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Drafting California Revocable Trusts

Tackle basic and sophisticated estate planning confidently with this comprehensive book.

Tackle basic and sophisticated estate planning confidently with this comprehensive book.

  • Complete forms
  • Managing property during client's lifetime
  • Transferring property at death
  • Professional responsibility
  • Drafting and tax considerations
  • Creation of trust, distribution provisions
  • Marital deduction QTIPs and QDOTs
  • Survivor's trust, bypass and disclaimer trusts
  • Payment of taxes, debts, and administration expenses
  • Trustee powers and duties
  • Revocation and amendment
  • Funding the trust and related documents
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Tackle basic and sophisticated estate planning confidently with this comprehensive book.

  • Complete forms
  • Managing property during client's lifetime
  • Transferring property at death
  • Professional responsibility
  • Drafting and tax considerations
  • Creation of trust, distribution provisions
  • Marital deduction QTIPs and QDOTs
  • Survivor's trust, bypass and disclaimer trusts
  • Payment of taxes, debts, and administration expenses
  • Trustee powers and duties
  • Revocation and amendment
  • Funding the trust and related documents

1

Role of Revocable Trusts in California Estate Planning

Nancy E. Howard

  • I. USING REVOCABLE TRUST TO ACHIEVE ESTATE PLANNING OBJECTIVES
    • A. Objectives of Estate Planning 1.1
    • B. Definition of Revocable Trust 1.2
    • C. Uses in Property Transfer Planning 1.3
    • D. Uses in Incapacity Planning 1.4
    • E. Tax Neutrality of Revocable Trust 1.5
    • F. Other Uses of Revocable Trust 1.6
  • II. EVALUATING REVOCABLE TRUST AS PROPERTY TRANSFER DEVICE
    • A. Probate Avoidance
      • 1. When Probate Is Necessary 1.7
      • 2. Advantages of Avoiding Probate 1.8
      • 3. Disadvantages of Avoiding Probate 1.9
      • 4. Administrative Costs of Trust and Probate 1.10
        • a. Executor's Commissions and Trustee's Fees 1.11
          • (1) Statutory Probate Fees 1.12
          • (2) Trustee's Fees 1.13
          • (3) Corporate Trustee Fees 1.14
          • (4) Fees for Continuing Trusts 1.15
          • (5) Court Approval of Fees 1.16
          • (6) Extraordinary Fees 1.17
        • b. Attorney Fees 1.18
      • 5. Court Supervision 1.19
      • 6. Applicability of Probate Law 1.20
      • 7. Privacy of Trust Administration 1.21
    • B. Management
      • 1. Continuity of Management 1.22
      • 2. Coordination of Management 1.23
    • C. Tax Considerations 1.24
    • D. Creditors' Claim Issues 1.25
    • E. Mobility and Choice of Forum 1.26
    • F. Comparing Will and Trust Contests 1.27
    • G. Legal Uncertainties Concerning Specific Assets 1.28
      • 1. Encumbered Real Property 1.29
      • 2. Assets Covered by Title Insurance 1.30
      • 3. Stock in IRC §1244 Small Business Corporation 1.31
  • III. ALTERNATIVE PROPERTY TRANSFER DEVICES
    • A. Small Estate Procedures 1.32
    • B. Property Passing to Surviving Spouse or Registered Domestic Partner 1.33
    • C. Joint Tenancy and Community Property With Right of Survivorship 1.34
    • D. Totten Trusts and Pay-on-Death Accounts 1.35
    • E. Transfer on Death Security Registration 1.36
    • F. Irrevocable Trusts 1.37
    • G. Revocable TOD Deeds 1.37A
  • IV. EVALUATING REVOCABLE TRUST AS INCAPACITY PLANNING DEVICE
    • A. Limitations of Revocable Trust 1.38
    • B. Administrative Burdens 1.39
    • C. Expenses of Revocable Trust 1.40
    • D. No Significant Tax Effects 1.41
  • V. ALTERNATIVE INCAPACITY PLANNING DEVICES
    • A. Durable Power of Attorney 1.42
      • 1. Advantages of DPOA 1.43
      • 2. Disadvantages of DPOA
        • a. Third Party Acceptance Problems 1.44
        • b. Lack of Understanding by Principals 1.45
        • c. Abuse by Agents 1.45A
        • d. Limitation to Lifetime Management 1.46
    • B. Conservatorship of Estate
      • 1. Conservatorship for Property Management 1.47
      • 2. Comparison of Conservatorship and Revocable Trust
        • a. Advantages of Conservatorship 1.48
        • b. Disadvantages of Conservatorship
          • (1) Court Supervision 1.49
          • (2) Limitation to Management During Incapacity 1.50
    • C. Coordinated Use of Revocable Trust, DPOA, and Conservatorship of Estate
      • 1. Coordinated Property Arrangements to Meet Client's Needs 1.51
      • 2. Avoiding Potential Conflicts 1.52
    • D. Joint Tenancy Devices 1.53
    • E. Community Property Management by Spouse or Registered Domestic Partner 1.54
    • F. Representative Payee 1.55

2

Professional Responsibility

Susan T. House

  • I. IMPORTANCE OF ETHICAL RULES IN DRAFTING REVOCABLE TRUSTS 2.1
  • II. RULES GOVERNING PROFESSIONAL RESPONSIBILITY
    • A. Where to Find Rules 2.2
    • B. Rules Applicable to Attorneys Drafting Revocable Trusts 2.3
    • C. Consequences of Violating Rules
      • 1. Discipline by State Bar 2.4
      • 2. Malpractice Liability 2.5
      • 3. Court Order Setting Aside Client's Estate Plan 2.6
  • III. ENGAGEMENT AND FEES
    • A. Scope of Representation 2.7
    • B. Identifying the Client 2.8
    • C. Engagement for Hire and Engagement Letter 2.9
    • D. Determining When Representation Terminates 2.10
    • E. Fee Agreement 2.11
    • F. When Fees May Be Deductible 2.11A
  • IV. CONFIDENTIALITY
    • A. Duty to Maintain Client Confidences 2.12
    • B. Duty of Confidentiality 2.13
    • C. Duty to Communicate With Client 2.14
    • D. Multiple Representation 2.15
    • E. Joint Representation 2.15A
    • F. Third Party Agents and Family Members 2.16
    • G. Current or Former Clients 2.17
    • H. IRS Demands for Information 2.18
    • I. Ethical Duty Compared With Attorney-Client Privilege 2.19
    • J. Obtaining Consent to Waive Confidentiality 2.20
  • V. DUTIES OF SKILL AND CARE
    • A. Standard of Professional Skill and Care 2.21
      • 1. Extent of Attorney Liability 2.21A
      • 2. Length of Exposure 2.21B
    • B. Duty to Function Competently 2.22
    • C. Duty to Do Research 2.23
    • D. Duty to Consult or Refer Client to Specialist 2.24
      • 1. Selection of Specialist 2.25
      • 2. Division of Fees 2.26
  • VI. CONFLICTS OF INTEREST
    • A. Duty to Avoid Conflicts 2.27
    • B. Conflicts in Representing Couples 2.28
    • C. Future Conflict Caused by Joint Estate Planning 2.29
    • D. Consequences of Representing Conflicting Interests 2.30
    • E. How to Deal With Conflicts
      • 1. Obtain Consent to Representation of Potentially Adverse Interests 2.31
        • a. Form: Consent to Dual Representation—Short Form 2.32
        • b. Form: Consent to Dual Representation—Long Form 2.33
      • 2. Treat Each Party as Client 2.34
      • 3. Withdraw From Representation 2.35
  • VII. ETHICAL ISSUES CONCERNING ATTORNEY AS INTERESTED PARTY
    • A. Attorney as Beneficiary
      • 1. Presumption of Undue Influence 2.36
      • 2. When Presumption Does Not Apply 2.37
      • 3. Drafting Attorney as Beneficiary 2.38
    • B. Attorney as Trustee 2.39
    • C. Attorney as Executor of Will 2.40
    • D. Drafter as Attorney for Estate 2.41
  • VIII. PREPARING FOR THREAT OF MALPRACTICE 2.42
    • A. File Memorandums and Letters to Clients 2.43
    • B. Colleague Review of Draft Trust 2.44
    • C. Documenting Client's Unusual Decisions 2.45
    • D. Notifying Former Client of New Law 2.46
  • IX. TAX PRACTICE STANDARDS 2.47
    • A. Tax Return Preparers 2.48
    • B. Written Advice 2.49
  • X. MENTALLY IMPAIRED CLIENT
    • A. Estate Planner's Dilemma 2.50
    • B. Assessing Client Competence and Possibility of Undue Influence 2.51
    • C. Protecting Client With Diminished Capacity From Elder Abuse 2.52
      • 1. California Authority 2.53
      • 2. National Authority 2.54

3

Drafting Considerations

Jeffrey A. Dennis-Strathmeyer

  • I. USING THIS BOOK
    • A. Overview of Trust Drafting 3.1
    • B. Trust Design Objectives 3.2
      • 1. Document Audience 3.3
      • 2. Flexibility and Safety 3.4
    • C. Drafting Suggestions 3.5
  • II. COMPLETE FORMS
    • A. Emphasis on Distribution Provisions 3.6
    • B. Common Structure and Subsets 3.7
    • C. Consolidation of Subtrust Provisions 3.8
    • D. Document Length 3.9
      • 1. California Statutes 3.10
      • 2. Desire to Override State Law 3.11
      • 3. Desire to Evidence Settlor Intent 3.12
      • 4. Out-of-State Contacts 3.13
      • 5. Trust Duration 3.14
    • E. Paragraph Headings 3.15

