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41 Cards in this Set

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  • Back
Settlor’s role under a living trust arrangement:
-he may be the trustee
-he may be a beneficiary
-he may not be a trustee for his own benefit
-he may not be the sole beneficiary of the trust
Non-tax reasons for an irrevocable trust:
-Protection from the importunities of dependent beneficiaries
-Protection from the infirmities of old age--Sickness, senility, insanity
-Protection from one’s own defects in character or habi
2 Types of insurance trusts
-Business Liquidation Trust
-Personal Insurance Trust
3 Types of Personal Insurance Trusts

- Funded - Trustee responsible for payments of insurance, based on monies left in trust, and being charged with duty to pay. Duty to pay is very important.
- Unfunded - Creator continues to pay premiums
-Installment - Trustee is charged with duty to pay, and is given some, but not sufficient monies to make payment on the premiums. The creator continues to put in money to make up the difference. Also called accumulating or cumulative.
Key Man Insurance
- A corporation purchases insurance on the life of a key employee with specialized skills, or an executive, to shield themselves from losses stemming from their sudden death. Needs to be enough to cover costs of replacement of employee, and recovering from this loss.
Funded Cross Buy/Sell Agreement/Contract -
Example: Partnership/Corporation XYZ, made up of partners A,B, &C each have a separate LI Trust or Contract. Corp. is worth $6M.

A has LI contract on B & C for $2M each
B has LI contract on A & C for $2M each
C has LI contract on A & C for $2M each

All proceeds are payable directly to the trustee
Purpose of a Cross Buy/Sell in a Trust:

1.) Keeps the ownership from being taxable as part of the state.
2.) Protects the value of stock for beneficiaries of dead partner
- at the hour of death, stock is either worth far less or far more than $2M.
This agreement makes sure that the stock is actually bought.
3.) Keeps the government from butting in and valuing the corporation itself, for
which the estate of the dying partner would be liable.
4.) Even if your relationships are good, the board can choose not to pay dividends to stockholders- Reason against keeping stock for dividend purposes.

* Cautionary note:
- if, in the following situation, the parties are related, they stand to inherit the business, and they put an exorbitant amount in an ILIT , far above actual valuation, the IRS will look upon it as a scheme to pass on tax free wealth, and the court will not rule in our favor.
Entity Purchase Plan -
A type of business succession plan that is used by companies that have more than one owner. The plan involves having the company take out an insurance policy on the lives of owners in the amount equal to each owner's interest. In the event of death, the amount collected by the company from the insurance, which is equal to the deceased owners stake, is used to pay the deceased's estate for its share of the business.
- 2 main reasons people need life insurance:
-To build an estate
-Liquidity, especially in the case of land ownership - the need for liquidity will be the primary reason our clients need this
Gross Estate
-The part of your estate that you pay taxes on

-if you leave your insurance to anyone but trust, it will be placed with your gross estate for tax purposes

- The gross estate is usually subject to the claims of creditors
Incidents of Ownership
- in the case of an insurance policy, the right to make changes
- can change beneficiaries
- right to pledge as collateral for debt
-enjoin claims? - can’t tell what I wrote
Something you should never do:
-Make insurance payable to estate
Always make insurance payable to a trust. Why?
Example: Father w/insurance policy payable to daughter
-policy is still included in gross estate
- NOT included in the probate estate
- NOT subject to claims of creditors
- Is taxable
Pour-over will
-at death, the assets, insurance, etc. POUR OVER into trust.
Settlement options for life insurance policies
-cash option/lump sum
-interest option
-fixed amount
-fixed period
Simple Life Annuity
- an insurance instrument that provides a fixed amount for the rest of a person’s life, in exchange for a lump sum.

Example: 120K for life, for the rest of that person’s life
Joint-Survivor Annuity
Annuity benefits that can be transferred from husband to wife at death.
*NOTE: If, as trustees, we take anything but the cash/lump sum option, we have VIOLATED...
-the duty NOT TO DELEGATE.
ERISA: Acronym stands for:
ERISA: Qualified Plan Definition?

any plan established for employees of one or more employers to provide for employees their families or dependents
-medical care
-disability benefits
-retirement benefits
-annuity benefits
-healthcare services , which meet statutory requirements
8 Types of Plans:

1.) Self Administered Plan: the employer provides the funds and administers the plan without the benefit of an insurance company or trustee
2.) Insurance Plan: employer purchase life insurance or annuity contracts
3.) Trusteed Plan: the employer contributes funds to a trustee (a large bank trust department) and the trustee will invest the funds and eventually pay out benefits
4.) Split Fund Plan: trustee in part will invest in stocks and bonds and take part of the funds and purchase insurance
5.) Non-Contributory: only the employer makes contributions
6.) Contributory: both the employer and the employee makes contributions
7.) Negotiated Plan: Union negotiates the plan with a number of employers, the employee is a member of a union – benefits can transfer as long as you stay in the industry and in the Union - COBRA is a part of this plan, even though it is non-Union.
8.) Qualified Plan: you have met all of the requirements of ERISA – most important requirement to be qualified is that the plan be non-discriminatory towards highly paid officials, executives, or stock holders.
What does a company have to do for their plan to be a Qualified Plan?

