Estate Planning Chapter 5

Front 1

Trust

Back 1

A fiduciary agreement whereby the legal title of property is held and the property is managed by someone for the benefit of another

Front 2

Fiduciary

Back 2

One occupying a legally defined position of trust; a person or institution that holds and manages property for the benefit of another; an individual charged with the duty to act exclusively for the benefit of another party as to matters within the scope of the relationship between them

Front 3

Types of a Fiduciary Arrangements; Types of Fiduciaries

Back 3

Trustee, Guardian, and Personal Representative of Estate (administrator/executor)

Front 4

Trustee

Back 4

The holder of legal title to property for the use or benefit of another; duties exist trust terminates according to trust terms

Front 5

Guardian

Back 5

A person named to represent the interests of minor children or disabled individuals; exists until legal disability or minority of ward ends

Front 6

Administrator

Back 6

Appointed by the court to settle an estate; exists until estate is settled and property is distributed

Front 7

Executor

Back 7

Appointed by a will to settle an estate; exists until estate is settled and property is distributed

Front 8

Duties of a Fiduciary

Back 8

(1) Be loyal to the beneficiary
(2) Act for the benefit of the beneficiary
(3) Do not delegate activities that the fiduciary is able to perform
(4) Disclose facts affecting any transaction
(5) Preserve investment assets for the beneficiary
(6) Make assets productive
(7) Do not self-deal
(8) Be impartial toward income beneficiaries and remainderpersons
(9) Have full disclosure

Front 9

Basic Principles all Fiduciary Relationships Share

Back 9

(1) Act for the benefit of the other party as to matters within the scope of the relationship
(2) Responsibilities are not to be delegated to others if they may be performed by the fiduciary
(3) If the fiduciary enters into a personal relationship with the other party to the relationship, the fiduciary must make full disclosure of all facts that may affect the transaction

Front 10

Common Trust Funds

Back 10

Commingled or collected investments; allowed by the federal government without becoming taxable entities themselves

Front 11

Proprietary Mutual Funds

Back 11

Funds created when the bank or brokerage firm that distributes the fund also acts as an investment advisor for the fund

Front 12

State Investment Powers

Back 12

(1) Prudent Person Rule
(2) Mandatory Legal List
(3) Permissive Legal List
(4) UPIA

Front 13

Prudent Person Rule

Back 13

A rule stating that a fiduciary, in acquiring, investing, reinvesting, exchanging, retaining, selling, and managing a property for the benefit of another, shall exercise the judgement and care under the circumstances then prevailing, that persons of discretion and intelligent exercise in the management of their own affairs

Front 14

Uniform Prudent Investor Act (UPIA)

Back 14

Introduced in 1992; emobdies a MPT and total return approach: investments must be chosen based on the investment's suitability for the beneficiaries of each account

Front 15

Difference between UPIA and Prudent Person Rules

Back 15

UPIA suggests that fiduciary delegate investment responsibilities to investment professionals whereas the Prudent Person Rules suggest that a fiduciary handle those responsibilities alone; UPIA requires a more "portfolio management" approach that may be outside the abilities of the fiduciary

Front 16

Legal List States

Back 16

A state having either a mandatory or permissive list of investments that fiduciaries must or may make unless the terms of the instrument or relationship permit otherwise

Front 17

Selecting Individual/Related/Subordinate Trustees

Back 17

-Beneficiary Trustee: Discretionary powers over trust income may cause tax ownership; death or incompetence potential

-Family Member Trustee: Possible conflicts of interest and family discord: little regulatory supervision provides opportunity for breach of trust; tax law complexities and changes make it difficult to stay current

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Selecting Corporate/Independent Trustee

Back 18

(1) Holds legal title only- no personal tax ownership
(2) Fiduciary relationship not affected by employee death or incapacity
(3) Conflicts of interest are avoided
(4) Regular Auditing
(5) Expectancy of tax expertise

Front 19

Legal Requirement of an Executor

Back 19

Mentally competent adult who has not been convicted of a felony

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Ward

Back 20

An individual for who a guardian is appointed for

Front 21

Guardian Ad Litem

Back 21

A guardian appointed by the courts for a particular purpose, generally to defend a specific lawsuit or legal proceeding in which a minor is a party; guardianship dissolved after the legal issue is settled

Front 22

Testamentary Guardian

Back 22

A guardian named in a will

Front 23

Guardian De Son Tort

Back 23

An individual who assumed the guardianship of a minor or incompetent without obtaining court approval; held fully responsible for all acts as guardian

Front 24

Removal of Trustees

Back 24

(1) Beneficiary and trustee conflict
(2) Changes in state trust law
(3) Changes in state tax law
(4) Inconvenience- moving addresses, etc.

Front 25

Purposes of a Trust

Back 25

(1) Obtain competent and professional management as well as investment of trust property
(2) Protect the property for beneficiaries
(3) Provide a skill the settlor doesn't have
(4) Provide security and protection for beneficiaries
(5) Protect the interests of children from an earlier marriage (ensures proper channeling of assets to heirs)
(6) Living trusts handle assets during trips, disability, etc.
(7) Consolidates accumulation of wealth
(8) Saves on estate taxes

Front 26

Elements of a Trust

Back 26

(1) Creator (Grantor/Settlor/Trustor)
(2) Trustee
(3) Property
(4) Beneficiaries
(5) Terms

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Spendthrift Provision

Back 27

Provides a restriction against attachment by creditors of trust assets, whether they are creditors of the beneficiary or the grantor

Front 28

Rule Against Perpetuties

Back 28

A limitation that restricts a persons power to alienate property in trust beyond the time of a life of lives in being plus 21 years

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Rule Against Accumulations

Back 29

State law that restricts a trust form accumulating too much property for too long a period of time

Front 30

Types of Trusts

Back 30

(1) Living Trusts
(2) Testamentary Trusts
(3) Charitable Trusts

Front 31

Types of Living Trusts

Back 31

(1) Revocable
(2) Irrevocable

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Living Trust

Back 32

A trust is created and operates before the death of the settlor

Front 33

Revocable Trust

Back 33

A trust that can be revoked, amended, terminated by the grantor and the property recovered by the grantor

Front 34

Irrevocable Trust

Back 34

A trust that cannot be terminated with property reclaimed by the grantor

Front 35

Testamentary Trust

Back 35

A trust created under the will of a testator; never irrevocable until death or legal incapacity of the testator

Front 36

Charitable Trust

Back 36

A tax-exempt organization operated exclusively for charitable purposes as specified in Sec. 501(c)(3)

(1) Trust must be set up for charitable purposes
(2) Must have a definite class of beneficiaries
(3) May be created for an unlimited duration (unlike other trusts)

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Cy pres

Back 37

A doctrine of law created to prevent the failure of trusts that cannot be applied to their original charitable purpose

Front 38

Power of Appointment

Back 38

A property right created or reserved by the donor of the power enabling the donee of the power to designate, within such limits as the donor has prescribed, who will be the transferres of the property

Front 39

Donee of the Power

Back 39

The recipient of the power

Front 40

Lapse

Back 40

Failure to exercise a power

Front 41

Appointee

Back 41

Recipients of the property after the donee exercises the power

Front 42

Types of Powers of Appointment

Back 42

(1) General Power
(2) Special (Limited) Power

Front 43

General Power

Back 43

A power of appointment that gives the donee a right at any time to designate the property to parties that include the donee or the donee's estate or creditors

Front 44

Special (Limited) Power

Back 44

A power of appointment in which the donor of the power limits the donee's appointment of the property to an appointee other than the donee, the donee's estate, or the donee's creditors