4

Tax Considerations

Frayda L. Bruton

Theodore E. Calleton

Monica Dell'Osso

Beth L. Kramer

Kim Marois

Lisa K. Y. Nakahara

  • I. OVERVIEW OF TAX ISSUES DIRECTLY RELATED TO TRUST DRAFTING 4.1
  • II. TAX CONSIDERATIONS SPECIFIC TO REVOCABLE TRUSTS
    • A. Tax Neutrality 4.2
    • B. Transfer Tax Exception: Powers of Appointment 4.3
    • C. Income Tax Considerations
      • 1. Grantor Trust Status 4.4
      • 2. Termination of Grantor Trust Status at Death 4.5
      • 3. Persons Treated as Owners 4.6
        • a. Right to Take Corpus or Income 4.7
        • b. Sole Right to Exercise 4.8
        • c. Ascertainable Standard 4.9
        • d. Support Obligations 4.10
    • D. California Property Taxes 4.11
  • III. INCOME TAXATION OF ESTATES, IRREVOCABLE TRUSTS, AND DISTRIBUTEES 4.12
    • A. Taxable Income 4.13
    • B. Income Tax Rates 4.14
    • C. Income Tax Deductions 4.15
    • D. Deduction in Lieu of Personal Exemption 4.16
    • E. Charitable Deduction 4.17
      • 1. Limitations on Charitable Deductions 4.17A
      • 2. When Capital Gains Deduction Allowed 4.17B
      • 3. Amounts Permanently Set Aside for Charity 4.17C
    • F. Other Limits to Deductions 4.18
      • 1. Miscellaneous Itemized Deductions 4.18A
      • 2. Interest Deductions 4.18B
    • G. Alternative Minimum Tax 4.19
    • H. Distributable Net Income (DNI) 4.20
      • 1. Computation of DNI 4.21
      • 2. Capital Gains 4.22
      • 3. Capital Losses 4.22A
      • 4. Tax-Exempt Income 4.23
      • 5. Allocation of Expenses to DNI 4.24
      • 6. Separate Shares 4.25
    • I. Taxation of Distributions 4.26
    • J. Tier System 4.27
      • 1. First-Tier Distributions 4.28
      • 2. Second-Tier Distributions 4.29
        • a. Amounts Properly Paid or Credited 4.29A
        • b. Actual Payment or Crediting Required 4.29B
      • 3. Intermediate Tier 4.30
      • 4. Variable Tier 4.31
    • K. Distribution of Appreciated Property 4.32
    • L. Distribution of Depreciated Property 4.33
    • M. Property Representing IRD 4.34
    • N. Interest or Income on Gifts 4.35
      • 1. Interest on Pecuniary Gifts 4.36
      • 2. Income Generated by Specific Gifts 4.37
    • O. Taxable Year of Inclusion 4.38
      • 1. Electing Fiscal Year 4.38A
      • 2. When Estate and Beneficiary Have Different Tax Years 4.38B
    • P. Terminating Estate or Trust 4.39
      • 1. Carryover Losses 4.39A
      • 2. Excess Deductions 4.39B
  • IV. INCOME TAX BASIS OF TRANSFERRED PROPERTY
    • A. Importance of Basis Considerations 4.40
    • B. Basis Rules for Transfers at Death
      • 1. Date-of-Death Basis Adjustment 4.41
      • 2. Basis Rules for Registered Domestic Partners 4.41A
      • 3. Exceptions to Basis Adjustment Rule 4.42
        • a. Income in Respect of Decedent (IRD) 4.43
        • b. Appreciated Property That Decedent Acquired by Gift 4.44
      • 4. California Rules for Transfers at Death 4.45
      • 5. Application of Basis Rule to Particular Forms of Ownership
        • a. Joint Tenancy 4.46
        • b. Community Property 4.47
        • c. Community Property With Right of Survivorship 4.48
        • d. Tenancy in Common 4.49
        • e. Separate Property 4.50
        • f. Basis Adjustment Planning Considerations 4.51
    • C. Basis Rules for Lifetime Transfers
      • 1. Federal Provisions
        • a. Carryover Basis for Lifetime Transfers 4.52
        • b. Increase in Basis for Gift Tax Paid 4.53
        • c. Part Gift/Part Sale 4.54
      • 2. California Lifetime Transfers Provisions 4.55
      • 3. Lifetime Gift Planning Considerations 4.56
  • V. ESTATE AND GIFT TAXES
    • A. Impact of Transfer Taxes 4.57
      • 1. Unified Estate and Gift Tax System 4.58
      • 2. Portability of Applicable Exclusion Amount 4.59
      • 3. Table: Maximum Transfer Tax Rates and Applicable Exclusion Amounts 4.60
      • 4. Calculating Estate and Gift Taxes 4.61
        • a. Estate Tax Calculation 4.62
        • b. Gift Tax Calculation 4.63
    • B. Estate Tax
      • 1. Scope of Estate Tax 4.64
      • 2. Property Included in Gross Estate 4.65
        • a. Property in Which Decedent Had an Interest (IRC §2033) 4.66
        • b. Gifts Made and Gift Tax Paid Within 3 Years Before Death (IRC §2035) 4.67
        • c. Transfers With Retained Life Estate (IRC §2036) 4.68
          • (1) Bona Fide Sale Exception 4.68A
          • (2) Legitimate and Significant Nontax Reason for Business Entity 4.68B
          • (3) Right to Income, Possession, or Enjoyment 4.69
            • (a) Reciprocal Trusts 4.70
            • (b) Right to Occupy Residence 4.71
            • (c) Retained Interest Trusts 4.71A
          • (4) Right to Designate Possession or Enjoyment 4.72
          • (5) Retained Voting Rights in Controlled Corporation 4.73
        • d. Transfers Taking Effect at Death (IRC §2037) 4.74
        • e. Revocable Transfers (IRC §2038) 4.75
        • f. Annuities (IRC §2039) 4.76
        • g. Joint Interests (IRC §2040) 4.77
        • h. Powers of Appointment 4.78
          • (1) Significance in Revocable Trust Drafting 4.79
          • (2) Basic Appointment Power Rules 4.80
          • (3) Powers Created on or Before October 21, 1942 4.81
          • (4) Retained Powers Excluded 4.82
          • (5) General Power of Appointment 4.83
            • (a) Power to Discharge Support Obligation 4.84
            • (b) Power to Remove Trustee 4.85
            • (c) Power Held Jointly With Nonadverse Party 4.86
            • (d) Power to Allocate Between Principal and Income 4.87
          • (6) Nongeneral Powers
            • (a) Power Limited by Ascertainable Standard 4.88
            • (b) Power Jointly Held With Adverse Party 4.89
          • (7) Estate and Gift Taxation of Powers 4.90
            • (a) Release or Lapse of Power 4.91
            • (b) Exception for "Five or Five" Powers 4.92
            • (c) Treatment of Limited Powers Distinguished 4.93
            • (d) Gift of Income Interest 4.94
            • (e) Delaware Tax Trap 4.95
        • i. Proceeds of Life Insurance (IRC §2042) 4.96
        • j. Transfers for Insufficient Consideration (IRC §2043) 4.97
        • k. Certain Property for Which Marital Deduction Was Previously Allowed (IRC §2044) 4.98
        • l. Qualified Conservation Easement Exclusion 4.99
        • m. Valuation of Property in Gross Estate 4.100
          • (1) Alternate Valuation Date Election 4.101
          • (2) Fair Market Value 4.102
          • (3) Special Use Valuation (IRC §2032A) 4.103
          • (4) Property Sold After Death 4.104
            • (a) Valuation Based on Postdeath Events 4.105
            • (b) Reasonable Time for Subsequent Sale 4.106
            • (c) Appreciation Adjustment to Sale Price 4.107
            • (d) Postdeath Events Other Than Completed Sales 4.108
            • (e) Postdeath Sales of Similar Properties 4.109
      • 3. Deductions From Gross Estate 4.110
        • a. Expenses, Indebtedness, and Taxes (IRC §2053) 4.111
          • (1) Funeral Expenses 4.112
          • (2) Administration Expenses 4.113
          • (3) Claims Against Estate 4.114
            • (a) Claims Founded on Promise or Agreement 4.114A
            • (b) Taxes Accrued at Death 4.114B
          • (4) Unpaid Mortgages or Property Indebtedness 4.115
          • (5) Other Administrative Expenses 4.116
          • (6) Property Taxes 4.117
          • (7) Interest on Graegin Loans 4.118
          • (8) Marital Settlement Property 4.119
        • b. Losses (IRC §2054) 4.120
        • c. Charitable Deduction (IRC §2055) 4.121
          • (1) Nondeductibility for Partial Interests 4.122
          • (2) Exceptions to Nondeductibility 4.123
          • (3) Remainder Interests in Personal Residences and Farms 4.124
          • (4) Charitable Remainder Following Qualified Terminable Interest Property (QTIP) Trust 4.125
          • (5) Pooled-Income Funds 4.126
          • (6) Charitable Gift Annuities 4.127
        • d. Conservation Easements 4.128
          • (1) Qualifying Conservation Purpose 4.128A
          • (2) Income Tax Deduction for Qualified Conservation Contribution 4.129
          • (3) Estate Tax Deduction for Qualified Conservation Contribution 4.130
          • (4) Estate Tax Exclusion for Conservation Easement Property 4.131
            • (a) Special Requirements 4.132
            • (b) Postmortem Imposition 4.133
        • e. Marital Deduction (IRC §2056) 4.134
        • f. Deduction for State Death Taxes Paid (IRC §2058) 4.135
      • 4. Estate Tax Credits 4.136
        • a. State Death Tax Credit (IRC §2011) 4.137
        • b. Credit for Gift Tax Paid (IRC §2012) 4.138
        • c. Credit for Tax on Prior Transfers (IRC §2013) 4.139
        • d. Credit for Foreign Death Taxes (IRC §2014) 4.140
        • e. Credit for Death Taxes on Remainders (IRC §2015) 4.141
      • 5. Recovery of Taxes Claimed as Credits (IRC §2016) 4.142
      • 6. Filing Estate Tax Return 4.143
      • 7. Payment of Estate Tax 4.144
        • a. Extension of Time for Payment 4.145
        • b. Installment Payments for All Taxpayers 4.146
        • c. Installment Payments for Closely Held Business Interests 4.147
          • (1) Interest on Deferred Payments 4.148
          • (2) Acceleration of Deferred Tax 4.149
          • (3) Lien Imposed and Bond Required 4.149A
          • (4) Assets Used in a Trade or Business 4.149B
    • C. Gift Tax
      • 1. Purpose of Gift Tax 4.150
      • 2. Transfers Subject to Gift Tax 4.151
        • a. Below-Market-Interest-Rate Loans 4.152
          • (1) Demand Loans 4.153
          • (2) Term Loans 4.154
          • (3) Exceptions to Gift Loan Treatment 4.155
        • b. Exercise or Release of General Power of Appointment (IRC §2514) 4.156
        • c. Payment of Generation-Skipping Transfer Tax (IRC §2515) 4.157
        • d. Discharge of Indebtedness 4.158
        • e. Transfers To and From Corporations and Partnerships 4.159
        • f. Payment for Services to Third Party 4.160
        • g. Joint Bank Accounts 4.161
        • h. Community Property Life Insurance Proceeds 4.162
      • 3. Completed Gifts 4.163
        • a. Gifts With Retained Powers 4.164
        • b. Transfer by Minor or Incompetent 4.165
      • 4. Transfer Incident to Divorce (IRC §2516) 4.166
      • 5. Annual Exclusion Gifts (IRC §2503(b)) 4.167
        • a. Present Interest Requirement 4.168
        • b. No Limit on Number of Transferees 4.169
        • c. Trusts Qualifying for Annual Exclusion Gifts 4.170
      • 6. Exclusion for Education and Medical Expenses 4.171
        • a. "Education Expenses" Defined 4.172
        • b. "Medical Expenses" Defined 4.173
      • 7. Marital Deduction (IRC §2523) 4.174
      • 8. Charitable Deduction (IRC §2522) 4.175
      • 9. Split-Gift Election (IRC §2513) 4.176
      • 10. Qualified Disclaimers 4.177
        • a. Disclaimers Under California Law 4.178
        • b. Transfers Made Before 1977 4.179
      • 11. Valuation of Gifts 4.180
        • a. Gifts of Fractional Interests 4.181
        • b. Defined Value Formula Gifts 4.182
      • 12. Filing Gift Tax Return 4.183
  • VI. GENERATION-SKIPPING TRANSFER TAX
    • A. Purpose of GST Tax 4.184
    • B. Second Tax on Same Transfer 4.185
    • C. Timing of GST Tax 4.186
    • D. Taxable Events 4.187
    • E. GST Tax Rates 4.188
    • F. Example of Direct Skip 4.189
      • 1. Inter Vivos Gift 4.190
      • 2. Transfer at Death 4.191
    • G. Tax Calculation and GST Exemption
      • 1. Tax Calculation Formula 4.192
      • 2. Overview of GST Exemption 4.193
      • 3. GST Exemption Allocation Rules 4.194
      • 4. Allocating Exemption to Lifetime Direct Skips 4.195
      • 5. Allocating Exemption to Other Lifetime Transfers 4.196
      • 6. Exemption Allocation Relief Provisions 4.197
    • H. Other Important GST Tax Concepts
      • 1. Changing Inclusion Ratios 4.198
      • 2. Limited Gift Tax Annual Exclusion 4.199
      • 3. Educational and Medical Expenses Exclusion 4.200
      • 4. Broad Definition of "Trust" 4.201
      • 5. Identifying GST Transferor 4.202
      • 6. Generation Assignments 4.203
      • 7. Multiple Skips 4.204
      • 8. Grandfathered Transfers 4.205
    • I. Separate Trust and Valuation Problems
      • 1. Need for Separate Trusts 4.206
      • 2. Separating Transfers at Death 4.207
      • 3. Separate Share for Pecuniary Amount 4.208
      • 4. Separating and Valuing Pecuniary Gifts 4.209
      • 5. Basic Safe-Harbor Rules 4.210
      • 6. Form: Appropriate Interest 4.211
      • 7. Trust Severance Provisions 4.212
    • J. GST Tax Strategies
      • 1. Fundamental GST Planning Strategies 4.213
      • 2. Reverse QTIP Election Strategy 4.214
        • a. Effect of Reverse QTIP Election 4.215
        • b. Separating Reverse QTIP Trust 4.216
        • c. Discretionary Reverse QTIP Trust 4.217
      • 3. Form: Division of QTIP Trust 4.218
      • 4. Mandatory Reverse QTIP Trust 4.219
      • 5. Shifting Estate Tax Burden 4.220
      • 6. Form: Estate Tax Apportionment 4.221
  • VII. CALIFORNIA REAL PROPERTY TAXES
    • A. Property Tax Estate Planning 4.222
    • B. Fundamental Property Tax Concepts 4.223
      • 1. Change in Ownership 4.224
      • 2. Excluded Transfers 4.225
      • 3. Trust Transfers 4.226
      • 4. Revocable Trust Property 4.227
      • 5. Irrevocable Trust Property 4.228
        • a. Transfers to Charitable Trusts 4.229
        • b. Transfers to Personal Residence Trusts 4.230
    • C. Joint Tenancy Transfers 4.231
    • D. Interspousal and Domestic Partner Transfers 4.232
      • 1. Transfers Through Medium of Trust 4.233
      • 2. Effect of "Five or Five" Power on Trust Property 4.234
      • 3. Cotenant Transfers 4.234A
    • E. Parent-Child Exclusion 4.235
      • 1. Applies Only to "Direct Interests" in Real Property 4.236
      • 2. Nonprorata Allocation of Property 4.237
      • 3. Step Transaction Doctrine Disregarded 4.238
      • 4. Transfers to Grandchildren 4.239
      • 5. Application to Typical Family Revocable Trust 4.240
    • F. Legal Entity Transfers 4.241
      • 1. Transfers of Interests in Legal Entities 4.242
      • 2. Change in Control 4.242A
      • 3. Cumulative Transfers 4.243
    • G. Base-Year-Value Transfers 4.244
    • H. Disclaimers of Transferred Interests 4.245
    • I. Reporting Requirements for Real Property Transfers 4.246
      • 1. Transfers on Death 4.247
      • 2. Statutes of Limitations 4.248

5

Creation of Trust

Charles A. Larson

  • I. ELEMENTS OF A TRUST 5.1
    • A. Trust Intent 5.2
    • B. Trust Property 5.3
    • C. Trust Beneficiary
      • 1. Definite Beneficiary Required 5.4
      • 2. Charitable Beneficiaries 5.5
    • D. Valid Trust Purpose 5.6
    • E. Selecting Trustee 5.7
      • 1. Individual Trustee 5.8
      • 2. Corporate Trustee 5.9
      • 3. Settlor as Trustee: Advantages 5.10
      • 4. Spouse or Partner as Trustee: Possible Disadvantages After First Death 5.11
      • 5. Attorney as Trustee
        • a. Ethical Considerations 5.12
        • b. Restrictions on Dual Compensation 5.13
      • 6. Presumption of Fraud or Undue Influence
        • a. When Sole Trustee Subject to Removal 5.14
        • b. Form: Certificate of Independent Review 5.15
      • 7. Beneficiary as Trustee
        • a. When Beneficiary May Act as Trustee 5.16
        • b. Potential for Conflicts of Interest 5.17
      • 8. Particular Trustee Requirements 5.18
    • F. Limitations on Donative Transfers 5.18A
    • G. Form: Creation of Trust for Sole Settlor 5.19
  • II. CREATION OF TRUST FOR MARRIED SETTLORS
    • A. Trust Property Characterization
      • 1. Married Settlor Property Transfer 5.20
      • 2. Basic Trust Marital Property Provisions
        • a. Preservation of Community Property Character 5.21
        • b. Severing and Transmuting Joint Tenancies 5.22
        • c. Form: Character of Trust Property 5.23
    • B. Character Identification Issues
      • 1. Desirability of Characterization 5.24
      • 2. Ethical Issues in Characterizing Trust Property
        • a. Conflicts of Interest 5.25
          • (1) Waiver of Rights by Surviving Settlor 5.25A
          • (2) Effect of Premarital Agreement 5.25B
          • (3) Transmutation of Property 5.25C
        • b. Duty of Competence 5.26
      • 3. Cost of Determining Character 5.27
      • 4. Potential Disputes Between Clients 5.28
    • C. Character Identification Strategies
      • 1. Planning Alternatives 5.29
      • 2. Form: Characterization of Trust Property in Exhibit A 5.30
    • D. Quasi-Community Property Considerations
      • 1. Nature of Quasi-Community Property 5.31
      • 2. Surviving Spouse's Rights to Quasi-Community Property 5.32
      • 3. Treatment as Separate Property During Joint Lifetimes of Spouses and for Estate Tax Purposes 5.33
      • 4. Restoration of Transferred Quasi-Community Property to Surviving Spouse 5.34
      • 5. Trust Drafting Issues 5.35
    • E. Separate Property in Joint Trust 5.36
    • F. Form: Creation of Married Settlor Trust 5.37
  • III. CREATION OF JOINT TRUST FOR DOMESTIC PARTNER SETTLORS 5.37A
  • IV. FORM: SAMPLE SCHEDULE OF ASSETS (EXHIBIT A) 5.38

6

Distributions While Trust Is Revocable

Charles A. Larson

  • I. LIFETIME TRUST DISTRIBUTIONS
    • A. Distributions to Settlors 6.1
    • B. Distributions to Third Parties 6.2
  • II. DISTRIBUTION TO SPOUSES
    • A. Community Property
      • 1. Distributions of Community Property 6.3
      • 2. Trustee Discretion 6.4
      • 3. Form: Distributions of Community Property 6.5
    • B. Separate Property
      • 1. Distributions of Separate Property to Married Settlors 6.6
      • 2. Addressing Potential Conflicts 6.7
      • 3. Form: Distributions of Separate Property to Married Settlors 6.8
    • C. Quasi-Community Property
      • 1. Treated as Separate Property 6.9
      • 2. Form: Preference for Use of Quasi-Community Property 6.10
    • D. Determination of Incompetence
      • 1. Determining Competence of Settlor 6.11
      • 2. Form: Determination of Incompetence 6.12
  • III. DISTRIBUTION TO DOMESTIC PARTNERS 6.12A
  • IV. DISTRIBUTION TO SINGLE SETTLOR
    • A. Function of Distribution Provision 6.13
    • B. Form: Distributions to Single Settlor 6.14
  • V. PAYMENTS TO OTHERS
    • A. Married Settlors
      • 1. When Consent Is Required for Payments 6.15
      • 2. When Consent Is Not Required 6.16
      • 3. Nonapplication of 3-Year Rule 6.17
      • 4. Payments to Third Parties When One Settlor Is Incompetent 6.18
      • 5. Form: Payments to Others 6.19
    • B. Domestic Partner Settlors 6.19A
    • C. Single Settlor
      • 1. Support of Individual Beneficiary When Settlor Is Incompetent 6.20
      • 2. Form: Support of Individual Beneficiary When Settlor Is Incompetent 6.21

