4/6/2016
LIFETIME GIFTING, MINORS
AND INCAPACITATED
BENEFICIARIES
Patricia J. Shevy, Esq.
The Shevy Law Firm, LLC
[email protected]
LIFETIME GIFTING
• TAXATION OF GIFTS:
• LIFETIME GIFTS ARE TAX EXCLUSIVE- Donor pays the gift tax on gift from
other funds (gift not used to pay the tax).
• TESTAMENTARY GIFTS ARE TAX INCLUSIVE- Estate tax is paid on the
property being gifted and the tax paid (gift used to pay the tax).
• FEDERAL GIFT TAX EXEMPTION: $5.45 Million.
• NYS ESTATE TAX: None, BUT listen to Jennifer Boll.
LIFETIME GIFTING:
ANNUAL EXCLUSION
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$14,000 Per Donee (Recipient).
Recipient may be any person regardless of relationship to donor.
Gift to 2+ persons is a gift to each person in proportion.
Transfer to trust is gift to the beneficiaries.
Transfer to corporation/LLC is gift to shareholders/members.
Reciprocal gifting prohibited.
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LIFETIME GIFTING:
ANNUAL EXCLUSION
• ANNUAL EXCLUSION APPLIES TO PRESENT INTERESTS ONLY.
• PRESENT INTEREST- an unrestricted right to the immediate use,
possession or enjoyment of property or income from property.
• No exclusion for future interest.
EXCEPTION TO ANNUAL EXCLUSION
PRESENT INTEREST RULE
• SECTION 2503(c) TRUSTS FOR MINORS:
• Not a future interest if principal and income may be spent by, or for the benefit of,
donee before attaining 21YO and if donee dies before 21YO, trust is payable to donee’s
estate or by donee’s general power of appointment.
• No substantial restriction on Trustee’s discretion.
• Trust term may be extended by donee.
• Donor should NOT be a Trustee.
EXCEPTION TO ANNUAL EXCLUSION
PRESENT INTEREST RULE
• CRUMMEY TRUSTS:
• Trust gives beneficiary a right of withdrawal with respect to funds transferred to the
trust.
• Beneficiary given limited time to withdraw contribution to trust.
• Withdrawal right converts future interest to present interest.
• Reasonable notice of withdrawal right must be provided to beneficiaries.
• Beneficiary may NOT waive right to notice of future trust contributions.
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EXCEPTION TO ANNUAL EXLCUSION
PRESENT INTEREST RULE
• TUITION AND MEDICAL EXPENSES:
• Tuition paid to a qualified educational organization for education or training is NOT a
taxable gift.
• “Educational organization” must normally maintain a regular faculty and curriculum and
normally have a regularly enrolled body of students.
• Non-educational activities OK as long as incidental.
• Must be paid directly to school; and may be prepaid.
• Does not apply to educational trusts, books, room/board, summer camp or other
incidentals.
LIFETIME GIFTING: GIFT SPLITTING
• $28,000 limit- ½ by each spouse if proper election is made.
• Gift split election must be made with respect to all gifts made during a
calendar year in which the election is made and CANNOT be applied to a
portion of the gifts.
• Consent of both spouses required- signified on gift tax return.
UNIFORM TRANSFERS TO MINOR ACT
• New York has adopted the UTMA as set forth in Article 7 of the EPTL.
• When to use? The client wants to give a young person a gift and use the
annual exclusion but does not want the young person to have absolute
control over the gift.
• How? UTMA Custodian allows the donor to transfer property to the
custodian of a minor beneficiary who holds and administers the UTMA
property for the beneficiary until the beneficiary attains the age of majority.
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UTMA
Advantages:
Disadvantages:
• Simple to create and simple to maintain.
• Qualifies for gift tax annual exclusion.
• No formal trust documents or court orders
• Property must be paid outright to the minor
required.
• Not a trust for income tax purposes and
fiduciary income tax returns.
• Minor reports all UTMA custodial income on
his or her own income tax return.
at age 21.
• If minor dies before age 21, custodial
property is distributed to his or her estatetypically the parent who set up the UTMA
account.
• If donor is the custodian, the UTMA
account will be included in the donor’s
taxable estate.
TRUSTS FOR YOUNG /
SPENDTHRIFT
BENEFICIARIES
Lifetime / Testamentary
WHY USE A §2503 TRUST?
• Advantages:
• Asset protection from future creditors.
• Federal income tax consequences flow through to beneficiaries to the extent trust
income is distributed to beneficiaries.
• No contribution limits.
• Contributions not limited to cash.
• If trust meets requirements, entire value of property transferred
is eligible for §2503(b) annual exclusion.
