Trust - Types of Trusts an Introduction

Trust - Types of Trusts an Introduction

Client Letter - What this idea is about	Engagement Letter	Learning Objectives	What it does; Why It Works - Plain English Analysis	What It does; Why It Works - Technical Analysis & Citations	Tax Killers: ABT, Activity Based Taxplanning
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What is does, Why it works - Plain English Analysis

TYPES OF TRUSTS

There are several types of trusts frequently used in estate planning. The following sections provide a general summary of the various types of trusts and the typical tax characterizations for each.

Revocable Living Trusts

REVOCABLE LIVING TRUSTS

By far the most widely used type of trust is the revocable living trust. This is generally a trust for which the grantor is the trustee, and reserves the right to revoke or amend the trust at any time. The grantor is typically the primary beneficiary during his lifetime with possible discretionary distributions during the grantor's disability to individuals who are dependent on the grantor. At the grantor's death, the trust becomes irrevocable, and, after payment of taxes, expenses, and debts, the corpus is distributed to designated beneficiaries or allocated among new trusts created at death of the grantor under the trust agreement.

During the grantor's lifetime when he is competent this trust is considered a grantor trust under Code Section 676. It is not entirely clear whether the trust would become a complex trust upon the grantor's disability; however, because more states are now giving grantors' guardians certain rights of revocation, and disability is not necessarily permanent, the trust under these circumstances would likely retain grantor status under Code Section 676. Also, the grantor's retained rights to distributions for support would likely result in grantor trust status under Code Section 677. At the grantor's death, the trust becomes a complex trust until distributed or allocated and thus has many of the characteristics of an estate. With respect to estates of decedents dying after August 5, 1997, the trustee and the grantor's executor have the right to elect to treat the trust as part of the grantor's estate for income tax purposes for the period beginning on the grantor's death and ending on one of the following dates: (1) if no federal estate tax return is required, the date that is two years after the grantor's death, or (2) if a federal estate tax return is required, the date that is six months after the date of the final determination of liability of federal estate tax. Code Section 645 (former Code Section 646). The election must be filed no later than the time prescribed for filing the return of tax imposed on the grantor's estate (including extensions) for its first tax year. Code Section 645.

COMPLIANCE TIP: The election is made by attaching a statement to the estate's Form 1041. The procedures and requirements for making this election are spelled out in Rev. Proc. 98-13, 1998-4 I.R.B. 21.

Go to sample election. See Planning Article, Revocable Living Trusts.

Trusts created at death

TRUSTS CREATED AT DEATH OF GRANTOR/DECEDENT

Trusts can receive assets from a revocable trust as of the date of death of the grantor. This is substantially similar to trusts created under an individual's will (also known as testamentary trusts). These trusts can have a variety of distribution provisions and trustee powers, which can cause the trusts to be taxed as grantor trusts, complex trusts, or simple trusts.

Many estate plans provide for marital trusts to be created at the death of one spouse for the surviving spouse and direct that all the income be distributed to the surviving spouse with discretionary principal distributions to the spouse. The trusts also prohibit any distributions of income or principal to any other beneficiaries. These trusts, often referred to as qualified terminable interest trusts or "QTIP trusts," are simple trusts during any year in which no discretionary distributions of trust accounting principal are made.

Another frequent testamentary trust is a trust for the benefit of the spouse and descendants of the decedent. These generally are treated as complex trusts unless the spouse has certain powers that cause the spouse to be treated as the owner of the trust under Code Section 678.

Irrevocable Insurance Trusts

IRREVOCABLE INSURANCE TRUSTS

Irrevocable insurance trusts are established primarily to own insurance. Contributions are periodically made to pay the insurance premiums. Typically the trust does not have taxable income unless an interest bearing bank account is established for making contributions and paying premiums.

Often such trusts provide the beneficiaries with certain withdrawal rights known as "Crummey rights" that could have the effect of causing the beneficiaries to be taxed on trust income under Code Sections 678 and 677. <7> But this typically does not present a problem because such trusts either do not have income or have provisions causing the original grantor to be taxed on the income. The most typical of these provisions is the authorization and actual use of income to pay life insurance premiums on insurance insuring the life of the grantor. Code Section 677(a)(3).

When the grantor dies, the insurance proceeds are added to the trust and subject to allocation among designated beneficiaries and trusts. Before allocation, an insurance trust is a complex trust. However the insurance trust does not qualify for the special election contained in Code Section 645 for revocable trusts. Upon allocation of the assets, the new trusts, if any, are subject to the rules regarding complex versus simple trusts, and often the insurance trust agreement provides for trusts similar to the ones created under the grantor's main estate plan found in his revocable trust or his will.