7

Distributions From Continuing Trusts

Jeffrey A. Dennis-Strathmeyer

Joel A. Levine

  • I. CHOICE OF DISTRIBUTION METHOD 7.1
    • A. Client Purposes in Making Gift 7.2
    • B. Beneficiary Characteristics 7.3
    • C. Available Distribution Methods 7.4
    • D. Dangers of Discretionary Distribution Powers 7.5
    • E. Fixed and Discretionary Distribution Options 7.6
      • 1. Split-Rule Distributions 7.7
      • 2. Common Distribution Rules 7.8
        • a. Annuity Amount 7.9
        • b. Unitrust Amount 7.10
  • II. INCOME TAX CONSIDERATIONS
    • A. Trust Income Taxed to Trust or Beneficiary 7.11
      • 1. Beneficiary Taxed on Ordinary Income Distributed to Beneficiary 7.12
        • a. Rule Applies to Distributions of Annuity Amounts 7.13
        • b. Capital Gains Generally Taxed to Trust 7.14
      • 2. Beneficiary Taxed Under Grantor Trust Rules 7.15
        • a. When Holder of Unrestricted Withdrawal Power Is Taxed 7.16
        • b. Effect of Discretionary Power to Distribute Trust Income 7.17
    • B. Basis Change on Death of Beneficiary 7.18
  • III. POWER OF APPOINTMENT TRANSFER TAX PROBLEMS
    • A. Discretionary Power May Result in General Power 7.19
    • B. Power of Appointment Terminology 7.20
    • C. Federal Transfer Tax Definition of General Power 7.21
      • 1. Power to Discharge Support Obligation 7.22
        • a. Effect of Statutory Saving Provision 7.23
        • b. Power Over Property Held as Custodian 7.24
        • c. Form: Prohibition Against Discharge of Support Obligation 7.25
      • 2. Power to Remove Trustee 7.26
      • 3. Power Held Jointly With Nonadverse Party 7.27
      • 4. Merely Administrative Powers 7.28
    • D. Power to Allocate Between Principal and Income 7.29
    • E. The HEMS Ascertainable Standard Exception 7.30
    • F. Tax Consequences of General Powers 7.31
      • 1. Lapse of Power Treated as Release 7.32
      • 2. Income Tax Treatment of General Powers 7.33
      • 3. Treatment of Limited Powers Distinguished 7.34
      • 4. Gift of Income Interest on Exercise of Limited Power 7.35
    • G. Creditor Rights Consequences of General Powers 7.36
    • H. Drafting to Avoid Inadvertent General Powers 7.37
  • IV. INCOME, ANNUITY, AND UNITRUST DISTRIBUTIONS
    • A. Disfavored Trust "Income" Distributions 7.38
      • 1. Allocation Problem 7.39
      • 2. Total Return Problem 7.40
      • 3. Considerations Favoring Income Distributions
        • a. Distribution May Be Made by Using Property in Kind 7.41
        • b. Avoiding Large Income Accumulations 7.42
        • c. Qualification for Tax Deduction or Election 7.43
      • 4. Form: Mandatory Distribution of Income for Life 7.44
    • B. Annuities 7.45
      • 1. Advantages of Annuities 7.46
      • 2. Disadvantages of Annuities 7.47
      • 3. Form: Payment of Annuity Amount 7.48
    • C. Unitrust Distributions 7.49
      • 1. Advantages of Unitrusts 7.50
      • 2. Disadvantages of Unitrusts
        • a. Distribution Amount Not Related to Objectives 7.51
        • b. Appraisal Problems 7.52
        • c. Use of Property in Kind Problems 7.53
      • 3. Form: Payment of Unitrust Amount 7.54
    • D. Conduit Trust Distributions 7.54A
      • 1. The "Designated Beneficiary" Concept 7.54B
      • 2. The Conduit Trust Safe Harbor 7.54C
      • 3. Form: Payment of Conduit Trust Amount 7.54D
      • 4. Additional Conduit Trust Drafting Considerations 7.54E
  • V. DRAFTING ASCERTAINABLE STANDARD HEMS DISCRETIONARY DISTRIBUTION PROVISIONS
    • A. Advantages and Disadvantages of Discretionary Distributions 7.55
    • B. Drafting Challenges in Providing for Discretionary Distributions 7.56
    • C. HEMS Power Requirements 7.57
      • 1. Meaning of "Health, Education, Support, or Maintenance" 7.58
        • a. Support or Maintenance 7.59
        • b. Education 7.60
        • c. Health and Medical Care 7.61
      • 2. Form: Basic HEMS Power 7.62
    • D. Elaboration Techniques 7.63
      • 1. Selection of Person Having Discretion 7.64
      • 2. Broadening or Narrowing Discretion 7.65
      • 3. Consideration of Beneficiary's Other Resources 7.66
        • a. Resources Taken Into Consideration 7.67
        • b. Form: Consideration of Other Resources 7.68
      • 4. Identifying Favored Beneficiaries 7.69
        • a. Using Favored Beneficiary Clause 7.70
        • b. Form: Favored Beneficiary Clause 7.71
      • 5. Defining Education 7.72
        • a. Including Related Expenses in Definition 7.73
        • b. Form: Definition of "Education" 7.74
  • VI. DRAFTING INDEPENDENT TRUSTEE DISTRIBUTION POWERS
    • A. Independent Trustee Power Need Not Be HEMS Power 7.75
    • B. Required Precautions in Drafting Trustee Powers 7.76
    • C. Distributions for "Comfort" and "Happiness" 7.77
    • D. Assessing Risks and Benefits of Not Using HEMS Power 7.78
    • E. Form: Limitations on Discretionary Distributions to Trustee 7.79
  • VII. DRAFTING DISCRETIONARY SPRINKLING PROVISIONS
    • A. Sprinkling Provisions Used in Family Pot Trusts 7.80
      • 1. Advantages of Sprinkling Provisions 7.81
      • 2. Disadvantages of Sprinkling Provisions 7.82
    • B. Drafting Considerations Applicable to Sprinkling Provisions 7.83
    • C. Form: Principal and Income Sprinkled Among Children 7.84
  • VIII. DRAFTING PERSONALLY HELD APPOINTMENT POWERS
    • A. Favored Beneficiary Given Nongeneral Power of Appointment 7.85
    • B. Special Power of Appointment for Surviving Settlor 7.86
    • C. Form: Exercise of Powers of Appointment 7.87
    • D. Form: Lifetime Special Power of Appointment 7.88
    • E. Form: Survivor's Special Power of Appointment 7.89
  • IX. "FIVE OR FIVE" POWERS
    • A. Exception to Transfer Taxation for Five or Five Powers 7.90
    • B. Uses of Five or Five Powers 7.91
    • C. Form: Five or Five Withdrawal Power 7.92
  • X. DISPOSITION OF UNDISTRIBUTED TRUST INCOME
    • A. Need to Direct Application of Undistributed Income 7.93
    • B. Form: Accumulation of Undistributed Income 7.94
  • XI. SPECIAL NEEDS TRUST CLAUSES
    • A. Purpose of Special Needs Trust 7.95
      • 1. Using Inter Vivos or Testamentary Special Needs Trust 7.96
      • 2. Advantages of Revocable Special Needs Trust 7.97
    • B. Need for Statement of Trust Purpose 7.98
      • 1. Liability of Trust for Reimbursement When Required by Statute 7.99
      • 2. Exemption from Reimbursement Liability of Most Special Needs Trusts 7.100
    • C. Sole Beneficiary or Multiple Beneficiaries 7.101
    • D. Distribution Provisions 7.102
      • 1. Direction to Supplement, Not Supplant, Public Benefits 7.103
      • 2. Trustee Power to Supplant Public Benefits 7.104
      • 3. Trustee Duty to Seek Public Benefits 7.105
    • E. Function of "Spendthrift" Clause in Special Needs Trust 7.106
    • F. Termination of Trust to Preserve Trust Assets 7.107
    • G. Remainder Distribution on Trust Termination 7.108
    • H. Distribution on Death of Beneficiary 7.109
    • I. Form: Special Needs Trust for Sole Beneficiary 7.110
    • J. Additional Clauses for Multiple-Beneficiary Special Needs Trust 7.111
    • K. Form: Special Needs Trust for Multiple Beneficiaries 7.112

8

Distributions on Terminating Event

Jeffrey A. Dennis-Strathmeyer

Kenneth G. Petrulis

  • I. TERMINATING DISTRIBUTIONS 8.1
  • II. DISTRIBUTION TERMINOLOGY 8.2
  • III. DISPOSITION DRAFTING PROBLEMS 8.3
    • A. Bankruptcy of the Residue and Abatement 8.4
      • 1. Statutory Abatement Rules 8.5
      • 2. Avoiding Abatement Problems 8.6
      • 3. Form: Abatement of Gifts 8.7
    • B. Ademption of Gifts
      • 1. Rules of Ademption 8.8
      • 2. Avoiding Ademption Problems 8.9
    • C. Exoneration of Encumbrances
      • 1. Expression of Settlor's Wishes 8.10
      • 2. Form: Exoneration of Encumbrances 8.11
    • D. Tax Apportionment Issues 8.12
    • E. Number of "Interested" Beneficiaries 8.13
    • F. Disclaimers of Gifts
      • 1. Failure to Consider Disclaimers 8.14
      • 2. Form: Disposition of Disclaimed Gift 8.15
    • G. Survivorship Issues
      • 1. Survivorship in Joint Trusts for Spouses and Domestic Partners 8.16
      • 2. Simultaneous Death 8.17
      • 3. Lapse of Gifts
        • a. Disposition of Distribution If Initial Beneficiary Fails to Survive 8.18
        • b. Antilapse Statute 8.19
          • (1) Parent-Child Relationship 8.19A
          • (2) Presumption of Paternity 8.19B
        • c. Avoiding Survivorship and Lapse Issues 8.20
        • d. Avoiding Gift to Deceased Beneficiary 8.20A
    • H. Dispositions to Young Persons 8.21
      • 1. Managing Minor's Property in Absence of Express Trust Provisions 8.22
        • a. Guardianship of Estate 8.23
        • b. Transfer to Custodianship Without Trust Authorization 8.24
        • c. Gift Delivered to Parent of Minor With Small Estate 8.25
        • d. Court-Ordered Disposition of Gift 8.26
      • 2. Trust-Authorized Distributions to Custodianships
        • a. CUTMA Requirements 8.27
        • b. Form: Distribution to CUTMA Custodian 8.28
      • 3. Retention in Further Trust
        • a. Disadvantages of Custodianship 8.29
        • b. Form: Retention in Trust Until Specified Age 8.30
      • 4. Distribution to Family Pot Trust 8.30A
      • 5. Distribution to Separate Trusts 8.30B
  • IV. PARTICULAR DISPOSITIONS
    • A. Organization of Dispositive Provisions 8.31
      • 1. Form: Introduction to Dispositive Provisions 8.32
      • 2. Form: Introduction to Dispositive Provisions With Power of Appointment 8.33
      • 3. Uses of Power of Appointment 8.34
    • B. Tangible Personal Property 8.35
      • 1. Administrative Expense Issues 8.36
      • 2. Form: Gift of Single Item of Personal Property 8.37
      • 3. Form: List of Gifts of Personal Property Included in Trust 8.38
      • 4. Form: Settlor to Give Trustee Separate List of Gifts of Personal Property 8.39
      • 5. Form: Gift of Tangible Personal Property Not Otherwise Disposed Of 8.40
      • 6. Form: Gift of Tangible Personal Property to Children 8.41
    • C. Specific Gifts of Corporate Stock and Business Interests
      • 1. Specific Gift Drafting Considerations 8.41A
      • 2. Form: Specific Gift of Publicly Traded Stock 8.41B
      • 3. Form: Specific Gift of Closely Held Stock 8.41C
      • 4. Form: Specific Gift of General Partnership Interest 8.41D
      • 5. Form: Specific Gift of Limited Partnership Interests 8.41E
      • 6. Form: Specific Gift of LLC Membership Interest 8.41F
      • 7. Form: Specific Gift of Sole Proprietorship 8.41G
    • D. Form: Gift of Residence to Survivor or Other Individual 8.42
    • E. Beneficiary Indebtedness to Settlor 8.43
      • 1. Form: Forgiveness of Indebtedness 8.44
      • 2. Form: Allocation of Indebtedness 8.45
    • F. General Gifts 8.45A
      • 1. Form: General Pecuniary Gifts 8.45B
      • 2. Form: General Gift of Stock 8.45C
    • G. Residuary Gifts 8.46
      • 1. Form: Introduction to Disposition of Residue 8.47
      • 2. Form: Disposition of Residue to Specified Individual 8.48
    • H. Class Gifts
      • 1. Class Gift Drafting Considerations 8.49
        • a. Identifying Potential Class Members 8.49A
        • b. When Class Members Determined 8.49B
        • c. Alternate Takers for Class Members 8.49C
        • d. Equal Shares for Class Members 8.49D
      • 2. Class Member Identification Issues 8.50
        • a. Gifts to Children and Issue
          • (1) Statutory Definitions of "Children" and "Issue" 8.51
            • (a) Children Born Out of Wedlock, Foster Children, Stepchildren 8.52
            • (b) Adopted Children 8.53
            • (c) Grandchildren 8.54
            • (d) Posthumously Conceived Children 8.54A
            • (e) Inheritance Rights of Parents and Siblings 8.54B
          • (2) Alternative Definitions of Children and Issue 8.55
        • b. Gifts to Heirs 8.56
      • 3. Time for Ascertaining Class Membership 8.57
      • 4. Proportions to Be Taken by Class Members 8.58
        • a. Statutory Patterns for Distributions to Issue or Descendants
          • (1) Descriptions of Statutory Patterns 8.59
          • (2) Wording of Statutory Patterns 8.60
          • (3) Examples of Differences Among Patterns 8.61
        • b. Form: Manner of Making Distribution Per Capita at Each Generation 8.62
      • 5. Form: Class Gift to Issue 8.63
      • 6. Form: Class Gift to Named Persons and Their Descendants 8.64
  • V. CHARITABLE GIFTS 8.65
    • A. Basic Requirements for Charitable Deduction 8.66
    • B. Organizations Qualifying for Charitable Deduction 8.67
    • C. Charitable Remainder Annuity Trusts and Unitrusts: Similarities and Differences 8.68
    • D. Sample Clauses for Charitable Remainder Trusts 8.69
      • 1. Form: Charitable Remainder Unitrust 8.70
      • 2. Form: Charitable Remainder Annuity Trust 8.71
    • E. Overview of Charitable Lead Trusts 8.72
      • 1. GST Rules for Charitable Lead Trusts 8.73
      • 2. CLAT Planning Considerations 8.74
      • 3. CLAT Drafting Requirements 8.75
    • F. Form: Required and Desirable Provisions for CLAT 8.76
  • VI. TRUSTEE DISCRETIONARY POWERS CONCERNING "MANDATORY" DISTRIBUTIONS
    • A. Nonprorata Funding
      • 1. Nonprorata Funding of Shares 8.77
      • 2. Nonprorata Division of Community Property 8.78
      • 3. Form: Nonprorata Division of Community Property 8.79
    • B. Delayed Distributions
      • 1. Power to Delay Distributions 8.80
      • 2. Form: Power to Delay Distributions 8.81
      • 3. Interest on Delayed Pecuniary Gift 8.82
      • 4. Form: Interest on Delayed Distribution of Pecuniary Amount 8.83

