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Revocable Inter Vivos Trusts (Portfolio 860)

Tax Management Portfolio, Revocable Inter Vivos Trusts, No. 860, describes and analyzes the creation and use of revocable trusts for various estate planning benefits.

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DESCRIPTION

Tax Management Portfolio, Revocable Inter Vivos Trusts, No. 860, describes and analyzes the creation and use of revocable trusts for various estate planning benefits.
Revocable trusts are used for many reasons. A revocable trust can provide management of the grantor's property, afford protection of the grantor's assets from the claims of creditors or family members, serve as a will substitute (to avoid probate), allow selection of the situs of the administration of specific trust assets, and enhance estate liquidity. A revocable trust is often used together with a will that adds the grantor's probate assets to the revocable trust (a “pour-over will”), and is sometimes accompanied by a durable power of attorney that enables a designated family member or other person to fund the revocable trust fully in case of the grantor's disability.
This Portfolio first addresses the requirements for a valid and effective revocable trust, how and when the trust may be revoked, what constitutes a valid and adequate trust corpus, and when a revocable trust may be expected to achieve significant estate planning benefits. It then addresses the various uses to which a revocable trust may be applied, focusing on when a revocable trust will be the most appropriate vehicle to accomplish each purpose. The Portfolio then addresses the income and wealth transfer tax issues raised by the use of a revocable trust, including when a revocable trust must obtain a taxpayer identification number and file federal income tax returns, when a revocable trust will be treated as an independent entity for income or wealth transfer tax purposes, the effect of holding stock options or subchapter S stock in a revocable trust, and how and when to elect to have a revocable trust treated as part of a decedent's estate for federal income tax purposes.
For a discussion of the income taxation of grantor trusts and trusts in general, see 819 T.M., Grantor Trusts: Income Taxation Under Subpart E, and 852 T.M., Income Taxation of Trusts and Estates, respectively.
This Portfolio may be cited as Zaritsky, 860 T.M., Revocable Inter Vivos Trusts.


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AUTHORS

HOWARD M. ZARITSKY, ESQ.
Howard M. Zaritsky, B.A., Emory University (1970); J.D., Stetson University College of Law (1973); LL.M. (Taxation), Georgetown University Law Center (1976); member, Virginia bar; advisory board, University of Miami Estate Planning Institute; author, Tax Planning for Family Wealth Transfers After Death (2014); author, Tax Planning for Family Wealth Transfers During Life (2013); co-author, Structuring Buy-Sell Agreements (2d ed. 2000); co-author, Generation-Skipping Transfer Tax (2d ed. 2001); co-author, Structuring Estate Freezes (2d ed. 1997); co-author, Federal Income Taxation of Estates and Trusts (3d ed. 2001); co-author, Tax Planning With Life Insurance (2d ed. 1999); co-author, 819 T.M., Grantor Trusts: Income Taxation Under Subpart E; co-author, 854 T.M., U.S. Taxation of Foreign Estates, Trusts and Beneficiaries; tax editor, Probate Practice Reporter; fellow, American College of Trust and Estate Counsel; Fellow, American College of Tax Counsel; chair, Virginia Bar Association, Section on Wills, Trusts & Estates (2001).

