The Tools & Techniques of Trust Planning, 2nd Edition

Stephan Leimberg, Jonathan E. Gopman , Michael A. Sneeringer

• Publisher: The National Underwriter Company
• Year: 2019
• ISBN:
  9781949506464
• Edition: 2
• Topic: Jura
• Subtopic: Wettbewerbsrecht

The Tools & Techniques of Trust Planning, 2nd Edition provides advisers with the most up-to-date information about the creation, administration, and modification of trusts for legal and estate planning professionals. Not only does this title deliver an expert overview of general trust information, but it explains how to use specific types of trusts to solve unique planning problems. Explorations of different types of trusts include detailed knowledge about:

• The types of trusts that are most commonly used
• How each type of trust came to be used
• The possible tax consequences for grantors and beneficiaries of using a particular type of trust
• The requirements for each type of trust and how they should be drafted
• How planning professionals such as attorneys, accountants, investment advisers, and trust officers should administer the trust to achieve the client's stated planning goals over the life of the trust
• In contrast to academic trust publications that focus on the ramifications of various trust terms and deep case law analysis, this resource provides a refreshing alternative in the form of a succinctly written collection of chapters on trending topics in trust planning.

New in the 2ndEdition:

• Completely updated information to reflect the 2017 Tax Cuts and Jobs Act
• A new chapter on trust planning topics for blended families
• Updated state, federal, and international law updates for asset protection trusts
• New and more detailed real-world examples of trust planning scenarios that are most commonly encountered by planning professionals
• Current compliance and best practice information to help planners and other professionals avoid common mistakes and improve client satisfaction

Topics Covered:

• The Role of Trust Protectors
• Marital Deduction and Bypass Trusts
• 2503(b) and 2503(c) Trusts
• Trusts and Divorce
• Trust Amendments
• Special Needs Trusts
• S Corporations and Trusts
• Grantor Retained Interest Trusts
• And more! See the "Table of Contents" section for a full list of topics

As with all the resources in the highly acclaimed Leimberg Library, every area covered in this book is accompanied by the tools, techniques, practice tips, and examples you can use to help your clients successfully navigate the complex course of trust planning and confidently meet their needs.

TRUSTS: WHAT ARE THEY, WHY DO WE USE THEM AND BEST PRACTICES

CHAPTER 1

INTRODUCTION

A trust is a legal relationship in which the legal ownership of property is separated from the beneficial ownership of the property. The person (or group of persons) who is considered the legal owner of the trust property, and is therefore responsible for the investments and management of the trust property, is known as the trustee, and the persons who receive the income or other benefits of the trust property are the beneficiaries. The property that is held by the trustee in trust is sometimes known as the corpus or principal of the trust.

The person who creates the trust, by transferring the money or property to the trustee, is called the grantor, settlor, or trustor. The terms and conditions are usually stated in a written document called a deed of trust or agreement of trust. (In this book, we will usually refer to the document creating the trust as the trust document.)

As will be discussed in other chapters of this book, it is possible for the grantor to be the trustee, for the grantor to be a beneficiary, and for a beneficiary to be a trustee. The only thing that is usually not possible is for the sole trustee to be the sole beneficiary (with no future beneficiaries). In that case, the legal and beneficial interests are said to merge, and the trust is no longer valid. This is called the Doctrine of Merger.

It is also possible for a trust to exist without a written trust document. A trust can be created accidentally, which is sometimes called a resulting or constructive trust. It is also possible in some states to create an oral trust (i.e., by a conversation between the grantor and the trustee, with nothing in writing) In this book, we will be describing trusts created intentionally (sometimes called express trusts), and we will hope that the grantor has had the sense to put the terms of the trust in writing, and not merely depend on the memory (and honesty and existence) of the trustee.

HOW DOES A TRUST WORK?

Picture in your mind a box. Let’s call that box a trust. Into that box you can put cash, stocks, bonds, mutual funds, the deed to your home, or even life insurance. When you put property into the box, you are “funding” the trust. You can put almost any asset into a trust at any time. You can name a trust as the beneficiary of your personal or group life insurance, pension plan, IRA or other work-related benefits, and you can determine how the proceeds should be administered and distributed at your death.

