Trust Creation Tutorial

Mike

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• Publié par: Mafor
• Nombre de lectures: 27
• Langue: English

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    TRUST CREATION TUTORIAL ©   Guidance In Filling Out A Trust Application   From American Estate & Trust, LC

                          TM                                                                                       © Copyright American Estate & Trust, LC, 2007. All rights reserved.          

 

 

 

   

TRUST CREATION TUTORIAL

Guidance in Filling Out An AE-Trust Application For a Trust  

TABLE OF CONTENTS

AE-Trust Pricing And Delivery Policy........................................................................................................- 1 -   Use The Tutorial To Solve Difficult Issues ................................................................................................- 1 -   Important Definitions.................................................................................................................................- 1 -   Grantor................................................................................................................................................- 1 -   Current And Secondary Beneficiary ...................................................................................................- 1 -   Issue ...................................................................................................................................................- 1 -   Deceased, Decedent ..........................................................................................................................- 1 -   Per Stirpes, Per Capita.......................................................................................................................- 1 -   Planning Situations & The Trust Application.............................................................................................- 2 -   1 - One Or Two Grantors, One Plan & One Set Of Beneficiaries.......................................................- 2 -   2 - Married Grantors, Separate Heirs, And Assets. ............................................................................- 3 -   3 - Married Or Nearly Married Grantor W/Own Assets & Heirs, Individual Planning Needs ..............- 4 -   4 - Estates Which May Exceed Gift & Estate Tax Exemptions. .........................................................- 4 -   5 - Trustee Selections And Limitations ...............................................................................................- 5 -   6 - Selecting And Identifying Beneficiaries ......................................................................................... 5 -   - 7 - Sole (Secondary) Beneficiary ........................................................................................................- 6 -   8 - Possible Future Children Of Grantors ...........................................................................................- 6 -   9 - Leaving A General Trust Share To Grandchildren ........................................................................- 6 -   10 - Predeceased Beneficiaries.......................................................................................................... 6    - - 11 - Including Or Excluding Spouses Of Beneficiaries .......................................................................- 7 -   12 - Adopted Heirs..............................................................................................................................- 7 -       13 - Beneficiaries' Share Size.............................................................................................................- 7 - 14 - Specific Property To Specific Beneficiaries .................................................................................- 7 -   15 - Cash Gifts To Special Beneficiaries ............................................................................................ 8   - - 16 - Disinheriting Certain Heirs...........................................................................................................- 9 -   17 - Age(S) At Which Shares Are Distributed.....................................................................................- 9 -   18 - Underage Beneficiaries Or Issue Upon Trust Distribution ..........................................................- 9 -   19 - Beneficiaries Who Owe Money To The Grantors Or Trust .......................................................- 10 -   20 - Heirs With Poor Spending Habits Or Substance Abuse Problems ...........................................- 10 -   21 - Caring For Handicapped Beneficiaries......................................................................................- 11 -   22 - Providing For College Education ...............................................................................................- 11 -   23 - Selecting Personal Reps And Power Holders ...........................................................................- 11 -   Do's And Don'ts Of Trust Planning .........................................................................................................- 12 -   Footnote..................................................................................................................................................- 13 -

Trust Creation Tutorial

Note: Throughout this publication American Estate & Trust, LC is referred to as “AE-Trust”.   AE-Trust Pricing and Delivery Policy. Available at no extra charge in each trust and estate planning structure from AE-Trust are provisions for a broad range of trust grantor (trust client) planning needs. Generally this includes anything provided for within the application and/or described in this Trust Creation Tutorial. If the grantors significantly modify or deviate from AE-Trust’s standard planning provisions, AE-Trust reserves the right to quote a surcharge and/or extended delivery times before proceeding with work. Extra charges and extended delivery times may apply to orders which violate the “Do’s and Don’ts” list in this Tutorial. In some of these non-standard cases the order will be returned for re-work before AE-Trust will accept it.     Use the Tutorial to Solve Difficult Issues. The topics in this tutorial cover the issues which present the most difficulty for grantors in creating their trust. These difficulties are often due to planning of the grantors which is poorly thought out. For many of the topics discussed below the trust grantors should not try to devise their own plan. Much of this is highly complex subject matter, and the trust provisions must be written in precise legal terms. The negative ramifications of poor or illogical planning are too costly to attempt without close guidance. If the trust grantors make unreasonable and illogical choices AE-Trust must send the order back for re-work.   Important Definitions         Grantor.  Grantors are the parties who transfer or place the assets into the trust, and usually are the ones who arrange the trust’s creation as well. With general family trusts, such as the AE-Trust Premier I Living Trust or the Premier II-NV and Premier LitE Trusts, the grantors are also the current beneficiaries (see next definition). Throughout this tutorial we use the term “grantor” or “grantors” to refer to the individuals who are planning a trust, as opposed to the term “clients” or some other less direct reference.     Current And Secondary Beneficiary.  A trust can have more than one class of beneficiaries. Often the classes are: current beneficiaries (also known as primary beneficiaries) and future beneficiaries (also known as secondary beneficiaries). For example, a husband and wife will put property in a family trust and they may receive all the income and use of the property for the rest of their lives. But the trust may also name the children (who may be adults) as future beneficiaries. When the parents die all trust assets go to the children. In this example the husband and wife are the current (or primary) beneficiaries and the children are the secondary beneficiaries. Therefore there can be both current interests and remainder (future) interests in a

