Pour-Over Will

Pour-Over Will

If a revocable living trust is used to implement the client’s estate plan then a pour-over will is used in conjunction therewith. One of the purposes of the pour-over Will is to direct that all assets that were not titled in the name of the trustee of the living trust ultimately become part of the trust and are disposed of pursuant to the terms of the trust.

Checklist P-OW 1

· Select guardians and successor guardians for any minor children

· Select executors and successor executors.

· Disinherit any parties, such as children and spouses.

· Dispose of interests in retirement plans and individual retirement plans.

· Make specific bequests, usually of items of personal property that are not ordinarily transferred to trust.

Checklist P-OW 2

· Tangible Personal Property: personal effects usually flow to surviving spouse.

· Items such as: jewelry, clothing, household furniture, personal automobiles, books, paintings, works of art are not transferred to trust.

· Gift all your disposable interests in all plans of deferred compensation; this gift includes all individual retirement accounts. (If spouse disclaims for any unforeseen circumstances then items are placed in a Disclaimer Trust created under the terms of the Trust).

· Provision of disinheritance may prove useful.

· No contest clause often prevents controversies among heirs.

Revocable Living Trusts

Checklist RLT-01: Factors to Consider in Drafting a Revocable Living Trust.

1. Estate Tax Considerations

* Size of the estate. The size of the estate bears on the types and number of trusts to be included. For example, if the settler is married and his or her estate exceeds $600,000, then a trust qualifying for the unlimited marital deduction may be appropriate as well as a credit shelter trust.

* Separate property.

* Power of appointment. With regard to gifted property, consider retaining a limited power of appointment, an arrangement that will give the holder of the power significant control and also provide tax advantages.

2. Disposition of Estate.

· Specific bequests. Gifts to collateral family members and friends.

· Charitable gifts.

· Pecuniary bequests. Most gifts to trusts are pecuniary bequests because they are easier to administer. A pecuniary bequest made to fund a gift ordinarily constitutes a sale or exchange, which may result in recognition of income.

· Small estates. Where the estate is relatively small, the gift to satisfy the marital bequest ( with the remainder to the exemption trust) may result in an acceptably small tax gain on the funding the gift.

· Large estates. A pecuniary bequest to fund the marital deduction gift is often inappropriate, because it may trigger a substantial income tax liability. Therefore, a pecuniary bequest to a family trust, with the remainder to fund the marital trust, is appropriate.

· Qualified Terminable Interest Property (QTIP) Trust. This type of trust is appropriate in the following situations:

a. Where the first deceased spouse wants to control the ultimate disposition of the trust assets.

b. Where the surviving spouse is in need of protection, because the trust can qualify as an asset protection trust.

When using a QTIP trust, we should maximize generation skipping transfer tax planning options and consider granting a limited power of appointment to the surviving spouse, exercisable only at death.

· Qualified Domestic (QDOT) Trust. If the settlor’s spouse is not a U.S. citizen, a QDOT trust should be used to eliminate estate tax exposure.

· Bypass Trust. The credit shelter trust can be an asset protection trust.

a. Consider providing that income of the bypass trust will be accumulated rather than distributed, a provision that can protect the income.

b. Bear in mind that granting the surviving spouse a limited power of appointment will result in adverse estate tax consequences where deferred compensation or other assets are disclaimed into the bypass trust.

· Generation Skipping Transfer Tax (GST) Planning. Upon the death of both the settlor and settlor’s spouse, the trust estate can remain in an asset protection trust. Where property remains in trust for children and grandchildren, the issue of a generation skipping transfer tax applies.

a. This is especially important where property will remain in trust for heirs.

b. Consider the rule against perpetuities. (21 year limit)

3. Other Considerations.

a. Consider providing a mechanism for distributions in the event of the settlers’ disability.

b. Consider the appropriate definition of issue- for example, should adopted children be included in the definition?

c. Consider granting the trustees the power to change of situs of the trust.

d. Consider providing for contingent beneficiaries (if immediate family does not survive the distribution of the trust). Although it rarely happens, a beneficiary should be designated to take in the event all immediate members of the family are deceased. The beneficiary is often a charity or distant relatives, such as nephews and nieces.

Checklist RLT-02: Selecting Trustees and Successor Trustees.

The Trustees and successor trustees are important for many reasons, including, without limitation, the persons so designated will manage the settlors’ property if they are unable to do so by reason of disability or otherwise. Further, in order for an asset protection trust to be effective, the beneficiary cannot act as sole trustee.

· Where only unrelated trustee(s) act, consider requiring at least two unrelated successor trustee in order to minimize financial impropriety.

