Contents

Preface vii Foreword ix CHAPTER 1 Introduction 1 1.01 Objectives 2 (a) Enjoyment 2 (b) Management 2 (c) Protection Against Creditors 2 (d) Tax Efficiency 2 (e) Control 3 (f) Investment Strategy 3 (g) Principal-Income Model 3 (h) Annuity Trust And Unitrust Models 4 (i) Trust Models 4 1.02 Illustrations Of Drafting To Approach Benefits (But Not Burdens) Of Outright Ownership 6 CHAPTER 2 The Chief Uncertainties 7 2.01 Overview Of Rules 7 2.02 Method Of Analysis 7 2.03 Meaning Of Sunset Provision 8 (a) Effect Upon Exempt Property 8 (b) Effect Upon Nonexempt Property 9 (c) Is Property Transferred During Repeal “Exempt” Or “NonExempt”? 9 (d) Adjustments At Sunset To Pre-Sunset Trusts That Consist of (i) Unallocated GST Exemption or (ii) All Property of Which Settlor Is Contributor 12 2.04 Continuation Of By-Pass-Trust Sheltering During, And After, Repeal 13 (a) Risk Of Restoration Of Taxes 13 (b) Risk Of Retention In Trust 13 (c) The View Of The Writer 14 (d) Drafting For Shelter 15 (e) Hedging Against Repeal Of Sunset And Restoration Of Taxes 16 2.05 Drafting For Instability 16 (a) Implications For Pecuniary Gifts And Fractional Shares 16 2.06 Drafting For Retroactive Restoration 16 (a) Rules Of Construction 17

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Form 2.1 Construction 17 (b) Drafting And Purpose: Connection Between Dispositions And Retroactive Application Of Estate Tax And Generation-Skipping Tax 17 (c) Drafting And Purpose: Deadline For Determination of Retroactive Application 21 CHAPTER 3 The Building Blocks For Payments To Beneficiaries 23 SUBCHAPTER A: PRIMARY BENEFICIARIES 23 3A.01 Mandatory Payments 23 (a) Accumulation of Income 23 Form 3.1 Income 23 (1) Taxation Of Ordinary Income 23 (b) Distribution Of Income 23 (1) Examples 23 Form 3.2 Single Distributee 23 Form 3.3 Plural Distributees 23 (2) Taxation Of Ordinary Income 23 (3) Taxation Of Corpus Income 24 (c) Distribution Of Principal 24 (1) Fixed Number Of Dollars 24 Form 3.4 Pecuniary Gift 24 (A) Income Tax Results 24 (B) Drafting 24 (2) Fixed Fraction Of Residue 25 Form 3.5 Remainder Of Trust Estate 25 (A) Drafting 25 (3) Formula-Determined Gifts 26 (A) Exemption-Shelter Gift 26 Form 3.6 Exemption Legacy 26 (i) Purpose 26 (ii) Drafting 26 (B) Marital-Deduction Gift 27 Form 3.7 Marital Gift 27 (i) Purpose 27 (ii) Drafting 27 (C) Income Tax Results 27 3A.02 Discretionary Distributions: Independent Trustee Possesses Discretion 28 (a) Examples 28 Form 3.8 Single Distributee 28 Form 3.9 Plural Distributees 28 (b) Taxation Of Ordinary Income 28 (c) Taxation Of Corpus Income 28 (d) Drafting 28 Form 3.10 Optional Limitation: Statement Of Purpose Concerning Discretion 29

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Form 3.11 Optional Limitation: Precatory Preference For Specified Person(s) 30 Form 3.12 Optional Limitation: Treatment Of Distributions As Advancements 30 (e) Special Drafting For Avoidance Of Claims Of Creditors 31 (f) Special Drafting For Disabled Beneficiaries 31 (g) Marital-Deduction Planning When Spouse Is Disabled Or Insolvent 31 (h) Use Of Discretionary Trusts To Avoid Gift Tax 31 3A.03 Discretionary Distributions: Nonindependent Trustee Possesses Discretion 32 (a) Examples 32 Form 3.13 Single Distributee 32 Form 3.14 Plural Distributees 32 (b) Tax Problems 32 (c) Solutions 32 (1) Preventing (i) Ownership (For Tax Purposes)