9

The Marital Deduction

Marc M. Stern

  • I. MARITAL DEDUCTION QUALIFYING TRANSFERS 9.1
  • II. OPERATION AND EFFECT OF MARITAL DEDUCTION 9.2
  • III. REQUIREMENTS FOR MARITAL DEDUCTION GIFT 9.3
    • A. Marriage of Decedent and Survivor 9.4
    • B. Survival of Recipient Spouse 9.5
    • C. Need for Simultaneous Death Provision 9.6
    • D. Form: Simultaneous Death Provision 9.7
    • E. Surviving Spouse Citizenship 9.8
    • F. Property Passes to Surviving Spouse 9.9
      • 1. Net Value Rule 9.10
      • 2. Property Passing Under Will Contest 9.11
    • G. Deductible Interest 9.12
      • 1. Interest Includable in Decedent's Gross Estate 9.13
      • 2. Interest Not Subject to Double Deduction 9.14
      • 3. Nondeductible Terminable Interest 9.15
        • a. Examples of Nondeductible Terminable Interests 9.16
        • b. Exceptions to Terminable Interest Rule
          • (1) No One Other Than Surviving Spouse Will Have Interest in Property 9.17
          • (2) Survival Contingencies Not Exceeding Six Months 9.18
          • (3) Life Estate Plus General Power of Appointment 9.19
          • (4) Qualified Terminable Interest Property (QTIP) 9.20
          • (5) Charitable Remainder Trusts 9.21
      • 4. Reduction for Nonqualifying Assets 9.22
  • IV. ADVANTAGES AND DISADVANTAGES OF DIFFERENT MARITAL DEDUCTION QUALIFYING TRANSFERS 9.23
    • A. Outright Transfers to Surviving Spouse 9.24
    • B. Transfers to Qualifying Survivor's Trusts 9.25
    • C. Transfers to Qualified Terminable Interest Property (QTIP) Trusts
      • 1. Characteristics of QTIP Trust 9.26
      • 2. Use of QTIP Trust 9.27
        • a. Advantages of QTIP Trust
          • (1) Postmortem Tax Planning 9.28
          • (2) Prior Transfer Property (PTP) Credit 9.29
          • (3) Fractional Share Election 9.30
          • (4) Reverse QTIP Election 9.31
        • b. Disadvantages of QTIP Trust 9.32
    • D. Legal Life Estate QTIP Trusts 9.33
    • E. General-Power-of-Appointment Trusts
      • 1. Characteristics of GPA Trust 9.34
      • 2. Use of GPA Trust 9.35
      • 3. Form: General-Power-of-Appointment Trust 9.36
      • 4. Basis Harvesting Provision 9.36A
    • F. Estate Trusts
      • 1. Characteristics of Estate Trust 9.37
      • 2. Use of Estate Trust 9.38
      • 3. Form: Estate Trust 9.39
    • G. Qualified Charitable Remainder Trusts
      • 1. Characteristics of Charitable Remainder Trust 9.40
      • 2. Factors in Deciding Whether to Use QTIP or Charitable Remainder Trust 9.41
      • 3. Requirements of Charitable Remainder Trust 9.41A
      • 4. Form: Qualified Charitable Remainder Trust 9.41B
  • V. LIMITATION APPLICABLE TO SOME MARITAL TRANSFER INSTRUMENTS DRAFTED BEFORE 1982 9.42

10

Distributions on First Spouse's Death

CEB Staff

  • I. DISTRIBUTION OF TRUST ON DEATH OF FIRST SPOUSE
    • A. Providing for Third Party Dispositions
      • 1. Making Gifts to Third Parties and Gifts to Surviving Spouse 10.1
      • 2. Deceased Settlor's Power of Appointment 10.2
      • 3. Form: Distribution of Decedent's Property as Appointed by Deceased Settlor 10.3
    • B. Administration of Entire Trust as Survivor's Trust 10.4
    • C. Form: Distribution of Both Settlors' Trust Property to Survivor's Trust 10.5
    • D. Administration of Entire Trust as Administrative Trust 10.5A
    • E. Form: Administrative Trust Authorized 10.5B
  • II. DIVISION OF TRUST
    • A. Division Into Three Trusts 10.6
    • B. Division Into Two Trusts 10.7
    • C. Form: Division of Trusts 10.8
    • D. Form: Additional Language for Nonprorata Division of Community Property 10.8A
      • 1. Purpose of Aggregate Theory Community Property Agreement 10.8B
      • 2. Nonapplication of Community Property Agreement to Qualified Plans 10.8C
    • E. Deferral of Division or Distribution of Assets 10.9
    • F. Form: Deferral of Division or Distribution of Trust Assets 10.10
  • III. SURVIVORSHIP OF SPOUSE
    • A. Surviving Settlor's Failure to Meet Survivorship Conditions 10.11
    • B. Form: Distribution of Deceased Settlor's Property If Spouse or Partner Does Not Survive 10.12
    • C. Simultaneous Death Provision 10.13
  • IV. NOTIFICATION BY TRUSTEE ON FIRST DEATH 10.14

11

Marital Deduction Formulas and Funding

Marc M. Stern

  • I. MARITAL DEDUCTION PLANNING
    • A. Marital Deduction Planning Considerations 11.1
      • 1. Need for Planning Flexibility 11.1A
      • 2. Typical Marital Estate Plan 11.1B
    • B. Determining Marital Deduction; Formula Clauses 11.2
    • C. Division of Trust Assets on First Death 11.3
  • II. MARITAL DEDUCTION FORMULAS AND FUNDING ISSUES 11.4
    • A. Types of Formula Clauses 11.5
      • 1. Form: Pecuniary Amount Formula Clause 11.6
      • 2. Form: Fractional Share Formula Clause 11.7
    • B. Complexities of Formula Clauses 11.8
  • III. PECUNIARY MARITAL FORMULA 11.9
    • A. Overview of Pecuniary Marital Formula 11.10
    • B. Form: Pecuniary Marital Formula (Bypass Trust as Residue) 11.11
    • C. Factors Included in Pecuniary Marital Formula 11.12
      • 1. Federal Estate Tax Deductions 11.13
      • 2. Other Property Passing to Surviving Spouse 11.14
      • 3. Federal Estate Tax Credits 11.15
        • a. State Death Tax Credit 11.16
        • b. Prior Transfer Property Credit 11.17
        • c. Foreign Death Tax Credit 11.18
      • 4. Adjusted Taxable Gifts 11.19
      • 5. Specific Allocation to Bypass Trust 11.20
    • D. Funding Issues When Pecuniary Marital Formula Is Used
      • 1. Revenue Procedure 64–19 11.21
      • 2. "Date-of-Distribution Value" Funding 11.22
      • 3. "Fairly Representative" Funding 11.23
      • 4. "Minimum Worth" Funding 11.24
      • 5. Consequences of Funding Plan 11.25
      • 6. Income Tax Issues 11.26
        • a. Gain and Loss 11.27
        • b. Income in Respect of a Decedent (IRD) 11.28
        • c. Distributable Net Income (DNI) 11.29
    • E. Comparison of Funding Plans Used With Pecuniary Marital Formula
      • 1. Date-of-Distribution Value Funding
        • a. Advantages of True Value Funding 11.30
        • b. Disadvantages of True Value Funding 11.31
      • 2. Fairly Representative Funding
        • a. Advantages of Fairly Representative Funding 11.32
        • b. Disadvantages of Fairly Representative Funding 11.33
        • c. Overcoming Disadvantages of Fairly Representative Funding 11.34
      • 3. Minimum Worth Funding
        • a. Advantages of Minimum Worth Funding 11.35
        • b. Disadvantages of Minimum Worth Funding 11.36
  • IV. PECUNIARY BYPASS MARITAL FORMULA
    • A. Overview of Pecuniary Bypass Formula 11.37
    • B. Form: Pecuniary Bypass Formula (Marital Trust as Residue) 11.38
    • C. Factors Included in Pecuniary Bypass Formula 11.39
    • D. Administration Expenses Claimed as Income Tax Deductions 11.40
    • E. Funding Issues When Pecuniary Bypass Formula Is Used
      • 1. Date-of-Distribution Value Funding 11.41
      • 2. Fairly Representative Funding 11.42
      • 3. Comparison of Date-of-Distribution Value and Fairly Representative Funding Used With Pecuniary Bypass Formula 11.43
  • V. FRACTIONAL SHARE MARITAL FORMULAS
    • A. Overview of Fractional Share Marital Formulas 11.44
    • B. Form: Fractional Share Marital Formula 11.45
    • C. Comparison With Pecuniary Funding Formulas
      • 1. Fractional Share Formula With Prorata Funding
        • a. Prorata Funding Not Advised 11.46
        • b. Disadvantages of Prorata Funding 11.47
      • 2. Fractional Share Formula With Nonprorata Funding
        • a. Advantages of Nonprorata Funding 11.48
        • b. Disadvantages of Nonprorata Funding 11.49
        • c. Form: Power to Make Nonprorata Distribution 11.50
  • VI. SELECTING FORMULA AND FUNDING OPTIONS
    • A. Selection Considerations 11.51
    • B. Conflicts in Funding 11.52
    • C. Timing of Distributions 11.53
  • VII. DECEASED SETTLOR'S ESTATE TAX AND OTHER EXPENSES PAYABLE
    • A. Equitable Tax Allocation 11.54
    • B. Trust From Which Taxes and Expenses Should Be Payable 11.55
    • C. Avoiding General Power of Appointment Over Survivor's Community Share 11.56
    • D. Form: Deceased Settlor's Expenses 11.57

12

Survivor's Trust

CEB Staff

  • I. QUALIFYING FOR MARITAL DEDUCTION 12.1
    • A. Required Provisions 12.2
    • B. Third Party Distribution Provisions 12.3
    • C. No Marital Deduction for Domestic Partners 12.3A
  • II. INTRODUCTORY PROVISIONS
    • A. Form: Distribution to Survivor's Trust 12.4
    • B. Purpose of Survivor's Trust 12.5
    • C. Form: Purpose of Survivor's Trust 12.6
    • D. Revocability of Survivor's Trust 12.7
    • E. Marital Deduction Qualification If Third Party Distributions 12.8
    • F. Form: Marital Deduction Survivor's Trust 12.9
  • III. DISPOSITIVE PROVISIONS
    • A. Payment of Principal and Income of Survivor's Trust
      • 1. No Negative Tax Consequences 12.10
      • 2. Form: Payment of Income and Principal 12.11
    • B. General Power of Appointment
      • 1. Use of General Power of Appointment 12.12
      • 2. Form: General Power of Appointment 12.13
    • C. Termination When Survivor Does Not Hold or Has Not Exercised Power of Appointment
      • 1. Pourover Into Bypass Trust 12.14
      • 2. Form: Pourover Into Bypass Trust 12.15
      • 3. Separate Dispositive Clauses for QTIP Trust and Survivor's Trust 12.16
      • 4. Form: Specified Distribution of Survivor's Trust 12.17
      • 5. Form: Distribution to Family Pot Trust 12.18
      • 6. Form: Distribution to Separate Trusts for Children or Grandchildren 12.19

13

QTIPs and QDOTs

Marc M. Stern

  • I. QTIP TRUSTS
    • A. Uses of QTIP Trust 13.1
    • B. Form: QTIP Trust Purpose 13.2
    • C. Qualifying-Income-Interest-for-Life Requirement 13.3
      • 1. What Constitutes Requisite Income Interest 13.4
        • a. Degree of Enjoyment 13.5
          • (1) Qualifying Unitrust Interest 13.5A
          • (2) Power to Compel Trustee to Make Trust Property Productive of Income 13.5B
        • b. Payable at Least Annually 13.6
        • c. Distributions "for the Benefit" of Spouse 13.7
        • d. Income Unpaid at Death 13.8
        • e. Income From Specific Portion of Trust 13.9
        • f. No Contingent Continuation of Income Interest 13.10
        • g. Income Interest May Be Contingent on QTIP Election 13.11
      • 2. No Appointment of Property to Persons Other Than Spouse
        • a. Prohibition Against Third Party Distributions 13.12
        • b. Consequences of Distribution by Surviving Spouse 13.13
        • c. Deemed Gift of QTIP Remainder 13.13A
      • 3. Form: QTIP Trust Income Provision 13.14
      • 4. Form: QTIP Unitrust Provision 13.14A
    • D. Distribution of Principal
      • 1. Distribution of Principal to Surviving Settlor Permitted 13.15
      • 2. Avoiding General Power of Appointment 13.16
      • 3. Form: Discretionary Distribution of Trust Principal to Surviving Settlor 13.17
    • E. Termination of QTIP Trust
      • 1. When Surviving Settlor Holds Limited Power of Appointment 13.18
      • 2. Form: Limited Power of Appointment Exercisable at Death 13.19
      • 3. Termination When Surviving Settlor Does Not Hold or Has Not Exercised Power of Appointment 13.20
    • F. Form: Marital Deduction Saving Clause 13.21
    • G. Division of QTIP Trusts
      • 1. Making QTIP Election
        • a. Potential Conflict of Interest in QTIP Election Decision 13.22
        • b. Consequences of Unnecessary QTIP Election or Failure to Make Election 13.23
        • c. Form: Authorization to Make QTIP Election 13.24
      • 2. Partial QTIP Election
        • a. When Partial Election Permissible 13.25
        • b. Form: Division of Trusts Reflecting Partial Election 13.26
  • II. QUALIFIED DOMESTIC TRUSTS FOR NONCITIZEN SPOUSES
    • A. Use of QDOT to Qualify for Marital Deduction 13.27
    • B. Requirements to Qualify Trust as QDOT 13.28
    • C. When Noncitizen Spouse Becomes Citizen 13.29
    • D. Effect of QDOT on Estate Tax 13.30
    • E. When QDOT Property Subject to Estate Tax 13.31
    • F. Successor Domestic Trustees 13.32
    • G. Form: Qualifying Trust as QDOT 13.33
    • H. Amount of QDOT Tax 13.34
    • I. QDOT Drafting Considerations 13.35

14

Bypass and Disclaimer Trusts

Marc M. Stern

  • I. PURPOSE OF BYPASS TRUST
    • A. Basic Zero-Tax Strategy 14.1
    • B. Three Approaches to Bypass Trust 14.2
      • 1. Marital Deduction Formula Clause 14.3
      • 2. QTIPable Bypass Trust 14.4
      • 3. Disclaimer Trust 14.5
    • C. Bypass Trust for Domestic Partners 14.5A
  • II. IMPACT OF EGTRRA-2001
    • A. Relevant Provisions of EGTRRA-2001 and Continuing Uncertainty 14.6
    • B. Flexibility Planning Under EGTRRA-2001 14.7
      • 1. Initial Value Flexibility Strategies 14.8
        • a. Eliminating Formula Disposition; Proposed Portability Strategy 14.9
        • b. Modifying Disposition Provisions of Bypass Trust 14.10
      • 2. Preserving Predeath Flexibility 14.11
        • a. Giving Agent Power to Amend Trust 14.12
        • b. Form: Agent's Power to Amend Trust 14.13
      • 3. Creating Postdeath Flexibility 14.14
        • a. Avoiding Restrictions on Postdeath Judicial Modification 14.15
          • (1) Omitting Spendthrift Clause 14.16
          • (2) Facilitating Unanimous Beneficiary Agreement 14.17
          • (3) Overcoming Material Purpose Limitation 14.18
          • (4) Removal of Uncertainty as a Changed Circumstance 14.19
        • b. Giving Independent Trustee Broad Distribution Discretion 14.20
        • c. Form: Option to Purchase Residence From Bypass Trust 14.20A
  • III. BYPASS TRUST DISTRIBUTION OPTIONS
    • A. Overview of Distribution Options 14.21
      • 1. Surviving Settlor as Trustee of Trust Benefiting Survivor 14.22
      • 2. Use of Bypass Trust for Small Estates 14.23
      • 3. Form: Non-QTIPable Bypass Trust 14.23A
    • B. QTIPable Bypass Trust 14.24
      • 1. Determining QTIP Portion of Trust 14.25
      • 2. Providing Different Distribution Terms for Unelected Portion of Trust 14.26
      • 3. Principal-Invasion Provision 14.26A
      • 4. Form: QTIPable Bypass Trust 14.27
      • 5. Form: Disclaimer of Bypass Trust Interests 14.27A
      • 6. Form: Authorization to Make DSUE Election 14.27B
  • IV. DISCLAIMER TRUST
    • A. Use of Disclaimer Trust
      • 1. Purpose of Disclaimer Trust 14.28
      • 2. Disclaimer Trust Problems 14.29
      • 3. Surviving Settlor's Beneficial Use of Disclaimed Property 14.30
    • B. Required Elements of Disclaimer Trust
      • 1. Limiting Discretionary Distributions by Surviving Settlor 14.31
      • 2. Disclaiming Special Power of Appointment 14.32
    • C. Optional Features of Disclaimer Trust
      • 1. Bypass Trust as Recipient of Disclaimed Property 14.33
      • 2. Disclaimer Trust as Sole Trust After Death of Deceased Settlor 14.34
    • D. Form: Disclaimer Trust 14.35
  • V. CLAYTON QTIP CONTINGENT BYPASS TRUST
    • A. Description of Contingent Bypass Trust 14.36
    • B. Purpose of Contingent Bypass Trust 14.37
    • C. Evaluating Contingent Bypass Trust 14.38
    • D. Form: Clayton QTIP Trust 14.39
    • E. Form: Contingent Bypass Trust 14.40

