Fundaments of Trusts

6/22/2017

Center for Agricultural Law & Taxation

June 22, 2017

Agenda

• Common reasons to create a trust • Grantor vs. Non-Grantor Trusts • Simple vs. Complex • Terminology • Fiduciary (Trustee) Responsibilities • Filing Requirements • Kinds of Trusts – there are many

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Disclaimer

• Much of what we will discuss today will require the engagement of an attorney • In addition, laws vary from state to state • I am not an attorney and do not represent my self as one • Discussion will center on a general overview of trusts and select filing issues

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1 6/22/2017

Overall Concept

• The person who creates the trust is known as the grantor (or sometimes, the settlor or trustor) • The grantor names beneficiaries, who will benefit from the trust • Beneficiaries may receive income from the trust or may have access to the principal of the trust either during the grantor’s lifetime or after the grantor dies • The trustee is responsible for : • Administering the trust • Managing the assets, and • Distributing income and/or principal according to the terms of the trust – a formal document 4

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Overall Concept

• Depending on the purpose of the trust, the grantor can name almost anyone as a trustee – must be a person or entity, no cats or dogs, etc. • They can even name more than one trustee if they choose • The remainder man is the person who receives what’s left of the trust’s property when the trust ends

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Note

• The trust may distribute income via a Form K-1 but like with other pass through's they may not “receive” the income • The income is still taxable

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Type of Trust Must Fit Need

• The type of trust used, and the mechanics of its creation, will differ depending on what an individual client is trying to accomplish • The client may need more than one type of trust to accomplish all of their goals • An interview to discuss the pros and cons of setting up any trust and what the client wishes to accomplish are a vital part of the process

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What is a Trust?

• A trust is a legal entity (for tax purposes) that holds assets for the benefit of another • A client can put practically any kind of asset into a trust, including cash, stocks, bonds, insurance policies, real estate, and collectibles • The client’s goals are an important aspect in determining the kind of trust to establish

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What the Client Wants?

• The client many need a trust to generate income, therefore placing income-producing securities, such as bonds, in the trust may be an option • Or, they may want to create a pool of cash that may be accessible to pay any estate taxes due upon death or provide for the family • A client may want to fund the trust with a life insurance policy • A trust involves three parties: the creator (grantor), the trustee or trustees (fiduciary) who agree to manage the assets as directed by the terms of the trust, and the beneficiaries 9

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Some Reasons to Create a Trust

Provide Shield Avoid Income for Assets Probate Charity

Preserve Pool Trust Assets for Investments Heirs

Support to Provide Shift Income to Beneficiary in if Incapacitated Lower Tax Bracket Advanced Health Care Directive 10

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General Rule

• The general rule is that all trusts are separate taxpayers, each with its own tax year and accounting method • Trusts are taxed on income and receive deductions for certain authorized expenses • The trust return also has its own tax structure • Schedule G of Form 1041 is used to calculate the tax

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Form 1041

• The fiduciary (trustee) of a domestic decedent's estate, trust, or bankruptcy estate uses Form 1041 to report: • Income • Deductions • Gains and losses of the estate or trust • Income will be accumulated and held for future distribution or distributed currently to the beneficiaries – based on the trust document

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Taxation of the Trust

• Taxable trusts have a very small exemption of only $100 • If the trust requires that all income be distributed annually, the exemption is $300 – simple trust • IRC §641(b), generally, taxable income of an estate or trust is computed in the same manner as in the case of an individual • A qualified disability trust is allowed a $4,050 exemption if the trust's modified AGI is less than or equal to $259,400

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The Trust Return

• Estimated Tax Payments Allocated to Beneficiaries • The trustee (or executor, for the final year of the estate) may elect under §643(g) to have any portion of its estimated tax treated as a payment of estimated tax made by a beneficiary or beneficiaries • The election is made on Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries, which must be filed by the 65th day after the close of the trust's tax year • Form 1041-T shows the amounts to be allocated to each beneficiary • This amount is reported on the beneficiary's Schedule K-1

