Additional Charitable Remainder Trust Considerations

We previously provided an overview of Charitable Remainder Trusts (“CRTs”) and suggested that now might be a good time to employ this strategy to avoid immediate capital gains taxes on appreciated or concentrated marketable securities positions. That overview has sparked a number of inquiries about this strategy. We followed the introduction with an article specifying who can and should be involved in the creation of a CRT. In this article, we look at specific questions about flexibility in choosing ultimate charitable beneficiaries, limits on how much of the charitable income tax deduction can be taken in a given tax year, what types of trust assets should be considered for contribution to a CRT, and what types should be avoided.

Choice of Charitable Beneficiaries

Using a CRT appeals to those who truly care about philanthropy, and who wish in some measure to give back to society a portion of their success. It is important that they have the utmost flexibility in choosing those charities that will eventually benefit from the assets held in the CRT.

One of the methods used for flexibility in choosing charities is to draft the CRT so that the trustmaker may change the charitable beneficiaries at any time. This right can be exercised during life or can be exercised in a trustmaker’s will or trust. In fact, this right to change charitable beneficiaries can be given to other income beneficiaries such as the trustmaker’s spouse or children. With this type of drafting, if a trustmaker’s charitable objectives change or if the charity is no longer able to meet the trustmaker’s needs, then a new charity or charities can be named.

There are certain requirements that must be met by a charity before it can be a “qualified” charity for purposes of a CRT. A charity must be qualified in order to ensure that the CRT’s benefits will be realized and that the assets will not be included in the trustmaker’s estate. Charitable beneficiaries can include public charities and operating and non-operating private foundations (often referred to as non-public charities). The only repercussion of naming non-public charities as the charitable beneficiary of a CRT is that the amount of the current charitable income tax deduction drops substantially regardless of the kind of property that is being contributed to the CRT. All charities that are named in a CRT must be qualified charities as defined in the Internal Revenue Code.

CRT trustmakers can name as many or as few charitable beneficiaries as they choose. There are a number of different methods that are used to name charitable beneficiaries. For example, a trustmaker could allocate a fixed percentage to a number of charities, such as: 40 percent to the Red Cross, 25 percent to the Boy Scouts, 25 percent to the Girl Scouts, and 10 percent to the American Legion. In another example, a trustmaker could name all or a portion to the trustmaker’s own charitable foundation or a donor advised fund, such as: 100 percent to the John and Sarah Doe Charitable Foundation, or 50 percent to the Sam and Betty Smith Foundation and 50 percent to the Fidelity Charitable Fund with advice given by the trustmaker’s children. Finally, trustmakers may leave all or part of the CRT assets to their local Community Foundation or to a National Foundation, such as: 100 percent to the National Foundation for Philanthropy, or 50 percent to the Community Foundation for Anne Arundel County and 50 percent to the National Heart Foundation.

Annual Limits on CRT Charitable Income Tax Deductions

A federal judge once said, “Trying to understand the various exempt organization provisions of the Internal Revenue Code is as difficult as capturing a drop of mercury under your thumb.” Because of the inordinate complexity of the Internal Revenue Code, it is impossible to succinctly give you an overview of this area of the law in this article. However, you should know these basics:

  • Gifts of long term capital gain property are deductible up to 30 percent of the trustmaker’s contribution base (i.e., his or her adjusted gross income computed without regard to the charitable deduction and any net operating loss carryback) if given to public charities, but only up to 20 percent if given to certain private foundations.
  • While cash gifts can normally be deducted up to 50 percent of the trustmaker’s contribution base if given directly to public charities, this increase limitation is not available for contributions to CRTs. For a gift of cash to a CRT, the most that can be deducted in any one year is 30% of the contributor’s contribution base.
  • If these limitations prevent a taxpayer from deducting the predicted value that will ultimately pass to charity from his CRT in the year of contribution, any deduction generated by making gifts to a CRT can be carried forward for an additional 5 years.
  • A Charitable Remainder Annuity Trust will not qualify for an income tax deduction if the probability exceeds 5 percent that the trust assets will be exhausted prior to passing to charity. (This restriction does not apply to Charitable Remainder Unitrusts.)

I find that the decision whether or not to proceed with CRT planning is not generally based on the amount of the charitable income tax deduction. It does not play a major role in most people’s decision-making process, possibly because the capital gain issue is of much greater concern. As in all planning, the motivation of each person differs, and it is the task of your advisors to make sure your planning fits these motives.

CRT Contributable Trust Assets

Using cash is the easiest method to fund a CRT. There are no initial capital gains tax savings when cash is given to a CRT, but the charitable deduction that can be taken is a maximum of 30 percent of taxpayer’s “contribution base.” If these limits keep the trustmaker from deducting the entire amount that is predicted to go to charity, he or she may carryover the unused amount of the deduction for up to five additional years.

