Why the Treasury Department favors the FLIP-CRUT

San Francisco, CA – (800) 775-7612 – In a prior post, we looked at the FLIP-CRUT concept in which a Charitable Remainder Trust begins as as a Net Income Charitable Remainder Trust, and after a “Triggering Event”, changes and becomes a Standard Charitable Remainder Trust with a fixed Unitrust or Annuity distribution.

We also looked at relevant Treasury Department definitions of Triggering Events, which are judged not to be subject to the control of the Trustee or another person.

Among the most common instances of Triggering Events is the sale of Unmarketable Assets, for example, the sale of a Personal Residence, or any other real or commercial property, securities or various business holdings that are not publicly traded, and do not have any sort of public marketplace to value and sell.

In Treasury Regulations § 1.664-1(a)(7)(ii), the interpretation of Unmarketable Assets includes:

Assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents. Unmarketable assets include real property, closely-held stock, and an unregistered security for which there is no available exemption permitting public sale.

Why this definition is essential when using a FLIP-CRUT to sell appreciated real estate.

A Charitable Remainder Trust is an excellent way to postpone the tax on sale if you possess a piece of real estate that has appreciated in value, so that selling it outright would result in significant capital gains.

The IRS will unfortunately prohibit the deduction based on the Step Transaction Doctrine if you donate the real property to a Charitable Remainder Trust once an irrevocable commitment to sell already exists.

On the other hand, placing real property in a Standard Charitable Remainder Trust – which has a fixed yearly commitment to pay the income to the Grantor – may also not be feasible.

A Standard Charitable Remainder Trust will not get the job done, if the real property takes takes a good amount of time to sell (surely more than a year).

This is why the Treasury Departments inclusion of Real Property as not readily marketable is critical. It allows you to donate the property immediately, take the appropriate deductions, and after that convert to a Standard Charitable Remainder Trust after there is sufficient liquidity (post-sale) to fulfill the yearly distribution requirements.

The FLIP-CRUT is really the best vehicle when offering for sale appreciated assets that are not readily marketable, such as real estate.

Connect with a Family Philanthropy Attorney at Ainer and Fraker 800-775-7612 right now to find out how you can take advantage of the incredible tax benefits of a FLIP-CRUT.

FLIP-CRUT Safe Harbors According to Treasury Regulations

San Francisco, CA – 408-777-0776 – In a prior post, we talked about the FLIP-CRUT idea in which a Charitable Remainder Trust starts its life as an Earnings Charitable Remainder Trust, and upon a “Triggering Event”, transforms to a Standard Charitable Remainder Trust at a set percentage distribution.

Certainly, the whole FLIP-CRUT idea hinges on the Treasury Department’s definition of a Triggering Event – at which time the Net Income CRT transforms to the Standard CRT, with its annual payment requirement.

Let’s examine this Activating Event concept by exploring some fundamentals:

1. The Triggering Event needs to be clearly defined in the FLIP-CRUT document. Treas. Reg. §1.664-3(a)(1)(i)(c)
2. The Triggering Event may be a certain DATE that is specified in the FLIP-CRUT document OR it MAY be upon the specific incident of an EVENT, however:.
If the Triggering Event is defined as an Event, then the occurrence of that Event can not be “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other individual. Treas. Reg. §1.664-3(a)(1)(i)(c)(1)

Examples of Triggering Events that WOULD NOT Work.

1. Upon the choice of the Donor (or Trustee) to sell the profile of extremely valued openly traded securities;.
2. Whenever the Trustee feels like it;.
3. Upon the advice of the Donor’s financial consultant, Certified Public Accountant or other fiduciary that now is an ideal time to sell.

Each of these are examples of EVENTS that are “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or other individual.

Examples of Triggering Events that WOULD Work:.

1. On the first day of June in the 3rd year after the FLIP-CRUT is developed;.
2. Upon the marriage, divorce, death, or birth of a child of the Donor;.
3. Upon the sale of unmarketable assets that are not cash, cash equivalents, or other possessions that can be readily offered or exchanged for money or cash equivalents.

