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Drafting California Irrevocable Trusts

A one-of-a-kind book containing extensive, detailed coverage on every aspect of structuring and drafting a trust.

A one-of-a-kind book containing extensive, detailed coverage on every aspect of structuring and drafting a trust.

  • Income tax, estate and gift tax
  • Valuing interests in property
  • Trust administration and trustee's powers
  • Introductory and basic clauses, dispositive clauses
  • Life insurance trusts and trusts for minors
  • Qualified domestic trusts (QDOTs)
  • Generation-skipping dynasty trusts
  • GRATs & QPRTs
  • Charitable remainder trusts
  • Issues related to nature of trust assets
OnLAW ES94710

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$ 495.00
Print ES32710

3d edition, 2 looseleaf volumes, updated 7/19

 

$ 495.00
Add Forms CD to Print ES22715
$ 99.00

A one-of-a-kind book containing extensive, detailed coverage on every aspect of structuring and drafting a trust.

  • Income tax, estate and gift tax
  • Valuing interests in property
  • Trust administration and trustee's powers
  • Introductory and basic clauses, dispositive clauses
  • Life insurance trusts and trusts for minors
  • Qualified domestic trusts (QDOTs)
  • Generation-skipping dynasty trusts
  • GRATs & QPRTs
  • Charitable remainder trusts
  • Issues related to nature of trust assets

1

Overview of Irrevocable Trusts

John R. Cohan

  • I.  DRAFTING IRREVOCABLE TRUSTS
    • A.  Overview of Trust Planning  1.1
    • B.  Types of Irrevocable Trusts  1.2
    • C.  Relationship Between Revocable and Irrevocable Trusts  1.3
  • II.  OBJECTIVES IN CREATING IRREVOCABLE TRUSTS  1.4
    • A.  Reconciling Beneficiary Needs With Management Concerns  1.5
    • B.  Obtaining Tax Savings
      • 1.  Transfer Tax Benefits  1.6
      • 2.  Income Tax Benefits  1.7
      • 3.  Effect of Circular 230  1.7A
    • C.  Asset Protection  1.8
      • 1.  Voidable Transfers  1.9
      • 2.  Limited Protection in Bankruptcy  1.10
      • 3.  Discretionary Trusts  1.11
      • 4.  Offshore Trusts  1.12
      • 5.  Asset Protection for Beneficiaries  1.13
        • a.  Third Party Trustees  1.14
        • b.  Foreign State Trusts  1.15
      • 6.  Using Special Powers of Appointment for Asset Protection  1.16
      • 7.  Reciprocal Trusts  1.17

2

Estate and Gift Tax: A Drafter’s Guide

Ann C. Harris

  • I.  TAXABLE TRANSFERS
    • A.  Unified System of Estate and Gift Taxation  2.1
      • 1.  Pre-1977 Gifts  2.2
      • 2.  Removing Post-Gift Appreciation From Tax Base  2.3
      • 3.  Tax-Exclusive Versus Tax-Inclusive Tax Base  2.4
    • B.  Computing Gift and Estate Taxes
      • 1.  Gift Tax  2.5
      • 2.  Estate Tax  2.6
      • 3.  Sample Computations of Gift and Estate Taxes  2.7
  • II.  TAX CONSEQUENCES OF LIFETIME TRANSFERS
    • A.  Determining Transfer of Property Interest for Gift Tax Purposes  2.8
      • 1.  Indirect Transfers  2.9
      • 2.  Below-Market-Rate Loans  2.10
      • 3.  Powers of Appointment  2.11
        • a.  Powers Limited by Ascertainable Standard  2.12
        • b.  Powers Held Jointly With Person Having an Adverse Interest  2.13
      • 4.  Transfers of Less Than Entire Interest  2.14
    • B.  Determining When Transfer Is Completed
      • 1.  Definition of Completed Transfer  2.15
        • a.  Termination or Release of Retained Power  2.15A
        • b.  Lapse of Retained Power  2.15B
      • 2.  Retained Power Over Disposition  2.16
        • a.  Income Interest or Power  2.16A
        • b.  Power to Vary Beneficial Interests  2.16B
      • 3.  Consequences of Subsequent Incompetence  2.17
      • 4.  Powers Exercisable With Third Party  2.18
      • 5.  Powers Held by Trustee  2.19
    • C.  Valuing Transferred Property Interest
      • 1.  General Valuation Rules
        • a.  When Property Should Be Valued  2.20
          • (1)  Contingent Gifts  2.20A
          • (2)  Value Definition Clauses  2.20B
        • b.  Willing Buyer-Willing Seller Standard  2.21
        • c.  Valuing Life Estates, Terms of Years, and Remainder Interests  2.22
        • d.  Discounts and Premiums  2.23
          • (1)  Blockage Discount and Control Premium  2.23A
          • (2)  Minority Interest Discount  2.23B
          • (3)  Low-Basis Assets  2.23C
          • (4)  Assets Transferred to Family Limited Partnerships (FLPs)  2.23D
          • (5)  Undivided Interests in Real Property  2.23E
          • (6)  Undivided Interests in Tangible Personal Property  2.23F
          • (7)  Lack of Marketability  2.23G
          • (8)  Lack of Control  2.23H
        • e.  Swing Votes  2.24
      • 2.  Special Valuation Rules
        • a.  Overview of Chapter 14  2.25
        • b.  Interest in Corporation or Partnership  2.26
          • (1)  Value of Transferred Interest  2.26A
          • (2)  Corporate Recapitalizations  2.26B
        • c.  Interests in Trust  2.26C
          • (1)  Qualified Interests  2.27
          • (2)  Exceptions to Qualified-Interest Rules  2.28
        • d.  Options, Buy-Sell Agreements, Rights of First Refusal, and Leases  2.29
        • e.  Treatment of Certain Lapsing Rights and Restrictions  2.30
        • f.  Restrictions on Liquidation Disregarded  2.30A
      • 3.  Determining Gift Tax Liability
        • a.  Donor Is Primarily Liable  2.31
        • b.  Donee Must Pay Gift Tax as Condition of Receiving Gift  2.32
    • D.  Payment of Consideration in Exchange for Transfer  2.33
    • E.  Gift Tax Annual Exclusion
      • 1.  Number of Donees Unlimited  2.34
      • 2.  Present-Interest Requirement  2.35
      • 3.  Trusts in Which Entire Interest Is Present Interest
        • a.  Crummey Trust Withdrawal Powers  2.36
        • b.  Nonmarital Spousal Trust  2.36A
        • c.  IRC §2503(c) Trusts  2.37
      • 4.  Reciprocal Trust Doctrine  2.37A
    • F.  Exclusion for Direct Payments of Tuition and Medical Expenses  2.38
    • G.  Deductions Available to Determine Taxable Amount of Transfer
      • 1.  Unlimited Marital Deduction  2.39
        • a.  Inter Vivos QTIP Trust  2.39A
        • b.  Form: Inter Vivos QTIP Trust  2.39B
        • c.  Form: Inter Vivos Unitrust QTIP Trust  2.39C
        • d.  Estate and Gift Taxation of QTIP Trust  2.39D
        • e.  Unitrust Definition of Income  2.39E
        • f.  Retained Interests  2.39F
      • 2.  Charitable Deduction
        • a.  Unlimited Gift Tax Charitable Deduction  2.40
        • b.  Combining Unlimited Marital Deduction With Charitable Remainder Trusts  2.41
        • c.  Charitable Gifts of Remainder Interests Not in Trust  2.42
    • H.  Split-Gift Election  2.43
    • I.  Considerations in Making Gifts  2.44
      • 1.  Advantages of Lifetime Gifts  2.45
      • 2.  Disadvantages of Lifetime Gifts  2.46
      • 3.  Adequate Disclosure of Gifts  2.46A
  • III.  TAX CONSEQUENCES OF TRANSFERS OCCURRING AS RESULT OF DEATH
    • A.  Determining Decedent’s Gross Estate for Federal Estate Tax Purposes  2.47
    • B.  Transfers in Which Decedent Retains Enjoyment or Control of Property  2.48
      • 1.  Retained Life Estate  2.49
        • a.  Direct or Implied Right to Use or Occupy Real Property  2.50
          • (1)  Right to Receive Rental Income  2.50A
          • (2)  Retained Leasehold Interest  2.50B
        • b.  Indirect Benefits That Constitute Retained Right to Income
          • (1)  Assets Available to Creditors  2.51
          • (2)  Trustee’s Power to Use Income or Corpus for Decedent’s Benefit  2.52
          • (3)  Right to Have Income Used for Support of Dependents  2.53
        • c.  Reciprocal Trusts  2.54
        • d.  Transfer in Exchange for Annuity  2.55
        • e.  Assets Transferred to Family Limited Partnership  2.55A
      • 2.  Retained Voting Rights  2.56
      • 3.  Retained Reversionary Interest  2.57
      • 4.  Retained Right to Designate Person Who Will Possess or Enjoy Property  2.58
      • 5.  Retained Right, Through Exercise of Power, to Alter, Revoke, or Terminate Transferred Interest  2.59
      • 6.  Right to Designate Person Who Will Possess Property Compared With Right to Alter, Revoke, or Terminate Transferred Interest  2.60
      • 7.  Administrative Powers  2.61
      • 8.  Trustee’s Discretionary Power  2.62
    • C.  Life Insurance on Decedent’s Life  2.63
    • D.  Transfers Within 3 Years Before Death  2.64
    • E.  General Powers of Appointment  2.65
    • F.  Annuities  2.66
    • G.  Joint Tenancies  2.67
    • H.  Exclusion to Extent of Consideration Furnished  2.68
    • I.  Determining Value of Assets for Federal Estate Tax Purposes
      • 1.  General Valuation Rule  2.69
      • 2.  Minority Discounts for Community Property Interests  2.70
      • 3.  Problems in Applying Premiums or Discounts to Charitable or Marital Gifts  2.71
      • 4.  Special-Valuation Provisions for Certain Assets Included in Gross Estate  2.72
        • a.  Alternate Valuation Date Election  2.72A
        • b.  Special Use Valuation Election  2.72B
        • c.  Qualified Conservation Easement Exclusion  2.72C
        • d.  Qualified Conservation Contribution Deduction  2.72D
          • (1)  Qualifying Conservation Purpose  2.72E
          • (2)  Additional Requirements  2.72F
    • J.  Deductions From Gross Estate to Arrive at Taxable Estate
      • 1.  Deductions to Arrive at Adjusted Gross Estate  2.73
      • 2.  Charitable Deduction  2.74
      • 3.  Marital Deduction
        • a.  In General  2.75
        • b.  Exceptions to Terminable Interest Rule
          • (1)  Estate Trust  2.76
          • (2)  Six-Month Survivorship  2.77
          • (3)  General Power of Appointment Trust  2.78
          • (4)  Qualified Terminable Interest Property (QTIP) Trust  2.79
      • 4.  Marital Deduction for Noncitizens  2.80
        • a.  Requirements of Qualified Domestic Trust (QDOT)  2.81
          • (1)  Inter Vivos Qualified Domestic Trust  2.81A
          • (2)  Form: Construction of Trust  2.81B
          • (3)  Form: Compliance With Security Requirements  2.81C
          • (4)  Form: United States Trustee  2.81D
          • (5)  Form: Designated Filer  2.81E
          • (6)  Form: Distributions of Principal and Income  2.81F
          • (7)  Form: Designation of Successor Trustees  2.81G
          • (8)  Alternative Spousal Access Trust  2.81H
        • b.  Availability of PTP Credit for QDOT  2.82
        • c.  Applicability of Customary Marital Deduction Rules When Surviving Spouse Becomes United States Citizen  2.83
    • K.  Credits Applicable to Estate Tax
      • 1.  Deduction for State Death Taxes  2.84
      • 2.  Credit for Gift Taxes Paid  2.85
      • 3.  Prior Transfer Property (PTP) Credit  2.86
        • a.  Availability of PTP Credit for QTIP Trust  2.86A
        • b.  Amount of PTP Credit  2.86B
    • L.  Payment of Estate Tax
      • 1.  When Estate Tax Due  2.87
      • 2.  Extension of Time for Reasonable Cause  2.88
      • 3.  Extension of Time for Tax Attributable to Interest in Closely Held Business  2.89
      • 4.  Extension of Time for Tax Attributable to Vested Remainder Interest  2.90
      • 5.  Stock Redemptions to Pay Estate Tax  2.91

3

Income Tax: A Drafter’s Guide

Ann C. Harris

  • I.  INTRODUCTION TO TRUST TAXATION
    • A.  Nongrantor and Grantor Trusts  3.1
    • B.  Relationship Between Federal and California Income Tax Rules  3.2
  • II.  TAXATION OF NONGRANTOR TRUSTS
    • A.  Characterization of Nongrantor Trust
      • 1.  Trust Is Treated as Separate Taxpayer, Pass-Through Entity, or Both  3.3
      • 2.  Trust Treated as Association [Deleted]  3.4
    • B.  General Trust Taxation Rules
      • 1.  Determining Taxable Income  3.5
      • 2.  Trust Income Tax Charitable Deduction  3.5A
      • 3.  Selecting Tax Year  3.6
      • 4.  Income Tax Rates Applicable to Trusts  3.7
      • 5.  Disallowance of Certain Capital Losses  3.8
      • 6.  Alternative Minimum Tax  3.9
    • C.  Determining Distributable Net Income (DNI)  3.10
    • D.  Simple Trusts
      • 1.  Definition of Simple Trust  3.11
      • 2.  Taxation of Simple Trust and Its Beneficiaries  3.12
        • a.  Definition of “Income”  3.12A
        • b.  Taxation of Beneficiaries  3.12B
        • c.  Distributions in Kind  3.12C
      • 3.  Estimated Tax Payments for Simple Trusts  3.13
    • E.  Complex Trusts
      • 1.  Definition of Complex Trust  3.14
      • 2.  Taxation of Complex Trusts  3.15
      • 3.  Estimated Tax Payments for Complex Trusts
        • a.  Determining Liability for and Amount of Estimated Tax Payments  3.16
        • b.  Problems in Determining Estimated Tax Using Annualized Income Method  3.17
          • (1)  Trustee Problems  3.17A
          • (2)  Beneficiary Problems  3.17B
      • 4.  Taxation of Beneficiaries of Complex Trusts  3.18
        • a.  First-Tier Distributions  3.18A
        • b.  Second-Tier Distributions  3.18B
        • c.  The Intermediate Tier  3.18C
        • d.  The Variable Tier  3.18D
      • 5.  Separate Share Rule  3.18E
    • F.  Impact of “Kiddie Tax”
      • 1.  Operation of “Kiddie Tax”  3.19
      • 2.  Avoidance of “Kiddie Tax”  3.20
    • G.  Tax Consequences of Termination of Nongrantor Trusts  3.21
    • H.  Net Investment Income Tax  3.21A
  • III.  TAXATION OF GRANTOR TRUSTS
    • A.  Definition of Grantor Trust  3.22
    • B.  Grantor Trusts Subject to Different Rules  3.23
    • C.  Use of Grantor Trusts as Planning Device  3.24
    • D.  Grantor as Owner of Trust
      • 1.  Retained Powers That Cause Grantor to Be Treated as Owner
        • a.  Right to Reversionary Interest  3.25
        • b.  Right to Control Enjoyment of Trust  3.26
        • c.  Administrative Powers  3.27
        • d.  Power to Revest Title to Trust Property  3.28
        • e.  Power to Use Income for Grantor’s Benefit  3.29
      • 2.  Retained Powers That Do Not Cause Grantor to Be Treated as Owner  3.30
        • a.  Power to Apply Income and Principal to Support of Dependents  3.31
        • b.  Power to Distribute Corpus Under Certain Circumstances  3.32
        • c.  Power to Accumulate Income Under Certain Circumstances  3.33
        • d.  Power to Distribute or Accumulate Income for Minor Beneficiary  3.34
        • e.  Trustee’s Power to Distribute Income and Principal That Is Limited by Ascertainable Standard  3.35
        • f.  Independent Trustee’s Powers  3.36
        • g.  Power to Use Income to Discharge Grantor’s Support Obligations  3.37
    • E.  Person Other Than Grantor Treated as Owner  3.38
    • F.  Tax Treatment of and Reporting for Grantor Trusts  3.39
      • 1.  Trust Owned Entirely by One Person Who Is a Trustee  3.39A
      • 2.  Trust Owned Entirely by One Person Who Is Not a Trustee  3.39B
      • 3.  Trust Owned Entirely by Two or More Persons  3.39C
      • 4.  Grantor Trust Reporting in All Other Cases  3.39D
    • G.  Creating “Defective” Grantor Trusts
      • 1.  IRC §674(c) Provisions  3.40
      • 2.  IRC §675(4)(C) Provisions  3.41
      • 3.  Other IRC §675 Provisions  3.41A
      • 4.  IRC §677(a)(3) Provisions  3.42
      • 5.  IRC §678 Provisions  3.43
      • 6.  Special Concerns and Considerations  3.44
    • H.  Former Grantor Trust Taxed As Estate  3.44A
    • I.  Installment Sale to “Defective” Grantor Trust  3.44B
    • J.  Sale to Grantor Trust Versus GRAT  3.44C
    • K.  Beneficiary Defective Irrevocable Trust (BDIT)  3.44D
    • L.  Grantor Irrevocable Life Insurance Trust (GILIT)  3.44E
    • M.  Termination of Grantor Trust Status  3.44F
    • N.  Portability and Grantor Trusts  3.44G
  • IV.  CHARITABLE REMAINDER TRUSTS AND CHARITABLE LEAD TRUSTS
    • A.  Charitable Remainder Trusts (CRTs)  3.45
      • 1.  Taxation of CRTs  3.46
      • 2.  Taxation of Noncharitable Beneficiaries  3.47
      • 3.  Taxation of Charitable Beneficiaries  3.48
    • B.  Charitable Lead Trusts (CLTs)  3.49
      • 1.  Grantor CLTs  3.50
      • 2.  Nongrantor CLTs  3.51
  • V.  TRUSTS HOLDING S CORPORATION STOCK
    • A.  General S Corporation Trust Rules  3.52
    • B.  Grantor Trusts Holding S Corporation Stock
      • 1.  Eligible Grantor Trusts  3.53
      • 2.  Crummey Trusts  3.54
      • 3.  Tax Treatment After Deemed Owner’s Death  3.55
      • 4.  Areas of Particular Concern  3.56
    • C.  Qualified Subchapter S Trusts (QSSTs)
      • 1.  General QSST Rule  3.57
      • 2.  Basic Requirements for QSST  3.58
      • 3.  Requirement to Distribute All Income  3.59
      • 4.  One-Beneficiary Requirement  3.60
      • 5.  QSST Election  3.61
      • 6.  Tax Consequences of QSST  3.62
      • 7.  Creative Use of S Corporations and Trusts  3.63
    • D.  Electing Small Business Trusts (ESBTs)
      • 1.  General ESBT Rule  3.64
      • 2.  Basic Requirements for ESBTs  3.65
      • 3.  Determining Number of S Corporation Shareholders  3.66
      • 4.  Taxation of ESBTs  3.67
  • VI.  FOREIGN TRUSTS
    • A.  Definition of Foreign Situs Trust  3.68
      • 1.  Court Test  3.68A
        • a.  Safe Harbor for Court Test  3.68B
        • b.  Automatic Migration Rule for Court Test  3.68C
      • 2.  Control Test  3.68D
        • a.  Twelve-Month Grace Period After Inadvertent Change in Trust Residence  3.68E
        • b.  Automatic Migration Rule for Control Test  3.68F
    • B.  Taxation of Foreign Trusts; Reporting Requirements  3.69
      • 1.  Annual Reporting Required for Foreign Trust With United States Grantor  3.69A
        • a.  Appointment of United States Agent  3.69B
        • b.  Owner Reporting Requirements  3.69C
      • 2.  Reporting Establishment of and Transfers to Foreign Trust  3.69D
        • a.  Reportable Event  3.69E
        • b.  Gratuitous Transfer  3.69F
        • c.  Responsible Party  3.69G
      • 3.  Penalties for Failure to Comply With Foreign Trust Reporting Obligations  3.69H
      • 4.  Foreign Trust Considered Foreign Financial Institution Under FATCA  3.69I
        • a.  When FFI Trust Has Substantial U.S. Owner  3.69J
        • b.   Withholding Requirements for FFI Trust With Substantial U.S. Owner  3.69K
    • C.  Special Grantor-Trust Rules Applicable to Foreign Trusts  3.70
      • 1.  United States Beneficiary of Foreign Grantor Trust  3.70A
      • 2.  Application of Foreign Grantor-Trust Rules  3.70B
    • D.  FBAR Reporting Requirements for Trustees and Beneficiaries of Foreign Trusts  3.71
    • E.  When Foreign Trust Is Not Taxed as Grantor Trust  3.72
    • F.  Taxation of Beneficiaries of Foreign Trust  3.73
      • 1.  Distributable Net Income (DNI) of Foreign Trust  3.73A
      • 2.  Distributions From Foreign Trust  3.73B
    • G.  Consequences of Using Foreign Trusts to Defer or Avoid Tax  3.74
      • 1.  Deferral of Tax on Foreign Source Income  3.74A
      • 2.  Application of Throwback Rules  3.74B
    • H.  Gain on Transfers of Appreciated Property to Foreign Trusts  3.75