The second easiest assets to give to a CRT are publicly traded securities. Because these securities are traded publicly, they are easy to value and can be readily sold. Charitable deductions can also be taken for CRT gifts of marketable securities up to a maximum of 30% of the contributor’s contribution base with any unused charitable deduction amount subject to carryover for up to five years.

CRTs can accommodate gifts of assets which are difficult to value as long as there is an independent trustee. These hard-to-value assets include:

  • Real estate
  • Closely-held stock
  • Tangible personal property

CRTs are generally not designed to accommodate gifts of:

  • Assets encumbered with debts (such as real property subject to a mortgage or deed of trust)
  • Business inventory
  • Limited partnership and limited liability company interests
  • Real estate investment trust interests
  • Options to acquire or sell securities
  • Installment obligations

Contributions of these types of assets could invalidate the trust or create significant income tax problems and should be avoided in almost every situation.

The Irrevocability of a CRT and the Gifts to it

A CRT is irrevocable; its essential terms cannot be changed. As a result, great care should be taken to make sure that every CRT document provides the exact instructions of its trustmakers and the precise handling of the innumerable contingencies that might arise in the future. It is imperative that these trusts be carefully designed and written by experts.

Just as the trust documents are irrevocable, the gifts that are made to them are also irrevocable. They are not conditional and cannot be taken back.

Additional gifts cannot be made to Charitable Remainder Annuity Trusts, but additional gifts can be made to any type of charitable remainder unitrust. Note, however, that, if circumstances change and a new CRT is desired, the provisions of the new CRT do not have to be the same as the original one. It may be a good idea to make a series of CRTs, especially if you believe that interest rates will be increasing over a long period ahead.

As you can gather from our discussions about the details of CRTs, they are powerful strategies if implemented by those who know what they are doing. They should only be created with the help of an experienced tax planner and trust attorney. If you think that a CRT might be a solution for your situation, I would be honored if you contacted me for assistance with this strategy.

© Richard Wright 2019


Nitty-Gritty Details About Charitable Remainder Trust Participants

We previously provided an overview of Charitable Remainder Trusts (CRTs) and suggested that they might be a good strategy to employ to avoid immediate capital gains taxes on appreciated or concentrated marketable securities positions. That overview has sparked a number of specific questions about this strategy. In this article, we review details about who can and should be involved in creating a CRT. We will follow with a final installment in this series detailing flexibility in choosing ultimate charitable beneficiaries, how the charitable income tax deduction is calculated, and what types of trust assets should be contributed to a CRT and what types should be avoided.

Who Can Be the Trustmakers and Income Beneficiaries of a CRT

Any CRT can have one or more trustmakers. Sole trustmakers are generally either unmarried or a married person who chooses to fund the trust with his or her separate property. Married spouses who own property jointly often elect to create a joint CRT where they are both trustmakers.

The trustmakers of a CRT also can be its income beneficiaries. A trustmaker’s spouse, children, grandchildren, or anyone else for that matter, can be an income beneficiary.

A CRT can have a sole income beneficiary, or it can have multiple beneficiaries. Multiple beneficiaries can receive their income concurrently or successively. “Concurrent” beneficiaries each receive payments. (For example, “I want the income of my trust paid equally to my spouse and me.”) A CRT can also name a succession of income beneficiaries. (“I’ll receive the income first; on my death my spouse will receive it, and after her death, my children will receive it equally.”)

If there are income beneficiaries other than the trustmaker or the trustmaker’s spouse, it is important to note that (as discussed in more detail below) a gift taxable transfer can occur. This, however, may be a good way to lock in high federal estate tax exemptions that will be halved in 2026. The IRS has already ruled that gifts made using the higher exemption will not be “clawed back” into a donor’s estate.

How Much Income Should Be Taken?

A concern of almost all who are considering a CRT is what percentage of income they should take out of their CRT each year. By law, this income percentage can be no less than five percent and can go as high as 50 percent, as long as the predicted value of the assets ultimately passing to charity are at least 10 percent of the value of the contributed assets. (For CRATs only, there is an additional requirement that there exists at least a one in 20 probability that the charity will receive some of the trust property end of the period of distributions to noncharitable persons.)

At first blush, it is the tendency of most people to opt for a higher percentage as representative of a greater benefit. However, on reflection they often change their minds because of two very significant reasons:

  1. The charitable income tax deduction is inversely proportionate to the income percentage: the higher the income percentage, the lower the immediate charitable tax deduction will be, and vice versa.
  2. By selecting a lower income percentage, the trust principal will appreciate faster and generate more income to the income beneficiaries over time. There is power in tax-free compounding of income and appreciation inside the CRT. A lower percentage taken as against a larger principal will often yield a greater overall income return than a higher income percentage over the same period. Taking out a great deal of income does not allow the principal to grow.