15

Payment of Taxes, Debts, and Administration Expenses

CEB Staff

  • I. BURDEN OF TRUST PAYMENT OBLIGATIONS 15.1
  • II. APPORTIONMENT OF FEDERAL TRANSFER TAXES 15.2
    • A. Equitable Proration Under California Statutes 15.3
      • 1. Overriding Equitable Proration 15.4
      • 2. Right of Recovery by Personal Representative 15.5
    • B. Federal Apportionment Statutes 15.6
      • 1. Life Insurance Proceeds 15.7
      • 2. IRC §2041 Power-of-Appointment Property 15.8
      • 3. IRC §2036 Retained Life Estate Property 15.9
      • 4. IRC §2044 Qualified Terminable Interest Property 15.10
      • 5. QDOT Tax Apportionment 15.11
      • 6. GST Tax Apportionment 15.12
    • C. Recommended Apportionment Clause Scheme for Funded Revocable Trusts 15.13
      • 1. Form: Equitable Proration Under California Law 15.14
      • 2. Transfer Taxes Caused by Disclaimer 15.15
      • 3. Form: Apportionment of Tax to Disclaimed Property 15.16
      • 4. Form: Alternative Tax Allocation Clause 15.16A
    • D. Particular Apportionment Problems 15.17
      • 1. Tax Deductible Gift Paid From Residue 15.18
      • 2. Tax Imposed on Gift Taxes Paid 15.19
      • 3. Other Uncertainties Concerning Lifetime Transfers 15.20
      • 4. IRC §2032A Special Use Valuation Property 15.21
  • III. PAYMENT OF DECEASED SETTLOR'S DEBTS AND FUNERAL EXPENSES 15.22
    • A. Allocation of Debts Between Married Settlors 15.23
    • B. Payment of Debts From Specific Assets 15.24
    • C. Avoiding Uncertainties Concerning Postdeath Additions to Trusts 15.25
    • D. Mandating Use of Optional Statutory Creditor Claim Procedure 15.26
    • E. Form: Payment of Debts—Single Settlor 15.27
    • F. Form: Payment of Debts—Married Settlors' Joint Trust 15.28
  • IV. TRUST ADMINISTRATION EXPENSES 15.29
    • A. Deductibility of Expenses 15.30
      • 1. Two-Percent Floor on Itemized Deductions 15.31
      • 2. Income Tax Deduction Versus Estate Tax Deduction 15.32
    • B. Source of Payment of Expenses 15.33
    • C. Allocation of Expenses Between Principal and Income 15.34

16

Office of Trustee

Charles A. Larson

  • I. OFFICE OF TRUSTEE
    • A. Choice of Trustee 16.1
    • B. Application of Trustee Provisions 16.2
      • 1. Form: Definition of Trustee 16.3
      • 2. Form: Scope of Trustee Provisions 16.4
    • C. Cotrustees
      • 1. Role of Cotrustee 16.5
      • 2. Beneficiary Cotrustee 16.6
      • 3. Form: Cotrustees 16.7
    • D. Special Trustee 16.8
      • 1. Management of Specified Assets 16.9
      • 2. Form: Appointment of Special Trustee 16.10
      • 3. Form: Effect of Powers of Special Trustee on Powers of Trustee 16.11
      • 4. Form: Settlor-Trustee's Power to Use and Employ Agents 16.12
      • 5. Potential for Special Trustee's Conflict of Interest 16.13
      • 6. Use of Special Trustee to Protect Beneficiary Trustee From Adverse Tax Consequences 16.14
      • 7. Compensation 16.15
      • 8. Form: Compensation of Special Trustee 16.16
    • E. Trustee's Bond
      • 1. Bond Generally Not Required 16.17
      • 2. Form: Trustee's Bond 16.18
    • F. Trustee Compensation
      • 1. When Compensation Is Allowed 16.19
      • 2. Form: Trustee Compensation 16.20
  • II. EXCULPATING TRUSTEE
    • A. Cotrustee Liability 16.21
    • B. Relief From Liability by Trust Provision 16.22
    • C. Form: Exculpation of Trustee 16.23
    • D. Form: Effect of Account 16.23A
  • III. LIABILITY FOR ACTIONS OF OTHER TRUSTEES
    • A. Trustee Duties and Liabilities 16.24
    • B. Cotrustee Provisions
      • 1. Form: Cotrustee's Duty to Act 16.25
      • 2. Form: Limitation on Duty to Investigate Predecessor or Cotrustee 16.26
      • 3. Form: Nonliability for Cotrustee's Acts 16.27
      • 4. Form: Nonliability of Trustee or Special Trustee for Conflicts of Interest 16.28
      • 5. Notice to Trustee of Births, Deaths, and Other Events Affecting Interests
        • a. Purpose of Clause 16.29
        • b. Form: Notice to Trustee of Births, Deaths, and Other Events Affecting Interests 16.30
  • IV. TRUSTEE VACANCY
    • A. Procedures When Office of Trustee Becomes Vacant 16.31
    • B. Duties and Powers of Former Trustee Pending Delivery to Successor 16.32
  • V. RESIGNATION OF TRUSTEE
    • A. Methods of Trustee Resignation 16.33
    • B. Form: Trustee Resignation 16.34
  • VI. REMOVAL OF TRUSTEE
    • A. How Trustee May Be Removed 16.35
      • 1. Statutory Grounds for Removal 16.36
      • 2. Trust Provisions Authorizing Removal 16.37
    • B. Tax Consequences Arising From Beneficiary's Power to Replace Trustee 16.38
    • C. Removal of Incompetent Settlor Acting as Trustee 16.38A
    • D. Form: Removal of Incompetent Settlor Acting as Trustee 16.39
    • E. Form: Removal of Corporate Trustee 16.40
    • F. Form: Removal of Any Trustee 16.41
    • G. Form: Removal of Trustee by Beneficiary or Third Party 16.42
    • H. Removal on Change of Beneficiary's Residence
      • 1. Need for New Trustee When Distance Makes Appointed Trustee Inaccessible 16.43
      • 2. Form: Removal on Change of Beneficiary's Residence 16.44
    • I. Removal Owing to Trustee Incapacity
      • 1. Need for New Trustee When Appointed Trustee Becomes Physically or Mentally Incapacitated 16.45
        • a. Alternatives to Determination of Incapacity 16.45A
        • b. Replacing Trustee Because of Incapacity 16.45B
      • 2. Form: Replacement of Incapacitated Trustee 16.46
      • 3. Form: Grant of Authority to Health Care Agent and Authorization Under HIPAA and California Law for Release of Health Information 16.46A
      • 4. Form: Trustee Required to Authorize Release of Health Information 16.46B
      • 5. Form: Authorization for Use and Disclosure of Protected Health Information 16.46C
  • VII. SUCCESSOR TRUSTEES
    • A. Designation of Successor Trustees 16.47
    • B. Form: Sole Settlor's Designation of Successor Trustees 16.48
    • C. Form: Temporary Trustee 16.49
    • D. When Successors to Cotrustees Must Be Named
      • 1. Maintaining Original Number of Cotrustees 16.50
      • 2. Cotrustee Remains Sole Trustee 16.51
    • E. Institution Named as Last Successor Trustee
      • 1. Ensuring Availability of Successor Trustee 16.52
      • 2. Form: Settlor's Designation of Institution as Last Successor Trustee 16.53
    • F. Power to Name Successor Trustees
      • 1. Authorizing Trustee or Beneficiary to Name Successor Trustees 16.54
      • 2. Form: Power to Name Successor Trustee 16.55
    • G. Powers and Liabilities of Successor Trustees
      • 1. Powers of Successor Trustee 16.56
      • 2. Liability of Successor Trustee for Acts of Predecessor Trustee 16.57
      • 3. Form: Powers and Nonliability of Successor Trustee and Cotrustee 16.58

17

Trustee Powers and Duties

Jeffrey A. Dennis-Strathmeyer

  • I. DRAFTING POWERS AND DUTIES
    • A. Statement of Trustee Powers 17.1
    • B. Probate Code §16202 Power Limitations 17.2
    • C. Duty Modifications Distinguished; Potential Ambiguity 17.3
  • II. TRUSTEE POWERS
    • A. Evolving Presumption of Trustee Power 17.4
    • B. Uniform Trust Code 17.5
    • C. Third Party Duty of Inquiry 17.6
    • D. Drafting Considerations
      • 1. Long Form Versus Short Form Powers Provisions 17.7
      • 2. Intentional Limitations on Trustee Powers 17.8
    • E. Consequences of Incorporating California Law 17.9
      • 1. Powers Without Express Limitations 17.10
      • 2. Limited Powers 17.11
        • a. Investment in Any Kind of Property 17.12
        • b. Delegation of Investment and Management Functions 17.13
        • c. Retention of Property 17.14
        • d. Operation of a Business 17.15
        • e. Obligations of the United States 17.16
        • f. Deposit of Funds in Excess of FDIC Insurance Limits 17.17
        • g. Distribution to Minors and Incompetents 17.18
    • F. Form: Statement of Broad Trustee Powers 17.19
    • G. Amplification of Business Powers
      • 1. Trustee's Ability to Operate a Business 17.20
      • 2. Form: Powers for Business Interests 17.21
      • 3. Corporation Powers
        • a. Authority to Participate in Corporate Organizational Matters 17.22
        • b. Form: Corporate Business Management 17.23
      • 4. Partnership Interest Powers
        • a. Authority to Hold Partnership Interest 17.24
        • b. Form: Power to Engage in Partnership Business 17.25
      • 5. Farming and Ranching Powers
        • a. Authority to Hold Farming and Ranching Interests 17.26
        • b. Form: Powers for Farming Interests 17.26A
  • III. DUTIES LIMITING POWERS 17.27
    • A. Form: Generic Power Limitation 17.28
    • B. Limitations Conferring Powers on Individuals 17.29
      • 1. Allocation of Investment Powers 17.30
      • 2. Form: Corporate Trustee's Duty to Propose Purchases and Sales 17.31
      • 3. Form: Investment Power Solely in Individual Trustee 17.32
      • 4. Form: Special Trustee's Veto Power Over Investments 17.33
  • IV. DUTIES AND DUTY MODIFICATIONS
    • A. Duty Defined 17.34
    • B. Trust Drafting Significance 17.35
    • C. Form: General Statement of Trustee's Duties 17.36
    • D. Duties Owed to Settlor 17.37
    • E. California Statutory Scheme
      • 1. Duty to Administer Trust According to Document 17.38
      • 2. Limiting Statutory Duties 17.39
    • F. Particular Duties
      • 1. Duty of Loyalty 17.40
        • a. Limitations on Trustee's Duty of Loyalty 17.40A
        • b. Form: Limitations on Trustee Duty of Loyalty 17.41
        • c. Custom Limitations on Duty of Loyalty for Businesses 17.42
      • 2. Duty to Deal Impartially With Beneficiaries 17.43
      • 3. Duty to Avoid Conflict of Interest 17.44
      • 4. Duty Not to Undertake an Adverse Trust 17.45
      • 5. Duty to Take Control of Trust Property 17.46
      • 6. Duty to Make Property Productive 17.47
      • 7. Duty to Keep Property Separate and Identified 17.48
      • 8. Duties to Enforce Claims and Defend Actions 17.49
      • 9. Duty Not to Delegate 17.50
      • 10. Form: Delegation of Powers and Duties 17.51
      • 11. Duty to Diversify Investments 17.52
      • 12. Form: Continued Retention and Management of Business 17.53
      • 13. Duty to Report and Account 17.54
      • 14. Form: Waiver of Accounting 17.55
      • 15. Duties Regarding Discretionary Powers 17.56
      • 16. Duties Regarding Charitable Trusts 17.57
      • 17. Duty to Accept Additions 17.58
      • 18. Form: Acceptance of Additions 17.59
      • 19. Duty With Respect to Cotrustees 17.60
      • 20. Duty to Use Special Skills 17.61

18

Construction of Trusts

K. Bruce Friedman

Donald J. McCubbin

  • I. INTERPRETATION OF TRUST TERMS
    • A. According to Intention of Settlor as Expressed 18.1
    • B. When to Include Rules of Construction 18.2
    • C. Where to Place Definitions of Terms 18.3
  • II. TERMS OF RELATIONSHIP
    • A. Purpose of Terms of Relationship Clause 18.4
    • B. Form: Terms of Relationship 18.5
  • III. DEFINITION OF "SPOUSE"
    • A. Purpose of Spousal Definition Clause 18.6
    • B. Form: Definition of "Spouse" 18.7
    • C. Form: Definition of "Domestic Partner" 18.8
  • IV. CHOICE OF LAW
    • A. Enforceability and Desirability of Choice-of-Law Provision 18.9
    • B. Form: California Law Used in Construction of Trust 18.10
    • C. Form: Statutory References 18.11
  • V. OTHER DEFINITIONS AND CONSTRUCTION CLAUSES
    • A. Form: Use of Headings in Construction 18.12
    • B. Form: Relevance of Common Estate Planning Practice 18.13
    • C. Form: Definition of "Education" 18.14
    • D. Form: Definition of "Charity" 18.15
    • E. Form: References to Internal Revenue Code 18.16
  • VI. TRADITIONAL CLAUSES
    • A. Form: Gender and Number 18.17
    • B. Form: Divisions and Paragraphs 18.18
    • C. Form: Trustees and Fiduciaries 18.19
    • D. Form: "Shall" and "May" 18.20
    • E. Severability Clause
      • 1. Purpose of Severability Clause 18.21
      • 2. Form: Severability Clause 18.22

