Complete v. Express Interview in a Revocable Living Trust Document

We’ve been asked . . .

Q:        “Today, I tried to assemble a Revocable Living Trust that included a residuary distribution to a charitable remainder trust, but the option to make a distribution to charity did not appear in any of the input screens.  Why doesn’t it appear?  What did I do wrong?”

A:         This is a great question because it points out that WealthDocx7® has different initial trust and assembly choices that affect the options that appear later in the WealthDocx7 interview.  In our last blog, Simplified v. Full Revocable Living Trust, we discussed the option that allows you to select either a “full” and “simplified” RLT document.  Today, we discuss the difference between the “Complete” and “Express” Interview.

One finds the option for a “Complete” or “Express” Interview at the “Revocable Living Trust Options” screen:

(Note:  If you set the trust length to “simplified,” this choice will not appear.)

The idea behind the Express Interview is to permit you to maneuver quickly through the Interview by providing the choices that you will need in the majority of estate planning cases.  The Express Interview provides fewer questions, relies on certain preference settings, makes assumptions based on most common practices, and eliminates some options that are available in the Complete Interview. 

The following is an outline of the differences between the Express and Complete Interviews:

1.      The following options are set based on your preferences and the software does not ask for these options in the Interview.  (If you have not set a preference, then the software selects the most commonly used option by default).  The idea is that you can always program the software to follow the settings that you prefer in these areas, which are typically used over-and-over again in the same manner by the planner.  A good example is the first one listed – ascertainable standards.  Most planners define ascertainable standards the same way in every document they create, so it makes sense to do it once as a preference.  NOTE:  Preferences are not just available in the Express Interview.  If you select preferences, those choices will apply also when you create a trust using the Complete Interview.  The difference is that in the Express Interview you can’t change these choices.  In the Complete interview you can change them. 

These are the options for which you can set a preference, if you choose, and the default language that will appear if you do not set a preference:

• Ascertainable standards term (defaulted to “health, education, maintenance or support”)
• Trustee Discretion statement (defaulted to “sole and absolute discretion”)
• How the Trustee is to determine apportionment between principal and income (Defaulted to “As the Trustee determines in a fair, equitable and practical manner” and the Trustee is not authorized to allocate capital gain to income)
• Income period on a general appointment marital trust (defaulted to “quarter-annually”)
• QTIP Trust options:
  • Income option (defaulted to “All income”)
  • Income period (defaulted to “quarter-annually”)
  • Principal distributions (defaulted to “An Independent Trustee may distribute principal to the surviving spouse for any purpose.  If there is no Independent Trustee principal will be distributed for ascertainable standards.”)
  • 5 and 5 power (defaulted to FALSE)

• Residuary design:
  • Descendants as current beneficiaries (defaulted to “No”)
  • Income options (defaulted to “Discretionary distributions of income and principal to the beneficiary.”)
  • If preference for income option is not discretionary distributions, then distribution frequency (defaulted to “quarter-annually”)
  • Principal option (defaulted to “An Independent Trustee may make distributions for any purpose and an Interested Trustee shall make distributions pursuant to ascertainable standards.”

• Underage beneficiary age (defaulted to 21)
• Standby Supplemental Needs Trust provisions (defaulted to “NO”)
• Standby Supplemental Needs Trust termination provision (defaulted to “NO”).

2.      The idea with the Express Interview is to provide only the options that most clients might want, and eliminate the options that only a limited number of clients might need – you can use the Complete Interview for those clients.  For example, experience teaches us that most clients probably do not include a testamentary charitable remainder unitrust to hold their retirement plan assets.  So, if you select the Express interview, the option will not even appear. 

The following options are not available in the Express Interview:

• In the Joint Trust, the option to create a trust that grants each Grantor a lifetime general power of appointment to permit funding the credit shelter trust with the trust property of both Grantors.
• Express GSTT planning options
• The following  enhanced trustee powers provisions:
  • Invest and manage Section 529 qualified tuition programs
  • Farm, ranch and other agricultural provisions
  • Closely-held business interest provisions
  • Professional Practice provisions
  • Sub-Chapter S Corporation stock provisions
  • Unitrust or Total Return Trust provisions