Be sure to look at a number of projections about the ultimate return before deciding on a particular CRAT annuity percentage or CRUT unitrust amount. If your income is likely to decrease in the future, you may want to vary the income amounts received at different times using a NIMCRUT.

Multiple Income Beneficiaries

Sometimes, a CRT names multiple income beneficiaries. Naming more than one income beneficiary creates some planning complexities. These can be positive or negative based on each individual’s personal situation.

A trustmaker’s spouse can be named as either a current or successor income beneficiary without any adverse tax consequences because of the unlimited marital deduction law. Most trustmakers routinely name their spouses as income beneficiaries.

If a parent names children as immediate income beneficiaries (“I want the current income beneficiaries of my CRT to be my children”) or concurrent income beneficiaries (“I want the income from my CRT split equally between me, my spouse, and my children”), then the trustmaker has made a gift to his or her children. The amount of the gift is the present value of their income interest based on their life expectancies. While this may seem like a very complex computation, the Internal Revenue Service has tables that can be used to readily ascertain the amount of the gift.

If a parent names children as successor beneficiaries (“I want my trust income paid to me and my spouse for our lives, and then equally to our children for their lives”), the gift to the children will either be subject to immediate gift taxation or to estate tax on the death of the survivor of their parents. The timing of the gift depends on how the CRT is drafted. While a federal gift tax return will be required for a lifetime gift to children, the practical effect of today’s $11,400,000 estate and gift tax exemption is that actual current taxation of this gift is unlikely to occur. The gift will, however, reduce the amount of this exemption available in the future.

When children or grandchildren are named as concurrent or successor beneficiaries, the present value of the amount that is ultimately going to pass to charity is going to be very low or nonexistent. As a result, the charitable income tax deduction is going to be very small or nonexistent. The CRT will not qualify for beneficial tax treatment if this amount predicted to go to charity is less than 10% of the amount initially contributed to the CRT. Therefore, this is not a good strategy to use when current income taxation is important to the overall planning.

Selecting Who Can or Should Be Trustee

You can be your own trustee. As trustee, you can, in effect, retain total control of your trust assets during your lifetime. If you choose to act as your own trustee, you must name a special independent trustee in your CRT–someone who is not related or subordinate to you. Having a special independent trustee is important when a CRT acquires hard-to-value assets such as business interests and real estate holdings. Because these types of assets can create conflicts of interest when the trustmakers are also the trustees, the special independent trustee acts to ensure that any conflicts are resolved. A special independent trustee is especially important if the trustmaker gives real estate or closely-held stock in a corporation to a CRT.

Almost all people who decide to create a CRT name themselves as trustee of their trusts. However, a few of them name corporate fiduciaries or children as their trustees. These decisions are based upon unique situations and are in the minority.

As you can gather from this discussion about CRT participants, there are a number of interrelated considerations to decide before obtaining the powerful benefits of a CRT. If you think that a CRT might be a valuable solution for your situation, I will be happy to assist you with this strategy.

© Richard Wright 2019


A.R.T. and Estate Planning

Assisted Reproductive Technology and Estate Planning: 
When Science Gets Ahead of the Law

Traditionally, Americans and the law have thought of families as mothers, fathers and their children conceived by conventional methods and brought to term in the mother’s womb.  However, since the 1978 birth of Baby Louise Brown after laboratory fertilization and implantation, individuals and couples have increasingly turned to Assisted Reproductive Technology (“ART”) to have children when impaired fertility, anatomical anomalies, or risks of future infertility or death otherwise make this difficult.  For these reasons and changes in family social structures, the birth of a child and the creation of a family relationship are no longer limited to instances resulting from human copulation.  In addition, children born as a result of changes in social standards (without ART) call to question whether biological parentage should always be the measure of family composition.  At the same time, however, like the mindsets of many, the law remains deeply rooted in concepts of family and descendancy that fail to consider these new methods of human gestation and family structures.  This paper suggests some considerations about these scientific and social developments and the law’s slow response that clients should contemplate in planning to achieve their hopes for future generations.

The Increasing Number of Non-Traditional Families

ART is the use of laboratory procedures that include the handling of human eggs or embryos to help a woman become pregnant other than by sexual intercourse.  ART includes techniques such as in vitro fertilization, egg and embryo cryopreservation for deferred use, egg and embryo donation, and the use of a gestational surrogate other than the ultimate child’s actual mother.  The U.S. Centers for Disease Control and Prevention (“CDC”) estimates that today, approximately 1.7% of all infants born in the United States every year are conceived using ART.  Between 1999 and 2013, the CDC reports that about 2% (30,927) of all ART “cycles” used a gestational carrier, resulting in some 13,380 deliveries and, because of the high incidence of multiple births, 18,400 infants.  Additionally, the U.S. Department of Health and Human Services Office of Population Affairs reports that there are now more than 620,000 cryo-preserved embryos in the United States awaiting future use.