(Form 1041), box 13, code A 14

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Form 1041 K-1

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Form 1041-T

• Attach Form 1041-T to the return only if the return has not yet been filed • Attaching Form 1041-T to Form 1041 doesn't extend the due date for filing Form 1041-T • If the individual has already filed Form 1041-T, don't attach a copy to the return, it can be filed alone • Failure to file Form 1041-T by the due date will result in an invalid election • An invalid election will require the filing of amended Schedules K-1 for each beneficiary who was allocated a payment of estimated tax

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Form 1041-T

• For the election to be valid, a trust or decedent’s estate must file Form 1041-T by the 65th day after the close of the tax year as shown at the top of the form • If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day • For a 2016 calendar year decedent’s estate or trust, that date is March 6, 2017

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Form 1041-T – Stand Alone Form if Needed

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Form 1041-T – Stand Alone Form if Needed

• If you are allocating a payment of estimated taxes to more than 10 beneficiaries, list the additional beneficiaries on an attached sheet that follows the format of line 2 of the form • Enter on line 3 the total from the attached sheet(s)

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Withholding- Sometimes an Issue

• Except for backup withholding, withheld income tax can't be passed through to beneficiaries on either Schedule K-1 or Form 1041-T • Backup withholding requires a payer to withhold tax from income not otherwise subject to withholding • A taxpayer may be subject to backup withholding if they fail to provide a correct taxpayer identification number (TIN) when required or if they fail to report interest, dividend, or patronage dividend income

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Backup Withholding

• If the estate or trust received a 2016 Form 1099 showing federal income tax withheld (that is, backup withholding) on interest income, dividends, or other income, check the box and include the amount withheld on income retained by the estate or trust in the total for line 24e • Report on Schedule K-1 (Form 1041), box 13, code B, any credit for backup withholding on income distributed to the beneficiary

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Form 1041- Line 24 e

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Estimated Tax Penalty

• Generally, an estate or trust must pay estimated income tax if it expects to owe, after subtracting any withholding and credits, at least $1,000 in tax, and it expects the withholding and credits to be less than the smaller of: • 1. 90% of the tax shown on the tax return, or • 2. 100% of the tax shown on the prior year tax return (110% of that amount if the estate's or trust's adjusted gross income on that return is more than $150,000, and less than 2/3 of gross income for 2016 or 2017 is from farming or fishing). • However, if a return was not filed for 2016 or that return

didn't cover a full 12 months, item 2 doesn't apply 23

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Accounting Methods

• Figure taxable income using the method of accounting regularly used in keeping the estate's or trust's books and records • Permissible methods include the cash method, the accrual method, or any other method authorized by the Internal Revenue Code • In all cases, the method used must clearly reflect income • Generally, the estate or trust may change its accounting method (for income as a whole or for any material item) only by getting consent on Form 3115, Application for Change in Accounting Method 24

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Accounting Periods

• Generally, a trust must adopt a calendar year • The following trusts are exempt from this requirement: • A trust that is exempt from tax under §501(a); • A charitable trust described in §4947(a)(1); and • A trust that is treated as wholly owned by a grantor under the rules of §671 through 679 • These sections also include the anti-abuse rules

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Tax Year

• Just a note- IRS often has issues with fiscal year taxpayers • When filing on paper for a short year or fiscal year highlight the year to bring attention to the tax year •

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Special Issues

• Grantor type trusts, the S portion of electing small business trusts (ESBTs), and bankruptcy estates all have reporting requirements that are significantly different than other Subchapter J trusts and decedent's estates • Additionally, grantor type trusts have optional filing methods available • In general, a grantor trust is ignored for income tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor – Form 1040 • This also applies to any portion of a trust that is treated

as a grantor trust 27

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Optional Filing Methods for Certain Grantor Type Trusts • Generally, if a trust is treated as owned by one grantor or other person, the trustee may choose • Optional Method 1 or Optional Method 2 as the trust's method of reporting instead of filing Form 1041 • A husband and wife will be treated as one grantor for purposes of these two optional methods if: • All of the trust is treated as owned by the husband and wife, and • The husband and wife file their income tax return

jointly for that tax year 28

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Optional Filing Methods for Certain Grantor Type Trusts

• Generally, if a trust is treated as owned by two or more grantors or other persons, the trustee may choose Optional Method 3 as the trust's method of reporting instead of filing Form 1041 • Once the individual chooses the trust's filing method, they must follow the rules under changing filing methods if they want to change to another method