• A general power of appointment over any accrued but undistributed income remaining in the marital trust (stub income).
• Decanting Power
• Trustee indemnification statement
• Provision granting the Trustee the authority to make discretionary distributions of principal from the QTIP trust to assist the surviving spouse in achieving estate planning objectives
• An Independent Trustee may distribute property to the beneficiary of a trust so that the beneficiary’s estate may utilize the 1014 basis increase without causing an increase in the federal estate tax
• Testamentary charitable remainder trusts to hold retirement plan assets.
• Family trust “Total Return” unitrust for distributions of income.
• Minimum fraction to the marital share when using the Fractional Marital Share formula
• A formula to zero out the estate tax when both individual and charitable residuary beneficiaries are selected
• Trust Protector provisions
• Incapacity of a Trustee established by a written certificate.
• Provisions authorizing gifting powers to the trustee during the grantor’s incapacity.
• Distribution Trustee
• Federal Estate Tax repeal options
• Same gender couple alternative planning options

3.      The software offers sets a number of options automatically, based on what we believe are the most common practices of our members.  We believe you will want these options for the majority of clients for whom you create estate plans.  For example, the Express Interview provides an option to create charitable distributions since many clients include distributions to charities in their plans, but it does not include the option to create testamentary charitable remainder trust, lead trusts, or private foundations since only a minority of clients choose to make charitable distributions using those tools.

The following options are set in the Express interview and cannot be changed:

• Afterborn definition of children is always included when there are children
• Marital deduction language accounts for both federal estate and state death taxes
• Include a Personal Property Memorandum
  • If grantor is married but there are no children, the beneficiary is the spouse but if the spouse is deceased then the trust beneficiaries.
  • If grantor is married and there are children, the beneficiary is the spouse but if the spouse is deceased then the beneficiaries are the living children.
  • If the grantor is not married and has no children, the personal property goes to the residuary beneficiaries.
  • If the grantor is not married and has children, the personal property goes to the living children.

•  If someone other than the Grantor removes a Trustee, the person or persons removing the Trustee are not required to appoint a successor Trustee.  The grantor relies on the other provisions of the trust agreement to control Trustee succession when someone removes a Trustee.
• If Charitable residuary beneficiaries are selected, the only type of Charity is and existing charitable organization or foundation.  Private foundations, testamentary CRTs, CLTs, etc. are not available.
• Specific gifts to individuals are outright monetary gifts.  Gifts in trust and gifts of specific property are not available.
• A grantor may only make specific charitable gifts to existing charitable organizations or foundations.  Gifts to existing charitable trusts or testamentary private foundations, CLTs, and CRTs are not available.
• In community property states transfers of separate property to the trust use language for community property states.
• In separate property states, transfers of separate property to the trust use the language for separate property states and the document treats unscheduled property as half separate property of each spouse.
• The definition of Charities only includes public charities.  It does not include private foundations.
• The chosen marital deduction method will apply to both federal estate and state death taxes.
• If you select a pecuniary formula, the valuation method is “True Worth,” and not minimum worth.

4.      The following options are defaulted to common practices but the program allows you to select another option if you desire:

• Residuary Beneficiary trusts, separately stated:
  • The trustee will hold a residuary trust share set aside for an afterborn or adopted child in similar trust to another child’s trust.
  • If a residuary beneficiary is deceased, the Trustee will distribute the share outright to the descendants of the deceased beneficiary.
  • No precatory beneficiary guidelines
  • No withdrawal right
  • No 5 and 5 power
  • General power of appointment
  • In case of lapse, property goes to the beneficiary’s descendants.

• Residuary Beneficiary trusts, stated once
  • General power of appointment
  • Permissible appointees are “any person or entity”
  • No withdrawal right
  • No 5 and 5 power
  • No precatory beneficiary guidelines

• No common Trust for residuary beneficiaries
• Spousal right to remove current and successors trustees with or without cause.
• No requirement that at least two trustees serve.
• No provision as to a beneficiary’s right to serve as a trustee.
• A majority of beneficiaries may remove a Trustee with or without cause.
• No spouse’s right to remove and appoint the current and successor Trustees after the grantor’s death.
• A property agreement does not override the trust.
• Signature lines are not included on the schedules.

So, if you think you are missing an option that should have appeared, check the “Revocable Living Trust Options” screen.  Maybe you should have selected the Complete Interview rather than the Express Interview!