See Planning Article, Life Insurance Trusts.

Gift Trusts

There are primarily two varieties of gift trusts. These trusts are typically used by parents, grandparents, uncles and aunts in making gifts for children, grandchildren, nieces, nephews, grandnieces and grandnephews.

A Typical IRC �2503(c) annual exclusion trust, and

A Crummey Trust

Often gift trusts provide the trustee with broad discretion in distributing income and principal to or for the benefit of the primary beneficiary. It is often intended that contributions to these trusts qualify for the gift tax annual exclusion under Code Section 2503. Under Code Section 2503, contributions to trusts for the benefit of minors can qualify for the gift tax annual exclusion if the income of the trust may be expended for the benefit of the minor prior to reaching age 21; any amounts remaining in the trust at age 21 will pass to the minor, and if the minor dies prior to reaching age 21 any amounts remaining in the trust will be payable to the estate of the minor or pass in accordance with the exercise of a general power of appointment by the minor. Code Section 2503(c). This type of trust is treated as a complex trust for income tax purposes until the minor reaches age 21. At that time, the trust becomes a grantor trust under Code Section 678. A variation on this plan is to give the minor an unconditional withdrawal right at age 21, which closes in a number of days (sometimes referred to as a "Clam Trust"). This trust still is a complex trust until age 21 and becomes a grantor trust thereafter, unless the rights retained in the trust upon lapse of the withdrawal power do not fall within the various rules of Code Sections 673-677.

An alternative to Code Section 2503(c) to qualify the contribution for gift tax annual exclusion treatment is to provide the beneficiary with an immediate withdrawal right upon contribution, based primarily on a ruling which stated that such a withdrawal right created a present vested interest that qualified for the gift tax annual exclusion. Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). These trusts could have grantor trust attributes to the beneficiary with the withdrawal rights and subject to the rules in Code Sections 678 and 677. To the extent they are not grantor trusts, they are considered complex trusts.

GRANTOR RETAINED ANNUITY TRUSTS

Grantor retained annuity trusts (GRATs) last for a term of years and provide a periodic payment to the grantor of the trust during the term. At the end of the term, the trust is allocated and distributed among designated beneficiaries, possibly including trusts. Typically during the initial term of the trust, the grantor acts as the trustee. At the end of the initial term there is a new trustee.

During the initial term the grantor retained trust is a grantor trust for income tax purposes. This is due primarily to the possibility that income and principal will be distributed to the grantor to satisfy the annuity obligation. Thus, Code Section 677 applies. At the end of the term, the trust becomes a complex trust until distributed. At the time of distribution, if any new trusts are created, these new trusts can have dispositive provisions and tax characterizations similar to the provisions for other testamentary trusts of the grantor described above.

QUALIFIED PERSONAL RESIDENCE TRUSTS

As with the grantor retained annuity trust, the qualified personal residence trust (QPRT) is a creation of the special valuation rules found in Chapter 14 of the Code, particularly Code Section 2702 and Reg.

Section 25.2702-5. Generally, the grantor transfers a personal residence into the trust and retains the right to use the residence rent free for a period of years. The grantor is typically the trustee and retains the right to sell the property (other than to herself) and invest the proceeds in a new residence or convert the proceeds (or unused proceeds) to a grantor retained annuity trust. If she dies during the term, often the trust provides that the trust assets revert to her estate.

During the term of the trust, it is treated as a grantor trust for income tax purposes primarily due to the applications of Code Sections 673 and 677. As to Code Section 673, it is important that the reversionary interest meet the 5 percent actuarial test, after applying the valuation rules found in the estate tax regulations. <8> It is important that the trust be characterized as a grantor trust during the term for principal and income purposes because the grantor will want to retain special income tax benefits for residences, including the $250,000 exclusion. <9>

At the end of the initial term, the property typically is retained in a family trust with the children as trustees or an independent trustee. If certain powers are retained by the grantor, the trust continues as a grantor trust. This treatment can have an effect on deductibility of real estate taxes and the taxation of rental income paid by the grantor.

CHARITABLE REMAINDER TRUSTS

Charitable remainder trusts (CRTs) generally involve the establishment of rights of the grantor and possibly her spouse and children to receive a set annuity for life or a term of years not to exceed 20 years. At the end of the life of the individual non-charitable beneficiaries (or the end of the term if a definite term is used) the trust property passes to certain qualified charities. The annuity amount is either a set amount based on a percentage of the fair market value of the initial contribution (annuity trust), or is an amount based on a percentage of an annual valuation of the trust assets (unitrust). See Section 42.11 for a discussion of charitable gifts in trust.

