This post contains Articles Five of a sample living trust agreement. My clients have asked me the same question frequently. To answer these questions, I dedicated BoomX Show episodes to answering these questions. I video taped the episode with my iPhone in the studio. These short videos are meant to liven up the tutorial with a BoomX feel to it. But, I admit, they are also far from professionally produced. The text of the sample Article is displayed below.
The most common question that arises when clients read this article is about expenses. This short BoomX style video answers, as best I can, that question.
After the first of us dies, the surviving Grantor’s interest in any community property of our trust and the surviving Grantor’s separate trust property will be referred to as the surviving Grantor’s trust property. The surviving Grantor’s trust property will be referred to as the Survivor’s Trust, and our Trustees shall administer the Survivor’s Trust as provided in Error! Reference source not found..
The deceased Grantor’s interest in any community property of our trust and the deceased Grantor’s separate trust property will be referred to as the deceased Grantor’s trust property.
Upon a Grantor’s death, our trust will become irrevocable as it pertains to the administration and distribution of the deceased Grantor’s trust property. Our Trustee may need to apply for a separate Taxpayer Identification Number for the deceased Grantor’s trust property.
Before the distribution of the deceased Grantor’s trust property as provided in this trust, the deceased Grantor’s trust property will be referred to as the administrative trust, but may continue to be known as the Joe Sample and Jane Sample Living Trust during the administration period. The administrative trust will exist for the period reasonably necessary to complete the administrative tasks set forth in this Article.
Our Trustee may pay from the deceased Grantor’s trust property:
expenses of the deceased Grantor’s last illness, funeral, and burial or cremation, including expenses of memorials and memorial services;
legally enforceable claims against the deceased Grantor or the deceased Grantor’s estate;
expenses of administering the trust and the deceased Grantor’s estate; and
court-ordered allowances for those dependent upon the deceased Grantor.
These payments are discretionary with our Trustee. Our Trustee may make decisions on these payments without regard to any limitation on payment of the expenses and may make payments without any court’s approval. No third party may enforce any claim or right to payment against the trust by virtue of this discretionary authority.
If payment would decrease the federal estate tax charitable deduction available to the deceased Grantor’s estate, our Trustee may not pay any administrative expenses from assets passing to an organization that qualifies for the federal estate tax charitable deduction.
If payment would decrease the federal estate tax marital deduction available to the deceased Grantor’s estate or violate the provisions of Treasury Regulation Section 20.2056(b)-4(d), our Trustee may not pay any administrative expenses from the net income of property qualifying for the federal estate tax marital deduction.
Our Trustee shall pay death taxes out of the trust property’s principal, as provided in Section 1.13. But if a probate estate is opened within six months after the date of the deceased Grantor’s death, the deceased Grantor’s Personal Representative shall pay any outstanding claims and expenses as authorized by the Personal Representative, as well as any death taxes from the deceased Grantor’s probate estate to the extent that the cash and readily marketable assets in the deceased Grantor’s probate estate are sufficient.
The term designation date means September 30 of the calendar year following the year of the deceased Grantor’s death, or another date as established by Treasury Regulations or other tax law authority as the final date for determining whether this trust meets the requirements for treatment of the trust’s oldest beneficiary as if the beneficiary was named individually as beneficiary of any qualified retirement plan payable to this trust.
Notwithstanding any other provision of this trust or state law to the contrary, our Trustee may not distribute any qualified retirement benefit payable to our trust or any trust created under this trust to or for the benefit of the deceased Grantor’s estate, any charity, or any beneficiary other than an individual, on or after the designation date. Our intent is that all qualified retirement benefits held by or payable to this trust on or after the designation date be distributed to or held only for individual beneficiaries, within the meaning of Internal Revenue Code Section 401(a)(9).
Qualified retirement benefits payable to the trust may not be used or applied on or after the designation date for payment of the deceased Grantor’s debts, taxes, expenses of administration, or other claims against the deceased Grantor’s estate, or for payment of estate, inheritance, or similar transfer taxes due because of the deceased Grantor’s death, other than those directly attributable to and the legal obligation of a particular qualified retirement plan. This Section does not apply to any bequest or expense that is specifically directed to be funded with qualified retirement benefits.
Despite anything to the contrary in this instrument, any life insurance proceeds payable to the Trustee under this instrument must never be or become part of our probate or testamentary estate. Nothing in this instrument directs that these life insurance proceeds be used to pay our debts or expenses.
For the purposes of this Article, the term death taxes refers to any taxes imposed by reason of the deceased Grantor’s death by federal, state, or local authorities, including estate, inheritance, gift, and direct-skip generation-skipping transfer taxes. For purposes of this Section, death taxes does not include any additional estate tax imposed by Internal Revenue Code Section 2031(c)(5)(C) or Section 2032A(c), or any other comparable recapture tax imposed by any taxing authority. Nor does the term include any generation-skipping transfer tax, other than a direct-skip generation-skipping transfer tax.