4

Generation-Skipping Tax Problems of Irrevocable Trusts

Jon J. Gallo

  • I.  INTRODUCTION TO GENERATION-SKIPPING TRANSFER (GST) TAX
    • A.  GST Tax Dangers  4.1
    • B.  Scope of Chapter  4.2
  • II.  GST TAX FUNDAMENTALS FOR IRREVOCABLE INTER VIVOS TRUSTS
    • A.  Purpose of GST Tax  4.3
    • B.  GST Tax Definition of Transferor  4.4
      • 1.  Effect of Reverse QTIP Election  4.4A
      • 2.  Effect of Lapse of Withdrawal Powers  4.4B
    • C.  Generation Assignments  4.5
    • D.  Rates of Tax: Tax-Exclusive Versus Tax-Inclusive Taxation  4.6
    • E.  GST Tax Events Involving Irrevocable Trusts  4.7
      • 1.  Direct Skips on Creation of Trust  4.8
      • 2.  Taxable Distributions  4.9
        • a.  Taxable Distributions Involving General Powers of Appointment  4.10
          • (1)  GST Tax Consequences of Lapse  4.10A
          • (2)  Gift Tax Consequences of Lapse  4.10B
        • b.  Trustee Payment of GST Tax Attributable to Taxable Distributions  4.11
      • 3.  Taxable Terminations  4.12
    • F.  Multiple Skips: GST Tax at Each Generation  4.13
  • III.  AVOIDING GST TAX
    • A.  Qualified Tuition or Medical Expenses  4.14
    • B.  Limited GST Tax Annual Exclusion  4.15
    • C.  Predeceased Ancestor Exception  4.16
    • D.  GST Exemption
      • 1.  Amount of GST Exemption  4.17
      • 2.  Inclusion Ratio Concept  4.18
      • 3.  Relevance of GST Tax Transferor  4.19
      • 4.  Determination of Number of Trusts; Division of Trusts  4.20
        • a.  Qualified Severance  4.20A
        • b.  Nonqualified Severance  4.20B
      • 5.  Allocation of GST Exemption; Need for Action  4.21
      • 6.  Allocation Procedure: Lifetime Direct Skips  4.22
      • 7.  Allocation of Exemption to Transfers to Trusts That Are Not Direct Skips; Notice of Allocation  4.23
        • a.  Timely Allocations  4.24
        • b.  Late Allocation on IRS Form 709  4.25
        • c.  Late Allocation to Lifetime Transfer on IRS Form 706  4.26
        • d.  Deemed Allocation to Lifetime Transfer to GST Trust  4.26A
        • e.  Retroactive Allocation to Lifetime Transfer  4.26B
        • f.  Default Post-Death Late Allocation to Lifetime Transfer  4.27
        • g.  Special Rules for Charitable Lead Annuity Trusts  4.28
        • h.  Estate Tax Inclusion Period (ETIP) Exception to General Rules  4.29
          • (1)  When ETIP Rule Applies to Withdrawal Powers  4.29A
          • (2)  When ETIP Rule Does Not Apply  4.29B
      • 8.  Recalculation of Inclusion Ratio  4.30
  • IV.  FILING RETURNS AND PAYING TAX
    • A.  Direct Skips  4.31
    • B.  Taxable Distributions and Terminations  4.32
  • V.  GST TAX STRATEGY FOR IRREVOCABLE TRUSTS  4.33
    • A.  Maximizing Use of Limited Annual Exclusion  4.34
    • B.  Making Trusts Fully Exempt or Fully Nonexempt  4.35
    • C.  Maximizing Benefits of Exempt Trusts  4.36
    • D.  Layering Nonexempt Trusts  4.37
    • E.  Paying Medical Expenses and Tuition From Nonexempt Trusts; HEET Trusts  4.38
    • F.  Paying Estate Tax Instead of GST Tax: General Power of Appointment Causes Inclusion in Child’s Estate  4.39
      • 1.  Trustee’s Power to Confer General Power  4.39A
      • 2.  Child’s Power to Confer General Power  4.39B
    • G.  Using Wait-and-See Allocation Strategy  4.40
    • H.  Avoiding Creation of ETIPs  4.41
    • I.  Planning for GST Exemption Allocation  4.42

5

Trust Planning: Permanent Trusts

John R. Cohan

  • I.  INTRODUCTION TO TRUST PLANNING
    • A.  Permanent Trusts Distinguished From Other Trusts  5.1
      • 1.  Spousal Lifetime Access Trust (SLAT); Nonqualified Grantor Retained Interest Trust (GRIT)  5.1A
      • 2.  Revocable Trusts, Trust for Minors, and Other Specialized Trusts  5.1B
    • B.  Purposes Served by Permanent Trusts
      • 1.  General Purposes of Permanent Trusts; Family Trusts  5.2
      • 2.  Balancing Personal and Tax Objectives  5.3
      • 3.  Tax Purposes of Permanent Trusts
        • a.  Reducing Settlors’ Taxable Estate  5.4
          • (1)  Benefits of Exclusion from Settlor’s Estate  5.4A
          • (2)  When Trust Property Will Be Included in Settlor’s Estate  5.4B
        • b.  Preventing Inclusion of Trust Property in Beneficiaries’ Taxable Estates  5.5
        • c.  Planning for Generation-Skipping Transfer Tax  5.5A
          • (1)  Provisions of GST Tax  5.6
          • (2)  Effect of GST Tax on Irrevocable Trust  5.7
        • d.  Reducing Settlors’ Income Tax  5.8
        • e.  Achieving Grantor Trust Status
          • (1)  Grantor Trust Powers  5.9
          • (2)  Power Granted to Special Trustee to Add Beneficiaries of Named Class  5.10
    • C.  Funding the Trust  5.11
    • D.  Reciprocal Trusts  5.12
    • E.  Permanent Trust Gifting Strategy  5.12A
  • II.  BASIC PRINCIPLES VERSUS SETTLORS’ HOPES
    • A.  Clients’ Pipe Dream  5.13
    • B.  Pipe Dream Trust  5.14
    • C.  Diagnosis of Pipe Dream Trust
      • 1.  Basic Estate Tax Principles  5.15
      • 2.  Basic Gift Tax Principles  5.16
      • 3.  Basic Income Tax Principles  5.17
        • a.  Origin of Grantor Trust Rules  5.17A
        • b.  Power to Designate Beneficial Enjoyment  5.17B
      • 4.  Road to Reality  5.18
      • 5.  Support of Dependents and Payment of Legal Obligations  5.19
        • a.  Scope of Obligation to Support
          • (1)  Support of Minors  5.20
          • (2)  Education Expenses  5.21
          • (3)  Support of Parents and Adult Children  5.22
          • (4)  Statutory Limits on Trustee’s Powers to Discharge Support Obligations  5.23
        • b.  Estate Tax Principles  5.24
        • c.  Gift Tax Principles  5.25
        • d.  Income Tax Principles  5.26
        • e.  Independent Trustee’s Discretionary Power to Discharge Support Obligation  5.27
    • D.  Flexibility Versus Control  5.28
    • E.  Single Versus Multiple Trusts  5.29
      • 1.  Considerations Favoring Single Trust  5.30
      • 2.  Considerations Favoring Multiple Trusts  5.31

6

Valuing Interests in Property

Belan K. Wagner

Paul E. Hoelschen, Jr.

  • I.  INTRODUCTION TO VALUATION
    • A.  Scope of Valuation Chapter  6.1
    • B.  Trusts With Interests Requiring Valuation  6.2
    • C.  Necessity for Valuing Interests  6.3
  • II.  HOW TO VALUE INTERESTS
    • A.  Using IRS Valuation Tables  6.4
    • B.  Locating Tables and Publications
      • 1.  List of Valuation Tables  6.5
      • 2.  IRS Publications Containing Valuation Tables  6.6
      • 3.  Requests for Actuarial Computation by IRS  6.7
    • C.  Components of Valuation Tables  6.8
      • 1.  Interest Rates  6.9
      • 2.  Mortality Factor  6.10
    • D.  Example of Valuation of Life Estate  6.11
    • E.  Procedures for Transfers After November 30, 1983, and Before May 1, 1989  6.12
    • F.  Procedures for Transfers After April 30, 1989, and Before May 1, 1999  6.13
    • G.  Procedures for Transfers After April 30, 1999, and Before May 1, 2009  6.14
  • III.  SINGLE LIFE REMAINDER FACTORS (TABLE S)
    • A.  Overview of Single Life Remainder Factors  6.15
    • B.  Example of Computation of Present Value of Single Life Annuity, Income, and Remainder Interests  6.16
    • C.  Annuities  6.17
    • D.  Life Interests  6.18
    • E.  Remainders or Reversionary Interests  6.19
    • F.  Charitable Gifts  6.20
  • IV.  TERM CERTAIN REMAINDER FACTORS (TABLE B)
    • A.  Overview of Term Certain Remainder Factors  6.21
    • B.  Example of Computation of Present Value of Annuity, Income, and Remainder Interests for Term Certain  6.22
    • C.  Annuities  6.23
    • D.  Income for Term Certain  6.24
    • E.  Remainders or Reversionary Interests  6.25
    • F.  Contingent Remainder Interests  6.26
    • G.  Charitable Contribution Deductions  6.27
  • V.  ADJUSTMENT FACTORS FOR ANNUITIES (TABLE K)
    • A.  Overview of Annuity Adjustment Factors  6.28
    • B.  Examples of Computations Using Table K Factors  6.29
  • VI.  CHARITABLE REMAINDER UNITRUST SINGLE LIFE REMAINDER FACTORS—ADJUSTED PAYOUT RATES (TABLES U(1), F)
    • A.  Overview of CRUT for Single Life  6.30
    • B.  Example of Computation of Charitable Remainder Unitrust Interest—Single Life, Adjusted Payout  6.31
  • VII.  CHARITABLE REMAINDER UNITRUST; TERM OF YEARS (TABLES D, F)
    • A.  Overview of CRUT Remainder Factors for Term of Years  6.32
    • B.  Example of Computation of Charitable Remainder Unitrust Interest Postponed for Term of Years; Adjusted Payout Rate  6.33
  • VIII.  CHARITABLE REMAINDER UNITRUST; TWO MEASURING LIVES (TABLES U(2), F)
    • A.  Overview of CRUT Remainder Factors for Two Measuring Lives  6.34
    • B.  Example of Computation of Charitable Remainder Unitrust With Two Measuring Lives  6.35
  • IX.  LIMITATIONS ON APPLICATION OF STANDARD VALUATION FACTORS
    • A.  Limitations on Valuing High Yield Annuities, Unproductive Property, Inadequately Preserved Property, and Transfers to Trust in Cases of Terminal Illness  6.36
    • B.  Example of Computation Involving Application of Limitations to Valuation of High Yield Annuity  6.37
  • X.  SELECTING COMPUTER SOFTWARE PROGRAMS  6.38
    • A.  Desirable Features of Estate Planning Software  6.39
    • B.  Use of Electronic Spreadsheets  6.40

7

Structuring the Trust Instrument

Jeffrey A. Dennis-Strathmeyer

  • I.  RECOMMENDED TRUST DESIGN  7.1
  • II.  DRAFTING CONSIDERATIONS
    • A.  The Target Audience  7.2
    • B.  Drafting Suggestions  7.3
    • C.  Required Formalities  7.4
    • D.  Clauses Mandated by Tax Laws  7.5
    • E.  Narrow Focus—Comparison With Revocable Trusts  7.6
    • F.  Tax-Sensitive Powers  7.7
    • G.  California Trust Law  7.8
  • III.  PROPOSED ORGANIZATION  7.9

8

Introductory and Basic Clauses

Sandra J. Chan

Diana M. Hastings

  • I.  INTRODUCTORY CLAUSES
    • A.  Creation of Trust  8.1
      • 1.  Form: Trust Agreement  8.2
      • 2.  Form: Declaration of Trust  8.3
      • 3.  Form: Transfer Document  8.4
    • B.  Form: Name of Trust  8.5
  • II.  IRREVOCABILITY
    • A.  Statutory Presumption of Revocability  8.6
    • B.  Form: Irrevocability of Trust  8.7
  • III.  CONCLUDING CLAUSES
    • A.  Signatures
      • 1.  Form: Signature When Agreement of Trust Is Used  8.8
      • 2.  Form: Signature When Declaration of Trust Is Used  8.9
    • B.  Spouse’s Consent to Transfer
      • 1.  Purpose of Spouse’s Consent to Transfer  8.9A
      • 2.  Form: Spouse’s Consent to Transfer  8.10
    • C.  Acknowledgments
      • 1.  Purpose of Acknowledgment  8.11
      • 2.  Form: Acknowledgment  8.12

9

Dispositive Clauses

John R. Cohan

Bruce Givner

  • I.  DISTRIBUTION CLAUSES
    • A.  Outright Distribution of Trust Assets on Trust Termination
      • 1.  Termination and Distribution on Settlor’s Death  9.1
        • a.  Survivorship Period  9.2
        • b.  Multiple Beneficiaries  9.3
        • c.  Minor Beneficiaries  9.4
        • d.  Particular Gifts  9.4A
        • e.  Form: Distribution on Settlor’s or Surviving Settlor’s Death  9.5
      • 2.  Termination and Distribution of Small Trust
        • a.  When Termination and Distribution Are Appropriate for Small Trust  9.6
        • b.  Form: Distribution When Trust Is Small  9.7
      • 3.  Preliminary Considerations
        • a.  Clients’ Reluctance to Use Irrevocable Trusts  9.7A
        • b.  Settlors as Trustees  9.7B
        • c.  Beneficiaries as Trustees  9.7C
        • d.  Accountant as Trustee  9.7D
        • e.  Attorney as Trustee  9.7E
        • f.  Trust Company  9.7F
    • B.  Sprinkling Trust
      • 1.  Description of Sprinkling Trust  9.8
        • a.  Distribution Guidelines for Sprinkling Trust  9.8A
        • b.  Distributions to Children, Grandchildren, and Spouses  9.8B
      • 2.  Form: Sprinkling Trust  9.9
      • 3.  Sprinkling Power Exercised by Special Trustee
        • a.  Purpose of Special Trustee Sprinkling Power  9.10
        • b.  Form: Sprinkling Power Exercised by Special Trustee  9.11
        • c.  Form: Power Granted to Special Trustee to Add Beneficiaries of Named Class  9.11A
      • 4.  Tax Considerations for Sprinkling Trust
        • a.  Estate Tax on Sprinkling Trust  9.12
        • b.  Gift Tax on Sprinkling Trust  9.13
        • c.  Income Tax on Sprinkling Trust Income  9.14
        • d.  Generation-Skipping Transfer Tax on Sprinkling Trust Distributions  9.14A
        • e.  Substitution of Independent Trustee  9.14B
        • f.  Explaining Grantor Trusts  9.14C
        • g.  Avoiding or Deferring California Income Tax  9.14D
      • 5.  Form: Substitution of Independent Trustee  9.15
    • C.  Sprinkling Trust (Income Only, Ascertainable Standard)
      • 1.  Description of Income-Only Sprinkling Trust  9.16
      • 2.  Form: Sprinkling Trust (Income Only, Ascertainable Standard)  9.17
      • 3.  Tax Considerations for Income-Only Sprinkling Trust
        • a.  Estate, Gift, and Generation-Skipping Transfer Tax on Sprinkling Trust  9.18
        • b.  Grantor Trust Exception for Income-Only Sprinkling Trust  9.19
    • D.  Single Trust With Discretion to Distribute Principal
      • 1.  Description of Discretionary Trust  9.20
        • a.  Single Trust (Discretion to Distribute Principal)  9.20A
        • b.  Separate Shares of Single Trust  9.20B
      • 2.  Form: Single Trust (Discretion to Distribute Principal)  9.21
      • 3.  Form: Separate Shares (Discretion to Distribute Principal)  9.21A
      • 4.  Tax Considerations for Discretionary Trust
        • a.  Estate Tax on Discretionary Trust  9.22
        • b.  Gift Tax on Discretionary Trust  9.23
        • c.  Income Tax on Discretionary Trust Income  9.24
        • d.  Generation-Skipping Transfer Tax on Discretionary Trust  9.24A
    • E.  Separate Trust for Each Beneficiary
      • 1.  Description of Separate Trust  9.25
      • 2.  Forms for Separate Trusts  9.25A
        • a.  Form: Separate Trust for Each Beneficiary  9.26
        • b.  Form: Distribution of Income and Principal or Accumulation of Income During Child’s Minority  9.27
        • c.  Form: Distribution After Child Reaches Age 21  9.28
      • 3.  Tax Considerations for Separate Trusts
        • a.  Estate and Gift Tax on Separate Trust  9.29
        • b.  Income Tax on Separate Trust Income  9.30
        • c.  Generation-Skipping Transfer Tax on Separate Trust Distributions  9.30A
    • F.  Accumulation Trust
      • 1.  Description of Accumulation Trust  9.31
      • 2.  Forms for Accumulation Trust
        • a.  Form: Income Accumulation  9.32
        • b.  Form: Distribution if No Issue  9.33
      • 3.  Tax Considerations for Accumulation Trust
        • a.  Estate and Gift Tax on Accumulation Trust  9.34
        • b.  Income Tax on Accumulation Trust Income  9.35
        • c.  Escape Hatch From Trust Rate Compaction  9.36
        • d.  Form: Special Power of Invasion  9.37
    • G.  Less Significant Exceptions to Grantor Trust Rules  9.38
      • 1.  Power to Apply Income to Satisfy Support Obligation  9.38A
      • 2.  Power Affecting Beneficial Enjoyment Only After Occurrence of Event  9.38B
      • 3.  Testamentary Power of Appointment  9.38C
      • 4.  Power to Allocate Among Charitable Beneficiaries  9.38D
      • 5.  Power to Withhold Income During Disability of Beneficiary  9.38E
      • 6.  Power to Allocate Between Corpus and Income  9.38F
    • H.  Hybrid Trusts
      • 1.  Income Tax Considerations for Hybrid Trust  9.39
        • a.  Segregation of Income and Principal Accounts  9.39A
        • b.  Accumulation of Income While Beneficiary Under Age 21  9.39B
      • 2.  Estate and Gift Tax Considerations for Hybrid Trust  9.40
    • I.  Annuity Trusts and Unitrusts
      • 1.  Purpose of Annuity Trust and Unitrust  9.41
      • 2.  Forms for Annuity Trust and Unitrust
        • a.  Form: Annuity Trust  9.42
        • b.  Form: Unitrust  9.43
      • 3.  Tax Considerations for Annuity Trust and Unitrust
        • a.  Estate and Gift Tax on Trust  9.44
        • b.  Income Tax on Trust Income  9.45
    • J.  “Five or Five” Withdrawal Powers
      • 1.  Taxation of Five or Five Powers  9.45A
      • 2.  Uses of Five or Five Powers  9.45B
      • 3.  Form: Five or Five Withdrawal Power  9.45C
      • 4.  Form: Trustee’s Notice to Beneficiaries of Withdrawal Right  9.45D
      • 5.  Form: Beneficiary’s Acknowledgment of Notice of Withdrawal Right  9.45E
  • II.  ADDITIONAL CLAUSES FOR PERMANENT TRUSTS
    • A.  Miscellaneous Trust Distribution Clauses  9.46
      • 1.  Form: Preventing Outright Distributions to Minors and Others  9.47
      • 2.  Form: Survivorship Clause  9.48
      • 3.  Form: Distribution of Remainder  9.49
      • 4.  Form: Distribution to CUTMA Custodian  9.49A
    • B.  Beneficiary as Trustee
      • 1.  Problems of Nonsettlor Beneficiary  9.50
      • 2.  Form: Beneficiary as Trustee  9.51
      • 3.  Tax Considerations for Nonsettlor Beneficiary
        • a.  Estate and Gift Tax on Trust  9.52
          • (1)  Exercise of Power to Support Minor Children  9.52A
          • (2)  Hidden Powers of Appointment  9.52B
          • (3)  General and Limited Powers Distinguished  9.52C
        • b.  Income Tax on Trust Income  9.53
      • 4.  Beneficiary-Controlled Trust  9.53A
      • 5.  Form: Beneficiary-Controlled Trust  9.53B
    • C.  Powers of Appointment
      • 1.  Purpose of Appointment Powers  9.54
      • 2.  Form: Power of Appointment Created  9.55
      • 3.  Tax Considerations in Creating and Exercising Power of Appointment
        • a.  Estate and Gift Tax on Power of Appointment Trust  9.56
        • b.  Income Tax on Power of Appointment Trust Income  9.57
      • 4.  Perpetuities Savings Clause for Power of Appointment Trust
        • a.  Relevance of Rule Against Perpetuities  9.58
        • b.  Form: Perpetuities Savings Clause for Power of Appointment Trust   9.59
      • 5.  When Generation-Skipping Transfer Tax Applies to Power of Appointment Trust  9.60
      • 6.  Retention of Reversionary Interest in Trust Property  9.61
      • 7.  Using Powers of Appointment in Marital Deduction Trusts  9.62
    • D.  Discretionary Distribution Guidelines  9.63
      • 1.  Questions Addressed by Distribution Guidelines  9.63A
      • 2.  Desirable Qualities of Distribution Guidelines  9.63B
      • 3.  Communicating Distribution Guidelines  9.63C
    • E.  Spendthrift Protection
      • 1.  When Spendthrift Protection Necessary  9.64
      • 2.  Form: Spendthrift Settlor Clause  9.65
      • 3.  Tax Considerations in Spendthrift Trust
        • a.  Estate and Gift Tax on Trust  9.66
        • b.  Income Tax on Trust Income  9.67
    • F.  When Beneficiary Disclaimers Effective  9.68
      • 1.  Federal Law Disclaimer Requirements  9.69
      • 2.  Application to Transfers Made Before 1977  9.70
      • 3.  Form: Sample Disclaimer Document  9.71
    • G.  Trust Protector  9.72
      • 1.  Use of Trust Protector  9.73
      • 2.  Trust Protector Defined  9.74
      • 3.  Powers of Trust Protector  9.75
      • 4.  Appointment of Trust Protector  9.76
      • 5.  Form: Appointment of Trust Protector  9.77
      • 6.  Form: Powers of Trust Protector  9.78
    • H.  Decanting Trust  9.79

