1. Chapter 9 Specialized Trusts

2. Wills, Trusts, and Estates Administration, 3e Herskowitz 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”

3. Wills, Trusts, and Estates Administration, 3e Herskowitz 3 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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

4. Wills, Trusts, and Estates Administration, 3e Herskowitz 4 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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

5. Wills, Trusts, and Estates Administration, 3e Herskowitz 5 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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

6. Wills, Trusts, and Estates Administration, 3e Herskowitz 6 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights Reserved. Advantages And Disadvantages Of Sprinkling Trusts Advantages 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

7. Wills, Trusts, and Estates Administration, 3e Herskowitz 7 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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

8. Wills, Trusts, and Estates Administration, 3e Herskowitz 8 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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

9. Wills, Trusts, and Estates Administration, 3e Herskowitz 9 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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

10. Wills, Trusts, and Estates Administration, 3e Herskowitz 10 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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

11. Wills, Trusts, and Estates Administration, 3e Herskowitz 11 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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.2 nd 82 (9 th Cir. 1968)

12. Wills, Trusts, and Estates Administration, 3e Herskowitz 12 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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.

13. Wills, Trusts, and Estates Administration, 3e Herskowitz 13 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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

14. Wills, Trusts, and Estates Administration, 3e Herskowitz 14 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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

15. Wills, Trusts, and Estates Administration, 3e Herskowitz 15 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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”

16. Wills, Trusts, and Estates Administration, 3e Herskowitz 16 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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)

17. Wills, Trusts, and Estates Administration, 3e Herskowitz 17 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ 07458. All Rights 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