WHAT IS A LIVING TRUST

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WHAT IS A LIVING TRUST?

• In the 1960s one Dacey advanced the use of a
  revocable trust to avoid probate. The idea was
  to put all the clients property into this trust
  and name the beneficiaries, who normally would
  only succeed to the property at the grantors
  death.
• The publics dislike of the then probate
  procedure led to the enactment of the Uniform
  Probate Code, Title 30.1, NDCC, which greatly
  simplified probate.
• In the 1980s the revocable trust was re-invented
  and is now called a living trust. It has
  nothing to do with living, and is just the same
  device Dacey came up with over 20 years before.

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IS A REVOCABLE TRUST A GOOD ESTATE PLAN?

• The scheme is to put all your property into a
  revocable trust, and name the beneficiaries who
  receive the assets at your death it is not a
  taxable gift, the donor remains income taxable on
  the income of the trust and its value is all
  included in your estate.
• You can arrange your beneficiary designation so
  as to accomplish tax planning.
• Yes, this method will avoid probate, as
  everything in the trust is a non-probate asset.
  The client still needs a will in case he forgets
  to put something into the trust.
• What is a probate asset?

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A FEW ADVANTAGES OF PROBATE COMPARED TO A
REVOCABLE TRUST.

• A will is much less expensive than a revocable
  trust and will. Probate costs are about the same
  for each.
• A fiscal year is available in probate but not for
  a revocable trust..
• In probate, a notice to creditors cuts off
  unexpected debts. There is no comparable
  advantage for the revocable trust.
• A will excludes a divorced spouse a revocable
  trust does not.
• In probate, losses incurred in administration are
  deductible by the heirs at the time of
  distribution. This benefit is not available with
  the revocable trust.
• In a probate the estate can deduct its
  administration expenses on either its income tax
  return or estate tax return.

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A COMPARISON OF THE PROBATE OF A REVOCABLE
TRUST AND A WILL

• Assume a taxable estate, with real property, an
  interest in a corporation, brokerage accounts,
  autos, boats, furniture and personal effects.
• In our first example the decedent placed
  everything into a revocable trust and named his
  wife as trustee.
• In the second example the decedent retained
  ownership of the property and died with a will,
  naming his wife as personal representative.

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STEPS TO PROBATE A REVOCABLE TRUST

• The trustee must record the trust with the
  register of deeds and then deed the real estate
  he will give copies of the trust to banks,
  brokers and others having custody of the
  decedents assets and execute transfer documents
  (checks, assignments, bills of sale, assignment
  of stock certificates and the like to the heirs.
• The trustee files the estate tax return. He
  should reserve sufficient funds to pay taxes,
  debts and expenses to settle the estate.

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PROCEDURE TO PROBATE A WILL

• The personal representative is appointed, which
  involves three forms to be filed.
• Then the P.R. deeds the land to the heirs,
  assigns intangible property to heirs, transfers
  the tangible property by bills of sale, and pays
  the debts and taxes. Cars and boats are
  transferred by signing the certificate of title.
• The personal representative files the estate tax
  returns. Absent a controversy, that is all there
  is to do, and it is no more work and maybe less
  than with a revocable trust.
• In states that have not adopted the Uniform
  Probate Code there is somewhat more work for a
  probate estate.

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LOBER V US

• Lober created trusts for his children he was
  the trustee and could turn over the corpus to
  the children at any time although the trusts
  were otherwise irrevocable. This power was
  fatal, and the trust was included in his estate.
• Why do parents retain such powers? We never name
  the grantor a trustee nor do we give him any
  power over the trust.
• The powers mentioned on page 242, note 1 (b),
  will not cause trust property to be included in
  the estate.
• We recommend naming a trustee who will be
  amenable to the grantors wishes he is called a
  tame trustee.
• Was this transfer a taxable gift when made?
  You bet it was. Will the same property be taxed
  twice? No, except it will be included in the
  estate at fair market value at Lobers death.

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TULLYS ESTATE V US

• Decedent and DiNapoli each owned a 50 interest
  in a corporation, TD, Inc. It contracted to pay
  their widows a years salary on the death of
  either one.
• 2038 requires a transfer. Did Tully make any
  transfer of this benefit? When?
• Why did Tully not have the power to alter, amend,
  revoke or terminate?
• Is there any kind of tax here? How about a gift
  tax? Mrs. Tully is income taxable on the
  104,000 when paid, but the corporation can
  deduct that amount as compensation income.

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JENNINGS V SMITH

• Dad created trusts for two sons he and the sons
  were the trustees income could be distributed if
  necessary to maintain the sons station in life.
  The principal could only be invaded in the event
  of prolonged illness or financial misfortune.
  IRS claimed these powers are equivalent to a
  power to alter,revoke, amend or terminate under
  2038 which would require the value of the trusts
  to be included in Jennings gross estate.