1.) Must be established by the employer, for the benefit of the employees.
2.) Must NOT discriminate in favor of highly paid employees, Execs, or stockholders.
3.) Must operate and be administered in a non-discriminatory manner.
4.) Must cover a sufficient, specified number of employees
5.) Purpose of the plan must be to offer employee, or their beneficiaries either a share of the profits, or income after their retirement.
6.) It must be established with the intention of it being a permanent plan, even though it might terminate at some point in the future.
7.) Must be in writing
8.) It must be formally communicated to the employee
Benefits/Consequences of a Qualified Plan:
1.) When the company makes contributions to the plan, the company can take an income tax deduction for the contribution
2.) Once the funds are in the plan, they accumulate income tax deferred
3.) The plan benefits are taxed only as they are paid out
What would damage to the hypoglossal nerve to to the tongue? 121
It would cause ipsilateral atrophy and if the tongue is protruded, is would DEVIATE TO THE SAME SIDE AS THE LESION!!
Information an Actuary Needs to Determine Company Contribution:

1.) Ages of Employees
2.) Gender of Employees - Why? Life Expectancy calculations
3.) Historic Turnover Rate
4.) Anticipated death rate
5.) Anticipated rate of return on trust investments
6.) What kind of benefits does the company want to provide?
8 Reasons to Set Up an Employee Benefit Plan

1.) Provide for employees who become incapacitated before retirement
2.) Provide a pension income
3.) To enable employees to share in profits
4.) To enable employees to become part-owners in company
5.) Reward an employee for distinctive service
6.) To encourage employees to be productive
7.) To reduce turnover
8.) To encourage economy and thrift on the part of the employees
2 Qualifiers for Charitable Trusts:
1.) Needs to be established for a qualified, charitable purpose.
- For the advancement of religion, education, the benefit of the community, or relief of poverty.
2.) Established for the benefit of an indefinite number of people
Charitable Remainder Annuity Trust

Ex. Daughter gets a fixed percentage of the ORIGINAL value of trust, each year. It can be no less than 5%
Charitable Remainder Unitrust

Ex. Daughter gets fixed amount of ACTUAL value of the trust, each year. Fluctuates, and gives you better protection with regard to long term inflation.
Pooled Income Fund
Ex. Bill gives trustee as charity, 1/20th of the overall holding of the fund in assets. Trust is actually the sum of 20 separate assets. Bill is entitled to 1/20th of the income from all pooled assets in the trust.
Charitable Foundations
-The main thing to remember about foundations, is that they have multiple charitable purposes:
3 Tests for a Corporate Trust:
1.) The trustee must be given sufficient power to protect the interests of the holder of the bond.
2.) The relationship between the trustee and the issuing company + investment banker must be restricted, so as to prevent collusion.
3.) The issuing company must make periodic reports to the trustee.
Debenture Bond
Unsecured bonds based solely on faith in the company.
Mortgage Bonds
Company pledges collateral to secure issued debt.
Sinking Fund Bond
A bond with a fund or account into which an issuer deposits money on a regular basis to repay the bond when it matures. For example, if a company issues a bond with a balloon maturity of seven years, one may put money into a bond sinking fund for seven years in order to be ready to pay off the principal when it comes due. Some bonds have sinking fund provisions, requiring the issuer to put money aside to repay bondholders at maturity
Pre-1942 Power of Appointment
-if you die holding a pre-1942 power of appointment, property is taxed only if the power is exercised. In this case, you would not want to exercise the power.
2 types of Power of Appointment:
1.) General
2.) Limited AKA (special)
Taxation Issues if you die holding a power of appointment:
-if you die holding a limited power of appointment, there are no taxes to the holder
-if you die holding a general power of appointment, the full amount contained in the trust is taxed at the estate level.
Can you be forced to accept income from the trust, or the power itself?

If the person who is the recipient of either power or income disclaims within 9 months of when the trust COMES INTO BEING (notice that I didn’t say “Becomes aware that the trust was formed”.), then everything is fine, and there are no consequences.

If the person waits even 9 mos. and 1 day, then it is qualified as a “release”.
Unified Tax Credit Value:
$345,800, allows you to pass $1M tax-free.
What constitutes the valid exercise of a power (in the context of a will)?
1.) Specific reference made to the creating document(Yes, valid.)
2.) References the powers of Appointment, but not the document (Yes, valid.)
3.) No references to power of appointment (Some states-PA, yes, NC-No)