Because it is a fixed date that is specified in the FLIP-CRUT document, # 1 works.

# 2 works due to the fact that these life occasions are not “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other individual.

# 3 works since the sale of unmarketable possessions needs two parties – a Purchaser and a Seller – both of whom have to agree on a a great deal of identifying factors. Both sides are not “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other person.

Additional Treasury Department Guidance about Acceptable Triggering Events.

In Treas. Reg. §1.664-3(a)(1)(i)(e) the Regulations provide seven (7) examples of what an acceptable triggering event might involve. These “safe harbors” should not be considered unique in nature.

They are:.

1. Upon the sale of the Donor’s former individual residence;.
2. The sale of securities for which there is no available securities exemption allowing a public sale.
3. When the earnings recipient reaches a particular age;.
4. When the Donor gets married;.
5. When the Donor divorces;.
6. When the earnings recipient’s first kid is born; and.
7. When the income recipient’s dad dies.

While these are not the only circumstances that will be authorized, each of them is a safe harbor, indicating they should be approved if the fact-pattern matches the safe harbor.

It is important to have the suggestions of qualified legal and tax counsel when considering establishing a FLIP-CRUT.

Call a Charitable Giving Attorney with Ainer and Fraker 800-775-7612 right away to find out how you can profit from the powerful tax advantages of a FLIP-CRUT.

What are the Essential Elements of a FLIP-CRUT?

San Francisco, CA – Fairly recently, I was working with a client to develop a Charitable Remainder Trust in to which he would be able to contribute his $3.2 million real property.

In our discussion, my Client communicated his desire to not sell the investment property inside the Charitable Remainder Trust until the second or third year year after donation.

So, I asked him: “Have you ever thought about a FLIP-CRUT?”.

To which he replied: “What is a FLIP-CRUT?”.

To which I said: “It’s an unique variety of Charitable Remainder Trust, which allows you to defer the annual income distribution until after your real estate sells.”.

This is the way it works.

Usually, a Charitable Remainder Trust is required to pay out either a fixed percent (unitrust) or fixed pecuniary amount (annuity) to the Income Recipient, no less frequently than annually.

What happens if the Trust doesn’t have sufficient assets that are capable of generating the required amount each year?

The solution is to start with a Net Income Charitable Remainder Trust, which contains language permitting it to switch over (or FLIP) into a Standard Charitable Remainder Trust on a specified event in the future.

During the initial period, the CRT pays out the lesser of Net Income or the Unitrust amount. If there is no Net Income, then the amount paid out during that period will be zero.

Upon the occurrence of a “Triggering Event”, the Trust then converts to a Standard CRT, and pays out the originally defined percentage.

In this particular client’s example, he contributed a $3.2 million piece of investment property, into an 8 %, 12 year FLIP-CRT.

During the initial period, before the sale of the real property, the net income would be zero.

The CRT begins its annual 8 % unitrust payout to the Client upon the occurrence of the Triggering Event – in this instance the selling of the real property.

There are a couple of critical rules to the use of a FLIP-CRUT:

(1) The “triggering event” may not be something that is “under the control” of the Donor. Oddly enough, , the sale of real property is not deemed being “under the control” of the Donor.

(2) The Grantor may also be the Trustee of the Charitable Remainder Trust (CRT) in some cases. An outside Special Independent Trustee is required to manage the transactions if hard to value assets are donated – such as real property, partnership interests … pretty much anything apart from cash or publicly traded securities .

CONCLUSION: The FLIP-CRUT is a great instrument when you wish to donate
Unmarketable Assets – or those that do not immediately produce income – to a Charitable Remainder Trust. You will still enjoy the substantial tax benefits of a Charitable Remainder Trust, while not being forced to distribute Income until it is available.

Contact a Charitable Giving Lawyer with Ainer and Fraker 800-775-7612 right now to learn how you can profit from the powerful tax benefits of a FLIP-CRUT.

