funding trusts: ensuring optimal asset transfers, changing...

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Presenting a live 90-minute webinar with interactive Q&A

Funding Trusts: Ensuring Optimal

Asset Transfers, Changing Ownership,

Monitoring Asset Performance

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, OCTOBER 18, 2016

Priya Prakash Royal, Esq. LL.M., Managing Attorney, Royal Law Firm, Washington, D.C.

Yahne Miorini, LL.M, Founder and Principal, Miorini Law, McLean, Va.

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Funding Trusts By Yahne Miorini, LL.M

Miorini Law PLLC

Overview of the Types of

Trusts

6

Types of Trusts

Revocable Trust:

The creator (called Settlor, Trustor, Grantor) reserves the right to revoke and amend the Trust and is the primary beneficiary of the Trust.

An agent under a power of attorney can also revoke or amend the Trust, if the Trust authorizes it and the power authorizes it as well.

Irrevocable Trust:

The Settlor cannot terminate or revoke the Trust and is not the primary beneficiary of the Trust (except for Asset Protection Trusts).

Modification of the Trust is possible with a “decanting” provision or with the use of a Trust Advisor or Trust Protector.

There must be an agreement by all the beneficiaries to terminate the Trust.

7

Types of Trusts – Grantor

Trusts

A Grantor Trust is an IRS qualification. It means that the

income of the Trust can be reported on the individual

income tax return for the Grantor instead of being

reported as Trust income with a Trust income tax return.

If the Settlor’s SSN can be used for the Trust (if we have a

revocable trust + grantor is the trustee), the grantor trust

is an ignored entity.

If the Trust has a separate tax identification number (the

Settlor of the Revocable Trust is not a trustee or the Trust is

irrevocable), then an IRS Form 1041 needs to be filed.

8

Types of Trusts – Grantor

Trusts

Revocable Trust For Revocable Trusts,

the Settlor’s SSN can be

used as long as the

Settlor is a trustee

For Joint Revocable

Trusts, either Settlors’

SSNs can be used as

long as they are also a

trustee

IRS § 676: Power to

Revoke

Irrevocable Trust

Called “intentionally

defective irrevocable

grantor trusts”

IRS § 671 – 679

Substitution of Assets

Limited power of

Appointment

9

Types of Trusts- Tax Planning

GRAT (Grantor Retained Annuity Trust): Irrevocable Trust where the Settlor receives an annual annuity payment for a certain number of years. When the term ends, the Trust is distributed to the Trust beneficiaries.

CRAT (Charitable Remainder Annuity Trust): Irrevocable Trust that pays a fixed amount of income each year to the donor or the donor’s specified beneficiary for a period of time. At the end of the period, the balance of the Trust is distributed to a charity.

CRUT (Charitable Remainder Unitrust): Irrevocable Trust that distributes a fixed percentage of the value of its assets to a non-charitable beneficiary for a period of time. At the end of the period, the balance of the Trust is distributed to a charity.

QPRT (Qualified Personal Residence Trust): Irrevocable Trust for the personal residence that allows the Settlor to live on the property for a limited number of years.

ILIT (Life Insurance Trust): Irrevocable Trust that owns a life insurance policy, generally on the life of the Settlor.

10

Types of Trusts – Transfer to

generations

GST (Generation-skipping Trust): An Irrevocable Trust

where the beneficiaries are the grandchildren of the

settlor or where there is a difference of age of more

than 37 ½ years between the Settlor and the beneficiary.

Dynasty Trust: A long-term Trust created to pass wealth

from generation to generation without incurring transfer

of taxes such as estate and gift tax. Some states observe

the Rules Against Perpetuities, which limits the amount

of time a Trust can exist and therefore does not allow for

such Trusts.

11

Types of Trusts – Asset

protection

QSST (Qualified Self-settled Spendthrift Trust) or Asset

Protection Trust: Irrevocable trust that is protected

against creditors’ claims and where the Settlor is

entitled to receive distributions of income and principal.

These types of Trusts are only authorized in a limited

number of states. Each state has different rules.

Medicaid Qualifying Trusts: Irrevocable Trust where the

Settlor retains the right to receive income from the

Trust. This structure is aimed towards qualification for

Medicaid and income tax planning (step-up basis) rather

than focusing on estate or gift tax planning.

12

Initial Funding

Requirements

13

Trust Funding

Practice Tips:

Have a list of assets

Create a funding letter

Review the funding at the signing of the estate planning

documents

Monitor the funding

Explain how a client will sign as trustee

14

Funding Trusts

Letter of Instruction

with a Trustee

Certification

Bank Accounts

Portfolios

Assignment of

Interest

Tangible

Works of Art

Cars: DMV

Boats

Business Interests and

Closely Held

Corporations:

Cost of an appraisal

15

FUNDING INSTRUCTIONS

Authorization to release information when a funding

team will handle the funding.

16

Funding Instructions - Banks

We wish to change the title of all of our accounts (other than any IRA or other tax deferred accounts). Please change the owner of each account to the following:

JOHN DOE and MARIE DOE, or their successors, as Trustee of THE JOHN AND MARIE DOE REVOCABLE TRUST, U/A dated xxxx.

