1. Estate Tax. Property transferred by a grantor in trust for the benefit of another is includible in the gross estate of the grantor in the following circumstances:

a. Retained life estate. If the grantor retains for a period which does not end prior to his death, the possession or enjoyment of the property or the right, either alone or in conjunction with any other person, to designate who shall possess or enjoy the property, the property will be included in the gross estate. (Code Section 2036)

b. Transfers taking effect at death. If the grantor transfers property, the ultimate interest in which can be obtained only by surviving the grantor and the grantor retains a reversionary interest in excess of 5 percent, the property will be included in the gross estate. (Code Section 2037)

c. Revocable transfers. If the grantor transfers property in trust and retains the ability to revoke the transfer and reinvest the property in the grantor, the property will be included in the gross estate. (Code Section 2038)

d. Power of appointment. The value of property in a trust will be included in the estate of any person who, at the time of death, has the power to appoint the property to himself, his estate, his creditors or the creditors of his estate. (Code Section 2041)

2. Gift Tax. A gift may be effected through transfers in trust. Although there are flaws in the system, in general a transfer in trust is a completed gift unless the property transferred in trust would be included in the grantor's estate under the rules discussed above. Transfers in trust do not qualify for the $10,000 annual exclusion because they are gifts of a "future interest".

1. Benefit. Pension trusts are exempt from taxation under Code Section 501.

2. Discussion. Pension and profit sharing plans, in all their amazing and intricate complexity are the result of the basically simple concept of a trust being overwhelmed by multiple and complex code provisions. In effect, a Pension Trust consists of a grantor (the company) transferring assets (the contribution) to a person (the trustee) for the benefit of other persons (the participants/employees). From a tax standpoint, Pension Trusts accomplish deferral of tax by allowing current deductions of sums that will be included in the income of the employees at a later time upon distribution from the trusts.

3. Requirements. The requirements mandated by Code Section 401 et. seq. are beyond the scope of this outline, beyond the scope of any seminar and possibly beyond human comprehension.

1. Benefit. Code Section 1361(b) provides that a corporation will not be eligible for an election under Sub-Chapter S if it has as a shareholder a trust other than certain specified trusts. A Qualified Sub-Chapter S Trust is designed to satisfy these requirements, thereby permitting an election under Sub-Chapter S.

2. Discussion. A qualified Sub-Chapter S Trust serves as a mechanism to simplify the holding of S corporation stock for the benefit of a minor or other incompetent beneficiary. Without the availability of a Qualified Sub-Chapter S Trust, difficulty could be encountered in allowing minors to hold Sub-Chapter S stock. In addition to the income tax aspects, the Qualified Sub-Chapter S Trust provides an excellent estate planning mechanism for making gifts of such stock to minors. CAVEAT: The beneficiary (or guardian) of the trust must make an election not later than 60 days after the transfer of the S Corporation stock to the trust for the trust to be treated as a Qualified Sub-Chapter S Trust. Failure to make this election will revoke the Sub-Chapter S election.

3. Requirements. The provisions of Section 1361(d)(3) are set forth below:

(3) Qualified Sub-Chapter S Trust. For purposes of this subsection, the term "qualified subchapter S trust" means a trust---

(A) the terms of which require that---

(i) during the life of the current income beneficiary, there shall be only 1 income beneficiary of the trust,

(ii) any corpus distributed during the life of the current income beneficiary may be distributed only to such beneficiary,

(iii) the income interest of the current income beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust, and

(iv) upon the termination of the trust during the life of the current income beneficiary, the trust shall distribute all of its assets to such beneficiary, and

(B) all of the income (within the meaning of section 643(b)) of which is distributed (or required to be distributed) currently to 1 individual who is a citizen or resident of the United States.

A substantially separate and independent share of a trust within the meaning of 663(c) shall be treated as a separate trust for purposes of this subsection and subsection(c).

1. Benefit. Effective January 1, 1997, an ESBT is a permitted shareholder of stock in an S Corporation. An ESBT may provide benefits not available through a QSST (discussed above) because the ESBT may have multiple beneficiaries and the trustee can have discretionary authority over distribution of income.