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trust. This will be true of all general family trusts, such as the AE-Trust Premier l Living trust, Premier II Life Estate and Premier LitE Trusts.     Issue . Issue is a term which refers to lineal descendants of a person, whether they be biologically descended or descended by adoption. In other words, issue are children, grandchildren, etc. Issue includes adopted descendants as well as those whom are descendants by actual birth.    Deceased, Decedent. Deceased means “died”, decedent is the person who died. Sometimes a decedent is referred to as “the deceased”, but we do not use that term in this tutorial.     Per Stirpes, Per Capita . These legal terms refer to a formula or system for dividing an estate among the heirs of a decedent. In a per stirpes distributions of the estate, each child of the decedent will get an equal share of the estate, equal to the share of the other children of that decedent. If a child has predeceased the decedent whose estate is being distributed, that child's equal share will go to that child's children (grandchildren of the decedent whose estate is being distributed), in equal shares to those grandchildren. This division continues in lineal descendancy as far as necessary to distribute each original child's share. In other words, it continues to grandchildren if the child has predeceased the original trust grantors, or to the great-grandchildren if both a child and the grandchildren have predeceased the original trust grantors. In the first generation where there are living heirs, each person gets an equal share to that of their siblings.    The per capita plan takes over when an heir or beneficiary has predeceased the decedent who left the estate, and predeceased without having issue of his/her own. In that case, the share of such a predeceased heir or beneficiary is given to and divided equally among the lateral heirs, or heirs who are at the same generational level as the predeceased heir. These, per capita, divided shares among the lateral heirs are given to them, per stirpes. That is, if one of the lateral heirs has also predeceased the time of the trust or estate share distribution, but predeceased with issue of their own, that share passes per stirpes to the issue of that predeceased, lateral heir.   The following illustrations help explain per stirpes, per capita:   Assume that a trust has four secondary beneficiaries named Bob, Mary, Joe, and Beth as equal beneficiaries. The grantors of that trust die while all four secondary beneficiaries are still alive. As example 1 shows, each secondary beneficiary receives an equal or a 25% allocation or distribution of the trust.

Trust Creation Tutorial

    Next in example 2, assume that Bob predeceased the grantors but left two children. When the trust is allocated or distributed, Bob's share will be divided equally between his two children. This is a per stirpes division to Bob's lineal descendants.    

      In example 3, assume that Bob predeceased the grantors and left no direct heirs. No per stirpes division of Bob's share is possible in this case, he has no lineal descendants. In this example Bob's share will be divided equally between Mary, Joe, and Beth, each one of them receiving 1/3 of Bob's trust share. This is a per capita allocation or distribution of Bob's share. Of course, Mary, Joe, and Beth will also receive their originally designated 25% share of the trust. See example 3.   In example 4, assume again that Bob predeceased the grantors and left no direct heirs, but also assume that Beth predeceased the grantors, but she did

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    did leave direct heirs. Beth's family will still get an equal share from Bob's inheritance (1/3 of Bob's trust share), but that 1/3 will be sub-divided equally among Beth's children. This is a per capita allocation or distribution of Bob's share to Beth's family, and then divided per stirpes among Beth's children. And of course, Beth's family, plus Mary and Joe, will receive their originally designated 25% share of the trust.    

     Per stirpes - per capita is an elegant, logical choice for leaving an estate to one's heirs. It is a time-tested solution recommended by the vast majority of estate planning professionals.   Planning Situations & The Trust Application        1 - One or Two Grantors, One Plan & One Set of Beneficiaries. This is a typical and common family trust