Using a FLIP-CRUT to Sell Real Estate

Oakland, CA – 800-775-7612 – In a prior post, we explained the FLIP-CRUT technique in which a Charitable Remainder Trust starts its life as a Net Income Charitable Remainder Trust, and upon a specific “Triggering Event”, changes to a Standard Charitable Remainder Trust at a defined percentage payout.

Additionally we looked at relevant Treasury Department definitions of Triggering Events, that are judged not to be subject to the control of the Trustee or Grantor or any other person.

Among the most popular examples of Triggering Events is the sale of Unmarketable Assets, for instance, the sale of a Personal Residence, or any other real or commercial property, closely-held securities or various business holdings that are not publicly traded, and therefore are without a formal marketplace to value and sell.

In Treasury Regulations § 1.664-1(a)(7)(ii), the meaning of Unmarketable Assets includes:

Assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents. Unmarketable assets include real property, closely-held stock, and an unregistered security for which there is no available exemption permitting public sale.

Why this definition is important when using a FLIP-CRUT to sell appreciated real estate.

If you have a piece of investment that is highly appreciated in value, and selling it outright would result in substantial capital gains tax, a Charitable Remainder Trust is an exceptional way to postpone the tax at the time of sale.

If you donate the real estate to a Charitable Remainder Trust after a binding obligation to sell already exists, then unfortunately the IRS will not allow the deduction based on the Step Transaction Doctrine.

Contributing real property in a Standard Charitable Remainder Trust may also not be feasible due to its fixed yearly commitment to distribute the Unitrust or Annuity amount to the Grantor.

A Standard Charitable Remainder Trust does not get the job done, if the real property takes takes a good amount of time to sell (surely more than a year).

This is why the Treasury Departments inclusion of Real Property as not being readily marketable is critical. It allows you to grant the asset immediately, get back the appropriate deductions, and after that convert to a Standard Charitable Remainder Trust after there is sufficient liquidity (post-sale) to accomplish the annual payout requirements.

Therefore, the FLIP-CRUT is truly the best vehicle when selling appreciated assets that are not readily marketable, like real estate.

Connect with a Planned Giving Attorney at Ainer and Fraker 800-775-7612 today to find out how you can profit from the incredibly powerful tax benefits of a FLIP-CRUT.

Seven FLIP-CRUT Examples that Meet IRS Requirements

Oakland, CA – 408-777-0776 – In a previous post, we discussed the FLIP-CRUT principle in which a Charitable Remainder Trust begins its life as a Net Income Charitable Remainder Trust, and upon a “Triggering Event”, converts to a Conventional Charitable Remainder Trust at a fixed percentage distribution.

Undoubtedly, the entire FLIP-CRUT principle hinges on the Treasury Department’s definition of a Triggering Event – at which time the Net Income CRT transforms to the Requirement CRT, with its yearly payout requirement.

Let’s analyze this Activating Event idea by checking out some basics:

1. The Triggering Event has to be plainly specified in the FLIP-CRUT document. Treas. Reg. §1.664-3(a)(1)(i)(c)
2. The Triggering Event may be a particular DATE that is specified in the FLIP-CRUT document OR it MAY be upon the specific event of an EVENT, however:.
3. If the Triggering Event is specified as an Event, then the event of that Event can not be “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or other individual. Treas. Reg. §1.664-3(a)(1)(i)(c)(1)

Examples of Triggering Events that WOULD NOT Work.

1. Upon the choice of the Donor (or Trustee) to sell the profile of extremely valued openly traded securities;.
2. Whenever the Trustee gets around to it;.
3. Upon the recommendations of the Donor’s financial consultant, CPA or other fiduciary that now is an ideal time to sell.

Each of these are examples of EVENTS that are “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other person.

Examples of Triggering Events that WOULD Work:.

1. On the very first day of June in the Third year after the FLIP-CRUT is established;.
2. Upon the marriage, divorce, death, or birth of a child of the Donor;.
3. Upon the sale of unmarketable properties that are not money, cash equivalents, or other assets that can be easily offered or exchanged for money or money equivalents.

Since it is a set date that is defined in the FLIP-CRUT document, # 1 works.

# 2 works because these life occasions are not “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or other individual.