2. Discussion. The ESBT is designed to allow Subchapter S stock to be held by a trust which provides for discretionary distribution of income. This may be desirable particularly in testamentary situations where the testator desires to provide for the family group though a trust which holds the Subchapter S stock. The primary limiting factor of an ESBT is that the ESBT's share of the S Corporation income is automatically taxed at the maximum individual rate. Nevertheless, the ESBT will have utility in large estates where all income is likely to be taxed at the maximum rate anyway.

3. Requirements. The provisions of Section 1361(e)(1) are set for below:

(e) Electing small business trust defined.

(1) Electing small business trust. For purposes of this section-

(A) In general. Except as provided in subparagraph (B), the term "electing small business trust" means any trust if-

(i) such trust does not have as a beneficiary any person other than (I) an individual, (II) an estate, (III) an organization described in paragraph (2), (3), (4), or (5) of section 170(c),

(ii) no interest in such trust was acquired by purchase, and

(iii) an election under this subsection applies to such trust.

(B) Certain trusts not eligible. The term "electing small business trust" shall not include-

(i) any qualified subchapter S trust (as defined in subsection (d)(3))if an election under subsection (d)(2) applies to any corporation the stock of which is held by such trust.

(ii) any trust exempt from tax under this subtitle, and

(iii) an charitable remainder annuity trust or charitable remainder unitrust (as defined in section 664(d)).

1. Benefit. In a Charitable Remainder Trust the grantor is seeking to retain the current income from property transferred to a trust while obtaining a current income tax deduction for the value of the remainder interest which is payable to a charity and the estate tax benefit of removing the property from his estate.

2. Discussion. A Charitable Remainder Trust retains for the grantor for his life an annuity (Annuity Trust) or a payment stream based on a fixed percentage of the corpus of the trust (Unitrust). Additional beneficiaries may follow the grantor's interest. For example, a surviving spouse or children may continue to receive income from the trust corpus until their death. The tax deduction available is computed based on the life expectancy of the income beneficiaries, using current interest rates to determine the actuarial value of the remainder. Because a Charitable Remainder Trust is a tax exempt entity under Section 501, gain on subsequent sale of property transferred to the trust will be tax free. The grantor then enjoys a full return on the value of the property transferred to the trust undiminished by taxes on sale.

3. Requirements. Code Section 664(d) is set forth below:

(d) Definitions. -

(1) Charitable Remainder Annuity Trust. For purposes of this section, a charitable remainder annuity trust is a trust---

(A) from which a sum certain (which is not less than 5 percent of the initial net fair market value of all property placed in trust) is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c), and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals,

(B) from which no amount other than the payments described in subparagraph (A) may be paid to or for the use of any person other than an organization described in section 170(c), and

(C) following the termination of the payments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use.

(2) Charitable Remainder Unitrust. For purposes of this section, a charitable remainder unitrust is a trust---

(A) from which a fixed percentage (which is not less than 5 percent) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals,

(B) from which no amount other than the payments described in subparagraph (A) may be paid to or for the use of any person other than the organization described in section 170(c), and

(C) following the termination of the payments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organization described in section 170(c) or is to be retained by the trust for such a use.

(3) Exception. Notwithstanding the provisions of paragraphs (2)(A) and (B), the trust instrument may provide that the trustee shall pay the income beneficiary for any year---

(A) the amount of the trust income, if such amount is less than the amount required to be distributed under paragraph (2)(A), and

(B) any amount of the trust income which is in excess of the amount required to be distributed under paragraph (2)(A), to the extent that (by reason of subparagraph (A)) the aggregate of the amounts paid in prior years was less than the aggregate of such required amounts.

1. Benefit. The benefit sought is to structure an individual's will in such a manner that full utilization of the transfer tax credit will be made while satisfying the individual's desires with respect to disposition of his property.

