Hello, everybody. I am Leslie Levin. I am an attorney at Cuddy and Feder. We're based in Queens, New York. We also have offices in New York City and I'm also admitted in Connecticut. And our focus today will try and be somewhat general, but it will be focusing more on New York law if there's a question of law. I encourage you to check the laws in your own states. And while some of these provisions and laws and theories are the same everywhere, there certainly are specifics from state to state. So you definitely want to check it out. We're going to be talking about drafting a trust today, and my contact information is in the slides. And I encourage you to reach out and ask me questions. You can email me, you can call me whatever. Please reach out with any questions. I'm happy to help if I can. There's in addition to the PowerPoint, there is also an article I wrote to go along with this that has more details than what's here on the slides, so feel free to dive into that as well for some additional information. So we're going to dive on in now. We have what's in a trust. So we're talking about drafting a trust, but we really need to know some basic terms first. So a trust can be two things. One is a separate document or it can be buried inside of a will. So a lot of times when I'm talking with clients and they're asking me about trust for their kids or for their spouses, and they think they're going to be getting a whole nother document and explain, No, it's really just Article five of the document, and they're often surprised by that.
And I will say sometimes you run into problems when we're dealing with financial institutions. So we have a situation right now where we're trying to change the trustee on a trust account because the trustee died and the successor trustee went to the bank and they want to see a copy of the trust agreement. So we gave them a copy of the will and they said, No, we're looking for the trust agreement. That is the will. This is on page or whatever of the will is where you'll find the trust. And the person we're talking to is totally confused and doesn't understand what we're talking about. And we're banging our head against the wall trying to make them understand. But it is important to know that you're right that when don't need to have a separate trust, you don't need to have a separate trust document. And very often we don't. And just because the person you're talking to is confused, your job is then to straighten them out, find a manager, find somebody legal, find somebody who's going to understand what you're talking about and and that you are, in fact correct. But you can also do it as a separate document.
And it'll depend on what you're doing, why you're doing it, and your job as the attorney is to know when you need a separate document or when you need just a regular provision inside the. So we have some key terms that we use when we're talking about trust. The first is that the person is either the grantor or the settlor. Either term is used. And New York, we tend to use the word grantor. In Connecticut, we tend to use the word settlor. It's really the same thing. It's somebody who is a competent person 18 years or older. They're stating their wishes regarding what they want to have happen. The beneficiary is the person for whom the trust is being administered. We have the one person creating it, and then we have the person that is going to be administering is the beneficiary. Then we have the trustee. The trustees job is now to carry it out. So we stated what we want to happen, who it's for and how is that all going to play out. The trustee is the person that has the job of administering it based on what the document says the trustees job is to gather the property, is to invest the property and to distribute the property so they decide they want to go to Merrill Lynch to invest the cash. They can go to CVS to invest the cash. They can buy IBM, they could buy Apple, they could buy a mutual fund.
They can put it in a CD. They put in the bank. They could buy real estate, do whatever they want, whatever the trust allows them to do. If the trust has real estate, they have been in good condition. They have to make sure it doesn't fall into disrepair. If it holds real estate, maybe there comes a point in time where they need to sell the real estate and so they need to make sure they put it out there on the market. That they properly go through the procedures to sell it. And so they've got a fiduciary duty to make sure that this trust continues and works for the benefit of the beneficiary. Now, sometimes the trustee and the beneficiary are related, and we have a possible conflict of interest for the trustee maybe is the remainder man. So for example, dad creates a trust for the wife, right? So he creates a trust for mom and the son is the trustee. The son also is going to inherit when mom dies. So the son might be tight with the purse strings. The more money that's in the trust when mom dies, the more money the son inherits. So you've got to make sure clients understand what's going on, where the potential conflicts of interest are, and whether or not the son is going to do right by his mom in our example, or whether or not he's going to be a penny pincher and say no more money for me.
So sometimes we have to look outside the family for the right trustee. We need to consider possibly a corporate trustee. Maybe we need a friend of the family so it doesn't have to be the spouse, it doesn't have to be the child. There's a lot of other people that we can pick. There's a lot of other companies we can pick, financial institutions we can pick. So it's really important to have these conversations with the client so that way they understand that they're picking the right person. If a trustee is the beneficiary of the trust. So going back to our example, we have Dad makes a trust for mom. And mom is also a trustee. So in this instance, mom can't make discretionary distributions to herself. She can do it under something called an ascertainable standard, which is health, education, maintenance and support. We call them the Hems standard. And that is considered under case law and statutes that there's not really a discretion that if somebody needs something for health, that's pretty much not discretionary. We know we know that they need to pay the doctor bill. That's pretty cut and dry can do that, but it can get into gray area. What exactly is support? Mom thinks buying a Lamborghini is support. Somebody else might say no, the use Camry would be appropriate to get around town.