10

Trust Administration and Trustee’s Powers

Sandra J. Chan

Diana M. Hastings

  • I.  INTRODUCTION TO TRUST ADMINISTRATION  10.1
    • A.  Selection of Trustee
      • 1.  Tax Considerations in Trustee Selection  10.2
      • 2.  Settlor or Nonadverse Party as Trustee  10.3
        • a.  Estate Tax Consequences of Settlor-Trustee  10.4
        • b.  Income Tax Effects of Settlor-Trustee  10.5
      • 3.  Beneficiary as Trustee  10.6
        • a.  Beneficiary Removal Power  10.6A
        • b.  Beneficiary Administrative Powers  10.6B
        • c.  Beneficiary Distribution Power  10.6C
      • 4.  Independent Trustee  10.7
      • 5.  Cotrustees and Special Trustees  10.8
        • a.  Cotrustee Relationship  10.8A
        • b.  Special-Trustee Relationship  10.8B
      • 6.  Drafting Attorney as Trustee  10.9
    • B.  Limitations on Trustee’s Exercise of Discretion
      • 1.  Independent Trustee Powers  10.10
      • 2.  “Tax-Sensitive” Trustee Powers  10.11
  • II.  CLAUSES RELATING TO TRUSTEES
    • A.  Cotrustees or Special Trustees  10.12
      • 1.  Trustee’s Authority to Act  10.13
        • a.  Form: Cotrustee Unanimity Not Required  10.14
        • b.  Form: Cotrustee Delegation of Powers  10.15
        • c.  Form: Cotrustee Action When Individual Cotrustee Incapacitated  10.16
        • d.  Form: Corporate Trustee to Have Custody of Assets  10.17
        • e.  Form: Authority of Corporate Trustee to Expend No More Than Fixed Amount  10.18
        • f.  Form: Appointment of Special Trustee  10.19
        • g.  Form: Compensation of Special Trustee; No Effect on Powers of Trustee  10.20
      • 2.  Cotrustee Investment Powers  10.21
        • a.  Form: Corporate Trustee’s Right to Propose Purchases and Sales  10.22
        • b.  Form: Power to Invest Vested Solely in Individual Trustee  10.23
      • 3.  Discretionary Powers Relating to Principal and Income
        • a.  Form: Power to Invade Principal Vested Solely in Individual Cotrustee  10.24
        • b.  Special Trustee to Make Payments to Beneficiary-Trustee Other Than Settlor
          • (1)  Avoiding Adverse Tax Consequences  10.25
          • (2)  Form: Special Trustee to Make Payments to Beneficiary-Trustee  10.26
          • (3)  Form: Trustee to Appoint Special Trustee to Make Payments to Beneficiary-Trustee  10.26A
    • B.  Resignation of Trustee
      • 1.  Methods of Resignation  10.27
      • 2.  Form: Resignation of Trustee  10.28
    • C.  Removal of Trustee  10.29
      • 1.  Form: Trustee Removal and Replacement by Beneficiary or Third Party  10.30
      • 2.  Form: Replacement of Incapacitated Trustee  10.31
      • 3.  Form: Certificate of Independent Review  10.31A
      • 4.  Tax Consequences of Beneficiary’s Removal Power  10.31B
    • D.  Designation of Successor Trustees  10.32
      • 1.  Form: Designation of Successor Trustees  10.33
      • 2.  Form: Remaining Cotrustee Acts as Sole Trustee; Settlor Designates Succession Thereafter  10.34
      • 3.  Form: Settlor Designates Successor Trustees When Corporate Fiduciary Unwilling or Unable to Serve  10.35
      • 4.  Form: Trustee’s Power to Designate Successor  10.36
      • 5.  Form: Beneficiaries’ Power to Designate Successor  10.37
    • E.  Exculpating Trustee  10.38
      • 1.  Form: Nonliability of Trustee  10.39
      • 2.  Form: Nonliability for Cotrustee’s Acts  10.40
      • 3.  Form: Successor Trustee’s Nonliability for Predecessor’s Acts  10.41
      • 4.  Purpose and Effect of Exculpatory Clause  10.41A
    • F.  Commingling Undivided Interests
      • 1.  Commingled Interests Problem  10.42
      • 2.  Form: Authorization of Commingling of Undivided Interests  10.43
    • G.  Self-Dealing
      • 1.  Potential for Self-Dealing  10.44
      • 2.  Form: Authorization of Self-Dealing  10.45
      • 3.  Form: Conflicts of Interest; Self-Dealing (Broad Powers)  10.46
      • 4.  Form: Nonliability of Trustee or Special Trustee for Conflicts of Interest  10.47
      • 5.  Investment in Common Trust Funds Permitted  10.47A
    • H.  Trustee’s Bond
      • 1.  Bond Generally Not Required  10.48
      • 2.  Form: Trustee’s Bond  10.49
    • I.  Trustee’s Compensation
      • 1.  When Compensation Allowed  10.50
      • 2.  Form: Reasonable Compensation (Individual Trustee)  10.51
      • 3.  Form: Percentage of Net Value of Principal Plus Reasonable Compensation (Individual Trustee)  10.51A
      • 4.  Form: Reasonable Compensation (Cotrustees)  10.51B
  • III.  SETTLOR’S CONTROL OF INVESTMENTS
    • A.  Settlor’s Power to Control Trust Investments  10.52
    • B.  Form: Settlor’s Veto Power Over Investments  10.53
    • C.  Form: Settlor’s Power to Direct Investments  10.54
    • D.  Form: Settlor’s Powers Personal to Settlor  10.55
    • E.  Form: Investment Counsel  10.56
    • F.  Form: Investment Consultant  10.56A
  • IV.  CLAUSES GOVERNING TRUSTEE’S POWERS AND ADMINISTRATION
    • A.  Form: Introduction to Trustee’s Powers  10.57
    • B.  Form: Trustee’s Powers  10.58
    • C.  Trustee Duties Regarding Investments  10.59
    • D.  General Investment Powers
      • 1.  Broad or Restricted Investment Powers
        • a.  Form: Broad Investment Powers Under Prudent Investor Rule  10.60
        • b.  Form: Limited Investment Powers  10.61
      • 2.  Power to Retain Property and Operate a Business
        • a.  Retaining Property and Operating a Business  10.62
        • b.  Form: Power to Retain Property and Operate a Business (Standard Clause)  10.63
        • c.  Form: Power to Retain or Purchase Unproductive or Underproductive Property  10.64
      • 3.  Diversification of Assets
        • a.  Duty to Diversify Assets  10.65
        • b.  Form: Diversification Not Required  10.66
      • 4.  Power to Sell, Exchange, Manage, Encumber, and Grant Options on Property
        • a.  Disposing of and Managing Property  10.67
        • b.  Form: Power to Sell, Exchange, Manage, Encumber, and Grant Options on Property (Standard Clause)  10.68
      • 5.  Power to Lease, Including Oil and Mineral Development (Standard Clause)
        • a.  Leasing Property  10.69
        • b.  Form: Power to Lease, Including Oil and Mineral Development (Standard Clause)  10.70
      • 6.  Securities Ownership
        • a.  Managing Securities  10.71
          • (1)  Form: Power to Manage Securities (Standard Clause)  10.72
          • (2)  Form: Power to Register Shares for Sale (Closely Held or Controlled Public Corporation)  10.73
        • b.  Holding Stocks and Other Securities in Nominee’s, Broker’s, or Street Name
          • (1)  Authority to Hold Stocks and Other Securities  10.74
          • (2)  Form: Authority to Hold Trust Property as Nominee  10.75
      • 7.  Power to Employ Agents or Investment Counsel
        • a.  Use of Power to Employ  10.76
        • b.  Form: Power to Employ Agents  10.77
        • c.  Form: Individual Trustee’s Power to Employ Investment Counsel  10.78
    • E.  General Management Powers
      • 1.  Power to Borrow or Lend  10.79
        • a.  Form: Power to Borrow (Standard Clause)  10.80
        • b.  Form: Power to Make Loans (Standard Clause)  10.81
      • 2.  Power to Lend to, Buy From, and Sell to Trust
        • a.  Allowing Trustee as Individual to Purchase Assets or Make Loans to Trust  10.82
        • b.  Form: Power to Lend to, Buy From, and Sell to Trust Individually  10.83
      • 3.  Power to Initiate and Defend Litigation and to Compromise Claims
        • a.  Explicit Grant of Power Reinforces Trustee’s Duty to Preserve Trust Property  10.84
        • b.  Form: Power to Initiate and Defend Litigation and Power to Compromise (Standard Clause)  10.85
      • 4.  Power to Insure
        • a.  Power to Insure Assets and Insure Against Liability  10.86
        • b.  Form: Power to Insure (Standard Clause)  10.87
    • F.  Powers to Deal With Settlor’s Probate Estate
      • 1.  Use of Probate Estate Powers  10.88
      • 2.  Form: Power to Lend to Settlor’s Probate Estate  10.89
      • 3.  Form: Power to Purchase Property From Settlor’s Probate Estate  10.90
    • G.  Powers Relating to Taxes
      • 1.  Trustee’s Disclaimer, Release, or Restriction of Administrative Powers  10.91
        • a.  Selective Disclaimer or Release of Powers  10.91A
        • b.  Form: Disclaimer, Release, or Restriction of Administrative Powers  10.92
      • 2.  Power to Adjust for Consequences of Tax Elections and Other Decisions
        • a.  Trustee Tax Elections  10.93
        • b.  Form: Power to Adjust for Tax Consequences  10.94
      • 3.  Power to Consider Tax Consequences of Distributions
        • a.   Limited Scope of Throwback Rules  10.95
        • b.  Form: Power to Consider Tax Consequences of Distributions  10.96
      • 4.  Authority to Pay Estate Taxes
        • a.  Form: Payment of Estate Taxes  10.97
        • b.  Payment of Generation-Skipping Transfer Taxes  10.98
    • H.  Tax Consequences of Powers
      • 1.  Avoiding Adverse Tax Consequences to Settlor or Beneficiary-Trustee  10.99
      • 2.  Administrative Powers  10.99A
      • 3.  Form: Trustee Prohibited From Exercising Certain Powers  10.100
    • I.  Miscellaneous Management Clauses
      • 1.  Power to Consolidate or Divide Trusts  10.101
        • a.  Form: Physical Division of Separate Trusts Created in Single Instrument Not Required; Division Into Separate Trusts Permitted (Standard Clause)  10.102
        • b.  Form: Consolidated Administration of Trusts  10.103
      • 2.  Form: Power to Move Situs  10.104
      • 3.  Form: Payments to Beneficiary Under Disability or to Minor Beneficiary  10.105
      • 4.  Distribution on Termination of Trust
        • a.  Distribution Issues to Consider  10.106
        • b.  Form: Broad Powers of Distribution (Standard Clause)  10.107
      • 5.  Power to Delay Distribution Until Resolution of Claims or Liability
        • a.  Use of Power to Delay Distribution   10.108
        • b.  Form: Power to Withhold Payment if Conflicting Claims Arise  10.109
    • J.  Notice of Proposed Action
      • 1.  When Notice May Be Used  10.109A
      • 2.  Notice Procedure  10.109B
      • 3.  Form: Notice of Proposed Action  10.109C
      • 4.  Required Information in Notice of Proposed Action  10.109D
  • V.  POWERS RELATING TO PRINCIPAL AND INCOME
    • A.  Purpose of Allocation Clauses  10.110
      • 1.  Relevance of Adjustment Power  10.110A
      • 2.  Using Discretionary Power  10.110B
    • B.  Tax Considerations in Allocation Clauses  10.111
    • C.  Allocation Clauses  10.112
      • 1.  Form: Uniform Principal and Income Act to Govern  10.112A
      • 2.  Form: Broad Power to Determine Principal and Income (Standard Clause)  10.112B
      • 3.  Form: Power to Make Allocations Between Principal and Income With Limited Discretion (Tax-Sensitive Trustee)  10.112C
    • D.  Allocation of Income and Expenses Among Successive Beneficiaries
      • 1.  Allocation of Income  10.113
      • 2.  Form: Undistributed Income Payable to Successive Beneficiaries  10.114
      • 3.  Allocation of Expense Items  10.115
      • 4.  Form: Allocation of Expenses Among Successive Beneficiaries  10.116
    • E.  Conversion of Income Interest to Unitrust Interest  10.116A
    • F.  Reconversion of Unitrust Interest  10.116B
  • VI.  ACCOUNTING BY TRUSTEE
    • A.  Purpose of Trust Accounting  10.117
    • B.  Form: Accounting by Trustee  10.118
  • VII.  MISCELLANEOUS ADMINISTRATIVE CLAUSES
    • A.  Notice of Births, Deaths, and Other Events Affecting Interests
      • 1.  Purpose of Clause  10.119
      • 2.  Form: Notice to Trustee of Births, Deaths, and Other Events Affecting Interests  10.120
    • B.  Additions to Trust
      • 1.  Purpose of Additions Clause  10.121
      • 2.  Form: Clause Authorizing Additions to Trust  10.122
    • C.  Spendthrift Clause
      • 1.  Purpose of Spendthrift Clause  10.123
      • 2.  Using Long-Form Spendthrift Clause  10.123A
      • 3.  Form: Spendthrift Clause  10.124
    • D.  Choice-of-Law Clause
      • 1.  Enforceability and Desirability  10.125
      • 2.  Form: Specifying Law to Govern Validity, Construction, and Administration of Trust  10.126
    • E.  Construction of Commonly Used Terms  10.127
      • 1.  Form: Gender and Number  10.128
      • 2.  Form: Trustees and Fiduciaries  10.129
      • 3.  Form: Distribution Among Beneficiaries  10.130
      • 4.  Form: “Shall” and “May”  10.131
    • F.  Commonly Included Definitions
      • 1.  Form: Education  10.132
      • 2.  Issue and Children
        • a.  Defining “Issue” and “Children”  10.133
          • (1)  Natural Parent-Child Relationship Under Uniform Parentage Act  10.133A
          • (2)  Conclusive Marital Presumption for Children of Spouses or Registered Domestic Partners  10.133B
          • (3)  Adopted Children  10.133C
        • b.  Form: Issue and Children (California Law of Intestate Succession Applies)  10.134
        • c.  Form: Issue and Children (Lineal Descendants)  10.134A
      • 3.  Form: Spouse, Husband, or Wife  10.135
    • G.  Form: No-Contest Clause  10.136
      • 1.  Need for Caution in No-Contest Clause  10.136A
      • 2.  Optional Addition to No-Contest Clause  10.136B
    • H.  Form: Annual Distributions of Income  10.137
    • I.  Form: Distribution of Disclaimed Property  10.138
    • J.  Form: Power to Distribute if Power of Appointment Not Exercised  10.139
  • VIII.  IMPLEMENTING THE TRUST  10.140

11

Life Insurance Trusts

Jon J. Gallo

  • I.  FUNDING TRUSTS WITH LIFE INSURANCE  11.1
    • A.  Life Insurance Trust Objectives  11.2
    • B.  Special Considerations  11.3
  • II.  PLANNING AND DRAFTING CONSIDERATIONS
    • A.  Transmuting Community Property  11.4
    • B.  Avoiding Application of Reciprocal Trust Doctrine  11.5
      • 1.  Reciprocal Trust Doctrine Applied  11.5A
      • 2.  Reciprocal Trust Doctrine Not Applied  11.5B
    • C.  Selecting and Changing Trustee  11.6
      • 1.  Fiduciary Incidents of Ownership  11.6A
      • 2.  Settlor’s Power to Appoint Trustee  11.6B
      • 3.  Settlor’s Spouse as Trustee  11.6C
    • D.  Transferring Property to Trust
      • 1.  Inclusion of Pre-Owned Policy in Insured’s Estate Under IRC §2035  11.7
      • 2.  Form: Contingent Marital Deduction Gift  11.8
      • 3.  Avoidance of Estate Tax Inclusion of New Policy  11.9
        • a.  Insurable Interest Problem  11.9A
        • b.  Effect of Substitute Application  11.9B
      • 4.  Gift Tax Value  11.10
      • 5.  Gift Tax Exclusions  11.11
    • E.  Removing Policy From Trust  11.12
      • 1.  Exceptions to Transfer-for-Value Rule  11.12A
      • 2.  Power to Acquire Policy Held in Trust  11.12B
    • F.  Choosing Method of Premium Payment  11.13
      • 1.  Funded Insurance Trust  11.13A
      • 2.  Periodic Gifts to Trust  11.13B
    • G.  Holding Sufficient Liquid Assets to Satisfy Crummey Withdrawal Demands  11.14
      • 1.  When Present Interest Issue Arises  11.14A
      • 2.  Recommended Precautions   11.14B
    • H.  Addressing Generation-Skipping Transfer Tax Problems  11.15
      • 1.  Avoiding ETIPs  11.16
      • 2.  Planning for GST Exemption Allocation  11.17
      • 3.  Allocating GST Exemption by Formula  11.18
    • I.  Exercising Trustee Powers  11.18A
  • III.  FORMS
    • A.  Form: Power to Invest in Life Insurance  11.19
    • B.  Form: Power to Remove and Replace Trustee  11.20
  • IV.  SELECTING APPROPRIATE INSURANCE PRODUCT  11.21
    • A.  Selecting Company  11.22
    • B.  Understanding Insurance Products and Illustrations  11.23
      • 1.  Risk Factors  11.24
        • a.  Mortality Experience  11.25
        • b.  Investment Experience  11.26
        • c.  Lapse Rates  11.27
        • d.  Company Expenses  11.28
      • 2.  Insurance Products  11.29
        • a.  Term Insurance  11.30
          • (1)  Annual Renewable Term  11.31
          • (2)  Level Term  11.32
          • (3)  Decreasing Term  11.33
          • (4)  Modified Term  11.34
        • b.  Whole Life Insurance  11.35
          • (1)  Limited-Pay Whole Life Insurance  11.36
          • (2)  Current Assumption (Interest-Sensitive) Whole Life Insurance  11.37
          • (3)  Blended Whole Life/Term Insurance  11.38
          • (4)  Joint Lives Life Insurance  11.39
          • (5)  Universal Life Insurance  11.40
          • (6)  Variable Life Insurance  11.41
          • (7)  Variable/Universal Life Insurance  11.42
          • (8)  Secondary Guarantee Universal Life (SGUL) Insurance  11.42A
          • (9)  Modified Endowment Contract (MEC) Income Tax Consequences  11.42B
          • (10)  Flexible Cash Value (FCV) Contract  11.42C
      • 3.  Life Insurance Illustrations  11.43
        • a.  Term Insurance  11.44
        • b.  Whole Life Insurance  11.45
        • c.  Blended Insurance  11.46
        • d.  Second-to-Die Insurance  11.47
        • e.  Variable Insurance  11.48
      • 4.  Obtaining Information  11.49

