Articles Posted in Trust formation and amendment

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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.

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Wills benefiting the attorney or caregiver are suspect

Abuses in formation of wills and trusts

In California over the last few decades there have been some situations whereby attorneys or caregivers have had wills or trusts prepared that benefit them. There was a famous case of a 95-year-old lady whose will left the bulk of her fortune to the people taking care of her. It turns out that the people taking care of her, known as “care custodians” had the will prepared under suspicious circumstances such that the 95-year-old lady probably didn’t know what she was signing. This and other similar situations led to recent legislation to correct abuses.


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.

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.

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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.

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.