Yours for better drafting,

Thomas Ray
Executive Editor, WealthCounsel

Simplified v Full Revocable Living Trust

We’ve been asked . . .

Q:        “Today, I tried to assemble a Revocable Living Trust that included a residuary distribution to a charitable remainder trust, but the option to make a distribution to charity did not appear in any of the input screens.  Why doesn’t it appear?  What did I do wrong?”

A:         This is a great question because it points out that WealthDocx® has different initial trust and assembly choices that affect the options that appear later in the WealthDocx 7 dialogue.  The second screen that appears in the RLT module is the Revocable Living Trust Options:

When you click this option, the following screen will appear in the dialogue window:

The first option under “Type of Revocable Living Trust” gives you two choices for Trust Length:  “Full” and “Simplified.”  A “simplified” RLT is a trust that has fewer provisions than the full-length trust.  It is not as specific as the full RLT, and relies more on state law instead of specific trust provisions to accomplish the grantor’s objectives.  If you select this trust length option, some of the options that would normally appear if you were creating a full-length trust will be absent from the assembly dialogues simply because those provisions are unavailable in the simplified trust.

The following chart shows the provisions that are missing from the simplified trust:

 

Article	Main Difference
Establishing the Trust	No Distribution Trustee provisions No provisions exercising a testamentary Power of Appointment possessed by Grantor
Family Information	No provisions for additional family information such as other family members or beneficiaries, deceased family members, or disinherited family members
Trustee Succession	No provisions for a Trust Protector Death Trustees are by default the same as the incapacity Trustees (this can be changed in the interview so they are not the same in the assembled trust) No option to separately name trustees of the separate trusts
Administration Upon Incapacity	Relies on the definition of incapacity in the General Provisions Relies on the options for determining incapacity in the General Provisions Disability priority is set to "Grantor's needs [and spouse's needs], then to needs of other" No provisions for gifting during incapacity
Administration Upon Death	Apportionment of death taxes is as provided by state apportionment statue No provisions re. Retirement Plans No provisions re. Authority to Make Tax Elections No provisions re. Payment of Chartable Bequests
Specific Distributions and Disposition of Tangible Personal Property	No option for Testamentary Charitable Remainder Trusts for Specific Purposes Tangible Personal Property (that is not disposed of by memorandum if that option is selected) is distributed to the spouse (if there is one) or if spouse is deceased then under the terms of the trust Only outright pre-residuary distributions
Division of Property Upon Death	Marital Deduction Planning options are: All to Marital Share All to Marital Share, with any disclaimed amounts going to Non-Marital Share Clayton Election Fractional Marital Formula Statutory minimum to Marital Share (if individual trust) No explicit division into GSTT Exempt and Nonexempt shares (uses default language in Trust Administration article only) No option for alternative distribution if estate tax is repealed
[All Trusts]	No option is presented for discretionary distributions.  Instead the language is determined by the default preferences setting as follows: If the default preference is for the Trustee to "make distributions pursuant to ascertainable standards" in all cases then that language is merged If the default preference setting is set to any other option, then an Independent Trustee may make distributions for any purpose and an Interested Trustee may only make distributions pursuant to ascertainable standards
Marital Trust	No option for General Power of Appointment over accrued but undistributed income remaining in the Marital Trust (Stub Income)
Bypass Trust	The nonmarital share goes to a bypass trust (no option to allocate to Residuary)  Beneficiaries can be either: Spouse Spouse and descendants Priority is to spouse, then descendants No Total Return Trust option
Distribution of Remaining Trust Property	Residuary options are Outright to descendants, per survivorship option Equal shares for living children and descendants of deceased children, each share held in trust.  Terms of the trusts stated once and applied to all descendants' trusts Shares for named beneficiaries.  Terms of the trusts stated separately for each beneficiary
Trustee Powers	This article is substantially redacted.  It includes general statement of powers, incorporating state law and optionally includes a list of specific powers. Included at the end of the Trusts Administration article instead of having its own article.

Because those provisions don’t exist in the templates for the simplified trust, you obviously won’t find design questions about them in the dialogue screens.  If the member who submitted this question had specified a “simplified” trust length, then the option for charitable planning of the residuary amount would not appear because we do not offer charitable provisions of this type in the simplified trust.