12

Trusts for Minors

Monica Dell’Osso

Betty J. Orvell

  • I.  TRANSFERS TO MINORS
    • A.  Scope of Chapter  12.1
    • B.  Tax Aspects of Gifts to Minors  12.2
      • 1.  Gift Tax  12.3
      • 2.  Estate Tax  12.4
      • 3.  Income Tax  12.5
      • 4.  Generation-Skipping Transfer Tax  12.6
    • C.  Nontax Aspects of Gifts to Minors  12.7
      • 1.  Minor’s Legal Disability  12.8
      • 2.  Child’s Ability to Manage Assets  12.9
      • 3.  Impact on Child’s Incentive  12.10
      • 4.  Donor’s Loss of Control Over Assets  12.11
  • II.  OUTRIGHT GIFTS AND OTHER PROPERTY TRANSFER DEVICES
    • A.  Outright Gifts to Minors
      • 1.  Legal and Tax Aspects of Outright Gifts  12.12
      • 2.  Advantages and Disadvantages of Outright Gifts  12.13
      • 3.  Legal Obstacles in Minors Exercising Control of Outright Gifts  12.13A
    • B.  Direct Payments for Educational and Medical Expenses (IRC §2503(e))  12.14
    • C.  Pay on Death (POD) and Totten Trust Accounts
      • 1.  Legal and Tax Aspects of POD Accounts  12.15
      • 2.  Advantages and Disadvantages of POD Accounts  12.16
    • D.  Joint Tenancy and Revocable TOD Deed
      • 1.  Legal and Tax Aspects of Joint Tenancy  12.17
      • 2.  Advantages and Disadvantages of Joint Tenancy  12.18
      • 3.  Estate and Gift Tax Consequences of Joint Tenancy  12.18A
      • 4.  Revocable TOD Deed  12.18B
    • E.  Guardianships
      • 1.  Legal and Tax Aspects of Guardianship  12.19
      • 2.  Advantages of Guardianship  12.20
      • 3.  Disadvantages of Guardianship
        • a.  Termination at Age 18  12.21
        • b.  Transfer of Property if Minor Dies  12.22
    • F.  Custodianships Under California Uniform Transfers to Minors Act
      • 1.  Establishment of Custodianship  12.23
      • 2.  Transfer to Custodian  12.23A
      • 3.  Powers of Custodian  12.24
      • 4.  Liability of Custodian  12.25
      • 5.  Substitute Custodians and Successor Custodians
        • a.  Designation of Substitute Custodian  12.26
        • b.  Designation of Successor Custodian  12.27
      • 6.  Form: Creation of Custodianship by Transferor  12.28
      • 7.  Form: Designation of Successor Custodian by Current Custodian  12.29
      • 8.  Termination of Custodianship  12.30
        • a.  Gift Tax Consequences of Custodianship  12.31
        • b.  Estate Tax Inclusion in Donor’s Estate
          • (1)  When Donor Is Custodian  12.32
          • (2)  Under Reciprocal Trust Doctrine  12.33
        • c.  GST Tax Implications of Custodial Gifts  12.34
        • d.  Income Taxation of Custodianship  12.35
      • 9.  Advantages of Custodianship  12.36
      • 10.  Disadvantages of Custodianship  12.37
    • G.  Qualified Tuition Programs; ABLE Accounts  12.37A
    • H.  Coverdell Education Savings Accounts  12.37B
  • III.  SECTION 2503(c) TRUSTS (MINORS’ TRUSTS)
    • A.  Introduction to Minors’ Trusts  12.38
    • B.  Requirements for Qualification
      • 1.  No Substantial Restriction on Trustees’ Power to Distribute Property to Minor  12.39
        • a.  Consideration of Minor’s Other Resources  12.40
        • b.  Prohibition Against Use of Property for Legal Support  12.41
        • c.  Discretionary Sprinkling Power  12.42
      • 2.  Distribution of Property at Age 21  12.43
      • 3.  Distribution of Property on Minor’s Death  12.44
        • a.  Distribution to Minor’s Estate  12.45
        • b.  General Power of Appointment  12.46
        • c.  Taker in Default  12.47
        • d.  Limited Power of Appointment  12.48
    • C.  Tax Aspects of IRC §2503(c) Trusts
      • 1.  Gift Tax; Need for Separate Trusts  12.49
      • 2.  Estate Tax Inclusion of Trust
        • a.  Death of Beneficiary  12.50
        • b.  Death of Settlor
          • (1)  Trust Assets Generally Not Included in Settlor’s Estate  12.51
          • (2)  Inclusion When Assets Used to Meet Settlor’s Duty of Support  12.52
          • (3)  Risks When Settlor Has Power to Appoint Successor Trustee  12.53
          • (4)  Inclusion When Settlor-Trustee Has Broad Discretion Over Income Distribution  12.54
      • 3.  No Generation-Skipping Transfer Tax on Assets Included in Minor’s Estate  12.55
      • 4.  Income Taxation of IRC §2503(c) Trust  12.56
      • 5.  Trusts Continuing After Age 21  12.57
      • 6.  Gift Tax Consequences on Lapse of Termination Right  12.57A
    • D.  Distribution of Income and Principal to Living Child
      • 1.  Form: Division of Trust Estate  12.58
      • 2.  Form: Discretionary Payment of Income and Principal Before Child Attains Age 18 or 21  12.59
      • 3.  Form: Outright Distribution to Living Child at Age 18 or 21  12.60
      • 4.  Form: Child’s Power to Terminate Trust After Attaining Specified Age  12.61
    • E.  Distribution When Child Dies
      • 1.  Form: Distribution to Child’s Estate  12.62
      • 2.  Form: Distribution According to Beneficiary’s Power of Appointment  12.62A
    • F.  Advantages and Disadvantages of IRC §2503(c) Trust  12.63
    • G.  Form: Complete IRC §2503(c) Minor’s Trust  12.63A
  • IV.  SECTION 2503(b) TRUSTS (INCOME INTERESTS ONLY QUALIFYING FOR ANNUAL EXCLUSION)
    • A.  Introduction to IRC §2503(b) Trust
      • 1.  “Income Interest Only” Qualification  12.64
      • 2.  Valuing the Income Interest  12.65
      • 3.  Tax Benefits Versus Nontax Objectives  12.66
      • 4.  Taxable Gift of Remainder Interest  12.66A
    • B.  Features of IRC §2503(b) Trusts
      • 1.  Standard Trust: Current Income Interest Combined With Post-Age-21 Principal Distribution  12.67
      • 2.  Herr Trusts: Accumulation of Pre-Age-21 Income for Single Beneficiary  12.68
        • a.  Description of Herr Trust  12.69
        • b.  Tax Aspects of Herr Trust  12.69A
        • c.  Qualification of Post-Age-21 Income Interest  12.70
    • C.  Combination of IRC §2503(b) Trust and CUTMA  12.71
      • 1.  Income Distributions Required  12.71A
      • 2.  Distribution to Custodian  12.71B
    • D.  Tax Aspects of IRC §2503(b) Trusts
      • 1.  Gift Tax on IRC §2503(b) Trust  12.72
      • 2.  Estate Tax on IRC §2503(b) Trust  12.73
      • 3.  Income Taxation of IRC §2503(b) Trust  12.74
      • 4.  GST Tax on IRC §2503(b) Trust  12.75
    • E.  Form: Herr Trust—Distribution of Income by Age 21  12.76
    • F.  Form: Distribution of Post-Age-21 Income  12.77
    • G.  Form: Distribution of Balance if Beneficiary Dies Before Age 21  12.78
    • H.  Form: Discretionary Early Distribution of Principal  12.79
  • V.  CRUMMEY TRUSTS
    • A.  Description of Crummey Trust  12.80
      • 1.  Expiration of Withdrawal Powers  12.80A
      • 2.  Exercise of Withdrawal Powers  12.80B
    • B.  Requirements for Annual Exclusion
      • 1.  Guardian for Minor Beneficiaries  12.81
      • 2.  Right of Withdrawal  12.82
        • a.  Notice of Withdrawal Rights
          • (1)  Importance of Written Notice  12.83
          • (2)  Persons Receiving Notice  12.84
          • (3)  Form: Notice to Beneficiary  12.85
        • b.  Period of Withdrawal Right  12.86
        • c.  Lapse of Withdrawal Right  12.86A
        • d.  Amount of Withdrawal Right  12.87
          • (1)  Split-Gift Problem  12.87A
          • (2)  Spouse’s Crummey Power  12.88
          • (3)  Analyzing Excess Lapse Issues  12.89
            • (a)  When Excess Lapses Must Be Avoided  12.89A
            • (b)  When Excess Lapses May Be Acceptable  12.89B
          • (4)  Avoiding Excess Lapses  12.90
        • e.  Multiple Trust Problems  12.91
        • f.  Liquid Assets to Satisfy Withdrawal Power  12.92
        • g.  Naked Crummey Powers  12.93
          • (1)  IRS Letter Rulings: Exclusion Disallowed  12.93A
          • (2)  Cristofani Decision: Exclusion Allowed Despite Remote Remainder Interest  12.94
          • (3)  Post-Cristofani: IRS Renewed Challenge to Naked Crummey Power  12.95
          • (4)  Revised Acquiescence in Cristofani  12.95A
          • (5)  “Unenforceable” and “Illusory” Withdrawal Rights; IRS Position and Mikel Decision  12.95B
    • C.  Withdrawal Provisions for Crummey Trust
      • 1.  Form: No Excess Lapse Protection  12.96
      • 2.  Form: Withdrawal Right Limited to “Five or Five” Amount  12.97
      • 3.  Form: “Hanging” Crummey Power  12.98
    • D.  Tax Consequences of Crummey Trusts
      • 1.  Income Taxation of Crummey Trusts
        • a.  Settlor Income Tax  12.99
        • b.  Beneficiary Income Tax  12.100
      • 2.  Beneficiary Gift Tax  12.101
        • a.  “Five or Five” Limitation  12.102
        • b.  No Gift if Powerholder Is Beneficiary or Has General Power of Appointment  12.103
        • c.  Avoiding Gift Taxation by Use of “Hanging” Crummey Power  12.104
      • 3.  Estate Tax Inclusion of Crummey Trust
        • a.  Beneficiary Estate Tax  12.105
        • b.  Settlor Estate Tax  12.106
      • 4.  Generation-Skipping Transfer (GST) Tax; Application to Crummey Trust
        • a.  Beneficiary GST Tax  12.107
        • b.  Settlor GST Tax  12.108
      • 5.  Gift Tax; Lapse of Withdrawal Power  12.109
      • 6.  Use as Sprinkling Trust  12.110
  • VI.  INCENTIVE TRUSTS
    • A.  Description of Incentive Trusts  12.111
    • B.  Nontax Incentive Planning With Trusts for Children  12.112
    • C.  Income Tax Aspects of Incentive Trusts  12.113
    • D.  Exceptions to Grantor Trust Treatment  12.113A
    • E.  Transfer Tax Aspects of Incentive Trusts
      • 1.  Gift Tax on Trust Transfers  12.114
      • 2.  Estate Tax Inclusion of Incentive Trust  12.115
      • 3.  Generation-Skipping Transfer (GST) Tax; Application to Incentive Trust  12.116
    • F.  Incentive Trust Provisions
      • 1.  Form: Conditions for Distribution  12.117
      • 2.  Form: Distributions for Medical Emergency  12.118
      • 3.  Form: Right of Withdrawal at Specified Ages When Child Has Complied With Incentive Provisions  12.119
      • 4.  Form: Manner of Distribution to Child Exercising Right of Withdrawal and When Child Dies Without Exercising Right of Withdrawal  12.120
      • 5.  Form: Child Not in Compliance With Incentive Provisions at Specified Ages  12.121

13

Special Needs Trusts

Ruth A. Phelps

Sterling L. Ross, Jr.

  • I.  PLANNING AND DRAFTING SNTs
    • A.  Purpose of Special Needs Trust (SNT)  13.1
    • B.  Types of SNTs  13.2
      • 1.  Third Party SNT  13.3
      • 2.  Funding Third Party SNT  13.4
      • 3.  First Party SNT  13.5
    • C.  Public Benefits
      • 1.  Overview of SSI and Medi-Cal  13.6
      • 2.  SSI Benefits  13.7
        • a.  Eligibility for Disabled and Aged Poor  13.8
        • b.  Limitation on Resources  13.9
        • c.  SSI Benefits Reduced by Income  13.10
        • d.  Reduction for In-Kind Support and Maintenance  13.11
        • e.  SSI Transfer Rules  13.12
      • 3.  Medi-Cal Benefits  13.13
        • a.  Eligibility for Medi-Cal Benefits  13.14
        • b.  Medi-Cal Transfer and Estate Recovery Rules  13.15
      • 4.  Social Security and Medicare Distinguished  13.16
    • D.  SSI Special Needs Trust Rules
      • 1.  Third Party SNTs  13.17
      • 2.  First Party SNTs  13.18
        • a.  Need for Irrevocability Clause  13.19
        • b.  Avoiding Attack on Irrevocability Clause  13.20
    • E.  Medi-Cal Special Needs Trust Rules
      • 1.  Federal Medicaid Law  13.21
      • 2.  Medi-Cal Trust Regulations  13.22
        • a.  Third Party Trusts  13.23
        • b.  First Party Trusts  13.24
    • F.  Statutory “Spendthrift” Protection  13.25
    • G.  Income Taxation of SNTs  13.26
    • H.  Chart: Summary of SNTs  13.27
  • II.  ESTABLISHING LSNTs
    • A.  Overview of LSNTs  13.28
      • 1.  Substantial Impairment  13.29
      • 2.  Unmet Special Needs  13.30
      • 3.  Amount Reasonably Necessary  13.31
    • B.  Procedure for Obtaining Court Approval  13.32
    • C.  Petition to Terminate Trust  13.33
    • D.  Claims by Government Agencies  13.34
    • E.  Disabled Adults With Capacity  13.35
    • F.  Continuing Court Supervision  13.36
    • G.  Estate and Gift Tax Consequences of Funding and Termination of LSNTs  13.37
  • III.  INTER VIVOS THIRD PARTY SNT CLAUSES
    • A.  Introductory Clauses for Third Party SNT  13.38
      • 1.  Form: Table of Contents; Trust Agreement  13.39
      • 2.  Form: Irrevocability; Limited Power of Amendment for Third Party SNT  13.40
      • 3.  Purpose of Third Party SNT  13.41
    • B.  Distribution Provisions for Third Party SNT  13.42
      • 1.  Form: Distribution for Special Needs  13.43
      • 2.  Form: Trust Advisory Committee  13.44
      • 3.  Form: Requirement to Seek Public Benefits  13.45
      • 4.  Form: Trust Estate to Supplement Public Benefits  13.46
    • C.  Termination Provisions for Third Party SNT  13.47
      • 1.  Form: Termination of Third Party SNT on Death of Beneficiary  13.48
      • 2.  Form: Backstop Termination Clause for Third Party SNT  13.49
      • 3.  Form: Payment of Expenses of Third Party SNT  13.50
    • D.  Form: Office of Trustee; Trustee Powers; Governing Law; Description of Transferred Property  13.50A
  • IV.  OTHER INTER VIVOS FIRST PARTY SNT CLAUSES
    • A.  Introductory Clauses for First Party SNT  13.51
    • B.  Distribution Provisions for First Party SNT  13.52
    • C.  Termination of First Party SNT on Death of Beneficiary  13.53
    • D.  Trust Protector Clause  13.54

13A

Dynasty Trusts

Richard S. Kinyon

Danielle T. Zaragoza

  • I.  INTRODUCTION TO DESCENDANTS TRUSTS  13A.1
  • II.  BASIC FEATURES OF A GST-EXEMPT DYNASTY TRUST
    • A.  GST Exemption Allocated to Trust  13A.2
    • B.  Discretionary Accumulation Trust  13A.3
    • C.  Trust Divided Into Separate Trusts in Each Generation  13A.4
    • D.  Duration of Trust Limited by Rule Against Perpetuities  13A.5
  • III.  ADDITIONAL FEATURES OF A GST-EXEMPT DYNASTY TRUST
    • A.  Intentionally Defective Grantor Trust  13A.6
    • B.  Using Valuation Discounts to Enhance Trust  13A.7
    • C.  Leveraging the Trust  13A.8
    • D.  Example of Leveraged Intentionally Defective Grantor, GST-Exempt Dynasty Trust  13A.9
      • 1.  Income Tax Treatment of Sale to Trust  13A.10
      • 2.  Annual Exclusion Gifts of Remaining LLC Interest to Issue  13A.11
      • 3.  Grantor Trust Status Ends on Death of Settlor  13A.12
    • E.  Alternative Example—Bargain Installment Sale to Descendants Trust  13A.13
    • F.  Private Annuity Alternative to Promissory Note  13A.14
  • IV.  FORM OF DESCENDANTS TRUST AND RELATED INSTRUMENTS
    • A.  Form: Generation-Skipping Descendants Trust  13A.15
    • B.  Form: Unsecured Installment Promissory Note  13A.16
    • C.  Form: Secured Installment Promissory Note  13A.17
    • D.  Form: Secured Annually Renewable Demand Promissory Note  13A.18
    • E.  Form: Security Agreement for Limited Liability Company Interest  13A.19
    • F.  Form: Deed of Trust With Assignment of Rents  13A.20

14

Grantor Retained Income Trusts (GRITs)

Marc M. Stern

  • I.  OVERVIEW OF GRANTOR RETAINED INCOME TRUSTS (GRITs)
    • A.  Objectives of GRIT  14.1
      • 1.  Valuation of Remainder Gift  14.1A
      • 2.  Valuation of Retained Interests  14.1B
    • B.  Advantages of GRIT  14.2
      • 1.  “Member of the Family” Defined  14.2A
      • 2.  Application to Domestic Partners  14.2B
    • C.  Valuation Benefits of GRIT  14.3
    • D.  Selecting GRIT Term  14.4
    • E.  Lack of Statutory Requirements  14.5
    • F.  Permissible Provisions
      • 1.  Trust Assets  14.6
      • 2.  Fractional Interests  14.7
  • II.  TAX CONSIDERATIONS
    • A.  Income Tax Issues  14.8
      • 1.  Settlor Payment of Capital Gains Taxes  14.8A
      • 2.  Grantor Trust as S Corporation Shareholder  14.8B
    • B.  Spousal Interests  14.9
    • C.  Repurchase/Exchange Strategy for Obtaining New Basis  14.10
    • D.  California Real Property Tax Considerations  14.11
    • E.  Integration Into Settlor’s Estate Plan  14.12
  • III.  CALCULATING VALUE OF GRIT GIFT  14.13
  • IV.  WHEN TO USE GRIT  14.14
  • V.  DRAFTING CONSIDERATIONS  14.15
  • VI.  GRANTOR RETAINED INCOME TRUST PROVISIONS
    • A.  Form: Table of Contents; Declaration of Transfer to Trustee  14.16
    • B.  Form: Trust Name  14.17
    • C.  Form: Trust Estate  14.18
    • D.  Form: Irrevocability of Trust  14.19
    • E.  Form: Trust Term  14.20
    • F.  Form: Payment of Income  14.21
    • G.  Form: Limitation on Trust Distributions  14.22
    • H.  Form: Distribution if Settlor Survives Trust Term  14.23
    • I.  Form: Distribution if Settlor Fails to Survive Trust Term  14.24
    • J.  Form: Distribution on Termination  14.25
    • K.  Form: Office of Trustee  14.26
    • L.  Form: Trustee Powers  14.27
    • M.  Form: Applicable Law; Execution  14.28
    • N.  Form: Description of Transferred Property  14.29