· Consider each of the following factors in evaluating potential trustees:

a. Cost. Often institutional trustees provide secure management of assets, but only at a significant cost.

b. The management skills of the person.

c. The investment knowledge and skill of the person. The following questions, in this regard, should be asked:

i. Should an investment advisor be named in the trust?

ii. Should someone be named who will recommend an investment advisor?

iii. Should the trustee take into account the investment profile?

d. Whether the likely beneficiaries will interact well with the trustee.

e. The relationship of co-trustees (if applicable). Do the co-trustees know each other? If so, is their relationship such that the potential for financial misconduct is present?

· In order for the bypass trust and the marital trust to be asset protected trusts, never allow the surviving settlor to act as sole trustee and always have a co-trustee.

· Never allow a beneficiary of a trust that is intended to qualify as an asset protected trust to act as sole trustee; always appoint a co-trustee.

· Consider whether it is necessary to require a bond? It is often unnecessary and usually expensive.

· Allow trustees to be changed in order to add flexibility and avoid long term conflicts.

· Decide whether the trust can hold stock of publicly traded companies?

Checklist RLT-03: Funding the Trust

· List all property funding the trust.

· Check the title to each item of property to see whether it is held as separate property, community property, co-tenancy, or joint tenancy.

· List all assets transferred and transferable to trust.

· Determine which assets need not be transferred to trust to avoid probate (for example, retirement plans or insurance policies would be included in the pour-over will).

Checklist RLT-04: Drafting Considerations

1. Division of Trusts During Settlors’ Life.

· Intra-spousal gifts should be retained in trust in order to minimize the likelihood that a resulting trust will be imposed on that property.

2. Character of Property

· Define the property rights of each party.

· All provisions of the trust should be consistent with any marital agreements-for example, during joint lifetimes, separate property trusts can be amended only by the spouse whose separate property is held by that trust.

3. Marital Trust

· Qualifying for the Marital Deduction. There are various ways to qualify for the marital deduction. The ways in which interests can qualify for the marital deduction and the asset protection implications of each are as follows:

a. QTIP Trust, which can be an asset protected trust, except as to income actually distributed.

b. A trust that gives the surviving spouse all income and a general power of appointment, which generally is not asset protected.

c. Purchasing a life annuity, which can be asset protected.

· Disposition of Assets. Disposition on death of surviving spouse can be:

a. Pursuant to a power of appointment, which should be limited for asset protection purposes.

b. Pursuant to the direction of the first decease spouse where the marital trust is a QTIP trust.

4. Bypass Trust

· This can be an asset protection trust if the surviving spouse:

a. Does not act as sole trustee; and

b. Does not exercise too much control over assets.

· Income can be handled in one or two ways:

1. It can be automatically distributable to surviving spouse, which exposes income to creditors.

2. It can be accumulated and distributed as needed, which is more effective for asset protection purposes.

· Granting the surviving spouse a limited power of appointment adds flexibility and is not subject to creditor attachment.

5. Division of Trust into Separate Shares.

· Term of Trust.

Consider that creditors can reach assets at the end of the term.

a. Consider providing a term certain, but granting an independent trustee the power to extend the term of the trust if distribution will not contradict the settlor’s purpose to benefit named beneficiary.

· Power of appointment granted to children and others.

1. Such power must be a limited power in order to preserve asset protection.

2. The exercise of such power may be restricted.

· Distributions to issue of deceased child.

6. Taxes and Expenses

· Maximize allocation of expenses to the bypass trust in order to maximize the amount that can be allocated to that trust. An allocation of expenses to the marital trust would effectively reduce the amount of the marital deduction.

· Such taxes and expenses on the death of the surviving spouse are allocated to the portion of the trust estate that is subject to estate tax, namely, the survivor’s property and the marital deduction trust.

7. Tax Compliance

· Since the trust is revocable, all income is taxed to the settlor.

· A separate tax return for the trust is not required where the grantor(s) act as trustee.

· Similarily, IRS Form 56 is not required under those conditions.

Checklist RLT-05: Drafting the Letter of Disclosure of Terms of Trust

1. Trustees

· Verify the identity of the successor trustees and co-trustees.

· Note that successor trustees have power to manage trust assets during disability.

· If two trustees have not been appointed, then note that this increases the likelihood of financial irresponsibility.

2. Settlor’s Power.

3. Disposition of Trust Estate. Disposition of trust assets upon the death of the Settlor.

4. Asset Protection Aspects of Trusts Created on Death of a Settlor. (Bypass trust, marital trust, QTIP, QDOT, and sub-trusts).

· The survivor’s trust is not asset protected because it is both self-settled and revocable.

· The trusts created upon the death of one settlor are asset protected trusts, provided the following conditions are met:

a. The beneficiary thereof does not act as sole trustee; and

b. The beneficiary thereof does not exercise too much control over trust assets.

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