Don't need the Lamborghini to go to the mall. And so we get into some issues where one person will say, yes, this falls into one of those categories and somebody else might differ. And so rather than have to risk getting into these fights, the best practice to name a co-trustee to serve with that beneficiary who is the trustee. So going back to the example we have of Dad making the trust for mom, Mom's a trustee. Let's throw the son in there as a co trustee so that way the son writes the checks to mom. Why do we want mom in there as a trustee at all? Well, she can say, look, I want the trust invested at Merrill Lynch. I have a relationship with them. I want to use the advisor there. I want to see what's happening with the investments. I want to say in all of that, I want to pick the accountants. I want to use such and such firm because I think they're really good. And so she can now have a say in what's happening in this vehicle that's for her benefit, even though she's not writing herself the checks. So if you name a yes man in there as your co-trustee, then there's really little risk, mom, that she won't be able to get the money that she needs to do whatever she wants to be in order to be comfortable. Now we have different kinds of trust.
We have inter Vivos trusts, which are trusts that we create during time. And those are the one that really comes to mind is the revocable trust or living trust, and that is a will substitute. So that is something that in certain jurisdictions you'll see people using revocable trust and living trusts in place of a will. It functions during the person's lifetime. And then when the person dies, it says, this is what happens when I die with all these assets that are in the trust. So it has two pieces to it. It has the alive part and the dead part, and that's where it really differs from a will. And. Whereas, a will only covers what happens when you die. When we use a revocable trust or a living trust, we don't have to go through probate, don't have to go through the court process. And so that is oftentimes why people will use the revocable trust. They'll use it in jurisdictions where probate might be a problem. So yesterday, for example, I had a meeting with clients who are going to be using a trust because the county in which they live in, even though we're in New York, where probate in general isn't so awful, the county that they live in is notorious for being backed up and delayed and that it can take a really long time. So because of where they live and what's happening with the courts in their county, we're going to be moving more towards a trust process.
There's some other reasons, too. So it just all sort of came together and seemed like the logical conclusion. Irrevocable trust must be in writing. It has to be executed and acknowledged by the grantor. If there are trustees other than the grantor, at least one trustee must also execute the trust and the execution must be notarized or witnessed by two witnesses. So we still have the same formalities that we have with wills. So a lot of times people think, Oh, it's simpler to do a trust and don't need all the witnesses and everything, but if you're doing it as a will substitute, we still need the same kind of witnesses and we and we need notaries. Now revocable trust can be amended during lifetime and even do it under the grantors will by specific reference to the trust. The amendments and the revocation have to be in writing executed by the person with authority to amend or revoke should be acknowledged or witnessed by the two witnesses, and the written notice must be delivered to at least one trustee if there is a trustee other than the grantor. So it's important to note we have flexibility with it. We can change and grow with the times and keep it updated. But there are formalities that have to be done. These are serious documents and we have to follow proper procedure in order for that amendment to be considered legitimate.
Now, why might we want to use revocable trust? Well, we were just talking a second ago about that. We might want to do it. To avoid probate because of delays in the jurisdiction, we might be facing a possible will contest. Have that on another matter. Where there's issues with my client's kids, she wants to disinherit her children and leave assets to her grandchildren. And so rather than go through the courts and open Pandora's box and have a possible will contest going on, we're going to use a revocable trust to minimize the risk of a court proceeding and make it a little bit more difficult and put a couple more roadblocks in everybody's way. Um, we might want to avoid ancillary probate. So, for example, if we have that vacation home down in Florida and the person lives in New York, if we don't do a trust, then when the person dies, we're going to have court in New York and we're going to have court in Florida. So now we're in two different jurisdictions with two different sets of rules and two different requirements and two court proceedings that we've got to pay for and go. So instead, we put that Florida House into our trust. Now, when the person dies, they don't own Florida estate. The trust holds it so we don't have to march into court down in Florida. So that's a big one.
Is avoiding answering probate. Sometimes we have court imposed accountings on testamentary trust. So, for example, in Connecticut, if you set up a trust in your will, then every three years you have to submit an accounting to the court. And there are clauses that you can put in your documents to avoid that. But really, the best way to avoid the whole thing is to use a revocable trust. And then we don't have to go to court and then we don't have to file these accounting for every three years and then we don't need permission from the court to shut it down. So in Connecticut, we typically use revocable trust. Also we can have smooth transition of management of assets. So depending on what's in the trust, we might need to have instant access to things. So we either need it because we have a bill to pay, maybe their health issues or something. After somebody passes away, the surviving spouse is going to need care to have those bills paid immediately. Maybe there are real estate investments and complicated assets where there's a business interest in there and we need to have immediate access to it on day one. So we need to have a trust set up so we don't have to wait for the court process to play itself out. And that's also a way of helping the grantor to manage assets during lifetime. So if the person is getting older or maybe has health issues or is just overwhelmed or really busy, then rather than using a power of attorney to help them out with assets, we can just have everything in the trust and have a co-trustee who has access to everything.
Sometimes that's easier than having to produce a power of attorney to show that you've got authority. Now, the other kind of trust that we have are irrevocable trusts. These are also trusts we create during our lifetime that provide a category. But these are irrevocable, meaning we cannot change that. It can't be terminated. It can't be amended. Once you do them, they're done. Yes, there are some loopholes and there are things, you know, nothing is ever 100%. But the goal of these documents is that we're doing planning that can't be changed. Usually there's a gift involved because we're moving something out of somebody's name. And we're moving it into a trust for oftentimes tax reasons is one of the main reasons we're doing it. Sometimes we're doing it to benefit the next generation. So the first one we're going to talk about is the qualified Personal Residence trust. And you will see that in trusts and estates, there's lots of these cute little. Smaller, shortened versions of words. So we have the for qualified personal residence trust and a couple of other that come up as talk about things. But the goal of the Cooper is for residents.
