Articles Posted in Trusts


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Trust terminology basics

A trust is created by a written  document  known as a declaration of trust, and is then funded by transfer of money  into  trust bank accounts and/or deeding or transferring of properties to the  trust.   The creator of the trust is known as the “Trustor” or the “Settlor.”

Trusts are usually prepared by attorneys because each trust is custom for the situation and there are many types of trusts.  The persons who are to receive money and property out of the trust are known as the “Beneficiaries.” The person or institution that takes care of the money and property  of  the  trust is the “trustee”.  The trustee is bound by law to follow the  directions contained in the declaration of trust.

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My Sister is the Trustee and She Refuses to Pay My Share

Trust terminology basics

A trust is created by a written document known as a declaration of trust, and is then funded by transfer of money into trust bank accounts and/or deeding or transferring of properties to the trust.   The creator of the trust is known as the “Trustor” or the “Settlor.”  Trusts are usually prepared by attorneys because each trust is custom for the situation and there are many types of trusts.  The persons who are to receive money and property out of the trust are known as the “Beneficiaries.” The person or institution that takes care of the money and property of the trust is the “Trustee”.  The trustee is bound by law to follow the directions contained in the declaration of trust.

Getting Money Out of a Trust – the typical process

Payout events – When do the beneficiaries get paid?

In a typical trust the beneficiaries are scheduled to be paid their share after the trustors’ death.  Because declarations of trust are custom prepared, some are better than others as far as payout instructions. If there are not any instructions as to the exact payment dates, then the trustee is simply required to pay out the shares in a reasonable period of time.  In smaller estates I typically require payouts to occur within less than a year or maybe even 60 to 90 days.  I also typically require that all personal property and furniture be divided up and distributed within 60 days so that it is not held up with the rest of the estate. In larger estates, especially where a business or property is involved in which need to be sold it may be reasonable to give the trustee a year or more to distribute. The first step in getting a beneficiary’s share paid is to obtain a copy of the declaration of trust and see what it says.


What is a spendthrift trust?

Image of young shopaholic with her hands full of brightly colored shopping bagsA spendthrift trust is a trust that is created for the benefit of a person who is often unable to control his or her spending and gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary. Spendthrift trust are often established when the beneficiary is too young, immature, or doesn’t have the mental capacity to manage their own money and wants to protect a beneficiary from the beneficiary’s own tendency to uncontrollably, imprudently —and usually rapidly— will exhaust assets.

Spendthrift trust – a simple example

This is best illustrated by a simple example. Mom & Dad set up a living trust for their children and put $500,000 principal into it to be held for the benefit of the children. Suppose one or more of the children has financial trouble and owes money to creditors. With a properly written spendthrift clause in the trust document, the creditors of the children cannot enforce their claims against the children’s share of the trust. The trustee of the trust still would be have discretion to pay money out to the children. People also can set up trusts to benefit themselves but those types of trust are subject to more limits on the spendthrift provisions.

General rule-transfers to creditors can be prohibited

California law generally allows a trust instrument to legally provide that a trust beneficiary’s interest in trust may not be transferred and may not be subject to enforcement of a creditor’s money judgment. Thus, in the $500,000 put into the trust in the above example, if the money is to be held in the trust until the children reach age 35, then before the children reach that age a creditor with a money judgment against the children cannot reach that money. However when a child reaches age 35 in the example and is entitled to his trust principal distribution, the child’s creditors can get a court order to have the child’s principal paid to the creditors to satisfy the judgment. Likewise, if the trust provides for discretionary payment of trust income to trust beneficiaries (as opposed to mandatory payment of income) then the children’s creditors cannot force the trust to pay the income to them.

Taxation of Irrevocable Trusts – Tax rates can be high on permanent trusts


Image of older man holding his cat while sitting on benchThe term “irrevocable trust” is commonly used by estate lawyers and financial planners to describe a trust which is permanent and cannot be changed or revoked. 