# 3 works since the sale of unmarketable possessions needs 2 parties – a Buyer and a Seller – both of whom need to settle on a substantial number of determining factors. Both sides are not “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other person.

Further Treasury Department Guidance about Appropriate Triggering Events.

In Treas. Reg. §1.664-3(a)(1)(i)(e) the Regulations provide seven (7) examples of exactly what an appropriate triggering event might involve. These “safe harbors” should not be thought about exclusive in nature.

They are:.

1. Upon the sale of the Donor’s previous individual home;.
2. The sale of securities for which there is no readily available securities exemption permitting a public sale.
3. When the earnings recipient reaches a particular age;.
4. When the Donor gets wed;.
5. When the Donor divorces;.
6. When the earnings recipient’s very first kid is born; and.
7. When the income recipient’s dad passes away.

While these are not the only situations that will be approved, each of them is a safe harbor, meaning they should be approved if the fact-pattern matches the safe harbor.

When considering establishing a FLIP-CRUT, it is important to have the recommendations of competent legal and tax counsel.

To learn how you can take advantage of the amazing tax benefits of a FLIP-CRUT Consult with a Planned Giving Attorney with Ainer and Fraker 408-777-0776 right away.

FLIP-CRUT Fundamentals

San Jose, CA – 800-775-7612 – Recently, I was talking to a client to create a Charitable Remainder Trust into which he would be able to donate his $3.2 million investment property.

In this meeting, my Client expressed his wish to not sell the commercial property inside the Charitable Remainder Trust until two or more years year after donation.

So, I asked him: “Have you ever looked into a FLIP-CRUT?”.

To which he replied: “What in the world is a FLIP-CRUT?”.

I said: “It’s a particular type of Charitable Remainder Trust, allowing you to defer the annual income distribution until after the investment property sells.”.

Here’s the way it operates:

Ordinarily, a Charitable Remainder Trust is required to disburse either a fixed percent (Unitrust) or fixed pecuniary amount (Annuity) to the Grantor, no less frequently than on an annual basis.

What if the Trust doesn’t have assets that are capable of producing that amount each year?

The solution is to begin with a Net Income Charitable Remainder Trust (or NICRUT), which contains provisions which allows it to switch over (or FLIP) into a Standard Charitable Remainder Trust (CRUT) on a specific event in the future.

During the initial term, the CRT will distribute the lesser of Net Income or the Unitrust amount. If there isn’t any Net Income, then the amount distributed that year will be zero.

Upon the occurrence of a “Triggering Event”, the Trust then changes into a Standard CRT, and pays out the initially specified percentage.

In this client’s example, he contributed a $3.2 million piece of real property, into an 8 %, 12 year FLIP-CRT.

During the initial period, preceding the sale of the real property, the net income would be zero.

The CRT begins its annual 8 % unitrust distribution to the Grantor upon the occurrence of the Triggering Event – here in this situation the sale of the real property.

A few essential rules to using a FLIP-CRUT:

(1) The “triggering event” may not be a factor “under the control” of the Donor. Interestingly enough, , the sale of real property is not treated as being “under the control” of the Donor.

(2) The Client may also be the Trustee of the Charitable Remainder Trust (CRT) in certain cases. However, if difficult to value assets are contributed – for example real property, partnership interests … basically anything other than cash or publicly traded securities – than an outside Special Independent Trustee is going to be required to manage those transactions.

CONCLUSION: The FLIP-CRUT can be an ideal tool when you want to transfer
Unmarketable Assets – or those that may not immediately produce income – to a Charitable Remainder Trust. You will still enjoy the substantial tax benefits of a CRT, while not being required to distribute Income until it becomes available.

To find out more about the amazing tax benefits of a FLIP-CRUT, Contact a Charitable Giving Lawyer at Ainer and Fraker at 408-777-0776 today.

Critical Grantor Trust Fundamentals

Ever since the Middle Ages, people with significant assets have used the “Trust” concept to pass real property and personal effects to their children. In the previous fifty years , the “Living Trust” has become the de facto foundation of all estate planning resources.