19

No-Contest Clause and Miscellaneous Trust Provisions

K. Bruce Friedman

Donald J. McCubbin

  • I. NO-CONTEST CLAUSE
    • A. Purpose and Effect of No-Contest Clause 19.1
      • 1. Enforceability of No-Contest Clause 19.2
      • 2. Effect of Lifetime Transfer Agreement 19.3
    • B. Optional Language in No-Contest Clause 19.4
    • C. Form: No-Contest Clause 19.5
    • D. Form: Alternative No-Contest Clause 19.5A
  • II. LIMITING COURT JURISDICTION
    • A. Purpose of Clause Limiting Court Jurisdiction 19.6
    • B. Form: Limiting Court Jurisdiction 19.7
    • C. Binding Arbitration Clause 19.7A
  • III. DISINHERITANCE CLAUSE
    • A. Purpose of Disinheritance Clause 19.8
    • B. Form: Disinheritance Clause 19.9
  • IV. PERPETUITIES SAVING CLAUSE
    • A. Purpose of Perpetuities Saving Clause 19.10
    • B. Form: Perpetuities Saving Clause 19.11
  • V. SPENDTHRIFT CLAUSE
    • A. Purpose and Effect of Spendthrift Clause 19.12
    • B. Form: Spendthrift Clause 19.13
  • VI. GUARDIANSHIP CLAUSES
    • A. Nomination of Guardian 19.14
    • B. Form: Nomination of Guardian of Person 19.15
    • C. Nomination of Guardian of Estate 19.16
  • VII. PROFESSIONAL CORPORATION CLAUSE
    • A. Shares of Professional Corporation Held in Trust 19.17
    • B. Form: Shares of Professional Corporation Held in Trust 19.18
  • VIII. CONCLUDING CLAUSES
    • A. Form: Name of Trust 19.19
    • B. Form: Signatures 19.20

20

Revocation and Amendment

Charles A. Larson

  • I. EXPRESS REVOCATION PROVISIONS RECOMMENDED 20.1
    • A. When Statutory Revocation Method May Be Used 20.1A
    • B. When Trust Revocation Method Is Exclusive 20.1B
    • C. Capacity Required to Amend Trust 20.1C
  • II. FORM: REVOCATION AND AMENDMENT BY SOLE SETTLOR 20.2
  • III. REVOCATION AND AMENDMENT BY MARRIED SETTLORS
    • A. Form: Revocation and Amendment by Married Settlors 20.3
    • B. Revocation Power With Respect to Community Property 20.4
      • 1. Revocation Recommended in Dissolution Proceeding 20.4A
      • 2. Community Property Retains Character 20.4B
    • C. Revocation Power With Respect to Separate Property 20.5
    • D. Revocation and Amendment by Surviving Settlor 20.6
      • 1. Form: Revoking Settlor's Power to Direct Disposition Intended 20.6A
      • 2. Form: Revoking Settlor's Power to Direct Disposition Not Intended 20.6B
  • IV. RIGHTS OF THIRD PARTIES TO EXERCISE POWER TO REVOKE OR AMEND
    • A. Revocation by Conservator 20.7
      • 1. Purpose of Revocation Provision 20.7A
      • 2. Benefits of Substituted Judgment 20.7B
    • B. Revocation by Durable Power Agent 20.8
      • 1. Power to Make Gifts 20.8A
      • 2. Power to Amend Trust 20.8B
  • V. FORM: AMENDMENT TO TRUST 20.9
  • VI. RESTATEMENT OF ENTIRE TRUST
    • A. Practical Reasons for Restatement 20.10
    • B. Form: Restatement of Entire Trust 20.11
  • VII. REVOCATION AND AMENDMENT BY DOMESTIC PARTNERS 20.12

21

Funding the Trust

Linda C. Roodhouse

  • I. PURPOSE OF TRUST FUNDING 21.1
    • A. Funding Not Required 21.1A
    • B. Subtrust Funding for Married Settlors 21.1B
  • II. NONTRANSFERABLE PROPERTY 21.2
  • III. LESS THAN FULL FUNDING 21.3
  • IV. THE FUNDING PLAN 21.4
  • V. FORM: SAMPLE CLIENT MEMORANDUM ON TRUST FUNDING 21.5
  • VI. PARTICULAR TYPES OF ASSETS
    • A. Real Property
      • 1. Personal Residence 21.6
      • 2. Transfers to Revocable Trust Do Not Trigger Reassessment 21.7
      • 3. Homeowner's Exemption 21.8
      • 4. Notification of Lender, Insurance Carrier, and Tenants 21.9
      • 5. Grant Deed 21.10
      • 6. Form: Grant Deed 21.11
      • 7. Preliminary Change of Ownership 21.12
      • 8. Form: Preliminary Change of Ownership Report (PCOR) 21.13
      • 9. Non-California Real Property 21.14
      • 10. Title Insurance Problem 21.14A
    • B. Personal Property
      • 1. Assignment of Personal Property 21.15
      • 2. Form: Assignment of Tangible Personal Property 21.16
      • 3. Form: General Assignment of Property to Trust 21.17
      • 4. Automobiles, Boats, Mobilehomes 21.18
    • C. Cash Bank Accounts
      • 1. Title Change Procedure 21.19
      • 2. Form: Sample Letter to Financial Institution 21.20
    • D. Securities
      • 1. Transfer of Brokerage and Mutual Fund Title 21.21
      • 2. Form: Sample Letter of Instruction to Broker 21.22
      • 3. Transfer of Share Certificates 21.23
      • 4. Form: Assignment Separate From Certificate or Bond 21.24
      • 5. Obtaining Information About Transfer Agent 21.25
      • 6. Lost or Missing Share Certificates 21.26
      • 7. Securities of Nominal or No Value 21.27
      • 8. Restricted Securities 21.28
      • 9. Employee Incentive Stock Option Plans 21.29
      • 10. Bonds 21.30
    • E. Closely Held Business Interests 21.31
      • 1. Transfer of Partnership Interest 21.32
        • a. Obtaining Partnership Information 21.33
        • b. Form: Assignment of Partnership Interest 21.34
        • c. Form: Consent to Assignment of Partnership Interest 21.35
      • 2. Closely Held Corporations 21.36
      • 3. Limited Liability Companies (LLCs) 21.37
        • a. Form: Assignment of LLC Membership Interest 21.37A
        • b. Form: Consent to Assignment of LLC Membership Interest 21.37B
      • 4. Sole Proprietorships 21.38
    • F. Coordinating Beneficiary Designations 21.39
      • 1. Life Insurance 21.40
      • 2. IRA or Qualified Retirement Plan 21.41
    • G. Other Assets
      • 1. Promissory Notes 21.42
      • 2. Form: Sample Letter to Payor Regarding Payment on Promissory Note 21.43
      • 3. Intellectual Property 21.44
        • a. Form: Assignment of Copyright to Trust 21.45
        • b. Form: Sample Letter to Copyright Office 21.46
        • c. Form: Assignment of Patent to Trust 21.47
        • d. Form: Assignment of Trademark to Trust 21.48
    • H. Foreign Assets 21.49

22

Related Documents

CEB Staff

  • I. CERTIFICATION OF TRUST
    • A. Use of Certification of Trust 22.1
    • B. Form: Certification of Trust 22.2
    • C. Effect of Certification of Trust 22.2A
  • II. POUROVER WILL
    • A. Purpose of Pourover Will 22.3
    • B. Saving Clause If Direct Devise to Trust Is Ineffective 22.4
    • C. Form: Disposition of Residue to Trust 22.5
    • D. Form: Sample Pourover Will 22.6
    • E. Form: Nomination of Guardian of Person 22.7
    • F. Form: Tax Allocation Clause 22.8
    • G. Form: Power Over Digital Assets 22.9
  • III. DURABLE POWER OF ATTORNEY
    • A. Coordinated Use of Revocable Trust and Durable Power of Attorney 22.10
      • 1. Selecting Agent; Nominating Conservator 22.11
      • 2. Springing Powers Versus Immediate Powers 22.12
      • 3. Scope of Agent's Powers 22.13
    • B. Form: Durable Power of Attorney 22.14
  • IV. CERTIFICATE OF INDEPENDENT REVIEW
    • A. Purpose of Certificate of Independent Review 22.15
    • B. Form: Certificate of Independent Review 22.16
    • C. Who May Execute Certificate of Independent Review 22.17

23

Multistate Trusts

Joseph L. Wyatt, Jr.

Patrick R. McCabe

  • I. PLANNING AND DRAFTING MULTISTATE TRUSTS
    • A. Role of Conflicts in Multistate Trusts 23.1
    • B. Conflict-of-Laws Problem 23.2
      • 1. Continuing Change in Conflict-of-Laws Theories 23.3
      • 2. Application of Interest-Analysis Theory 23.4
      • 3. Form: Trustee May Apply Principle of Validation 23.5
    • C. Hypothetical Case: The Jones Trust 23.6
    • D. Use of Out-of-State Counsel 23.7
  • II. GENERAL RULES ON VALIDITY, CONSTRUCTION, INTERPRETATION, AND ADMINISTRATION OF TRUSTS
    • A. Analyzing Conflicts of Laws in Terms of "Characterization" 23.8
      • 1. Questions of Validity 23.9
      • 2. Questions of Construction and Interpretation 23.10
      • 3. Questions of Administration 23.11
    • B. Validity of Trust 23.12
      • 1. Validity of Real Property Trust 23.13
      • 2. Equitable Conversion of Real Property 23.14
      • 3. Validity of Personal Property Trust 23.15
      • 4. Validity of Real and Personal Property Trust 23.16
      • 5. Determining Character of Trust Property 23.17
    • C. Interpretation and Construction of Trust 23.18
      • 1. Construction of Real Property Trust 23.19
      • 2. Construction of Personal Property Trust 23.20
      • 3. Construction of Real and Personal Property Trust 23.21
    • D. Administration of Trust 23.22
      • 1. Administration of Real Property Trust 23.23
      • 2. Administration of Personal Property Trust 23.24
      • 3. Administration of Real and Personal Property Trust 23.25
      • 4. Change in Place of Administration 23.26
      • 5. Form: Trust Governed by Law of Place of Administration 23.27
      • 6. Form: Saving Clause for Unforeseen Tax Consequences 23.28
  • III. JURISDICTION TO RESOLVE VARIOUS ISSUES 23.29
    • A. Jurisdiction to Determine Conflicting Rights and Claims to Trust Property 23.30
    • B. When Courts of Other States May Act 23.31
    • C. When Federal Courts May Refuse Jurisdiction 23.32
    • D. Validity of Choice-of-Forum Clauses 23.33
    • E. Form: Choice-of-Forum Clause 23.34
  • IV. PLANNING FOR VALIDITY, CONSTRUCTION, INTERPRETATION, AND ADMINISTRATION OF TRUSTS 23.35
    • A. Revocability of Trust 23.36
    • B. Defining Technical Terms ("Issue" and "Children") 23.37
    • C. Enforceability and Desirability of Choice-of-Law Clause 23.38
      • 1. Form: Choice of Law (All Real and Personal Property in One State) 23.39
      • 2. Form: Choice of Law (Real Property in Several States and Personal Property) 23.40
      • 3. Application of Choice-of-Law Clause to Hypothetical Jones Trust 23.41
    • D. Law Governing Investments 23.42
    • E. Trustee's Liabilities; Exculpatory Clauses 23.43
    • F. Trustee's Compensation 23.44
  • V. SPECIAL PROBLEMS OF MULTISTATE TRUSTS
    • A. Who Can Act as Nonresident Trustee 23.45
      • 1. Application of Nonresident Trustee Laws to Hypothetical Jones Trust 23.46
      • 2. Form: Appointing Trustee for Real Property 23.47
    • B. Validity of Pourover Transfer to Revocable Trust
      • 1. When Pourover Transfer Permitted 23.48
      • 2. Application of Pourover Transfer Laws to Hypothetical Jones Trust 23.49
    • C. Transfer of Marital Property to Trust in Another Jurisdiction
      • 1. Nature of Marital Property Problems 23.50
        • a. Separate or Community Character of Property Transferred 23.51
        • b. Character of Property for State Death Tax Purposes 23.52
        • c. Marital Rights of Nonresident Spouse 23.53
        • d. Income Tax Effects of Transfer of Community Property 23.54
        • e. Form: Choice of Law for Community Property 23.55
        • f. Effect of Agreement Between Spouses 23.56
      • 2. Steps to Take on Transfer of Marital Property 23.57
      • 3. Effect of Change of Settlors' Residence 23.58
      • 4. Application of Marital Property Laws to Hypothetical Jones Trust 23.59
    • D. Trusts in Violation of Family Rights
      • 1. Surviving Spouse's Rights 23.60
      • 2. Children's Rights 23.61
      • 3. Application of Family Rights to Hypothetical Jones Trust 23.62
    • E. Assignment, Attachment, and Disclaimer of Beneficiary's Interest; Creditors' Rights 23.63
    • F. Powers of Appointment
      • 1. Applicable Law on Powers of Appointment 23.64
      • 2. Transfer of Assets to New Trustee 23.64A
      • 3. Drafting Considerations for Powers of Appointment 23.65
        • a. Form: Exercise of Power of Appointment 23.66
        • b. Form: Choice of Law Governing Exercise of Power of Appointment 23.67
      • 4. Application of Law Governing Powers of Appointment to Hypothetical Jones Trust 23.68
    • G. Charitable Trusts
      • 1. Nature of Charitable Trust Problems 23.69
        • a. Effect of State Law on Validity and Taxation of Charitable Trusts 23.70
        • b. Application of Rule Against Perpetuities to Charitable Trusts 23.71
        • c. Effect of Marital Rights on Charitable Trusts 23.72
        • d. Administrative Problems of Charitable Trusts 23.73
      • 2. Application of Charitable Trust Laws to Hypothetical Jones Trust 23.74
  • VI. TAXATION OF MULTISTATE TRUSTS 23.75
    • A. State Death Taxes 23.76
      • 1. Taxation of Real Property and Tangible Personal Property 23.77
      • 2. Taxation of Intangible Personal Property 23.78
      • 3. Tax Exemption and Arbitration Statutes 23.79
        • a. Conflicting Characterization of Property 23.80
        • b. Tax Problem of Multiple Domiciles 23.81
      • 4. Computation of State Death Tax Credit or Deduction for Federal Estate Tax 23.82
      • 5. Pick-Up Tax Problem 23.83
      • 6. Character of Decedent's Interest as Community or Separate Property 23.84
    • B. Application of State Death Tax Planning to Hypothetical Jones Trust
      • 1. Avoiding Multiple Domiciles 23.85
      • 2. Planning to Minimize State Death Taxation 23.86
    • C. Payment of State Death Taxes and Apportionment
      • 1. Nature of Apportionment Problem 23.87
      • 2. Planning for Payment of Death Taxes 23.88
      • 3. Application of Apportionment Clause to Hypothetical Jones Trust 23.89
    • D. State Death Taxation of Beneficiary's Interest 23.90
    • E. State Gift Taxation
      • 1. Taxation of Real Property and Tangibles 23.91
      • 2. Taxation of Intangibles 23.92
      • 3. Planning for Gift Taxes 23.93
      • 4. Application of State Gift Taxation to Hypothetical Jones Trust 23.94
    • F. State Income Taxation
      • 1. Taxation of Trusts and Beneficiaries 23.95
        • a. Income From Sources Within the State 23.95A
        • b. California Taxation of Trust Income 23.95B
      • 2. Tax Credit Statutes 23.96
      • 3. Application of State Income Taxation to Hypothetical Jones Trust 23.97
      • 4. Planning for State Income Taxes 23.98
    • G. Property Taxes
      • 1. Basic Property Tax Principles 23.99
      • 2. Taxation of Intangibles by Settlors' Domicile 23.100
      • 3. Taxation of Intangibles by Beneficiary's Domicile 23.101
      • 4. Application of Property Taxes to Hypothetical Jones Trust 23.102
      • 5. Planning for Property Taxes 23.103
  • VII. CHECKLIST: MULTISTATE TRUSTS 23.104

