wills trusts Chapter 9: Special Provisions in Trusts

Chapter 9 Overview

  • Coverage: Chapter 9 discussions will occur today and Monday morning.

  • Quiz Schedule: Quiz on Chapters 7, 8, and 9 will be on Wednesday of next week.

    • No class on the following Friday due to Spring Break.

Previous Lectures

  • Last week’s discussion focused on regular trusts.

Current Chapter Focus

  • Chapter 9 addresses special provisions in trusts to protect beneficiaries.

  • Main Topics Covered in Chapter 9:

    • Spendthrift Trust

    • Sprinkling and Spray Trusts

    • Marital Deduction Trust

    • Terminal Interest Property Trust

    • Life Insurance Trust

    • Crummy Powers

    • Charitable Gifts and Charitable Remainder Trust

    • Special Needs Trusts

    • Lady Bird Deeds

    • Revocable Transfer on Death Deeds

    • Pet Trusts

    • Gifting Framework

Spendthrift Trust

  • Definition: A provision that restricts a beneficiary's access to trust assets.

  • Purpose:

    • Protects assets from the beneficiary's spending habits.

    • Shields assets from creditors attempting to collect debts.

  • Distribution Control:

    • Assets are managed according to trust terms, not directly by the beneficiary.

  • Example: For educational purposes, the trustee pays funds directly to the institution instead of the beneficiary.

Discretionary Trust (Sprinkle/Spray Trust)

  • Definition: A trust that gives the trustee discretion over distributions to beneficiaries.

  • Advantages:

    • Adjust distributions according to beneficiary needs, which can be beneficial for unexpected life events (e.g., medical emergencies).

    • Protects trust assets from beneficiary creditors.

  • Disadvantages:

    • Potential for trustee abuse if they withhold distributions unjustly.

    • Possibility of conflicts between beneficiaries and trustees regarding fund release.

Marital Deduction Trust

  • Definition: A tax strategy trust for married couples, allowing them to avoid federal estate taxes upon the death of one spouse.

  • Features:

    • Unlimited transfers between spouses exempt from federal estate taxes.

    • Common forms include:

    • Marital Trust

    • Family Trust

    • QTIP Trust (Qualified terminable interest property trust).

  • Function:

    • Provides income to the surviving spouse while controlling future asset distribution.

  • Example of Use: AB Trust (Credit Shelter Trust) helps reduce estate taxes when the first spouse dies.

  • Tax Implications:

    • High federal estate tax exemptions may reduce the necessity of such trusts for smaller estates.

QTIP Trust

  • Purpose: Allows income to be provided to the surviving spouse, controlling asset distribution to eventual beneficiaries.

  • Specificity: Must adhere to IRS rules for tax qualification; life estates must be reported as income.

Life Insurance Trust

  • Definition: An irrevocable trust that becomes both the owner and beneficiary of a life insurance policy.

  • Functionality:

    • Avoids probate and potentially estate taxes.

    • Trust creator pays premiums.

  • Important Note: Crummy powers enable temporary withdrawal rights for trust contributions for tax exemption.

  • Example of Mechanism: If a life insurance policy worth $100,000 had $20,000 borrowed, upon death, $80,000 would be retained by the trust.

Charitable Trust

  • Basic Requirements:

    • Created for a charitable purpose (e.g., education, science, religion).

    • Must benefit the public or a defined group, not a specific individual.

    • Clear intentions must be documented within the trust.

  • Example: Trust established for children with cancer.

Charitable Remainder Trust

  • Structure:

    • Trustor receives income during their lifetime; remaining assets go to charity when the trustor dies.

    • Types include:

    • Charitable remainder annuity trust (fixed payments).

    • Charitable remainder unit trust (percentage of trust value).

  • Alternative Option: Charitable Lead Trust, which pays charity first and redistributes later.

Cypress Doctrine

  • Definition: A legal rule applied to charitable trusts to redirect funds if a named charity ceases to exist.

  • Judicial Application: The court may redirect to a similar charity unless clearly stated otherwise in the trust.

Special Needs Trust

  • Purpose: Designed to assist individuals with disabilities without risking loss of government benefits (e.g., Medicaid).

  • Mechanics: Funds held in trust for additional needs (medical, educational), managed by a trustee.

  • Case Study: Legal enforcement post-lawsuit to protect student funds from parental access.

Talking Trust (Pay on Death Trust)

  • Definition: Allows beneficiaries to receive funds upon the owner's death without probate.

  • Mechanics: Property and control remain with the owner during their lifetime; benefits transfer automatically to the designated beneficiary.

Lady Bird Deeds (Enhanced Life Estate Deed)

  • Purpose: Allows property owners to retain control of property and designate beneficiaries for automatic transfer upon death.

  • Ownership: The current property owner holds full possession and may alter property use.

  • Historical Context: Named after Lady Bird Johnson, who utilized this type of deed.

Pet Trusts

  • Definition: Trust created to provide care for pets after the owner's death.

  • Management: Must have a trustee to oversee care funding and management.

Gifts

  • Definition: Transfer of property or money without compensation.

  • Purpose: Reduces the taxable estate of the giver through annual exclusions.

  • Practical Applications: Parents often gift properties to shield from debts or reduce estate value for tax purposes.