We transfer residents to the Cooper When we do that, the value of the residence discounted. And it's based on how. And it's based on the age of the grand Tour. Whether or not these life tables think that the grantor is going to survive the term of the trust and by the grantor surviving the term of the trust, we're able to successfully remove the residence from the grantor. It's not included in their estate. Now for estate tax purposes, but the dies. And if that residence continues to appreciate all that appreciation is also now out of the ground. But if the grantor dies during the trust term, all bets are off. It's as if we didn't do anything. No harm, no foul. It's includable in the Grantor's estate. And we gave it our best shot. But it's still. At the end of the term, the grantor can then rent the residence from the beneficiary. And if you get a fair market rent valuation. And that's another way of moving more money to the kids. So, for example, the grand tour sets up a trust, a corporate trust at the end of the term. The residents now passes to the children, prevents the house from his children, those rental payments that he makes to the kids, it's a way of giving them more money without having to use an annual exclusion on gifts or filing a gift tax return for additional funds going to the kids.
Yes, the kids have to report it as income. However, you know, as my dad always said, if you're paying income tax, it means you made money. So these kids are getting sort of extra money on top of the house. And depending on the market where you live, if you're in an area where real estate appreciates, then this can really be a home run. Now, the other kind of trusts are testamentary trust and testamentary trust are trusts that create when you die in your will. And that's what we were talking about before with the bank was looking for an irrevocable trust or irrevocable trust. They were looking for a separate trust document was created during the grandfather's lifetime instead of just one that is created in the will, a testamentary trust that takes effect upon the testing of staff. So again, this is something you find in the document. On page six of the will is where you find your name, your trust, your. For example. So there's. Something called our unified credit. And the unified credit is an amount that you can pass that avoids estate tax. Right now that credit is up to 12 million, $92,000 for federal purposes and 6,058,000 for state purposes. And the feds and the New York and the Connecticut actually match. Right. So. In Florida, which we were just talking about a second ago, doesn't have a state state tax. So when we do planning, the goal is to, one, figure out how do we take care of family, what are the things keeping our clients up at night? What do.
The very piece of it is now how do we maybe save some estate tax while we execute this plan that we came up with? So the typical thing that we use in a will is a disclaimer of trust or a credit. And the real difference between the two is that a mandatory trust is the credit shelter trust or a bypass trust. And it is created in an amount equal to this credit that I've mentioned. And that number is also indexed for inflation, and that number will be dropping back in 2026. It's going to drop to match what where New York is at now unless Congress. Passes a new line. The other kind of trust is the optional trust is the disclaimer. Trust does the same thing, but the benefit is that the surviving beneficiary oftentimes spouse can decide how much we want to dump into this trust after the first spouse dies. We're not just tying it into this formula of whatever the credit is. That's how much you put into the trust. It used to be back in the Stone Age when I first started practicing that we always did Credit Shelter Trust. The credit was about 650,025. 600 when they first started out and it was a no brainer. Somebody had a life insurance policy, a 401.
K and a house. They were going to be over 600,000 over the 50, and they needed to save estate tax. So we always would do credit shelter trust as this number increased. So the up to 1,000,005. 2 million. Now we're over 12 million. That's like monopoly money. We're not seeing as many credit shelter trust. We're seeing more of the disclaimer trust. And that way people have the benefit of being able to wait and see what they want to do. Do they want to create this trust? How much do they want to put in this trust? And all those decisions are made after the first spouse dies. So we'll get a chance to see what are the tax laws. Are we talking about a 99 year old or are we talking about a 70 year old? I'm talking on somebody in good health. Bad health. Are there kids to take care of, grandkids to take care of? Is the person working? Are they not working? Have all these different things and all these different choices. And I find most of my clients like this Optional trust gives them greater flexibility to decide what they want. So when we create this trust in the wealth, whether it's the credit shelter trust or the disclaimer, trust it oftentimes for the surviving spouse. But it can be for children, it can be for the grandchildren, it could be for a class of beneficiaries of the spouse and the children.
So it's important to talk to the client and decide what it is they're trying to accomplish. And who are trying to benefit and what works best for that plan if they're going to Disclaimer the key is it has to be within nine months of when the client dies. So husband dies. We have nine months for the wife to decide is she going to disclaim anything that she's inheriting? Because the will likely says, leave it all to my wife. By. If she disclaims, then it goes into the disclaimer. So that's where we come in to say, okay, this is the pot of assets. These are the laws. This is what's going on. Let's go through all of our facts. We're talking about a second ago and decide what you want. To disclaim. And once the disclaimer is made, it's irrevocable. It's. And, um, it's in writing. It's within nine months. There's no acceptance of the interest or benefit and the disclaimed assets passed without direction by the person disclaiming. So what happens is here it's very important that the spouse in our example can't have collected something and said, You know what? I took this brokerage account but realized I really don't need it because I have other assets and I'm never going to spend all this. So we should stick this in the trust. So I changed my mind. Can't do that. Once you take it, that ship has sailed and it's done.