Trust Creation Tutorial situation. There are either one or two grantors, the trust has one common plan for all parties to the trust and there is one set of children who are named as secondary beneficiaries. If the trust is for a married couple, the planning is the same regardless of which one dies first, and that includes leaving all property for the lifetime benefit of the surviving spouse. These typical family trust plans take care of approximately 75 to 90 percent of all trust grantors. Use the same AE- Trust application whether there are one or two grantors. Simply write "N/A" in the application space for the second grantor name when there is only one grantor. The following two topics cover situations where the planning is not so straightforward.        2 - Married Grantors, Separate Heirs, and Assets.   In some marriages each spouse has children from a former marriage or other heirs which are different for each spouse. In other words, the married couple has two sets of heirs or beneficiaries, his and hers. Nevertheless they may want to setup one comprehensive estate plan or one trust program. They may wish to leave their combined and remainder assets equally to their combined heirs. Alternatively, they may want to ensure that the remainder of their specific assets which each owns goes to their individual heirs. In either case they may want to reduce estate taxes the maximum amount possible. There are three common choices given below, and grantors should use one of these unless there is some unusual aspect to their family structure.   A. (This paragraph describes the first of two plans to select if the grantors wish to ensure that the remainder of their specific assets goes to their individual heirs, see B below for the second plan.) A special version of an irrevocable bypass trust will be set up and funded with the assets of the first spouse to die. This trust is called a "decedent's trust." The surviving spouse's assets will be held in the original trust or "survivor's trust". The surviving spouse has full access to the survivor's trust assets. The surviving spouse also will receive for life, income and principal as needed for reasonable support from the irrevocable decedent's trust. The heirs of the first   spouse to die will receive the remainder of the decedent's trust assets when the second spouse dies. The heirs of the second spouse to die will receive the remainder of the survivor's trust, but nothing from the decedent’s trust. Note that this trust works in this manner regardless of which spouse dies first. This plan allows the surviving spouse to be cared for as actually needed from the assets of the first spouse to die, while preserving the assets of both spouses as far as possible and reasonable for their respective heirs.   (i) Under the planning choice of sub- paragraph A above, AE-Trust will not write a

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trust which allows the surviving spouse to be trustee of the decedent's trust, for both legal and estate tax reasons. Grantors must either name a trustee for the decedent's trust who is an heir of the first spouse to die, or the grantors must name an independent trustee for the decedent's trust, such as AE-Trust. Each grantor must individually specify who the trustee of the decedent's trust will be if they are the first to die.   (ii) If the trust is a Premier I Living Trust, and either spouse has assets which are sufficient to end up with an estate tax owed, a QTIP trust (marital or "C" trust) should be specified on the trust order. This places "excess" assets of the first spouse to die in a QTIP trust (excess over the amount which can be exempt from estate taxes in a bypass or decedent's trust). This puts the QTIP assets in the taxable estate of the surviving spouse, but holds the remainder of those assets irrevocably for the beneficiaries of the first spouse to die. The surviving spouse receives the income from the QTIP trust and reasonable amounts of principal as actually needed.   Caution. Using either a Premier I or a Premier II- NV/LitE Trust, with the planning choice of sub- paragraph A above it is imperative that the grantors fill out the "Schedule of Separately Held Assets" which is furnished with the trust, and that the grantors keep their assets separately identified after they go into the trust, until the first one dies.   B. In a small number of cases the grantors want the specific assets of each spouse to go directly and immediately to the beneficiaries of that spouse. With this plan the surviving spouse will receive nothing from the estate of the first to die. Normally the couples that select this plan are wealthier, and both spouses have sufficient assets to live on alone. In this case there are two choices:   (i) As the first choice, order a single grantor trust for each grantor and leave no benefits to either grantor's spouse. This choice leaves the assets and estate planning of each individual spouse cleanly separated, and therefore is often best for this situation.   (ii) As a second choice, order a two grantor trust and specify that there are two sets of heirs. Identify those heirs separately and specify that the assets of each spouse are to go immediately and directly to their respective heirs upon the death of each. The reason this plan would be chosen is to save on the cost of a second trust (which would be incurred with the

Trust Creation Tutorial

choice of sub-paragraph (i) above) and to simplify titling all assets into one trust name.   Caution. With the planning choice of sub-paragraph (ii) above, it is imperative that the grantors fill out the "Schedule of Separately Held Assets" which is furnished with the trust, and that the grantors keep their assets separately identified after they go into the trust, until the first one dies.   C. Some grantors want the combined assets of both spouses to simply be divided among all issue of both spouses. Each beneficiary can have the same share size, or different size shares can be allocated to each. But no distinction will be made among the beneficiaries regarding which spouse contributed assets to the trust or how much each contributed. A bypass trust should still be created for estate tax reasons and to protect all the heirs from being disinherited from the assets of the first spouse to die. However, from a trust creation perspective this beneficiary arrangement isn't different from that of any other married couple's. Simply list all the beneficiaries on the trust application, the share size each is to receive and with no reference to two different sets of beneficiaries.   Caution. If the trust is a Premier I Living Trust, the surviving spouse, having full and direct access to the assets of the survivor's trust, could disburse the survivor trust assets to his or her heirs, then attempt to live off the bypass or decedent's trust. This could cut in half the amount that would be left to the heirs of the first spouse to die, while increasing by 50% the amount left to the heirs of the surviving spouse. Either the survivor's trust should become irrevocable on the death of the first to die, or the grantors should order a Premier II-NV Trust which is irrevocable to begin with. If the grantors order a Premier I, irrevocability of the survivor's trust must be specially ordered or listed on the trust application if this is needed by the grantors.   3 - Married or Nearly Married Grantor w/Own Assets & Heirs, Individual Planning Needs. Some individual grantors are married or intend to marry at some point after they have acquired their own, separately held estate. The grantor may want his/her spouse to benefit from that estate for life (income and reasonable amounts of principal), because the spouse has little or no assets of his/her own. Then after the trust grantor dies, he/she wants the remainder to go to his/her heirs and not to the spouse's heirs.   A. Order this from AE-Trust as a single grantor trust, listing only one grantor, that being the person with the assets. Then include a special provision or notation with the application, or reference this topic item on the application, that the grantor's spouse is to receive benefits for life, with the remainder to the