But the question persists in many people’s minds: What exactly does a Living Trust do?

It is helpful to think of a Living Trust as a vessel (such as a glass) that one person successfully passes to another person. Everything within the glass (liquids, ice cubes, etc.) will be successfully passed to the other person. Everything that stays outside of the glass will not be passed on to them.

Funding is the process of adding your real and personal property– the “water” and “ice cubes”– to the Living Trust, so that they successfully will make it to your heirs.

See our article I’ve Got My Living Trust Now What Do I Do?

Three Critical Roles

The Living Trust has Three Fundamental Roles:

1. The Grantor/ Settlor/ Creator– This is the man or woman who establishes the Living Trust;

2. The Trustee– This is the Individual who manages the affairs of the Trust for the benefit of somebody else; and

3. The Beneficiary– this is the end recipient of the benefits of the Trust.

During your life, when you create a Trust, you act in all three roles. You are the Grantor– you created the Trust. You are the Trustee. And you remain the Beneficiary during your lifetime.

During Incapacity– If you are incapacitated, but are still alive, then you remain the Grantor and the Beneficiary. However someone else will need to be your Successor Trustee, to deal with your affairs for your benefit– if you can not do so.

After Death– Once you have passed away, your property is then managed by your Successor Trustee, for the benefit of your children or heirs (Beneficiaries).

REVOCABILITY

During the Settlor’s life, the Living Trust remains totally revocable. This means that the individual who developed the Living Trust can alter, amend, or revoke the Living Trust.

Upon the Disability or Death of the Settlor, the Living Trust becomes irrevocable. This means the Living Trust can no longer be altered, amended, or revoked without court permission.

THE JOINT HUSBAND AND WIFE LIVING TRUST (THE A-B TRUST)

Often a married couple will jointly settle (create) a Living Trust, which is commonly known as an A-B Trust.

Upon the death of the first spouse, the Living Trust splits in to two (2) separate and distinct trusts.

The Survivor’s Trust (Trust A) is also named the Marital Trust. This Trust continues being revocable during the Surviving Spouse’s lifetime. The Surviving Spouse has limitless use of Trust A’s Principal and Income during their life, and is free to add or remove the Beneficiaries of Trust A.

The Bypass Trust (Trust B) is also known as the Credit Shelter Trust. If planning is done properly, Trust B should distribute without being subject to Estate Taxes.

At this time, Trust A can either be (1) Joined into Trust B and distributed according to the conditions of Trust B, or (2) Distributed to the beneficiaries that the Surviving Spouse has selected during their lifetime.

THE IMPORTANT REQUIREMENT OF TRUST SETTLEMENT

The procedure of dividing the Living Trust into Trust A and Trust B is commonly known as as the Trust Settlement process. This is a critical process that can not be skipped.

When the first spouse dies, and a fully-funded Living Trust is in place, there is still work that will need to be done. While the assets funded to the Living Trust should not have to be subject to Probate, neglecting this Trust Administration until the Surviving Spouse dies can have devastating results for the beneficiaries.

Failing to appropriately divide the Living Trust at the time of the death of the first spouse may (in some cases) cause you to forfeit the Estate Tax credits that might otherwise be available. When property is distributed to the Beneficiaries, it can also cause major headaches.

It is crucial to remember that while a Living Trust has numerous advantages, it is crucial to use it in the manner it was designed.

CONCLUSION

A correctly funded Living Trust is the cornerstone of a successful Estate Plan. It helps Avoid Probate, Provides greater flexibility than a simple Will, and streamlines the Estate Settlement process, while keeping costs to a minimum.

Contact a Living Trust Attorney at Ainer and Fraker to discuss your Estate Planning needs in greater detail.

More A-B Living Benefits

Since the Middle Ages, families with assets have utilized the “Trust” idea to pass real estate and personal property to future generations. In the previous fifty years , the “Living Trust” has become the de facto foundation of all estate planning techniques.

But the question persists in many people’s minds: What exactly does a Living Trust do?