An example would be where you establish a trust and put $100,000 into it for the benefit of your children and the $100,000 stays there no matter what happens to you.  The actual documentation establishing the trust has to be read before you can say for sure if the trust is permanent or irrevocable.


The Internal Revenue Code, which is the place where all of the federal tax laws are located in the federal legal system, has provisions for the taxation of permanent/irrevocable trusts.  A permanent/irrevocable trust is a separate taxable entity and would need to obtain a federal tax ID# upon formation.   Tax returns to be filed are form 1041 fiduciary income tax return and California fiduciary income tax return form 541. These tax returns are due on April 15.  

Living Trust Taxation – The IRS ignores revocable living trusts


Image of Old man resting on bench and cuddling dog and catThe term “living trust” is commonly used by estate lawyers and financial planners to describe a trust which is established during a person’s lifetime and which is revocable and changeable. 

Living trusts – are also known as “revocable trusts”. A living trust could have components which are permanent and not revocable so the actual documentation establishing the trust has to be read before you can say for sure if the trust is revocable.


Documentation prepared to establish a trust is not registered with any government agency or taxing authority. The only way to find out what a trust says is to actually have the documentation prepared and signed when the trust was formed. Typically the estate lawyer will retain a copy of any trust prepared and then the people establishing the trust will have their own copies. However, in the context of probate and estates, we have seen instances where the trust documentation is lost or destroyed so nobody can figure out what the trust requires. That is the subject of another blog.


The Internal Revenue Code, which is the place where all of the federal tax laws are located in the federal legal system, has a special term for revocable trusts.  That term is “grantor trust”.  Under the grantor trust rules the person who transfers property to a trust and retains certain powers or interests is treated as the owner of what is transferred to the trust for income tax purposes. This means for example if you transfer a savings account to a revocable trust, the interest income on that savings account is reported on your personal tax return. The IRS does not recognize revocable trusts (grantor trusts) as a tax paying entity. The IRS does not require revocable trusts (grantor trusts) to have a separate tax ID number. In fact, if it is a revocable trust, your Social Security number would be the number on the account in this situation.

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I was just put in charge of a trust so what do I do?

Trust Administration Basics for Newly Appointed Trustees

Events triggering administration.    Trust administration is needed when or both of the Trustors (i.e. persons who created the trust) passes away or resigns voluntarily or becomes legally incompetent.

Basic responsibilities

The trust documentation must be consulted for exact instructions pertaining to the trust involved but most trusts typically involve the following steps.

♦ Authorize successor Trustee Appropriate paperwork will need to be done to establish who is the successor trustee and to authorize the successor trustee to act on behalf of the trust and its accounts and properties.
♦ Notifications & certificates Original death certificates are needed and notices need to be sent as determined by what is in the trust.
♦ Formal notice to beneficiaries A formal notice in the form required by the California Probate Code must be sent to everyone mentioned in the trust.
♦ New tax ID# & banking A new tax ID# must be obtained from the IRS and some or all of the trust bank accounts will need the new ID# and new account signatures.
♦ Inventory of assets All accounts, personal property and real estate needs to be inventoried
♦ Notify creditors & pay debts All bills need to be paid and creditors notified
♦ Insurance & Pension Plans Notification of death and paperwork may be needed to get distributed.
♦ Real estate titles Documents need to be filed with the county recorder because of the death and the property tax situation considered
♦ Business & investment changes If the trust owns a business or shares in some type of investment involving other owners then various documentation will need to be done.
♦ Appraisals Appraisals of all real estate and valuable personal property are needed.
♦ Trust allocations & reports to IRS If the trust has assets from a husband and wife various accounting and allocations/reports to the IRS may be needed
♦ Property taxation issues Determine property tax effects of the death on each parcel of real estate and consider options depending upon how property is to be disposed of.
♦ Income, estate and gift tax returns Income tax returns for the trust and for the deceased person need to be filed as well as possibly estate and gift tax returns.
♦ Accounting & distributions Trust law requires a detailed formal accounting at least annually to all beneficiaries unless it is waived.  After the final accounting, if there are no objections to the accounting, the trust estate is distributed to the beneficiaries according to the instructions in the trust.