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grantor's heirs. Be sure to include the non-grantor spouse's full name and social security number. Then in the application's beneficiary section, list the heirs of the grantor, not the spouse, as the trust beneficiaries in the usual manner.   B. If the Grantor does not wish to leave benefits to his/her spouse, then order a single grantor trust, name the heirs of the grantor as beneficiaries, and specifically omit the spouse as a beneficiary as discussed in the later topic "Disinheriting Certain Heirs".   (i) If the grantor plans to omit his/her spouse, the Premier II-NV/LitE is a better choice than a Premier I Living Trust. The irrevocability of the Premier II-NV/LitE provides much greater protection from attempts of the disinherited spouse to penetrate the trust in either a divorce or an inheritance claim. There are no guarantees that the spouse will not be able to penetrate even a Premier II-NV/LitE, but the odds are much more favorable.   4 - Estates Which May Exceed Gift & Estate Tax Exemptions.  For unmarried grantors a general family trust such as the Premier I and Premier II-NV/LitE provides no specific gift or estate tax planning. Estates for these grantors which may exceed estate tax exemptions will require something more than the basic family trust to reduce or eliminate estate taxes. Married couples routinely lose the exemption of the first one that dies to the extent that the couple relies on joint tenancy for their estate planning and probate avoidance strategy. But married couples will preserve both estate tax exemptions in AE-Trust, two-grantor family trusts. If preservation of both estate tax exemptions is insufficient to reduce or eliminate estate taxes, something more than the basic family trust will be required. Suggestions for more extensive estate tax planning for both married and unmarried grantors are listed below:   A. One simple technique which married couples may employ is to order a QTIP trust provision for their Premier I or Premier II-NV/LitE Trust. The QTIP trust provision is sometimes referred to as the "C" trust of an A-B-C trust structure, and also as a "marital" trust. A QTIP trust allows the excess amount (amount of the estate which exceeds the estate tax exemption) of the first spouse to die to be included in the surviving spouse's estate for tax purposes. At the same time the QTIP holds the remainder of the excess irrevocably for the heirs of the first to die. The surviving spouse will receive the income plus any needed principal of the QTIP trust. This trust doesn't necessarily avoid estate taxes on the excess, QTIP trust amount. But it at least defers the tax until the second spouse dies and it gives the surviving spouse the chance to use up the excess and thereby avoid any taxation on the estate of the

Trust Creation Tutorial

first spouse to die. The Premier I and Premier II- NV/LitE Trust applications require or call for the QTIP provision for estates which have valuations which are likely to need this extra provision.   B. Both married and unmarried grantors can use pre-death gifting strategies to reduce their taxable estates. Either or both their annual gift tax exclusions or their lifetime gift tax credits may be used to avoid both gift and estate taxes. A gifting program might include the use of either a Premier III Children's/Gifting Trust, an FLP Trust or a limited liability company.   C. Both married and unmarried grantors could use a Premier V Irrevocable Life Insurance Trust to provide a leveraged means of paying the estate taxes and/or increasing the size of the non-taxable estate.   For any of AE-Trust's programs, see specific info at www.TrusteeAmerica.com, or ask your AE-Trust estate planning professional for more information.   5 - Trustee Selections and Limitations.  It is beyond the scope of this publication to explain who the trustees should be for each trust type and what considerations there are in picking trustees. An estate planning professional can explain this further. Also, the trust application will be very helpful in guiding you thru the identification process for trustees and their successors. For this topic we are primarily addressing trustee arrangements and the AE-Trust limit on the number of trustees or successor trustees who are active at the same time.   A. The limit on the number of active trustees or successor trustees must be one or two. Three or more trustees active at the same time make a trust very difficult to administer and manage, especially when the trustees live in different cities or states. Be aware that all trustees must sign for all major trust activities. Chasing down more than 2 signatures on a routine basis can be very difficult, and securing agreement among 3 different trustees is even more of a problem. Further, the AE-Trust system was intentionally designed to accommodate no more than two active trustees and no more than two successor trustees. If grantors have 3 or more heirs which they wish to treat equally in a trustee role, they should appoint one or two as trustee (or successor), and one or two more as successor to the trustee (or alternate to the successor). If grantors have still more heirs, they simply cannot be accommodated in a trustee role in an AE-Trust trust.   B. With a Premier I Living Trust the usual arrangement is for the grantors to start out as trustee. There must be at least one successor trustee named when the grantors are the trustees.