So, if you think you are missing an option that should have appeared, check the “Revocable Living Trust Options” screen.  Maybe you should have selected the “full” rather than the “simplified” trust length!

In our next blog, we will discuss the difference between the “complete” and “express” interviews.

Yours for better drafting,

Thomas Ray
Executive Editor, WealthCounsel

“Zeroed-Out” Testamentary Charitable Lead Trusts

Q:  I want to build in a zeroed-out charitable lead annuity trust (CLAT) in my client’s living trust.  I am not seeing that the insertion of a charitable lead trust is part of the living trust dialogue, but I may be missing something.  I am also not sure of the term I need on the CLAT to eliminate the estate tax.  Can you assist me here or point me toward some resources?

A:  My book, Charitable Gift Planning: A Practical Guide for the Estate Planner (ABA 2^nd ed. 2007), discusses lead trusts generally in chapters 8, 9 and partly in chapter 10.  It discusses this specific strategy on pages 488-491.  But let’s review the concept here, and then show how to draft a zeroed-out testamentary CLAT (TCLAT) using WealthDocx7™.

The concept:  A good description of the charitable lead trust comes from Howard Zaritzky:

“A charitable lead trust is the opposite of a charitable remainder trust.  It is a charitable gift of an annuity or unitrust interest followed by a noncharitable remainder interest.  Charitable lead trusts are a useful way to make a lifetime or testamentary gift at a reduced (or zero) gift or estate tax cost.

“The annuity or unitrust interest of a charitable lead trust is almost identical with the noncharitable interest used in a charitable remainder trust, except that there is no minimum 5 percent payout requirement on a charitable lead trust.

“The donor receives no income tax deduction for a gift to a charitable lead trust, but does receive a gift tax charitable deduction based on the actuarial value of the charitable lead interest.  This value is based on actuarial tables, which change monthly to incorporate the prevailing interest rates, pursuant to Section 7520 [of the Code].  Like the valuation of the interest in a charitable remainder trust, a donor may value the interests in a charitable lead trust using the assumed interest rate applicable on the date of the transfer for during either of the two immediately preceding months.  Generally, a lower assumed interest rate will produce a larger charitable deduction for a charitable lead interest.”

-- H. Zaritsky, Tax Planning for Family Wealth Transfers -- Analysis with Forms, ¶5.04[1] (WG&L)

A testamentary charitable lead trust is a lead trust that the client creates as a sub-trust of his or her revocable living trust or Last Will, funded at his or her death.  It can produce significant tax savings to his or her estate.  The present value of the charitable lead trust’s income interest qualifies for the estate tax charitable contribution deduction.  Only the remainder interest is subject to estate tax.  However, it is possible to use a formula clause that creates a lead trust with the present value of the income interest equal to the amount used to fund the trust, and, thus “zero-out” the estate tax.

What’s Best?  A Charitable Lead Unitrust or Charitable Lead Annuity Trust?  As Zaritsky notes, charitable lead trusts come in two varieties:  The charitable lead unitrust (CLUT) calculates the income interest to charity as an amount equal to a fixed percentage of the net fair market value of the trust assets as determined annually.  Treas. Reg. §§ 1.170A-6(c)(2)(ii)(A), 20.2055-2(e)(2)(vii), 25.2522(c)-3(c)(2)(vii).  A charitable lead annuity trust pays “a determinable amount” at least annually to the charitable beneficiary.  Treas. Reg. §§ 1.170A-6(c)(2)(i)(A), 20.2055-2(e)(2)(vi), 25.2522(c)-3(c)(2)(vii).  The traditional method for defining “determinable amount” is to simply state it as an amount equal to a stated fraction or percentage of the initial fair market value of the trust property.  Most drafters use a TCLAT to accomplish the “zero-out” because only with an annuity trust can one draft the present value of the charitable interest to equal the fair market value of the assets transferred into the trust; thus, the full value of the assets transferred to the lead annuity trust equals the estate tax charitable deduction amount.  One finds it difficult – if not impossible – to accomplish this same result with a lead unitrust.  Like a lead annuity trust, the Code defines the charitable deduction for a lead unitrust as the present value of the income interest.  But unlike the lead annuity trust, the unitrust interest changes from year-to-year with the fair market value of the assets.  If the market value of the assets grows at the Section 7520 rate, the value of the assets can never reach zero.  Consider these results for a charitable lead annuity trust and unitrust, both funded with $100,000, each with a 15-year term, and with the annuity and unitrust percentages at 9.38 percent.  The Section 7520 rate is 4.6 percent:

                                                                         Annuity Trust                                  Unitrust

Value of Asset                                                          $100,000                                 $100,000

Charitable Deduction                                               $100,000                                   $75,565           

Taxable Amount                                                              $ -0-                                   $24,435

Under this scenario, one must increase the lead unitrust percentage to 40 percent before the present value of the unitrust interest comes close ($99,927) to the value of the assets used to fund the trust.