2. Discussion. These trusts are all utilized to structure the dispositive components of an individual's estate plan. The opportunities present in this planning situation highlight the tremendous flexibility of the trust arrangement. The ideal arrangement is for an amount equal to the credit equivalent (currently $600,000) to pass in such a manner that the marital deduction provided in Code Section 2056 will not be available and such amount will not be taxable to the surviving spouse. The complexity arises because various individuals have varying desires with respect to providing for a surviving spouse. There are individuals who insist on giving everything to the spouse and there are other individuals who would like to limit the amount benefitting the spouse in order to insure the benefit for children. The portion for which a marital deduction is desired can range from outright fee simple transfer to the spouse all the way to a QTIP arrangement whereby the spouse only has an income interest for life and no control over ultimate disposition of the trust corpus. A trust providing for the spouse to have a general power of appointment over the property is a common arrangement which lies somewhere between these two extremes. On the other hand, the credit equivalent portion, for which no marital deduction is desired, may range from outright fee simple transfer bypassing the spouse all the way to a trust which benefits the spouse very significantly. This latter, non-marital trust, can be controlled by the surviving spouse as trustee and can contain a special power of appointment exercisable by the spouse which enables the spouse to appoint the property to any person other than the spouse, spouse's estate or the spouses creditors. The principal can be made available to the spouse for medical and certain other needs. The range is very broad and allows the flexibility to satisfy the demands of most individuals. Through use of a QTIP arrangement, the same trust may or may not qualify for a marital deduction depending on whether the executor makes a QTIP election.

3. Requirements. Code Section 2056(b)(7)(B) is set forth below:

(B) Qualified Terminable Interest Property Defined. For purposes of this paragraph -

(i) In General. The term "qualified terminable interest property" means property -

(I) which passes from the decedent,

(II) in which the surviving spouse has a qualifying income interest for life, and

(III) to which an election under this paragraph applies.

(ii) Qualifying Interest Income for Life. The surviving spouse has a qualifying income interest for life if---

(I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct interest for life in the property, and

(II) no person has a power to appoint any part of the property to any person other than the surviving spouse.

Subclause (II) shall not apply to a power exercisable only at or after the death of the surviving spouse. To the extent provided in regulations, an annuity shall be treated in a manner similar to an income interest in property (regardless of whether the property from which the annuity is payable can be separately identified).

(iii) Property Includes Interest Therein. The term "property" includes an interest in property.

(iv) Specific Portion Treated as Separate Property. A specific portion of property shall be treated as separate property.

(v) Election. An election under this paragraph with respect to any property shall be made by the executor on the return of tax imposed by Section 2001. Such an election, once made, shall be irrevocable.

1. Benefit. With a Code Section 2503(c) Trust we seek to obtain an annual exclusion for a transfer by gift of a future interest.

2. Discussion. A Code Section 2503(c) is a transfer to a minor which constitutes a completed gift. The requirements, discussed below, mandate that the trust assets must be distributed upon age 21 of the beneficiary. However, a Crummey provision may be inserted to provide for a demand right at age 21 by the beneficiary and to allow continuation of the trust if the beneficiary fails to demand distribution of the assets.

3. Requirements. Code Section 2503(c) is set forth below:

(c) Transfer for the Benefit of a Minor. No part of a gift to an individual who has not attained the age of 21 years on the date of such transfer shall be considered a gift of a future interest in property for purposes of subsection (b) if the property and the income therefrom---

(1) may be expended by, or for the benefit of, the donee before his attaining the age of 21 years, and

(2) will to the extent not so expended---

(A) pass to the donee on his attaining the age of 21 years, and

(B) in the event the donee dies before attaining the age of 21 years, be payable to the estate of the donee or as he may appoint under a general power of appointment as defined in Section 2514(c).

1. Benefit. The object of a private foundation is to obtain a current charitable contribution deduction for transfers made to an entity substantially controlled by the grantor.

2. Discussion. A charitable foundation may be structured either as a trust or a corporation. In either event, the arrangement is such that the entity will qualify as a tax exempt organization. Contributions to the foundation are deductible for income tax purposes. The grantor may retain significant control over the private foundation through designation of friendly trustees or through specific provisions in the documents which determine the time and recipient of distributions. Very strict rules concerning prohibited transactions between the grantor and the foundation must be adhered to, as well as limits on the time during which distributions to ultimate charitable beneficiaries must be made. The private foundation is an excellent vehicle commonly used by wealthy individuals to establish their charitable motives during life, often structured as the remainder beneficiary of a Charitable Remainder Trust and frequently the recipient of substantial benefits upon the death of the grantor.

