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Top Ten Trust Tricks

                       TOP TEN TRUST TRICKS

                              Part I
                       THE BASIC TAX TRUSTS

                        JERRY FRANK JONES
                            Austin, Tx
                         Copyright  1995

                       ALL RIGHTS RESERVED

Trusts are the greatest invention since sliced bread.  Trust are
more flexible than a politician.  Trusts accomplish  a variety of
estate planning purposes.

A trust is simply one person's promise to hold property for the
benefit of another.  A trust can go into effect during your life
(an intervivos trust) or at your death through your will (a
testamentary trust).  An intervivos trust can be revocable (you
can change your mind and shut it down or change its terms) or it
may be irrevocable (make sure you have it right because you can't
change it).

The basic estate tax building blocks are:

1.   By-Pass Trust (also known as "Credit Equivalent Trust" or
     "Credit Shelter Trust".  
          The Federal Estate Tax allows a person to pass during
     his life and upon his death, a total of $600,000 to any
     person or persons without taxation.  If a husband and wife
     have a community estate of  $1, 200,000, they can pass all
     of that to their children without taxation by using a By-Pass
Trust.  On the death of the first spouse, rather than
     leaving  $600,000 to his spouse, he leaves it to a By-Pass
     Trust.  The By-Pass Trustee can be the surviving spouse. 
     The beneficiaries during the life of the surviving spouse
     can be the surviving spouse or the surviving spouse and the
     children.  The surviving spouse can have a special power of
     appointment.  Then, on the death of the surviving spouse the
     property goes to the children without taxation.  It is not a
     part of the surviving spouse's gross estate (it by passes
     her estate for purposes of taxation).  Thus, each spouse has
     transferred $600,000 to their children without taxation.  

2.   Marital Deduction Trust. Like the By-Pass Trust, these can
     be created in your will or in an intervivos trust ("Living
     Trust" or "Loving Trust").  The estate tax law allows you to
     give as much property to your spouse as you want without any 
     taxation (the unlimited marital deduction).  Any property
     qualifying for the marital 
     deduction, to the extent it is around,  must be included in
     the gross estate of  the 2nd spouse:  Uncle Sam wants at
     least one opportunity to collect his tax.  

     This can be done by an outright gift, but it can also be
     done by trust.  The two most common marital deduction trusts
     are the "QTIP" trust  (Qualified Terminal Interest Property)
     and "QDOT" trust (Qualified Domestic Trust ).  A QTIP Trust
     typically arises there are children by a prior marriage. 
     The QTIP must give the surviving spouse all of the income
     for life and may allow principal invasion.  On her death, it
     passes to the children.  The QDOT Trust is required if your
     spouse is a foreign national.  IRS wants to make certain
     that they are able to collect their tax on the trust after
     the surviving spouse has died.  In the past, they have had
     problems with surviving spouses moving back to their
     original country and never being able to find the property
     for subsequent taxation.  Thus, to get the marital deduction
     for a foreign national surviving spouse, the property must
     be in a trust that insure its ultimate taxability. 
     Primarily, it requires a responsible trustee that is a U.S.
     corporation or citizen.

     The Marital Deduction Trust and the By-Pass Trust are the
     basic building blocks of any estate plan for a couple with a
     taxable estate ($600,000 or more).

3.   Generation Skipping Trust.    Like the By-Pass Trust, this
     allows avoidance of  taxation of your assets again when your
     children die.  The typical Generation Skipping Trust also
     includes the by pass provisions discussed in 1. above.  The
     Generation Skipping Trust says,

          I put "X" dollars in trust for my wife during her life. 
          On her death, the trust shall continue for the benefit
          of my child.  During my child's life, my child can be
          the trustee, can receive the income, can receive
          principal under an ascertainable standard and can have
          a special power of appointment.  Then on my child's
          death, the property passes to my grandchildren.

     This trust is not a part of the child's gross estate and is
     not taxable on the child's death.  This property while
     subject to tax on the original death, has not been subject
     to tax on the  spouse's death or the child's death.  It is
     not subject to tax again until the grandchildren die.  This
     is sometimes referred to as a "Dynasty Trust."

                             Part II
                        THE GIFTING TRUSTS

                        JERRY FRANK JONES
                            Austin, Tx
                         Copyright 1995

                       ALL RIGHTS RESERVED

Set out below are  three  trusts most commonly established during
a person's life ("inter vivos" trusts).  Each of these will
reduce the ultimate estate tax.  

1.   Qualified Minor's Trusts (aka 2503c Trust).  Federal gift
     tax law allows a gift of $10,000 per donor per donee per
     year of present interest gifts.  For example, a husband and
     wife can give $20,000 to each of their children during 1995; 
     then they can give another $20,000 to each child in 1996.  