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There may also be either one co-successor or one alternate successor trustee. If the grantors are unable or unwilling to serve as trustee, then other trustee appointments may be made, either from among the grantors' heirs or from independent trustees such as AE-Trust.   C. Grantors may also serve as trustee of the Premier III Childrens/Gifting Trust. The grantors may not in any case serve as trustee for the Premier II- NV/LitE or Premier V Life Insurance Trust.   D. Any time that a single individual is acting as trustee, and on all Premier I Living Trusts, there must be at least one successor trustee. If the initial trustee(s) dies or is otherwise unable or unwilling to serve, and if there isn't a pre-appointed successor trustee, it can require a costly and time consuming court procedure to get a replacement.   E. Trustees in more than one state can cause litigation to occur over which state's laws control the trust. Also, it is possible when trustees live in different states that each state will attempt to impose an income tax on the trust. However, using AE-Trust as the trustee is unlikely to cause either of these 2 problems.   6 - Selecting and Identifying Beneficiaries.   Simply decide who are the most immediate and preferred beneficiaries, and then plan to leave them the trust estate. If the trust is a Premier I Living Trust or a Premier II-NV/LitE Trust, the grantors themselves are the primary beneficiaries for life. Beneficiary planning for these two trusts centers on the secondary beneficiaries, and they normally are the most immediate heirs of the grantors.   If the trust is another AE-Trust type, such as the Premier III or V, the grantors will not be beneficiaries at all. The named beneficiaries in these trusts are current (primary) beneficiaries and secondary beneficiaries are not usually named. Normally the named, current beneficiaries in these other trust types will also be the most immediate heirs of the grantors.   If the Grantors have no children they usually name other relatives as beneficiaries, such as siblings, nieces and nephews. Sometimes they wish to name parents as beneficiaries. While naming parents is legal, see sub- paragraph B below.   A. When the grantors have no children, and other relatives are named as beneficiaries, AE-Trust has a standard provision which can be added to provide for the possibility that the grantors may have children in the future. This provision specifies that if the grantors should have one or more children in the future, the future child or children will become the beneficiaries, replacing the originally named

Trust Creation Tutorial

beneficiaries of the trust. If there is more than one future child, they will each receive an equal share of the trust. Older grantors who are past child bearing years will not need this provision whereas younger couples should consider it. You must specifically request this provision on the trust application if the provision is applicable to your situation.   B. If the grantors consider naming parents as beneficiaries, they should think this thru, especially where the parents are elderly. There is little chance that parents, especially elderly ones, will outlive the grantors. Naming parents as beneficiaries usually makes little sense and will simply force the trust to be amended later, or it could result in the trust assets ending up in an intestacy type distribution. If parents are named, AE-Trust requires that one level of contingent beneficiaries also be named to avoid almost certain problems later.   C. Where married grantors have different heirs, separate assets or separate planning needs, see topics 2 and 3 of this tutorial for further help.   D. AE-Trust's "Trust Information and Order   Agreement" trust application will guide you in providing all the needed information for identification of beneficiaries.   7 - Sole (Secondary) Beneficiary.  The grantors   may name an only-child or other individual as the sole trust beneficiary or secondary beneficiary. Some special consideration may be needed in the event that the sole beneficiary predeceases the grantors.   A. If the sole beneficiary has or is likely to have issue, nothing special should be requested on the trust application. The AE-Trust standard per stirpes, per capita plan by design includes the issue of the sole beneficiary as successor beneficiary(ies) in the event the sole beneficiary predeceases the grantors.   B. If there is some chance the sole beneficiary will not have issue; the grantors should name contingent beneficiaries in the event the sole beneficiary predeceases the grantors. However, contingent beneficiary planning should be limited to one level. The AE-Trust per stirpes, per capita plan more than adequately provides for the possibility of predeceased contingent beneficiaries.     8 - Possible Future Children of Grantors.  What if the grantors are young enough that they might have additional children that they also want to include in trust provisions?   A. State this in the application. AE-Trust will insert a provision which automatically re-divides the bene- ficial interests of the trust, among all children equally any time an additional child is added to the family.

