Chapter 8.docx - Chapter 8 1 Why are trusts used in estate...

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Chapter 8 1. Why are trusts used in estate planning? They are used for asset management and flexibility in the operation of the estate plan. 2. What is a trust? They are a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary/beneficiaries. 3. List three common parties of a trust. Grantor, trustee, and a beneficiary. 4. Who is the fiduciary of a trust? The trustee is the fiduciary of a trust. 5. Explain the legal duties imposed on a fiduciary. The law imposes the duty of loyalty and the duty of care on the fiduciary, or trustee. The trustee must loyal to the beneficiaries of a trust and must make decisions that are in the best interests of the beneficiaries (and consistent with the terms of the trust) even if those decisions result in a loss to the fiduciary. A trustee owes a duty of care to the beneficiaries and therefore should make decisions only after engaging in a diligent investigation of the facts and thoughtful considerations of the impact on beneficiaries. 6. Describe the two most common types of beneficiaries. The income beneficiary is the person or entity who has current rights to income from the trust, or the right to use the trust assets. The remainder beneficiary is the individual or entity who is entitled to receive the assets that remain in the trust on the date of its termination. Other types of beneficiaries would include contingent beneficiaries. 7. List three reasons the use of a trust is beneficial to an estate plan. A trust can provide property management or creditor protection. A trust can also be used to take a single property interest and split it up into different interests. Property placed in trust is also not included in a decedent’s probate estate and the appreciation property placed in an irrevocable trust may avoid estate taxes. 8. What is a spendthrift clause and why is it included in a trust? A spendthrift clause states that the beneficiary of a trust may not anticipate distributions from the trust and may not assign, pledge, hypothecate, or otherwise promise to give distributions from the trust to anyone. If such a promise is made, it is void and may not be enforced against the trust. A spendthrift clause protects the assets of a trust from the claims of the beneficiary’s creditors. 9. How can the creation of a trust reduce estate taxes? First, the creation of a trust can reduce estate taxes because any appreciation of the property contributed to an irrevocable trust after the date of the contribution belongs to the beneficiaries of the trust and will not be included in the grantor’s estate. Second, the creation of a dynasty trust would allow the beneficiary to

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