Once property is put into the trust, it is the responsibility of the trustee to administer the property in accordance with the trust document. For this purpose, “administer” means holding the property and collecting the income, distributing or reinvesting the income, selling the property and reinvesting the proceeds, and making other decisions regarding the investments of the trust, subject always to the instructions in the trust document (which can be very flexible or very restrictive). The trustee must also make the distributions to the beneficiaries required by the trust document and, if the distributions are “as needed” for specific purposes, such as support or education, the trustee may need to decide when the distribution is needed.

For example, Grandfather wishes to set aside $10,000 for his granddaughter, age six, to be used for her college education. Grandfather (the grantor) can give $10,000 to Father (the trustee) to hold in trust for Granddaughter (the beneficiary). Under the terms of the trust, the money is invested as Father decides, and the income and principal may be used for Granddaughter’s education as Father decides is appropriate. Any money not spent for education will be paid to Granddaughter at age twenty-five.

THE TRUST DOCUMENT

A trust document will usually spell out the following:

• how – and by whom – and under what guidelines – the assets of the trust are to be managed and invested;

• who will receive the money and assets from the trust;

• how and under what terms and conditions that money is to be paid out (for example, whether money is paid directly to the beneficiary for any purpose, or only paid to a school for the educational expenses of the beneficiary); and

• when money is to be paid (for example, at what ages or in what circumstances the beneficiaries will receive their shares).

In directing how and when money will be distributed, a trust document will usually have different directions for the principal placed in the trust and the income from that principal, such as interest, dividends, or rents. (Capital gains, representing the increase in the value of the property in the trust, are usually considered to be part of the principal even though they are taxable income for tax purposes.) For example, a common arrangement is for one beneficiary to get the income from the trust during his or her lifetime, and principal if the trustee decides it is needed for some purpose specified in the trust document, but the remaining principal will be distributed to someone else after the death of the original beneficiaries.

GRANTORS, TRUSTEES AND BENEFICIARIES

In establishing a trust, the grantor decides:

• what goes into the trust;

• who benefits from the trust;

• the terms and conditions of the trust; and

• who administers the trust and its assets.

Someone is needed to safeguard, invest, and then pay out the assets, or the income from the assets, to the beneficiaries. This someone is the trustee whose obligation may last only a few years or it may run for many generations. There can be more than one trustee, and there can be individuals or corporate trustees such as banks. When several parties are named, they are co-trustees and make decisions jointly (and are jointly liable for mistakes). It is also wise to provide for successor trustees.

The people for whom the grantor set up the trust are the beneficiaries, who receive income from the trust assets, and perhaps also principal, at the age or ages and under the terms and conditions the grantor has specified. The person who is entitled to all of the income from a trust is sometimes called an income beneficiary or life tenant. For example, if the trust instrument says that the grantor is to be paid the income for as long as he or she lives, he or she is the life tenant. If a child is to receive what remains in the trust at a mother’s or father’s death, he or she is the remainderman.

Because the trust is for the benefit of the beneficiaries, not the trustee, the trustee has a legal obligation to act for the benefit of the beneficiaries (consistent with the trust document) and not for the trustee’s own benefit. This is often called a fiduciary obligation (from the Latin word for “trust”) and a trustee is often referred to as a fiduciary.

TYPES OF TRUSTS

Living Trusts

A trust set up during the grantor’s lifetime is an inter vivos trust (from the Latin meaning “between living persons) or a living trust. A trust created during a grantor’s lifetime is considered to be a living trust even if the trust later receives assets after the death of the grantor. In fact, quite often, the grantor’s will ”pours over” assets into a previously established living trust just like a funnel could channel assets into a box.

For example, while he was alive, Grandfather could establish a living trust and put cash, real estate, mutual funds, or other assets into that “box.” He could name his daughter, a bank or trust company, or himself as the initial trustee of the trust, and he could spell out in detail the duties of the trustee during his (Grandfather’s) lifetime. The trustee could be authorized to use Grandfather’s assets for Grandfather’s care and support, or for the care and support of Grandmother and Grandfather’s children and grandchildren. The trust could provide for the disposition of Grandfather’s assets following his death. Grandfather could revoke the trust at any time while he was alive. When he died, Grandfather’s will could provide that some or all of his assets were to pass from his estate through the pour-over “funnel” into the trust.