Please find a copy of a Certification of Trust which documents the establishment of our trust and sets out our unlimited powers for the future handling of the account(s) as trustees. Please continue to use the current Social Security Number on the account as the Tax Identification Number; pursuant to IRS Regulation 1.671-4(b), no separate Tax Identification Number is required for this type of Trust.

If you have any questions regarding this transfer, please contact us at the address below, or telephone us at XXXX. Thank you for your cooperation.

17

FUNDING TRUSTS – Assignment

of Tangibles I, John Doe, hereby declare that all articles of personal and household use and ornament of every kind and description and wheresoever situated which we presently own or hereafter acquire, regardless of the means by which acquired and/or the record title in which held; including, by way of illustration and not limitation, all automobiles, club memberships, china, digital assets and/or rights (including any “social media”, online accounts and/or email accounts), glass, clothing, jewelry, precious stones, furniture, rugs, paintings and other works of art, books, silverware, etc., and including all insurance with respect thereto) are transferred to and the same shall be owned by:

THE JOHN DOE REVOCABLE TRUST,

being a revocable living trust, which exists under a certain trust agreement created by me on xxxx.

The foregoing declaration and transfer shall apply even though "record" ownership or title, in some instances, may, presently or in the future, be registered in our respective individual name or names, in which event such record ownership shall hereafter be deemed held in Trust even though such trusteeship remains undisclosed. This declaration may be terminated by us by written notice to the trustee of the above-mentioned Trust. Notwithstanding this transfer in Trust, we reserve the unlimited right to the use of the aforementioned items.

Executed on xxxx.

18

Funding Trusts – Assignment of

Business Interests

Assignment

Be familiar with business entities and bookkeeping

structures

19

Funding Trusts – Assets That

Cannot Be Transferred

Purchase only

CDs

Life Insurance policies

(ILIT)

Annuities (CRAT)

Beneficiary

Designation

Retirement Accounts

Life insurance policies

Annuities

20

FUNDING INSTRUCTIONS –

BENEFICIARY DESIGNATION

Mysteries of the Beneficiary Designation forms:

DOB

SSN

Space

21

FUNDING INSTRUCTIONS –

BENEFICIARY DESIGNATION

I wish to change the contingent beneficiary of the above-

referenced policy. Please re-title your records (or provide

me with the appropriate Change of Beneficiary form to

effectuate this change) to the following:

Section 6.G. (2)(c), titled Children Trust, of the John DOE

Trust, U/A dated XXX

If you have any questions regarding this request, please

contact me at the address above, or telephone me at xxxx.

Thank you for your cooperation.

22

Funding Trusts – Special Rules

Real Estate Property Deeds

Recording fee

Deed in other states

TOD deeds

Notify insurance company

Notify loan

Refinance

Leases

Contact the Company

Royalties, patents and

copyrights

Paper stocks: Often

require a Medallion

Stamp

Time shares

Digital assets

23

Funding Trusts - Deeds

To have and to hold the said property by the Trustee of the Grantee Trust with the appurtenances thereunto belonging, in fee simple, upon the Trust and for the purposes set forth herein and under the said Trust and with the following rights, powers and privileges, in accordance with §55-17.1 of the Code of Virginia, as amended:

1. The Trustee, including any successor Trustee, shall have the power to sell, lease, encumber or otherwise dispose of the property herein described,

2. No one dealing with the Trustee, including any successor Trustee, shall be required to make further inquiry as to the right of such Trustee to act,

3. No one dealing with the Trustee, including any successor Trustee, shall inquire as to the disposition of any proceeds.

This conveyance is made subject to easements, conditions and restrictions of record insofar as they may lawfully affect the property.

The parties acknowledge that this Deed has been prepared for Estate Planning purposes and without the benefit of a title examination.

24

Funding Trusts – Classical

Problems

Banks:

May request a Power of Attorney (POA)

POA needs to have funding powers

May refuse to transfer accounts that:

Are TOD

Receive social security and automatic payments of bills

Joint

Financial Institutions:

Refuse to have account titled as tenant-in-common with 2

trusts

25

Funding Trusts – Classical

Problems

Client’s Memory:

Forgetting assets

Confused by all of the

funding rules

Cost of the Appraisal

Beneficiary Designations

Homeowner Insurance’s

Refusal

Employee Stock Options

Safe deposit boxes and

Cash

Assets abroad

Cemetery plots

26

Funding Trusts and the IRS

Don’t forget the Gift Tax Return for Irrevocable Trusts

27

Selling, Adjusting and

Substituting Trust Assets

28

Life Insurance Policies

Independent professional review of the policy

29

Thank You

Yahne Miorini, LL.M

Miorini Law

1616 Anderson Road, Suite 209

McLean, VA 22102

703-448-6121

[email protected]