     The "present interest" requirement means that the recipient
     must be able to use the property immediately.  You must hand
     the $10,000 to Sonny immediately.  You cannot give the
     $10,000 to Uncle Joe to hold and turn over to Sonny next
     year or when he turns 30.  However, an exception is made for
     minors.  The law recognizes that we cannot and do not want
     to give $10,000 to a child.  Thus, the exclusion can be
     obtained by putting the $10,000 into a Qualifying Minor's
     Trust (sometimes called a 2503c trust).  To qualify the

          a)   must have only 1 beneficiary; 

          b)   must terminate when the beneficiary reaches age 21

          c)   if the child dies before age 21, the trust must
pass to the beneficiary's               estate or he must have a
                                        general power of

     The advantages of  this transfer are great: The income may
     be taxable at the child's lower rate, no charge is made
     against the parent's $600,000 exemption equivalent, and the
     transferred asset will not be taxed on the parent's death.

2.   Irrevocable Life Insurance Trusts.  Because life insurance
     often is of little use to the owner during his life,  it is
     a great planning asset.  If you have life insurance that you
     do not presently need (it is not security for a loan or you
     do not expect to borrow from the cash surrender value) and
     you have a taxable estate, it should be transferred to a
     life insurance trust. 

      If you transfer the policy to a properly crafted trust, it
     will not be a part of your gross estate on your death. 
     Further, you can typically transfer it to the trust for a
     fraction of its death benefit value.  The transfer value is
     the amount an insurance company would charge for the policy
     on the date of the gift (the "interpolated terminal
     reserve").  Generally, this translates into the cash
     surrender value plus the unearned premium.  

     For example, a typical $100,000 life insurance policy might
     have a cash surrender value of only $5,000 and an annual
     premium of $1,000..  While slightly oversimplified,
     transferring that life insurance policy to a trust
     immediately after the annual premium would represent a gift
     of only $6,000.  However, on  death, you have avoided
     taxation on $100,000.

     To maintain the policy the insured can transfer money to the
     trust.  However,  extreme caution should be exercised.  IRS
     hates how effective these trusts are and has a long history
     of challenging how they are administered.  Basically gifts
     should be made at a time other than the due date of the
     premium and for amounts other than the premium amount. 
     Under no circumstances should the insured pay the premium
     directly; nor should the trustee endorse the check over to
     the insurance company.

     The transfer of the original policy and the subsequent gifts
     of money to the trust are not present interests.  The
     beneficiaries don't get anything until the insured dies. 
     But, the present interest exclusion can be obtained if
     "Crummy" provisions are included.  The "Crummy" provisions
     (named after the IRS court case involving Dr. Crummy's
     trusts) allow the beneficiaries to withdraw the gifts if
     they want to.  Allowing immediate withdrawal turns the gifts
     into "present interests."

     The beneficiaries rarely exercise this right.  They know if
     they do, there will be no more gifts.

3.   Charitable Remainder Trusts.  This is an increasingly
     popular device.  It allows a person to make charitable
     gifts, to enjoy an income tax deduction currently and to
     insure income to themselves.  In its simplest form, a person
     transfers $500,000 of property to a Charitable Remainder
     Trust.  The terms of the trust indicate how much the grantor
     wants to receive each month (or each year) for the rest of
     his life.  Then, taking into consideration the age of the
     grantor and the current interest rate, the value of the
     remainder interest is calculated.  

     The amount of the remainder interest is currently deductible
     on the income tax return.  For older people without
     children, this is sometimes the very best planning technique
     available.  Its first cousin is the charitable annuity. 
     There a gift is made to a charity in exchange for the
     charities' promise to pay a certain amount per month for the
     life of the beneficiary.  With both of these devices, for
     older people it is possible that they can receive more
     income per month than retaining the property in a CD. 

                       TOP TEN TRUST TRICKS
                              PART 3
                        THE NON TAX TRUSTS

                        JERRY FRANK JONES
                            Austin, Tx
                         Copyright 1995

                       ALL RIGHTS RESERVED

There are reasons for creating a trust that have nothing to do
with taxation.  The trusts set out below illustrate how important 
trusts can be for even a person of modest means.

1.   Ancillary Trust.   If you have real estate in another state,
     an Ancillary Trust can save you the cost of a second
     probate.  If you live in Texas and all of your property is
     in Texas, your will can be probated in Texas.  However, if
     you also own a condominium in Colorado, you need some means
     of transferring title.  Usually that is the probate process.

     You can avoid the second probate by placing the Colorado
     condominium in a Texas trust (the ancillary trust).  This is
     a trust created under Texas law;  then the Colorado property
     is deeded to the trust.  Then, at your death, the title to
     the real estate is in the trust and not in your name.  As a
     result, no probate is needed in Colorado:  The owner (the
     trust) did not die.  And, in fact, all the new trustee has
     to do to transfer or otherwise deal with the property is
     prove his successorship and sign the necessary documents.