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Optional Filing Methods for Certain Grantor Type Trusts

• Optional Method 1 • Grantor trusts that haven't applied for an EIN and are going to file under Optional Method 1 don't need an EIN for the trust as long as they continue to report under that method – Form 1040

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Special Issue with Grantor Trusts

• A trust is a grantor trust if the grantor retains certain powers or ownership benefits • This can also apply to only a portion of a trust • If only a portion of the trust is a grantor type trust, indicate both grantor trust and the other type of trust, for example, simple or complex trust, as the type of entities checked in Section A on Page 1 of Form 1041

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Form 1041- Section A

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Special Issue with Grantor Trusts – Only Applies if a Combination • If the entire trust is a grantor trust, fill in only the entity information of Form 1041 • Don't show any dollar amounts on the form itself; show dollar amounts only on an attachment to the form • Don't use Schedule K-1 (Form 1041) as the attachment • If only part of the trust is a grantor type trust, the portion of the income, deductions, etc., that is allocable to the non-grantor part of the trust is reported on Form 1041, under normal reporting rules • The amounts that are allocable directly to the grantor are shown only on an attachment to the form

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Special Issue with Grantor Trusts

• Don't use Schedule K-1 (Form 1041) as the attachment • However, Schedule K-1 is used to reflect any income distributed from the portion of the trust that isn't taxable directly to the grantor or owner • The fiduciary must give the grantor (owner) of the trust a copy of the attachment

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Basics

• For calendar year estates and trusts, file Form 1041 and Schedule(s) K-1 by April 15 (Saturday, Sunday or Holiday can change that) • The extension of time to file an estate (other than a bankruptcy estate) or trust return is 5 1/2 months • New in 2016, certain domestic trusts that hold specified foreign financial assets ("specified domestic entities") must file Form 8938, Statement of Specified Foreign Financial Assets, along with their Form 1041

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New in 2015 Form 8971

• Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, along with Schedule A, is used to comply with the filing requirements regarding consistent basis reporting between an estate and a person acquiring property from an estate

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Form 8971

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Form 8971 Schedule A

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Difference Between and Estate and Trust

• A decedent's estate comes into existence at the time of death of an individual • A trust may be created during an individual's life (inter vivos) or at the time of their death under a will (testamentary) • If the trust instrument contains certain provisions, then the person creating the trust (the grantor) is treated as the owner of the trust's assets • Such a trust is a grantor trust and generally has special reporting requirements

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General Rule - Remember

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Exception to Trust Rules

• The exception to this rule is trusts that are ignored for (trust) income tax purposes under the “grantor trust” rules • File form 1040

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Grantor Trusts

• A grantor trust is the exception to the general rule that all trusts are taxpayers • Grantor trusts are ignored for (trust) income tax purposes • A trust is a “grantor trust” if the grantor retains one or more of the powers defined in §§ 673 through 677 of the code • The most common type of “grantor trust” is the revocable living trust

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Trust Terminology

• Grantor - All trusts have a grantor, sometimes called a "settler" or "trustor“ • This is the person that creates the trust and is the one who has the legal capacity to transfer property held under the trust • Decedent • The person who has died • This person is usually the grantor of the trust

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Trust Terminology

• Revocable • A revocable trust (also called "modifiable") is a trust that can be changed by the grantor during his or her lifetime

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Trust Terminology

• Irrevocable • An irrevocable trust is a trust that cannot be changed by the grantor once the trust is deemed irrevocable • The grantor loses total control of the property and has to obey the trust rules • A trust can be revocable during the grantor's lifetime and becomes irrevocable upon death

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Living Trust (Inter Vivos Trust)- Often called a Grantor Trust

• A Living Trust is established while the client is alive • A living trust is a written legal document through which assets are placed into a trust for the clients benefit during their lifetime and then transferred to designated beneficiaries at death • A living trust avoids probate • Often this results in a faster distribution of assets to heirs • Debts will be paid and assets distributed • Guardians can be designated for minor heirs 46

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Living Trust

• As a living trust is not made public, upon death the estate will be distributed in private, unless contested • Other Issues to look when establishing a trust include: • Age • Wealth • Marital status • Kinds of assets • Plans for heirs 47