To qualify as a charitable remainder trust, no person, including the grantor, may be considered the owner of the trust under Code Sections 671- 678. Reg. Section 1.664-1(a)(4). Thus, it is important that neither the grantor nor the grantor's spouse retain any of the powers enumerated in these sections.

Charitable remainder trusts are exempt from income tax. However, the non-charitable annuity recipients must report income from the trust based on a three-tier approach found in Code Section 664 and discussed in Section 724.4

CHARITABLE LEAD TRUSTS

Charitable lead trusts (CLTs) are in essence the flip side of charitable remainder unitrusts. They provide for the payment of an annuity to a qualified charity based on a term of years or measured by the life of one or more individuals. The annuity can either be a set annuity rate based on a percentage of the value of the trust on creation of the trust (annuity trust) or a payment to be determined annually by multiplying the fixed percentage by the fair market value of the assets on a valuation date each year (unitrust). See Section 42.11 for a discussion of charitable gifts in trust.

A charitable lead trust is not exempt from income tax. It is not subject to the special rules similar to those found in Code Section 664 for charitable remainder trusts.

To obtain a current income tax deduction equal to the present value of the stream of annuity payments, the trust must be considered a grantor trust as to the donor. Code Section 170(f)(2)(B). This usually is accomplished by having the remainder interest pass to the grantor and/or her spouse; thus Code Section 673 usually applies. If the trust is taxed as a grantor trust each year, the donor must report all items of income, deductions, and credits on her return. If the trust later ceases to be a grantor trust, the grantor must recognize as additional income the difference between the original charitable deduction and the discounted value of income previously taxed to her. Code Section 170(f)(2)(B).

If the trust is not treated as a grantor trust for federal income tax purposes, the grantor does not receive an immediate income tax deduction. Instead, the trust is treated as a complex trust with the right to take income tax deductions each year for the amounts distributed to charity. Code Section 642(c). However the trust can not deduct amounts paid to charities in excess of the annuity amount. Crown Income Charitable Fund v. Commissioner, 98 T.C. 327 (1992).

QUALIFIED SUBCHAPTER S TRUSTS

Certain trusts, but not all trusts, qualify as shareholders of stock in S corporations. <10> Grantor trusts qualify. In addition, trusts qualify if they meet certain requirements and a special election is filed by the trust beneficiary (known as qualified Subchapter S trusts or QSSTs). Code Section 1361(d). Pursuant to this election (effective as of the date the stock was transferred into the trust or, if later, the effective date of the S election for the corporation), for purposes of Code Section 678(a), the beneficiary of the trust is treated as the owner of that portion of the trust that consists of stock in the S corporation for which the election by the beneficiary is made. <11>

To qualify for this election, pursuant to Code Section 1361(d)(3)(A), the trust terms must provide the following:

(1) During the life of the current income beneficiary there is only one income beneficiary;

(2) any corpus distributed during the life of the current income beneficiary may be distributed only to that beneficiary;

(3) the income interest of the current income beneficiary will terminate on the earlier of such beneficiary's death;

(4) upon the termination of the trust during the life of the current income beneficiary the trust assets will be entirely distributed to the beneficiary.

As a result of this election, the portion of the trust relating to the Subchapter S corporation stock is treated as a grantor trust under Code Section 678 as to the beneficiary. The balance of the trust is subject to normal rules of taxation. For example, a QTIP marital trust that owns S corporation stock and for which an election is made is, in part, a grantor trust to the spouse and, in part, a simple trust (or a complex trust to the extent of principal distributions). Any gain or loss incurred on the sale of Subchapter S stock is taxed to the trust in its status as a separate taxpayer under Code Section 641.

SMALL BUSINESS TRUSTS

Another way to qualify a trust to own Subchapter S stock is to elect to treat the trust as a small business trust. <12> A trust qualifies as a small business trust under Code Section 1361(e)(1)(A), if:

(1) The trust does not have as a beneficiary any person other than an individual; an estate; or an organization described Code Sections 170(c)(2), 170(c)(3), 170(c)(4), or 170(c)(5) ; and

(2) no interest in the trust was acquired by purchase; and

(3) an election applies to these trusts.