Because Of Powers To Pay To Self And (ii) Gifts Because Of Powers To Pay To Others 32 (2) Preventing Ownership Because Of Powers To Discharge Legal Obligations By Payment To Other Than Power Holder 34 (A) Examples 34 Form 3.15 Removal Of Discretion 34 Form 3.16 Prohibition Of Payment 34 (B) Purpose 34 (C) Drafting 35 (3) Drafting Of Ascertainable Standards 35 (d) Relationship Between Ascertainable Standards And Rights Of Creditors 38 3A.04 Discretionary Distributions: Combination Of (i) Nonindependent Trustee Possesses Some Discretion and (ii) Independent Trustee Possesses Other Discretion 41 (a) Examples 41 Form 3.17 Single Distributee 42 Form 3.18 Plural Distributees 42 (b) Purpose 42 (c) Drafting 42 (1) Single Distributee 43 (A) First Configuration 43 (i) Facts 43 (ii) Examples 43 (iii)Comment 44

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(B) Second Configuration 44 (i) Facts 44 (ii) Examples 44 (C) Third Configuration 44 (i) Facts 44 (ii) Examples 44 (D) Fourth Configuration 44 (2) Plural Distributees 45 (A) Fifth Configuration 45 (i) Facts 45 (ii) Examples 45 (iii)Comment 45 (B) Sixth Configuration 45 (C) Seventh Configuration 45 (i) Facts 45 (ii) Comment 45 (3) Eighth Configuration 46 (A) Facts 46 (B) Comment 46 (d) Special Drafting For Disabled Beneficiaries And Avoidance Of Claims Of Creditors 46 Form 3.19 Distributions 46 Form 3.20 Distributions 47 3A.05 Discretionary Distributions: Primary Beneficiary Possesses Nonfiduciary Discretion (Right To Withdraw): Five-And-Five Power 48 (a) Example 48 Form 3.21 Right To Withdraw Greater Of $5000 And 5% 48 (b) Transfer Tax Implications And Planning 48 (c) Income Tax Implications And Planning 49 3A.06 Changes Because Of Prudent Investor Rule And Modern-Portfolio Theory 49 (a) Prudent Person Rule 49 (b) Prudent Investor Rule 50 (c) Scope 51 (d) Reasons For The Rule 51 (1) Deficiencies Of Pre-existing Law 51 (2) Evidence Of Dissatisfaction 51 (e) Accommodation of Modern-Portfolio Theory 52 (1) First Principle Of The Theory: Risks Of Shortfall 52 (A) Two Risks Of Shortfall 52 (B) Market Risk 53 (C) Nonmarket Risk 54 (D) Prime Duty 54

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(2) Second Principle Of The Theory: Ability To Outperform The Market 55 (f) Trusts That Are Designed For Diminished Distinction Between Income And Principal 55 (1) General Principles 55 Form 3.22 Income And Principal 56 Form 3.23 Income And Principal 56 Form 3.24 Income And Principal 56 Form 3.25 Income And Principal 57 (2) Facilitating The Change 57 Form 3.26 Property That Is Underproductive of Income 57 Form 3.27 Unproductive Property Shall Not Be Held For More Than A Reasonable Time 57 3A.07 Modern Styles of Distributions: Annuity Trusts And Unitrusts 58 Form 3.28 Annuity Trust Example 58 Form 3.29 Conventional Unitrust Example 58 (a) Rationales And Characteristics 58 (b) Mandated-Percentage Unitrusts 60 Form 3.30 Unitrust Interest 60 (1) Rationale And Characteristics 61 3A.08 Modern-Style Discretionary Distributions: Primary Beneficiary Possesses Nonfiduciary Discretion: Withdrawable-Percentage (“Give-Me-Five”) Unitrusts 62 Form 3.31 Withdrawable-Percentage (“GIVE-ME-FIVE”)Unitrust Example 62 (a) Rationale And Characteristics 63 (1) First And Second Versions 63 (2) Advantages 64 (3) Exercise Of The Power 65 (4) Relationship Between Give-Me-Five Power And Rights Of Creditors 67 (A) Vulnerability To Creditors 67 (B) Implications For Code Sections 2041(b)(2) and 2514(e) 69 (C) Conclusion 71 (5) A Problem 72 (6) Transfer Tax Implications And Planning 72 (7) Income Tax Implications And Planning 73 (8) Interface Between Income Tax And Transfer Tax Implications, And Planning For It 77 (9) Conclusion 78 3A.09 Unitrusts And Annuity Trusts, Trust-Accounting Income And Principal, “Ordering” Rules And Code Section 643 Regulations 79