CALL  (949) 229-7034  to speak with Lawyer  David L. Crockett

How Often Should You do an Estate Plan Review?

Outdated Estate Plan, Trust or Will

Outdated Estate Plan?
An Estate Plan Review Helps You Deal with Life Changes

Once you have your estate plan drafted and and your selected assets funded into your Revocable Living Trust, you can’t simply throw your estate planning documents into a drawer and forget about them.

If some years have passed since you funded your Trust, or signed all the various Estate Planning documents, there may have been changes in the laws coupled with critical changes in yours’ and your loved one’s life circumstances. That means that your estate plan is now out of date and out of tune with the realities of your life situation. An estate plan review or trust review is needed. Your estate plan might need a legal tune-up.

Qualified Personal Residence Trust

What is a Qualified Personal Residence Trust?

A Qualified Personal Residence Trust (also known as a “ QPRT”) is an irrevocable trust which a homeowner establishes to make a future gift of his home to his or her children while retaining the right to continue living in the home for a defined number of years. At the end of that period, the home transfers to the remainder beneficiaries who are typically the homeowner’s children.  The right to continue living in the home is the “retained interest” and the beneficiaries’ interest is the “remainder interest”.   The remainder interest is a reportable gift and effectively removes the house from the homeowner’s taxable estate. The QPRT takes advantage of provisions in the tax law that allows the gift to be reported at a discounted value.

Typical Situation

John Doe, a widower at age 67,  owns his home which is worth $1 million.  He has a life expectancy of 15.2 years.  He expects that the house will be worth $1.5 million in 15.2 years.  He has other assets which total over $5,325,000, the amount of the federal estate tax exemption.  If he keeps his home until he dies, then it becomes part of his taxable estate and will be subject to estate tax of 35% on the $1.5 million value at his date of death.  $1.5 million at the 35% tax rate would be $525,000.  He wants to transfer the ownership of the home to his children and avoid the estate tax by getting it out of his estate.  He establishes a QPRT which provides that he may live in the home for 10 years.

What is a Qualified Domestic Trust?

qualified domestic trustA Qualified Domestic Trust (also known as a “ QDOT”) is type of trust established where estate property passes to a non-U.S. citizen spouse to allow a marital deduction on the death of the first spouse.  A QDOT allows the amount transferred into the Trust to qualify for the estate tax marital deduction.  Without a QDOT, assets transferred from a decedent to a spouse who is a non-U.S. citizen do not qualify for the marital deduction on the decedent’s Federal Estate Tax return, form 709, and thus get taxed on the death of the spouse who is a U.S. citizen. 

For a trust to qualify as a QDOT, the trust instrument requires that at least one trustee be a U.S. citizen or a domestic (U.S.) corporation and that no distribution of trust principal can be made unless that trustee has the right to withhold the tax imposed on QDOTs.  A QDOT is authorized under the IRC §2056(d) and regulations thereunder governing the marital deduction for property passing to a surviving spouse.

The purpose of the QDOT from the standpoint of the government, is to insure that estate taxes get collected on distributions of trust principal/corpus during the life of the surviving spouse or at her death.


According to the tax laws, IRC §671-679,  a “grantor trust” is any trust in which the Trustor/Grantor retains control over the income or principal, or both to such an extent that he is regarded as the substantial owner of the trust property and income.  The power to revoke is a typical retained power that makes a trust a grantor trust.  Thus, the typical living trust used in estate planning is a revocable trust and hence a “grantor trust”.  The income tax significance is that the taxable income generated by the grantor trust is reported on the income tax return form 1040 of the Trustor/Grantor. Also, the tax due on such income is paid by the Trustor/Grantor on his personal income tax return, form 1040.  Thus, a grantor trust does not typically file any income tax return.