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Living Trust

• When property is placed into a living trust, the trust becomes its owner, therefore transfer of title to the property from individual to trust must occur • The right to use the property remains unchanged • Income from the trust must be reported on the tax return • The trust itself often files a separate income tax statement as well, though the IRS doesn't require one if the grantor, trustee and beneficiary are the same person

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Living Trust

• Revocable trusts (along with other non-probate transfers like insurance policies) are not automatically revoked or amended on divorce • If the taxpayer does not amend the trust, an ex- spouse could end up being the beneficiary • Revocable or irrevocable? • As with other trusts, living trusts can be revocable (changeable) or irrevocable • Most living trusts are revocable

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Living Trust

• Some make the trust irrevocable to avoid taxes • Control is given up to escape some estate, income or gift taxes • An irrevocable trust doesn't avoid taxes entirely--it merely sets up a separate taxable entity that might be able to pay taxes at a lower rate than if all the assets were combined in one estate • It can also offer a bit more protection from creditors • Probate may still be an issue if no arrangements are made for all property 50

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Summary • Living trusts -- both revocable and irrevocable -- avoid probate of the property they hold because the trust entity and not the decedent technically owns that property • Probate is only necessary to move ownership from the name of an individual who is deceased to those of his living beneficiaries • A testamentary trust can't avoid probate because the property to be transferred into it remains in the decedent's name at the time of his death -- the trust hasn't been formed and funded yet. • Probate is necessary to move that property into the name of the trust, just as it would be to transfer it into the names of living beneficiaries 51

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Intentionally Defective Grantor Trust

• The trust was intentionally created so that the grantor retains one of the powers listed in the Internal Revenue Code and • To freeze some of an individual’s assets for estate tax purposes • The intentional flaw is built in to ensure that the individual must continue to pay income taxes, which reduces the value of the grantor’s estate and allows beneficiaries such as children or grandchildren to receive the full value of the assets

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Intentionally Defective Grantor Trust

• A gift is only complete for income tax purposes if a taxpayer gives away all of the powers in the grantor trust rules • If the taxpayer retains any of the listed powers, then the gift is “defective,” which means the trust will be considered a grantor trust, and the taxpayer will pay income tax on all of the trust’s income

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Review

• With grantor trusts, the grantor retains power over the trust administration • These powers include the power to revoke (amend or terminate) the trust • The grantor also keeps control over the property inside the trust • The grantor is usually also a trustee and beneficiary of the trust’s income and principal

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Review

• The principal refers to the property funding the trust, also called “corpus” • Items of income and deduction are generally declared on the grantor’s income tax return Form 1040 • The trust doesn’t have a tax identification number (TIN) or file its own return Form 1041 – all passes through the Form 1040

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Non-Grantor Trusts

• The grantor has given up all right, title, and interest in the principal • Only the trustee may revoke or terminate the trust • In a non-grantor trust, the grantor cannot be named as a trustee, beneficiary, or a remainderman

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Complex vs. Simple

• Non-grantor trusts (i.e., trusts that are not considered grantor trusts) are divided into two categories • A non-grantor trust will either be a simple trust or a complex trust, depending on how it handles distributions to beneficiaries

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Simple Trusts

• A simple trust must pass three tests: • The trust instrument requires that all income must be distributed currently • The trust instrument doesn't provide that any amounts are to be paid, permanently set aside, or used for charitable purposes • The trust doesn't distribute amounts allocated to the corpus of the trust - principal

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Complex Trust

• A complex trust is one that does one or more of the things that a simple trust cannot do • It can accumulate income • Distribute principal • Make distributions to charity • Therefore a trust must qualify as a simple trust, or else it will be considered a complex trust • The difference between the two lies in the way that the trust deducts distributions to beneficiaries

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Non-Grantor Trusts

• Grantor trusts and intentionally defective grantor trusts become non-grantor trusts at the grantor’s death • A tax identification number for the trust must then be obtained • On December 31 of the year of the grantor’s death, the administrator becomes responsible for filing a Form 1041 for this non-grantor trust

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Other Trusts You May Encounter

