclusion for gifts to
the trust Asset Protection
ILIT Objections
Cost to set up Administrative hassle Perceived loss of access to cash value
build-up within policy
ILIT Alternatives (Page 67)
Continued individual ownership Ownership by adult children Family Insurance Partnership
Estate Taxation of Insurance (Page 68)
Insurance is included if: Insured possessed incidents of ownership (IRC
2042)
Proceeds are payable to or for the benefit of the estate (IRC 2042)
Policy (or incidents of ownership) are transferred within 3 years of death (IRC 2035)
Estate Taxation of Insurance (Page 68)
IRC 2042 Incidents of ownership
Power to change beneficiary Power to surrender or cancel the policy Power to assign the policy Power to revoke an assignment Power to pledge the policy A reversionary interest in the policy
Payable to or for the benefit of the estate
Valuation of Insurance (Page 69)
Generally: Interpolated terminal reserve
+ Unused premiums
+ Accumulated dividends
- Policy Loans Single premium policies valued by
replacement Group term has no value but continued
payment of premiums are on-going gifts from the employee
Income Taxation of Insurance (Page 69)
General Rule: Excluded from income (IRC 101(a)(1))
Exception: Transfer for Value (IRC 101(a)(2))
Exception to the Exception: Transferee determines basis from transferor’s
basis, i.e., carry-over basis (IRC 101(a)(2)(A))
Transferee is insured, partner of the insured, partnership in which insured is a partner, or corporation in which insured is shareholder or officer. (IRC 101(a)(2)(B))
Avoiding 3 Year Rule of 2035 (Page 70)
Never possess incidents of ownership Purchase new policy Sell policy to grantor trust Sell policy to partner of the insured Sell policy to partnership in which insured
is a partner
Avoiding 3 Year Rule of 2035 (Page 70)
Sell policy to grantor trust
RevocableLivingTrust
RevocableLivingTrust
ILITILIT
$150,000 + other assets
$150,000
Policy
Avoiding 3 Year Rule of 2035 (Page 71)
Sell policy to partner of the insured
RevocableLivingTrust
RevocableLivingTrust
ILITILIT
Limited Partnership (or LLC)Limited Partnership (or LLC)
$150,000 + other assets
Otherassets
L.P.Int.
Assets
G.P. & L.P. Int.
$150,000
Policy
Drafting to Provide Liquidity (Page 71)
Trustee is authorized to lend to the estate Trustee is authorized to purchase assets
from estate WD provides these options
Community Property Issues (Page 71)
Non-insured spouse cannot contribute to trust of which he or she is beneficiary
Solution is Partition Agreement
ILITs for Survivorship Policies (Page 72)
Neither spouse/insured can be trustee Incidents of ownership exist even in
fiduciary capacity Co-trustee may solve Joint trust can hold individual policies
Trustee Liability for Policy Performance (Page 72)
Recent lawsuits Trend to statutorily reduce liability Audits
Introduction (Page 74)
Chapter 14 Lack of certainty with GRAT Grantor trust rules remain Less frequency with $5 million gift
exemption
Sequence
Grantor establishes defective IRT Grantor contributes assets, allocates GST
exemption Grantor engages in sale (or part-gift/part-
sale) with IRT
Types of Consideration (Page 76)
Case Not typically
Installment Note Interest-only vs. Self-amortizing Refinancing Income tax concerns at death
IRD? Step-up in basis?
Types of Consideration (Page 74)
Self-Canceling Note Term > life expectancy = Private Annuity Even for the young and healthy
Private Annuity Even for the young and healthy Exhaustion test
Defined Value Formulas (Page 82)
Procter, King, Ward McCord
Tax Court Lots of politics Full Tax Court Decision See Judge Laro’s dissent (Page 86)
5th Circuit
Defined Value Formulas (Page 82)
Christiansen Formula disclaimer of 75% to near-zero CLAT
and 25% to Foundation Disclaimant was CLAT remainderman 8th Circuit slams IRS – see page 88
Petter UPS stock LLC with three classes Sale for promissory notes three days after gift Defined value amount; excess to charity
Reporting a Sale to Grantor Trust (Page 90)
New Question 12(e) on 706 Better to report now or later?
