A typical trust will have these parts, or "clauses":
Payment of Expenses Sample clause: Estate & Transfer Taxes. I direct that my Trustee, in cooperation with my Executor or Administrator, if any, shall make arrangements to pay all estate, inheritance, legacy, succession or transfer taxes, including any interest and penalties thereon, imposed by any law with respect to all property taxable under such law by reason of my death (“death taxes”), whether or not such property passes under my Last Will or this trust or otherwise and whether such taxes be payable by my estate or by any recipient of any such property, so that they shall be charged against the principal of the residue of this trust, provided, however, that no such payment shall be made out of assets of this trust which are not otherwise subject to death taxes and, provided further, that such payments shall be made with no right of reimbursement from any recipient of any such property. The foregoing prohibition against reimbursement shall not apply to any right of recovery with respect to federal estate tax established by sections 2207 and 2207A of the Internal Revenue Code, nor to any additional tax imposed by section 2032A nor to any generation-skipping transfer tax imposed by Chapter 13 of the Internal Revenue Code or corresponding provision of local law ("GST"). In addition, the Pour Over Will should have the following clause regarding expenses and taxes: I direct that my Executor make arrangements to pay all of the expenses of the administration of my estate, as well as any estate, inheritance, legacy, succession or transfer taxes, including any interest and penalties thereon, imposed by any law with respect to all property taxable under such law by reason of my death, whether or not such property passes under this my Last Will and Testament and whether such taxes be payable by my estate or by any recipient of any such property, such that they shall be charged against the residuary of my revocable trust, more particularly described below, but if none by my Executor out of the principal of my residuary estate with no right of reimbursement from any recipient of any such property provided, however, that no such payment shall be made out of assets which are not otherwise subject to estate, inheritance, or other death taxes. The foregoing prohibition against reimbursement shall not apply to any right of recovery with respect to federal estate tax established by sections 2207 and 2207A of the Internal Revenue Code, any additional tax imposed by section 2032A and/or any generation-skipping transfer tax imposed by Chapter 13 of the Internal Revenue Code or corresponding provision of local law ("GST"). The Pour Over Will should also address the issue of joint property and encumbered properties. See below sample clause. I hereby confirm my intention that the beneficial interest in all property, real or personal, tangible or intangible (including joint checking or savings accounts in any bank or savings and loan association), which is registered or held, at the time of my death, jointly in my name and the name of any other person(s) (excluding any tenancy in common), or as to which there is a designated beneficiary (including a "POD" or "TOD" account) shall pass by right of survivorship or operation of law and outside of the terms of this Will to the surviving joint tenant or such designated beneficiary, if he or she survives me. To the extent that my intention may be defeated by any rule of law (other than rules relating to disclaimers), I give, devise and bequeath all such property to such other person or persons who shall survive me. I direct that any property (solely or jointly owned) subject to an encumbrance shall pass subject to such encumbrance unless otherwise directed by this Will In the miscellaneous clauses, the drafter can include a no-contest clause, provisions for change of domicile, for change of law, number of original trust documents will be executed, simultaneous death issues. Simultaneous Death Act The commonwealth of Virginia has adopted the Uniform Simultaneous Death Act, which establishes a presumption of order of death. Va. Code Section 64.1-104.2 states that when there is no clear and convincing evidence that one individual survived another individual by 120 hours, then, each individual is presumed to have predeceased the other. For joint ownership with right of survivorship, the code provides that the property shall be divided in half and each half shall be part of each co-owner’s estate. You may want to reverse the presumption for simultaneous death for tax planning in certain situation. If one spouse is significantly wealthier than the other, you may want to stipulated that the wealthier spouse is presumed to have died first. Finally, you may want to expand the length of time of survival. It is not recommended to increase the presumption to more than six months, because it will impair the estate administration which has its own set of deadlines and rights to distribution. Types of Asset Transfers Upon Death of the Creator Upon the death of the creator of the revocable trust, the trust becomes irrevocable. The social security number of the creator can no longer be used. The trustee will have to request a new tax identification number (EIN) from the IRS. The trustee will have to provide the EIN to any financial institution holder of a trust asset. Usually, the trustee will sign and send a form W-9 that certifies the correctness of the EIN. Upon his/her death, the creator may want the trust assets to be distributed outright, in installment or in trust. An outright bequest will be received by the beneficiary after the trustee has paid the trust expenses and debts. This bequest can be made by capita or per stirpes. Per Capita means that, if the beneficiary of the bequest has predeceased the creator, the bequest will lapse. The bequest will be included in the residue of the trust assets. Per stirpes means that, if the beneficiary of the bequest has predeceased, his/her decedent(s) will receive his/her bequest. For instance: John bequests $100,000 to Mary. Mary predeceases John. Upon the death of John, each of three children of Mary will receive on third of $100,000. A bequest in installment will be made over a period of time. This is often the option used for beneficiaries who are minors at the time the trust is created. The bequest would be held in trust. When the beneficiary reaches the age of 25, half of the bequest will be distributed and the rest could be distributed at a later age. Below