Qualified Disability Trust

• A qualified disability trust is any non-grantor trust: • Governed by § 42 U.S.C. 1396p(c)(2)(B)(iv) and established solely for the benefit of an individual under 65 years of age who is disabled plus • All the beneficiaries of which are determined by the Commissioner of Social Security to have been disabled for some part of the tax year • A trust will not fail to meet the second requirement above just because the trust's corpus may revert to a person who isn't disabled after the trust ceases to have any disabled beneficiaries

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Pre-Need Funeral Trusts

• The purchasers of pre-need funeral services are the grantors and the owners of pre-need funeral trusts established under state laws • Review Rev. Rul. 87-127 • The trustees of pre-need funeral trusts can elect to file the return and pay the tax for qualified funeral trusts • Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts

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Formation, Termination and Administration

Formation - Trust Agreement

• You always want a written trust agreement • Do not rely on oral declaration or agreement • Biggest problem trusts generally have is they are not funded • We need a document placing assets into the name of the trust • The settler must create a deed transferring title to the trustee of the trust, deliver the deed to the trustee, and the deed must be recorded

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Termination

• A trust may be terminated by action taken by the trustees, the settlor or the beneficiaries or as a result of a particular event

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Administration

• Trust administration refers to the trustees’ management of trust property according to the trust document’s terms • As well as for the benefit of the beneficiaries after the settlor’s death • Trust administration starts with mandatory notice to all beneficiaries and the settlors’ heirs • After receiving notice, the beneficiary has a certain amount of days, depending on the jurisdiction, to file a trust contest

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Terminology

Let’s Look at This in Another Way

23 6/22/2017

Trust Terminology

• Grantor - An individual who conveys or transfers ownership of property • The Admiral

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Trust Terminology

• Property - what gets put inside a trust and it is sometimes called the "principal" or the "corpus“ • Property can be any type of asset and can be transferred to the trust during the lifetime of the grantor (inter-vivos/living trust) or under the will of the grantor after death (testamentary trust) • Property can include things like money, securities, real estate, jewelry, etc. • The Ship

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Trust Terminology

• Trustee - The trustee of the trust can be any legal individual or corporation that can take title to property on behalf of a beneficiary • Responsible for managing the property based on the trust document wishes • Must keep the best interest of the beneficiary in mind at all times • The trustee must be prepared to be held accountable to the grantor and/or beneficiaries • The Captain of the Ship 72

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Trust Terminology

• Beneficiary - is the person benefiting from the trust • The beneficiary can be one or multiple parties • Multiple beneficiaries do not have to have the same interests in the trust property • An interesting thing about trust beneficiaries is that they do not have to exist at the time the trust is created • The Sailors on the Ship

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Trust Terminology

• Surviving Spouse • The spouse who survived the decedent • The Admirals Wife/Husband

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Trust Terminology

Admirals Admiral (Grantor) Surviving Property (Corpus) Spouse (Trustee, Beneficiary or Neither) Captain (Trustee)

Sailors (Beneficiaries)

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Trust Terminology

• Funded - A trust may be fully or partially funded by the grantor during his or her lifetime or after death • In the case of a funded trust, it means that property has been titled in the name of the trust

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Trust Terminology

• Unfunded • An unfunded trust is simply the trust agreement • Some trusts remain unfunded until the death of the grantor, or may just stay unfunded

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Wills

26 6/22/2017

What is a Will?

• A will, sometimes called a “last will and testament,” is a document that states an individual’s final wishes • A will is a written legal document with a plan of distribution of assets upon death • The executor (named in the will) will oversee the process, and nothing in the will takes effect until after the person dies • A will is public record and so all transactions will be public as well • It is read by a county court after death, and the court makes sure that the individual’s final wishes are carried out • Name guardians for children and their property • Decide how debts and taxes will be paid. • Provide for pets • Serve as a backup to a living trust 79

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Testamentary Trusts

• A testamentary trust, also called a will trust, specifies how the assets of an individual are designated • This document arises at the time of the testator's death • Generally, testamentary trusts are created for young children, relatives with disabilities, or others who may inherit a large sum of money that enters the estate upon the testator's death • The trust kicks in at the completion of the probate process after the death of the person