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Structural Issues

A. Definition

B. Validity

1. Judicial Validation of Revocable Trusts

2. Statutory Validation of Revocable Trusts

C. Formalities of Creation

D. Revocable Bank Deposit (“Totten”) Trusts

1. Judicial Validation of Totten Trusts

2. Statutory Validation of Totten Trusts

E. The Settlor's Power to Revoke

1. Generally

2. Reforming a Trust to Make it Revocable

3. Power to Amend Distinguished

4. Exercise of Power to Revoke

a. Generally

b. Revocation by Agent

(1) Guardians, Conservators, and Attorneys-in-Fact

(2) Creditors of Settlor

c. Revocation by Will

d. Revocation By and For an Incapacitated Settlor

e. Jointly-Held Powers to Revoke

f. Revocation by Divorce

g. Effect of Revocation

F. Settlor as Sole Trustee and Primary Beneficiary

1. The Settlor as Sole Trustee

2. The Settlor as Sole Beneficiary

G. Trust Corpus

1. Generally

2. Testamentary Additions

III. Special Nontax Considerations for Revocable Trusts

A. Rule Against Perpetuities

B. Joint Revocable Trusts

1. Generally

2. Implied Contract Not to Revoke

C. The Pour-Over Will

1. Generally

a. Pour-Over to Trust from Will of Non-Settlor

b. Pour-Over from One Inter Vivos Trust to Another

c. Pour-Over from an Inter Vivos to a Testamentary Trust

d. Addition to Trust by Exercise of a Power of Appointment

2. Coordinating the Pour-Over Will and the Revocable Trust

a. Inconsistent Apportionment Language in a Pour-Over Will and Revocable Trust

b. Estate's Right of Recovery Under 2207B

D. Lapse and Application of Anti-Lapse Statutes

E. Ademption

F. Effect on Medicaid Eligibility

1. Generally

2. Self-Settled Revocable Trusts

3. Revocable Trusts After the Settlor's Death

G. Susceptibility (and Lack Thereof) to Challenge

1. Beneficiary Lacks Standing While Trust Is Revocable

2. Standards for Establishing Fraud or Undue Influence

3. Procedural Requirements for Challenging a Revocable Trust

H. Federal Deposit Insurance

I. Long-Arm Jurisdiction

IV. Nontax Uses of Revocable Trusts

A. Management of the Settlor's Assets

1. Current Asset Management

a. Generally

b. Community Property

c. Real Property

2. Future Asset Management

a. Generally

b. The Standby Revocable Trust - Management During Settlor's Incapacity

c. Management of Life Insurance Proceeds

(1) Insurance as the Sole Corpus

(2) Providing Estate Liquidity

(3) Alternatives to a Revocable Life Insurance Trust

d. Revocable Retirement Plan Death Benefits Trust

B. Asset Protection

1. Claims of Creditors

a. Generally

b. Tax Claims

2. Interests of a Surviving Spouse

a. Elective Share Rights Generally

b. The Classic New York and Massachusetts Rules

c. Transfers in Fraud of Elective Share Rights

d. Applying the Law of a Nondomiciliary State

e. Rights of Electing Spouse in Revocable Trust Assets in Addition to Statutory Share

f. The Omitted Spouse

3. Statutory Shares of Settlor's Children

a. Pretermitted Heirs

b. Adopted Children

c. Forced Heirship

C. Probate Avoidance - The Funded Revocable Trust as a Will Substitute

D. Selecting the Situs of Asset Administration

E. Improving Estate Liquidity

V. Tax Considerations During the Settlor's Lifetime

A. In General

B. Income Taxes

1. Grantor Trust Rules

a. Power to Revoke Defined

b. Trusts Revocable with Consent of a Nonadverse Party

c. Trusts Revocable with Consent of an Adverse Party

d. Deferred Power to Revoke

e. Charitable Gifts from a Revocable Trust

2. Holding Period of Trust Assets

3. Transactions Between a Settlor and a Revocable Trust

4. Installment Sales and Installment Obligations

5. Principal Residences Held in Trust

6. U.S. Savings Bonds

7. Stock Options

8. S Corporation Stock

9. Foreign Situs Revocable Trusts

10. Income Tax Returns, Identification Number, and Fiscal Year

a. Tax Returns and Taxpayer Identification Numbers: First Alternate Reporting Method (Regs. 1.671-4(b)(2)(i)(A))

b. Tax Returns and Taxpayer Identification Numbers: Second Alternate Reporting Method (Regs. 1.671-4(b)(2)(i)(B))

c. Fiscal Year

C. Gift Taxes

D. Generation-Skipping Transfer Taxes

E. State Taxes

1. State Income Taxes

2. Property and Transfer Taxes

VI. Tax Considerations After the Settlor's Death

Introductory Material

A. Income Taxes

1. Taxable Year

2. Adjusted Basis of Trust Assets

a. Tax Basis Revocable Trust ( 1014(e))

b. Carryover Basis Rules in 2010 ( 1022, 1040)

3. Holding Period

4. Personal Exemption

5. Estimated Income Taxes

6. Recognition of Loss on Distribution in Satisfaction of Pecuniary Bequest

7. Charitable “Set Asides”

8. Consenting to a Joint Return with the Settlor's Surviving Spouse

9. Series E and EE U.S. Savings Bonds

10. S Corporation Stock

11. Passive Losses

12. Section 645 Election to Treat a Revocable Trust as Part of the Settlor's Estate

a. Qualified Revocable Trusts

b. Procedures

c. Taxation of an Electing QRT

d. Reporting Requirements During Election Period

B. Estate Taxes

1. Trustee of the Revocable Trust as Executor

2. Alternate Valuation Date

3. Deduction of Estate Administration Expenses

4. Discharge of the Trustee's Liability

5. Spouse-Owned Life Insurance

6. Joint Property Held in a Revocable Trust ( 2040)

7. Special Use Valuation ( 2032A)

8. Gifts from a Revocable Trust Within Three Years of the Settlor's Death ( 2035)

C. Special Tax Problems of Joint Revocable Trusts

1. Nondeductible Interspousal Gift on Creation of Trust

2. Gift to Remainder and Other Beneficiaries on Creation of Trust

3. Gift to Remainder and Other Beneficiaries at First Spouse's Death

4. Estate Taxation of Jointly-Owned Property Transferred to a Joint Revocable Trust ( 2040(b))

D. Qualified Retirement Plan Benefits Paid to a Revocable Trust

1. In General

2. Income Taxation of Retirement Plan Death Benefits Paid to a Revocable Trust


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Pour-Over Will Deferring to Revocable Trust for Tax Apportionment

Worksheet 2 Revocable Trust with Lifetime General Power of Appointment Marital Trust, No Credit Shelter Trust

Worksheet 3 Revocable Trust with QTIP, Reverse QTIP, and Credit Shelter/Generation-Skipping Trusts, and with Alternate Provisions if Carryover Basis Regime Replaces Estate Tax

Worksheet 4 Joint Revocable Trust with Right of Surviving Spouse to Revoke Entire Trust, No Credit Shelter Trust, Provisions for Retention of Community Property Status

Worksheet 5 Joint Revocable Trust with Right of Each Settlor to Revoke His or Her Portion, with QTIP, Reverse QTIP, and Credit Shelter/Generation-Skipping Trusts, and with Alternate Provisions if Carryover Basis Regime Replaces Estate Tax

Worksheet 6 Joint “Tax Basis” Revocable Trust with Inclusion of Entire Fund in Estate of First Settlor to Die, and with Marital Deduction Estate Planning1

Worksheet 7 Limited Durable Power of Attorney Authorizing Transfer of Assets to Principal's Revocable Trust1

Worksheet 8 Escrow Agreement to Create a Springing Power of Attorney

Bibliography

OFFICIAL

Federal Statutes:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

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