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9 - Leaving a General Trust Share to Grandchildren. For most families it is generally best to not leave a general division or trust share to grandchildren. Leaving an educational or other fixed fund amount is OK. Many grantors do this. But the best planning for fractional shares of the trust is to leave that to the grantor's children. Then trust those children to take care of their own children properly (the grantor's grandchildren). Leaving general trust shares to grandchildren often creates special estate planning problems. One serious problem that may result is the imposition of the generation skipping tax (GST) on each grandchild's share, subject to the GST's extremely high flat rate. Other problems are that some grandchildren may receive more money than other grandchildren (especially if one grandchild's parent predeceases the grantors), some grandchildren may receive money while others get nothing, or some grandchildren may receive earlier distributions than other grandchildren.   10 - Predeceased Beneficiaries. What happens if a beneficiary predeceases the grantors, or predeceases final trust distribution, with or without the beneficiary having issue (see "Definitions" topic for meaning of issue)? AE-Trust's default provision in this case provides for the predeceased secondary beneficiary's share to be divided per stirpes - per capita. See the "Per Stirpes, Per Capita" definition and examples at the beginning of this tutorial for a full explanation. On the AE-Trust trust application you do not need to specify anything regarding predeceased beneficiaries if per stirpes - per capita, the AE-Trust default, has not been specifically avoided. That planning provision is automatically built into AE-Trust trusts.   Caution. This planning area has one of the biggest traps that people fall into. Being unaware of the specifics, the power and logical nature of a per stirpes - per capita plan, some families want to create their own contingency planning for predeceased beneficiaries. The plan they come up with invariably is more complicated and less certain of being carried out. Their plan usually overlooks several major contingencies, and therefore suffers a real risk of failure. Be sure that you understand the AE-Trust default, per stirpes - per capita final distribution plan. This planning was developed by the best legal minds in the world over many centuries, and is supported by the vast majority of estate planning professionals. You should strongly resist the urge to try to "improve on" this centuries old, time tested formula.   Even if you feel you must name a contingent beneficiary, AE-Trust's attorneys normally will not write contingent planning beyond one level. That is they may not agree to write contingency planning for the contingent beneficiaries, etc. This is due to the extremely complex language that usually is necessary and the fact that there is a real risk the extra

Trust Creation Tutorial

contingency language may be interpreted incorrectly or not understood at all many years down the road. Therefore, if you do name contingent beneficiaries, be prepared to end with one level, with a "per stirpes" provision for a predeceased contingent beneficiary (and "per capita" if there are lateral contingent beneficiaries).   11 - Including or Excluding Spouses of Beneficiaries.  The AE-Trust per stirpes - per capita distribution plan intentionally excludes spouses of beneficiaries or spouses of issue from receiving a trust share or benefit. This is accomplished by simply not naming them as a beneficiary or by not giving them any benefit. Grantors must specifically request that spouses be included in order to have their trust written that way. However, 90% or more of all grantors want to exclude the spouses of their heirs from receiving a trust share when other direct descendants are around to inherit the trust assets. This overwhelming choice is the reason the default planning excludes spouses.   A. To include a beneficiary's spouse for some benefit, AE-Trust's default provision for spouses states that if a beneficiary predeceases the grantor, then the spouse of that beneficiary can receive the income from the deceased beneficiary's share for the life of the spouse (but none of the principal), and only if the predeceased beneficiary provided for that benefit in his or her will. Then upon the death of the spouse receiving the income benefit, that share of the trust will go to the issue of the predeceased beneficiary, per stirpes.   Caution. Sometimes grantors mistakenly think they should leave a predeceased beneficiary's share to the spouse of the decedent under the assumption that would be necessary to care for the issue of the beneficiary (usually the grandchildren of the grantors). But the grandchildren or other issue of predeceased beneficiaries will be taken care of in the best possible manner by AE-Trust's default plan. This plan leaves the shares of minor age issue in the trust, under the trustee's discretionary support provisions. See the later topic "Underage Beneficiaries or Issue Upon Trust Distribution" for more information. Further, if the spouse of a secondary beneficiary is allowed to receive principal from the predeceased beneficiary's share there is no way for the trust to require the remainder of that principal to go to the issue of the predeceased beneficiary. The spouse would have uncontrolled use of the principal. Therefore, it is when no planning at all is done for spouses of beneficiaries that the children of those beneficiaries receive the best protection from the trust.   12 - Adopted Heirs. The AE-Trust per stirpes - per capita distribution plan treats adopted children and issue the same as descendants by actual birth. You must ask to eliminate all adopted issue in order to have the trust