15

Grantor Retained Annuity Trusts (GRATs)

Marc M. Stern

  • I.  OVERVIEW OF GRANTOR RETAINED ANNUITY TRUSTS (GRATs)
    • A.  Objectives and Design of GRAT  15.1
      • 1.  Qualified Annuity Interest  15.1A
      • 2.  GRAT Compared to CRAT  15.1B
    • B.  Valuation Benefits of GRAT  15.2
    • C.  Expressing Annuity Amount   15.3
    • D.  Selecting GRAT Term
      • 1.  General Considerations  15.4
        • a.  Advantages of Short-Term GRAT  15.4A
        • b.  Advantages of Longer-Term GRAT  15.4B
        • c.  Alternative GRAT for Settlor’s Life  15.4C
        • d.  High-Payout GRAT  15.4D
      • 2.  “Zeroed-Out” GRAT  15.5
      • 3.  Walton GRATs  15.6
      • 4.  “Rolling” GRATs  15.6A
      • 5.  ETIP Problem for GRATs  15.6B
      • 6.  Sale of GRAT Remainder Interest  15.6C
      • 7.  Marital Deduction Qualifying GRAT Remainder Interest   15.6D
    • E.  GRAT Requirements and Permissible Provisions  15.7
      • 1.  Assets Used to Fund GRAT  15.8
      • 2.  Required Governing Instrument Provisions  15.9
      • 3.  Fractional Interests  15.10
  • II.  TAX CONSIDERATIONS
    • A.  Income Tax Issues  15.11
      • 1.  Settlor Payment of Capital Gains Taxes  15.11A
      • 2.  Grantor Trust as S Corporation Shareholder  15.11B
      • 3.  Nonrecognition Transactions Between Settlor and Grantor Trust  15.11C
    • B.  Spousal Interests  15.12
      • 1.  Revocable Spousal Annuity  15.12A
      • 2.  Separate Property GRATs  15.12B
    • C.  Repurchase/Exchange Strategy for Obtaining New Basis  15.13
    • D.  California Real Property Tax Considerations  15.14
    • E.  Integration Into Settlor’s Estate Plan  15.15
    • F.  Qualifying for Marital Deduction If Settlor Dies During GRAT Term  15.15A
  • III.  CALCULATING VALUE OF GRAT GIFT  15.16
  • IV.  WHEN TO USE GRAT  15.17
  • V.  DRAFTING CONSIDERATIONS  15.18
  • VI.  GRANTOR RETAINED ANNUITY TRUST PROVISIONS
    • A.  Form: Table of Contents; Declaration of Transfer to Trustee  15.19
    • B.  Form: Trust Name  15.20
    • C.  Form: Trust Estate  15.21
    • D.  Form: Irrevocability of Trust  15.22
    • E.  Form: Trust Term  15.23
    • F.  Form: Operation During Trust Term  15.24
      • 1.  Form: Payment for Each Year of Trust  15.25
      • 2.  Form: Annuity Amount  15.26
      • 3.  Form: Short Taxable Year  15.27
      • 4.  Form: Trust Income  15.28
      • 5.  Form: Limitation on Trust Distributions  15.29
      • 6.  Form: Commutation Prohibited  15.30
    • G.  Form: Distribution on Expiration of Trust Term  15.31
    • H.  Form: Distribution on Termination  15.32
    • I.  Form: Office of Trustee  15.33
    • J.  Form: Trustee Powers  15.34
    • K.  Form: Applicable Law  15.35
    • L.  Form: Statement of Intent; Execution  15.36
    • M.  Form: Description of Transferred Property  15.37
    • N.  Form: GRAT Client Memorandum  15.38

16

Grantor Retained Unitrusts (GRUTs)

Marc M. Stern

  • I.  OVERVIEW OF GRANTOR RETAINED UNITRUSTS (GRUTs)
    • A.  GRUT Objectives and Design  16.1
      • 1.  Qualified Unitrust Interest  16.1A
      • 2.  GRUT Compared to CRUT  16.1B
      • 3.  GRUT Compared to GRIT  16.1C
    • B.  GRUT Valuation Benefits  16.2
    • C.  Selecting GRUT Term  16.3
    • D.  GRUT Requirements and Permissible Terms  16.4
      • 1.  Assets Used to Fund GRUT  16.5
      • 2.  Required Governing Instrument Provisions  16.6
      • 3.  Fractional Interests  16.7
  • II.  TAX CONSIDERATIONS
    • A.  Income Tax Issues  16.8
    • B.  Spousal Interests  16.9
      • 1.  Revocable Spousal Unitrust Interest  16.9A
      • 2.  Separate Property GRUTs  16.9B
    • C.  Repurchase/Exchange Strategy for Obtaining New Basis  16.10
    • D.  California Real Property Tax Considerations  16.11
    • E.  Integration Into Settlor’s Estate Plan  16.12
  • III.  CALCULATING VALUE OF GRUT GIFT  16.13
  • IV.  WHEN TO USE GRUT  16.14
  • V.  DRAFTING CONSIDERATIONS  16.15
  • VI.  GRANTOR RETAINED UNITRUST PROVISIONS
    • A.  Form: Table of Contents; Declaration of Transfer to Trustee  16.16
    • B.  Form: Trust Name  16.17
    • C.  Form: Trust Estate  16.18
    • D.  Form: Irrevocability of Trust  16.19
    • E.  Form: Trust Term  16.20
    • F.  Form: Operation During Trust Term  16.21
      • 1.  Form: Payment for Each Year of Trust  16.22
      • 2.  Form: Unitrust Amount  16.23
      • 3.  Form: Correcting Distributions  16.24
      • 4.  Form: Short Taxable Year  16.25
      • 5.  Form: Trust Income  16.26
      • 6.  Form: Limitation on Trust Distributions  16.27
      • 7.  Form: Commutation Prohibited  16.28
      • 8.  Form: Distribution if Settlor Survives Trust Term  16.29
    • G.  Form: Distribution on Termination  16.30
    • H.  Form: Office of Trustee  16.31
    • I.  Form: Trustee Powers  16.32
    • J.  Form: Applicable Law  16.33
    • K.  Form: Statement of Intent; Execution  16.34
    • L.  Form: Description of Transferred Property  16.35

17

Qualified Personal Residence Trusts (QPRTs)

Bruce Givner

Owen Kaye

Bruce D. Whitley

  • I.  OVERVIEW OF QUALIFIED PERSONAL RESIDENCE TRUSTS (QPRTs)
    • A.  Purpose and Use of QPRTs  17.1
      • 1.  Applicable Statute and QPRT Regulations  17.2
      • 2.  Note on Using Acronyms With Clients  17.3
      • 3.  Example of QPRT  17.4
      • 4.  Are QPRTs Underused?  17.5
    • B.  Advantages of QPRTs  17.6
      • 1.  Tax Advantages of QPRTs  17.7
        • a.  Gift Tax Advantage of QPRT  17.8
          • (1)  Potential Valuation Advantages  17.8A
          • (2)  Examples of Valuation Advantages  17.8B
        • b.  Estate Tax Advantage of QPRT  17.9
        • c.  Income Tax Advantage of QPRT  17.10
      • 2.  Creditor Advantages of QPRT  17.11
        • a.  Diminishing Value of Retained Interest  17.12
        • b.  Voidable Transfer Limitations  17.13
          • (1)  Limitations Period  17.13A
          • (2)  Badges of Fraud  17.13B
          • (3)  Alter Ego Liability  17.13C
        • c.  Bankruptcy Protection  17.14
          • (1)  Importance of Motive  17.14A
          • (2)  Mechanical Problems  17.14B
    • C.  Disadvantages of QPRTs  17.15
      • 1.  Tax Disadvantages of QPRTs  17.16
      • 2.  Financial Disadvantages of QPRTs  17.17
        • a.  When Encumbered Property Used  17.18
        • b.  Effect on Financial Statements  17.19
        • c.  Reduced Ability to Borrow  17.20
        • d.  Payment of Rent After Term Ends  17.21
    • D.  Candidates for QPRTs  17.22
    • E.  Expenses of QPRTs
      • 1.  Initial QPRT Expenses  17.23
        • a.  Counseling Client  17.23A
        • b.  Review Appraisal  17.23B
        • c.  Review Loan Documents  17.23C
        • d.  QPRT Documents  17.23D
        • e.  Prepare Deeds  17.23E
        • f.  New Title Insurance  17.23F
        • g.  Other Insurance  17.23G
        • h.  Initial Federal Gift Tax Return  17.23H
        • i.  Amend Family Trust  17.23I
      • 2.  Ongoing QPRT Expenses  17.24
        • a.  Sale of the Residence  17.24A
        • b.  Termination of QPRT Term  17.24B
        • c.  Refinancing QPRT Residence  17.24C
        • d.  Later Federal Gift Tax Returns  17.24D
        • e.  Maintenance Program  17.24E
    • F.  Ethical Considerations
      • 1.  When Grantors May Have Adverse Interests  17.24F
      • 2.  When Trustee May Need Representation  17.24G
      • 3.  When Beneficiaries May Need Separate Counsel  17.24H
      • 4.  When Clients Improperly Terminate QPRT  17.24I
  • II.  TAX CONSIDERATIONS
    • A.  Requirements of QPRT Regulations  17.25
      • 1.  Personal Residence Requirement  17.26
        • a.  Appurtenant Structures  17.27
        • b.  Fractional Interests  17.28
        • c.  Community Property  17.29
        • d.  Separate Property  17.29A
      • 2.  Required Governing Instrument Provisions  17.30
      • 3.  Summary of Governing Instrument Regulations  17.31
      • 4.  Required Conversion to GRAT  17.32
      • 5.  When Favorable Tax Status Lost or Not Achieved  17.32A
    • B.  Gift Tax Considerations for QPRT
      • 1.  Transfer of Residence as “Completed Gift”  17.33
      • 2.  No Qualification for Gift Tax Annual Exclusion  17.34
    • C.  Estate Tax Treatment of QPRT
      • 1.  Treatment if Grantor Survives  17.35
        • a.  Gift of Further Term Interest  17.36
        • b.  Power to Extend QPRT Term  17.37
      • 2.  Treatment if Grantor Fails to Survive  17.38
      • 3.  Transfer Tax Apportionment  17.39
    • D.  Income Tax Issues Related to QPRT  17.40
      • 1.  Need for Grantor Trust Status  17.41
      • 2.  Loss of Preferential Tax Basis Treatment  17.42
      • 3.  Grantor Trust Status Strategies  17.43
      • 4.  Grantor Trust Status for GRAT  17.44
    • E.  GST Tax Considerations  17.45
    • F.  State Tax Considerations  17.46
      • 1.  Real Property Tax  17.47
      • 2.  Documentary Transfer Tax  17.48
  • III.  STRUCTURING THE QPRT  17.49
    • A.  Selecting QPRT Term  17.50
      • 1.  Pure Transfer Tax Motive  17.51
      • 2.  Fear of Paying Rent  17.52
      • 3.  Creditor Concerns  17.53
      • 4.  Using Illustrations  17.53A
    • B.  Calculating Value of QPRT Gift  17.54
    • C.  How Many QPRTs?  17.55
    • D.  How Many Residences?  17.56
    • E.  Naming Trust as Remainder Beneficiary  17.57
    • F.  Example of “Reverse” QPRT  17.58
    • G.  Retained Right to Rent Residence for Fair Market Value After QPRT Term  17.58A
  • IV.  ALTERNATIVES TO QPRT  17.59
    • A.  Outright Gift  17.60
    • B.  Sale-Leaseback  17.61
    • C.  Part-Gift, Part-Sale  17.62
    • D.  Family Limited Partnership or Limited Liability Company  17.63
    • E.  Grantor Retained Annuity Trust  17.64
    • F.  Joint Purchase  17.65
    • G.  “Zeroed-Out” QPRT  17.66
    • H.  Intentionally Defective QPRT  17.67
    • I.  Summary of Alternatives to QPRT  17.68
  • V.  DRAFTING QPRT  17.69
    • A.  Form: Table of Contents; Declaration of Transfer to Trustee  17.70
    • B.  Form: Trust Name  17.71
    • C.  Form: Trust Estate  17.72
    • D.  Form: Limit on Additions to Trust Estate  17.73
    • E.  Form: Irrevocability of Trust  17.74
    • F.  Form: Trust Term  17.75
    • G.  Form: Operation During Trust Term  17.76
      • 1.  Form: Limitations on Trust Property  17.77
      • 2.  Form: Separate Account for Cash Additions  17.78
      • 3.  Form: Exclusive Use of Residence  17.79
      • 4.  Form: Trust Income to Settlor  17.80
      • 5.  Form: Distribution of Excess Cash  17.81
      • 6.  Form: Limit on Trust Distributions  17.82
      • 7.  Form: Payment of Trust Expenses  17.83
      • 8.  Form: Sale of Residence  17.84
      • 9.  Form: Damage to or Destruction of Personal Residence  17.85
      • 10.  Form: Cessation of Use as Personal Residence  17.86
      • 11.  Form: Cessation of QPRT Status  17.87
      • 12.  Form: Prohibition on Transfer to Settlor  17.88
    • H.  Form: Distributions on Termination  17.89
      • 1.  Form: Trust Operations Account  17.90
      • 2.  Form: Trust Income  17.91
      • 3.  Form: Remaining Trust Estate  17.92
    • I.  Form: Conversion to Annuity Trust  17.93
      • 1.  Form: Payment of Annuity  17.94
      • 2.  Form: Beginning Date/Deferral of Payment  17.95
      • 3.  Form: Payment for Each Year of Trust  17.96
      • 4.  Form: Annuity Amount  17.97
      • 5.  Form: Short Taxable Year  17.98
      • 6.  Form: Value of Trust Estate  17.99
      • 7.  Form: Prohibition Against Additions  17.100
      • 8.  Form: No Distributions to Other Persons  17.101
      • 9.  Form: Commutation Prohibited  17.102
      • 10.  Form: Distribution at End of Trust Term  17.103
    • J.  Form: Office of Trustee  17.104
    • K.  Form: Trustee Powers  17.105
    • L.  Form: Governing Law  17.106
    • M.  Form: Statement of Intent; Execution  17.107
    • N.  Form: Description of Transferred Property  17.108
    • O.  Form: Distribution on Termination if Settlor Survives  17.109
    • P.  Form: QPRT Client Memorandum  17.110
    • Q.  Form: Sample Letter Transmitting Draft QPRT to Client  17.111
    • R.  Form: QPRT Diagrams for Husband and Wife  17.112
    • S.  Form: QPRT Maintenance Program  17.113
    • T.  Form: Special Appointment of Agent  17.114
    • U.  Form: Preliminary Change of Ownership Report  17.115
    • V.  Form: Claim for Reassessment Exclusion for Transfer Between Parent and Child  17.116
    • W.  Form: Sample Broker’s Opinion of Value  17.117
    • X.  Form: Title Officer’s Letter Denying Coverage on Transfer to Family Trust  17.118
    • Y.  Form: Additional Insured Endorsement (CLTA Form 107.9–107.10)  17.119