24

Complete Trust Forms

CEB Staff

  • I. MARRIED SETTLORS' FORMULA MARITAL DEDUCTION TRUST
    • A. Description of Married Settlors' Formula Marital Deduction Trust 24.1
    • B. Form: Married Settlors' Formula Marital Deduction Trust 24.2
  • II. MARRIED SETTLORS' SIMPLE JOINT TRUST WITH STANDBY DISCLAIMER TRUST
    • A. Description of Married Settlors' Simple Joint Trust With Standby Disclaimer Trust 24.3
    • B. Form: Married Settlors' Simple Joint Trust With Standby Disclaimer Trust 24.4
  • III. INDIVIDUAL SETTLOR TRUST: LONG FORM
    • A. Description of Individual Settlor Trust: Long Form 24.5
    • B. Form: Individual Settlor Trust: Long Form 24.6
  • IV. INDIVIDUAL SETTLOR TRUST: SHORT FORM
    • A. Description of Individual Settlor Trust: Short Form 24.7
    • B. Form: Individual Settlor Trust: Short Form 24.8
  • V. ALTERNATIVE CLAYTON QTIP TRUST FOR MARRIED SETTLORS
    • A. Description of Alternative QTIP Trust for Married Settlors 24.9
    • B. Form: Alternative QTIP Trust for Married Settlors 24.10

 

DRAFTING CALIFORNIA REVOCABLE TRUSTS

(4th Edition)

September 2017

TABLE OF CONTENTS

 

File Name

Book Section

Title

CH02

Chapter 2

Professional Responsibility

02-032

§2.32

Consent to Dual Representation—Short Form

02-033

§2.33

Consent to Dual Representation—Long Form

CH04

Chapter 4

Tax Considerations

04-211

§4.211

Appropriate Interest

04-218

§4.218

Division of QTIP Trust

04-221

§4.221

Estate Tax Apportionment

CH05

Chapter 5

Creation of Trust

05-015

§5.15

Certificate of Independent Review

05-019

§5.19

Creation of Trust for Sole Settlor

05-023

§5.23

Character of Trust Property

05-030

§5.30

Characterization of Trust Property in Exhibit A

05-037

§5.37

Creation of Married Settlor Trust

05-038

§5.38

Form: Sample Schedule Of Assets (Exhibit A)

CH06

Chapter 6

Distributions While Trust Is Revocable

06-005

§6.5

Distributions of Community Property

06-008

§6.8

Distributions of Separate Property to Married Settlors

06-010

§6.10

Preference for Use of Quasi-Community Property

06-012

§6.12

Determination of Incompetence

06-014

§6.14

Distributions to Single Settlor

06-019

§6.19

Payments to Others

06-021

§6.21

Support of Individual Beneficiary When Settlor Is Incompetent

CH07

Chapter 7

Distributions From Continuing Trusts

07-025

§7.25

Prohibition Against Discharge of Support Obligation

07-044

§7.44

Mandatory Distribution of Income for Life

07-048

§7.48

Payment of Annuity Amount

07-054

§7.54

Payment of Unitrust Amount

07-054D

§7.54D

Payment of Conduit Trust Amount

07-062

§7.62

Basic HEMS Power

07-068

§7.68

Consideration of Other Resources

07-071

§7.71

Favored Beneficiary Clause

07-074

§7.74

Definition of “Education”

07-079

§7.79

Limitations on Discretionary Distributions to Trustee

07-084

§7.84

Principal and Income Sprinkled Among Children

07-087

§7.87

Exercise of Powers of Appointment

07-088

§7.88

Lifetime Special Power of Appointment

07-089

§7.89

Survivor’s Special Power of Appointment

07-092

§7.92

Five or Five Withdrawal Power

07-094

§7.94

Accumulation of Undistributed Income

07-110

§7.110

Special Needs Trust for Sole Beneficiary

07-112

§7.112

Special Needs Trust for Multiple Beneficiaries

CH08

Chapter 8

Distributions on Terminating Event

08-007

§8.7

Abatement of Gifts

08-011

§8.11

Exoneration of Encumbrances

08-015

§8.15

Disposition of Disclaimed Gift

08-028

§8.28

Distribution to CUTMA Custodian

08-030

§8.30

Retention in Trust Until Specified Age

08-032

§8.32

Introduction to Dispositive Provisions

08-033

§8.33

Introduction to Dispositive Provisions With Power of Appointment

08-037

§8.37

Gift of Single Item of Personal Property

08-038

§8.38

List of Gifts of Personal Property Included in Trust

08-039

§8.39

Settlor to Give Trustee Separate List of Gifts of Personal Property

08-040

§8.40

Gift of Tangible Personal Property Not Otherwise Disposed Of

08-041

§8.41

Gift of Tangible Personal Property to Children

08-041B

§8.41B

Specific Gift of Publicly Traded Stock

08-041C

§8.41C

Specific Gift of Closely Held Stock

08-041D

§8.41D

Specific Gift of General Partnership Interest

08-041E

§8.41E

Specific Gift of Limited Partnership Interests

08-041F

§8.41F

Specific Gift of LLC Membership Interest

08-041G

§8.41G

Specific Gift of Sole Proprietorship

08-042

§8.42

Gift of Residence to Survivor or Other Individual

08-044

§8.44

Forgiveness of Indebtedness

08-045

§8.45

Allocation of Indebtedness

08-045B

§8.45B

General Pecuniary Gifts

08-045C

§8.45C

General Gift of Stock

08-047

§8.47

Introduction to Disposition of Residue

08-048

§8.48

Disposition of Residue to Specified Individual

08-062

§8.62

Manner of Making Distribution Per Capita at Each Generation

08-063

§8.63

Class Gift to Issue

08-064

§8.64

Class Gift to Named Persons and Their Descendants

08-070

§8.70

Charitable Remainder Unitrust

08-071

§8.71

Charitable Remainder Annuity Trust

08-076

§8.76

Required and Desirable Provisions for CLAT

08-079

§8.79

Nonprorata Division of Community Property

08-081

§8.81

Power to Delay Distributions

08-083

§8.83

Interest on Delayed Distribution of Pecuniary Amount

CH09

Chapter 9

The Marital Deduction

09-007

§9.7

Simultaneous Death Provision

09-036

§9.36

General-Power-of-Appointment Trust

09-039

§9.39

Estate Trust

09-041B

§9.41B

Qualified Charitable Remainder Trust

CH10

Chapter 10

Distributions on First Spouse’s Death

10-003

§10.3

Distribution of Decedent’s Property as Appointed by Deceased Settlor

10-005

§10.5

Distribution of Both Settlors’ Trust Property to Survivor’s Trust

10-005B

§10.5B

Administrative Trust Authorized

10-008

§10.8

Division of Trusts

10-008A

§10.8A

Additional Language for Nonprorata Division of Community Property

10-010

§10.10

Deferral of Division or Distribution of Trust Assets

10-012

§10.12

Distribution of Deceased Settlor’s Property If Spouse or Partner Does Not Survive

CH11

Chapter 11

Marital Deduction Formulas and Funding

11-006

§11.6

Pecuniary Amount Formula Clause

11-007

§11.7

Fractional Share Formula Clause

11-011

§11.11

Pecuniary Marital Formula (Bypass Trust as Residue)

11-038

§11.38

Pecuniary Bypass Formula (Marital Trust as Residue)

11-045

§11.45

Fractional Share Marital Formula

11-050

§11.50

Power to Make Nonprorata Distribution

11-057

§11.57

Deceased Settlor’s Expenses

CH12

Chapter 12

Survivor’s Trust

12-004

§12.4

Distribution to Survivor’s Trust

12-006

§12.6

Purpose of Survivor’s Trust

12-009

§12.9

Marital Deduction Survivor’s Trust

12-011

§12.11

Payment of Income and Principal

12-013

§12.13

General Power of Appointment

12-015

§12.15

Pourover Into Bypass Trust

12-017

§12.17

Specified Distribution of Survivor’s Trust

12-018

§12.18

Distribution to Family Pot Trust

12-019

§12.19

Distribution to Separate Trusts for Children or Grandchildren

CH13

Chapter 13

QTIPs and QDOTs

13-002

§13.2

QTIP Trust Purpose

13-014

§13.14

QTIP Trust Income Provision

13-014A

§13.14A

QTIP Unitrust Provision

13-017

§13.17

Discretionary Distribution of Trust Principal to Surviving Settlor

13-019

§13.19

Limited Power of Appointment Exercisable at Death

13-021

§13.21

Marital Deduction Saving Clause

13-024

§13.24

Authorization to Make QTIP Election

13-026

§13.26

Division of Trusts Reflecting Partial Election

13-033

§13.33

Qualifying Trust as QDOT

CH14

Chapter 14

Bypass and Disclaimer Trusts

14-013

§14.13

Agent’s Power to Amend Trust

14-020A

§14.20A

Option to Purchase Residence From Bypass Trust

14-023A

§14.23A

Non-QTIPable Bypass Trust

14-027

§14.27

QTIPable Bypass Trust

14-027A

§14.27A

Disclaimer of Bypass Trust Interests

14-027B

§14.27B

Authorization to Make DSUE Election

14-035

§14.35

Disclaimer Trust

14-039

§14.39

Clayton QTIP Trust

14-040

§14.40

Contingent Bypass Trust

CH15

Chapter 15

Payment of Taxes, Debts, and Administration Expenses

15-014

§15.14

Equitable Proration Under California Law

15-016

§15.16

Apportionment of Tax to Disclaimed Property

15-016A

§15.16A

Alternative Tax Allocation Clause

15-027

§15.27

Payment of Debts—Single Settlor

15-028

§15.28

Payment of Debts—Married Settlors’ Joint Trust

CH16

Chapter 16

Office of Trustee

16-003

§16.3

Definition of Trustee

16-004

§16.4

Scope of Trustee Provisions

16-007

§16.7

Cotrustees

16-010

§16.10

Appointment of Special Trustee

16-011

§16.11

Effect of Powers of Special Trustee on Powers of Trustee

16-012

§16.12

Settlor-Trustee’s Power to Use and Employ Agents

16-016

§16.16

Compensation of Special Trustee

16-018

§16.18

Trustee’s Bond

16-020

§16.20

Trustee Compensation

16-023

§16.23

Exculpation of Trustee

16-023A

§16.23A

Effect of Account

16-025

§16.25

Cotrustee’s Duty to Act

16-026

§16.26

Limitation on Duty to Investigate Predecessor or Cotrustee

16-027

§16.27

Nonliability for Cotrustee’s Acts

16-028

§16.28

Nonliability of Trustee or Special Trustee for Conflicts of Interest

16-030

§16.30

Notice to Trustee of Births, Deaths, and Other Events Affecting Interests

16-034

§16.34

Trustee Resignation

16-039

§16.39

Removal of Incompetent Settlor Acting as Trustee

16-040

§16.40

Removal of Corporate Trustee

16-041

§16.41

Removal of Any Trustee

16-042

§16.42

Removal of Trustee by Beneficiary or Third Party

16-044

§16.44

Removal on Change of Beneficiary’s Residence

16-046

§16.46

Replacement of Incapacitated Trustee

16-046A

§16.46A

Grant of Authority to Health Care Agent and Authorization Under HIPAA and California Law for Release of Health Information

16-046B

§16.46B

Trustee Required to Authorize Release of Health Information

16-046C

§16.46C

Authorization for Use and Disclosure of Protected Health Information

16-048

§16.48

Sole Settlor’s Designation of Successor Trustees

16-049

§16.49

Temporary Trustee

16-053

§16.53

Settlor’s Designation of Institution as Last Successor Trustee

16-055

§16.55

Power to Name Successor Trustee

16-058

§16.58

Powers and Nonliability of Successor Trustee and Cotrustee

CH17

Chapter 17

Trustee Powers and Duties

17-019

§17.19

Statement of Broad Trustee Powers

17-021

§17.21

Powers for Business Interests

17-023

§17.23

Corporate Business Management

17-025

§17.25

Power to Engage in Partnership Business

17-026A

§17.26A

Powers for Farming Interests

17-028

§17.28

Generic Power Limitation

17-031

§17.31

Corporate Trustee’s Duty to Propose Purchases and Sales

17-032

§17.32

Investment Power Solely in Individual Trustee

17-033

§17.33

Special Trustee’s Veto Power Over Investments

17-036

§17.36

General Statement of Trustee’s Duties

17-041

§17.41

Limitations on Trustee Duty of Loyalty

17-051

§17.51

Delegation of Powers and Duties

17-053

§17.53

Continued Retention and Management of Business

17-055

§17.55

Waiver of Accounting

17-059

§17.59

Acceptance of Additions

CH18

Chapter 18

Construction of Trusts

18-005

§18.5

Terms of Relationship

18-007

§18.7

Definition of “Spouse”

18-008

§18.8

Definition of “Domestic Partner”

18-010

§18.10

California Law Used in Construction of Trust

18-011

§18.11

Statutory References

18-012

§18.12

Use of Headings in Construction

18-013

§18.13

Relevance of Common Estate Planning Practice

18-014

§18.14

Definition of “Education”

18-015

§18.15

Definition of “Charity”

18-016

§18.16

References to Internal Revenue Code

18-017

§18.17

Gender and Number

18-018

§18.18

Divisions and Paragraphs

18-019

§18.19

Trustees and Fiduciaries

18-020

§18.20

“Shall” and “May”

18-022

§18.22

Severability Clause

CH19

Chapter 19

No-Contest Clause and Miscellaneous Trust Provisions

19-005

§19.5

No-Contest Clause

19-005A

§19.5A

Alternative No-Contest Clause

19-007

§19.7

Limiting Court Jurisdiction

19-009

§19.9

Disinheritance Clause

19-011

§19.11

Perpetuities Saving Clause

19-013

§19.13

Spendthrift Clause

19-015

§19.15

Nomination of Guardian of Person

19-018

§19.18

Shares of Professional Corporation Held in Trust

19-019

§19.19

Name of Trust

19-020

§19.20

Signatures

CH20

Chapter 20

Revocation and Amendment

20-002

§20.2

Form: Revocation And Amendment By Sole Settlor

20-003

§20.3

Revocation and Amendment by Married Settlors

20-006A

§20.6A

Revoking Settlor’s Power to Direct Disposition Intended

20-006B

§20.6B

Revoking Settlor’s Power to Direct Disposition Not Intended

20-009

§20.9

FORM: AMENDMENT TO TRUST

20-011

§20.11

Restatement of Entire Trust

CH21

Chapter 21

Funding the Trust

21-005

§21.5

Form: Sample Client Memorandum On Trust Funding

21-011

§21.11

Grant Deed

21-016

§21.16

Assignment of Tangible Personal Property

21-017

§21.17

General Assignment of Property to Trust

21-020

§21.20

Sample Letter to Financial Institution

21-022

§21.22

Sample Letter of Instruction to Broker

21-024

§21.24

Assignment Separate From Certificate or Bond

21-034

§21.34

Assignment of Partnership Interest

21-035

§21.35

Consent to Assignment of Partnership Interest

21-037A

§21.37A

Assignment of LLC Membership Interest

21-037B

§21.37B

Consent to Assignment of LLC Membership Interest

21-043

§21.43

Sample Letter to Payor Regarding Payment on Promissory Note

21-045

§21.45

Assignment of Copyright to Trust

21-046

§21.46

Sample Letter to Copyright Office

21-047

§21.47

Assignment of Patent to Trust

21-048

§21.48

Assignment of Trademark to Trust

CH22

Chapter 22

Related Documents

22-002

§22.2

Certification of Trust

22-005

§22.5

Disposition of Residue to Trust

22-006

§22.6

Sample Pourover Will

22-007

§22.7

Nomination of Guardian of Person

22-008

§22.8

Tax Allocation Clause

22-009

§22.9

Power Over Digital Assets

22-014

§22.14

Durable Power of Attorney

22-016

§22.16

Certificate of Independent Review

CH23

Chapter 23

Multistate Trusts

23-005

§23.5

Trustee May Apply Principle of Validation

23-027

§23.27

Trust Governed by Law of Place of Administration

23-028

§23.28

Saving Clause for Unforeseen Tax Consequences

23-034

§23.34

Choice-of-Forum Clause

23-039

§23.39

Choice of Law (All Real and Personal Property in One State)

23-040

§23.40

Choice of Law (Real Property in Several States and Personal Property)

23-047

§23.47

Appointing Trustee for Real Property

23-055

§23.55

Choice of Law for Community Property

23-066

§23.66

Exercise of Power of Appointment

23-067

§23.67

Choice of Law Governing Exercise of Power of Appointment

23-104

§23.104

Checklist: Multistate Trusts

CH24

Chapter 24

Complete Trust Forms

24-002

§24.2

Married Settlors’ Formula Marital Deduction Trust

24-004

§24.4

Married Settlors’ Simple Joint Trust With Standby Disclaimer Trust

24-006

§24.6

Individual Settlor Trust: Long Form

24-008

§24.8

Individual Settlor Trust: Short Form

24-010

§24.10

Alternative QTIP Trust for Married Settlors

 

Selected Developments

September 2017 Update

The estate and gift tax provisions made permanent by the American Taxpayer Relief Act of 2012 (ATRA-2012) (Pub L 112–240, 126 Stat 2313) confront planners with an applicable exclusion amount and GST exemption of $5 million plus cost-of-living adjustments ($5,490,000 in 2017) and a maximum tax rate of 40 percent. Current law continues the trend of increased exclusion amounts that began with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA-2001) (Pub L 107–16, 115 Stat 38).