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No Will or Trust

• If an individual does not leave valid instructions about their estate, property generally goes to the spouse or closest heirs, which may not be what the individual wanted done • Also, the state could assign someone an individual does not trust to manage the distribution of property or be the legal guardian of minor children

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Dying Intestate – Without a Will

• As mentioned state laws vary on this issue • Most provide for the surviving spouse and children first • In some states children of decedents always inherit a share, while in others they inherit only if they are not also the children of the surviving spouse • Point – review state rules

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Fess, Control and Maintenance Must be Discussed

• A trust can be expensive to set up and maintain trustee fees, professional fees, and filing fees must be paid • Depending on the type of trust chosen, control over the assets may be an issue • Maintaining the trust and complying with recording and notice requirements can take up considerable time • Income generated by trust assets and not distributed to trust beneficiaries may be taxed at a

higher income tax rate than at an individual rate 83

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Other Types of Trusts

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Asset Protection Trust

• An asset protection trust is a type of trust that is designed to protect a person's assets from claims of future creditors • These types of trusts are often set up in countries outside of the United States, although the assets do not always need to be transferred to the foreign jurisdiction • The purpose of an asset protection trust is to insulate assets from creditor attack • These trusts are normally structured so that they are irrevocable for a term of years and so that the trust- maker is not a current beneficiary

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Asset Protection Trust

• An asset protection trust is normally structured so that the undistributed assets of the trust are returned to the trust-maker upon termination of the trust provided there is no current risk of creditor attack, thus permitting the trust-maker to regain complete control over the formerly protected assets

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Charitable Trust

• Charitable trusts are trusts which benefit a particular charity or the public in general • Typically charitable trusts are established as part of an estate plan to lower or avoid imposition of estate and gift tax • A charitable remainder trust (CRT) funded during the grantor's lifetime can be a financial planning tool, providing the trust-maker with valuable lifetime benefits

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Constructive Trust

• A constructive trust is an implied trust established by a court and is determined from certain facts and circumstances • The court may decide that, even though there was never a formal declaration of a trust, there was an intention on the part of the property owner that the property be used for a particular purpose or go to a particular person

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Special Needs Trust

• A special needs trust is one set up for a person who receives government benefits so as not to disqualify the beneficiary from such government benefits • This is completely legal and permitted under the Social Security rules provided that the disabled beneficiary cannot control the amount or the frequency of trust distributions and cannot revoke the trust • Ordinarily when a person is receiving government benefits, an inheritance or receipt of a gift could reduce or eliminate the person's eligibility for such benefits

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Spendthrift Trust

• A trust that is established for a beneficiary which does not allow the beneficiary to sell or pledge away interests in the trust is known as a spendthrift trust • It is protected from the beneficiaries' creditors, until such time as the trust property is distributed out of the trust and given to the beneficiaries

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By-Pass Trust

• A by-pass trust is a type of trust that is created to allow one spouse to leave money to the other, while limiting the amount of federal estate tax that would be payable on the death of the second spouse • If the individual leaves property to someone in the form of a bypass trust, that property will not be subject to estate taxes when that person dies • Portability in its current form has made these types of trusts less and less but they may have a purpose in certain situations

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Totten Trust

• A Totten trust is one that is created during the lifetime of the grantor by depositing money into an account at a financial institution in his or her name as the trustee for another • This is a type of revocable trust in which the gift is not completed until the grantor's death or an unequivocal act reflecting the gift during the grantor's lifetime occurs • An individual or an entity can be named as the beneficiary • Upon death, Totten trust assets avoid probate • A Totten trust is used primarily with accounts and securities in financial institutions such as savings accounts, bank accounts, and certificates of deposit • A Totten trust cannot be used with real property • A Totten Trust provides a safer method to pass assets on to family

than using joint ownership 92

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Generation-Skipping Trusts

• A generation-skipping trust (also called a dynasty trust) allows the individual to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations their junior - typically grandchildren

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Irrevocable Life Insurance Trusts