Certain trusts are specifically prohibited from being small business trusts. An electing small business trust does not include qualified Subchapter S trusts; trusts that are exempt from tax; charitable remainder annuity trusts; and charitable remainder unitrusts. Code Section 1361(e)(1)(B).

The effect of the small business trust election is to tax this trust under special rules found in Code Section 641(c) (former Code Section 641(d)). This section provides that if a small business trust election is made, the portion of the trust consisting of Subchapter S stock is treated as a separate trust and the tax imposed on that trust is computed separately. The following special tax rules apply, pursuant to Code Section 641(c)(2) :

(1) The income will be taxed at the highest rate;

(2) the exemption amount will be zero;

(3) the only items of income, loss, deduction or credit to be taken into account are items reported to the trust pursuant to Subchapter S rules found in Code Section 1366 ; gain or loss on disposition of Subchapter S stock; and state or local taxes or administrative expenses allocable to these items of income. Clearly missing from the computation is the distribution deduction. Thus, even if there are distributions to the current beneficiaries, the trust -- not the beneficiaries -- must pay the tax on net Subchapter S income.

PRE-NEED FUNERAL TRUSTS

A pre-need funeral trust or qualified funeral trust (QFT) is a trust arrangement set up by contract with a funeral home or mortician whereby the trust funds will be used to purchase funeral merchandise and/or services to benefit a specified beneficiary on her death. A qualified funeral trust is deemed to be a grantor trust, with the purchaser treated as the owner of the trust. <13>

A trust that meets the requirements of Code Section 685(b) may elect to pay income tax on the trust's income using the rates applicable to estates and trusts. The trust may not accept aggregate contributions by or for the benefit of an individual in excess of $7,000 annually, adjusted for inflation, for any contract entered into after 1998. Code Section 685(c). For the year 2000, the inflation- adjusted figure is $7,200. Rev. Proc. 99-42, 1999-46 I.R.B. 1. For 1999, the amount is $7,100. Rev. Proc. 98-61, 1998-52 I.R.B. 18.

The election is made by filing Form 1041-QFT by the due date (including extensions) for filing the trust income tax return. The election applies to each trust reported on that return, i.e., a trustee may file one aggregate Form 1041-QFT for all of its qualified funeral trusts. The election may be made for any year. Once made, however, it can be revoked only with IRS consent. Notice 98-6, 1998-3 I.R.B. 3.

<<ENDNOTES>>

7/ See discussion of grantor trusts in Section 720.3 above.

8/ See Reg. Sections 20.2031-7T, Reg. Section 20.2031-7.

9/ See Code Section 121.

10/ For a discussion of eligible S corporation shareholders, see Section 301.3

11/ For further discussion of QSSTs, see Section 301.3(d).

12/ Code Section 1361(e). For a further discussion of electing small business trusts, see Section 301.3(e).

13/ Rev. Rul. 87-127, 1987-2 C.B. 156. In TAM 199935060, the IRS National Office determined that an accrual-method funeral home operator is not required to report income from pre-need funeral contracts until payments from customers are due or received, whichever happens earlier.

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Summary

A-B Trusts. Before the adoption of the unlimited marital deduction and while the marital deduction was limited to 50% of an individual's adjusted gross estate, it was common to create two trusts for the benefit of an individual's spouse, one which qualified for the marital deduction and one which did not. These were frequently referred to as A-B Trusts.

Alaska Trusts. These trusts, available in certain states, combine the benefits of multigenerational planning (see Generation Skipping Trusts and Dynasty Trusts, below) with an attempt at protection from the grantor's creditors. They have risks which must be carefully considered.

Applicable Credit Amount Trust. See Unified Credit Trust (below).

Blind Trust. This is a trust, often created by a politician after election to office, pursuant to which certain assets of the grantor are managed by one or more trustees without the grantor being advised of (or having any continued input as to) what is taking place. The assets, however, are managed for the benefit of the grantor of the trust.

Bypass Trust. See Credit Shelter Trust (below).

Cemetery Trust. This is typically a trust for the purpose of maintaining
one or more graves or grave sites in a cemetery.

Charitable Lead Trust. This is a trust pursuant to which a specified sum (expressed as a fixed percentage of the value of the trust at inception [in effect, an annuity] or as a fixed percentage of the value of the net assets of the trust, calculated annually), is to be paid to a charity at least annually, for a specified period, with the remainder then passing to one or more individuals. If an annuity is utilized, it is a Charitable Lead Annuity Trust (a CLAT); if a percentage of the net assets valued annually is utilized, the trust is a Charitable Lead Unitrust (a CLUT). Such trusts may save estate, gift, and income taxes.

