CHERRY CREEK CORPORATE CENTER
4500 CHERRY CREEK DRIVE SOUTH #600
DENVER, CO 80246-1500
303.322.8943
WWW.WADEASH.COM
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IRREVOCABLE TRUST
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CAUTION:
The purposes of this memorandum are to assist you and the trustee of your irrevocable trust in:
1. Creating your irrevocable trust and transferring assets to the trust;
2. Setting up procedures to give required notices to beneficiaries;
3. Maintaining records for the trust; and
4. Filing any required tax returns.
This memorandum can only provide general information. If you or your trustee have any questions,
please contact us.
DISCLAIMER
Material presented on the Wade Ash Woods Hill & Farley, P.C., website is intended for informational
purposes only. It is not intended as professional service advice and should not be construed as such.
The following memorandum is representative of the types of information we provide to clients when we
prepare estate planning documents for them. However, this material may not be used by every attorney
in the firm in every case. The attorneys at Wade Ash view each case as uniquely different and, therefore,
the information we provide to our clients may be substantially different depending on the clients needs
and the nature and extent of their assets.
Any unauthorized use of material contained herein is at the users own risk. Transmission of the informa-
tion and material herein is not intended to create, and receipt does not constitute, an agreement to create
an attorney-client relationship with Wade Ash Woods Hill & Farley, P.C., or any member thereof.
INTRODUCTION
Part I of this memorandum discusses the documents that are required to create your irrevocable trust.
The most important of those documents is the trust agreement, but there are other documents that
must be signed and filed. The purpose of the trust is to receive gifts that qualify for the gift tax
annual exclusion, and to avoid estate taxes being imposed on the trust assets at your death. To obtain
this estate tax advantage, there are a number of formalities that must be observed, both in the
creation of the trust and in the continuing administration of the trust.
Part II of this memorandum discusses the procedures that the trustee must observe in notifying the
beneficiaries of their withdrawal rights. Such rights are granted to the beneficiaries to minimize the
gift tax consequences of creating the trust. Part II also discusses the filing of any necessary fiduciary
income tax returns.
PART I -- CREATING YOUR IRREVOCABLE TRUST
Trust Agreement
A separate summary was prepared outlining the terms of your irrevocable trust agreement. In
general, the agreement tells the trustee how to administer the trust property. You cannot change the
trust or any of its terms after it is executed and funded. It must be irrevocable in order to give you
the advantage of not having the trust assets taxed in your estate at your death.
Trust Registration Statement
Because the trust is irrevocable, the trustee is required under Colorado law to register the trust with
the district court of the county in which the principal place of administration is located. The
principal place of administration is where the trustee usually keeps the records pertaining to the trust,
such as the trustees usual place of business or the trustees residence. The purposes of the trust
registration statement are to give the current beneficiaries notice of the creation of the trust, and to
establish the court that has jurisdiction to hear any dispute concerning the trust.
If the trust is administered in Colorado, the trustee must sign a Trust Registration Statement and file
it with the court. The filing fee is currently $163. A copy of the Trust Registration Statement must
be sent to each beneficiary. If the trustee is not located in Colorado, this form will not be used, and
the law of the state where the trustee keeps the trust records will control any registration require-
ments.
Taxpayer Identification Number
Because an irrevocable trust is a separate entity for income tax purposes, the trust must obtain its
own taxpayer identification number unless it is a grantor trust, in which case it can use the
grantors social security number. We will apply for the number on the IRS website, and notify you
of the number assigned to the trust. You should then use this number on any accounts opened in
the name of the trust.
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Transfer of Assets to the Trust
When you make cash gifts to the trust, you should simply write a check to the trustee of the trust, and
have it deposited into the trust account. The account should be titled in the name of the trust, with
the signers on the account being the trustee, or co-trustees, if applicable. If there are co-trustees, then
they usually can delegate signing authority among themselves to avoid requiring all to sign every
check.
Transfer of Property to the Trust, and Acquisition of Property by the Trust
In general, the donor should use this format for titling assets in the name of the trust:
The ________________ [name of your trust], dated ___________.
Identification of Trustees
When the trustee acquires or sells property in the name of the trust, the trustee may be asked to
provide evidence of who the trustees are, and who can sign for the trust. The donor or the trustee
may, of course, provide a copy of the trust agreement to show that information. However, the donor
may not want the trustee to disclose the entire trust agreement.