It is helpful to think about a Living Trust as a vessel (such as a glass) that one person successfully passes to another. Everything inside of the glass (liquids, ice cubes, etc.) will be successfully given to the other person. Everything that is outside of the glass will not be given on to them.

Funding is the procedure of putting in your real and personal property– the “water” and “ice cubes”– to the Living Trust, so that they successfully will make it to your inheritors.

See our article I’ve Got My Living Trust Now What Do I Do?

Three Fundamental Roles

The Living Trust has Three Critical Roles:

1. The Grantor/ Settlor/ Creator– This is the man or woman who sets up the Living Trust;

2. The Trustee– This is the Individual who manages the affairs of the Trust for the benefit of someone else; and

3. The Beneficiary– this is the final recipient of the benefits of the Trust.

During your lifetime, when you set up a Trust, you serve all three roles. You are the Grantor– you set up the Trust. You are the Trustee. And you remain the Beneficiary during your lifetime.

During Incapacity– If you are incapacitated, but are still alive, then you remain the Grantor and the Beneficiary. Someone else will need to be your Successor Trustee, to handle your affairs for your benefit– if you can not do so.

After Death– Once you have passed on, your Living Trust then is managed by your Successor Trustee, for the benefit of your children or heirs (Beneficiaries).

REVOCABILITY

During the Settlor’s life, the Living Trust remains entirely revocable. This means that the individual who created the Living Trust can alter, amend, or revoke the Living Trust.

Upon the Disability or Death of the Settlor, the Living Trust becomes irrevocable. This means the Living Trust can no longer be altered, amended, or revoked without court permission.

THE JOINT HUSBAND AND WIFE LIVING TRUST (THE A-B TRUST)

Often a married couple will jointly settle (create) a Living Trust, which is frequently called an A-B Trust.

Upon the death of the first spouse, the Living Trust splits in to two (2) separate and distinct trusts.

The Survivor’s Trust (Trust A) is also named the Marital Trust. This Trust continues being revocable during the Surviving Spouse’s lifetime. The Surviving Spouse has unlimited use of Trust A’s Principal and Income during their life, and is free to add or change the Beneficiaries of Trust A.

The Bypass Trust (Trust B) is also named the Credit Shelter Trust. This Trust becomes irrevocable upon the death of the first spouse to die. The Surviving Spouse is may use to All Income from Trust B, but may access the Principal only for designated purposes, such as for their health, education, maintenance and suppport . This is
named an Ascertainable Standard, and is legally required if the Surviving Spouse continues to serve as Trustee of Trust B.

Upon the passing of the second spouse, Trust B is distributed outright to its stated beneficiaries. Trust B should distribute without being subject to Estate Taxes if planning is done properly.

At this time, Trust A can either be (1) Joined into Trust B and distributed according to the language of Trust B, or (2) Distributed to the beneficiaries that the Surviving Spouse has chosen during their lifetime.

THE ESSENTIAL REQUIREMENT OF TRUST SETTLEMENT

The process of dividing the Living Trust into Trust A and Trust B is commonly known as as the Trust Settlement process. This is a critical process that can not be bypassed.

When one spouse dies, and a fully-funded Living Trust is in place, there is still work that needs to be done. While the assets put into the Living Trust should not need to be Probated, overlooking this Trust Settlement until the Surviving Spouse dies can have tragic results for the beneficiaries.

Failing to correctly divide the Living Trust at the time of the death of the first spouse may (in some cases) cause you to forfeit the Estate Tax exemptions that might otherwise be available. It can also cause major headaches when property is distributed to the Beneficiaries.

It is very important to remember that while a Living Trust has numerous advantages, it is important to use it in the manner it was designed.

CONCLUSION

A correctly funded Living Trust is the foundation of a successful Estate Plan. It helps Avoid Probate, Provides greater flexibility than a simple Will, and streamlines the Estate Settlement process, while keeping costs to a minimum.

Contact a Living Trust Attorney at Ainer and Fraker to discuss your Estate Planning needs in greater detail.

Fundamental Joint Living Trust Basics

Ever since the Middle Ages, families with assets have utilized the “Trust” idea to pass real property and personal property to the next generation. In the past half-century , the “Living Trust” became the de facto foundation of all estate planning techniques.