You also can't say, okay, well, I claim it and now I want it to go in favor of myself and trust or I want my kids or this is what I want to have happen to it once I've disclaimed. Can't have any control over that. So the will will say what happens when the spouse disclaims? It goes into the same trust. That is the one exception is that when it's for a spouse, the spouse can disclaim and it can pass into a trust for the spouse. If it were the child, for example, child cannot disclaim and then have it pass into a trust for the child. So the child can't say, Oh, look, I'm in the middle of a divorce, I really can't have this go into my pocket right now, so I'm going to disclaim and have it go into trust for me because that's safe. The child can't have that choice, but child disclaims. It now goes to what the next person in line, whether that's down to grandkids or siblings or Uncle Bob or whatever, Will says it can't go into trust for the child. So just know that that whole trust thing is a special thing and that is just a thing for. Okay. So actually so here's my example. This is what we were talking about. And in our example here, we have the $100,000 is left in trust for John. And if he predeceases the bequest lapses and becomes part of the residuary, the residuary is left to the decedent's two children.
But one of them is John. So what happens is John got this 100,000 and he said, No thanks, I don't want it. But now that it becomes part of the residuary, he's going to get it on the back end as he's a beneficiary of the residuary. So what happens is that he now needs to file a second disclaimer saying, okay, I don't want my share of this 100,000 that I'm getting individually. So first, he says no thanks to the 100,000 that's getting. Then he says a second. No thank you to his share of the residuary that it would pass through. And that's how we make that disclaimer. All right. So I have a slimmer example in here. I'm using dummy numbers that are based on the. Exemption dropping, and it's going to now be down to the 5,490,000 indexed for inflation. So by the time 2026 rolls around, probably closer to 7 million. But for easy math, we're going to stick with this 5 million number for purposes of our example. And we have here that the husband has 5 million, the wife has 5 million, husband dies first, his 5 million moved over to the wife's column. So now she's got ten. Okay. They don't have any tax because there's a marital deduction. Anything passing to a wife has no estate tax. And so it could have been $1 billion.
It doesn't matter. Whatever that number is, whatever passes to the wife. No. So now she's got 10 million. She dies the next day at. So what happens? We've got her credit. That amount goes to the kids, but that 5 million goes to the kids. That leaves us with 5 million. We've already used her credit. So now that's going to get hit with federal and state estate tax. We're going to lose about half of it. So we end up with 2.5 million left over. So the kids end up getting the 5 million that was sheltered with her credit, plus the 2.5 that was left over after taxes. The kids got seven and a half out of our original ten, which is not bad for a day's work. However, we can do better. So now if we use the disclaimer. Husband has 5 million. Wife has 5 million. Husband dies first, but now the wife disclaims. She says, No thanks. I don't want it. I have my own. So now it moves into the trust column. There's no tax because we use the husband's unified credit again, remember, we're in the future where it's that 5 million number. Now it's indexed for inflation. But again, we kind of have something. So this 5 million goes into the disclaimer trust now when she dies the next day. Million and the wife's column. And we have 5 million in the Disclaimer trust.
When we apply her unified credit. Then that amount goes to the kid. There's nothing left to get hit with the state tax. If you remember in our prior example, we still had 5 million left over that got the state tax. Now we have nothing that's getting hit with the state tax because it's not there. It was sitting in that trust for her benefit. So in this example, whatever's in that trust now passes to the kids. The kids got the 5 million from mom and they get the 5 million from the Disclaimer Trust. So in this example, the kids get the full 10 million. So we just did 2.5 million better by using. Now if instead of the wife dying the next day. 5 million goes. To the wife. She says, No thanks, I don't want it. It goes into the disclaimer Trust. Unified credit is applied against it so we don't have any tax. But many years passed and she lives in another 20 years and the assets double in size 10 million Inside this disclaimer Trust. When she dies, her 5 million goes to the kids and hers doesn't have the increase because she's spending it. She's living off of her money. So she really stays at that same 5 million because all of the appreciation on her side, she ends up spending on her care. And so she has 5 million left over. She's got her $5 million credit, goes to the kids.
But now we have 10 million in distress. The full 10 million is going to the kids. There's no tax because it is sheltered with the husband's unified credit. So in this example where we have the benefit of appreciation and time, the kids are walking away with 15 million. So you can see how this can really be a home run. And we were talking about that we have a disconnect between the federal and the New York and that we have this. Differential. But again, starting in 2026, it's going to come together. But our problem is, is that if instead of using the optional Stamer test, instead we were using a credit shelter and we tied it into the federal number, then we're going to kick off a New York estate tax. And that's because the federal number is over 12 million. The New York number is over 6 million right now. And we have that disconnect between the two. And so we have an extra 7 million call that's sitting in this trust that isn't protected on the New York side of things, only protected on the federal side of things. Now, the federal tax is much more than the New York tax. So sometimes people say this makes sense. I can actually save more money by doing that. And that I have I would rather pay some tax now, put the money in the trust to let it grow. Because it will save me money down the road.