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written in that manner. However, AE-Trust strongly believes that the default plan, which includes equal treatment for adoptees, is by far the best planning, especially when the adoptees are adoptive grandchildren of the grantors. A blanket disinheritance of all adoptees is usually poor planning. Parents generally should give their estates to their own children and then trust those children to take care of the succeeding generations. Parents of the adoptees may become resentful when their right to plan for their adopted children has been cut off by the grantors. Most of the time the decision on disinheriting an adoptee is best left to the adoptive parents of that adoptee, not to the grandparent trust grantors.   A. However, if there is a specific adoptee who should be disinherited due to specific facts, that is a different consideration. Use the later topic "Disinheriting Certain Heirs" for instructions on disinheriting any specific person.   13 - Beneficiaries' Share Size.  After choosing beneficiaries the next decision is whether they are to receive equal or unequal shares. There are several factors which can cause the estate owners to vary the share sizes they leave to each beneficiary. Whether the shares are equal or unequal, simply do the following:   A. On the trust application state beneficiary shares as a percentage of the trust assets for unequal shares.   B. Either use the term "equal" or state the shares in percentages for equal shares.   14 - Specific Property to Specific Beneficiaries.   Some grantors want to leave specific property to certain beneficiaries, such as the family home to one child and then certain other property to another child. To order this arrangement list each beneficiary who is to receive a specific asset along with the asset each is to receive on the trust application or on an attached note. Do not attempt to leave personal effects to anyone from within the trust. Use the trust only to plan for major assets. For personal effects use the "Bequeath of Specific Gifts" document which is included by AE-Trust with all Premier I and Premier II-NV/LitE Trusts.   A. Be sure to consider whether the beneficiary who receives special property is getting that property as part of his/her general share of the trust, or if the beneficiary is to receive a general split of the trust on top of the special property. State your decision on the trust application.   B. Be aware that if the asset has been sold or is no longer available at the time it is to be distributed to the beneficiary, the property simply will not be there to distribute. The special beneficiary will have nothing to make up the difference.

Trust Creation Tutorial

Caution. There is a planning trap here because specific property allocations among beneficiaries usually cause uneven values in the beneficiaries' shares. Often then the grantors design a complex system to balance the beneficiaries' share sizes. That in turn may take the trust order out of AE-Trust's standard planning and processing system. This could result in AE-Trust returning the order for a better plan, rejecting the order or sending the grantors a special price quotation with a longer delivery time. Grantors can use the AE-Trust plans outlined in Paragraphs C and D below. But a better choice may be to consider simply splitting the trust assets into percentages or equal shares unless there is some compelling reason for a beneficiary to get a specific asset. Frequently the beneficiaries don't really care about getting that specific asset, lose interest in it later, or are so strapped for cash when they do get the asset that they sell it anyway. Also, sometimes the property gets sold before the grantors die, and is no longer available for the special distribution.    C. One common method of balancing share sizes is to purchase life insurance on one or both grantors, then have the trust use the death benefit to fairly compensate all beneficiaries. If this is done the insurance policy should definitely name the trust as both the owner and the beneficiary of the policy. If the grantors choose to use this compensation method, advise AE-Trust of the existence of the plan on the trust application and a standard balancing formula will be included in the trust at no extra charge. (i) Be aware that there is a danger that the policy may inadvertently be allowed to lapse when the grantors become elderly, or that the death benefit may be inadequate (possibly because of appreciation on the specifically gifted asset). The standard balancing formula that AE-Trust inserts in the trust requires an over-compensated beneficiary to pay off under-compensated beneficiaries with cash or a secured note payable if the insurance policy has lapsed or is inadequate. This may force a beneficiary who has received a specific asset to mortgage or to sell part or all of that asset to pay off the other beneficiaries. Where there is no compensating death benefit, or an insufficient amount, the trustee will hold the specifically gifted asset in trust until the recipient of that asset comes up with a plan to pay the under-compensated beneficiaries. D. If life insurance is not chosen or the grantors are uninsurable, AE-Trust can employ a trust provision which requires an over-compensated beneficiary to pay off the under compensated beneficiaries with cash or a secured note payable. This may force a beneficiary who has received a specific asset to mortgage or to sell part or all of that asset to pay off

 

 

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the other beneficiaries. The trustee will hold the specifically gifted asset in trust until the recipient of that asset comes up with a plan to pay the under- compensated beneficiaries.   15 - Cash Gifts to Special Beneficiaries.  Some    grantors want to leave special gifts to grandchildren, nieces and nephews, charities, etc. from the family trust. Normally these are gifts of specific amounts of money. For example, the grantors may specify that each grandchild is to receive $10,000, niece A and nephew B are to get $5,000 each, and the local family church is to receive $10,000. Sometimes the list of these special gifts is quite long, with up to 10 or 15 being specified. These listed gifts are normal and AE-Trust will include them in the trust provisions at no extra charge.   A. AE-Trust's default language for these gifts will specify that the gifts are to be paid after the deaths of the grantors, free of estate taxes (so that the full amount of the gift is paid), and before the general division of the trust is made among the regular beneficiaries. This means that the secondary beneficiaries' shares will be reduced by the amount of these gifts. If any gift recipient is deceased or no longer in existence, that gift simply won't be made. That, in turn, will increase the size of the shares to the secondary beneficiaries.   B. Be certain to fully identify the gift recipients. With individuals, include all of the following information which is available: (1) Name, (2) either or both the social security number and the date of birth, (3) relationship to grantor(s), and (4) last known city and state of residence. With charities and institutions be certain to give the exact church, location, department, arm, or sub-organization of the charity or institution in addition to the exact name of the entity which is to receive the funds. Where applicable and determinable, include the federal tax ID number of the organization. Include addresses or at least the city and state where the charitable or institutional recipient is located.   Caution. The default provisions above are the simplest and best manner to handle the gifts. Grantors should avoid attempting to develop some formula or complex provisions beyond this default plan. Grantors should generally refrain from naming contingent recipients for these gifts, recipients who would receive the gift if the first recipient were deceased or not in existence. This is especially true for smaller amounts of money and/or where the grantors' plan would sub-divide the gift among multiple contingent recipients. AE-Trust normally declines to plan for contingent beneficiaries or gift recipients after one level. In most cases this extended contingency planning results in such complex language and questionable enforceability that it must be rejected by AE-Trust.