Testamentary Trusts

If a trust is created by your will and comes into legal existence at your death, it is a testamentary trust. Some or all of the assets owned in your name at your death can pass from your probate estate into the trust as directed by your will. Why use a testamentary trust? Attorneys use a testamentary trust to save you costs in two ways. First, a testamentary trust reduces the number of necessary documents. Because a testamentary trust is part of the will itself, there is only one document. Compare this to a living trust and a will which requires two separate documents. Second, a living trust may need to have assets transferred to it during your lifetime in order for the trust to be effective. That can means spending time (and perhaps money) transferring the legal title to assets into the trust. It can also mean other administrative and accounting expenses during your lifetime if you are not the trustee. A testamentary trust requires no effort during lifetime (other than signing the will), because the trust will not be funded (that is, no assets will be placed into it) until after your death.

One drawback of the testamentary trust is that if the will is revoked, lost, or otherwise not probated for any reason, the testamentary trust may never come into existence.

Revocable and Irrevocable Trusts

Remember the trust box we discussed earlier? Now picture a string on the box. That string enables you to pull the box back and reach in. You can revoke the trust, take back what you have transferred to it, alter it, amend it, or terminate it. This is a revocable trust. Its advantages of control, flexibility, and psychological comfort are obvious.

Cut the string you hold to the trust box and you have an irrevocable trust. No property can be removed from the trust and nothing can be changed. Once the terms and conditions of the trust are written down and the trust is signed, those provisions are fixed.

Why would anyone give up the control, flexibility, and psychological comfort of a revocable trust to create an irrevocable trust? The problem with a revocable trust is that, as long as the grantor retains the revocation “string,” the assets in the trust are still considered to be owned by the grantor for income and estate tax purposes (and are still subject to claims of the grantor’s creditors). If you can pull on the string and get the property back, the IRS can pull the income that trust assets earn into your taxable income and pull the property in the trust back into your estate. Generally speaking, the same principles apply to creditors’ ability to reach money or other assets in the trust. Irrevocable trusts are usually created to save income tax or estate taxes, and sometimes to protect assets from creditors.

USING A TRUST AS A MEANS TO ADMINISTER OR TRANSFER PROPERTY

Most forms of ownership are very basic, and can deal with only a limited range of possible future circumstances. Also, the rules governing most forms of ownership are fixed by formulas or specific dates or ages, while a trustee can have the flexibility to deal with a variety of changing conditions.

For example, if you want to make a gift to your grandchild, you could simply place money into a bank account or purchase a certificate of deposit or a stock or mutual fund, and title it in the name of your child as custodian for your grandchild under the Uniform Gifts to Minors Act (or Uniform Transfers to Minors Act, whichever is in force in your state). But consider that only one beneficiary is permitted for each account, and the funds must be turned over to your grandchild no later than an age specified by the statute in your state (usually either eighteen or twenty-one). Your state may also impose restrictive rules on how the money should be titled and invested, and for what purposes the money can be spent.

On the other hand, you could establish a trust for your grandchild or grandchildren, and set up incredibly flexible provisions for their future care. All of the money could be placed in one trust, and the trustee could be authorized to use funds for each grandchild’s college education. For example, the funds could be held in trust until the youngest grandchild is twenty-five, at which time, regardless of prior distributions, the money would then be divided equally among all of the grandchildren. But if a child was disabled or preferred to have the money remain in the trust because of creditor problems, domestic problems, or lack of money-managing experience, the grandchild (or the trustee) would have the option to withhold or disburse income or principal as they deemed appropriate. Because none of us can foresee the future, the flexibility that a trust can provide is often its most valuable feature.

In many instances, a finely-tuned trust instrument may be not only the best solution to a problem: it may be the only vehicle to solve or deal with an unusual situation. Suppose, for example, you want to make provisions for an individual who because of age, health, location, or relationship with you makes providing for him or her extremely difficult. These situations could include providing for a handicapped person, relatives who live outside of the country, a child born out of wedlock, a friend of the same or opposite sex, and even the care and maintenance of pets. Trusts can contain the provisions necessary to provide for such beneficiaries, and also give a considerable degree of comfort to the person setting up the trust. There are countless other examples of the many and varied special uses for trusts, as a review of this and the following chapters will indicate.

In deciding whether or not to use a trust, you should consider the alternative transfer devices available to accomplish your goals. These other methods of administering or transferring pr...