• An irrevocable life insurance trust can remove life insurance from an individual's taxable estate, help pay estate costs, and provide heirs with cash for a variety of purposes • To remove the policy from they estate, an individual will surrender ownership rights • No loans can be taken or change beneficiaries can be made • In return, the proceeds from the policy may be used to pay any estate costs after an individual dies and

provide beneficiaries with tax-free income 94

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Minor’s Trust

• The Minor’s Trust passes assets to a child and provides for management of those assets until the child reaches a certain age that the trust creator specifies • The trust avoids expensive guardianship proceedings needed to manage the assets the child inherits before he or she turns 18 years old • This arrangement holds all assets in the trust secure for the minor child, since the grantor receives no income from the trust’s assets

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Blind Trust

• Blind trusts allow the trustees or anyone who is holding power of attorney to handle the assets of the trust without the knowledge of the beneficiaries • These trusts can be useful in situations where the beneficiary should be kept unaware of the contents of the trust to avoid conflicts of interest

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Qualified Income Trust (Miller Trust or QIT)

• The Qualified Income Trust protects assets when an individual applying for Medicaid has income in excess of the amount needed for Medicaid eligibility • The QIT is an irrevocable trust that creates eligibility for long term nursing home care through Medicaid

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Marital Trust

• A Marital Trust creates a trust to benefit a surviving spouse and the heirs of the couple • Assets are moved into the trust when the first spouse dies, and the income generated by the assets are transferred to the surviving spouse • When that individual dies, the remaining assets go to the couple’s heirs

Center for Agricultural Law & Taxation

QTIP Trust - A Qualified Terminable Interest Property Trust

• A Qualified Terminable Interest Property Trust provides for a surviving spouse, but this trust also allows the grantor to retain control of the distribution of the trust’s assets after the death of the surviving spouse • Useful for second marriage families and for families wanting to protect assets from predatory marriages

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Qualified Personal Residence Trust

• This trust transfers the grantor’s residence out of the estate, removing it from the value of the grantor’s estate as a gift • Under the terms of the trust, the grantor can continue to live in the residence for a number of years rent free, before the beneficiaries of the trust are vested in their interests

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Center for Agricultural Law & Taxation

A GRAT, CLAT, CRUT, CRAT AND A CLUT

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Grantor Retained Annuity Trust (GRAT)

• This trust allows an individual to make large financial gifts to family members while avoiding the gift tax • The trust is set up as an annuity, allowing the donor to make a donation and receive an annual payment from the annuity for a fixed term • At the end of the term, remaining assets in the trust go to the beneficiary as a gift

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Charitable Lead Annuity Trust (CLAT)

• This irrevocable trust provides an income interest to a charitable organization, while passing assets to other beneficiaries • Part of this interest goes to another beneficiary, such as the donor, their family members or other individuals

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Center for Agricultural Law & Taxation

Charitable Remainder Unitrust (CRUT)

• This irrevocable trust was created under the authority of the Internal Revenue Service and distributes a fixed percentage of its assets to a beneficiary, and, at the end of a fixed term, the remainder of the assets are transferred to a designated charitable organization

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Center for Agricultural Law & Taxation

Charitable Remainder Annuity Trust (CRAT)

• This trust allows a donor to place a large gift of assets such as cash or property into a trust that pays back a fixed amount each year • Upon the donor’s death, the remaining assets are transferred to the designated charity

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Charitable Lead Unitrust (CLUT)

• This trust allows a donor to give a variable amount annually from the trust to charity for a fixed term of the life of an individual. When the term of the trust is over, remaining assets are distributed back to the donor or other designated recipient.

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Center for Agricultural Law & Taxation

SharkfinCharitable Lead Annuity Trust

• The “Sharkfin” trust allows for small payments to be made into a charitable lead annuity trust for the first few years of the trust term, but a very large payment must be made into the trust in the last year or two

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Center for Agricultural Law & Taxation

Irrevocable Life Insurance Trust (ILIT)

• This trust helps to preserve proceeds from life insurance from taxation, and allows the trust to invest a deceased person’s life insurance benefit and administer the trust for a surviving spouse and children

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Charitable Trusts

• A charitable trust described in Internal Revenue Code § 4947(a)(1) is a trust that is not tax exempt, all of the unexpired interests of which are devoted to one or more charitable purposes, and for which a charitable contribution deduction was allowed under a specific section of the Internal Revenue Code • A charitable trust is treated as a private foundation unless it meets the requirements for one of the exclusions that classifies it as a public charity 109