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16 - Disinheriting Certain Heirs.  Some grantors have a real or perceived need to disinherit or omit certain heirs. It is not necessary to specifically disinherit heirs who are not direct issue when the grantor has direct issue who are being named as beneficiaries. A grantor who is leaving his estate to his children, then, does not need to specifically omit relatives such as siblings, cousins, nephews and nieces, in-laws etc. These more distant heirs will have no chance of getting part of the trust when direct issue are named as beneficiaries. On the other hand, if the grantors are disinheriting a child or grandchild the disinheritance must be specifically provided for in the trust. If some siblings, nephews or nieces are given general trust shares (as opposed to specific cash gifts), the other siblings or the other nephews and nieces who are not named as beneficiaries should be specifically disinherited in the trust. The trust application has a dedicated section for the omission of heirs. If heirs are disinherited, be certain they are fully identified by at least 3 items:   A. Full name   B. Relationship to the grantor   C. The last known city and state of residence.   If either the social security number or the dates of birth of the omitted heirs are known, include that as well. You cannot be sure you have disinherited someone who is not clearly identified.   17 - Age(s) at Which Shares Are Distributed.  At what age should the beneficiaries get their share of the trust, or should their share be paid in two or three installments at different age milestones? The trust application will guide you through the below choices for the distribution timing. The choices you use should be one of these in virtually every case:   A. Immediate and full distribution of trust shares, paid after the deaths of the grantors to beneficiaries who are over a specified minimum age, such as 21 or 25 (the trust application allows the grantors to set the minimum age).   B. A three phase distribution of trust shares to the beneficiaries, paid after the deaths of the grantors as the beneficiaries reach certain age milestones, such as 1/3 at age 21, 1/3 at age 25 and the remainder at age 30. The actual language appearing in the trust will state that the beneficiaries are to get 1/3 of their share on the first distribution, 1/2 of the remainder of their share on the second distribution, and all of the remainder on the final distribution. If a beneficiary has already passed one or more of the age milestones, the beneficiary will immediately receive the distributions for those age levels which have been passed.

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C. In a small number of cases grantors choose to spread distributions over the lifetime of the beneficiaries. The AE-Trust trust provision for this provides a distribution of all income from the beneficiary's share of the trust, plus any principal as necessary for the reasonable support of the beneficiary, for life or until the share is depleted, whichever comes first.    Caution. In many estates the shares of the beneficiaries will not be large enough to warrant 3 stage or lifetime distributions. Be certain that you project the trust share sizes and evaluate whether they will be large enough to generate meaningful sums in prolonged distributions.     Note 1:  To be effectively and fairly administered, lifetime distributions as in sub-paragraph C above require either an independent, neutral or a fair and concerned family member as trustee over that beneficiary's share. If there is a chance that the trustee and/or successor trustee might not be completely neutral or sufficiently fair for the life beneficiary, consider naming a special trustee just for that beneficiary (such as AE-Trust).   Note 2:  On rare occasion grantors order a plan which will withhold distributions to the beneficiaries until they are middle age, 50 or sometimes even 60 years old. Their plan would require all the family's assets to simply sit in trust for years or decades, not doing any good for anybody. This is bad planning and a questionable use of a family's wealth. Either you trust your heirs to handle their money or you don't. Your heirs may have a real financial need long before middle age. What if, years before reaching the grantors' age selection, one of them needs a heart transplant, needs the money for the college education of their own children, or needs it to buy a home? If you don't feel your heirs will handle the money well by approximately age 30, then at least leave them a life time distribution (selection "C" above) under the control of an independent, fair or neutral trustee (such as AE-Trust). This will assure that if an emergency or important and worthwhile need arises, it can be taken care of in a prudent manner. Further, most of these provisions which require such a long term wait by the beneficiaries can and probably will be successfully challenged in court, and the grantors' plan may be set aside anyway.   18 - Underage Beneficiaries or Issue Upon Trust Distribution. What happens if a beneficiary or the issue of a predeceased beneficiary is an underage minor when his or her share of the trust is ready for distribution?    A. AE-Trust default trust language provides for that share to remain in trust until that beneficiary or issue reaches the minimum age requirements set out by