Wills/Trust


A. Wills
A will is an oral declaration or written instrument, to take effect upon a person’s death, in which the person disposes of his or her property or directs how it shall be disposed of once deceased. A will is revocable during the lifetime of a person. In general if a person dies without a will or if the will is invalid then laws of intestacy apply. To prevent an heir from taking a testator must dispose of all her property by will because if it is partially disposed of the heir would take by intestacy.
B. Trust
A trust is an agreement between a donor or grantor and a trustee which allows the trustee to hold legal title to the asset of the donor/grantor for the benefit of a beneficiary. There are three types of trust, simple trust, complex trust and grantor trust. The type of trust is determined by who pays taxes. With a simple trust the beneficiary owns the income and pays the tax, with a grantor trust the grantor owns the income and pays the taxes and with a complex trust the trust itself owns the income and pays the taxes, the taxes are not passed through the grantor or beneficiary.

1. Simple Trust
This is a trust that does not accumulate the income but requires that all income be distributed each year. Note that the trusts which are listed under complex trust can also be simple trust; there is simply no need to duplicate the entries.

2. Complex Trust
A complex trust is a trust that is not a simple trust.
a. Foreign Trust
It used to be that a trust was considered foreign if the trust was indeed foreign to the U.S. Nowadays a trust is considered a foreign trust as long as there is no court supervision of the trust. Such trust can be a grantor trust or a simple or complex trust.

 b. Business Trust
  i) Qualified Subchapter S Trust (QSST) and Electing Business Trust    (ESBT)
These are trusts which own S corporation shares. Just like S Corporations, a QSST and ESBT need to elect to be treated as such.
  ii) Business Trust
This is when the business itself is a trust, the trust operates a business. These types of trust are treated as grantor trust if the grantor retains control of the trust or as simple or complex trust if the grantor does not retain control of the trust.
  iii) Rabbi Trust
This is a retirement plan and just like an IRA or other retirement plan needs to be set up with the employer.

 C. Charitable Trust
   i) Charitable Lead Trust
In such a case the principal is held in trust and the interest is paid to a designated charity for a specified term of years. Once the specified term of year expires, the principal or remainder gets paid to the beneficiaries, usually family members or the donor him/herself. The grantor can deduct the interest paid to the charity for every year the annuity is paid. Another option with lead trust are lead annuity trust in which the trust pays a fixed percentage of the principal of the trust to a designated charity for the specified term of years and then the remainder reverts to the donor or his non charitable beneficiaries. While a charitable lead unitrust trust pays a percentage of the principal to the designated charity. The percentage paid is decided every year, and once the term of year is complete, then the remainder goes back to the grantor or the non-charitable beneficiaries
   ii) Charitable Remainder Trust
The charitable remainder trust is the reverse of the lead trust in the sense that the payments are first made to the grantor on non-charitable beneficiaries and then once the specified term of years is complete, the rest of the trust is turned over to the designated charitable organization. In a charitable remainder trust, the trust is paid as an annuity trust--which pays a certain amount of the trust-- or unitrust- - which pays a percentage of the principal—to the grantor the donor or another non charitable beneficiary for a specified period. Once the term of years is complete the remainder is paid to a designated charity.
   iii) Pooled Income Trust
Rather than being other assets, this type of trust involves property. In this case the grantor transfers the property to the charity and the charity sets up a trust in which the grantor retains the interest on the principal and the charity gets the remainder of the property.

3. Grantor Trust
If the trust agreement allows the grantor to retain some right and control, then the trust is a grantor trust. Grantor Trusts are trusts with income taxed to the grantor.
  a) Personal Residence Trust
This is when a grantor transfers his or her residence to a trust and maintains the right to live in the residence for a specified term of years. At the end of the term or when the grantor dies, the title to the property passes to the beneficiary.
  b) Qualified Personal Residence Trust
This is when a grantor transfers his or her residence to a trust and maintains a specified term interest. In such case, if the grantor dies before the end of the specified term interest, the fair market value of the residence is included in the grantor's estate but if the grantor survives the specified term of years, then the property passes to the beneficiary.
  c) Savings Account Trust
This is one type of inter-vivos (living) trust used as a substitute for wills. The grantor deposits money in the bank in the name of A in trust for B and can keep the bank books, make withdrawals, need not give notice to the beneficiary, and can revoke the trust at any time.
  d) Grantor Retained Income Trust
This is an irrevocable trust in which the grantor retains the right to all trust income until the earlier of a specified term of years or the death of the grantor. If the grantor survives the specified term of years, the principal passes to the beneficiary.
  e) Grantor Retained Annuity Trust or Unitrust
These are irrevocable trusts in which the grantor retains the right to receive, for a specified term, an annuity based on a specific amount or a fixed percentage of the principal.
  f) Funeral Trust
This is a trust which allows the prepayment of funeral expenses and is an agreement between the grantor and funeral home that the funeral home sets up.
  g) Life Insurance Trust
This is a trust which holds insurance on the life of the grantor and generally the grantor’s spouse. This is set up to avoid federal estate taxation on the insurance proceeds upon the death of the grantor or spouse.

Minnesota and New York.



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