Except as otherwise provided in this Article or elsewhere in this trust, our Trustee shall provide for payment of all death taxes from the administrative trust without apportionment. Our Trustee may not seek contribution toward or recovery of any payments of death taxes from any individual.
(a) Protection of Exempt Property
Death taxes may not be allocated to or paid from any assets that are not included in the deceased Grantor’s gross estate for federal estate tax purposes. To the extent practicable, our Trustee may not pay any death taxes from assets that are exempt from generation-skipping transfer tax purposes.
(b) Protection of the Marital Deduction
Death taxes may not be paid from or allocated to any property that qualifies for the federal estate tax marital deduction.
(c) Protection of the Charitable Deduction
Death taxes may not be paid from or allocated to any assets passing to an organization that qualifies for the federal estate tax charitable deduction, or from any assets passing to a split-interest charitable trust, unless the Trustee has first used all other assets available to pay the taxes.
(d) Property Passing outside of Our Trust
Death taxes imposed with respect to property included in the deceased Grantor’s gross estate for death tax purposes but passing outside of the trust are to be apportioned among the persons and entities benefited. The proportion attributed to each person or entity is the taxable value of each person or entity’s beneficial interest over the total taxable value of all property and interests included in the deceased Grantor’s gross estate for death tax purposes. The values used for the apportionment are to be the values as finally determined under federal, state, or local law.
(e) QTIP Property
If our Trustee or the surviving Grantor’s Personal Representative waives any right of recovery granted by Section 2207A and corresponding provisions of applicable state law, death taxes may not be apportioned to any property included in the taxable estate of the second Grantor to die will be apportioned to or collected from the assets of the QTIP as provided in Internal Revenue Code Section 2207A.
The following provisions are intended to help facilitate the coordination between the deceased Grantor’s Personal Representative and our Trustee. These provisions apply even if the Personal Representative and the Trustee are the same person or entity.
(a) Reliance on Information from the Personal Representative
Our Trustee may rely upon the written request of the deceased Grantor’s Personal Representative for payments authorized under this Article and the amounts included in those payments without computing the sums involved. If a payment is made under this Article to the deceased Grantor’s Personal Representative, our Trustee will have no duty to inquire into the application of the payment.
(b) Receipt of Probate Property
Our Trustee may accept or decline any distributions of property tendered to our Trustee by the deceased Grantor’s Personal Representative. If our Trustee accepts the property, our Trustee may do so without audit, and will not be required to review the Personal Representative’s records.
(c) Discretionary Distributions to the Deceased Grantor’s Personal Representative
Our Trustee may distribute cash, accrued income, or other trust property to the deceased Grantor’s probate estate as a beneficiary of this trust, to the extent our Trustee determines that doing so is in the best interests of the trust beneficiaries.
After a Grantor’s death, our Trustee may make tax elections as provided in this Section. But if a Personal Representative is appointed for the deceased Grantor’s probate estate, the discretionary authority granted to our Trustee as to any tax election will be subordinate to the Personal Representative’s statutorily delegated authority.
(a) Tax Elections
Our Trustee may make any tax elections necessary for the efficient administration of the deceased Grantor’s estate, including:
valuing assets according to an alternate valuation date;
electing whether to take administration expenses as estate tax deductions or income tax deductions;
allocating a Grantor’s unused generation-skipping exemption to any portion of the trust property;
electing special-use valuation;
deferring payment of all or any portion of any taxes; and
treating any portion of the deceased Grantor’s administrative trust as part of the deceased Grantor’s estate for federal or state income tax purposes, or both.
In addition, our Trustee, in its sole and absolute discretion, may elect to waive, in whole or in part, the deceased Grantor’s right to have the deceased Grantor’s estate reimbursed for any tax paid as a result of the inclusion in the deceased Grantor’s taxable estate of property held in a qualified terminable interest property (QTIP) trust created for the surviving Grantor by the deceased Grantor.
Our Trustee may make equitable adjustments between income and principal because of any tax elections made by our Trustee.
(b) Allocation of GST Exemption
Our Trustee may elect to allocate or not allocate any portion of the Available GST Exemption under Internal Revenue Code Section 2631, or a counterpart exemption under any applicable state law to any property of which the deceased Grantor is considered the transferor for generation-skipping transfer tax purposes. This includes any property transferred by the deceased Grantor during the deceased Grantor’s life for which the deceased Grantor did not make an allocation prior to death. The exercise of our Trustee’s discretion should be based on the transfers, gift tax returns, and other information known to our Trustee, with no requirement that allocations benefit the various transferees or beneficiaries in any particular manner.
(c) Qualified Conservation Easements
Our Trustee may create a qualified conservation easement, as defined in Internal Revenue Code Section 2031(c)(8)(A), in any land held by the trust and may make the necessary election provided by Section 2031(c)(6).