Current law includes a "portability" provision that allows a deceased settlor's unused exclusion amount to be applied to lifetime gifts by the surviving settlor or on the survivor's death, but this provision may continue to have limited effect on traditional estate planning. However, some settlors may seek to obtain a second step-up in basis on the survivor's death by allocating some or all of the deceased settlor's share of trust property to a marital deduction qualifying survivor's trust or bypass trust, for which a QTIP election will be made, to be included in the survivor's estate. The IRS has made clear that it will not disregard an unnecessary QTIP election when the portability election is made. See §14.24.

The update has

  • A revised discussion of Totten trusts and pay-on-death accounts. See §1.35.

  • A revised form of consent to dual representation for domestic partners. See §2.33.

The update has the following revised discussions reflecting recent case law and IRS guidance:

  • Income tax charitable deductions. See §4.17.

  • Spousal joint tenancy interests. See §4.36.

  • The portability election. See §4.59.

  • Business entity interests. See §4.68B.

  • Valuation discounts for fractional interests. See §4.102.

  • Qualified conservation contributions. See §4.128A.

  • Gifts of fractional interests in property. See §4.181.

  • Joint tenancy transfers for property tax purposes. See §4.231.

The update has the following revised discussions reflecting recent case law:

  • Property characterization. See §5.29.

  • Spendthrift clauses reflecting recent case law. See §19.12.

  • Trust bank accounts reflecting recent case law. See §21.19.

The update has a revised discussion of pourover wills reflecting a recent legislative change that permits the trust to be executed within 60 days after the will. See §22.3.

The update has a revised form of exercise of power of appointment for multistate trusts and related discussion reflecting a recent legislative change in nomenclature from the "donee" of a power to the "powerholder." See §23.66.

About the Fourth Edition Authors

FRAYDA L. BRUTON practices trust and estate planning in Sacramento. She received her B.A. from Wayne State University. She received her J.D. in 1985 and LL.M. in 1987 from McGeorge School of Law. Ms. Bruton is a Fellow of the American College of Trust and Estate Counsel and is a board-certified specialist in Estate Planning, Trust and Probate Law. Ms. Bruton is a frequent author and speaker on various estate planning topics, including ethics and real property change-in-ownership rules. She is a former member of the Executive Committee of the California State Bar Trusts and Estates Section. Ms. Bruton is a coauthor of chapter 4 (Tax Considerations).

THEODORE E. CALLETON is a partner in the firm of Calleton, Merritt, De Francisco & Bannon, LLP, in Pasadena. He received his B.A. in 1956 from Yale University and his LL.B. in 1962 from Columbia University. Mr. Calleton has taught in the Masters programs at the University of Southern California and Golden Gate University, and is currently an adjunct professor of law at Loyola Law School, Los Angeles. He has authored or coauthored various estate planning books and articles as well as Calleton's Wills & Trusts, a computerized form drafting system. Mr. Calleton is a Fellow of the American College of Trust and Estate Counsel and an Academician of the International Academy of Estate and Trust Law. He is a former Chair of the Los Angeles County Bar Tax and Probate Sections and has served on the UCLA-CEB Estate Planning Institute Advisory Board since its inception. He received the Dana Latham Memorial Award from the Los Angeles County Bar Tax Section in 1996. Mr. Calleton is a coauthor of chapter 4 (Tax Considerations).

MONICA DELL'OSSO is a partner in the firm of Wendel Rosen Black & Dean, LLP, in Oakland (formerly with Burnham Brown). She received her B.A. in 1971 from St. Mary-of-the-Woods College, her J.D. in 1981 from the University of California, Berkeley, School of Law, and a Ph.D. in history in 1989 from the University of Virginia. Ms. Dell'Osso is a Fellow of the American College of Trust and Estate Counsel, and is a past chair of the Estate Planning, Trust, and Probate Law Section of the Alameda County Bar Association. She is a member of the Advisory Board of the UCLA-CEB Estate Planning Institute and a former member of the Executive Committee of the Trusts and Estates Section of the State Bar of California. She is certified as a specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. Ms. Dell'Osso is a coauthor of chapter 4 (Tax Considerations).

JEFFREY A. DENNIS-STRATHMEYER is in private practice in Lafayette. He received his B.A. in 1967 from Stanford University and his J.D. in 1973 from the University of California, Davis, School of Law. He served as the legal editor of the CEB Estate Planning and California Probate Reporter from 1982 to 2011. He is the author of more than 40 published articles and book chapters on estate planning topics and is certified as a specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. Mr. Dennis-Strathmeyer is the author of chapter 3 (Drafting Considerations) and chapter 17 (Trustee Powers and Duties) and a coauthor of chapter 7 (Distributions From Continuing Trusts) and chapter 8 (Distributions on Terminating Event).

K. BRUCE FRIEDMAN, a member of Friedman McCubbin Law Group, LLP, San Francisco, specializes in estate planning, taxation, and trust law. He received his A.B. from Harvard University and his LL.B. from Yale University. Mr. Friedman has served on the Executive Committee of the Estate Planning, Trust and Probate Law Section of the State Bar of California and is a past Chair of the Estate and Tax Planning Committee and a past member of the Council of the Section of Real Property, Probate and Trust Law of the American Bar Association. He is also a past President of the San Francisco Estate Planning Council. For 11 years he taught the estate planning seminar at the University of California, Berkeley, School of Law. Mr. Friedman is a Fellow of the American College of Trust and Estate Counsel, a Director of the American College of Trust and Estate Counsel Foundation, an Academician and current Treasurer of the International Academy of Estate and Trust Law, a member of the American Law Institute, and certified as a specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. Mr. Friedman is a coauthor of chapter 18 (Construction of Trusts) and chapter 19 (No-Contest Clause and Miscellaneous Trust Provisions).

SUSAN T. HOUSE is a member of the firm of Hahn & Hahn LLP in Pasadena. Her practice focuses on estate planning, conservatorships, and probate and trust administration. She received her A.B. in 1971 from Wellesley College, and her J.D. in 1975 from the University of California, Los Angeles, School of Law. She has been a speaker at the USC Probate and Trust Conference, the USC Tax Institute, and the UCLA-CEB Estate Planning Institute, and is on the planning committee of the USC Tax Institute and the UCLA-CEB Estate Planning Institute. Ms. House is coauthor of the second edition of California Conservatorships and Guardianships and its annual supplements, and was coeditor with Bruce S. Ross of The Guide to the California Rules of Professional Conduct for Estate Planning, Trust and Probate Counsel published by the Estate Planning, Trust & Probate Law Section of the California State Bar. A Fellow of the American College of Probate Counsel, she is past California State Chair and is currently on the Board of Regents. Ms. House is certified as a specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. She is past Chair of the Trusts and Estates Section (formerly the Estate Planning, Trust & Probate Law Section) of the California State Bar, a member of the Executive Committee of that Section, and a former Editor of California Trusts & Estates Quarterly. Ms. House is the author of chapter 2 (Professional Responsibility).

NANCY E. HOWARD is Special Counsel at Sheppard, Mullin, Richter & Hampton LLP in Los Angeles. She received her A.B. and J.D. degrees from Stanford University. She has written numerous book chapters, articles, and institute papers on estate planning topics. Ms. Howard is the author of chapter 1 (Role of Revocable Trusts in California Estate Planning).

BETH L. KRAMER received her B.S. and B.A. in 1982 from the State University of New York at Binghamton, and her J.D. cum laude in 1985 from Boston University School of Law. She is the founder of Kramer Law Group, with offices in San Francisco and San Rafael, specializing in estate planning, trusts, and probate law. She is a member of the Bar Association of San Francisco (President, Probate and Trust Law Section, 1999–2000), the Marin County Bar Association (Section on Probate and Trust), the American Bar Association (Sections on Taxation, Real Property and Probate), and the Estate Planning Councils in San Francisco and Marin counties. Ms. Kramer is certified as a specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. Ms. Kramer is a coauthor of chapter 4 (Tax Considerations).

CHARLES A. LARSON was a partner of Gibson, Dunn & Crutcher, LLP in Los Angeles. In 2004, he opened the Law Offices of Charles A. Larson, which became Larson & Bawden LLP, Beverly Hills, in 2008. He received his B.A. in 1975 from Stanford University, and his J.D. from Yale Law School in 1978. His practice includes trusts and estates, family wealth planning, probate, closely held businesses, and charitable foundations and trusts, with a heavy emphasis on income, gift, and estate tax planning. Mr. Larson is the author of chapter 5 (Creation of Trust), chapter 6 (Distributions While Trust Is Revocable), chapter 16 (Office of Trustee), and chapter 20 (Revocation and Amendment).

JOEL A. LEVINE is a sole practitioner in Los Angeles, specializing in tax, estate planning, and business planning. He received his B.A. in 1969 and his J.D. in 1972 from the University of California, Los Angeles, School of Law. He has been an adjunct professor of law at Whittier College of Law and a speaker for CEB programs. Mr. Levine is certified as a specialist in Taxation Law and Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. Mr. Levine is a coauthor of chapter 7 (Distributions From Continuing Trusts).

KIM MAROIS is in private practice in Santa Rosa. Her practice focuses on estate planning, probate, trusts, and estates. She received her B.S. in 1972 from the University of California, Berkeley, and her J.D. in 1976 from the University of California, Hastings College of the Law. She is a member of the Bar Association of San Francisco (Co-Chair, Taxation Section, 1989), the Sonoma County Bar Association, and the State Bar of California (Taxation Section of the State Bar: Chair, Education Committee, 1982–1983; Member, Executive Committee, 1981–1984). She is a frequent lecturer on estate planning topics. Ms. Marois is a coauthor of chapter 4 (Tax Considerations).

PATRICK R. McCABE is a partner with the law firm of Shartsis Friese in San Francisco (formerly with Morrison & Foerster). His practice focuses on executive compensation, estate planning, estate administration, charitable gift planning, probate, and trust law. He received his B.A. in 1989 from the University of Utah and his J.D. in 1992 from Cornell University. Mr. McCabe is a coauthor of chapter 23 (Multistate Trusts).

DONALD J. McCUBBIN, a member of Friedman McCubbin Law Group, LLP, San Francisco, practices in the areas of estate planning and trust and estate administration. He received his A.B. from the University of California, Santa Barbara, and his J.D. from the University of California, Hastings College of the Law. Mr. McCubbin has served as chair of the Estate Planning, Trust and Probate Section of the Bar Association of San Francisco. Mr. McCubbin is a Fellow of the American College of Trust and Estate Counsel and is a life member of the American Bar Foundation. Mr. McCubbin is a coauthor of chapter 18 (Construction of Trusts) and chapter 19 (No-Contest Clause and Miscellaneous Trust Provisions).

LISA K. Y. NAKAHARA was an associate with the Kramer Law Group. She currently practices law in Honolulu. She received her B.A. summa cum laude in 1996 from Claremont McKenna College, and her J.D. in 1999 from the University of California, Hastings College of the Law. She received a CALI Excellence for the Future Award in Estate Planning. Ms. Nakahara is a member of the Bar Association of San Francisco (Probate and Trust Section) and the Marin County Bar Association (Probate and Trust Section) as well as the Hawaii State Bar Association. Ms. Nakahara is a coauthor of chapter 4 (Tax Considerations).

KENNETH G. PETRULIS is a shareholder of Goodson Wachtel and Petrulis APC in Los Angeles, specializing in estate planning, wills, trust law, probate, and conservatorships. He received his B.S. in 1967 from the Illinois Institute of Technology and his J.D. in 1973 from the University of Illinois. Mr. Petrulis is a member of the Beverly Hills Bar Association (Section on Probate; Chair, Probate Legislative Committee). He is certified as a specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. Mr. Petrulis is a coauthor of chapter 8 (Distributions on Terminating Event).

LINDA C. ROODHOUSE is a partner of Lombardi, Loper & Conant, LLP in Oakland. She received her B.A. in 1965 from Carleton College, her M.A. in 1966 from Northwestern University, and her J.D. in 1980 from McGeorge School of Law. She is certified as a specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. Ms. Roodhouse is the former chair of the Conservatorship Committee of the Trusts & Estates Section of the Alameda County Bar Association and is a member of the Committee to Revise Alameda County Probate Court Rules. Ms. Roodhouse is the author of chapter 21 (Funding the Trust).

MARC M. STERN is a partner with the law firm of Greenberg Glusker Fields Claman & Machtinger LLP in Los Angeles, practicing in the areas of estate planning, probate, trust administration, premarital agreements, and taxation. Mr. Stern received his B.S. in mathematics from Stanford University in 1981 and his J.D. from the University of Southern California in 1986. He is an adjunct professor at Golden Gate University's School of Accounting and Taxation, Los Angeles Campus, and has previously served as adjunct professor at University of Southern California School of Law. Mr. Stern has served as a member of the Executive Committee of the Probate and Trust Law Section of the Los Angeles County Bar Association, the Board of Governors of the California Young Lawyers Association, and the Barristers Board of Governors of the Beverly Hills Bar Association. He is a frequent speaker at continuing legal education programs on estate planning and related issues. Mr. Stern is the author of chapter 9 (The Marital Deduction), chapter 11 (Marital Deduction Formulas and Funding), chapter 13 (QTIPs and QDOTs), and chapter 14 (Bypass and Disclaimer Trusts).

JOSEPH L. WYATT, JR., was senior counsel with the law firm of Morrison & Foerster in Los Angeles, specializing in trust, probate, estate planning, and tax law. He received his B.A. in 1947 from Northwestern University and his J.D. in 1949 from Harvard Law School. Mr. Wyatt was a coauthor of chapter 23 (Multistate Trusts). Joe Wyatt died in 2013.

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PRACTICE AREA Estate Planning