Asset Protection & Estate Taxation (Page 91)
Creditor may reach beneficiaries’ interest based on: Enforceability of spendthrift provision; Beneficiary’s control over trust; and Whether beneficiary has property interest
4 Exceptions to Spendthrift (Page 92)
Self-Settled Trusts 3 Exceptions under Restatement (Second)
of Trusts Tort creditor Misc. case law exceptions
Enforceability of Spendthrift Provision (Page 92)
Self-Settled Trust Exception to Spendthrift No protection except in twelve states and
twenty offshore jurisdictions More states are changing laws Common self-settled trusts:
Revocable “Living” Trusts Charitable Remainder Trusts Grantor Retained Annuity Trusts
Enforceability of Spendthrift Provision (Page 93)
Self-Settled Trust Exception Restatement of Trusts Exceptions
Alimony or child support; Necessary services or supplies rendered to
beneficiary (such as medical services) Claim by US or State (such as tax liens)
Enforceability of Spendthrift Provision (Page 94)
Self-Settled Trust Exception Restatement of Trusts Exceptions Tort Public Policy Exceptions
MS court vs. MS legislature
Enforceability of Spendthrift Provision (Page 94)
Self-Settled Trust Exception Restatement of Trusts Exceptions Tort Public Policy Exceptions Case Law Exceptions
ERISA protects assets until paid out NY statute exposing principal “unnecessary
for reasonable requirements of judgment debtor”
Income paid is exposed
Beneficiary’s Control (Page 95)
Non Self-Settled Trusts Bene/Sole Trustee can’t protect from own
improvidence therefore no protection – FL AR expressly states otherwise Check your state law!
Co-trustee provides protection Fiduciary duties prevail if other benes
Beneficiary’s Control (Page 96)
Self-Settled Trusts in AP Jurisdictions Statutory specificity Classic jurisdictions:
Isle of Man Jersey Guernsey
Conflicts of Laws issues Contempt Orders
Affordable Media
Property Interest (Page 97)
Creditors may recover against debtor’s property interests
A discretionary interest in a trust is not a property interest
A property interest is one that can be sold or exchanged
Property Interest (Page 97)
Spendthrift precludes Mandatory distributions – “shall”
QTIPs GRTs & CRTs
Ascertainable Standards – “shall” for HEMS Beneficiary can sue under state law Creditor stands in beneficiary’s shoes
Special Needs Trusts
Property Interest (Page 99)
Conflicting Provisions Discretionary language + ascertainable
standards “may” for HEMS Have to consult state law to determine how
provision is interpreted
Discretionary Trusts (Page 101)
Beneficiary may not sue trustee Erosion of protection for:
Necessities of beneficiary Tax liens Alimony
Contingent Remainder vs. Dynasty Trust (Page 102)
Trend to treat contingent remainder as property interest CO – child bene has property interest in
bypass trust during life of surviving spouse CO – property interest in inter vivos trust even
during life of grantor Logic doesn’t apply to Dynasty Trust
Offshore or Domestic APT (Page 103)
Self-settled trusts Questionable protection in other than APT
jurisdiction Split-interest trusts
Non-Self Settled has fewer concerns Divorce – equitable division Cost/Benefit
Domestic Self-Settled Trust (Page 104)
More states changing laws Having it and not having it
Ownership vs. Exclusion Interplay between asset protection and
estate tax exclusion State law and creditor’s ability to reach
trust assets Prearrangement
Domestic Self-Settled Trust (Page 105)
Alaska Delaware Nevada Rhode Island Utah South Dakota Oklahoma Missouri?
Tennessee New Hampshire Wyoming Colorado Hawaii
Domestic Self-Settled Trusts (Page 106)
The evolution of the case law Herzog
Augustus Hand NY trust; completed gift
Holtz External standard for distributions = incomplete
Outwin MS trust; incomplete gift
Domestic Self-Settled Trusts (Page 107)
The evolution of the case law Irving Trust
Augustus Hand again NY trust; assets excluded
Uhl IN trust; assets included
Rev. Rul. 77-378 Retained “Right” is the problem Alaska’s Logical Next Step
Techniques for leveraging gifts Distinct economic interests
Division of time of ownership Division of the type of interest
That which is not given away is retained
Split-Interest Trusts (Page 78)
Grantor
Gifted Asset
Retained Benefit
Remainder
Split-Interest Trusts (Page 111)
Common Split-Interest Trusts CRTs CLTs GRTs QPRTs
We’re going to focus on the taxable gift trusts, i.e., non-charitable split-interest trusts
Split-Interest Trusts & Ch. 14 (Page 112)
Chapter 14 Designed to reduce intra-family
undervaluations of split-interest transfers Valuation provisions 2702- Fixed annuity or unitrust amount
Benefit of Split-Interest Trusts (Page 112)
Assumes: Property will produce income equal to 120%
of Federal Mid-Term Rate (§7520 rate) Principal value neither increases or decreases
General Rules (Page 113)
Who Can Serve as Trustee During income interest, may be grantor After income interest, other than grantor
General Rules (Page 113)
Problems with Gift-Splitting If spouses gift-split and one dies, only one-
half of the applicable credit is restored All or nothing in any given year
General Rules (Page 113)
Estate Tax Inclusion Period & GST 2642(f)(3) values transfer of asset at end of
period “during which the value of the property involved would be included in the gross estate of the transferor under chapter 11 if he died immediately upon making such transfer.”