is a sample language of assets held in trust for the benefit of a minor beneficiary. Anything herein to the contrary notwithstanding, should any nondiscretionary distribution with a value in excess of ONE HUNDRED THOUSAND DOLLARS ($100,000) vest in absolute ownership in a beneficiary other than a child of mine under the age of thirty-five (35), such distribution shall be held in further trust for such beneficiary and the Trustee may, in its discretion, pay to or expend for the benefit of such beneficiary (and/or to any ancestor of the beneficiary who shall have disclaimed an interest in property with the result that such property has become a part of this trust) so much of this separate trust's net income and principal (including all or none) as is reasonably appropriate for such beneficiary's (and/or such ancestor's) health, education, support, and maintenance, adding to principal any undistributed trust income. When the beneficiary attains age thirty (30), the Trustee shall distribute one-third (1/3) of the trust assets as then constituted to or for the benefit of the beneficiary; when the beneficiary attains age thirty-five (35), the Trustee shall distribute to or for the benefit of such beneficiary all trust funds that remain (including any accumulated income) outright and free of trust. Without limiting the discretion of the Trustee, it is my intention that this trust fund be preserved and continued for the benefit of the beneficiary until trust termination, and to assist the beneficiary to the greatest possible degree. When appropriate, for example, the Trustee should make loans to the beneficiary or purchase assets for the use of the beneficiary rather than to make outright distributions or expenditures, in order to best preserve the trust fund for the greatest possible time. If such beneficiary dies before all trust funds are distributed, the Trustee shall distribute any of his or her trust funds that are not exempt from generation-skipping tax (including any accumulated income) to such of my descendants and to the creditors of such beneficiary's estate, and to no other persons, as such beneficiary shall have appointed by specific reference to this general power in such beneficiary's Last Will and Testament. To the extent any part of such beneficiary's trust subject to this power shall not be validly appointed and to the extent of any assets that are exempt from generation-skipping tax, the Trustee shall distribute such assets to such beneficiary's then-living descendants, per stirpes, but if none, to the then-living descendants, per stirpes, of the beneficiary's parents, but if none, to my then-living descendants, per stirpes, provided that distributions to any such descendant shall be made to any further trust hereunder, whether then-existing or to be established hereunder. | Other clients prefer to have the entire bequest held in trust for the rest of the life of the beneficiaries. Each beneficiary can be his/her own trustee or co-trustee with a professional or a friend of the family. Others will not want the beneficiary to be a trustee but may add a trust protector as an additional safety. By creating a trust for the beneficiary, the creator can protect the beneficiary against creditors and bad divorces. The creator may give a general power of appointment to the beneficiary. Usually, the general power of appointment can be executed under a Will where the beneficiary will name beneficiaries of his/her trust and how the trust assets should be distributed. Some creator may want to limit the power of appointment. The most common restriction is to limit the power of appointment to family members. When the beneficiary is a special needs person, the creator can create a special needs trust. With a trust properly drafted, the beneficiary will not be disqualified from government benefits. Transfer to Spouse The majority of married couple wants their spouse to be the primary beneficiary of their estate. Some will want to protect their spouse by putting the assets into a marital trust called QTIP trust, while others will want to give their estate outright to their spouse. Because the spouse has an unlimited marital deduction, no estate tax will have to be paid by the spouse. But, by giving outright to the spouse, the couple may lose some tax planning opportunities. One of the most basic estate tax planning tool is the use of the bypass trust combined with the use of the unlimited marital deduction. With this technique, a couple can maximize their tax planning by using two times the unified credit which is currently $3.5 million per person. For instance, John and Mary have over 7 million of combine assets. Using good estate tax planning, if John were to die in 2009, $3.5 million (unified credit amount) could pass free of tax to his descendents while Mary could have access to the income and principal of the entire combine estate. If Mary were to die later during the year, $3.5 million (unified credit amount) could also pass free of tax to her descendents. John and Mary could pass $7 million free of tax to their descendents. The goal of the tax planning technique with a bypass Trust is to make full use of the unified credit exemption that is available to each spouse. The bypass Trust is also called Credit Shelter Trust, Family Trust, or Residuary Trust. At the death of the first spouse, an amount equal to the unified credit exemption should pass out of the estate in a manner that will not cause it to be included in the gross estate of the surviving spouse. The beneficiaries of the trust are often the children and the surviving spouse. The beneficiaries have the right of income and to invade the principal. Upon the death of the surviving spouse, the trust is distributed to the children or held in further trusts for the benefit of the children. Often the spouse will be the trustee of the trust. If the trustee is the surviving spouse, then the access to the principal of the trust assets needs to be limited to the ascertainable standard of health, maintenance, education, and support. Because the spouse is also one of the beneficiaries, this ascertainable standard needs to be used. Otherwise the Internal Revenue Service would qualify the power to invade the principal as a general power of appointment for the benefit of the spouse, and the bypass trust could be included in the surviving spouse’s estate. Because the estate tax laws are expected to change, many drafters prefer to bequest the entire estate either outright to the spouse with the use of a disclaimer. The