The Formula.  In a testamentary format, it is impossible to achieve a zero-out if the donor’s last will or living trust sets out all of the annuity variables (annuity amount, trust term) for the testamentary lead annuity trust.  The reason:  one cannot accurately predict the Section 7520 rate at the donor’s death.  Therefore, the donor’s estate plan must use a formula to ‘zero-out’ federal estate tax.  The Service has approved the use of formula clauses in lead annuity trusts for zeroing-out estate taxes.  See Priv. Ltr. Ruls. 199927031, 9631021, 9128051, and 8946022.  These clauses qualify for the federal estate tax deduction because they create a determinable amount, ascertainable as of the donor’s date of death.  Typically, the formula will state all of the lead trust variables, except the annuity interest.  Priv. Ltr. Ruls. 9128051 and 8946022.  So, the formula would define the annuity interest as an amount, which, after taking into account the Section 7520 rate for the donor’s date of death, will create an income interest, the present value of which equals the amount contributed to the trust.  Or, the formulas could leave the term of years as the formula variable.  Priv. Ltr. Rul. 9631021.  We offer both drafting options in WealthDocx7™. 

Does it really work?  A question we frequently see is whether the lead trust creates a remainder amount for the client’s family that is worth the wait necessary to zero-out the taxes.  Wouldn’t it be better just to pay the taxes, and leave the remainder immediately to the family members?  These are valid questions, and the answers turns on both a philosophical and practical basis:

1.      For some people, the idea of giving any estate taxes to the government is anthemia.  So, for these people, directing money to charity through a lead trust makes more sense philosophically than sending a check to the government, even if the family may have to wait a while for the remainder, and even if the transaction doesn’t make perfect sense considering the time value of money.

2.       As a practical matter, the answer depends on two factors: the Section 7520 rate at the time of the client’s death, and the internal rate of return for the trust.  Let’s assume that pre-Bush estate tax limits return in 2011 ($1,000,000 exemption amount / 55% maximum tax rate).  The client has a taxable estate of $5,000,000, and has his full $1 million exemption available at his death.  His estate tax at death is $2,045,000, leaving a $2,950,000 inheritance for his family, and nothing to charity.

Example No. 1:  At the time of his death, the Section 7520 is 1.8%.  The CLAT can achieve an internal investment rate of return equal to 7.5%.  Client left the term of years as the “zero-out” formula variable for the lead trust, and drafted the trust as a 7% annuity payout.  Under the WealthDocx7™ formula, the trustee will allocate $1 million immediately to the non-charitable share and $4 million to the lead trust.  The formula will result in a 16.8-year term.  At the end of this term, the trust will provide a remainder of $4,654,161 to the family, and payments over the trust term totaling $4,358,000 to charity.  A client with charitable motivations may find this an excellent result.

Example No. 2:  Same facts as No. 1, except the Section 7520 rate is 4.4% and the trust can only maintain a 6.5% rate of return.  The formula will result in a 23.1-year term, but a remainder of $2,998,031 for the family with payments over the trust term totaling $6,440,000 for charity.  This result might be less satisfactory for the family, considering the time value of money.

Because of this uncertainty, one might best describe the “zeroed-out” T-CLAT as a clean-up strategy to avoid federal taxes and use up any remaining exemption amount for family.  One probably should not view it as the primary strategy for getting wealth to family members, unless the client has very strong philanthropic inclinations or, perhaps, the client’s relatives are only collaterals and the client would prefer a large amount to charity but without completely disinheriting these relatives.  In most instances, a client uses the TCLAT when he or she has already transferred wealth to family members using some other tool – like a family limited partnership or irrevocable life insurance trust.