18

Charitable Remainder Trusts

Lynda S. Moerschbaecher

  • I.  GOALS OF CHARITABLE REMAINDER TRUSTS  18.1
  • II.  BASIC CHARACTERISTICS OF CHARITABLE REMAINDER TRUSTS  18.2
    • A.  Deduction Must Be Allowable  18.3
    • B.  Must Be Annuity Trust or Unitrust  18.4
    • C.  Provisions to Restrict or Control Trustee Prohibited  18.5
    • D.  Must Function Exclusively as Charitable Remainder Trust From Creation  18.6
    • E.  Payment and Term Limitations for CRATs and CRUTs  18.6A
    • F.  Spousal Waiver of Any Right to Trust Property on Donor’s Death  18.6B
    • G.  Satisfaction of Waiver Requirements  18.6C
  • III.  OVERVIEW: TYPES OF QUALIFIED CHARITABLE REMAINDER TRUSTS
    • A.  Charitable Remainder Annuity Trust  18.7
    • B.  Charitable Remainder Unitrust
      • 1.  Standard Type Unitrust  18.8
      • 2.  Income-Only Unitrust  18.9
      • 3.  Flip Unitrust  18.9A
      • 4.  Accelerated Charitable Trust  18.9B
    • C.  Summary of Differences Between Annuity Trust and Unitrust  18.10
  • IV.  PLANNING CONSIDERATIONS  18.11
    • A.  Choice of Form of Trust
      • 1.  Donor Considerations  18.12
      • 2.  Nature of Funding Asset
        • a.  Effect on Choice of Type of Charitable Remainder Trust  18.13
        • b.  Specific Assets  18.14
      • 3.  Needs of Beneficiary  18.15
    • B.  Beneficiaries and Their Payments
      • 1.  To Whom Payments Will Be Made; Length of Payment Period  18.16
      • 2.  Valuation for Computing Payment Amount  18.17
      • 3.  Division of Trust Into Separate Trusts for Individual Recipients  18.17A
    • C.  Who May Serve as Trustee  18.18
    • D.  Selection of Remainder Beneficiary  18.19
    • E.  Tax Treatment of Transaction Creating Charitable Remainder Trust
      • 1.  Settlor’s Income Tax Deduction  18.20
      • 2.  Settlor’s Gift Tax Deduction  18.21
      • 3.  Estate Tax Treatment in Settlor’s Estate
        • a.  Trust Must Be Includable in Decedent’s Gross Estate for Deduction  18.22
        • b.  Determination of Estate Tax Charitable Deduction  18.23
    • F.  Computing Amount of Deduction  18.24
      • 1.  Annuity Trust Deduction  18.25
      • 2.  Unitrust Deduction  18.26
        • a.  Maximizing the Deduction  18.27
        • b.  Using Special Factor for Payout Frequency  18.28
        • c.  Method of Calculation  18.29
      • 3.  Commercial Software  18.30
    • G.  Income Taxation of Recipients
      • 1.  Four-Tier System  18.31
      • 2.  Application to Income-Only Unitrusts  18.32
    • H.  Taxation of Charitable Remainder Trusts and Trustees  18.33
      • 1.  Definition of Unrelated Business Taxable Income (UBTI)  18.34
      • 2.  Tax Treatment of Unrelated Business Taxable Income (UBTI)  18.35
      • 3.  Excise Taxes on Prohibited Transactions  18.36
      • 4.  Tax Treatment on Termination of Trust  18.36A
      • 5.  Abusive Transactions  18.36B
  • V.  DRAFTING CHARITABLE REMAINDER TRUSTS
    • A.  Drafting Sources  18.37
      • 1.  Basic Approach of Regulations and Rulings  18.38
      • 2.  IRS Sample Forms  18.39
    • B.  Need for Initial and Continued Qualification  18.40
    • C.  Form: Trust Is Irrevocable  18.41
    • D.  Saving Clause
      • 1.  Effect on Qualification of Trust  18.42
      • 2.  Form: Saving Clause  18.43
    • E.  Overview: Mandatory Clauses  18.44
    • F.  Specific Mandatory Clauses
      • 1.  Payment to Recipient: Annuity Trusts and Unitrusts  18.45
        • a.  Annuity Trust Payments
          • (1)  Fixed Annuity Payments  18.46
          • (2)  Valuation of Trust Assets  18.47
          • (3)  Form: Payment of Sum Certain (One Life)  18.48
          • (4)  Annuity Trust Payment to Joint and Survivor Recipients
            • (a)  Form: Payment of Annuity Amount  18.49
            • (b)  Form: Payment During Joint Lifetimes  18.50
            • (c)  Form: Payment After First Death  18.51
          • (5)  Form: Time of Payment; Payment From Income, Then Principal  18.52
        • b.  Unitrust Payments
          • (1)  Payment of Fixed Percentage  18.53
          • (2)  Unitrust Payment to Joint Recipients  18.54
          • (3)  Form: Payment of Fixed Percentage (One Life)  18.55
          • (4)  Form: Joint and Survivor Recipients  18.56
          • (5)  Form: Time of Payment; Payment From Income, Then Principal  18.57
        • c.  Income-Only Unitrust
          • (1)  Income Requirements  18.58
          • (2)  Form: Income-Only Unitrust  18.59
      • 2.  Valuation of Unitrust if Other Than First Day of Trust’s Taxable Year
        • a.  Valuation Requirements  18.60
        • b.  Form: Unitrust Mandatory Clause (Valuation Date Does Not Occur on First Day of Each Taxable Year)  18.61
      • 3.  Proration of Annuity or Unitrust Amount
        • a.  Proration Requirements  18.62
        • b.  Form: Proration of Annuity or Unitrust Amount  18.63
      • 4.  Distribution to Charitable Remainder Beneficiaries
        • a.  Distribution Requirements
          • (1)  On Termination of Noncharitable Interest  18.64
          • (2)  Alternative Charitable Organizations  18.65
        • b.  Charitable Deduction Considerations  18.66
        • c.  Form: Charitable Remainder Beneficiaries and Alternative Remainder Beneficiaries  18.67
        • d.  Form: Power to Amend Charitable Remainder Beneficiary Designation  18.68
        • e.  Form: Restricted Purpose  18.69
      • 5.  Adjustment for Incorrect Valuation of Trust Assets
        • a.  Adjustment Requirements  18.70
        • b.  Form: Adjustment for Incorrect Valuation  18.71
      • 6.  Additions After Initial Contribution  18.72
        • a.  Annuity Trust Additions
          • (1)  Additional Contributions Prohibited  18.73
          • (2)  Form: Additional Contributions Prohibited  18.74
          • (3)  Form: Assets From Testamentary Trust Are One Contribution; No Additional Contributions Permitted  18.75
        • b.  Unitrust Additions
          • (1)  Additional Contribution Requirements  18.76
          • (2)  Form: Formula for Determining Unitrust Amount If Additional Contributions Permitted  18.77
          • (3)  Form: Additional Contributions at Death  18.78
      • 7.  Prohibited Transactions: Private Foundation Restrictions
        • a.  Private Foundation Rules  18.79
        • b.  Relevance of State Law Prohibitions  18.80
        • c.  Form: Annuity Trust or Unitrust Mandatory Clause (Private Foundation Prohibitions)  18.81
        • d.  Self-Dealing  18.81A
      • 8.  No Investment Restrictions on Trustee
        • a.  Investment Requirements  18.82
        • b.  Form: Investment of Trust Assets  18.83
      • 9.  No Payment of Gift, Estate, or GST Tax From Trust
        • a.  Disqualification of Trust  18.84
        • b.  Form: No Tax Paid From Trust  18.85
      • 10.  Form: No Other Noncharitable Payments  18.86
      • 11.  Form: Taxable Year  18.87
      • 12.  Form: Governing Law; Prohibition  18.88
      • 13.  Charitable Remainder Trusts Created at Donor’s Death
        • a.  Revocable Trust
          • (1)  Revocable Trust Requirements  18.89
          • (2)  Form: Charitable Remainder Trust Created  18.90
        • b.  Testamentary Charitable Remainder Trust
          • (1)  Testamentary Trust Requirements  18.91
          • (2)  Form: Deferred Payments  18.92
    • G.  Optional Clauses  18.93
      • 1.  Allocation Among Noncharitable Beneficiaries (Sprinkling Power)
        • a.  Allocation Requirements  18.94
        • b.  Form: Allocation Among Noncharitable Beneficiaries in Trustee’s Discretion  18.95
      • 2.  Testamentary Power to Revoke Recipient’s Interest
        • a.  Revocation Requirements  18.96
        • b.  Form: Annuity Trust or Unitrust (Testamentary Power to Revoke)  18.97
      • 3.  Partial Distributions in Kind to Charitable Organizations
        • a.  Partial Distribution Requirements  18.98
        • b.  Form: Annuity Trust (Partial Distributions to Charitable Organization)  18.99
        • c.  Form: Unitrust (Partial Distributions to Charitable Organization)  18.99A
    • H.  No-Contest Clause Omitted  18.100
  • VI.  REFORMATION OF CHARITABLE REMAINDER TRUSTS  18.101
    • A.  Three Categories of Charitable Remainder Trusts  18.102
    • B.  Deadlines for Reforming Trust
      • 1.  Category One Trusts  18.103
      • 2.  Category Two Trusts  18.104
    • C.  Reformation Requirements  18.105
  • VII.  ALTERNATIVES TO CHARITABLE REMAINDER TRUST
    • A.  Pooled Income Fund  18.106
      • 1.  Comparison of Polled Income Fund With Charitable Remainder Trusts  18.107
      • 2.  Taxation of Pooled Income Fund  18.107A
      • 3.  Drafting Requirements for Qualification  18.108
        • a.  Contribution of Remainder Interest to Charity  18.109
        • b.  Creation of Life Income Interest  18.110
        • c.  Commingling of Property  18.111
        • d.  Prohibition Against Exempt Securities  18.112
        • e.  Maintenance by Charitable Organization  18.113
        • f.  Prohibition Against Donor or Beneficiary Serving as Trustee  18.114
        • g.  Income of Beneficiaries Based on Rate of Return  18.115
        • h.  Termination of Life Income Interest  18.116
      • 4.  Use of Sample Document  18.117
    • B.  Charitable Gift Annuity
      • 1.  Contractual Gift to Charity  18.118
      • 2.  Comparison of Gift Annuity With Charitable Remainder Trust  18.119
      • 3.  Income Tax Considerations  18.120
      • 4.  Estate and Gift Taxes  18.121
    • C.  Qualified Terminable Interest Property Trust for Spouse With Charitable Remainder  18.122
    • D.  Comparison of Charitable Remainder QTIP Trust With Charitable Remainder Trust  18.122A
    • E.  Remainder Interest in Personal Residence or Farm With Retained Life Estate  18.123
  • VIII.  COMPLETE CHARITABLE REMAINDER TRUST FORMS
    • A.  Form: Charitable Remainder Annuity Trust  18.124
    • B.  Form: Charitable Remainder Unitrust  18.125

18A

Nongrantor Charitable Lead Annuity Trusts

Jeffrey A. Dennis-Strathmeyer

  • I.  INTRODUCTION TO CHARITABLE LEAD TRUSTS  18A.1
  • II.  SCOPE OF CHAPTER: NONGRANTOR CLATS VERSUS ALTERNATIVES  18A.2
  • III.  ASSESSING THE NONGRANTOR CLT
    • A.  Evolution of Charitable Lead Trusts  18A.3
    • B.  Contemporary Tax Considerations  18A.4
      • 1.  Grantor’s Income Tax Deduction for Contribution  18A.5
      • 2.  Trust’s Income Tax Deduction  18A.6
      • 3.  Estate Tax Deduction  18A.7
      • 4.  Gift Tax Deduction  18A.8
      • 5.  Generation-Skipping Transfer Tax
        • a.  Normal Inclusion Ratio Calculation  18A.9
        • b.  Special CLT Inclusion Ratio Rules  18A.10
          • (1)  Example of Annuity Inclusion Rules  18A.11
          • (2)  Implications of Annuity Inclusion Rules  18A.12
  • IV.  WHEN TO USE NONGRANTOR TRUST
    • A.  Benefits of Nongrantor CLAT  18A.13
    • B.  Example of Nongrantor CLAT  18A.14
      • 1.  Benefits of Leverage  18A.15
      • 2.  Benefits of a Low Present Value Remainder  18A.16
    • C.  Implicit Assumptions of Favorable Scenarios  18A.17
  • V.  SELECTION OF CLAT TRUSTEE  18A.18
  • VI.  CLAT DRAFTING REQUIREMENTS
    • A.  Overview of CLAT Requirements  18A.19
    • B.  Required and Highly Desirable Provisions
      • 1.  Guaranteed Annuity Interest  18A.20
        • a.  Validity of Shark-Fin CLAT  18A.20A
        • b.  Distributions for Private Purposes  18A.20B
      • 2.  Form: Payment of Guaranteed Annuity  18A.21
      • 3.  Private Foundation Prohibitions  18A.22
      • 4.  Form: Annuity Trust or Unitrust Mandatory Clause (Private Foundation Prohibitions)  18A.23
      • 5.  Charitable Deduction Saving Clause  18A.24
      • 6.  Form: Charitable Deduction Saving Clause  18A.25
  • VII.  AVOIDING GRANTOR TRUST STATUS  18A.26
  • VIII.  NONQUALIFIED CHARITABLE LEAD TRUSTS  18A.27
  • IX.  FORM: NONGRANTOR CHARITABLE LEAD ANNUITY TRUST  18A.28

19

Issues Related to Nature of Trust Assets

Sandra J. Chan

Diana M. Hastings

Richard S. Kinyon

Kathryn K. Miller

  • I.  DRAFTING FOR TRUST ASSETS  19.1
  • II.  REAL PROPERTY
    • A.  Creation and Validity of Trusts Containing Real Property  19.2
    • B.  Powers Relating to Real Property Discussed Elsewhere  19.3
    • C.  Power to Subdivide and Sell Real Property
      • 1.  Trustees Have Specific Power to Subdivide, Develop, and Sell Land  19.4
      • 2.  Form: Power to Subdivide and Sell Property  19.5
    • D.  Powers Related to Employment of Managers and Brokers
      • 1.  Power to Employ Managers and Brokers  19.6
      • 2.  Form: Power to Employ Property Managers to Assist Trustee  19.7
      • 3.  Form: Power to Employ Real Estate Brokers  19.8
      • 4.  Form: Payment of Managers’ and Brokers’ Compensation  19.9
      • 5.  Form: Exonerating Trustee for Liability for Acts of Agents  19.10
    • E.  Allocation of Items Between Income and Principal
      • 1.  Gains and Losses From Sale of Property  19.11
      • 2.  Form: Allocation of Gains or Losses Differs From Statute  19.12
      • 3.  Allocation of Option Money
        • a.  Sale of Option Similar to Sale of Real Property  19.13
        • b.  Form: Allocation of Option Money  19.14
      • 4.  Taxes and Assessments
        • a.  Allocation of Taxes and Assessments  19.15
        • b.  Form: Allocation of Taxes and Assessments  19.16
      • 5.  Expenses of Rental Property
        • a.  Allocation of Expenses of Rental Property  19.17
        • b.  Form: Creation of Depreciation Allowance  19.18
      • 6.  Allocation of Depreciation, Depletion, or Obsolescence  19.19
      • 7.  Power to Address Environmental Cleanup Concerns
        • a.  Fiduciary Liability Limited to Trust Assets  19.20
        • b.  Form: Power to Monitor Property and Comply With Environmental Laws  19.21
        • c.  Form: Special Trustee to Accept Real Property  19.22
        • d.  When Fiduciary May Have Personal Liability  19.22A
  • III.  PERSONAL PROPERTY
    • A.  Powers Relating to Personal Property Discussed Elsewhere  19.23
    • B.  Stocks in Publicly Traded Companies
      • 1.  Powers to Deal With Stock   19.24
      • 2.  Allocations of Corporate Distributions Between Income and Principal  19.25
      • 3.  Form: Allocations to Income Consistent With Tax Treatment  19.26
      • 4.  Alternative Characterizations  19.26A
    • C.  Bonds and Other Obligations for Payment of Money  19.27
      • 1.  Form: Power to Purchase Bonds at Premium  19.28
      • 2.  Form: Power to Purchase Bonds at Discount  19.29
      • 3.  Premiums and Discounts on Bonds and Other Obligations  19.29A
    • D.  Puts, Calls, Margin Accounts, and Other Specialized Investments
      • 1.  No Statutory Authority for Specialized Investments  19.30
      • 2.  Form: Power to Make Specialized Investments  19.31
    • E.  Tangible Personal Property
      • 1.  Difficulties of Holding Tangible Property in Trust  19.32
      • 2.  Form: Power to Abandon Property  19.33
  • IV.  UNDERPRODUCTIVE PROPERTY
    • A.  Duty to Make Property Productive  19.34
      • 1.  When Settlors Intend Underproductive Property  19.34A
      • 2.  Form: Authorization to Acquire and Retain Underproductive Property  19.35
      • 3.  Form: Power to Permit Beneficiaries to Occupy Residential Real Estate  19.36
    • B.  Allocations of Proceeds of Sale of Underproductive Property Between Income and Principal
      • 1.  Definition of “Underproductive Property”  19.37
      • 2.  Statutory Adjustment Power  19.37A
      • 3.  Form: Allocation of Proceeds of Sale  19.38
      • 4.  Form: No Special Adjustments for Underproductive Property  19.39
    • C.  Allocation of Expenses Pertaining to Underproductive Property
      • 1.  Ordinary Expenses Allocated to Income  19.40
      • 2.  Form: Allocation of Ordinary Expenses to Principal  19.41
      • 3.  Form: Definition of “Ordinary Expenses”  19.42
    • D.  Tax Considerations  19.43
      • 1.  Marital Deduction Trusts  19.44
      • 2.  Form: Full Beneficial Enjoyment Accorded to Spouse  19.45
      • 3.  Form: Spouse’s Power to Compel Conversion to Productive Property  19.46
      • 4.  Estate and Income Tax Implications to Settlor-Trustee or Beneficiary-Trustee
        • a.  Trust Taxable to Settlor-Trustee  19.47
        • b.  Form: Powers Exercisable Only in Trustee’s Fiduciary Capacity  19.48
      • 5.  Trusts Containing Charitable Interests  19.49
  • V.  ENCUMBERED PROPERTY
    • A.  Settlors Must Provide for Payments on Encumbrance  19.50
    • B.  Allocations of Payments on Encumbrances
      • 1.  Payments Divided Between Income and Principal  19.51
      • 2.  Form: Allocation of Payments  19.52
    • C.  Tax Considerations in Transfer of Encumbered Property
      • 1.  Income Tax Implications of Payment of Encumbrance
        • a.  When Settlors Are Personally Liable on Encumbrance  19.53
        • b.  When Settlors Are Not Personally Liable on Encumbrance  19.54
      • 2.  Capital Gains Tax Implications of Transfer  19.55
      • 3.  Gift Tax Implications of Transfer  19.56
      • 4.  Estate Tax Implications of Transfer  19.57
  • VI.  TRANSFERS WITH LEASEBACKS  19.58
    • A.  Income Tax Treatment of Lease Payments
      • 1.  Income to Nongrantor Trust  19.59
      • 2.  Deductibility of Lease Payments by Settlors  19.60
      • 3.  Treatment of Income for Grantor Trust  19.61
    • B.  Sale of Property to Trust
      • 1.  Advantages and Disadvantages of Sale to Trust  19.62
      • 2.  Installment Sale Treatment  19.63
      • 3.  Realization of Capital Gain  19.64
      • 4.  Nonrecognition of Capital Loss  19.65
      • 5.  Nonrealization of Capital Gains When Trust Is “Grantor Trust”  19.66
  • VII.  MORTGAGES, DEEDS OF TRUST, AND OTHER SECURED INSTRUMENTS  19.67
    • A.  Power to Subordinate
      • 1.  Need for Power to Subordinate  19.68
      • 2.  Form: Grant of Power to Subordinate  19.69
    • B.  Investments in Default
      • 1.  Need for Power to Foreclose  19.70
      • 2.  Form: Authorization to Foreclose and Bid on Property  19.71
      • 3.  Allocation of Proceeds on Disposition of Property Acquired by Foreclosure  19.72
      • 4.  Form: Allocation of Sale Proceeds of Property Acquired by Foreclosure  19.73
  • VIII.  BUSINESS INTERESTS
    • A.  Special Valuation Rules in Chapter 14  19.74
      • 1.  Transfers of Interests in Corporations and Partnerships  19.75
        • a.  Qualified Payment Rights  19.75A
        • b.  When IRC §2701 Rules Do Not Apply  19.75B
      • 2.  Buy-Sell and Other Restrictive Agreements  19.76
        • a.  Three-Part Test for Buy-Sell Agreements  19.76A
        • b.  Substantial Modification of Buy-Sell Agreement  19.76B
      • 3.  Family Partnership Income Tax Rules
        • a.  Family Partnership Test  19.77
        • b.  When Donor May Be Treated as Substantial Owner of Interest  19.78
        • c.  When Trust Is Donee of Partnership Interests  19.78A
      • 4.  Partnership Interests in General  19.79
    • B.  Power to Retain or Acquire Business Interests  19.80
      • 1.  Form: Authority to Invest in Partnerships  19.81
      • 2.  Form: Authority to Incorporate, Continue to Operate Business in Corporate or Unincorporated Form, and Form Corporations  19.82
      • 3.  Form: Authority to Consent to Corporate Transactions  19.83
      • 4.  Form: Authority to Retain Specified Business Interest  19.84
    • C.  Directions on Management of Business Enterprise  19.85
    • D.  Exoneration of Trustee From Liability for Management of Business Interest  19.86
    • E.  Trustee’s Compensation in Connection With Management of Business  19.87
      • 1.  Form: Reasonable Compensation in Connection With Business Interest  19.88
      • 2.  Form: Compensation as Officer of Corporation Not to Interfere With Trustee’s Compensation  19.89
    • F.  Expenses of Ongoing Business
      • 1.  Reimbursement of Trustee  19.90
      • 2.  Form: Reimbursement of Trustee for Expenses Related to Business  19.91
      • 3.  Accounting Separately for Business  19.92
        • a.  Form: Definition of “Business”  19.93
        • b.  Form: Allocation of Net Cash Receipts  19.94
        • c.  Form: Allocation of Proceeds of Liquidation  19.95
    • G.  Stock in S Corporations  19.96
      • 1.  Grantor Trusts  19.97
        • a.  Using Grantor Trust Status  19.97A
        • b.  Marital Deduction Trusts  19.98
      • 2.  Qualified Subchapter S Trusts (QSSTs)
        • a.  QSST Requirements  19.99
        • b.  Form: Qualification of Trust as QSST  19.100
        • c.  Taxation of QSST Beneficiary on Disposition of S Corporation Stock  19.101
        • d.  Form: Power to Make Distributions to Pay Capital Gains Tax  19.102
      • 3.  Electing Small Business Trusts  19.102A
    • H.  Stock of “Controlled” Corporations
      • 1.  When Settlors May Retain Right to Vote  19.103
      • 2.  Form: Power to Vote Stock of “Controlled” Corporation  19.104
      • 3.  Retained Voting Rights  19.104A
    • I.  Stock Subject to Securities Acts Restrictions  19.105
      • 1.  Rule 10b–5  19.106
      • 2.  Section 16  19.107
      • 3.  Securities Act and Rule 144  19.108
        • a.  Unrestricted Securities  19.108A
        • b.  When Trust Is Affiliate  19.108B
  • IX.  ASSETS SUBJECT TO DEPLETION (WASTING ASSETS), INTELLECTUAL PROPERTY, AND RETIREMENT PLANS
    • A.  Use of Wasting Assets to Fund Trust  19.109
    • B.  Allocation of Expenses and Income
      • 1.  Rules for Allocation of Receipts  19.110
      • 2.  Form: Establishment of Reserve for Depreciation, Depletion, and Amortization  19.111
    • C.  Natural Resources
      • 1.  Trust’s Lease or Ownership of Property Containing Natural Resources  19.112
      • 2.  Form: Trustee to Allocate to Income Specified Percentage of Receipts From Property Containing Natural Resources  19.113
    • D.  Intellectual Property  19.114
      • 1.  Assignment and Licensing of Copyrights  19.115
      • 2.  Copyright Term and Renewal and Termination Rights  19.116
    • E.  Retirement Plans  19.117
  • X.  MULTISTATE TRUST FORMS
    • A.  Validation Clause
      • 1.  Purpose of Validation Clause  19.118
      • 2.  Form: Trustee May Apply Principle of Validation  19.119
    • B.  Change in Place of Administration  19.120
      • 1.  Form: Trust Governed by Law of Place of Administration  19.121
      • 2.  Form: Saving Clause for Unforeseen Tax Consequences  19.122
    • C.  Choice-of-Forum Clause
      • 1.  Validity of Choice-of-Forum Clause  19.123
      • 2.  Form: Choice of Forum  19.124
    • D.  Enforceability of Choice-of-Law Clause  19.125
      • 1.  Form: Choice of Law (All Real and Personal Property in One State)  19.126
      • 2.  Form: Choice of Law (Real Property in Several States and Personal Property)  19.127
    • E.  Appointing Trustee for Real Property
      • 1.  Who Can Act as Trustee  19.128
      • 2.  Form: Appointing Trustee for Real Property  19.129
    • F.  Exercising Powers of Appointment  19.130
      • 1.  Form: Exercise of Power of Appointment  19.131
      • 2.  Form: Choice of Law Governing Exercise of Power of Appointment  19.132
  • XI.  FAMILY INVESTMENT COMPANIES
    • A.  Family Investment Companies in Estate Planning  19.133
    • B.  Form: California LLC Operating Agreement  19.134
    • C.  Form: Definitions  19.135
    • D.  Form: Regulatory and Curative Allocations  19.136
    • E.  Form: Promissory Note  19.137