This is commonly known as an IDGT and is used for income and estate tax advantages.  An IDGT involves setting up a trust that will accumulate income and will purposely give the Grantor a right or power that will cause him to (i) be taxed on the income under the grantor trust rules, IRC§§671-679 but (ii) will not be a power that would cause the trust property to be included in the Grantor’s estate for estate tax purposes.  The income tax savings can be significant because the trust income tax rates are considerably higher than individual rates.  See the following table for comparison.

$2,450-5,700 368 15% 245 10%
5,700-8,750 1,278 28% 570 10%
8,750-11,950 2,223 36% 875 10%
11,950 -17,400 3,375 39.6% 1,195 10%
17,400-70,700 6,866 39.6% 1,740 15%
70,700-142,700 25,640 39.6% 9,735 25%

The IDGT will usually save estate taxes.  First, the value of the property contributed is contributed to the trust and/or sold to the trust at a fixed amount and possibly a discounted amount.  This gets it out of the Grantor’s taxable estate altogether and avoids any increase in value from adding to the estate.  Second, the value of the gift of course is counted toward the Grantor’s lifetime estate and gift tax exemption which is currently at $5,250,000 per person.  There is no guarantee that the exemption amount will remain as Congress could decide at any time to lower it so the government could collect more estate taxes.

Typical Situation

Image of sign pointing to apartment officeJohn has an apartment building for which he paid $300,000 and which provides $70,700 per year cash flow net taxable income.  John doesn’t need the income from the building and wants to leave the building and the income to his children as part of his estate plan.  He decides to put the building into an IDGT which is a permanent irrevocable trust. 

At $70,700 per year taxable income, if the income is taxed to him individually on a joint return, the federal income tax will be $9,375.

However, if the apartment income is reported and taxed to the IDGT then the tax federal income tax will be $25,640, which is $16,265 per year more tax.  The IDGT is set up and written so that the income is taxed to John on his individual return and the trust doesn’t pay any of the tax. (This would be due to the IRC §§671-679).   The income tax savings alone makes it worthwhile to put the building into the IDGT.

However, there are estate tax benefits as well.  Assume also that the building is worth $500,000 when placed into the trust and that it goes up in value 10% from the time it is put in until the date of John’s passing.  That $500,000 building is a permanent transfer to a permanent irrevocable trust (the IDGT) so the $500,000 is out of his estate for estate tax purposes AND the 10% increase in value of $50,000 is out of his estate.  The potential estate tax savings is $220,000 on the building.  (Value of $550,000 times 40% estate tax rate = $220,000 estate tax).


  1. Save income taxes –.  As shown by the above example, significant income taxes can be saved with the Grantor paying the taxes on his/her own individual income tax returns.  The trust income tax rates are much higher.

  3. Save estate taxes –As with any permanent gift or transfer to a permanent trust or otherwise, the size of the Grantor’s taxable estate is lowered by placing assets into an IDGT.  There are of course estate and gift tax consequences to gifting or transferring to the IDGT because of the unified estate and gift tax scheme of the tax laws.  If a $500,000 asset is gifted to the IDGT, then that amount counts toward the lifetime estate and gift tax exemption which in 2013 is $5,250,000.  However, assuming appreciation value, using up $500,000 of the exemption by placing the asset in the IDGT today is better than waiting until it goes up to $550,000 in value because that higher value would use up more of the lifetime exemption.  This is known as “freezing” of values.

  5. Loss of step up in basis of assets at death. Under the gift tax rules, the income tax basis of the donor of the gift transfers “carries over” to the donee of a gift.  Thus, in the above example, the $500,000 in value property put into the IDGT retains the income tax basis of the Grantor which is $300,000 or less.  The actual adjusted basis would be the price paid, plus improvements, minus depreciation taken.  Because the IDGT keeps the property out of the Grantor’s taxable estate, there is no step up in basis upon the death of the Grantor.  So, if the trust sells the property or ultimately distributes it out to the beneficiaries, the tax basis is still $300,000 plus improvements minus depreciation taken.  If the property is then sold for $700,000 as an example, there would be taxable capital gains of $400,000 or more depending upon the adjusted basis amount.  Had the property NOT been put into the IDGT and assuming it was still owned at the death of the Grantor, then the income tax basis would have increased at the date of death (i.e. “steeped up”) to the date of death value.  If  the date of death value was $700,000 for example then whomever inherited the property could sell it for $700,000 and have no capital gains because of the basis step up.