We've done that before. It's done on a case by case basis, and you need to look at the situation and decide what makes sense. And sometimes the numbers do shake out. That makes sense. More often than not, it doesn't. And so the problem is that if the client's taxable estate is going to be more than 5% of the New York exclusion amount, then the client loses the New York exclusion. So normally we think about it that okay, for federal purposes. Right now we're at almost 13 million. Call it 13. So if the person has 14 million, then they would pay a state tax only on that extra million. Right. They have credit of 13 million. They have 14. So our taxes on that million dollar. What happens in New York isn't the same. So in New York, if we round it up and say 7 million right now and they have 8 million. We're not going to pay New York estate tax on that extra million dollars. We're actually going to pay tax on the full 8 million. We're going to York says If you're over by more than 5% of the exclusion, then you pay estate tax on the whole pot. And so we call this falling off the estate tax cliff. And the estate is subject to New York estate tax starting from dollar one, not from this overage. And a lot of people get confused about that.
They think, oh, well, the estate tax rates are so little in New York that if they're just going to pay a tax on this differential, I'll throw it in the trust. Well, we won't have a huge tax to pay. It makes sense. But no, no, no, no, no. We're going to pay tax on that full amount in there. And so that's why it might not be a good idea. So what we do sometimes is we have a provision that says, okay, we can disclaim. And if we're going to go over the New York number, then the amount that's over. And we're going to have a marital deduction on that. So part of it is going to be protected for the wife with a disclaimer, trust, a credit shelter, trust. Part of it is going to be protected with a. A marital trust. So that way we don't trigger an estate tax on the New York side. So we'll say a full formula in there saying that if there's an amount. That we're going to that will trigger a tax, then use a marital deduction there instead. The key there, though, is that we have to make sure that the surviving spouse is getting all of the income on this extra amount. So very often our disclaimer trust or our credit shelter trust might say discretionary income and principal to the surviving spouse. We don't want to force anything. To keep it out of her estate.
So now. We have a situation where we're going to. Have. We need to get a marital deduction. But we have a provision that says no mandatory income. And as hopefully, you know or you're now you're learning it for the first time in order to get a marital deduction on a trust for the spouse, you have to provide Bousquet to all the income. So it's important to make sure you build in provisions into this trust that says. Discretionary income to the spouse is on the credit shelter disclaimer part, but on the part that we took taken a marital deduction, that part we get mandatory income. So we have to remember that mandatory income. Now, the other thing we can do is portability. So portability is a concept that was legislated in 2010, starting in 2011. We could do a file, a 706, an estate tax return, even if no estate tax is due, and there's a section on it where you can check off to say that the surviving spouse wants to hold onto the deceased spouse. And so what does that mean? So what that means is that in our example, if we give all of the assets to the spouse, so if you remember our first example where we had that the tax that kicked in, if instead we say, okay, I'm going to give this all to the surviving spouse and we didn't we don't have any tax to pay on the first step because we have the marital deduction.
Everything went to a surviving spouse. Where we got hit with problems was on that second death and we never used the husband's credit. So when we have portability, what we have here is the opportunity to put a pin in the husband's and the husband's credit and say, okay, we're going to put a pin in this and we're going to save it for later. So we're going to file the tax return. We're going to say, all right, we still have 5 million or however many millions of the husband's credit that we're going to pin to the wall. And then when the wife dies, leader will unpin it and we'll apply it. And that way we won't have any tax to pay down the road. And so this way we can sort of have our cake and eat it too. The wife can have the assets outright. She doesn't have to have a trust, but instead we have this ability to use the husband's credit. But of course, nothing is perfect. And so our problem is that what if Congress legislated legislative portability out of it? What if it doesn't exist at this future date and time when everybody dies? Today we have it, but this doesn't apply until somebody actually dies. So maybe there is no such thing as portability at this future date. We don't know. The other problem is that if our surviving spouse remarried.
And the new spouse predeceases. Then we lose our credit. So. The in our example we have the husband dies, wife survives, wife remarries, and husband number two dies. So now she doesn't get husband number one credit. She gets husband number two's credit. Maybe he doesn't have a credit because maybe he used it during his lifetime. He gave it to kids from a first marriage. All sorts of things are possible. So we have a problem there. We also. So if remember our last example where we had the wife surviving and the value in that trust ballooned. It went from 5 million to 10 million. All of it was protected from estate tax on that second death. If the assets are in the wife's pocket, we have that kind of growth. We don't have any way of protecting that, of sheltering that. And so if the credits aren't sufficient for the growth that's happened in between the first spouse and the second spouse, then we might have a problem. So what we'd like to do is say, okay, we're going to plan for all possible. Let's have the documents drafted with a disclaimer trust, maybe a credit shelter trust. But we know portability is out there. And then when this future date and time comes and somebody dies, we can say, All right, what makes sense? I like to think of it like a buffet, right? You go up to the buffet, you got to do your laugh.
Got to see what's up there, what looks yummy to you? Nobody goes up to the buffet and takes the first thing they see. So if we draft with a disclaimer and we have provisions for the ability to include a marital deduction trust provision in there, if we. Portability is still on the books, then when that first spouse dies, we can sit down and do our lap around the buffet and say, these are all the different choices available to us now at this future date and time. What makes sense? What makes sense for you based on all the facts we've got at our fingertips? So the Credit Shelter Trust with the disclaimer trust is often created for the benefit of the surviving spouse, and it can be created for the class of people we've talked about. If we do that, then we have a sprinkling power in there which allows for distributions to the spouse and the issue based on who needs it. So if a little Bobby needs it, then he gets more out of the trust than. Do you have something called a five and five power? Some clients like it because it gives them some peace of mind, but it has a risk to it. So the concept is. I created this trust for the surviving spouse. Just can't get the money unless the trustee gives it to him or her.