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§2503(c) TRUSTS
• §2503(c) provides special exclusion for gifts benefiting person under 21 years old that
would normally be a future interest as long as:
• Minority Interest: Principal and income must be available for distribution while
donee is under 21.
• Termination at 21: If donee survives to age 21, all accumulated income and
principal must be distributed to donee at age 21.
• Distribution at Death of Donee: If donee dies before age 21, all income and
principal must be paid either to donee’s estate or to donee’s appointee pursuant to a
general power of appointment.
§2503(c) MINORITY
INTEREST REQUIREMENT
• Income and principal may be expended for donee before donee turns 21.
• Trustee must be given discretion to determine amounts & purposes for
distributions… but NO substantial restrictions on discretion.
• Sprinkle powers do NOT satisfy §2503(c); must establish separate shares for
each beneficiary (each share qualifies as a separate trust & qualifies for §2503(c)
exclusion).
WHAT IS A
SUBSTANTIAL RESTRICTION?
• No substantial restriction means Trustee has at least as much discretion
as that of a guardian under local law.
• If substantial restriction, minority interest requirement is not met:
• “For accident, illness or emergency” = Substantial Restriction
• “Support, care, education, comfort & welfare” ≠ Substantial Restriction
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§2503(c) TERMINATION AT AGE 21
• Reg §25.2503-4(b)(2): a gift will not be a future interest merely because donee MAY
ELECT to extend the trust term.
• Rev. Rul. 74-43: §2503(c) exclusion if beneficiary, upon reaching age 21, has
EITHER:
• Continuing right to compel distribution from trust, or
• Right during limited time period to compel distribution from trust by giving
written notice and on failure to exercise trust will continue on its own terms.
§2503(c) DISTRIBUTION AT DEATH
• Payable to Donee’s Estate, or
• Passes pursuant to a general power of appointment granted to donee.
• General Power of Appointment: the power to change the ultimate beneficiaries of the
trust among the “Tainted Class” (the donee, the donee’s creditors, the donee’s estate
or the creditors of donee’s estate).
SAMPLE §2503(c) TRUST LANGUAGE
• Until the B attains the age of 21 years, the Tee may distribute to, or for
the benefit of, the B, from time to time, as much of the net income or
principal of the trust as the Tee determines to be necessary for the B’s
health, support, maintenance or education; provided however, that the
Tee may not apply the net income or principal of the trust in
satisfaction of the Tee’s legal obligation to support the B. Any net
income not distributed shall be accumulated and added at least
annually to principal.
• Satisfies the Minority Interest Requirement.
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SAMPLE §2503(c) TRUST LANGUAGE
• If the B attains the age of 21 years, the Tee shall distribute to the B the
entire remaining balance of this trust, and upon final distribution, the trust
shall terminate; . . . .
• Satisfies the Distribution at 21 Requirement. . . . . but
SAMPLE §2503(c) TRUST LANGUAGE
• . . . . ; provided however, that the B shall have the right, upon attaining the age of
21, of extending the term of this trust, on the terms and conditions contained
herein, until the B attains the age of 35.
• If the B extends the term of this trust, then upon extension of the trust, the Tee
shall distribute currently to, or for the benefit of, the B all of the net income of the
trust. The Tee may continue to distribute to, or for the benefit of, the B as much
of the principal of the trust as the Tee determines to be necessary for the B’s
health, support, maintenance or education.
• If the B extends the term of this trust, then when the B attains the age of 35, the
Tee shall distribute to the B the entire remaining balance of the trust, and upon
such final distribution, this trust shall terminate.
SAMPLE §2503(c) TRUST LANGUAGE
• If the B dies before attaining the age of 21, or if the B does not attain the age
of 35 after extending the term of this trust, the B shall have a general
testamentary power of appointment to direct the disposition of the principal
of this trust as the B determines.
• Satisfies the Distribution at Death/GPOA Requirement.
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§2503(b) TRUST
• Qualifies for §2503(b) annual gift tax exclusion and need NOT
terminate at beneficiary’s 21st birthday.
• Involves only 1 beneficiary but 2 legal interests, each of which is for
the beneficiary:
• Income Interest: Donee is given a life income interest.
• Remainder Interest: Trustee is given discretion to make
principal distributions while donee is a minor.
§2503(b) TRUST
Advantages:
• Income interest qualifies for
§2503(b) exclusion.
• Need not end at any significant
age.
Disadvantages:
• Income interest must have
ascertainable value (under-productive
assets subject to challenge).
• Exclusion does NOT apply to
remainder interest.
• Income must be paid out “as soon as
reasonably practical.” Annually is
sufficient.