As the science of ART develops, so too is the likelihood of future increases in the birth of infants as a result of ART and outside traditional family structures.  This past November, a Chinese biophysics researcher and former professor, He Jianjui, announced that he had used ART to prevent HIV vulnerability in the first genetically edited babies brought to term.  Although this announcement was met with widespread ethical condemnation, it illustrates a potential new use of ART and new questions about the descendancy of the ART produced children with genetic alterations.

According to the U.S. Census Bureau in 2011, there were approximately 13.7 million single parents in the United States; and those parents were responsible for raising some 22 million children.  Although these single parent families are presumed to be mostly biological in nature, single parent adoption and ART now allow persons to be single parents by choice.  In addition, since the Supreme Court’s 2015 decision granting same-sex couples the constitutional right to marry nationwide, same-sex marriages now allow couples of the same sex anywhere in the U.S. to have children where at least one spouse will not be the biological parent.

Longer Ranged Estate Planning

We have noted in the past about the benefits of estate planning on a multi-generational basis.  In particular, such multi-generational planning using life-long Inheritance Trusts protects inherited assets from future beneficiaries’ potential creditors and estate taxes.  Effective multi-generational planning, however, demands that we be able to identify who the beneficiaries of that planning are intended to be.  For decades we have used such terms as “child”, “children”, “descendants” and “issue” in our estate planning documents to define the persons for whom we are planning.  ART and new family structures may now be making these terms fuzzy and call to question who a trustmaker intends to benefit.  For example, is a baby born to a gestational carrier who brings another couple’s embryo to term a “descendant” or the “issue” of the gestational carrier?  How do we know whether a trustmaker intends to include among his descendants children conceived using donated sperm from his biological male offspring who are not married to their mother?  In the future, how much genetic engineering will result in children that a trustmaker would not intend to include among his beneficiaries?

Maryland’s Limited Response to ART Children and Non-Traditional Families

To date, legislatures and the courts have lagged in providing answers to these and similar questions.  Fortunately, since the 1940s in Maryland, unless a will clearly indicates otherwise, the words, “child”, “descendant”, “heir”, “issue”, or any equivalent term in a will includes a person who is adopted; and an adopted child is treated as a natural child of his adopting parent or parents.  Adoption, therefore is one means of clarifying a child’s ancestry unless a testamentary document declares otherwise.  Similarly, Maryland law is clear that a child conceived by “artificial insemination” of a married woman with the consent of her husband is the legitimate child of both of them; and a child born to parents who have not participated in a marriage ceremony with each other is considered to be the child of the mother, unless a testamentary document declares otherwise.  Less clear is the status of an ART child whose married father has not documented his consent to parentage and whether a person born to parents who have not participated in a marriage ceremony is deemed to be the child of the father.  In the latter situation, the person is legally deemed to be child of the father only if the father is judicially determined to be the father in legal paternity proceedings, has acknowledged himself to be the father in writing, “has openly and notoriously recognized the child to be his child”, or has subsequently married the child’s mother and orally or in writing acknowledged himself to be the father.

In 2012, the Maryland Bar brought to the Legislature’s attention a developing legal issue concerning the posthumous use of decedent’s genetic material: how long should the decedent’s estate be kept open to determine who his or her legatees or heirs would be?  To allow estates to be expeditiously concluded for decedents leaving genetic material for future use, Maryland law was amended to legitimate a child conceived from the genetic material of a decedent if the decedent consented in a written record to be the parent of a posthumously conceived child, if the child is born within 2 years of the decedent’s death, and if, with respect to any trust, the decedent was the creator of the trust and the trust became irrevocable on or after October 1, 2012.  Unfortunately, this law is therefore inapplicable to trusts other than those of the decedent leaving genetic material for posthumous use, where the decedent has failed to consent in writing to posthumous use of his or her genetic material, or where a child conceived from the genetic material is born more than two years after the decedent’s death.

The Importance of Declaring your Intent About ART Questions in Your Estate Planning Documents

Given the current status of the Law, determination of questions about how ART and non-traditional family structures affect the interpretation of estate planning documents will rest largely on judicial findings of trustmaker intent at the time his or her documents were created.  How is this possible if these issues have never been considered or if a testator or trustmaker leaves no written statement of intent?  When the Law provides no default position on these questions, the need is magnified for consideration of the potential issues involved and effective expression of how you feel they should be resolved.  If you disagree with the Law’s limited resolutions made to date for these issues, you need to say so in your testamentary documents because the Law’s resolution will apply unless you state otherwise.