Charitable Remainder Trust. This is a trust pursuant to which one or more individuals receive, at least annually, either a sum equal to a fixed percentage of the assets valued at the trust's inception (in effect, an annuity) or a sum equal to a fixed percentage of the net assets of the trust valued annually, either for a set number of years or for one or more lifetimes. If an annuity is utilized the trust is a Charitable Remainder Annuity Trust (a CRAT); if a percentage of the net assets valued annually is utilized, the trust is a Charitable Remainder Unitrust (a CRUT). Such trusts may save estate, gift, income, and/or capital gains taxes.

CLAT. See Charitable Lead Trust (above).

Clifford Trust. This type of trust, no longer being created (although some previously created ones still exist), provided that its assets were to be held for a period of at least ten years, with the income payable to a person other than the grantor, and with the assets reverting to the grantor at the end of the term of the trust. Its purpose was to shift income and reduce income tax liability. Tax law changes have eliminated its usefulness.

CLUT. See Charitable Lead Trust (above).

Constructive Trust. This trust is created by law. No trust documents are involved. If a person receives assets he or she should not have received he or she may be deemed by law to be holding those assets for someone else in a Constructive Trust.

Contingent Trust. This trust comes into being only in the event a contingency occurs. For example, a document may provide that if any assets are distributable to a person under the age of 21 years, those assets are held in a Contingent Trust for the benefit of that person until that person attains 21 years of age.

CRAT. See Charitable Remainder Trust (above).

Credit Shelter Trust. This trust is customarily designed to receive the maximum amount that can pass free of Federal estate tax upon the death of the first of two spouses to die. It has numerous variations. Frequently the terms of the trust provide that all of its income will be payable to the surviving spouse for life, with the assets then passing to or in trust for one or more others upon the surviving spouse's death. Another variation involves a Sprinkling Trust (see below).

Crummey Trust. This trust permits one or more individuals to withdraw a limited amount from the assets added to the trust in a specified manner during a specified period. Its purpose is to avoid gift taxes with respect to assets placed in the trust. Insurance Trusts (see below) are often designed as Crummey Trusts.

CRUT. See Charitable Remainder
Trust (above).

Defective Grantor Trust. This is a type of trust purposely made "defective" so as to be a Grantor Trust (see below) for income tax purposes but an Irrevocable Trust (see below) for estate and gift tax purposes. It may result in increased tax savings.

Delaware Business Trust. Similar to a family limited partnership or limited liability company, as opposed to a traditional trust, a Delaware Business Trust is a way to hold and invest assets, possibly including life insurance, with greater flexibility than most trusts allow, with the grantor of the trust retaining far more control than the tax laws permit as to traditional trusts, and with opportunities for limited liability, creditor protection, and valuation discounts.

Disclaimer Trust. This trust is meant to receive property that is disclaimed (renounced) by a beneficiary. For example, if a husband writes a will and wants to provide that all of his assets are to benefit his wife, but he is not sure whether he has sufficient assets so that he would want to utilize a Credit Shelter Trust (see above), he may provide in his will that any assets disclaimed by his wife pass to a trust for her benefit. This gives his wife the option of either taking the assets outright or disclaiming some, such as the maximum amount that can pass free of Federal estate tax, with the disclaimed assets to pass into the Disclaimer Trust from which the surviving spouse herself may receive the net income. Note that such an arrangement is only possible with respect to a spouse.

Discretionary Trust. This is any trust as to which the trustees have discretion to distribute (or not distribute) income and/or principal to or among one or more beneficiaries. The discretion may apply to income, principal, or both. The trustees may have the right to give or not give income or principal to a single beneficiary, or to distribute some or all of the income or principal among members of a group, excluding one or more members if desired (see Sprinkling Trust, below).

Dry Trust. This trust has no assets. A Dry Trust is usually created either to receive assets upon the death of an individual, such as a pour-over under the individual's will (see Pour-Over Trust, below), or to receive assets transferred to the trust via a power of attorney in the event of an individual's incapacity (see Standby Trust, below).

Dynasty Trust. This is a name customarily used for a Generation-Skipping Trust (see below) that continues for an extended period of time, such as for multiple generations, limited only by the applicable Rule Against Perpetuities, if any. In certain states such a trust may run for a very extended period of time. Its purpose is to avoid estate taxation for several generations, and to provide for an individual's descendants (or equivalent) for a very long period.

Educational Trust. See Section 2503(c) Trust (below).