20

Complete Irrevocable Trust Forms

CEB Staff

  • I.  LONG-TERM FAMILY POT TRUST; INDEPENDENT TRUSTEE
    • A.  Description of Long-Term Family Pot Trust  20.1
    • B.  Form: Long-Term Family Pot Trust  20.2
  • II.  SEPARATE TRUSTS FOR CHILDREN OR GRANDCHILDREN (SKIP PERSONS); SENSITIVE TRUSTEE PERMITTED
    • A.  Description of Separate Trusts for Children or Grandchildren  20.3
    • B.  Form: Separate Trusts for Children or Grandchildren  20.4
  • III.  LIFE INSURANCE TRUST FOR CHILDREN
    • A.  Description of Irrevocable Life Insurance Trust for Children  20.5
    • B.  Form: Irrevocable Life Insurance Trust for Children  20.6
  • IV.  LIFE INSURANCE TRUST FOR SPOUSE AND ISSUE
    • A.  Description of Irrevocable Life Insurance Trust for Spouse and Issue  20.7
    • B.  Form: Irrevocable Life Insurance Trust for Spouse and Issue  20.8
  • V.  INTER VIVOS QTIP TRUST
    • A.  Description of Inter Vivos QTIP Trust  20.9
    • B.  Form: Inter Vivos QTIP Trust  20.10
  • VI.  INTER VIVOS QUALIFIED DOMESTIC TRUST (QDOT)
    • A.  Description of Inter Vivos QDOT  20.11
    • B.  Form: Inter Vivos QDOT  20.12
  • VII.  IRS CHARITABLE REMAINDER ANNUITY TRUSTS
    • A.  Description of IRS Charitable Remainder Annuity Trusts  20.13
    • B.  Form: Annuity Trust Payments During One Life  20.14
    • C.  Form: Annuity Trust Payments for a Term of Years  20.15
    • D.  Form: Annuity Trust Payments During Two Lives, Consecutive Interests  20.16
    • E.  Form: Annuity Trust Payments During Two Lives, Concurrent and Consecutive Interests  20.17
  • VIII.  IRS CHARITABLE REMAINDER UNITRUSTS
    • A.  Description of IRS Charitable Remainder Unitrusts  20.18
    • B.  Form: Unitrust Payments During One Life  20.19
    • C.  Form: Unitrust Payments for a Term of Years  20.20
    • D.  Form: Unitrust Payments During Two Lives, Consecutive Interests  20.21
    • E.  Form: Unitrust Payments During Two Lives, Concurrent and Consecutive Interests  20.22

DRAFTING CALIFORNIA IRREVOCABLE TRUSTS

(3d Edition)

July 2018

TABLE OF CONTENTS

 

File Name

Book Section

Title

CH02

Chapter 2

Estate and Gift Tax: A Drafter’s Guide

02-039B

§2.39B

Inter Vivos QTIP Trust

02-039C

§2.39C

Inter Vivos Unitrust QTIP Trust

02-081B

§2.81B

Construction of Trust

02-081C

§2.81C

Compliance With Security Requirements

02-081D

§2.81D

United States Trustee

02-081E

§2.81E

Designated Filer

02-081F

§2.81F

Distributions of Principal and Income

02-081G

§2.81G

Designation of Successor Trustees

CH08

Chapter 8

Introductory and Basic Clauses

08-002

§8.2

Trust Agreement

08-003

§8.3

Declaration of Trust

08-004

§8.4

Transfer Document

08-005

§8.5

Name of Trust

08-007

§8.7

Irrevocability of Trust

08-008

§8.8

Signature When Agreement of Trust Is Used

08-009

§8.9

Signature When Declaration of Trust Is Used

08-010

§8.10

Spouse’s Consent to Transfer

08-012

§8.12

Acknowledgment

CH09

Chapter 9

Dispositive Clauses

09-005

§9.5

Distribution on Settlor’s or Surviving Settlor’s Death

09-007

§9.7

Distribution When Trust Is Small

09-009

§9.9

Sprinkling Trust

09-011

§9.11

Sprinkling Power Exercised by Special Trustee

09-011A

§9.11A

Power Granted to Special Trustee to Add Beneficiaries of Named Class

09-015

§9.15

Substitution of Independent Trustee

09-017

§9.17

Sprinkling Trust (Income Only, Ascertainable Standard)

09-021

§9.21

Single Trust (Discretion to Distribute Principal)

09-021A

§9.21A

Separate Shares (Discretion to Distribute Principal)

09-026

§9.26

Separate Trust for Each Beneficiary

09-027

§9.27

Distribution of Income and Principal or Accumulation of Income During Child’s Minority

09-028

§9.28

Distribution After Child Reaches Age 21

09-032

§9.32

Income Accumulation

09-033

§9.33

Distribution if No Issue

09-037

§9.37

Special Power of Invasion

09-042

§9.42

Annuity Trust

09-043

§9.43

Unitrust

09-045C

§9.45C

Five or Five Withdrawal Power

09-045D

§9.45D

Trustee’s Notice to Beneficiaries of Withdrawal Right

09-045E

§9.45E

Beneficiary’s Acknowledgment of Notice of Withdrawal Right

09-047

§9.47

Preventing Outright Distributions to Minors and Others

09-048

§9.48

Survivorship Clause

09-049

§9.49

Distribution of Remainder

09-049A

§9.49A

Distribution to CUTMA Custodian

09-051

§9.51

Beneficiary as Trustee

09-053B

§9.53B

Beneficiary-Controlled Trust

09-055

§9.55

Power of Appointment Created

09-059

§9.59

Perpetuities Savings Clause for Power of Appointment Trust

09-065

§9.65

Spendthrift Settlor Clause

09-071

§9.71

Sample Disclaimer Document

09-077

§9.77

Appointment of Trust Protector

09-078

§9.78

Powers of Trust Protector

CH10

Chapter 10

Trust Administration and Trustee’s Powers

10-014

§10.14

Cotrustee Unanimity Not Required

10-015

§10.15

Cotrustee Delegation of Powers

10-016

§10.16

Cotrustee Action When Individual Cotrustee Incapacitated

10-017

§10.17

Corporate Trustee to Have Custody of Assets

10-018

§10.18

Authority of Corporate Trustee to Expend No More Than Fixed Amount

10-019

§10.19

Appointment of Special Trustee

10-020

§10.20

Compensation of Special Trustee; No Effect on Powers of Trustee

10-022

§10.22

Corporate Trustee’s Right to Propose Purchases and Sales

10-023

§10.23

Power to Invest Vested Solely in Individual Trustee

10-024

§10.24

Power to Invade Principal Vested Solely in Individual Cotrustee

10-026

§10.26

Special Trustee to Make Payments to Beneficiary-Trustee

10-026A

§10.26A

Trustee to Appoint Special Trustee to Make Payments to Beneficiary-Trustee

10-028

§10.28

Resignation of Trustee

10-030

§10.30

Trustee Removal and Replacement by Beneficiary or Third Party

10-031

§10.31

Replacement of Incapacitated Trustee

10-031A

§10.31A

Certificate of Independent Review

10-033

§10.33

Designation of Successor Trustees

10-034

§10.34

Remaining Cotrustee Acts as Sole Trustee; Settlor Designates Succession Thereafter

10-035

§10.35

Settlor Designates Successor Trustees When Corporate Fiduciary Unwilling or Unable to Serve

10-036

§10.36

Trustee’s Power to Designate Successor

10-037

§10.37

Beneficiaries’ Power to Designate Successor

10-039

§10.39

Nonliability of Trustee

10-040

§10.40

Nonliability for Cotrustee’s Acts

10-041

§10.41

Successor Trustee’s Nonliability for Predecessor’s Acts

10-043

§10.43

Authorization of Commingling of Undivided Interests

10-045

§10.45

Authorization of Self-Dealing

10-046

§10.46

Conflicts of Interest; Self-Dealing (Broad Powers)

10-047

§10.47

Nonliability of Trustee or Special Trustee for Conflicts of Interest

10-049

§10.49

Trustee’s Bond

10-051

§10.51

Reasonable Compensation (Individual Trustee)

10-051A

§10.51A

Percentage of Net Value of Principal Plus Reasonable Compensation (Individual Trustee)

10-051B

§10.51B

Reasonable Compensation (Cotrustees)

10-053

§10.53

Settlor’s Veto Power Over Investments

10-054

§10.54

Settlor’s Power to Direct Investments

10-055

§10.55

Settlor’s Powers Personal to Settlor

10-056

§10.56

Investment Counsel

10-056A

§10.56A

Investment Consultant

10-057

§10.57

Introduction to Trustee’s Powers

10-058

§10.58

Trustee’s Powers

10-060

§10.60

Broad Investment Powers Under Prudent Investor Rule

10-061

§10.61

Limited Investment Powers

10-063

§10.63

Power to Retain Property and Operate a Business (Standard Clause)

10-064

§10.64

Power to Retain or Purchase Unproductive or Underproductive Property

10-066

§10.66

Diversification Not Required

10-068

§10.68

Power to Sell, Exchange, Manage, Encumber, and Grant Options on Property (Standard Clause)

10-070

§10.70

Power to Lease, Including Oil and Mineral Development (Standard Clause)

10-072

§10.72

Power to Manage Securities (Standard Clause)

10-073

§10.73

Power to Register Shares for Sale (Closely Held or Controlled Public Corporation)

10-075

§10.75

Authority to Hold Trust Property as Nominee

10-077

§10.77

Power to Employ Agents

10-078

§10.78

Individual Trustee’s Power to Employ Investment Counsel

10-080

§10.80

Power to Borrow (Standard Clause)

10-081

§10.81

Power to Make Loans (Standard Clause)

10-083

§10.83

Power to Lend to, Buy From, and Sell to Trust Individually

10-085

§10.85

Power to Initiate and Defend Litigation and Power to Compromise (Standard Clause)

10-087

§10.87

Power to Insure (Standard Clause)

10-089

§10.89

Power to Lend to Settlor’s Probate Estate

10-090

§10.90

Power to Purchase Property From Settlor’s Probate Estate

10-092

§10.92

Disclaimer, Release, or Restriction of Administrative Powers

10-094

§10.94

Power to Adjust for Tax Consequences

10-096

§10.96

Power to Consider Tax Consequences of Distributions

10-097

§10.97

Payment of Estate Taxes

10-100

§10.100

Trustee Prohibited From Exercising Certain Powers

10-102

§10.102

Physical Division of Separate Trusts Created in Single Instrument Not Required; Division Into Separate Trusts Permitted (Standard Clause)

10-103

§10.103

Consolidated Administration of Trusts

10-104

§10.104

Power to Move Situs

10-105

§10.105

Payments to Beneficiary Under Disability or to Minor Beneficiary

10-107

§10.107

Broad Powers of Distribution (Standard Clause)

10-109

§10.109

Power to Withhold Payment if Conflicting Claims Arise

10-109C

§10.109C

Notice of Proposed Action

10-112A

§10.112A

Uniform Principal and Income Act to Govern

10-112B

§10.112B

Broad Power to Determine Principal and Income (Standard Clause)

10-112C

§10.112C

Power to Make Allocations Between Principal and Income With Limited Discretion (Tax-Sensitive Trustee)

10-114

§10.114

Undistributed Income Payable to Successive Beneficiaries

10-116

§10.116

Allocation of Expenses Among Successive Beneficiaries

10-118

§10.118

Accounting by Trustee

10-120

§10.120

Notice to Trustee of Births, Deaths, and Other Events Affecting Interests

10-122

§10.122

Clause Authorizing Additions to Trust

10-124

§10.124

Spendthrift Clause

10-126

§10.126

Specifying Law to Govern Validity, Construction, and Administration of Trust

10-128

§10.128

Gender and Number

10-129

§10.129

Trustees and Fiduciaries

10-130

§10.130

Distribution Among Beneficiaries

10-131

§10.131

“Shall” and “May”

10-132

§10.132

Education

10-134

§10.134

Issue and Children (California Law of Intestate Succession Applies)

10-134A

§10.134A

Issue and Children (Lineal Descendants)

10-135

§10.135

Spouse, Husband, or Wife

10-136

§10.136

No-Contest Clause

10-137

§10.137

Annual Distributions of Income

10-138

§10.138

Distribution of Disclaimed Property

10-139

§10.139

Power to Distribute if Power of Appointment Not Exercised

CH11

Chapter 11

Life Insurance Trusts

11-008

§11.8

Contingent Marital Deduction Gift

11-019

§11.19

Power to Invest in Life Insurance

11-020

§11.20

Power to Remove and Replace Trustee

CH12

Chapter 12

Trusts for Minors

12-028

§12.28

Creation of Custodianship by Transferor

12-029

§12.29

Designation of Successor Custodian by Current Custodian

12-058

§12.58

Division of Trust Estate

12-059

§12.59

Discretionary Payment of Income and Principal Before Child Attains Age 18 or 21

12-060

§12.60

Outright Distribution to Living Child at Age 18 or 21

12-061

§12.61

Child’s Power to Terminate Trust After Attaining Specified Age

12-062

§12.62

Distribution to Child’s Estate

12-062A

§12.62A

Distribution According to Beneficiary’s Power of Appointment

12-063A

§12.63A

Complete IRC §2503(c) Minor’s Trust

12-076

§12.76

Herr Trust—Distribution of Income by Age 21

12-077

§12.77

Distribution of Post-Age-21 Income

12-078

§12.78

Distribution of Balance if Beneficiary Dies Before Age 21

12-079

§12.79

Discretionary Early Distribution of Principal

12-085

§12.85

Notice to Beneficiary

12-096

§12.96

No Excess Lapse Protection

12-097

§12.97

Withdrawal Right Limited to “Five or Five” Amount

12-098

§12.98

“Hanging” Crummey Power

12-117

§12.117

Conditions for Distribution

12-118

§12.118

Distributions for Medical Emergency

12-119

§12.119

Right of Withdrawal at Specified Ages When Child Has Complied With Incentive Provisions

12-120

§12.120

Manner of Distribution to Child Exercising Right of Withdrawal and When Child Dies Without Exercising Right of Withdrawal

12-121

§12.121

Child Not in Compliance With Incentive Provisions at Specified Ages

CH13

Chapter 13

Special Needs Trusts

13-039

§§13.39-13.50A

Table of Contents; Trust Agreement

 

§13.40

Irrevocability; Limited Power of Amendment for Third Party SNT

 

§13.41

Purpose of Third Party SNT

 

§13.43

Distribution for Special Needs

 

§13.44

Trust Advisory Committee

 

§13.45

Requirement to Seek Public Benefits

 

§13.46

Trust Estate to Supplement Public Benefits

 

§13.48

Termination of Third Party SNT on Death of Beneficiary

 

§13.49

Backstop Termination Clause for Third Party SNT

 

§13.50

Payment of Expenses of Third Party SNT

 

§13.50A

Office of Trustee; Trustee Powers; Governing Law; Description of Transferred Property

CH13A

Chapter 13A

Dynasty Trusts

13A-015

§13A.15

Generation-Skipping Descendants Trust

13A-016

§13A.16

Unsecured Installment Promissory Note

13A-017

§13A.17

Secured Installment Promissory Note

13A-018

§13A.18

Secured Annually Renewable Demand Promissory Note

13A-019

§13A.19

Security Agreement for Limited Liability Company Interest

13A-020

§13A.20

Deed of Trust With Assignment of Rents

CH14

Chapter 14

Grantor Retained Income Trusts (GRITs)

14-016

§§14.16-14.29

Table of Contents; Declaration of Transfer to Trustee

 

§14.17

Trust Name

 

§14.18

Trust Estate

 

§14.19

Irrevocability of Trust

 

§14.20

Trust Term

 

§14.21

Payment of Income

 

§14.22

Limitation on Trust Distributions

 

§14.23

Distribution if Settlor Survives Trust Term

 

§14.24

Distribution if Settlor Fails to Survive Trust Term

 

§14.25

Distribution on Termination

 

§14.26

Office of Trustee

 

§14.27

Trustee Powers

 

§14.28

Applicable Law; Execution

 

§14.29

Description of Transferred Property

CH15

Chapter 15

Grantor Retained Annuity Trusts (GRATs)

15-019

§§15.19-15.37

Table of Contents; Declaration of Transfer to Trustee

 

§15.20

Trust Name

 

§15.21

Trust Estate

 

§15.22

Irrevocability of Trust

 

§15.23

Trust Term

 

§15.24

Operation During Trust Term

 

§15.25

Payment for Each Year of Trust

 

§15.26

Annuity Amount

 

§15.27

Short Taxable Year

 

§15.28

Trust Income

 

§15.29

Limitation on Trust Distributions

 

§15.30

Commutation Prohibited

 

§15.31

Distribution on Expiration of Trust Term

 

§15.32

Distribution on Termination

 

§15.33

Office of Trustee

 

§15.34

Trustee Powers

 

§15.35

Applicable Law

 

§15.36

Statement of Intent; Execution

 

§15.37

Description of Transferred Property

15-038

§15.38

GRAT Client Memorandum

CH16

Chapter 16

Grantor Retained Unitrusts (GRUTs)

16-016

§§16.16-16.35

Table of Contents; Declaration of Transfer to Trustee

 

§16.17

Trust Name

 

§16.18

Trust Estate

 

§16.19

Irrevocability of Trust

 

§16.20

Trust Term

 

§16.21

Operation During Trust Term

 

§16.22

Payment for Each Year of Trust

 

§16.23

Unitrust Amount

 

§16.24

Correcting Distributions

 

§16.25

Short Taxable Year

 

§16.26

Trust Income

 

§16.27

Limitation on Trust Distributions

 

§16.28

Commutation Prohibited

 

§16.29

Distribution if Settlor Survives Trust Term

 

§16.30

Distribution on Termination

 

§16.31

Office of Trustee

 

§16.32

Trustee Powers

 

§16.33

Applicable Law

 

§16.34

Statement of Intent; Execution

 

§16.35

Description of Transferred Property

CH17

Chapter 17

Qualified Personal Residence Trusts (QPRTs)

17-070

§§17.70-17.109

Table of Contents; Declaration of Transfer to Trustee

 

§17.71

Trust Name

 

§17.72

Trust Estate

 

§17.73

Limit on Additions to Trust Estate

 

§17.74

Irrevocability of Trust

 

§17.75

Trust Term

 

§17.76

Operation During Trust Term

 

§17.77

Limitations on Trust Property

 

§17.78

Separate Account for Cash Additions

 

§17.79

Exclusive Use of Residence

 

§17.80

Trust Income to Settlor

 

§17.81

Distribution of Excess Cash

 

§17.82

Limit on Trust Distributions

 

§17.83

Payment of Trust Expenses

 

§17.84

Sale of Residence

 

§17.85

Damage to or Destruction of Personal Residence

 

§17.86

Cessation of Use as Personal Residence

 

§17.87

Cessation of QPRT Status

 

§17.88

Prohibition on Transfer to Settlor

 

§17.89

Distributions on Termination

 

§17.90

Trust Operations Account

 

§17.91

Trust Income

 

§17.92

Remaining Trust Estate

 

§17.93

Conversion to Annuity Trust

 

§17.94

Payment of Annuity

 

§17.95

Beginning Date/Deferral of Payment

 

§17.96

Payment for Each Year of Trust

 

§17.97

Annuity Amount

 

§17.98

Short Taxable Year

 

§17.99

Value of Trust Estate

 

§17.100

Prohibition Against Additions

 

§17.101

No Distributions to Other Persons

 

§17.102

Commutation Prohibited

 

§17.103

Distribution at End of Trust Term

 

§17.104

Office of Trustee

 

§17.105

Trustee Powers

 

§17.106

Governing Law

 

§17.107

Statement of Intent; Execution

 

§17.108

Description of Transferred Property

 

§17.109

Distribution on Termination if Settlor Survives

17-110

§17.110

QPRT Client Memorandum

17-111

§17.111

Sample Letter Transmitting Draft QPRT to Client

17-113

§17.113

QPRT Maintenance Program

17-114

§17.114

Special Appointment of Agent

17-117

§17.117

Sample Broker’s Opinion of Value

17-118

§17.118

Title Officer’s Letter Denying Coverage on Transfer to Family Trust

17-119

§17.119

Additional Insured Endorsement (CLTA Form 107.9–107.10)

