Shelly Sheldon finished a meeting with a client, Helen Beyonce, and has some “tax” questions for you. Part of Shelly’s meeting with Dr. Beyonce included a review of a proposed estate plan for Helen and her husband, Tom. The estate plan was prepared by a “lawyer friend” of Tom who is not well-versed in estate planning. Shelly understood most of the language in Dr. Beyonce’s revocable living trust but is unable to decipher some of the tax language and “alternatives” that Dr. Beyonce should consider with regard to her living trust.
The attached language is from Dr. Beyonce’s proposed trust and contains two (2) proposals that may have both tax and non-tax effects following Dr. Beyonce’s death.
You understand that Dr. Beyonce has three children from a previous marriage and that she is interested in having only one person serve as the trustee of her Trust. Dr. Beyonce is extremely wealthy, her husband Tom is not. Dr. Beyonce and Tom Beyonce do not have a prenuptial agreement. Although Dr. Beyonce wants to leave her legacy to her children, ultimately, she is also very interested in “taking care of Tom” in the event she should predecease him.
Please provide Shelly a “plain English” explanation of the two proposals so that he can “intelligently” advise Dr. Beyonce. Remember, you do NOT have the entire document, only a few sections of the trust to analyze for Shelly.
Proposal One
4.3 At Settlor’s death. Upon the death of Settlor, Trustee first shall allocate to a separate asset account any funds that are not liable for debts or expenses of administration. If Chapter 11 of the Internal Revenue Code of 1986, as amended, is then in effect and if Settlor’s spouse survives Settlor (regardless of the length of the survival period), Trustee shall divide principal into two portions, the family portion and the marital portion. Trustee shall make the division by following the directions set forth in the section below entitled “Allocation between family and marital portions.” If Chapter 11 is not in effect or if Settlor’s spouse fails to survive Settlor, Trustee shall allocate all property to the family portion. If it is difficult or impossible to determine whether Settlor or Settlor’s spouse has survived the other or if there is not sufficient evidence to make that determination, Settlor’s spouse shall be deemed to have survived Settlor. In all events, however, Trustee shall satisfy any general or specific devises in Settlor’s last will as directed by Settlor’s personal representative; or if none is appointed, Trustee shall do so in accordance with the instrument Trustee determines to be Settlor’s last will. Trustee shall treat as an advancement against the share of Settlor’s spouse passing under this Agreement the value of a homestead allowance, family allowance, exempt property allowance, or similar statutory benefit received by Settlor’s spouse from Settlor’s probate estate to the extent that the personal representative of Settlor’s estate has not offset the benefits against a gift to the spouse. Trustee shall first adjust any outright transfers to Settlor’s spouse and then, if there are no outright transfers or to the extent of any insufficiency, any transfer in trust with respect to which Settlor’s spouse is the sole current trust beneficiary.
Alternative 1: 4.4 Family Portion
4.4 Family portion. Upon the death of Settlor, Trustee shall pay all charges against Settlor’s estate as provided in this section. Trustee may either advance to Settlor’s personal representative funds to meet any deficiency caused by debts, fees, expenses, taxes, and other charges against Settlor’s estate exceeding property in Settlor’s probate estate that can be liquidated reasonably or pay such charges directly. However, Trustee shall not pay debts or claims against Settlor’s estate with any funds that, at their source, are exempt from claims of Settlor’s creditors. In addition, to the extent that other assets are available, Trustee shall not use for payment of debts, transfer taxes, or expenses of administration any benefits payable to the trust under a retirement plan for which a trust beneficiary is treated as the designated beneficiary. All charges against Settlor’s estate, if paid by Trustee, shall be paid as an expense of administration without apportionment among the beneficiaries, unless otherwise directed in Settlor’s last will. In determining liabilities and charges under this section, Trustee may act upon evidence it deems reliable. Trustee shall then administer the balance of the family portion as provided in the section of this Article entitled “Family Trust.”
Alternative 2: 4.4 Family Portion
4.4 Family portion. Upon the death of Settlor, Trustee shall pay all charges against Settlor’s estate as provided in this section. Trustee may either advance to Settlor’s personal representative funds to meet any deficiency caused by debts, fees, expenses, taxes, and other charges against Settlor’s estate exceeding property in Settlor’s probate estate that can be liquidated reasonably or pay such charges directly. However, Trustee shall not pay debts or claims against Settlor’s estate with any funds that, at their source, are exempt from claims of Settlor’s creditors. In addition, to the extent that other assets are available, Trustee shall not use for payment of debts, transfer taxes, or expenses of administration any benefits payable to the trust under a retirement plan for which a trust beneficiary is treated as the designated beneficiary. All charges against Settlor’s estate, if paid by Trustee, shall be paid as an expense of administration without apportionment among the beneficiaries, unless otherwise directed in Settlor’s last will. In determining liabilities and charges under this section, Trustee may act upon evidence it deems reliable. Trustee shall then administer the balance of the family portion as provided in Article V.