Escher Trust. See Supplemental Needs Trust (below).

Estate Trust. This type of Marital Deduction Trust (see below) provides that, upon the death of the surviving spouse, the assets in the trust, or at least the accumulated income of the trust, are payable to his or her estate.

Generation-Skipping Trust. This trust either skips over an entire generation or provides for members of more than one generation, normally geared to utilize the exemption from the tax on generation-skipping transfers. Under Federal law this exemption may be as much as $1,000,000 per trust creator (not per trust and not per grandchild).

Grantor Retained Annuity Trust. This is an irrevocable trust created by an individual (the grantor) that provides for the payment to the grantor, at least annually, of a sum equal to a fixed percentage of the value of the assets placed in the trust (in effect, an annuity) for a fixed period of time, or until the grantor's death, if sooner. Upon its termination, the balance in the trust usually passes to the grantor's estate if the grantor does not survive the term of the trust, or to (or in trust for) another individual (or individuals) if the grantor survives the term of the trust. Its purpose is to reduce gift and estate taxes. It serves little, if any, tax purpose if the grantor dies during the term of the trust. Note, also, that it does not yield a step-up in basis of the assets of the trust if the trust terminates during the grantor's lifetime, and it is possible for the gift tax and resulting capital gains tax (assuming the assets are then sold) to exceed the tax saving resulting from the creation of the trust. Note also, that for income tax purposes it is a "Grantor Trust" (see above).

Grantor Retained Income Trust. This trust, now only used in limited situations, is an irrevocable trust where the grantor retains the right to income for a fixed period of years geared to end before the grantor's death. Upon termination of the trust, the assets in the trust pass to another. The main purpose of such a trust is to reduce the gift tax value of the transfer, because the value today of a gift of an asset in the future is less than the present value of that asset. Grantor Retained Income Trusts are now used for gifts to nonimmediate family members (e.g., nieces or nephews). Such a trust serves little or no tax purpose if the grantor dies before it terminates.

Grantor Retained Unitrust. This is very similar to a Grantor Retained Annuity Trust (see above), except that, rather than a fixed sum (a percentage of the assets of the trust valued at the creation of the trust), the grantor is to receive an annual (or more frequent) payment equal to a fixed percentage of the value of the net assets of the trust valued annually during the term of the trust.

Grantor Trust. This is a type of trust the income and capital gains of which are taxed to the grantor even if not payable to him.

GRAT. See Grantor Retained Annuity Trust (above).

GRIT. See Grantor Retained Income Trust (above).

GRUT. See Grantor Retained Unitrust (above).

GST Trust. See Generation-Skipping Trust (above).

IDIT. This is an Intentionally Defective Irrevocable Trust and is the same as a Defective Grantor Trust (above).

Illinois Land Trust. This is an arrangement commonly utilized in Illinois in connection with mortgage-like transactions. It is not used for normal trust purposes.

Insurance Trust. This is a trust, generally irrevocable, meant to own insurance on the life or lives of one or more individuals and to provide for the disposition of the proceeds of such insurance. Unless irrevocable, an Insurance Trust serves no tax purpose whatsoever.

Inter Vivos Trust. This is any trust created during the lifetime of the person creating the trust.

IRA QTIP. This is a type of QTIP Trust (see below) specifically designed to receive the proceeds of an IRA. It requires specific provisions in the IRA and in the IRA QTIP Trust to qualify for the marital deduction and to avoid adverse income tax consequences.

Irrevocable Trust. This is any trust that may not be amended or revoked by the grantor. Transfers to such a trust may be subject to gift tax.

Living Trust. See Inter Vivos Trust (above). In many instances the term "Living Trust" is used to refer to a Revocable Living Trust (see below).

Loving Trust. This is the name given by some trust salesmen to Living Trusts (see above).

Marital Deduction Trust. This is any trust that qualifies for the estate tax (or gift tax) marital deduction. A Marital Deduction Trust may provide, for example, that the individual's spouse receives all of the net income for life, with the assets remaining in the trust passing to a specified other individual or individuals upon the spouse's death. It may also provide that the net income is payable to the spouse for life, and give that spouse the right, either by will or by another specified instrument, to determine who receives the assets remaining in the trust upon that spouse's death.

Marital Trust. See Marital Deduction Trust (above).

Massachusetts Trust. This is not a trust at all but, rather, a corporation-like arrangement customarily utilized only in Massachusetts.