That makes me nervous because I like the concept. I like the idea of saving money. I like the idea of saving and not having to have tax. But I worry like, what if my kid decides to play hardball with me and doesn't give me money when I want it? I really want that Lamborghini and not letting me have it. So if we have a five and five power in there, the spouse is allowed to take the greater of 5000 or 5% of the principal each year, no questions asked. They can take a lesser amount. But this is a. So this way spouse can pull out 5% by that Lamborghini and nobody can say no. Our problem is, is that for the most part, if you're creating this trust, you're probably not pulling anything out of it, and that's why you created it in the first place. But then in the year of your death, the IRS takes the position. The year of your death. 5% of the trust principal is includable in your estate because the IRS is. Well, if you have this power to take out the money. Who says no? Of course you want to take out the money. So the IRS says if you live till the last day of the year, you would have taken out the money even if you've never done it before. And, of course, this was your year. This was the year you were going to take the money and run.
So by pulling 5% of the trust principal out and putting it into your column, into your taxable column, it could be enough to push you over one of the thresholds and maybe now it's triggered a taxable estate. So my feeling is that if you've got yes-men in place and if you know, everybody sort of trusts everyone, while there's certainly no guarantees, you don't really need this 5 or 5 power. If you're worried and you really don't feel like you have anybody else you can name as trustee, so you've got to go with this person, but you're still a little nervous. And yes, you put it in because this is not a law school exam. This is real life. And we have to make the spouse comfortable so there's not lying in bed tossing and turning all night worried about it. We can also reduce it. So while it's called a five and five power, we can reduce it to be 3% and we can draft it to be anything. You just can't go draft it over the five. So we've been talking about the Qtip trust. It's also short trust, and this is a trust where we have a marital deduction. So that's what we were talking about before we. Return on the form 706. It causes it to be included in the surviving spouses estate. And as we talked about, all income has to go to the surviving spouse, that is.
That's the only way to make this thing work. If you don't have that, you're out of luck. We have something called acute trust, and that is when we have a non-citizen spouse. It is a different kind of vehicle, but it still gives us our marital deduction for this non-citizen spouse who make the election on the estate tax return also. The Q tip Trust also can include discretionary amounts in addition to the mandatory income. So you can have discretionary principal, you can have it just totally discretionary that for any reason you can have it governed by that ascertainable standard we talked about before that hems can have it go for certain ages or years. So you can say, you know, maybe there's an annual allowance that that goes on for a number of years, that maybe it goes until remarriage. When you move in with somebody, you can do a combination of you can even say no principal distribution just in common. That's it. So you can get creative with it even within the confines of the strict income requirements and that it's only be for the spouse. So we talked about before with the credit shelter trust and the Slammer trust that it could be for a class of people, kids, grandkids, spouse sprinkles do all sorts of things here. You can't do. You violate the terms and you have to only have it be for the spouse.
So you can include a power of appointment that allows for flexibility when the spouse distributes assets upon the spouse's death. So you can say, okay, when a spouse dies, it goes down to the kids. But if you give the spouse a power of appointment, then she can say, All right, well, guess it goes to the kids. But instead of an age 35, trust now I want it to go outright or I want it to go in trust until they're 120 because they're spendthrifts or I want it to all go to just one of my three kids. Or I just wanted to go to my grandkids. So you can give powers in there to change where it goes because of the facts on the ground at this future date. Um, the assets are not taxed and the Testator's estate because we've got the marital deduction talking a lot about that. But instead they're going to be taxed when the surviving spouse go into the spouse's column. So remember our example before we had those three columns? Husband We had the trust and we had the wife only what was in the wife's column got hit with estate tax. What was in the trust in. That's because we were using our credit for this trust with the marital deduction. It's yes, it's in a separate pot, but that pot is part of the wife's column. And so she's going to get hit with estate tax on the value in this trust.
So it is important to remember that when you're doing. Another kind of trust that we have is a trust. The GST is generation skipping transfer and that is the generation. Skipping transfer tax was originally enacted in 1976 and it was because people were skipping their children's generation in order to funnel more money down. So if we the best way to think about it is this way, right? So husband and wife, they leave their assets to their kids and there's estate tax. And that transfer from the parents generation to the kid generation. Now the kid died and they leave their assets to their children. Again, we have a tax when they leave it from their generation to the third generation below them. So what people did, they tried to get cute and they said, all right, well, if we have a tax every time we transfer it, let's skip it. So instead I'm going to give it to my kids but in trust. And then when they die, it goes down to my grandkids. It was never part of their estate. And so there's never going to be that tax on that little transfer. I've gotten smart and I've gotten wise to this. And so I'm just going to have a tax on that transfer, that initial transfer, but I don't have that secondary tax. And so the IRS eventually caught on to this and said, well, that's not good.