Alternative 1: 4.5 Marital Portion
4.5 Marital portion. Trustee shall distribute the marital portion to Settlor’s spouse, free of trust.
Alternative 2: 4.5 Marital Portion
4.5 Marital portion. Trustee shall hold the marital portion as provided in the section of this Article entitled “Marital Trust.”
Family Trust
4.6 Distributions. Trustee shall administer all property in the family trust, including the allocated portion of the separate asset accounts, as follows:
(a) Income. Trustee shall pay the net income to Settlor’s spouse.
Alternative 1: 4.6(b) Invasion of principal for spouse
(b) Invasion of principal for the spouse. Trustee may pay principal to Settlor’s spouse from time to time (even to the exhaustion of the trust) as necessary to provide for the spouse’s health, education, support, and maintenance in his accustomed manner of living. Trustee shall look to the spouse’s other available resources when exercising this power.
Alternative 2: 4.6(b) Invasion of principal for spouse
(b) Invasion of principal for the spouse. Trustee may pay principal to Settlor’s spouse from time to time (even to the exhaustion of the trust) as, in Trustee’s discretion, is adequate and appropriate for his comfort, welfare, and best interests. Trustee shall look to the spouse’s other available resources when exercising this power.
(c) Invasion for descendants. Trustee may distribute principal to one or more of Settlor’s descendants (if it will not impair Settlor’s spouse’s security) in Trustee’s discretion to provide for the distributee’s health, education, support, and maintenance in the distributee’s accustomed manner of living. When making distributions under this section, Trustee shall consider other resources available to the distributee. These distributions shall not be taken into consideration when allocating the principal upon termination of the family trust.
(d) Invasion for children. Trustee may distribute principal to one or more of Settlor’s children (if it will not impair Settlor’s spouse’s security) in Trustee’s discretion to provide that child with a home of his or her own or enable that child to embark upon or pursue a business or professional venture. When making distributions under this section, Trustee shall consider other resources available to the distributee. Whenever principal is distributed for these purposes, the amount shall be treated as an advancement, without interest, to the child (or the child’s descendants) when Trustee allocates the principal upon termination of the family trust.
(e) Intent. The economic welfare of Settlor’s spouse is Settlor’s primary concern, and that of the other beneficiaries is secondary. Therefore, if there is a conflict between the interests of the spouse and other beneficiaries, Trustee shall favor the spouse.
(f) Termination. Upon the death of Settlor’s spouse (or upon Settlor’s death if Settlor’s spouse fails to survive Settlor), Trustee shall divide and distribute the family trust as provided in Article V.
Marital Trust
4.7 General directions. All property allocated to the marital portion shall be administered as follows:
(a) Tax election. Trustee is authorized to elect, in the absence of a personal representative for Settlor’s estate and under provisions of IRC 2056(b)(7), to have any portion or all of the marital trust qualify for a marital deduction in Settlor’s estate for federal estate tax purposes. By way of suggestion, Settlor indicates that this election should be made to minimize taxes in Settlor’s estate unless Trustee determines some tax should be paid or other considerations override the desirability of reducing taxes. Trustee shall not incur any liability for either electing or failing to make an election under this section so long as Trustee has acted in a prudent and responsible manner.
(b) Income. From Settlor’s date of death, Trustee shall pay the net income to Settlor’s spouse for his life, annually or at more frequent intervals.
(c) Invasion of principal. Trustee may distribute principal to Settlor’s spouse (even to the exhaustion of the marital trust) in Trustee’s discretion to provide for Settlor’s spouse’s health, education, support, and maintenance in his accustomed manner of living. When making distributions under this section, Trustee may consider other resources available to the distributee. Trustee shall first invade the portion, if any, of the marital trust for which an election to qualify for the marital deduction was made before invading the portion not qualified for the deduction, unless the qualified portion has been exhausted or, in Trustee’s discretion, invasion of the qualified portion is impractical or inadvisable.
(d) Withdrawal right. The beneficiary shall have the right in each calendar year to withdraw from principal, in one sum or installments, the greater of $5,000 or 5 percent of the aggregate fair market value of this trust as valued as of the date of the lapse. The exercise of a right of withdrawal shall be made in writing by the beneficiary; or if the beneficiary is under a disability, exercise may be made by the beneficiary’s legal representative acting in a fiduciary capacity, delivered to Trustee prior to the end of the calendar year. The right of withdrawal shall be noncumulative and shall lapse if not exercised before the end of the calendar year.