SAMPLE §2503(b) TRUST LANGUAGE
• During the B’s lifetime, the Tee shall currently distribute the entire net
income of the trust to the B, at least annually.
• Satisfies the Income Distribution Requirement.
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SAMPLE §2503(b) TRUST LANGUAGE
• Until the B attains the age of 21 years, the Tee may distribute to, or for the
benefit of, the B, from time to time, as much of the principal of the trust as
the Tee determines to be necessary for the B’s health, support, maintenance
or education; provided however, that the Tee shall not apply principal in
satisfaction of the Tee’s legal obligation to support the B.
• Satisfies the Remainder Interest Requirement.
TRUSTS FOR YOUNG BENEFICIARIES:
SAMPLE LANGUAGE
• SET UP THE TRUST IN THE WILL/REVOCABLE TRUST:
• Any property (other than tangible personal property) that would otherwise
pass outright under this Will [Agreement] (other than pursuant to the
exercise of a discretionary fiduciary power) to a descendant of mine who has
not attained the age of [Age], shall instead be held by the Trustee as a
separate trust for that descendant (the “Beneficiary”) upon the following
terms:
TRUSTS FOR YOUNG BENEFICIARIES:
SAMPLE LANGUAGE
• DEFINE RULES FOR DISTRIBUTION:
• A. The Trustee may distribute to the Beneficiary any
part or all of the income and principal of the trust as the
Trustee may determine for health, support, maintenance
or education. Any income not paid shall be accumulated
and added at least annually to principal.
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TRUSTS FOR YOUNG BENEFICIARIES:
SAMPLE LANGUAGE
• RULES FOR DISTRIBUTION AT SPECIFIC AGES:
• B. The Trustee shall distribute the remaining principal of the trust to the
Beneficiary upon his or her attaining the age of [Age]. OR
• B.
The Trustee shall distribute to the Beneficiary one third of the remaining
principal of the trust upon the Beneficiary’s attaining the age of [Age], one half
of the remaining principal upon the Beneficiary’s attaining the age of [Age],
and the entire remaining principal upon the Beneficiary’s attaining the age of
[Age]. If the Beneficiary has attained the age of [Age] or [Age] before the
Beneficiary’s share is set apart, then as soon as such share is set apart one third
or two thirds thereof, as the case may be, shall be distributed to the Beneficiary.
TRUSTS FOR YOUNG BENEFICIARIES:
SAMPLE LANGUAGE
• REMEMBER A BENEFICIARY COULD DIE BEFORE TRUST ENDS:
• C. If the Beneficiary dies prior to attaining the age of [Age], then upon the
Beneficiary’s death the remaining principal of the trust shall be distributed, subject to
this Article, in equal shares to the Beneficiary’s then surviving children; or if there is
none, to the then surviving descendants, per stirpes, of the person who, among a class
consisting of me and my descendants, is the Beneficiary’s closest ancestor with any
then surviving descendant.
• [BE CAREFUL- If only child, class needs to be broadened to “my parents and their
descendants or my spouse’s parents and their descendants, as the case may be”]
TRUSTS FOR YOUNG BENEFICIARIES:
SAMPLE LANGUAGE
• RULE AGAINST PERPETUITIES PROTECTION:
• D. Notwithstanding anything herein, any trust created under this Will
[Agreement] for any person not in being at the date of my death shall (unless
terminated earlier) terminate 21 years after the death of the last to survive of
all descendants of my parents in being at such date, and upon such
termination the assets of such trust shall be distributed to that person.
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TRUSTS FOR YOUNG BENEFICIARIES:
SAMPLE ADMINISTRATIVE LANGUAGE
• Any property, whether principal or income, distributable to any person under
this Will, may be applied for the benefit of that person, including without
limitation a distribution to a trust for the benefit of that person. In the case
of a minor, the property may be paid or delivered directly to the minor, to a
parent or guardian of the minor, to a person with whom the minor resides,
or to a custodian for the minor under any Uniform Transfers to Minors Act
or similar statute until age 21 or whatever earlier age is the maximum
permitted under applicable law.
TRUSTS FOR YOUNG BENEFICIARIES:
SAMPLE ADMINISTRATIVE LANGUAGE
• Except as otherwise specifically provided herein, in connection with the
exercise of a discretionary power to distribute income or principal to any
person, there is no requirement to take into account a person’s other income
or capital resources, the interest of the person in any other fund, or the duty
of anyone to support the person, although these factors may be taken into
account.
• [Also applies to spendthrift trusts.]
