Many estate plans provide for the creations of trusts after death
for the benefit of a surviving spouse, children or a charity. This
article discusses some of the issues that arise when funding these
"testamentary trusts," whether created under a will or a
revocable trust.
Funding a testamentary trust requires the transfer of assets into
a new account in the name of the trustee named in such trust. For
example, "Acme Trust Company, as Trustee of the Marital Trust
under the will of John Smith". A new taxpayer identification
number is required, but easy to obtain.
With respect to estate assets, a testamentary trust cannot physically be funded until the estate assets are gathered. Different rules apply to funding a testamentary trust, which depend upon the type of trust created. There are essentially two broad categories of trusts to consider: Pecuniary trusts and Residuary trusts.
A pecuniary trust is a gift of a specific amount of money. For
example, "I give $100,000 to my Trustee, to hold in trust for my
children". Often, pecuniary gifts are expressed by use of a
formula. For example, "I give to my Trustee the maximum amount
that can pass free of tax at my death by virtue of the unified
credit." Even though no dollar amount is specified, this is a
pecuniary gift that is determined based on information available at
the date of death.
After funding pecuniary gifts, and after paying debts, taxes and
expenses, the amount of property left in an estate (or revocable
trust) is called the "residuary." The residuary estate
often is held in trust following the completion of estate
administration. The primary advantage of a pecuniary trust is the
ease of administration. The executor of an estate or the successor
trustee of a revocable trust can fund the trust by transferring cash
or assets having a specific value to the trust. If assets are
distributed in kind to satisfy the pecuniary gift (shares of stock,
for example), these assets are usually valued as of the date they are
transferred to the trust. The executor or successor trustee can
choose which assets to use to fund a pecuniary trust.
When an executor or successor trustee uses assets that have grown
in value since the date of death to fund a pecuniary trust, the
estate incurs a capital gain upon the funding. The effect is the same
as if the assets had been sold and the cash proceeds used.
Accordingly, the personal representative or trustee must be mindful
of the potential tax impact upon funding a pecuniary trust.
A pecuniary trust is frozen in value as of the date of death,
while the residuary trust fluctuates. If the funding of the pecuniary
trust is deferred while the value of the assets decreases, the
residuary trust will suffer. In large estates, the potential growth,
or decline, of the residuary can be dramatic if there is a large
pecuniary trust. Thus, it is important to analyze the various options
available for funding trusts after a testator's death, as the
funding decisions may have crucial impact on tax planning and on the
interests of beneficiaries in the testamentary trusts.
