Cummings & Lockwood Estate Planning FAQs

As opposed to Revocable Trusts, Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs), Irrevocable Gift Trusts, and Irrevocable Insurance Trusts are all irrevocable trusts, meaning that they cannot be changed by the Grantor or any other person, and each type of trust has unique items of administration on which the Trustee must focus.  Typically, these Irrevocable Trusts are drafted to be “Grantor Trusts” for income tax purposes, during the Grantor’s lifetime, so that the income taxes are paid by the Grantor.

The administration of a GRAT has a few differences from the administration of a Revocable Trust.  The Trustee, in addition to making investment decisions and managing the assets, will be required to make annual annuity distributions to the Grantor.  Generally, the Trustee will make each annuity payment by distributing cash, to the extent there is cash available; however, since the goal is a high rate of return (to maximize the value received by the ultimate beneficiaries), often there will not be sufficient cash available to make all of the annuity payments, so the Trustee will have to make distributions with other assets.  To make in-kind distributions, the Trustee will be required to obtain a valuation of the assets being distributed as of the date of the annuity payment.

Since a QPRT cannot hold any other assets other than an interest in one residence and certain related assets, the administration of a QPRT is fairly straightforward, except for certain situations.  Generally, the Trustee is managing the residence and may be paying certain expenses related to the residence.  The Grantor may contribute cash to the QPRT for trust expenses that are expected to be paid within six months, such as improvements.  In addition,  if the Trustee has entered into a contract for purchase of the initial residence, the Grantor can contribute cash for such purchase.  If the QPRT is holding additional cash, the Trustee must determine quarterly the amount of cash that is in excess of the permissible amount, and, if any, such excess cash must be immediately distributed to the Grantor.  Additionally, proceeds from the sale of the residence or an insurance claim provide unique administration aspects.  The Trustee must use the proceeds from the sale or insurance policy to purchase a new residence or must convert the QPRT into a GRAT if the QPRT continues to hold the proceeds.

One of the main administration aspects of Irrevocable Gift Trusts and Irrevocable Insurance Trusts is ensuring the contributions to the trust qualify for the gift tax annual exclusion.  To qualify, the Trustee must make sure that the trust notifies the beneficiaries that a contribution has been made and that the beneficiaries have a right to withdraw all or part of the contribution.  The notification is done through what is commonly referred to as a “Crummey letter.”   In addition to sending the Crummey letters to the beneficiaries, the Trustee will need to make investment decisions and manage the assets of the trust, in the same manner as any other trust.  For an Irrevocable Insurance Trust, the Trustee will also need to make sure the premiums are paid on any life insurance policies owned by the Trust and that the policies continue to perform as expected.