For over two years, we have included in our pre-initial conference Estate Planning Questionnaires a page with questions about “Determining Family Relationships”.  (My hope was that this page would itself become a statement of intent that could be used as a future reference.)  I find, however, that few clients fill in answers on this page in the belief that these issues will never apply to their situations.  Where they do complete the form with respect to children conceived by ART, most will indicate that “[c]oncerns about ART children are unlikely to apply in my family.  I accept any judgments made in this context by applicable Maryland law.”  When I explain why I think this is short-sighted (in light of the statistics quoted above and my own family’s experiences), most recognize the need for considering these concepts, especially when planning on a multi-generational basis.  The concepts involved are so new that most have not come to grips with how these issues should be involved in their particular situations.

You need to know that these issues are far more likely to affect you, your family, and your estate planning than you think.  I hope that this paper will spark a sensitivity to these trends that will motivate you to express your intent in your documents about how these issues should be resolved if they affect your family and its membership.


Securing Your Family’s Future Using Inheritance Trusts: Part 1

PART 1: Inheritance Trusts and How They Work

The key to estate planning is understanding clients’ goals for the process. Generally, as a primary overarching goal, clients cite their desire to maintain their assets for as long as possible as a safety net protecting themselves and their loved ones from both anticipated and unforeseen threats and challenges. Nothing worries parents more than a creditor or divorcing spouse depriving their loved ones of the assets they worked so hard to pass on. Given this goal, it shouldn’t be any surprise that in our practice, once clients understand how Inheritance Trusts work, they choose to leave their estates to their loved ones by such trusts over 90% of the time.

Inheritance trusts have been with us for many years, primarily to manage funds for minors and others who would otherwise have trouble maintaining them. The basic idea was originally to separate management from benefit to protect the benefits for as long as necessary. The modern “wrinkle” has been the recognition that, by making the capable beneficiary the manager (i.e., the trustee) and by maintaining the trust in place, the protections and safety net remain in place for as long as possible without significant loss of beneficiary control or enjoyment.

In this installment, we describe Inheritance Trusts and explain how they work. To do so, however, we first have to review some basics:

The Law Underpinning our Use of Trusts

Trust law has developed over hundreds of years as an outgrowth of our laws of property and judicial support of fundamental fairness (equity). Under our law of property, the bundle of rights held by an owner includes the right to transfer his property in the manner he chooses. The law of equity will support and enforce such transfer as long as the transfer does not violate a paramount principle of public policy. In particular, the law grants primacy to the intent of the transferor in transferring his property, regardless of whether he transfers his entire bundle of rights in the property to one or more persons or whether he chooses to parcel out different rights in the property to different persons. Such differing rights could include the right to control how and/or how long property is used in a particular fashion, the right to receive the benefits of the property as so utilized, and the rights to transfer the property in the future and to administer the proceeds of such future transfer. This potential, indeed likelihood, for court enforcement of the transferor’s intent is the fundamental “glue” that underpins the use of trusts.

A trust is really nothing more than a transfer of property that separates the owner’s bundle of rights in the property at the time of transfer. In the case of an Inheritance Trust, that separation generally occurs after someone’s death, most likely, when a beneficiary might otherwise have inherited the property outright from the decedent.

What is a trust?

A trust is a court enforceable relationship established by a property owner when he transfers property to someone who will thereafter own and use the property according to a set of instructions that binds the new “owner” as to what he can or cannot do with the assets subject to those instructions. This relationship generally involves three types of parties: the original owner who is called a “settlor” or “Trustmaker”, a “Trustee” who will thereafter own the property and put it to use, and a “Beneficiary” who will now or at some time in the future enjoy the benefits of the property while it is owned by the Trustee. (Please note that although the words, “Trustmaker”, “Trustee”, and “Beneficiary”, are used here in the singular, there may be more than one Trustmaker, Trustee, and/or Beneficiary; and a person may simultaneously hold one or more of these capacities with respect to any trust.)

The Trustmaker is the party who establishes the trust by transferring property to the Trustee and by creating the instructions (i.e., in a will or trust agreement) that control that property in the Trustee’s hands. The Trustee is the party who actually has title to the trust property and who carries out the instructions. As the name suggests, the Beneficiary is the person who is intended to benefit from the trust assets and the Trustmaker’s instructions. It is the Trustee’s legal fiduciary duty to carry out the Trustmaker’s instructions for the benefit of the Beneficiary. If he or she fails to do so, the Trustee’s personal wealth is subject to court order to rectify any breaches of the terms of the trust (i.e., the Trustmaker’s intent).