  7. Compare the estate and income tax considerations first. Where there is highly appreciated property, it may not be worth it to put it into an IDGT because of the loss of stepped up basis. Because of the large estate tax exemption of $5,250,000, most estates and trusts are not in a position where there is any estate tax due.  Even if there is no estate tax due and even if no estate tax return is filed, assets owned at death still received stepped up basis.  Some practitioners elect to file the estate tax return anyway simply to establish the step up in basis. Due to the large exemption of $5,250,000, IDGT trusts are not used nearly as frequently as before in part because of the loss of stepped up basis and consequent higher capita gains.

  9. Possible Asset protection
    . Since the IDGT is permanent, the trust and its assets may be  legally immune from the debts and liabilities of the Grantor and the beneficiaries.

  11. Avoidance of estate and trust disputes later on. As people advance in age, there tends to be increasing interest by trust beneficiaries and heirs as to who is going to inherit what items.  Older people can be subjected to undue influence and urges to make changes to their estate plan where their estate is set up in a typical living/revocable trust.  Since the IDGT is a permanent and irrevocable trust, its terms and beneficiaries cannot be changed.  This fact tends to avoid disputes and urges to make changes.


  1. The income tax inclusion rules. The regulations at Reg §1.671-1(a) define certain powers and interests which cause a grantor of the trust to be treated as owner of the trust so the trust income is taxed to the grantor (i.e. to make it a “defective” grantor trust).  These powers are:

  • The Grantor has a reversionary interest in the corpus or income of any portion of the trust and the interest is more than 5% of the portion’s value. IRC §673.
  • The grantor or a non adverse party has the power to control the beneficial enjoyment of the trust. IRC §674.
  • The grantor has a certain administrative powers over the trust which are primarily for his or her benefit, rather than for the trust beneficiaries benefit. IRC §675. These types of powers are:
  • 675(1)Power to deal for less than adequate and full consideration. . . .

    675(2)Power to borrow without adequate interest or security. . ..

    675(3)Borrowing of the trust funds. The grantor has directly or indirectly borrowed the corpus or income and has not completely repaid the loan, including any interest, before the beginning of the taxable year. The preceding sentence shall not apply to a loan which provides for adequate interest and adequate security, if such loan is made by a trustee other than the grantor and other than a related or subordinate trustee subservient to the grantor. For periods during which an individual is the spouse of the grantor (within the meaning of section 672(e)(2)), any reference in this paragraph to the grantor shall be treated as including a reference to such individual.

    675(4)General powers of administration.  A power of administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity. For purposes of this paragraph, the term “power of administration” means any one or more of the following powers: (A) a power to vote or direct the voting of stock or other securities of a corporation in which the holdings of the grantor and the trust are significant from the viewpoint of voting control; (B) a power to control the investment of the trust funds either by directing investments or reinvestments, or by vetoing proposed investments or reinvestments, to the extent that the trust funds consist of stocks or securities of corporations in which the holdings of the grantor and the trust are significant from the viewpoint of voting control; or (C) a power to reacquire the trust corpus by substituting other property of an equivalent value.