Center for Agricultural Law & Taxation

Election Small Business Trust (ESBT)

• The S portion of an ESBT is the portion of the trust that consists of S corporation stock and that isn't treated as owned by the grantor or another person • Under the Small Business Job Protection Act of 1996, stock in an S corporation may be held by an "electing small business trust" (ESBT), by which the beneficiaries are, in effect, the shareholders of the S corporation

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Center for Agricultural Law & Taxation

Qualifying for an ESBT

• The trust must meet only three requirements: • All of the trust's beneficiaries must be individuals or estates eligible to be S shareholders • A beneficiary is any person to whom a distribution of income or principal may be made during the tax year • No interest in the trust may be acquired by purchase; these interests must be acquired by gift, bequest, etc. • The Trust must elect to be an ESBT

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Taxation of ESBT's

• In return for added flexibility, the ESBT is taxed in a different manner from normal trusts • The S stock portion of the trust, which is treated as a separate trust when computing the income tax attributable to such stock, is taxed at the highest individual rate (currently, 39.6% on ordinary income and 28% on net capital gains) • The taxable income attributable to the S portion includes only the items of income, loss or deduction attributable to the trust as a shareholder

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Center for Agricultural Law & Taxation

Date Entity Created

• Enter the date the trust was created, or, if a decedent's estate, the date of the decedent's death

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Center for Agricultural Law & Taxation

The Scoop – Upcoming Dates

• July 5 • July 19 • August 2 • August16 • August 30 • September 13 • October 4 • October 18 • November 1 • Held at 8:00 am and 12:00 pm Central time 114

Center for Agricultural Law & Taxation

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Up Coming Webinars http://www.calt.iastate.edu/calendar-node-field-seminar- date/month

• Payment of Wages with Commodities and Gifting Grain - June 27 • Handling Tax Returns for Religious Groups – Amish and Mennonite • June 29 • Net Operating Loss Basics July 6 and 7th • Form 1099 Preparation July 13 • Farm Assets and Stepped Up Basis at the Death of the Farmer July 24 • Reconstructing Records for Tax Compliance August 17 • Uber/Lyft Drivers and Business Expenses August 22 • Tax Reform and New Law Update October 17 • New Partnership Audit Rules October 19

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Iowa Taxpayer Advocate

• Online Free Webinar: 4th Annual Taxpayer Advocate Town Hall Meeting - June 28, 2017

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Upcoming Seminars – Mark Your Calendar – Final Dates

• S Corporation – July 20-21, 2017, Live and Webinar • September 21, 2017 Ag Law Seminar, Live and Webinar • September 22, 2017 Farm and Estate Tax Review, Live and Webinar • Retirement and Social Security Issues(Webinar) = October 10-11, 2017

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The Schedule is Finalized for the 44th Annual Federal Income Tax Schools

• November 2-3, 2017 – Maquoketa, Iowa – Centerstone Inn and Suites • November 6-7, 2017 – Le Mars, Iowa – Le Mars Convention Center • November 8-9, 2017 – Atlantic, Iowa – Cass County Community Center • November 9-10, 2017 – Mason City, Iowa – North Iowa Area Community College • November 16-17, 2017 – Ottumwa, Iowa – Indian Hills Community College • November 20-21, 2017 – Waterloo, Iowa – Hawkeye Community College • December 11-12, 2017 – Ames, Iowa and Live Webinar – Quality Inn and Suites

Center for Agricultural Law & Taxation

The CALT Staff

William Edwards Interim Director for the Beginning Farmer Center Interim Director for the Center for Agricultural Law and Taxation Kristine A. Tidgren [email protected] Assistant Director 515-294-6161 E-mail: [email protected] 473 Heady Phone: (515) 294-6365 518 Farm House Ln Ames. Iowa 50011 Fax: (515) 294-0700

Center for Agricultural Law & Taxation

The CALT Staff

Kristy S. Maitre Tiffany L. Kayser Tax Specialist Program Administrator E-mail: [email protected] E-mail: [email protected] Phone: (515) 296-3810 Phone: (515) 294-5217 Fax: (515) 294-0700 Fax: (515) 294-0700

Center for Agricultural Law & Taxation