Not appropriate for split-interest trusts Cannot allocate GST until after ETIP period Grant GPOA if trust provides for skip persons
Practical Matters to Consider (Page 114)
Effect of Interest Rate Higher rate = higher retention = lower gift
Term Longer term = more retained = lower gift Mortality risk increases over longer term Hedge mortality risk with insurance
Appraisal – Get them! EIN
Grantor trust during initial term May or may not be grantor trust after initial
term
GRITS (Page 116)
Income to Grantor for term Remainder paid to remainder beneficiary Significant benefit with
Non-income producing property Low income producing property
2702 eliminates use with family members Specific exception for personal residence -
QPRT
GRITS (Page 117)
Still useful for Business situations Gift to nieces and nephews Non-family settings
QPRTs (Page 117)
Gift to family members with retained right to live in the residence for term of years QPRTs generally overvalue use QPRTs assume no appreciation
QPRTs (Page 118)
Income Tax Consequences Grantor trust during term Mortgage interest deduction passes through
to grantor IRC 121 exclusion still available
QPRTs (Page 118)
PRTs Residence can’t be sold May not hold cash No contemplation of destruction of home
QPRT Residence may be sold
Reinvest within 2 years May hold cash Residences must be “personal residence”
Principal residence One other residence of grantor
QPRTs (Page 121)
Sale or disuse of residence disqualifies Upon disqualification, may
Distribute outright to grantor Convert to GRAT
Payment based on original 7520 rate Begins on date of sale, disuse, destruction, etc.
QPRTs (Page 122)
Effect of transferring property subject to mortgage If non-recourse, gift is FMV – debt; Continued
payment on debt are recurring gifts If recourse, gift is FMV; Continued payments
on debt are not additional gifts
QPRTs (Page 123)
Joint Property Each spouse can contribute one-half interest
to separate QRPTs Beware Reciprocal Trust Doctrine!
QPRTs (Page 124)
Capital Gain Tax on Sale Prohibition of Repurchase by Grantor Grantor Trust Beyond Term where
Administrative Powers Retained
QPRTs (Page 125)
Asset Protection After term, asset is removed During term, income interest is likely
reachable by creditors Regs require trustee to dispose of residence if
not used by grantor Conversion to GRAT may help
Remainder is protected Annuities are exempt in many states
GRUTs (Page 125)
Why They Do NOT Work Payout is unitrust amount As trust increases, payout increases Effect is that corpus remains about same as if
property had been gifted Direct gift has no reversion possibility
GRATs (Page 125)
Assets best suited are appreciating assets Discounts provide leverage No-Lose Propositions
GRATs (Page 127)
Rules for GRATs Can Increase Payouts (up to 120%) Gift Tax Valuation Estate Taxes
If grantor fails to survive term, inclusion of all property
Income Taxes GRAT is a grantor trust
Spousal Annuity Interest
Lifetime QTIPs (Page 132)
Trust created by one (“propertied”) spouse for another (“non-propertied”) spouse
Equalize estates without propertied spouse giving up control
Requires all income be paid at least annually to donee spouse
Can create secondary life estate for donor spouse
Lifetime QTIPs (Page 133)
Asset Protection During life of donee spouse – spendthrift trust After death of donee spouse
Lifetime QTIPs (Page 133)
Elements Only permissible beneficiary is donee spouse All income paid at least annually No person has power to appoint property
during life of donee spouse QTIP election is timely made on 709
No cure if you miss this!!! See PLR 201109012
Lifetime QTIPs (Page 134)
Estate Tax Effects Death of donee before donor renders donee
transferor for future trusts Can Allocate GST Exemption