If the Trustmaker retains the right to take back the property initially transferred to the Trustee or to change the instructions that control that property in the Trustee’s hands, the trust is called a “revocable trust”. If the Trustmaker expressly fails to retain or no longer has such rights (e.g. by reason of his death), the trust is called an “irrevocable trust”. Additional distinctions exist depending on when the trust is created: If the owner/Trustmaker establishes a trust during his lifetime, the trust is called a “lifetime”, “living”, or “inter vivos” trust. If the trust is created after the owner/Trustmaker’s death (e.g., a trust created under the Trustmaker’s will), the trust is generally styled as a “testamentary” trust. Absent express language in the trust document to the contrary, a Maryland lifetime or living trust is deemed to be a revocable trust. Since the Trustmaker is no longer alive to change his instructions, a testamentary trust will be irrevocable unless a court finds that the Trustmaker’s instructions (intent) have become impossible to achieve or that a unanimously agreed upon modification of trust terms is not inconsistent with a material purpose of the trust.

Examples Of Inheritance Trusts

Let’s say you and your spouse would like to establish Inheritance Trusts for your two daughters after both your deaths. You and your spouse will first create a will or living trust as a Trustmaker. Each of these documents will contain instructions to establish trusts for your daughters together or for each of them and will transfer your property to the Trustees of those trusts after both of you have passed.

You believe your oldest daughter is already prepared to manage the assets transferred to her trust, so you name her as the trustee of her trust so that she can control that property and you give her discretion as to when she can distribute property income (or the trust property itself) to herself or her descendants.

You would like to see your younger daughter grow into her future role as Trustee, so you name her as a Co-Trustee of the trust (with her sister or another trusted family member or friend as the other Co-Trustee) until your younger daughter reaches a certain age (e.g., 30). At that time, the trust instructions say that she will become her trust’s sole Trustee. While your younger daughter serves as a Co-Trustee with the consent of her Co-Trustee required to make decisions, your trust instructions require the Co-Trustees to distribute certain amounts to her annually so that she can count on receiving those annual benefits.

Once each daughter becomes sole Trustee of her respective trust, each will act as caretaker of the inheritances and manage their investment until they are ready to pass them on to their own children and/or more remote descendants.

In the meantime, while her trust remains in existence, you state in the trust document for each daughter that no right to benefit from the trust may be transferred by any beneficiary as such, and no creditor of a beneficiary may attach trust property or any trust interest. Trust property will remain transferrable by the Trustee, but under Maryland law, “[a] creditor may not . . . reach or otherwise compel distribution of the beneficial interest of a beneficiary that is a trustee or the sole trustee of the trust, . . . except to the extent that the interest would be subject to the claim of the creditor were the beneficiary not acting as cotrustee or sole trustee of the trust.” Subject to certain limited public policy exceptions for unpaid taxes, child support, and alimony, each daughter’s interest in the trust and the trust property itself is therefore protected from claims by potential creditors.

Stay tuned for future installments

In future installments of this series about Inheritance Trusts, we will explain these and other benefits of using Inheritance Trusts in your planning. We will also explain the process of receiving an inheritance in trust, as well as titling trust assets, setting up trust accounts, and the obligations of Trustee-beneficiaries to their other or future beneficiaries.

If in the meantime you would like to speak with us about securing your own plans for the future, please give us a call at (410) 224-7800.

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Securing Your Family’s Future Using Inheritance Trusts: Part 2

PART 2: The Benefits of Using Inheritance Trusts

In part 1 of this series, we described Inheritance Trusts and how they can achieve clients’ desires to maintain their assets for as long as possible as a safety net protecting themselves and their loved ones from both anticipated and unforeseen threats and challenges. In this installment, we go over the particular benefits they offer at relatively little cost.

Benefits of Receiving Your Inheritance in Trust

There are three significant benefits to receiving your inheritance in trust rather than outright: (1) asset and creditor protection, (2) transfer (i.e., estate, gift, and GST) tax minimization, and (3) disability planning.

Asset Protection

As we discussed in Part 1 of this series, inheritances held in Inheritance Trusts are typically what are commonly referred to as “spendthrift” trusts. This term comes from the trust provisions that prevent a beneficiary from being able to pledge, assign, or otherwise anticipate their interest in the trust before he or she actually receives it. Because the beneficiary has no right to receive trust distributions ahead of the time when the Trustee (who may be the beneficiary himself but who acts in a fiduciary, as opposed to an individual, capacity) actually distributes them to him, the beneficiary’s creditors similarly cannot reach his trust interest until it is actually in his possession. As a result, his individual judgment creditors will not be able to reach the assets owned by the beneficiary’s Inheritance Trust unless they are creditors of the trustee (in his or her separate role as trustee) or creditors of a beneficiary with respect to alimony, child support, or taxes. In other words, the Inheritance Trusts’ assets are protected from lawsuit judgments against the beneficiary (or the beneficiary’s descendants or siblings).

