1. Legal Document Preparation Class 8Slide 1 Parties to a Trust Settlor/ Grantor –This is the person who establishes the trust –Unless he or she is also trustee or beneficiary or keeps some control in the trust instrument, s/he gives up all benefit of the trust assets and has no control over them Trustee –This person (or entity- it can be a trust company or other professional trustee) has legal title over the trust assets and holds it for the beneficiary Beneficiary –This person or people hold equitable title in the trust assets –This is the class the trust assets are ultimately destined for

2. Legal Document Preparation Class 8Slide 2 Trust Requirements Requirements for Settlor –Competency –Power to dispose of the property she is putting into trust –Intent to create a trust Trustee –Must maintain accurate trust records –Owes a fiduciary duty to the beneficiaries –Is entitled to reasonable compensation Beneficiaries –No real requirements Trust res (property)

3. Legal Document Preparation Class 8Slide 3 Elements in Drafting Most Trusts 1 Identification of all three parties Identification of Trust Property –Trust property can always be added later, but a nominal amount should be stated in the trust up front A “Schedule A” is attached to many trusts on which to write a description of property in the trust The distribution of income from the trust The distribution of principal from the trust An irrevocability clause, if applicable A “spendthrift” clause- to prevent the trust from being accessible to creditors of the beneficiaries

4. Legal Document Preparation Class 8Slide 4 Elements in Drafting Most Trusts 2 Naming the trustee (or trustees) and successor trustees A description of the rights and duties of trustees Clause to define trustee compensation –or lack thereof Applicable state law Execution: Signatures, dates and notarization Other minor provisions include: –Perpetuities savings clause –Accounting procedures –Special provisions to preserve tax benefits of tax deferred retirement plans –Rights to conduct business with third parties

5. Legal Document Preparation Class 8Slide 5 Revocable Living Trusts 1 This is where the Settlor retains the right to take back the trust assets. In essence, it’s little more than a Will substitute Advantages: –Assets in the trust avoid probate on death –In the event of a disability of the Grantor, another person can take over automatically (easier than through POA) Drafting: –The trust should specifically state that the Grantor can revoke all or part of the trust at any time –Subtrust can be set up like testamentary trusts in a Will

6. Legal Document Preparation Class 8Slide 6 Revocable Living Trusts 2 The Grantor can be the trustee during his/her lifetime –Unless there’s a reason not to- such as that he or she is incompetent A provision should be inserted that the backup trustee should take over if the settlor becomes incompetent Keep in mind that the trust becomes irrevocable after the death of the grantor Assets in this trust are considered assets of the grantor for almost all legal purposes –It’s in the grantor’s taxable estate –Income is the grantor’s income (no need to even get a new Tax EIN)

7. Legal Document Preparation Class 8Slide 7 Irrevocable Trusts These avoid probate and can have many other benefits, including: –Removing the trust assets from the Settlor’s estate –Allowing the Settlor to become eligible for Medicaid or other asset based government program –Protect the assets from future creditors of the Settlor –Allows one to gift assets without allowing it to be susceptible to the creditors of the beneficiaries –Allows the Settlor to control when and how the beneficiaries eventually benefit from and enjoy the gifted assets

8. Legal Document Preparation Class 8Slide 8 Terms Common in Irrevocable Trusts For estate planning: –Term to make sure the Grantor does not have enough power to bring the trust assets back into his estate under § 2036 of the IRC; including no right to: Name beneficiaries of the trust Income from the trust –Rights of withdrawal (“Crummey powers”) For Medicaid planning or creditor protection –Make sure the Grantor cannot be a beneficiary of any trust asset Exception: “income only Medicaid trust”

9. Legal Document Preparation Class 8Slide 9 Trust Tax Planning Issues Sometimes it’s better to keep a trust in the estate of the Grantor, to: –Avoid gift tax implications on the transfer to the trust –Preserve the “step up” in basis for appreciated assets If the gift to the trust will be a completed gift, make sure to prepare and distribute rights of withdrawal notices! Ways to keep the trust assets in the estate of the Grantor: –Income or life estate for the grantor –Give the Grantor the power to control beneficial enjoyment of the trust assets

10. Legal Document Preparation Class 8Slide 10 Grantor Trust Provisions Grantor trusts are trusts whose income is taxable directly to the Grantor. Sometimes you want a trust to be a grantor trust and sometimes you don’t. The provisions that make something into a Grantor trust appear in Sections 671-679 of the IRC. They include: –Income being payable to the Grantor –The grantor or any “non-adverse” party having the right to direct beneficial enjoyment of the property –The grantor having the right to “redeem” trust property by paying equivalent value to the trust, etc.