TRUSTS FOR YOUNG BENEFICIARIES:
SAMPLE ADMINISTRATIVE LANGUAGE
• Notwithstanding anything herein, no person may participate in a decision to
make any proposed discretionary distribution of income or principal to
himself or herself or to satisfy any legal obligation of that person.
• No beneficiary of any trust has any right or power to anticipate, pledge,
assign, sell, transfer, alienate or encumber his or her interest in the trust in
any way; nor is any interest in any manner liable for or subject to the debts,
liabilities or obligations of the beneficiary or claims of any sort against the
beneficiary.
• [Also applies to spendthrift trusts.]
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TRUSTS FOR SPENDTHRIFTS
• Protection from creditors, potential for divorce.
• Similar language as trusts for young beneficiaries, but the trust lasts for the
beneficiary’s entire lifetime.
• Be careful with drafting- estate and generation-skipping transfer tax issues
(reviewed by Jennifer Boll).
TRUSTS FOR SPENDTHRIFTS:
SAMPLE LANGUAGE
• A.
The Trustees may distribute any part or all of the income and principal of the trust to
any one or more members of a class consisting of the Beneficiary and his or her
descendants for health, support, maintenance or education.
• B.
Payments may be made in such amounts and proportions as shall be determined from
time to time in the discretion of the Trustees, without regard to equality of distribution. I
request that unless the Trustees determine to the contrary, no payment shall be made that
would be a Taxable Distribution.
• C.
Any income not paid shall be accumulated and added at least annually to principal.
TRUSTS FOR SPENDTHRIFTS:
SAMPLE LANGUAGE
• D.
The Beneficiary shall have the right to occupy any such real property rent free;
provided that unless the Trustees determine otherwise, while the Beneficiary is
occupying such property rent free, the Beneficiary shall pay all charges incident to
maintaining such real property that are customarily paid from trust income.
• E. After attaining the age of 30, the Beneficiary shall have the right on the last
day of each calendar year commencing with the year following the year in which the
trust is established, to withdraw from the principal of the trust, by a duly
acknowledged instrument delivered to the Trustees, an amount that shall not exceed
the greater of Five Thousand Dollars or five percent of the market value of the
trust on such day. Such right of withdrawal shall be noncumulative, and shall be
limited to withdrawals taking effect during the Beneficiary's lifetime.
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TRUSTS FOR SPENDTHRIFTS:
SAMPLE LANGUAGE
• F.
Upon the death of the Beneficiary, the remaining principal of the trust
shall be distributed to, or for the benefit of, such one or more of my
descendants, in such manner and proportions, in trust or otherwise, as the
Beneficiary shall appoint. In addition, if the death of the Beneficiary would
result in the imposition of generation-skipping transfer tax on the trust by
reason of a Taxable Termination, the Beneficiary may also appoint the
remaining principal of the trust to his or her estate.
TRUSTS FOR SPENDTHRIFTS:
SAMPLE LANGUAGE
• G. All of the remaining principal of the trust not appointed or not fully or
effectively appointed upon the death of the Beneficiary shall be distributed,
subject to this Article, to his or her then surviving descendants, per stirpes;
or if there is none, to the then surviving descendants, per stirpes, of the
person who, among a class consisting of me and my descendants, is the
Beneficiary’s closest ancestor with any then surviving descendant.
TESTAMENTARY SUPPLEMENTAL
NEEDS TRUSTS: SAMPLE LANGUAGE
• SET UP THE TRUST IN THE WILL/REVOCABLE TRUST:
• Any property (other than tangible personal property) that would otherwise
pass outright under this Will [Agreement] to my [relation], [BENEFICIARY
FULL NAME], (“[Nickname]”), shall instead be held by the Trustee as a
separate trust for [Nickname] upon the terms hereinafter provided. The
purpose of this trust is to enhance the quality of [Nickname]’s life beyond
what [Nickname] might otherwise have if solely dependent upon
government benefits or assistance.
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TESTAMENTARY SUPPLEMENTAL
NEEDS TRUST: SAMPLE LANGUAGE
• A.
The principal and any accumulated income of the trust shall be held for
[Nickname]’s benefit, and shall be managed, invested and reinvested by the
Trustee, who shall collect the income therefrom and, after deducting all
charges and expenses properly attributable thereto, shall, at any time and
from time to time, apply for [Nickname]’s benefit, so much (even to the
extent of the whole) of the net income and/or principal of the trust as the
Trustee shall deem advisable, in the Trustee’s sole and absolute discretion,
subject to the limitations set forth below. Any income not paid shall be
accumulated and added at least annually to principal.
TESTAMENTARY SUPPLEMENTAL
NEEDS TRUSTS: SAMPLE LANGUAGE
• B.