We're losing out on a lot of money here. And that's when they introduced this generation skipping transfer tax. And they said, not so fast. We'll give you a credit just like we do with the unified credit that we're doing, shelter with the trust credit, shelter, trust, that whole concept. We'll give you the first, you know, in our case now, almost $13 million to pass. And we're going to they tied in the generation skipping transfer tax exemption amount and the unified credit amount are the same. So it's the same number. Those numbers are now matched. And so that is the amount you can pass. And once you go over that, then you have to pay generation skipping transfer tax. And by the way, it's the same tax rates as estate tax. So you're not really saving. And so they said, all right, we're going to we get what you're trying to do. We understand you want to benefit family. We'll let you do that to an extent. But once you go over, that's it. All bets are off. You've got to pay tax now and we're not going to let you get away with it. So it's important to note that are you giving assets in a way that it's going to pass down to successive generations? Um, we have a situation where. We you know, we also have what if we're giving it to somebody? It's not a grant check.
It's a niece or nephew or just a family friend. So the key is, are they 37.5 years younger than the donor? And that's where we know if the rules kick in. Now we can do this during lifetime. We can also do this in wills. So if we're doing this in wills, we can use a plan that uses a marital trust, but we can do something called a reverse Qtip election. And the decedent's generation skipping transfer tax exemption is going to be used. And so we would check the box on the estate tax return to make sure we're making this election. And it's a way to make sure we're not wasting the first spouse to die. Generation skipping transfer tax exemption just like. That we didn't lose his unified credit. This is a way of ensuring we don't lose this generation skipping transfer tax exemption. We don't see a lot of this with our very wealthy clients. We make more of this come into play. But this is where we good to know about this first tip. That we have something called a Descendants Trust and the descendants trust the jury. Trust. The concept is whatever is left, it passes down to the kids. If the kids are below a certain age, we want to have a trust in place for that. And so that's where this trust comes into play. Call it whatever you want to call it. I usually call it a descendants Trust.
Well, it's distributed to the children or the grandchildren in some discretionary amount at certain ages and discretion of the trustee. Combinations of all that we can do it as a separate trust for each kid. Or we can do one giant pot trust where all the kids are beneficiary and we sprinkle it upon them. So you have to go over with your clients to see which way they like it. I will say most of my clients will take it, split it into an equal share for each of their kids. So if they have three kids, they'll have three sentence trust with three with equal amount in each. And that way each trust can be administered for that specific kids. Why would we want to do this? Well, if the kids are little, we don't want them to send and get $10 million. We don't want to get $10 million to your ten year old. You might not want to give $10 million to your 25 year old either or to your 30. So we often see trusts that go until age 35. Give bites of the apple at earlier ages so that way we can start to teach them some responsibility. You might want to keep it out of the hands of future spouses. You might want to help them with their assets. Maybe they're not good at making decisions. Maybe there's Medicaid planning to. If you leave assets outright to a minor, then you're going to need a guardian to handle the property and every time.
The paper camp or school or things that aren't really even crazy things. They want to use it for basic needs. You're going to have to petition the court every time, and the court doesn't have to say yes. So it can really get hairy. So you really want to make sure if you've got minors that you're setting up a trust for them. So it's important to understand the ages of the children we're dealing with. What are their education plans? Who's going to be responsible for these kids? Are the kids responsible? Are they spendthrift? What's happening with their marriages? Are there any special needs in place? You've got to have these really frank conversations with your clients to understand who your cast of characters are. Um, when you set these up, you've got to then decide what kind of provisions you. So is it total discretion? Are we again locking into the ascertainable standard that hence are we doing it at certain? Are we going to have combinations with a term of years? What happens if the kid doesn't survive the term? Who gets it when the kid dies? What if they don't have kids and there aren't then grandchildren or great grandchildren take over two siblings. What's going on? Where does it go? We can also give a power of appointment in here too. So if it's a lifetime trust for a child, maybe we want to give them a power of appointment to appoint it to their kids and to decide where it goes.
Just like we were talking about for the wife's of the same concept. When we draft, we want to be focusing on the designation of the trustees, of who our successor trustees are. Make sure we have a line here. Making sure the last acting trustee can name a successor because we're not going to name a zillion different trustees. Make sure the trustee can resign. Make sure we have delegation powers between the trustees so they're serving without a bond. What happens if somebody becomes disabled? Want to remove them from power? We want to also make sure that you know who dies first and second if there's a common disaster. What if there's a business? Make sure that they can continue to run the business. We want to make sure that the fiduciaries have sufficient power to do whatever they need to do with the assets. Gems in there too. We want to have do we need a corporate entity in there as the advisor? What happens if there are disputes between your fiduciary majority makes the decisions. How do we break a deadlock? What if there's real estate? We want to include a real estate investment provision. These are all some of the extra provisions you want to include in your document to make sure that you're not just doing something boilerplate, you are thinking about what does this client need to handle these kinds of.