(e) Payment of taxes. At the death of Settlor’s spouse, Trustee shall pay the estate and inheritance taxes imposed upon Settlor’s spouse’s estate (unless otherwise directed in Settlor’s spouse’s last will) from that portion of this trust that Trustee elected to qualify for a marital deduction in Settlor’s estate, to the extent that the total of those taxes is greater than would have been imposed if the assets that were qualified for the marital deduction were not subject to tax.
(f) Distribution of balance. Upon the death of Settlor’s spouse, Trustee shall divide and distribute the remaining principal as provided in Article V.
Proposal Two
4.3 At Settlor’s death. Upon the death of Settlor, Trustee first shall allocate to a separate asset account any funds that are not liable for debts or expenses of administration. Trustee shall pay all charges against Settlor’s estate as provided in this section. Trustee may either advance funds to Settlor’s personal representative to meet any deficiency caused by debts, fees, expenses, taxes, and other charges against Settlor’s estate exceeding property in Settlor’s probate estate that can be liquidated reasonably or pay such charges directly. However, Trustee shall not pay debts or claims against Settlor’s estate with any funds that, at their source, are exempt from claims of Settlor’s creditors. In addition, to the extent that other assets are available, Trustee shall not use for payment of debts, transfer taxes, or expenses of administration any benefits payable to the trust under a retirement plan for which a trust beneficiary is treated as the designated beneficiary. All charges against Settlor’s estate, if paid by Trustee, shall be paid as an expense of administration without apportionment among the beneficiaries, unless otherwise directed in Settlor’s last will. In determining liabilities and charges under this section, Trustee may act upon evidence it deems reliable. If Settlor’s spouse survives Settlor (regardless of the length of the survival period), Trustee shall administer the remaining principal as provided in the section of this Article entitled “Spouse’s Trust.” If Settlor’s spouse fails to survive Settlor, Trustee shall administer the balance of the trust assets as provided in Article V. If it is difficult or impossible to determine whether Settlor or Settlor’s spouse has survived the other, or if there is not sufficient evidence to make that determination, Settlor’s spouse shall be deemed to have survived Settlor. In all events, however, Trustee shall satisfy any general or specific devises in Settlor’s last will as directed by Settlor’s personal representative; or if none is appointed, Trustee shall do so in accordance with the instrument Trustee determines to be Settlor’s last will.
Spouse’s Trust
4.4 General directions. All property allocated to the spouse’s trust shall be administered as follows:
(a) Tax election. Trustee is authorized to elect, in the absence of a personal representative for Settlor’s estate and under provisions of IRC 2056(b)(7), to have any portion or all of the spouse’s trust qualify for a marital deduction in Settlor’s estate for federal estate tax purposes. By way of suggestion, Settlor indicates that this election should be made to minimize taxes in Settlor’s estate unless Trustee determines some tax should be paid or other considerations override the desirability of reducing taxes. Trustee shall not incur any liability for either electing or failing to make an election under this section so long as Trustee has acted in a prudent and responsible manner.
(b) Income. From Settlor’s date of death, Trustee shall pay the net income to Settlor’s spouse for his life, annually or at more frequent intervals.
(c) Invasion of principal. Trustee may distribute principal to Settlor’s spouse (even to the exhaustion of the spouse’s trust) in Trustee’s discretion to provide for Settlor’s spouse’s health, education, support, and maintenance in his accustomed manner of living. When making distributions under this section, Trustee may consider other resources available to the distributee. Trustee shall first invade the portion, if any, of the spouse’s trust for which an election to qualify for the marital deduction was made before invading the portion not qualified for the deduction, unless the qualified portion has been exhausted or, in Trustee’s discretion, invasion of the qualified portion is impractical or inadvisable.
(d) Withdrawal right. The beneficiary shall have the right in each calendar year to withdraw from principal, in one sum or installments, the greater of $5,000 or 5 percent of the aggregate fair market value of this trust as valued on the date of the lapse. The exercise of a right of withdrawal shall be made in writing by the beneficiary; or, if the beneficiary is under a disability, exercise may be made by the beneficiary’s legal representative acting in a fiduciary capacity, delivered to Trustee prior to the end of the calendar year. The right of withdrawal shall be noncumulative and shall lapse if not exercised before the end of the calendar year. Trustee shall satisfy the withdrawal first from the portion, if any, of this trust for which an election to qualify for the marital deduction was made.
(e) Payment of taxes. At the death of Settlor’s spouse, Trustee shall pay the estate and inheritance taxes imposed upon Settlor’s spouse’s estate (unless otherwise directed in Settlor’s spouse’s last will) from that portion of this trust that Trustee elected to qualify for a marital deduction in Settlor’s estate, to the extent that the total of those taxes is greater than would have been imposed if the assets that were qualified for the marital deduction were not subject to tax.
(f) Distribution of balance. Upon the death of Settlor’s spouse, Trustee shall divide and distribute the remaining principal as provided in Article V.