But the question persists in many people’s minds: What exactly does a Living Trust do?

It is helpful to think of a Living Trust as a vessel (such as a glass) that one person passes to another. Everything inside of the glass (liquids, ice cubes, etc.) will be successfully given to the other person. Everything that is outside of the glass will not be transferred on to them.

Funding is the procedure of putting in your personal and real property– the “water” and “ice cubes”– to the Living Trust, so that they successfully will make it to your heirs.

See our post I’ve Got My Living Trust Now What Do I Do?

Three Critical Roles

The Living Trust has Three Fundamental Roles:

1. The Grantor/ Settlor/ Creator– This is the individual who sets up the Living Trust;

2. The Trustee– This is the Man or woman who manages the affairs of the Trust for the benefit of another person; and

3. The Beneficiary– this is the final recipient of the benefits of the Trust.

During your lifetime, when you set up a Trust, you act in all three roles. You are the Grantor– you set up the Trust. You are the Trustee. And you remain the Beneficiary during your lifetime.

During Incapacity– If you are incapacitated, but are still alive, then you are still the Grantor and the Beneficiary. However someone else will need to be your Successor Trustee, to handle your property for your benefit– if you can not do so.

After Death– Once you have passed away, your property then is handled by your Successor Trustee, for the benefit of your heirs or children (Beneficiaries).

REVOCABILITY

During the Settlor’s lifetime, the Living Trust remains fully revocable. This means that the individual who created the Living Trust can alter, amend, or revoke the Living Trust.

Upon the Disability or Death of the Settlor, the Living Trust becomes irrevocable. This means the Living Trust can no longer be altered, amended, or revoked without court permission.

THE JOINT HUSBAND AND WIFE LIVING TRUST (THE A-B TRUST)

Often a husband and wife will jointly settle (create) a Living Trust, which is frequently called an A-B Trust.

Upon the death of the first spouse, the Living Trust splits in to two (2) distinct and separate trusts.

The Survivor’s Trust (Trust A) is also referred to as the Marital Trust. This Trust continues being revocable during the Surviving Spouse’s lifetime. The Surviving Spouse has limitless use of Trust A’s Principal and Income during their life, and is free to add or subtract the Beneficiaries of Trust A.

The Bypass Trust (Trust B) is also referred to as the Credit Shelter Trust. This Trust becomes irrevocable upon the death of the first spouse to die. The Surviving Spouse is entitled to All Income from Trust B, but may invade the Principal only for specified purposes, such as for their health, suppport, education and maintenance . This is
known as an Ascertainable Standard, and is legally required if the Surviving Spouse continues to act as Trustee of Trust B.

Upon the death of the second spouse, Trust B is distributed outright to its stated beneficiaries. If planning is done properly, Trust B should distribute without being subject to Estate Taxes.

At this time, Trust A can either be (1) Folded into Trust B and distributed according to the terms of Trust B, or (2) Distributed to the beneficiaries that the Surviving Spouse has chosen during their lifetime.

THE IMPORTANT REQUIREMENT OF TRUST SETTLEMENT

The procedure of dividing the Living Trust into Trust A and Trust B is commonly known as as the Trust Settlement process. This is a critical process that can not be skipped.

When one spouse dies, and a fully-funded Living Trust is in place, there is still work that will need to be done. While the properties funded to the Living Trust should not have to be subject to Probate, overlooking this Trust Settlement until the Surviving Spouse dies can have terrible outcomes for the beneficiaries.

Failing to appropriately divide the Living Trust upon the death of the first spouse may (in some cases) cause you to forfeit the Estate Tax credits that might otherwise be available. It can also cause major headaches when property is distributed to the Beneficiaries.

It is crucial to remember that while a Living Trust has numerous benefits, it is necessary to use it in the manner it was designed.

CONCLUSION

A properly funded Living Trust is the cornerstone of a comprehensive Estate Plan. It helps Avoid Probate, Provides greater flexibility than a simple Will, and helps streamline the Estate Settlement process, while keeping costs to a minimum.