2.   Standby Trust.  It is a fact of  modern life that over 50%
     of us will go through a period at the end of our lives where
     we cannot care for our own affairs.  It is an important part
     of estate planning to anticipate this vulnerable period by
     making prior arrangements for the care of our assets.  The
     simplest of alternatives is to create a durable  power of
     attorney where you appoint someone to have control over your

     A more sophisticated technique is to create a power of
     attorney that (among other things) gives the authority to
     transfer assets to a trust.  And then to create a trust that
     has only a nominal asset transferred to it at the present
     time.  The understanding is that if and when you become
     disabled, that the power of attorney holder will transfer
     all of the assets to the trust for management.  Because
     third parties are more comfortable with trusts, standby
     trusts are generally more effective than powers of attorney. 
     Banks and other institutions will more readily deal with a
     trust and trustee than persons holding powers of attorney. 
     Further, with trusts you can in more detail spell out the
     relationships and duties between the trustees and the

3.   Management Trust.  Sometimes a person merely wants someone
     else to manage their assets for them.  Quite often this is
     why  a trust department is hired.  The trust created that
     spells out the duties and relationships between the trust
     department and the customer is a management trust.  It makes
     clear that the trustee is responsible for managing the

     Sometimes people use this trust to "train" their children to
     manage assets.  It is an excellent vehicle to teach the
     child how to manage money without losing control.  If the
     child is not careful or acts contrary to the parents wishes,
     the trust can be revoked or the child removed.

4.   Medicaid Trusts.  To qualify for nursing home benefits under
     the federal medicaid program, you must have very limited
     resources. What is and what is not a "resource" is
     established by the medicaid guidelines.  In 1993 Congress
     enacted a series of new laws effecting eligibility for these
     benefits.  Before 1993 only a testamentary trust or a
     special needs trust was a non-resource for medicaid
     purposes.  Now there are several that are not counted
     against a person in qualifying for government benefits.

     a.   Testamentary Trusts.  As with the prior law, any
          properly drawn trust created by will is not a resource. 
          Thus a husband can establish in his will a trust for
          the benefit of his wife and not have the trust assets
          count against her when qualifying for nursing home
          benefits.  These assets can be used for the wife,
          within certain limits, to supplement her government
          funded care.

          Medicaid has an income test as well as a resource test. 
          If you receive too much income (or other benefits)  in
          any one month, you lose your benefits for that month. 
          All distributions from the trust to the spouse (or for
          her benefit) is counted as income.  In making
          distributions the trustee has to be careful not to
          exceed the guidelines in any one month.

     b.   Under 65 Disabled Trusts.  A disabled person under age
          65 can now create a trust for himself (or herself) and
          not have those trust assets counted as resources.  The
          disabled person can have limited distributions from the
          trust during his life like those allowed for
          testamentary trusts.  To the extent trust assets are on
          hand at the death of the recipient, the government is
          entitled to recover its medicaid expenditures from the
          trust.  Oddly enough once a disabled person reaches age
          65 they cannot create this trust.

     c.   Miller Trusts (aka QUIT trust).  As noted before, to
          qualify for medicaid not only must your resources be
          limited but also your income.  Sometimes this results
          in a person not being eligible for nursing home
          benefits, but not having sufficient funds to pay for
          nursing home care.

          The new federal statute now allows the transfer of all
          income into a trust. The trust can be used to
          supplement the recipient during his life as discussed
          above.  However,  on the recipient's death, the
          government must be reimbursed.

     d.   Nonprofit Association Trusts.   The 1993 act also
          allows a recipient to transfer his or her assets into a
          pooled asset trust established by a nonprofit
          association for disabled persons.  Again,  any amounts
          on hand at the recipient's death are subject to

     e.   Disabled Child Trusts.  Finally,  the 1993 act allowed
          a parent to transfer assets to a trust for the sole
          benefit of a disabled child.  The parent would then be
          immediately eligible for nursing home benefits.  The
          child would be entitled to distributions from the trust
          for the child's lifetime.  On the child's death, the
          govenment would again be entitled to reimbursement.

     f.   Special Needs Trusts.  As before the 1993 act,  a third
          party can create a special needs trust for the medicaid
          beneficiary.  Typically this allows the trustee (in its
          sole discretion) to make distributions for the benefit
          of the recipient for needs not provided by governmental

     Mandatory Recovery.  Prior to 1993 each state could
     establish its own rules about recovering medicaid benefits. 
     Now Texas is obligated to pursue reimbursement from the
     probate estate of the medicaid recipients.  

     To date a person's home has not been counted as a "resource"
     in determining eligibility.  Further,  until 1993 the home
     was allowed to pass to the recipient's heirs at death
     without reimbursment. You may recall that several years ago
     someone in the State legislature proposed recovering those
     expenses from the recipient's home on their death.  That
     proposal met with a firestorm of objection and was quickly
     withdrawn.  No one has even suggested taking the home since. 
     But now with the mandatory recovery requirement that may

     This area has been complicated and has now become even more
     so.  However, there are a great many opportunities for

     As you have seen, trusts are wonderful devices with a great
deal of flexibility.  They are most useful when coupled with a
thoughtful plan about managing your estate and planning its
ultimate disposition.


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Copyright 1998 by Glenn M. Karisch     Last Revised May 15, 1998