  • The grantor or a non adverse party has the power to revoke the trust and reinvest title and the grantor. IRC §676
  • Trust income can be held or distributed income to or for the benefit of the grant- or or the Grantor’s spouse at the discretion of the grantor or a non adverse party. IRC §677
    1. The estate tax inclusion rules. To make the IDGT work, there needs to be the right combination of income tax rules under  IRC §671 which make the income taxable to the Grantor yet to not make the property in the IDGT be included in the Grantor’s taxable estate under the inclusion rules of estate taxes under IRC §§2036-2042.  The estate tax inclusion rules are:

  • If the Grantor retains for his life the right to possess or enjoy the property transferred to the trust. IRC §2036(a)(1)
  • If the Grantor retains for his life the right to designate who will possess or enjoy the trust property. IRC§2036(a)(1)
  • If the Grantor retains a reversionary interest in excess of 5% of the transferred property. IRC §2037(a)(2)
  • If the Grantor retains the right to alter or amend or revoke the trust. IRC §2037(a)(2)
  • If the Grantor is deemed to have retained a general power of appointment over the trust assets. IRC §2041(a)(2)
  • If the Grantor is deemed to have retained an incident of ownership over a life insurance policy owned by or transferred to the trust. IRC §2042
  • If the Grantor has made a transfer of or relinquished any of the foregoing rights (items (1) through (6) above) within three (3) years from his date of death. IRC §2035(a)(1).

    The IRS has issued two revenue rulings that support the use of various powers in IDGT drafting.  First, Rev. Rul. 2004-64 held that payment of income tax by the Grantor that arises from the trust’s income is not a gift by the Grantor and no portion of the IDGT will be included in the gross estate of the Grantor under Code §2036 if the Grantor must pay the income tax of the IDGT without reimbursement from the trust.  If the Grantor does need cash from the trust to pay the Grantor’s income taxes on the trust income, it can be accomplished by having the Grantor selling the property to the trust.  This is discussed below.

    Second, Rev. Rul. 2008-22 provided that the use of the “power to substitute assets” at fair market value will make an irrevocable trust defective such that income is taxed to the Grantor yet the trust assets are removed from the taxable estate of the Grantor.  This ruling follow IRC§675(4)(c)which states that a “power to reacquire the trust corpus by substituting other property of equivalent value” is a power of administration which causes the Grantor to be the owner of the income and hence has the income reportable on the Grantor’s personal income tax return.   The technique described in this Revenue Ruling is the safest course.


    1. Initial documentation – An IDGT is established by having an attorney prepare a Declaration of Trust with appropriate language so that there will be reserved powers in the Grantor (per IRC §§671-675) so he can pay the tax on the income yet not so much power that the trust assets are included in his estate for estate tax purposes (per §§2036-2042).  The Declaration of Trust states in precise detail exactly how the trust is to be run, who will receive money from the Trust, and when the money will be distributed.  Once the Declaration of Trust is signed, a federal tax id# for the trust is obtained and a trust bank account is opened.  The trust is then given money to pay for life insurance and then the Trust buys the life insurance policy and owns the policy in the name of the Trust.
    2. Transferring the property into the trust – There are two choices here.  First, the property can be gifted to the trust by the Grantor and a gift tax return is filed to report the gift.   The other choice is for the Grantor to sell the property to the trust on an installment contract so that the Grantor will receive monthly cash payments until the price is paid off.  Also, a combination of both can be done to accomplish the Grantor’s various objectives.  For example, gift $10,000 to the trust and then sell the property to the trust for $50
      0,000.  The exact numbers would depend upon how much money the Grantor wants or needs out of the trust.
    3. Choice of Trustee – The trustee of an IDGT should not be the Grantor or any related person or person under the employment or control of the Grantor or subordinate to the Grantor.  IRC §672(c).  Otherwise, there is a risk of inclusion of the trust assets in the estate of the Grantor under the “retained powers” sections of IRC§§2036-2042 discussed above.
    4. Ongoing & annual accounting – Typically, as with any permanent trust, it will have its own bank accounts and its own books and records which will all be maintained by the trustee.  As with any irrevocable trust, there are annual accounting requirements whereby the trustees must account to the beneficiaries.  The accounting requirements and prescribed format is found at Probate Code §§16060-16069, §16461.


    Any IDGT should provide specific prohibitions against the trustee doing anything or having any of the powers mentioned in  IRC §§2036-2042.  Also, the current status of Revenue Rulings 2004-64 and 2008-22 should be reviewed again before establishing any IDGT to make sure the principles expressed therein are still good law.  Remember, the IDGT is a disfavored tax saving technique as far as the IRS is concerned.