Asset protection is important in a litigious society where the divorce rate hovers around 50%. The value of trust asset protection cannot be emphasized enough, especially since public policy generally makes it impossible for an individual to obtain this level of asset protection with respect to his or her personal assets. Spendthift trust creditor protection is made possible by the law’s view that, as long as he does not violate some important public policy in doing so, the manner in which a Trustmaker ties up his assets after death is his business and an entitlement resulting from his ownership of these assets in the first place. Spendthrift trusts are not deemed to be violative of public policy.

Future Transfer Tax Minimization

Inheritance Trusts also implement important estate and generation-skipping transfer tax planning. Under this type of planning, the assets in an Inheritance Trust will not be included in the beneficiary’s gross estate for federal or state estate tax purposes, no matter how much they grow in value. While the beneficiary can control the trust as its Trustee and has powers in this regard that are quite broad, those Trustee powers are by design insufficient under federal and state law to make them the functional equivalent of outright ownership. The same is true as to inherited rights as a trust beneficiary. As a result, while retained in the Inheritance Trust, the trust assets are not taxed for estate tax purposes as a part of beneficiaries’ respective taxable estates, and they can be passed on to the next generation (i.e., the Trustmaker’s descendants) without being subjected to estate tax.

An Inheritance Trust can be passed on to the next generation tax-free because it is exempt for the federal generation-skipping transfer tax (“GST Tax”). This is a tax equal to the federal estate tax that becomes payable when trust assets are distributed to beneficiaries more than one generation below the person in whose taxable estate the trust assets were last included. In essence, the federal GST Tax is designed to capture the estate tax that would have been payable from a generation where estate tax on trust assets is skipped. To limit the reach of this GST Tax on “smaller” estates, Congress allows an exemption from GST Tax for each individual taxpayer. Inheritance Trusts can be specifically designed to take advantage of all of the GST Tax exemptions of both the Trustmaker and the Trustmaker’s spouse. (The current GST Tax exemption available to a decedent is $5,450,000, but this amount will be indexed for future inflation. In the case of spouses, those exemptions can be doubled with careful planning). Unfortunately, unused GST Tax exemptions are not portable from a prior spouse to his survivor, so each spouse will need to use an estate plan utilizing Inheritance Trusts to take advantage of his or her GST Tax exemption.

Beneficiary Disability Planning

While a beneficiary is alive and able to manage his finances, he can serve as Trustee of the Inheritance Trust set up for his benefit. In addition, Inheritance Trusts often authorize the beneficiary to determine who will succeed him as Trustee when he is no longer willing or able to serve. To do so, the beneficiary will have to nominate a person, persons, or entity as Successor Trustee in a written document executed with the level of formality required in the trust instructions. If the beneficiary fails to nominate a successor trustee, the Trustee of the Inheritance Trust will be as the Trustmaker originally nominated in the trust by default. Please note that if a beneficiary wants his spouse to serve as Trustee of his Inheritance Trust if he cannot do so, he will usually need to create a writing that specifically makes this designation. To avoid complications of any potential divorce, a spouse is not generally otherwise named as a part of a line of succession.

In any event, if the beneficiary becomes disabled, management of his trust assets for his benefit is assured without court appointment of a guardian of his property or the ambiguities of enforcing a power of attorney.


In the final installment of this series about Inheritance Trusts, we will explain the process of receiving an inheritance in trust, as well as titling trust assets, setting up trust accounts, and the obligations of Trustee-beneficiaries to their other or future beneficiaries.

If in the meantime you would like to speak with us about securing your own plans for the future, please give us a call at (410) 224-7800.

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Securing Your Family’s Future Using Inheritance Trusts: Part 3

The Logistics of Inheritance Trusts

In parts 1 and 2 of this series, we described Inheritance Trusts and how they can achieve clients’ desires to maintain their assets for as long as possible as a safety net protecting themselves and their loved ones from both anticipated and unforeseen threats and challenges. In this installment, we go over the mechanics of setting up and operating an Inheritance Trust.

Titling Trust Assets and Setting Up Trust Accounts

When an Inheritance Trust is established, its Trustee (and in particular, a Trustee who is also a beneficiary of the trust) will need to keep inherited assets (as well as assets acquired in the future using the proceeds of these inherited assets) segregated from his personal assets. He does so by the titling of trust property and by using a separate trust taxpayer identification number.

Title to all newly inherited trust assets (and the proceeds of these inherited assets) should be kept in the name of the Inheritance Trust at all times. We prefer the following format for titling assets in the name of an Inheritance Trust:

“Gloria Sample Jones, Trustee of the Gloria Sample Jones Inheritance Trust under Article Twelve of the John Sample Living Trust dated December 24, 2008”

Obviously, each beneficiary Trustee would insert his or her name in this language and the particulars of the source document when titling inherited assets to his trust. However, to avoid future problems with banks and financial houses, it is important to use a title that references the document that states the authority for the trust, the trust administration provisions, as well as the source for Trustee powers and succession provisions.