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JENNINGS V SMITH CONTINUED

• Because the trustees discretion was limited by an
  external standard (station in life and illness or
  misfortune) the trustees did not have power to
  alter, amend, revoke or terminate.
• You will use such external standards, but your
  grantors will never be a trustee, nor will you
  reserve such powers to the grantor. Accordingly,
  you need not rely on this exception to the 2038
  rules.
• The most common standards for invasion of
  principal of a trust include care, comfort,
  support, education or to establish a business or
  profession.

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LEOPOLD V US

• Another idiot named himself and a friend as
  trustees of a trust for the benefit of Leopolds
  children the trustees could pay out the income
  during minority only for Leopolds childrens
  support, maintenance, education and general
  welfare, but after they were 21 the trustees
  could pay out the income at any time. Moreover,
  the trustees could distribute the principal at
  any time, before or after minority. However, any
  accumulated income was paid only when the
  beneficiary reached age 21.

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MORE ON LEOPOLD

• The court found that there were the three
  separate interests involved, that is, income
  before majority, income after majority and the
  corpus, and they must be treated separately.
• Only the income before majority was subject to an
  ascertainable standard, and hence excluded from
  Leopolds estate. That income was payable only
  for support, education, maintenance and general
  welfare. The remaining two interests, i.e., the
  principal and income after age 21 were included
  in Leopolds estate.

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HOW YOU WILL DRAFT SUCH TRUSTS

• You will name a tame trustee and give him the
  power to distribute the income up to, say, age
  25, in amounts subject to the trustees
  discretion.
• You will likely require the trustee to distribute
  all the income after, say, age 25 and a part of
  the principal at age, say, 30, and the balance of
  the principal at, say, age 35. The theory here
  is to give the child time to learn how to handle
  wealth. Of course, these ages are only
  suggestions, and you will follow your clients
  wishes. I have had clients tell me to give it
  all to the child at age 16 and, in another case,
  not until age 70.

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POWERS EXERCISABLE WITH THE CONSENT OF ANOTHER

• There are three rules involved here for the gift
  tax a gift is complete unless a forbidden power
  is exercisable with the consent of someone not
  having a substantial adverse interest.
• For the estate tax a trust will be included in
  the grantors estate if such a forbidden power is
  held with anyone. For the income tax, trust
  income is taxable to the donor if such a power
  is held by any non-adverse person.
• Why are there three different rules? It just
  happened that way there was and is no reason for
  the disparity there is no real difference
  between the gift tax and income tax rules.

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MORE ON RESERVED POWERS

• What if the power to alter, amend, revoke or
  terminate is held solely by the grantors spouse?
  No problem, the gift is complete and the
  property is not included in the grantors estate.
• If the grantor can freely fire a trustee and
  replace him, any powers in the trust will be
  attributed to him. Not so , however, if he
  cannot appoint himself as a trustee and can only
  appoint an unrelated person as trustee.

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US V GRACES ESTATE

• Just before the gift tax was re-enacted the
  Husband gave property to his Wife for life, in
  trust, with a power to invade, remainder to
  whomever she appointed.
• At about the same time the Wife gave exactly the
  same interests in property that she owned to
  Husband for life under identical terms.
• When the wife died the IRS included the trust the
  wife created in her estate as a reciprocal trust.
  The case was compromised with 55 of the smaller
  trust included in her estate. Many years later
  the husband dies and the issue reappears.
• The issue is only whether the the trusts are
  related and if so, are the parties in the same
  economic position before and after the transfers.
  If so the trust created by the wife in which he
  had a life estate is includible in his estate.

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MORE ON GRACES ESTATE

• The taxpayers plan in making the gifts was that
  nothing would be included in either estate as
  both husband and wife owned nothing but a life
  estate which had been granted to him/her by
  his/her spouse. Had they reserved a life estate
  in their property and given the remainder to
  anyone the full value of that property would be
  included in his estate.
• The court included the value of the wifes trust
  in his estate under the crossed trusts, or
  reciprocal trust doctrine.

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THE DISSENT IN GRACE

• This is not so much a dissent as a comment that
  the court was not presented with the issue it
  decided.
• It turns out that both the husband and the wife
  had the power to pay the beneficiaries all of the
  corpus which is a power to terminate, and that
  alone would require the inclusion of the trusts
  in each estate. The same issue was involved in
  the Lober case.

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RECIPROCAL GIFTS

• Note the Sather case, page 266 involving gifts
  to nieces and nephews by two brothers the
  cross gifts resulted in the denial of the annual
  exemptions for gifts to the nieces and nephews.
  The gifts to nieces and nephews are treated as
  gifts to the donors children, and dad had
  already used his annual exemption for gifts to
  his children.
• This edition of the casebook p. 267 includes
  the Schulers Estate case where the claim was
  made that the cross gifts were to separate two
  families ownership of two different
  corporations. A good theory, but the facts were
  somewhat weak.