    1. A statement of intent is recommended to the effect that the Grantor intends for the trust to be a Grantor Trust under §§671-678 of the Internal Revenue Code and also that it is intended that the trust not be included in the estate of the Grantor under §§ 2036-2038 of the Code. State that the trust provisions should be interpreted and applied in such a manner as to accomplish these intents.

    3. A provision to make the trust “defective” under IRC §675(4)(C) such as, “The Grantor shall have the right, at any time exercisable in a non-fiduciary capacity, without the approval or consent of any person acting in a fiduciary capacity, to acquire any property then held in the trust  by substituting other property of an equivalent value on the date of substitution, pursuant to IRC §675(4)(C); provided that in the event of the exercise of this power of substitution, the Grantor shall certify in writing to the Trustee that any substituted property is of equivalent value to the property previously held in the Trust for which it is substituted.  The Grantor shall accompany his certification with appraisals by licensed appraisers.  The Trustee shall, in his/her discretion, independently verify such determination of value and any dispute regarding such determination of value shall be resolved by independent binding arbitration.”

    5. Provisions to make sure that the trust does not have powers which would inadvertently result in the trust assets being included in the Grantor’s taxable estate such as:

    7. A statement that the Grantor shall have not any right to demand that the trust pay his income taxes or reimburse him for the taxes paid on the income earned by the trust.
    8. A statement that under no circumstances shall the Grantor have any right or power, nor shall the Trustee permit the Grantor to utilize the assets of the trust to satisfy any legal obligation of the Grantor, including, but not limited to, the obligation of the Grantor to support any person.
    9. A statement that the trustee shall determine and certify in the exercise of the power of substitution of properties that such power has not been and may not be exercised in a manner that may result in the shifting of any benefits between or among the beneficiaries of the trust.
    10. A statement that the assets of the trust shall not be available to satisfy the claims of any creditor of the Grantor.


    1. Gift tax returns (form 709) will be required by April 15 each year if the amount of the money or property transferred into the trust exceeds the annual exclusion per trust beneficiary.  At present, the annual gift tax exclusion is $14,000 per donee.
    2. Fiduciary income tax returns (forms 1041 and 541) are due each year on April 15 to report the trust income.   Even if the income is minimal and below the reporting requirements, returns must be filed to establish the trust as a permanent irrevocable trust in the eyes of the IRS.  The point of that is to have evidence of that separateness of the trust to keep the trust and its assets out of the Grantor’s estate for estate tax purposes.
    3. Individual income tax returns (forms 1040 and 540) must be filed by the Grantor each year to report and pay tax on the IDGT income since the IDGT is a Grantor Trust. Also, if the Grantor uses the technique of selling the property to the IDGT rather than donating it he may have capital gains to report on the sale if he is selling the property to the IDGT for a gain above his cost basis.
    4. Estate tax return reporting not required for the trust assets (form 706). The trust assets and the trust are not to be reported on the estate tax return.  However, if the insured’s estate exceeds the $5,250,000 exemption (or whatever exemption is in effect at his date of death), then a return will be filed for the estate and the subject of the IDGT may come up, especially in an estate tax audit.  Typically, nearly all estate tax returns in Orange County are audited. The auditor will examine the IDGT records in detail and all must be in order and up to date or the insurance proceeds will be drawn back into the estate and be taxed.


    The information in this memo is for general informative purposes and may not fit every situation.  You are cautioned to have any IDGT situation thoroughly reviewed and appropriate documentation prepared by legal counsel before you actually commit to it.  The IDGT has been discussed by Congress and the IRS as being disfavored so it can be expected that the legally of the IDGT may be revoked by future legislation.  The tax laws and IRS regulations are constantly changing in this area.  Strict compliance with the required notices and the filing of tax returns and other administrative requirements are essential to be able to claim the tax benefits of an IDGT.