Using WealthDocx7 to draft the Zeroed-Out CLAT:  Like the user who asked the question, some users have found it difficult to locate the “zeroed-out” TCLAT input selection screens in the RLT dialogue.  Rest assured, we’d love to make it easier to find and use these screens, but the logic of the platform HotDocs™ program makes this impossible; we simply cannot program HotDocs in any other way.  By following these steps, however, we believe it’s easy for any user to draft a zeroed-out TCLAT for his or her clients:

1.      At the “Residuary Beneficiaries” dialogue box make the following selections:

2.      At the “Distribution of the Charitable Share,” dialogue, enter the name you want for your client’s TCLAT as the name of the First Charitable Beneficiary, enter 100% as the share amount, and select “Testamentary Charitable Lead Trust” as the type of charitable beneficiary:

3.      You now have the option of stating either the term of years of the trust, in which case the formula calculates the payout percentage.  Or stating the payout percentage, in which case the formula calculates the term of years.  The Trustee will determine the calculated amount or term of years (as the case may be) at the time the Trustee funds the TCLAT, depending on the 7520 rate in effect at that time.

4.      You have an option of creating layered TCLATs by stating shares at different year terms or different payout rates.  The formula will solve for the unstated term of years or payout rate.

a.      For Term of Years:

b.      For Percentage Payouts:

And that’s how you draft for a “zeroed-out” TCLAT!  We hope this helps.

Yours for better drafting,

Thomas Ray

Executive Editor

Acknowledgments:  I took portions of this blog from my book, Charitable Gift Planning: A Practical Guide for the Estate Planner (ABA 2^nd ed. 2007) – used with the permission of the publisher.  The book is available at the WealthCounsel MarketPlace.

I also acknowledge Lew Dymond’s efforts in creating the screen captures.

Creating a Dynasty Trust in WealthDocx RLT

The term "Dynasty Trust" means different things to different people.  WealthDocx uses the term Dynasty trust to describe a GST Exempt multi-generational common trust for descendants that lasts as long as the rule against perpetuities will allow.  This is one of the options for distribution of the Exempt Property when the mandatory division into GST Exempt and Non-exempt shares is selected.

Other individuals use the term dynasty trust to describe cascading individual trusts.  This is also available in WealthDocx by selecting the option to leave the property to a beneficiaries descendants in cascading trusts.

Submitted by Lew Dymond, JD
WealthCounsel, LLC 

Modest estate in decoupled state - Which marital deduction choice?

Query: Client has $1.4MM estate in a decoupled state. Will the selection of "all going to marital share" using a QTIP trust allow the Trustee/PR to make QTIP election for state estate tax purposes?

Response: You don't want "all to marital" if you want to fund a marital and a non-marital. With Maryland's $1MM exemption and a $3.5MM federal exemption, an "all to marital" fails to use any state or federal exemption at all.

If your state allows a separate state QTIP election (that is, the state QTIP election doesn't have to be the same amount as the federal QTIP election), you can use something like the Clayton election that provides the most flexibility after the client/grantor dies. The executor/trustee makes a $400k state QTIP election (sending the remaining $1MM to the bypass trust for state estate tax purposes) and elects ALL of the estate out of QTIP treatment for federal purposes (sending all $1.4MM through the bypass for federal estate tax purposes). If your state does not allow a separate state QTIP election, then use the Clayton option, with the further option of creating two separate QTIP trusts: one funded with the amount necessary to reduce state estate tax to the lowest amount, and the other funded with the amount necessary to reduce the federal estate tax to the lowest possible amount.

Matthew T. McClintock, JD WealthCounsel.com

Creating a Dynasty Trust in WealthDocx RLT

The term “Dynasty Trust” means different things to different people.  WealthDocx uses the term Dynasty trust to describe a GST Exempt multi-generational common trust for descendants that lasts as long as the rule against perpetuities will allow.  This is one of the options for distribution of the Exempt Property when the mandatory division into GST Exempt and Non-exempt shares is selected.

 

Other individuals use the term dynasty trust to describe cascading individual trusts.  This is also available in WealthDocx by selecting the option to leave the property to a beneficiaries descendants in cascading trusts.

Submitted by Lew Dymond, JD
WealthCounsel, LLC

Modest estate in decoupled state - Which marital deduction choice?