Medicaid Trust. This is typically an Inter Vivos Trust (see above) created by an individual for him- or herself or his or her spouse, for the purpose of protecting assets and permitting eligibility for Medicaid benefits. In most instances such a trust is ineffective in obtaining such benefits. Note however, that a Testamentary Trust (see below) may provide the benefits being sought (after the death of the person under whose will it is created). See also Supplemental Needs Trust (below).

Minority Trust. This is a trust geared to hold assets during an individual's minority, although it frequently runs until the individual attains the age of 21 years (the age of majority is generally 18). See Section 2503(c) Trust (below).

Net Income Makeup Charitable Remainder Unitrust. This type of CRUT, often used to supplement a retirement plan, permits the trustee to invest for maximum growth of capital since only the net income of the trust need be distributed currently. In the future (e.g., at retirement), the trust investments are rearranged to increase the trust's income, and the "unpaid" past distributions may be made up.

NIMCRUT. See Net Income Makeup Charitable Remainder Unitrust (above).

Nonmarital Trust. This trust does not qualify (or has not been qualified) for the estate or gift tax marital deduction.

Offshore Trust. This is a trust administered outside of the United States, frequently for the purpose of hiding funds from the grantor's creditors.

Pour-Over Trust. This trust is fed from another instrument. For example, in a person's will the executor may be instructed to transfer (pour over) all or a portion of the assets of the estate to a trust created under another instrument.

Power of Appointment Trust. This is a trust over which an individual has a power of appointment, being the right to designate who will receive some or all of the assets of the trust at a specified time or times. A power of appointment may be exercisable either during life (an "Inter Vivos Power") or by Will (a "Testamentary Power").

QDOT. See Qualified Domestic Trust (below).

QPRT. See Qualified Personal Residence Trust.

QTIP Trust. This is a Qualified Terminable Interest Property Trust and is one of several types of trusts designed to qualify for the estate or gift tax marital deduction (see Marital Deduction Trust, above). It provides that the grantor's spouse receives all of the net income for life. It may (but need not) provide for invasions of principal for the benefit of that spouse. Upon the death of the spouse for whose benefit the trust was created, the assets in the trust are includable in that spouse's estate for estate tax purposes and are distributed in accordance with the provisions of the trust.

Qualified Domestic Trust. This trust is very similar to a QTIP Trust (see above), but is meant for a surviving spouse who is not a citizen of the United States. A Qualified Domestic Trust must have specific provisions regarding the distribution of income and principal, dealing with who may be trustees and, unless an appropriate bank or trust company is a trustee, securing the IRS with respect to future taxes. It is subject to special tax rules applicable only to such trusts.

Qualified Personal Residence Trust. This is a variation of a Grantor Retained Annuity Trust (see above). It is a trust funded with the grantor's residence or vacation home. It provides that the grantor may reside in the residence (or in another purchased with the proceeds of the sale of the residence) for a specified number of years, at the end of which the property passes to or in trust for one or more other persons. Its purpose is to reduce the value of the property for transfer tax purposes.

Qualified Terminable Interest Trust. See QTIP Trust (above).

Rabbi Trust. This is not a typical trust arrangement but, in fact, a type of retirement plan or deferred compensation arrangement. The first was created for a rabbi (thus its name).

Residuary Trust. This is any trust (there are numerous varieties) funded with the assets remaining (the residue) after the payment of all prior ("pre-residuary") bequests, as well as debts, expenses, etc. and, sometimes, taxes.

Revocable Living Trust. This is a trust created during the grantor's life that may be revoked by the grantor. It is sometimes used to avoid probate, sometimes to provide management during the grantor's lifetime, sometimes to permit the administration, without additional ("ancillary") probate proceedings, of assets (e.g., real estate) located in a jurisdiction other than the one in which the grantor resides, and sometimes for other purposes. Such trusts save absolutely no income, gift, or estate taxes, as compared to wills, and may, or may not, reduce administration expenses and legal and accounting fees. Revocable Living Trusts must be executed in accordance with applicable state law. People often receive totally inaccurate information as to the benefits (and detriments) of Revocable Living Trusts.

Revocable Trust. This is any trust that may be revoked or amended by the grantor. See Revocable Living Trust (above).

Second-to-Die Insurance Trust. This is a type of Insurance Trust (see above) geared to own one or more second-to-die (also called Survivorship or Last-to-Die) life insurance policies insuring the lives of two (generally) people, who may (but need not) be husband and wife.