Merging Separate Inheritance Trusts from Each Parent

Often, children of the same parents will technically receive an Inheritance Trust from each parent. To avoid having multiple trusts, the source document will generally have a merger clause allowing the Trustee to merge multiple trusts with the same beneficiaries and trust provisions. As such, the substantially identical trusts set up by each parent can be merged by having the Trustees sign what is known as a Trust Merger Agreement. Thus, two separate Inheritance Trusts (i.e., one received each parent) are consolidated into a single Inheritance Trust for the beneficiaries involved.

Utilizing the Assets of An Inheritance Trust

In order to provide the asset protection and tax benefits described in Part 2 of this series, there need to exist certain technical restrictions on beneficiary Trustee access to an Inheritance Trust’s property. However, beneficiary Trustees need not feel particularly limited by these restrictions because these provisions are purposefully drafted to be as expansive as possible without causing tax effect. The beneficiary Trustee will generally have complete authority as to the investment of trust property and broad authority as to when to make distributions.

A Trustee of an Inheritance Trust may make distributions of trust property to trust beneficiaries (including himself) for their education, health, maintenance or support. These terms have very broad meanings as demonstrated below:


Includes payments for tuition, fees, books, supplies, living expenses, travel and reasonable spending money related to private pre-school, kindergarten, elementary school, middle school, college preparatory high school, undergraduate college, graduate college, and vocational, professional, or other specialized training


Includes payments for medical services, prescription/over-the-counter drugs, and/or medical equipment, and, in general, anything directly promotive of the good health of trust beneficiaries

Maintenance or Support

Includes payments to keep the beneficiaries living in the manner that is reasonable given the amount of funds which can be devoted to this purpose, i.e., anything reasonably required to maintain the beneficiary’s lifestyle. (In addition, Trustees are often given the discretion when and whether to take the beneficiary’s other resources into consideration in making such lifestyle maintenance distributions.)

The principal limitation here is that Inheritance Trust assets may not be used to benefit persons or entities other than those persons who are currently the beneficiaries designated by the Trustmaker.

Types of Property an Inheritance Trusts Can Own

In general and unless otherwise specified in the Trustmaker’s instructions, Inheritance Trusts may own any type of property that is readily available to the public, such as: real estate, farming/ranching businesses, stocks, bonds, commodities, options, metals, partnership interests, limited liability company interests, and other types of closely-held business interests. The limitations here are that the Trustee is obligated to the beneficiaries to invest prudently and to avoid self-dealing.

Inheritance Trusts may also own life insurance or annuity products. However, you should consult with an estate planning attorney prior to purchasing a life insurance or annuity product with an Inheritance Trust. Notwithstanding trust provisions, if the Trustee of a trust owns life insurance on his own life, that life insurance can be made taxable as a part of his estate.

Other Ongoing Trustee Duties

In addition to the duties discussed above, Trustees of Inheritance Trusts need to remember that they now have fiduciary duties to others to be responsible for many of the same tasks they would have been doing if they owned the property in their own name (rather than as Trustee of the Inheritance Trust), such as:

Insuring trust property against potential hazards/casualties;
Keeping records of the trust’s financial history; and
Filing annual federal and state income tax returns for the trust on April 15th of every year.

It is important to note that Inheritance Trusts will each be separate income taxpayers and will require their own respective income tax returns. To this end, Trustees need to use separate federal tax identification numbers for their trusts. Because trusts pay federal income tax based on very compressed tax brackets (in 2017, a trust’s undistributed income is taxed at 39.6% once that income totals only $12,500), Trustees will probably want to do some distribution planning to make sure that as much of this income as possible is taxed at lower rates available to trust beneficiaries.

Trusts currently written as a Maryland trust are also subject to Maryland income tax. However, beneficiary Trustees who reside outside of Maryland may change the taxing state if the trust is being administered outside of Maryland and was not created under the will of a Maryland resident. One of the first administrative activities a beneficiary Trustee might want to consider undertaking is an examination with a local accountant or attorney as to where it makes the most sense to have the trust taxed.

Finding Assistance

Much of this may seem new to you, but it is not “rocket science”. We are in business to help our clients plan their Inheritance Trusts and to help with their implementation and administration. If you would like to speak with us about achieving your goals for the future, please give us a call at (410) 224-7800.

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Protect Your Family From Unforeseen Creditors

Caring for a loved one can be quite an undertaking for you and your family. In light of this, we want you to be prepared for circumstances such as debts accumulated from unforeseen creditors. Here at The Wright Firm, we provide guidance and resources to protect your loved one’s hard-earned assets from various unforeseeable creditors, including business creditors, tort creditors, divorce, and nursing home costs. Asset Preservation covers protected inheritance trusts, planning for Medicaid and long term care, and special needs trusts. To get started in protecting your assets for your loved ones, please call us at (410) 224-7800 or visit our website,