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SUBCHAPTER B: OTHER BENEFICIARIES: DISCRETIONARY DISTRIBUTIONS: NONINDEPENDENT PERSON POSSESSES NONFIDUCIARY DISCRETION (POWERS OF APPOINTMENT) 84 3B.01 During Life Of Power Holder 84 (a) Nongeneral Power Of Appointment 84 Form 3.32 Nongeneral Power Of Appointment 84 (1) Effects Of Possession And Exercise 85 (2) Preventing General Power Of Appointment Because Of Power Holder’s Powers To Pay To Other Than Self 85 (3) Value Of Gift That Results From Exercise Of Nongeneral Power Of Appointment 85 (b) Power to Withdraw Entire Trust Estate If Power Holder Survives One Or More Others 86 Form 3.33 Power to Withdraw If Power Holder Survives One Or More Others 86 (1) Rationale 86 (2) Applicability 86 (c) Limited Right To Withdraw From QTIP 86 Form 3.34 Limited Right To Withdraw 86 (1) Purpose 87 (2) Income Tax Results 87 (d) Right To Withdraw Versus Mandatory Distribution 87 (1) Examples 87 Form 3.35 Marital-Deduction Trust 87 Form 3.36 Trust For Descendant 87 (2) Purpose 88 3B.02 After Death Of Power Holder: Nongeneral Power of Appointment Exercisable By Will 88 Form 3.37 Disposition On Death Of Wife 88 (a) Estate And Gift Tax Effects 88 (b) Additional Protection Against General Power Of Appointment 88 3B.03 General Power Of Appointment Exercisable By Will To Attract Estate Tax And Avoid Generation-Skipping Tax 89 (a) According To Mandate 89 (b) According To Formula That Permits Donee To Determine Outcome 89 (c) According To Discretion Of Independent Trustee 91

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Form 3.38 According To Discretion Of Independent Trustee 91 (1) Portion One-Portion Two System 97 (2) Effect Of Severances Upon Placement Of Rights To Withdraw: Qualified Severance And Inclusion In Gross Estate Of Settlor According To Code Sections 2036(a)(2) And 2038(a)(1) 97 (3) Purpose And Method Of Discretion To Grant GPOA 98 (4) One-Part Versus Two-Part Portion In Which GPOA Can Exist 98 (5) Models For Common Situations 99 (6) One-Part Portion In Which GPOA Can Exist: Should A GPOA Exist Unless Revoked, Or Should A GPOA Not Exist Unless Affirmatively Granted? 100 (7) One-Part Portion In Which GPOA Can Exist: Scope 101 (8) Risk Of Inclusion In Gross Estate of Settlor According To Code Sections 2036 (a)(2) and 2038(a)(1) 102 (9) Limit Deemed Existence 103 (10) Prevent Manipulation 103 (11) Qualified Severances 104 (12) Exclude From Appointive Portion Any Property That Otherwise Is Includable In Gross Estate 107 (13) Separate Trusts Of Different Transferors 108 (14) Two-Part Portion In Which GPOA Can Exist: Scope 108 (15) Two-Part Portion In Which GPOA Can Exist: Tandem Use With (i) One Or More Other Two-Part Appointive Portions or (ii) One Or More One-Part Appointive Portions 109 (16) Reimbursement Of Marginal Tax 110 (d) Conclusion 110 CHAPTER 4 Sheltering Of Exemptions: Methods, Amounts And Adjustments 111 4.01 Ownership And Payment Arrangements 111 (a) Transfer Tax 111 (b) Income Tax 112 (c) The Reluctant Donor 112 (1) Inter Vivos QTIP Trust 112