Query: Client has $1.4MM estate in a decoupled state. Will the selection of "all going to marital share" using a QTIP trust allow the Trustee/PR to make QTIP election for state estate tax purposes?

If your state allows a separate state QTIP election (that is, the state QTIP election doesn't have to be the same amount as the federal QTIP election), you can use something like the Clayton election that provides the most flexibility after the client/grantor dies. The executor/trustee makes a $400k state QTIP election (sending the remaining $1MM to the bypass trust for state estate tax purposes) and elects ALL of the estate out of QTIP treatment for federal purposes (sending all $1.4MM through the bypass for federal estate tax purposes). If your state does not allow a separate state QTIP election, then use the Clayton option, with the further option of creating two separate QTIP trusts: one funded with the amount necessary to reduce state estate tax to the lowest amount, and the other funded with the amount necessary to reduce the federal estate tax to the lowest possible amount.

$2 Million QDOT?

Query: I noticed in the WealthDocs QDOT that some of the language references a $2 Million amount. Is that tied to anything? Is it inflation adjusted or supposed to be tied to the estate tax applicable exclusion amount?

Response: The $2 Million number is specified right in the body of the Treasury Regulations. Regs. Sec. 20.2056A-2(d)(1)(i) specifically refers to additional requirements when the value of the QDOT exceeds $2 Million. Nothing in the Reg. indicates an inflation adjustment or otherwise sets the value to be equal to some other value.
Matthew T. McClintock, JD
WealthCounsel.com

Gift of REAL Property in Trust?

Query:  I'm drafting a trust where an individual wants to leave real estate to another individual in trust.  In the past, I have modified the "Monetary Gift - Trust" option to fit...but don't see why a "Specific Property in Trust" section couldn't easily be added.

Response: The practical concern I've always had about this type of provision is that it seems to me that more than the real property must be contributed to the trust. How will the financial obligations that attend managing that property be satisfied? There will be property taxes, improvements, insurance, maintenance, etc. that require money to fund. If an item of specific property (real or personal) is put in trust, how is that property maintained?

A "dry" trust owning real property (a residence) and no liquid assets or income is a real problem , one made even worse if the property is mortgaged. Principal payments on the mortgage inure to the remainder beneficiaries. If the beneficiary has to make the mortgage payments, each payment constitutes a completed gift to the remainder beneficiaries.

Trust Beneficiary occupants are theoretically the same as life tenants, except there are generally no common law rules governing trust beneficiaries equivalent to the well developed laws governing life tenants and remainder beneficiaries.

It's best to draft to meet the specific needs and provide for payment of taxes, capital improvements, etc and be sure there is cash to support the real property.

Shared contribution by the WealthDocs Editorial Oversight Board
WealthCounsel.com

WealthDocs ILIT - What's so special about February 1st?

Query: So I'm reading my WealthDocs ILIT and I see a reference to February 1 in the trust. I think this has something to do with "hanging" Crummey powers, but I don't get it.

Response: Believe it or not, that's a fairly technical and involved question. Recall that with "hanging powers," we want those hanging amounts to lapse to the greatest amount possible as soon as possible. For a more complete discussion on hanging Crummey powers, see the previous blog post on that topic. Here's how the hanging powers work in the context of the February 1 lapse date: 

Assume a $12,000 contribution is made to the trust in year 1. With a hanging power, the first $5,000 lapses after the initial Crummey withdrawal right term (assume the trust gives a 30 day withdrawal right). 

 

The remaining $7,000 (the amount of the contribution that exceeds the greater of $5,000 or 5% of the trust) "hangs around" and remains subject to a right to withdraw. On February 1 of the following year, (we have a "new year," and hence a new 5/5 that can lapse), the amount of the hanging power lapses, again to the greater of $5,000 or 5% of the trust. So on February 1, $5,000 of the hanging power lapses, leaving only $2,000 "hanging." Another contribution is made to the trust in year two, and we start the process again, gradually increasing the amount that "hangs." 

The reason WealthDocs makes the hanging power lapse as soon as possible in year two is to limit the value exposed to the beneficiary's continuing right to withdraw. We let the greatest amount of the hanging power lapse as quickly as possible in the following year. We set that date at February 1 to make sure that we have at least 30 days from year end to contemplate any gifts made to the trust on December 31 of the previous year.
Matthew T. McClintock, JD http://www.wealthcounsel.com/