When we're doing this, we want to make sure that our trustees know what they can do and what they can't do. So the trustees have to if it's a if it's a testamentary trust, they're going to file an oath saying that they're going to be the best trustees out there and that they're going to. Follow their duty. For doing this again. Testamentary is going to be in the back of the probation. Judiciary powers are outlined in the statute. And again, you want to look at what your state provides as the fiduciary power. So you may need to add additional powers that are not covered by your statute. So, for example, a big one that we always include is the power to delegate between them, which I just mentioned a second ago, because that is not a power that is in our statute. We want trustees to be able to delegate. You don't want to make all the trustees have to show up at the real estate closing. Let one of them go. We've got one in California and one in New York. We don't want to make the one in California fly in for the real estate closing. Let the one in New York handle that. Don't have a power to delegate in my document. Can't do that. Okay. We want to make sure that the trustees know to keep detailed records and will protect them.
It will ensure that transparency. We want to make sure. And they are going to be liable for anything that's in their control. So if they are not administering it properly, they're going to be in big trouble. They need to keep it separate. They cannot co-mingle it from their personal assets. They need to keep it separate. Um, the trustee is held to the prudent investor standard. Meaning that what would an ordinary person do to manage his or her affairs? So. You want to just because they invested in something, the market goes down. That's not the trustee's fault. If they did their due diligence, they hired an investment manager. They did exactly what they would have done if it had been their own assets. They acted in good faith. The market goes down. It goes down. They can't be nobody can point a finger and say, You blew it. We're suing. Um, and so it's important that they, they document the meetings that they have with financial advisors that they don't just try and go it alone. But they make sure they're doing things by the book. So if they have the sole discretion to distribute. So we talked about before different kinds of distribution powers where it can be very broad and flexible or it can be tied into that ascertainable standard. But in situations where it's very broad and they have total discretion to distribute or not distribute, then if they make a decision and they made a decision, the courts are not going to interfere with that.
If that's what the document says, that's what they do. It's only when there's something really bad happening and it's clear that they're abusing power and that they're not acting in good faith. And that's when the courts are going to interfere. But otherwise, you know, just because you don't like that your trustee said no or you don't like that, the trustee said yes. Too bad if the person drafting the document said, I'm going to leave it up to the trustee's decision and I trust what they're going to do, then that's what stands and that's what's going to be in place. Um, when we want to avoid the appearance of self-dealing. So it's important. Again, we talked about before, conflict of interest, what happens if our trustee is also a beneficiary? What happens if our trustees a residuary beneficiary? So they need to make sure that when they're doing things and they've made a decision that it doesn't look like they did that only to somehow benefit themselves. They didn't say no to the distribution to mom because they wanted to keep more assets in the trust for one day when mom died, if there was a reason why they decided to say no or that when they decided to make a distribution. There wasn't some implied agreement going on that some of that would be kicked back there or something going on.
You talked about the co-trustee already. The grantor, the revocable trust can serve as the sole trustee, and that's very often how we draft it. It's important to reassure clients who are going that route instead of a will. And then for powers that we've been talking about that they can invest in whatever, we can limit their ability so that way they can invest in whatever they want, that they can only do certain things if there are already LLC interests or business real estate. There's all these different things. We want to make it clear they can hold on to that because some of those investments are risky. And they might say, Well, this doesn't really seem like it's in the best interest, but if the client says, No, no, no, this is my business, This is something I've worked really hard on. I want to ensure that this passes on to the next generations. You should stay in this business. You should stay invested in this real estate. You should stay invested in this company. It should be spelled out in the will that that's okay to do and that they don't need to diversify. I remember once we had a client who had a big holding in one particular stock, and it was written into the documents that it was okay to have that that concentration, because normally you would say this is bad, you need to diversify.
You can't have such a big holding in something. But instead they said, no, no, no, there's a reason for this. This is family money. This is a business decision. This is what the old man wanted. It's okay. You can keep this. They didn't say you have to, but they're saying it's okay if you want to. You're not being forced to change that. You're not being forced to sell something. But we do want to give them the ability to sell. So we do want to make sure the documents do include that. Sometimes we have mineral rights. We have clients with oil wells, and I have one client who has a quarry and we want to make sure that they can mine that quarry. So you've got to really understand what are these documents for? What are they holding? You have to ask those probing questions and really get down into the nitty gritty with the clients to really understand what's going on. So that way we can make sure that you're drafting the right document and otherwise you've done a real disservice to. And the last thing I want to mention is that trustees are entitled to commission. So every state is different. So in New York, this is the commission schedule. They got one a little more than 1% on the first 400. They get a little less than half a percent on the next 600,000, 0.3% on anything over a million.
When the trust terminates, they get a payout commission of 1%. And if you have more than one fiduciary serving, you get more than one commission. So it was important to know that money's coming out of this trust to your trustees. And if you don't want that, don't want them to get a commission, you need to draft that in there to say they have to serve without a commission. And so if it's family oftentimes not a problem, you're naming a third party. They might not be willing to serve unless they're getting that commission. So it's important to have those conversations with clients, especially depending on who they're naming, and let them know that, by the way, they can take a commission. They don't have to, but they can. And is this something that we want to draft around? Every state is different. So you want to make sure you know what your state provides and whether or not it's a schedule like this on certain things or whether or not there's more discretion. And you have to justify what you're getting and what it's based on. So we have flown through all these exciting things about different trusts. Again, my materials, the extra materials, have some more details in them. If you have any questions, please reach out to me. I'm always happy to answer them and I hope that you all have a great day. And thank you so much for listening. Take care.