Contact a Living Trust Attorney at Ainer and Fraker to discuss your Estate Planning needs in greater detail.

Basic A-B Trust 101

Ever since the Middle Ages, people with assets have used the “Trust” concept to pass real estate and personal effects to their children. In the past fifty years , the “Living Trust” became the de facto bedrock of all estate planning techniques.

But the question persists in many people’s minds: What exactly does a Living Trust do?

It is helpful to think of a Living Trust as a vessel (such as a glass) that one person passes to another person. Everything inside of the glass (liquids, ice cubes, etc.) will be successfully given to the other person. Everything that remains outside of the glass will not be passed on to them.

Funding is the process of putting in your real and personal property– the “water” and “ice cubes”– to the Living Trust, so that they successfully will make it to your beneficiaries.

See our article I’ve Got My Living Trust Now What Do I Do?

Three Fundamental Roles

The Living Trust has Three Critical Roles:

1. The Grantor/ Settlor/ Creator– This is the person who sets up the Living Trust;

2. The Trustee– This is the Person who manages the affairs of the Trust for the benefit of somebody else; and

3. The Beneficiary– this is the end recipient of the benefits of the Trust.

During your lifetime, when you set up a Trust, you serve all three roles. You are the Grantor– you created the Trust. You are the Trustee. And you remain the Beneficiary during your lifetime.

During Incapacity– If you are incapacitated, but are still alive, then you are still the Grantor and the Beneficiary. Someone else will need to be your Successor Trustee, to handle your affairs for your benefit– if you can not do so.

After Death– Once you have passed on, your property then is handled by your Successor Trustee, for the benefit of your heirs or children (Beneficiaries).

REVOCABILITY

During the Settlor’s life, the Living Trust is entirely revocable. This means that the man or woman who developed the Living Trust can alter, amend, or revoke the Living Trust.

Upon the Incapacity or Death of the Settlor, the Living Trust becomes irrevocable. This means the Living Trust can no longer be altered, amended, or revoked without court permission.

THE JOINT HUSBAND AND WIFE LIVING TRUST (THE A-B TRUST)

Often a husband and wife will settle jointly (create) a Living Trust, which is generally known as an A-B Trust.

Upon the death of the first spouse, the Living Trust splits in to two (2) separate and distinct trusts.

The Survivor’s Trust (Trust A) is also called the Marital Trust. This Trust continues being revocable during the Surviving Spouse’s lifetime. The Surviving Spouse has limitless use of Trust A’s Principal and Income during their life, and is free to add or remove the Beneficiaries of Trust A.

The Bypass Trust (Trust B) is also known as the Credit Shelter Trust. If planning is done properly, Trust B should distribute without being subject to Estate Taxes.

At this time, Trust A can either be (1) Joined into Trust B and distributed according to the terms of Trust B, or (2) Distributed to the beneficiaries that the Surviving Spouse has chosen during their lifetime.

THE IMPORTANT REQUIREMENT OF TRUST SETTLEMENT

The procedure of dividing the Living Trust into Trust A and Trust B is commonly referred to as the Trust Settlement process. This is a critical process that can not be skipped.

When one spouse dies, and a fully-funded Living Trust is in place, there is still work that will need to be done. While the properties funded to the Living Trust should not have to be Probated, ignoring this Trust Settlement until the Surviving Spouse dies can have devastating outcomes for the beneficiaries.

Failing to correctly divide the Living Trust upon the death of the first spouse may (in some cases) cause you to lose the Estate Tax credits that might otherwise be available. It can also cause major headaches when property is distributed to the Beneficiaries.

It is crucial to remember that while a Living Trust has numerous benefits, it is necessary to use it in the manner it was designed.

CONCLUSION

A correctly funded Living Trust is the cornerstone of a successful Estate Plan. It helps Avoid Probate, Provides greater flexibility than a simple Will, and helps streamline the Estate Administration process, while keeping costs to a minimum.

Contact a Living Trust Attorney at Ainer and Fraker to discuss your Estate Planning needs in greater detail.