Section 2503(c) Trust. This is a trust for a minor (actually a person under the age of 21 years) and is designed to receive the annual gift tax exclusion for gifts on behalf of the minor. Section 2503(c) Trusts are an alternative to the use of the Uniform Gifts (or Transfers) to Minors Act and are often a better way of planning with respect to gifts to children, particularly if under the age of 14 years, whose parents are in a high income tax bracket. A Section 2503(c) Trust can have provisions allowing more flexibility than is available under the Uniform Gifts (or Transfers) to Minors Act. Variations of this trust permit the trust to continue beyond the date on which the beneficiary attains the age of 21 years.

SNT. See Supplemental Needs Trust (below).

Spill-Over Trust. See Pour-Over Trust (above).

Special Needs Trust. See Supplemental Needs Trust (below).

Spray Trust. See Sprinkling Trust (below).

Sprinkling Trust. This is a discretionary trust for the benefit of the members of a specified group, such as the grantor's spouse and descendants. See Discretionary Trust (above).

Standby Trust. This is a trust created during life (see Inter Vivos Trust, above) that is normally unfunded (see Dry Trust, above) until assets are added to it via a power of attorney upon the incapacity of the grantor of the trust.

Supplemental Needs Trust. This is a trust for the benefit of an incapacitated person. It typically provides that its assets are available to be used for the benefit of that person, but the trustees are not to use trust assets to the extent the incapacitated person would otherwise be receiving governmental benefits. Accordingly it is possible, for example, for a parent to create a Supplemental Needs Trust for an incapacitated child without interfering with the child's Medicaid benefits. Supplemental Needs Trusts often provide care for the beneficiary in addition to what Medicaid provides and deal with a beneficiary's nonessentials, such as paying for a vacation, a television set, etc. The use of Supplemental Needs Trusts was expanded under provisions of the tax law enacted by Congress in 1993, and EPTL section 7-1.12 (as to New York), but such trusts can be used only for certain beneficiaries and only under certain circumstances.

Testamentary Trust. This is any trust created under a Last Will and Testament.

Totten Trust. This name is given to a permitted asset (not a trust) titled so that, upon the death of that person, it passes to one or more other named persons without going through probate.

Unified Credit Trust. See Credit Shelter Trust (above).

Voting Trust. This is an arrangement for a specified, limited period by which one or more individuals authorize one or more other individuals to vote the shares of stock owned by the individual(s) creating the Voting Trust. It has no other typical trust attributes.

Wealth Replacement Trust. This is the name given to a type of insurance trust the purpose of which is to hold insurance on the life of an individual, or an individual and his spouse, and to utilize the proceeds of that insurance to replace assets passing to charity, such as upon the termination of a Charitable Remainder Trust (see above).

What It does, Why it works - Technical Analysis & Citations

Law (commentary and citation)

Regs (commentary and citation)

Cases (commentary and citation)

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Tax Killers

This is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth.

Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.

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Cost Killers

This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support sytems - in general about being a manager.

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What to gather - preparing for your CPA, your attorney, or preparing to start the job on your own

From Banking Records

From Customer Records

From Signed Documents

From Your Other Business, or Financial Records

From Corporation or Organization Records (meetings, etc.)

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Assistance - What To Do - Forms - checklists, time-line to do, etc.

Assistance - What to do

Forms - Checklists - Etc.

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Financial Accounting: Bookkeeping & Financials

	Financial Statement Presentation
	Notes to Financial Statements
	How to Make Entries
	What Kind of Records to Keep
	Bookkeeping Methods - Cash, Accrual and Other
	How the Business Entity Affects the Recording Sole Proprietor Corporation - C & S Partnerships - General, Limited, Limited Liability Company, Registered Limited Liability Partnership or Company Trusts Tax Exempt

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Compliance - what is required for protection, defense, etc.

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Alerts & Dangers - Risks, Asset Protection, IRS Defense

	Alerts & Dangers - Risks
	Asset Protection
	Your Defense

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trust_types.htm

Client Letter -

What this idea is about

Engagement Letter

Learning Objectives

What is does, Why it works - Plain English Analysis

What It does, Why it works - Technical Analysis & Citations

Tax Killers

Cost Killers

What to gather - preparing for your CPA, your attorney, or preparing to start the job on your own

Assistance - What To Do - Forms - checklists, time-line to do, etc.

Spreadsheets & Computations

Contracts, Trusts, etc.

Reports Required

Checklists for Deployment

Checklist for Monitoring

Financial Accounting: Bookkeeping & Financials

Compliance - what is required for protection, defense, etc.

Alerts & Dangers - Risks, Asset Protection, IRS Defense