chapter 9 specialized trusts. wills, trusts, and estates administration, 3e herskowitz 2 © 2011,...

Chapter 9

Specialized Trusts

Wills, Trusts, and Estates Administration, 3eHerskowitz

2© 2011, 2007, 2001 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights

Reserved.

Learning Objectives

Understand why one would need a specialized trust Understand how a spendthrift trust works Understand the purpose of a marital deduction trust

and how it is used Distinguish between charitable gifts and charitable

remainder trusts Understand gifts Understand special needs trusts Understand “Crummy Powers”



Reserved.

Why Use Specialized Trusts?

To protect assets from the reach of creditors

To protect assets from the reach of the IRS

To protect loved ones from themselves



Reserved.

Spendthrift Trusts

Why use a spendthrift trust? to protect assets from the beneficiary’s appetites and

creditors What is a spendthrift trust?

a trust with a provision that restricts the assets such that the beneficiaries can only receive distributions

the provision can declare that trust will not pay the beneficiary’s debts…

…or that the beneficiary may not sell or transfer his or her interest in the trust



Reserved.

Sprinkling (Spray) Trusts

These specialized trusts give trustees total discretion to distribute (i.e., sprinkle or spray) income to the beneficiaries as the trustee sees fit

Also called discretionary trusts, these trusts allow trustees to distribute principal, if necessary



Reserved.

Advantages And Disadvantages Of Sprinkling TrustsAdvantages Gives the trustee the

burden of making the tough decisions

Plans for unforeseen events that require trustee discretion

Allows for advantageous tax consequences

Protects the trust from the beneficiaries creditors...

…and the beneficiaries from themselves

Disadvantages Gives the trustee godlike

power over the beneficiaries

causes divisive litigation by beneficiaries against each other and the trustee



Reserved.

The Marital-Deduction Trust

What is it? an IRS-approved trust used by married couples

to avoid federal estate tax Why?

There is no limitation on the assets a spouse may transfer tax free to the other spouse

What types? Marital and family trusts QTIP trusts



Reserved.

The Marital And Family Trust

Sometimes called an A-B trust, credit shelter trust, or bypass trust

The spouses create two trusts, with each spouse giving trust income to the surviving spouse and at the death of the second spouse, the trusts pass to the beneficiaries

This arrangement allows the estate of the first spouse to pass tax free



Reserved.

The Qualified Terminable Interest Property (QTIP) Trust

Another trust expressly allowed by the IRS To be “qualified,” the trust must meet certain

standards under IRS rules The QTIP trust gives to the surviving spouse a

life estate in the trust’s income and then the principal to the beneficiaries at the death of the spouse

Hence—the interest in the property is terminable



Reserved.

The Life Insurance Trust

Using a trust to be the owner and beneficiary of the trustor’s life insurance policy

This type of trust allows the insurance proceeds to escape estate taxation, as well as probate

The testator must fund the trust to pay the premiums

The trustee must send Crummey Letters to beneficiaries each year



Reserved.

Crummey Powers

The trustor—through the trustee—gives the beneficiaries the option to take the insurance premiums instead of the later insurance proceeds in the form of an annual “Crummey Letter”

This offer to the beneficiaries results in the trust passing to the beneficiaries tax free

Comes from a famous trust case, Crummey v. Commissioner, 397 F.2nd 82 (9th Cir. 1968)



Reserved.

Charitable (Or Public) Trusts

Charitable trusts must meet three eligibility requirements:

1. The trust must be made for religious, scientific, charitable, literary, or educational purposes.

– The beneficiary must not be an individual

2. The trustor must intend to create a public trust. – A charitable purpose must be specified in the trust

agreement.

3. The beneficiaries must be an indefinite class.– The individuals who ultimately benefit from the gift

must be unascertainable.



Reserved.

Charitable Remainder Trusts

The trustor is the beneficiary of the income for life, and at death, the charity receives the remainder

Types of Charitable Remainder Trusts Charitable Remainder Annuity Trust Charitable Remainder Unitrust Charitable Lead Trust



Reserved.

Cy Pres Doctrine

What if the charity “dies” before the trust principal and remaining income can be distributed?

A court can find a charity whose purpose is similar as possible to the former charity, and distributed the trust assets…

…Unless the trustor intended (as shown in the trust agreement) to only benefit the original charity



Reserved.

Special Needs Trusts

Also called Supplemental Needs Trusts

Designed to benefit a person with disabilities

Prevents the person from losing governmental benefits

The funds creates a “safe harbor”



Reserved.

Totten Trusts

“Pay-on-Death” or POD Accounts

Savings accounts that a depositor (trustee) opens for the benefit of another (beneficiary)

Named for Matter of Totten, 179 N.Y. 112 (1904)



Reserved.

Lady Bird Deeds an enhanced life estate deed holder of the life estate retains the right to transfer the property by sale by gift without obtaining consent of the owner of the remainder interest

President Johnson allegedly used this type of deed to convey property to his wife, Claudia “Lady Bird” Johnson

chapter 9 specialized trusts. wills, trusts, and estates administration, 3e herskowitz 2 © 2011,...

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