Marital Trust Funding and

Grantor Trust Funding

Priya Prakash Royal, Esq., LL.M,

Royal Law Firm PLLC

Royal Law Firm PLLC | 800.409.0211 | www.royalesq.com

http://www.royalesq.com/

Marital Trusts: Overview

• Types of Marital Trusts

• General Power of Appointment Trust • Lifetime Income Interest

• Testamentary or intervivos Power of Appointment

• Qualified Terminable Interest Property (QTIP) Trust • Lifetime income interest

• No power to appoint beneficiaries for remainder

• Estate or Discretionary Trust • Discretionary distributions to income or principal

• Remainder to estate of surviving spouse


32


Marital Trust: Overview cont’d

• Benefits of marital trusts

• Estate tax deferred until death of second-to-die

• Value included in estate of surviving spouse

• Usually combined with a credit shelter trust funded with amount up to the federal tax exemption

Royal Law Firm PLLC | 800.409.0211 | www.royalesq.com 33


Marital Trust: Funding Formulas

• Pecuniary Funding • Preresiduary Pecuniary to fund Marital or Credit

Shelter Trust

• Fixed Sum

• Fairly Representative

• Fractional Share Formula Funding • Proportional allocation

• Valuation Issues

• Other funding option to ensure a marital trust funding



Marital Trust: Fixed Sum Pecuniary Funding • Valuation and Funding Issues:

• Appreciation and depreciation between date of

death and date of funding shifts to trust not funded with the pecuniary amount.

• Appreciation of assets allocated to the pecuniary share subject to tax on gain if prior to funding.

• IRD and IRA subject to subject to income tax on date of funding. • IRD should generally not be used to fund these trusts



Marital Trust: Fairly Representative Pecuniary Formula

• Funding • Can be pro-rata share of assets or

• Non pro-rata share of assets if • Based on the fair market value of the assets as of date of

funding

• Or fair value of net appreciation or depreciation from date of valuation to date of funding

• No gain recognized on funding marital (or credit shelter) trust



Marital Trust: Fractional Share Formula • Allocation of undivided interest in each trust under

the terms of the trust

• Allocation is percentage based between the trusts

• Valuation • Requires revaluation and recalculation to ensure

compliance with terms of trust when distributions are non pro-rata

• No issue if trust only authorizes pro-rata distributions

• Pick and choose funding can also alleviate some valuation issues. • Must be authorized in trust to prevent negative consequences

of taxable exchange treatment


37


Marital Trust: Fractional Share Formula Funding Methods

• Executor selects assets to fund the trust

• Prorate each asset – divide between marital and the rest of the estate.



Marital Trust: Funding Marital Trust – ensuring funding • More complex trust language providing a

formula so that marital trust does not remain unfunded with overfunded bypass trust

• Ideal for smaller estates under the federal tax exclusion amount

• Ensures spouse receives at least half the value of the adjusted gross estate and aggregate value of all assets

• Taxable estates may face negative tax consequences from this formula



Marital Trust: Funding Issues Overview/Recap • Pecuniary Funding

• Distribution as disposition of an asset

• Example

• Related taxpayers • Limitations of deductions

• Example

• Distribution of passive activities

• Holding period of assets



Marital Trust: Additional funding considerations • Valuation

• Discounting issues • Asset division between beneficiaries

• In kind distributions under IRC 643

• Personal residence and determining which trust should be funded

• Funding with savings bonds

• Trust tax year • IRC 645 and IRC 663 Election

• IRD and DNI Recap



Grantor Trusts: Oveview

• Revocable for income tax and irrevocable for estate tax

• Irrevocable Trusts that freeze assets • Intentionally defective grantor trusts (IDGT)

• Grantor retained annuity interest trusts (GRAT)

• Keep trust assets out of grantor’s estate

• Income and estate/gift tax consequences • Trust terms may allow power to lend to grantor, substitute

assets or, add charitable beneficiaries. • Each has funding considerations and consequences


42


Grantor Trust: Life Insurance

• Funding grantor trusts with life insurance • Income taxed to grantor

• Value of life insurance not included in estate

• Split dollar arrangements • Economic benefit test



Grantor Trust: IDGT

• Sale transactions • FMV frozen on date of sale • Applicable discounts • Transfer of family owned business interests

• Initial funding • Unified credit eliminates or reduces gift tax

• Promissory notes in sale transactions • Interest rates

• No income tax on sale because Grantor and Trust same

• Power to reacquire assets


44


Grantor Trusts: GRAT

• Allows transfer of assets without estate or gift tax on the appreciation

• Funding consideration • Must be asset that appreciates

• Cash or non income-producing property alone will not suffice

• No additional contributions requirement

• Annuity may be paid by distributions of assets • Limitations

• Valuation issues



Grantor Trust: Income tax

• Grantor taxed on income from trust

• Net Investment Income Tax issues • Applicable at grantor level under Affordable Care Act

• Funding considerations.

• Income tax free sales and loans



Concluding remarks

• Audit issues with Marital and Grantor trusts • Impact of funding considerations

• Funding limitations under trust terms

• Case law and revenue ruling references (Handout)



Contact:

Priya Prakash Royal, Esq. LL.M. DC, MD, PA, NJ & NY

Royal Law Firm PLLC

1725 I St. NW, Ste 300, Washington DC 20006 202.380.9336 or 800.409.0211

[email protected]


Comments?

48

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