disclaimer clause states that if the surviving spouse disclaims a portion or all the estate, the disclaimed assets will be held in a by-pass trust. See sample below. I. Residue to My Husband if He Survives Me. If my husband survives me, I give, devise and bequeath the rest, remainder and residue of my property and estate, of whatever kind and wherever situated and to which I may be in any manner entitled at the time of my death, including any property as to which I may have any power of disposition or appointment, to my husband, outright and free of trust, excepting only those assets as to which my husband executes within the appropriate time period a qualified disclaimer relating to this bequest. II. Disclaimer/Residuary Trust. From and after my death, assets disclaimed by my husband if he survives me (or all of my assets if my husband shall fail to survive me), shall be held as the "Residuary Trust", and the Trustee shall dispose of the income and principal of said trust as follows: 1. During my Husband's Lifetime. During my husband's lifetime, the Trustee shall pay such part of the net income and principal to or for the benefit of my husband and/or my descendants as the Trustee shall deem advisable for their respective health, support, maintenance, and the education of such descendants (which standard is intended to be construed as an "ascertainable standard" within the meaning of federal estate and gift tax rules). Consistent with that standard, it is my intention that the trustee provide liberally for the benefit of my husband, during his lifetime, and that his interests shall be considered before the interests of any other beneficiary. The Trustee may, in its discretion, pay more income and principal to or for the benefit of one or more of said beneficiaries than it does for others and may omit paying income principal to or for the benefit of one or more of said beneficiaries, provided, however, that without binding my Trustee it is my hope that my Trustee will remain mindful of my general intention to avoid distributions to "skip persons" that would be subject to the GST. The term "education," as used in this Will, shall include not only education in a preparatory school but undergraduate or postgraduate training in a college or university, training in a vocational school and training in any special type of school. 2. Termination of Residuary Trust. After the death of my husband and upon the first to occur of (a) the attainment by my youngest child of the age of twenty-five (25), or (b) the death of all my children under the age of twenty-five (25), this Residuary Trust shall terminate and the Trustee shall thereupon distribute the entire trust property and estate then held by it hereunder (without taking into account any previous distribution of income or principal to any beneficiary), together with any accrued and undistributed income, to my then-living descendants, per stirpes, subject to further trust as provided for below. If the clients want the assets to be held in a marital trust, called QTIP trust, the trust must meet the following three requirements in order to qualify for a QTIP trust: (1) the spouse must be entitled to all the income from the property for life; (2) the income must be paid to the spouse at least annually; and (3) no one, including the spouse can have a power to appoint the property during the spouse’s lifetime to anyone other than the spouse. The spouse can have a testamentary limited power of appointment. In order to qualify for the unlimited marital deduction, the executor of the decedent’s estate needs to make this election at the filing of the first estate tax return. The main advantage of this trust is that the grantor can control the distribution of the marital trust asset at the death of the surviving spouse. One of the disadvantages of this trust is that the restriction to invade the principal for children or other descendant prevents from future estate taxes planning the spouse could be interested in doing. Another disadvantage is the power of the spouse to request that the trust assets be productive which could result of the forced sale of a closely held business as discussed above for the marital trust with a power of appointment. Sample language: During my Husband’s Lifetime. My trustee shall pay the net income of the marital trust to my husband during his lifetime in quarterly or more frequent installments and may pay to him as much of the principal as my trustee may deem appropriate for his support, other needs and comfort. Distribution at my Husband’s Death. At my husband’s death, my trustee shall distribute to my husband’s estate any accrued or undistributed income of the marital trust and a sum needed to pay taxes attributable to the marital trust as later provided. My trustee shall distribute the remaining principal to my then-living descendant, per stirpes. Upon the Death of the Surviving Spouse Generally, upon the death of the surviving spouse, assets are distributed to the children. If the children are minors, the assets a held in one trust, called “pooled trust.” This trust is generally divided into equal shares when the youngest reaches the age of 25. The principal of the pooled trust is that the trustee can spend unevenly on each child needs like parents do. One child may go to an expensive college while another may receive a scholarship. One child may have higher medical expenses. Many clients will make special bequests to friends or charities at the death of the second spouse. Tangible property will be distributed at that time. A well drafted document should include a clause for remote beneficiaries. Who will receive the trust assets if all of the beneficiaries have predeceased the surviving spouse? Some clients have very specific ideas and an extensive list of charities, while others may simply want their assets to go to their remote family. Below is a sample clause for a remote beneficiary’s distribution. Failure of Beneficiaries If upon the termination of any trust established hereunder there shall be no beneficiaries designated to receive the assets thereof, the affected assets shall be distributed: 1. One-half (½)(or all thereof in the absence of any beneficiaries under subparagraph 2. immediately following) to the then-living descendants, per stirpes, of my parents; and 2. One-half (½) (or all thereof in the absence of any beneficiaries under subparagraph 1. immediately preceding), to the then-living descendants, per stirpes, of my husband's parents. |
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