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Problem Areas in Trust Administration

Learn about identifying subtrusts, funding assets, and the formulas involved in trust divisions. Explore funding methods, interest payments, and community property allocation scenarios. Discover important trust administration strategies.

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Problem Areas in Trust Administration

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  1. Problem Areasin Trust Administration Jim Lamping The Law Office of James P. Lamping San Francisco – Marin County (415) 992-3100 jim@jimlamping.com

  2. Topic One: Stale Trusts

  3. Understand the Formula • Identify the Subtrusts • Identify the Formula • What is the Method of Funding Assets? • Is There a GST Division?

  4. Two Trust Division

  5. Three Trust Division

  6. Identifying the Formula in a Three Trust Division • Pecuniary • Fractional

  7. Pecuniary Formulas • Pecuniary Marital – Residual Credit (3 Trust) • Pecuniary Credit – Residual Marital (3 Trust) • Pecuniary Survivor – Residual Credit (2 Trust) • Pecuniary Credit – Residual Survivor (2 Trust)

  8. Methods of Funding Pecuniary Amount with Assets in Kind • Date of Distribution • Date of Death • Default is Date of Distribution • If Date of Death, “Fairly Representative Funding” • Probate Code § 21118

  9. Methods of Funding for Fractional Share Formula • Strict Fractional • Fractional Pick and Choose

  10. Which Trusts Receive Appreciation or Depreciation?

  11. Kenan Gain • Pecuniary Bequest • Date of Distribution Funding • Satisfied in Kind with Appreciated Assets

  12. The Payment of Interest on Pecuniary Gifts

  13. Payment of Interest on Pecuniary Amount • Probate Code § 12003 • Does the Document Waive Interest? • Rate is Three Percent Less Than the Legal Rate (Probate Code § 12001) • 10% - 3% = 7% • GST Trusts

  14. Non Pro Rata Allocation of Community Property

  15. Hypothetical • Allocation of trust assets between the credit and survivor's trusts upon the death of the first spouse • Blackacre has a value of $1 million • Whiteacre has a value of $1 million • IRA (a non-trust asset) has a value of $1 million

  16. Pro Rata Allocation

  17. Non Pro Rata Allocation

  18. Determining the Targets

  19. Hypothetical • Husband Dies in 2002 • $1 Million Applicable Exclusion Amount • $2 Million of Community Property Assets (Date of First Death) • $12 Million Current Value of Those Assets

  20. Date of Death

  21. Allocation of Current Value

  22. Examples of Various Formulae

  23. Assumptions for Examples • First Death in 2002 • $1 Million Applicable Exclusion Amount • The Trust Held $6 Million at Date of Death • The Current Value of Trust Assets is $12 Million • All Community Property • The Surviving Spouse Used Only the Income Since the Date of Death • The Document Waives Interest on Pecuniary Bequests

  24. Values as of the First Death

  25. Pecuniary Marital – Residual CreditDate of Distribution

  26. Pecuniary Credit – Residual MaritalDate of Distribution

  27. Fractional Share orFairly Representative

  28. Assumptions for Examples • First Death in 2002 • $1 Million Applicable Exclusion Amount • The Trust Held $1.5 Million at Date of Death • The Current Value of Trust Assets is $10 Million • All Community Property • The Surviving Spouse Used Only the Income Since the Date of Death • The Document Waives Interest on Pecuniary Bequests

  29. Values as of the First Death

  30. Pecuniary Credit – Residual MaritalDate of Distribution

  31. What About Depreciation?

  32. Consider Terminating the Trust

  33. California Trust Administration (CEB) Chapter 14A

  34. Topic Two: The 645 Election

  35. History: What Is It and Why Is It?

  36. The Trust is Taxed as Part of Decedent’s Probate Estate for Income Tax Purposes, Even if No Probate

  37. Qualified Revocable Trust

  38. Who Makes the Election?

  39. Fiscal Year End

  40. Advantages of Fiscal Year: Timing Income and Expenses; Maybe Fewer Tax Returns

  41. Deadline: First Timely Filed Return, 15th Day of Fourth Month After End of Tax Year (Just Like April 15)

  42. P.S. Don’t Miss the Filing Deadline

  43. Duration: Two Years or Six Months From Closing Letter

  44. S Corporation Stock Holding Period

  45. Kenan Gain Offset by Losses

  46. The 645 Election Means a Complex Trust

  47. Separate Share Rule

  48. $200,000 Trust Income Beneficiary A 50 Percent ($100,000) Beneficiary B 50 Percent ($100,000) The Separate Share Rule

  49. Topic Three: The Surviving Spouse’s Purchase of an Interest in the Residence from Credit Trust

  50. Administrative Trust $1 Million Home Survivor’s Trust 50 Percent ($500,000) Credit Trust 50 Percent ($500,000) The Family Residence Problem

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