Usually an institution such as a bank or brokerage house will be satisfied with simply receiving
copies of the first page, pertinent pages about trustee powers, and signature pages of the trust
agreement, rather than the whole document. Alternatively, a Statement of Authority (discussed
below for Real Estate) identifying the trustee can be provided to the companies.
Real Estate
Real estate can generally be transferred to the trust by signing and recording a deed. Colorado law
allows real property to be titled in the name of the trust itself (without naming the trustee in the
deed), as long as a Statement of Authority is also recorded in the real estate records to show the
identity of the trustee(s). If there is a change of trustees, a new Statement of Authority should be
recorded to reflect the change before the property is conveyed by the trustee.
Before you transfer any real estate to your trust, there are several special issues that you should
consider:
If the real estate is subject to any debt (that is, if there is a deed of trust or mortgage
against the property), the note and deed of trust or mortgage documents should be
checked to see whether there are any restrictions on transferring the property. Those
documents may contain a due on transfer clause, allowing the lender to accelerate
the balance due on the loan if you transfer the property. In such a case, the donor
should ask the lender if it will waive its right to accelerate the loan with respect to the
transfer to your trust. If a waiver is obtained, be sure it is in writing. In addition,
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mortgaged real property could cause unrelated business taxable income as
discussed in Part II.
If you transfer real estate located in a state other than Colorado to the trust, you will
have to comply with the real estate laws of the state where the property is located.
An attorney in that state should be contacted about transferring the property.
Gift (and Generation-Skipping) Tax Considerations
Because the trust is irrevocable, any transfer of property to the trust by you is a completed gift.
For example, when you transfer cash to the trustee, that cash is a gift from you to the trust
beneficiaries.
By including withdrawal rights in the trust agreement (as discussed in Part II), the amount of the
taxable gift can be reduced or even eliminated. However, if there are taxable gifts, then a gift tax
return must be filed for each calendar year in which a gift is made. In addition, if you and your
spouse want to elect gift-splitting, so that each gift made by either of you to a third party during
a particular calendar year will be treated as made one-half by each of you, you must file gift tax
returns in order to make the gift-splitting election. The gift tax return is made on IRS Form 709,
is filed with the Internal Revenue Service, and is due by April 15 of the year following the
calendar year in which the gift is made, although it can be extended to the same due date as your
personal Form 1040.
Whether or not there are taxable gifts for gift tax purposes, you may want to consider filing a gift
tax return to allocate a portion of your $5,000,000 (as indexed for inflation after 2011)
generation-skipping tax (GST) exemption to the trust, if the trust includes generation-skipping
provisions. (Generally, generation-skipping involves providing benefits to persons who are two
or more generations younger than you, such as your grandchildren.)
If gift tax returns are required (to report taxable gifts, to make the gift-splitting election, and/or to
allocate GST exemption to the trust), we recommend that you have your accountant prepare and
file the returns. While we can prepare gift tax returns for you, we believe that it is usually more
economical for your accountant to prepare and file those returns. Unless you make specific
arrangements for us to prepare the returns, we will assume that your accountant will prepare and
file all necessary gift tax returns. Please send us copies of any returns that are filed.
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PART II - ADMINISTRATION OF THE TRUST DURING YOUR LIFETIME
Beneficiaries Withdrawal Rights
As discussed above, whenever you transfer property to the trust, you will be making a gift to the
trust beneficiaries. The gift tax law allows you to exclude the first $14,000 (in 2013) per year of
gifts to each donee from your taxable gifts (and therefore not pay any gift tax or use any of your
unified credit against gift and estate taxes). However, this gift tax annual exclusion only
applies to a gift of a present interest. A gift is a present interest if the donee has the immediate
right to the use, possession or enjoyment of the gifted property. If the donees rights to use,
possess or enjoy the property are restricted, then the gift is a future interest and the gift tax
annual exclusion does not apply.