This trust is intended and created expressly to be a supplemental needs trust that
conforms to the provisions of Section 7-1.12 of the New York Estates, Powers and Trusts
Law and is intended to supplement, and not to supplant, impair or diminish, any benefits or
assistance of any federal, state, county, city or other governmental or private entity, for which
[Nickname] may otherwise be eligible or may be receiving. Therefore, before making any
payment from the income or principal of the trust, it is my desire that my Trustee considers
the availability of all benefits from governmental or private assistance programs for which
[Nickname] may be eligible, and, to the extent possible, endeavor to maximize the collection
of such benefits and to facilitate the distribution of such benefits for [Nickname]’s benefit.
TESTAMENTARY SUPPLEMENTAL
NEEDS TRUSTS: SAMPLE LANGUAGE
• C.
None of the income or principal of this trust shall be applied in such a
manner as to supplant, impair or diminish benefits or assistance of any
federal, state, county, city, or other governmental entity for which [Nickname]
may otherwise be eligible or that [Nickname] may be receiving.
• D.
[Nickname] shall have no right or power to anticipate, pledge, assign,
sell, transfer, alienate or encumber [Nickname]’s interest in the trust in any
way, or to direct, distribute or authorize distributions from the trust.
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TESTAMENTARY SUPPLEMENTAL
NEEDS TRUSTS: SAMPLE LANGUAGE
• E.
Notwithstanding the foregoing, the Trustee may make distributions to meet [Nickname]’s
need for food, clothing, shelter or medical care even if such distributions may result in an
impairment or diminution of [Nickname]’s receipt of, or eligibility for, governmental or private
benefits or assistance but only if the Trustee determines that (1) [Nickname]’s needs will be better
met if such distribution is made, and (2) it is in [Nickname]’s best interest to suffer the consequent
effect, if any, on [Nickname]’s eligibility for, or receipt of, governmental or private benefits or
assistance; provided, however, that if the mere existence of the Trustee’s authority to make
distributions pursuant to this paragraph shall result in [Nickname]’s loss of government or private
benefits or assistance, regardless of whether such authority is actually exercised, this paragraph
shall be null and void and the Trustee’s authority to make such distributions shall cease and shall
be limited as provided in Sections A, B and C above, without exception.
TESTAMENTARY SUPPLEMENTAL
NEEDS TRUSTS: SAMPLE LANGUAGE
• F.
It is my intention that, except as limited above, the Trustee shall have full
discretion in regard to distributions and that neither Section 7-1.6(a) nor Section 71.6(b) of the New York Estates, Powers and Trusts Law nor any similar statute or
regulation that authorizes a court to make an allowance from the principal of a trust
to, or for the benefit of, an income beneficiary of such trust, shall apply to the trust
created hereunder.
• G. The trust shall terminate upon [Nickname]’s death and, upon such termination,
the remaining principal shall be distributed to ________________.
FUNDING TESTAMENTARY TRUSTS BY
BENEFICIARY DESIGNATION
• NEVER EVER name “My Estate” as a beneficiary.
• Review the forms supplied by the financial institution.
• Example: “John Smith, subject to Article THIRD of my Will dated April 7, 2016”
• Example: “Testamentary Trust under Article THIRD of my Will dated April 7, 2016.”
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FUNDING TESTAMENTARY TRUSTS BY
BENEFICIARY DESIGNATION
• BE CAREFUL with qualified (retirement accounts): Include language (conduit
trust) to ensure that a person counts as the beneficiary for required minimum
distribution purposes.
• Sample Language: Each year, beginning with the year of my death, and so long as the
Beneficiary is living, the Trustees shall withdraw from any Retirement Benefit the income
of such Retirement Benefit, or the Minimum Required Distribution for such Retirement
Benefit for such year if greater than the income of such Retirement Benefit, plus such
additional amount or amounts as the Trustees deem advisable in the Trustees’ discretion.
All amounts so withdrawn (net of expenses properly charged thereto) shall be paid directly
to the Beneficiary upon receipt by the Trustees.
GUARDIANS OF THE
PERSON/PROPERTY
• Problem: Testator failed to consider a trust for a minor or disabled
beneficiary. Court will appoint guardian of the property.
• Remember to appoint a person as the guardian of a minor:
• Guardian of the Person- With whom will the minor live?
• Guardian of the Property- Who will manage the minor’s funds?
• Sample Language: I appoint my ____, _____, to be the Guardian of the person and
property of each child of mine who is a minor at the time of my death. If [s/he] fails
to qualify or to continue to act, I appoint my ____, _____, to be such Guardian.
Questions?
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