3. Requirements. The definition of a private foundation is found in Code Section 509. There, a private foundation is defined as any organization described in Section 501(c)(3) (organizations exclusively for religious, charitable, scientific testing, public safety, literary or educational purposes or to foster amateur sports or for the prevention of cruelty to children or animals) other than an organization described in Section 170(b)(1)(A) (church, school, hospital, government, etc.) and other than certain publicly supported organizations. The definition is very convoluted, but forms are available which clearly satisfy all the requirements.

1. Benefit. The benefit of a GRIT is to allow the grantor to retain income from a fund for a period of years after which time the property will pass to the grantor's children. The goal is to have the value of the gift to the children determined at the time the GRIT is established thereby avoiding transfer tax on future appreciation.

2. Discussion. A GRIT is established for a period of years with the grantor retaining an income interest in the property. Upon expiration of the stated term, the trust typically terminates and the property passes to the grantor's children. The amount of gift transferred is actuarially determined upon establishment of the trust. If the grantor dies during the term of the trust the property is includible in his estate under Code Section 2036(c). If death occurs after termination of the income interest, the value of the property is fully excludible from the grantor's estate. Code Section 2036(c), which requires including in the estate where a disproportionate portion of the future appreciation of property has been transferred by a decedent, may be avoided in one of two ways. First Section 2036(c) applies only to an "enterprise". Establishment of a GRIT with cash or marketable securities should not be controlled by Section 2036(c). In addition, Section 2036(c) provides a special exception for A Qualified Trust Income Interest.

3. Requirements. The primary requirement for successfully structuring a GRIT is to make certain that the interest retained by the Grantor is a "qualified interest" as defined in Section 2702(b). A qualified interest is generally the right to receive a fixed amount payable not less frequently than annually ( a Grantor Retained Annuity Trust) or the right to receive an amount which is payable not less frequently than annually computed based on a fixed percentage of the fair market value of the property in the trust (a Grantor Retained Unitrust).

1. Benefit. A QPRT is a trust to which the Donor transfers his or her personal residence for a term of years. If the Donor survives the term of years, a significant portion of the value of the residence escapes estate tax.

2. Discussion. A QPRT is in essence a grantor retained income trust designed to hold a personal residence. The grantor transfers ownership of his or her residence to the trust, retaining the right to live in the residence for a term of years. If the donor dies before expiration of the term of years, the full value of the residence is includible in the estate. However, if the grantor survives beyond the term of years the value of the residence is excluded from the estate. Upon transfer of the residence to the trust, there is a gift to the remaindermen (usually the children) in an amount equal to the value of the remainder interest. The value of the remainder interest is determined based on the length of the term of years and the current Section 7520 interest rate. IRS tables are available for computing the value of the transfer. A QPRT provides significant benefit regardless of whether the residence appreciates in value. The trust may provide for the grantor to rent the residence from the remaindermen after termination of the trust. This allows the grantor to retain control over the right to remain in the residence and provides for further transfers out of the Grantors estate. The trust may also provide for sale and replacement of the residence during the term of the trust.

3. Requirements. The relatively straight forward requirements for establishing a QPRT are set forth in Regulations Section 25.2702-5.

1. Benefit. A Defective Grantor Trust is designed so that the income or loss of the trust will be taxable to the Grantor but the corpus of the trust will not be includible in the Grantor's estate.

2. Discussion. The benefit of providing for the corpus of the trust to be excluded from the grantor's estate is obvious. However, is some circumstances it is desirable to avoid the requirement for filing additional returns at the high trust tax rates. For example, a Life Insurance Trust is commonly structured as a Defective Grantor Trust. The Life Insurance Trust may be funded with a small amount which is placed in an interest bearing account and by using a Defective Grantor Trust no tax return is required to be filed for the trust.

3. Requirements. A Defective Grantor Trust must be structured to avoid inclusion of the corpus in the estate of the Grantor. Most of the provisions which will make the income of the Trust taxable to the Grantor will also cause the corpus to be included in the estate of the Grantor. However, there are several provisions which cause income taxability without causing estate inclusion. For example, the ability of the trustee to pay life insurance premiums on the life of the Grantor will cause the income on the trust to be taxable to the Grantor but will not cause the trust corpus to be included in the Grantors estate. See Section 2.9

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