CH18

Chapter 18

Charitable Remainder Trusts

18-041

§18.41

Trust Is Irrevocable

18-043

§18.43

Saving Clause

18-048

§18.48

Payment of Sum Certain (One Life)

18-049

§18.49

Payment of Annuity Amount

18-050

§18.50

Payment During Joint Lifetimes

18-051

§18.51

Payment After First Death

18-052

§18.52

Time of Payment; Payment From Income, Then Principal

18-055

§18.55

Payment of Fixed Percentage (One Life)

18-056

§18.56

Joint and Survivor Recipients

18-057

§18.57

Time of Payment; Payment From Income, Then Principal

18-059

§18.59

Income-Only Unitrust

18-061

§18.61

Unitrust Mandatory Clause (Valuation Date Does Not Occur on First Day of Each Taxable Year)

18-063

§18.63

Proration of Annuity or Unitrust Amount

18-067

§18.67

Charitable Remainder Beneficiaries and Alternative Remainder Beneficiaries

18-068

§18.68

Power to Amend Charitable Remainder Beneficiary Designation

18-069

§18.69

Restricted Purpose

18-071

§18.71

Adjustment for Incorrect Valuation

18-074

§18.74

Additional Contributions Prohibited

18-075

§18.75

Assets From Testamentary Trust Are One Contribution; No Additional Contributions Permitted

18-077

§18.77

Formula for Determining Unitrust Amount If Additional Contributions Permitted

18-078

§18.78

Additional Contributions at Death

18-081

§18.81

Annuity Trust or Unitrust Mandatory Clause (Private Foundation Prohibitions)

18-083

§18.83

Investment of Trust Assets

18-085

§18.85

No Tax Paid From Trust

18-086

§18.86

No Other Noncharitable Payments

18-087

§18.87

Taxable Year

18-088

§18.88

Governing Law; Prohibition

18-090

§18.90

Charitable Remainder Trust Created

18-092

§18.92

Deferred Payments

18-095

§18.95

Allocation Among Noncharitable Beneficiaries in Trustee’s Discretion

18-097

§18.97

Annuity Trust or Unitrust (Testamentary Power to Revoke)

18-099

§18.99

Annuity Trust (Partial Distributions to Charitable Organization)

18-099A

§18.99A

Unitrust (Partial Distributions to Charitable Organization)

18-124

§18.124

Charitable Remainder Annuity Trust

18-125

§18.125

Charitable Remainder Unitrust

CH18A

Chapter 18A

Nongrantor Charitable Lead Annuity Trusts

18A-021

§18A.21

Payment of Guaranteed Annuity

18A-023

§18A.23

Annuity Trust or Unitrust Mandatory Clause (Private Foundation Prohibitions)

18A-025

§18A.25

Charitable Deduction Saving Clause

18A-028

§18A.28

FORM: NONGRANTOR CHARITABLE LEAD ANNUITY TRUST

CH19

Chapter 19

Issues Related to Nature of Trust Assets

19-005

§19.5

Power to Subdivide and Sell Property

19-007

§19.7

Power to Employ Property Managers to Assist Trustee

19-008

§19.8

Power to Employ Real Estate Brokers

19-009

§19.9

Payment of Managers’ and Brokers’ Compensation

19-010

§19.10

Exonerating Trustee for Liability for Acts of Agents

19-012

§19.12

Allocation of Gains or Losses Differs From Statute

19-014

§19.14

Allocation of Option Money

19-016

§19.16

Allocation of Taxes and Assessments

19-018

§19.18

Creation of Depreciation Allowance

19-021

§19.21

Power to Monitor Property and Comply With Environmental Laws

19-022

§19.22

Special Trustee to Accept Real Property

19-026

§19.26

Allocations to Income Consistent With Tax Treatment

19-028

§19.28

Power to Purchase Bonds at Premium

19-029

§19.29

Power to Purchase Bonds at Discount

19-031

§19.31

Power to Make Specialized Investments

19-033

§19.33

Power to Abandon Property

19-035

§19.35

Authorization to Acquire and Retain Underproductive Property

19-036

§19.36

Power to Permit Beneficiaries to Occupy Residential Real Estate

19-038

§19.38

Allocation of Proceeds of Sale

19-039

§19.39

No Special Adjustments for Underproductive Property

19-041

§19.41

Allocation of Ordinary Expenses to Principal

19-042

§19.42

Definition of “Ordinary Expenses”

19-045

§19.45

Full Beneficial Enjoyment Accorded to Spouse

19-046

§19.46

Spouse’s Power to Compel Conversion to Productive Property

19-048

§19.48

Powers Exercisable Only in Trustee’s Fiduciary Capacity

19-052

§19.52

Allocation of Payments

19-069

§19.69

Grant of Power to Subordinate

19-071

§19.71

Authorization to Foreclose and Bid on Property

19-073

§19.73

Allocation of Sale Proceeds of Property Acquired by Foreclosure

19-081

§19.81

Authority to Invest in Partnerships

19-082

§19.82

Authority to Incorporate, Continue to Operate Business in Corporate or Unincorporated Form, and Form Corporations

19-083

§19.83

Authority to Consent to Corporate Transactions

19-084

§19.84

Authority to Retain Specified Business Interest

19-088

§19.88

Reasonable Compensation in Connection With Business Interest

19-089

§19.89

Compensation as Officer of Corporation Not to Interfere With Trustee’s Compensation

19-091

§19.91

Reimbursement of Trustee for Expenses Related to Business

19-093

§19.93

Definition of “Business”

19-094

§19.94

Allocation of Net Cash Receipts

19-095

§19.95

Allocation of Proceeds of Liquidation

19-100

§19.100

Qualification of Trust as QSST

19-102

§19.102

Power to Make Distributions to Pay Capital Gains Tax

19-104

§19.104

Power to Vote Stock of “Controlled” Corporation

19-111

§19.111

Establishment of Reserve for Depreciation, Depletion, and Amortization

19-113

§19.113

Trustee to Allocate to Income Specified Percentage of Receipts From Property Containing Natural Resources

19-119

§19.119

Trustee May Apply Principle of Validation

19-121

§19.121

Trust Governed by Law of Place of Administration

19-122

§19.122

Saving Clause for Unforeseen Tax Consequences

19-124

§19.124

Choice of Forum

19-126

§19.126

Choice of Law (All Real and Personal Property in One State)

19-127

§19.127

Choice of Law (Real Property in Several States and Personal Property)

19-129

§19.129

Appointing Trustee for Real Property

19-131

§19.131

Exercise of Power of Appointment

19-132

§19.132

Choice of Law Governing Exercise of Power of Appointment

19-134

§19.134

California LLC Operating Agreement

19-135

§19.135

Definitions

19-136

§19.136

Regulatory and Curative Allocations

19-137

§19.137

Promissory Note

CH20

Chapter 20

Complete Irrevocable Trust Forms

20-002

§20.2

Long-Term Family Pot Trust

20-004

§20.4

Separate Trusts for Children or Grandchildren

20-006

§20.6

Irrevocable Life Insurance Trust for Children

20-008

§20.8

Irrevocable Life Insurance Trust for Spouse and Issue

20-010

§20.10

Inter Vivos QTIP Trust

20-012

§20.12

Inter Vivos QDOT

20-014

§20.14

Annuity Trust Payments During One Life

20-015

§20.15

Annuity Trust Payments for a Term of Years

20-016

§20.16

Annuity Trust Payments During Two Lives, Consecutive Interests

20-017

§20.17

Annuity Trust Payments During Two Lives, Concurrent and Consecutive Interests

20-019

§20.19

Unitrust Payments During One Life

20-020

§20.20

Unitrust Payments for a Term of Years

20-021

§20.21

Unitrust Payments During Two Lives, Consecutive Interests

20-022

§20.22

Unitrust Payments During Two Lives, Concurrent and Consecutive Interests

 

Selected Developments

July 2019 Update

The estate and gift tax applicable exclusion amount and the GST exemption are $11,400,000 in 2019, as adjusted for inflation. However, the applicable exclusion amount will revert to $5 million (plus cost-of-living adjustments) in 2026 in the absence of future legislation. Lifetime gifts in excess of the applicable exclusion amount in effect on the donor’s death should not result in additional estate tax under IRC §2001(g)(2). The maximum tax rate is 40 percent. The gift tax annual exclusion, as adjusted for inflation, is $15,000 in 2019. The estate planning implications of these temporary and permanent provisions are discussed in §2.6. See also §5.12A.

California adopted the Uniform Trust Decanting Act in 2018. The legislation permits a trustee or fiduciary of an irrevocable trust to distribute the property of a first trust to one or more second trusts or modify the terms of the first trust without the consent of the beneficiaries or approval of the court, subject to certain exceptions. Prob C §§19501–19530. See §§1.15, 9.79.

The discussion in chap 2 is revised to reflect recent case law regarding the tax consequences of gifts made within 3 years of death. See §§2.4, 2.32. The update has a revised discussion of valuation discounts for partnership interests reflecting recent case law. See §2.23D. The update has additional discussion of conservation easements reflecting recent case law. See §§2.72E–2.72F. The update has a revised discussion of the marital deduction for noncitizens and the use of a QDOT. See §2.80.

In IRS Letter Ruling 201831003, taxpayer’s disclaimer of transfer from trust would not constitute taxable gift under IRC §2511, provided that taxpayer disclaimed transfer within 9 months of first obtaining knowledge of transfer and that taxpayer did not accept any benefits from trust. See §2.8.

A special trustee’s exercise of trustee powers to limit or eliminate beneficiary’s testamentary general power of appointment will not constitute the exercise or release of a general power of appointment. IRS Letter Ruling 201845006. See §2.11

The update has a revised discussion of the trust income tax charitable deduction reflecting recent case law and IRS guidance. See §3.5A. The update has a revised discussion of the “kiddie tax” under the law in effect in 2018–2025. See §§3.19–3.20, 12.5, 12.12, 12.35, 12.39, 12.56.

In Green v U.S. (10th Cir 2018) 880 F3d 519, reversing a district court decision, the court of appeals held that the trust charitable deduction for contributions of real property is limited to the donor’s income tax basis in the property, as the IRS had asserted in Chief Counsel Advice 201042023. See §3.5A

The Internal Revenue Service granted a 120-day extension to elect out of GST allocation when decedent-settlor reasonably relied on accounting firm’s assistance in failing to make election in appropriate Form 709. IRS Letter Ruling 201826001. In IRS Letter Ruling 201801001, the Service granted extension of time to allocate decedent’s GST exemption to an irrevocable trust funded at death. See §§4.21.

The definition of a minor under Fam C §3900(a) is amended to excuse a child from the requirement to be a full-time high school student if the child has a medical condition documented by a physician that prevents full-time school attendance. See §5.20.

The trustee may terminate a trust without court approval and without an express provision in the trust instrument if its principal does not exceed $50,000 (increased from $40,000 in 2018). Prob C §15408(b). See §9.6.

In IRS Letter Ruling 20185008, the allocation of GST exemption for credit shelter trust in excess of amount necessary to obtain inclusion ratio of zero was void under Treas Reg §26.2632–1(b)(4)(i). See §§11.17–11.18.

New treasury regulations were issued in 2018. The regulations include substantiation requirements for charitable contribution of a cash, check, or other monetary gift; substantiation and reporting requirements for noncash charitable contributions; and, how qualified appraisals and qualified appraisers and contributions of clothing and household items are covered. Treas Reg §§1.170A–15—1.170A–18 . See §18.20.

Provisions empowering the independent trustee to allocate part of the unitrust amount between noncharitable and charitable beneficiaries does not prevent CRUT qualification. IRS Letter Ruling 201845014. See §18.94.

About the Third Edition Authors

SANDRA J. CHAN, A.B. 1976, University of California, Los Angeles; J.D. 1979, University of California, Davis, School of Law. Ms. Chan practices trusts and estates law in Santa Barbara. She is a coauthor of chapter 8 (Introductory and Basic Clauses), chapter 10 (Trust Administration and Trustee’s Powers), and chapter 19 (Issues Related to Nature of Trust Assets).

JOHN R. COHAN, B.S. 1952, University of Arizona; J.D. 1955, Stanford University. Mr. Cohan, who was a retired senior partner of Irell & Manella in Los Angeles, practiced estate planning and tax law. He was consulting editor on this volume and on prior editions of Drafting California Revocable Living Trusts (4th ed Cal CEB) and was the author of chapter 1 (Overview of Irrevocable Trusts) and chapter 5 (Trust Planning: Permanent Trusts). Mr. Cohan died in 2001.

MONICA DELL’OSSO, B.A. 1975, St. Mary-of-the-Woods College; J.D. 1981, University of California, Berkeley, School of Law; Ph.D. 1989, University of Virginia. Ms. Dell’Osso, who is a partner in the law firm of Wendel Rosen (formerly of Burnham Brown) in Oakland, is certified as a specialist in estate planning, trust, and probate law by the California Board of Legal Specialization. She is a coauthor of chapter 12 (Trusts for Minors).

JEFFREY A. DENNIS-STRATHMEYER, B.A. 1967, Stanford University; J.D. 1973, University of California, Davis, School of Law. Mr. Strathmeyer practices in Pleasant Hill and is certified by the State Board of Legal Specialization as a specialist in estate planning, trust, and probate law. He is the former editor of the CEB Estate Planning and California Probate Reporter. He is the author of chapter 7 (Structuring the Trust Instrument) and chapter 18A (Nongrantor Charitable Lead Annuity Trusts).

JON J. GALLO, B.A. 1964, Occidental College, J.D. 1967, University of California, Los Angeles, School of Law. Mr. Gallo was a partner in the law firm of Greenberg Glusker Fields Claman & Machtinger LLP in Los Angeles. He was the author of chapter 4 (Generation-Skipping Tax Problems of Irrevocable Trusts) and chapter 11 (Life Insurance Trusts). Mr. Gallo died in 2014.

BRUCE GIVNER, B.A. 1973, University of California, Los Angeles; J.D. 1976, Columbia University; and LL.M. (Taxation) 1977, New York University. Mr. Givner, who is a partner with the firm of Givner & Kaye, Los Angeles, specializes in tax and estate planning. He is a coauthor of chapter 9 (Dispositive Clauses) and chapter 17 (Qualified Personal Residence Trusts (QPRTs)), previously revised by Bruce D. Whitley.

ANN C. HARRIS, B.A. 1972, University of California, San Diego; J.D. 1980, University of California, San Diego, School of Law. Ms. Harris, who practices in San Diego, specializes in probate, estate planning, and trust law. She is the author of chapter 2 (Estate and Gift Tax: A Drafter’s Guide) and chapter 3 (Income Tax: A Drafter’s Guide).

DIANA M. HASTINGS, B.A. 1979, University of Oregon; M.B.A. 1981, George Washington University; J.D. 1986, Cornell University Law School. Ms. Hastings has a private law practice in San Francisco. She is a coauthor of chapter 8 (Introductory and Basic Clauses), chapter 10 (Trust Administration and Trustee’s Powers), and chapter 19 (Issues Related to Nature of Trust Assets).

PAUL E. HOELSCHEN, JR., B.S. 1970, Oregon State University; J.D. 1973, University of California, Berkeley, School of Law; LL.M. (Taxation), 1976, New York University School of Law. He is a coauthor of chapter 6 (Valuing Interests in Property).

OWEN KAYE, B.S. 1991, San Diego State University; J.D. 1995, Western State University. Mr. Kaye, who is a partner with the firm of Givner & Kaye, Los Angeles, specializes in tax and estate planning. He is a coauthor of chapter 17 (Qualified Personal Residence Trusts (QPRTs)), previously revised by Bruce D. Whitley.

RICHARD S. KINYON, B.A. 1961, LL.B. 1965, University of Minnesota. Mr. Kinyon, who is a partner with Shartsis Friese, LLP (formerly senior counsel with Morrison & Foerster), in San Francisco, specializes in estate planning, probate, and trust law and taxation. He is a coauthor of chapter 13A (Dynasty Trusts) and chapter 19 (Issues Related to Nature of Trust Assets).

KATHRYN K. MILLER, B.A. 2008, University of South Carolina; J.D. 2013, University of California, Hastings College of the Law. Ms. Miller, who is an associate with Shartsis Friese, LLP, in San Francisco, specializes in counseling investment advisers on state and federal compliance. She is a coauthor of chapter 19 (Issues Related to Nature of Trust Assets).

LYNDA S. MOERSCHBAECHER, B.A. 1966, University of Wisconsin (Madison); J.D. and M.B.A. (Taxation) 1977, Golden Gate University School of Law. Ms. Moerschbaecher, who practiced in Carlsbad and now lives in San Diego, specializes in charitable gift planning. She is the author of chapter 18 (Charitable Remainder Trusts).

BETTY J. ORVELL, B.A. 1964, Tufts University; M.A. 1984, University of Pennsylvania; J.D. 1986, University of California, Hastings College of the Law. Ms. Orvell, who practiced with Reed Smith LLP, Oakland, specializes in trusts and estates. She is a coauthor of chapter 12 (Trusts for Minors).

RUTH A. PHELPS, B.A. 1972, Immaculate Heart College; J.D. 1975, and LL.M. (Taxation) 2004, Loyola Law School. Mrs. Phelps, who practices with Phelps Law Group (formerly Phelps, Schwartz & Phelps), Pasadena, is a certified elder law attorney and a certified specialist in estate planning, trust, and probate law. She is a coauthor of chapter 13 (Special Needs Trusts).

STERLING L. ROSS, JR., B.A. 1968, Stanford University; J.D. 1971, University of Michigan Law School. Mr. Ross, who is a partner with the law firm Robb & Ross, Mill Valley, is a certified specialist in estate planning, trust, and probate law. He is a coauthor of chapter 13 (Special Needs Trusts).

MARC M. STERN, B.S. 1981, Stanford University; J.D. 1986, University of Southern California. Mr. Stern is a partner in the law firm of Greenberg Glusker Fields Claman & Machtinger LLP, in Los Angeles and practices in the areas of estate planning, probate, trust administration, and taxation. He is consulting editor on this volume and the author of chapters 14–16 (GRITs, GRATs, and GRUTs).

BELAN K. WAGNER, B.A. 1972, University of California, Santa Barbara; J.D. 1975, McGeorge School of Law, University of the Pacific; LL.M. (Taxation) 1976, University of Miami. Mr. Wagner is a partner in the law firm of Wagner, Kirkman, Blaine, Klomparens & Youmans in Sacramento. He is a coauthor of chapter 6 (Valuing Interests in Property).

BRUCE D. WHITLEY, B.S. 1982, University of California, Berkeley; J.D. 1987, University of California, Hastings College of the Law. Mr. Whitley practices law with Silicon Edge Law Group LLP (formerly with Reed Smith LLP, Oakland), and is a certified public accountant. He revised chapter 17 on Qualified Personal Residence Trusts (QPRTs) with the assistance of Jeremy E. Wenokur. Mr. Wenokur practiced law in San Francisco and now lives in Incline Village, Nevada. Chapter 17 is based on the second edition chapter written by Mr. Whitley and the late Michael J. Bollard.

DANIELLE T. ZARAGOZA, B.A. 1998, University of California, San Diego; J.D., 2003, University of California, Davis, School of Law. Ms. Zaragoza is of counsel in Shartsis Friese LLP’s Family Wealth Planning Department in San Francisco where she represents high net-worth individuals in estate planning matters and fiduciaries and beneficiaries in probate and trust administration. She is a coauthor of chapter 13A (Dynasty Trusts).

About the 2019 Update Authors

CHRISTINA PROSPERO GABAR, update author of chapter 10, is an attorney with the law firm of Oldman, Cooley, Sallus, Birnberg & Coleman, L.L.P. in Encino. She earned a J.D. from California Western School of Law, where she was a board member of the Asian Pacific American Law Student Association and a member of the Pro Bono Program. In 2013, she received the Public Service Honor Society award for her work with the Family Law Facilitator’s Office in the South County Regional Center Courthouse in San Diego County. She attended University of California, Irvine, where she received her Bachelor of Arts in Political Science with an emphasis on International Relations.

ANDREA GEE, update author of chapter 19, is a partner in Ashworth & Ashworth, LLP, Santa Ana, emphasizing estate planning, probate, and trust law. Ms. Gee received her B.Journ. in 1983 from the University of Texas, Austin, and her J.D. in 1992 from Western State University College of Law, Irvine.

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