If the trust simply provided that each contribution made by you would be retained by the trustee
for investment and distribution to the beneficiaries at some time in the future, then all gifts to the
trust would be future interests, and the gift tax annual exclusion could not be used. Your trust
probably includes provisions to create present interests in the beneficiaries, and thereby make the
gift tax annual exclusion available. Under those provisions, whenever you transfer property to
the trust, certain beneficiaries may make withdrawals from the trust. These powers are referred
to as Crummey powers, named after the court case involving similar powers. Usually, these
withdrawal powers are structured so that you may specify which beneficiaries may make
withdrawals, but if you do not specify otherwise, then your children (and perhaps your spouse)
will have withdrawal rights. These withdrawal rights give the beneficiaries present interests, so
that the gift tax annual exclusion will apply.
The withdrawal rights are limited in amount, and may only be exercised for a limited period of
time after each contribution. The limitations are quite technical, and are spelled out in the trust
agreement. In general, each withdrawal right is limited to make optimum use of the gift tax
annual exclusion, without causing other tax problems. Although the annual exclusion is $14,000
(in 2013) per donee per year, and in some cases may be doubled to $28,000 per donee per year by
electing gift-splitting, there are other limitations that may apply, and which may limit a
beneficiarys withdrawal power to $5,000 per year. If you have any questions about how much
gift tax annual exclusion may be available each year for gifts to your trust, please ask us.
The withdrawal power provisions are included to save gift and estate taxes for you and your
family. You probably will not intend that a beneficiary will ever actually exercise a withdrawal
power and take money out of the trust while you are alive. However, in order for the powers to
be effective to create present interests, and make the gift tax annual exclusion available, the
power holders must have real, legal rights to exercise the powers. Thus, you must be aware that
the powers could be exercised by the holders.
In this regard, the IRS takes the position that the withdrawal powers will not work to create
present interests unless the power holders have notice of the existence of the withdrawal powers
and the contributions to the trust. We recommend that, when you create the trust, you give notice
to the initial power holders that they have the powers, and of the initial contribution to the trust.
If future contributions to the trust are fairly certain as to timing and amounts, the initial notice
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could also list the planned future contributions. (However, additional notices should then be
given of any change in who is entitled to make withdrawals, or in the future contributions as
actually made.) The more conservative approach is for the trustee to give a new notice each time
a contribution is made to the trust. We provided you with a form that can be used to provide
notice to the beneficiaries of their withdrawal rights and of contributions to the trust. If you give
us information about the initial contributions, we will prepare a notice of those contribution(s)
that the trustee may send to the beneficiaries.
The trustee may use the blank form we will include with the copy of the trust to prepare future
notices to the power holders. We can prepare those notices if the trustee wishes us to do so.
However, unless the trustee makes specific arrangements for us to prepare the notices, we will
not do so, and will assume that the trustee will prepare and deliver all future notices.
The completed notices should be delivered to the beneficiaries promptly after a contribution is
made. We recommend that the trustee ask each beneficiary to sign a copy of the notice to
acknowledge that he or she received it. The trustee should then keep those acknowledged copies
of the notices as part of the trusts permanent records. The following is a discussion of the IRSs
position on these notices and withdrawal rights:
The IRS has accepted the basic premise of the Crummey case, but has consistently taken the
position that, to have a present interest, the beneficiary must have notice or actual knowledge of
the existence of the Crummey power and of the gifts to the trust. We frequently help clients
prepare initial notices to Crummey power beneficiaries which advise them of the power, the date
and amount of the initial gift to the trust, and the dates and amounts of planned future gifts to the
trust.
So long as the future gifts are actually made as indicated in the initial notice, we think this
procedure adequately informs the beneficiaries and should satisfy any reasonable notice
requirement. (If future gifts vary from the notice, then a new notice should be given. Also, if the
initial notice is given to a parent or guardian for a minor beneficiary, it is advisable to give a new
notice directly to the beneficiary when he or she reaches the age of majority.)
Income Tax Returns
The trust is required to file federal and state fiduciary income tax returns if the trust has a certain
amount of income during a taxable year. The trust is required to use the calendar year as its
taxable year. Currently, a trust is required to file income tax returns if, during a taxable year it
has gross income of $600 or more, or any amount of taxable income. If the trust is a grantor
trust, then the grantor reports all the income from the trust on the grantors personal Form 1040,
instead of reporting it on a trust income tax return. We recommend that the trustee retain an
accountant to prepare those returns, or let us know if you would like us to prepare them.
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice
included in this written or electronic communication was not intended or written to be used, and it cannot be used by the tax-
payer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or
agency.
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