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(2) Intraspousal Agreement 113 4.02 Why Shelter Rather Than Deduct? 113 4.03 All Or Nothing At All 114 4.04 A More Measured Approach 114 4.05 The Various Credits 117 (a) Applicable Or Unified Credit 117 (b) Credit For State-Death Tax 117 (c) Credit For Tax On Prior Transfers 117 (d) Other Credits 118 (e) Deductions 118 4.06 Why Pay Rather Than Defer? 118 4.07 Preserving The Choices 119 4.08 Protecting Includable Transfers Against Short Survival 120 (a) Planning For Wealthier Spouse 121 (1) Examples 121 Form 4.1 Formula-Marital-Deduction-Credit-Shelter Arrangement 121 Form 4.2 Simple Will 121 (2) Drafting 122 (b) Planning For Less Wealthy Spouse 123 (1) Examples 123 Form 4.3 Formula-Marital-Deduction-Credit-Shelter Arrangement 123 Form 4.4 Simple Will 123 (2) Drafting 123 4.09 Receptacles For Spousal Disclaimers 123 (a) Special “Disclaimer” Trust 124 Form 4.5 Certain Disclaimers 124 (1) Purpose And Drafting 125 (b) Existing Trust 125 (c) Existing Trust, With Modifications 125 (d) Special “Disclaimer” Trust, Created By Reference To Existing Trust 126 (e) Original Trust 126 4.10 Enhancing The Use Of Spousal Disclaimers That Salvage Exemptions But Do Not Forgo Enjoyment 126 (a) Outright To Spouse By Joint Tenancy, Beneficiary Designation Or Bequest But, If Spouse Disclaims, In Sheltered Disposition For Primary Benefit Of Spouse 126 Form 4.6 Certain Disclaimers 126 (1) Purpose And Drafting 127 (b) Gift Of Interest In IRA Or Qualified Plan Outright To Spouse But, If Spouse Disclaims, In Sheltered Disposition For Primary Benefit Of Spouse 130

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Form 4.7 Gift Of Interest To Spouse 130 (1) Purpose 130 (c) Effect Of Disclaimer Upon Sizes Of Marital And Credit-Shelter Dispositions 130 Form 4.8 Effect Of Disclaimer 130 (1) Purpose 131 (d) Effect Of Disclaimer Upon Size And Inclusion Ratio Of GST-Exemption Disposition 132 (1) Examples 132 Form 4.9 Disclaimer Trusts 132 (2) Purpose 133 (3) Drafting 133 4.11 Qualified Terminable Interest Property 136 (a) Partial Elections 136 Form 4.10 Partial Elections 136 (1) Exception 136 (2) Allocation Of Charges; Severance Of Portions 136 (b) Alternative Means Of “Fine-tuning” The Election 137 (c) Using “Clayton QTIPS” To Defer Decoupled State Death Taxes 137 (1) “Clayton QTIP” 138 Form 4.11 Remainder Marital Trust 138 CHAPTER 5 Increase Of Basis During Repeal 141 5.01 Code Section 1022(b) Increase 141 5.02 Code Section 1022(c) Increase 141 5.03 Shades Of Marital Deduction? 141 5.04 Questionable Policy 141 5.05 Draft For Code Section 1022 141 5.06 Code Section 1022(b) Is Preferable To Code Section 1022(c) 142 5.07 Drafting For Bases Increases 142 (a) Do Not Use Pecuniary Gift 142 (b) Tend Not To Use Fractional-Share Gift 143 Form 5.1 143 (c) Specific Gift of Appreciated Assets 143 Form 5.2 143 Form 5.3 143 (d) Minimum-Worth Gift 144 Form 5.4 144 Form 5.5 145 CHAPTER 6 Configurations 147 6.01 Arrangements For Present Benefit Of More Than One Person 147

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(a) General Characteristics 147 (b) “Pot” Trust Until Youngest Beneficiary Attains Certain Age 147 Form 6.1 “Pot” Trust 147 (1) Purposes And Drafting 147 (c) Single Trust For All Descendants, And Optionally Spouse, Of Testator 148 Form 6.2 Family Trust 148 (1) Purposes And Problems 149 (d) Separate Trusts, For Descendants, Per Stirpes, And Their Descendants 149 Form 6.3 Family Trust 149 (1) Purposes And Problems 151 6.02 Arrangements For Present Benefit Of One Person 152 (a) Examples 152 Form 6.4 Division Into Shares 152 Form 6.5 Outright Dispositions 152 (1) Purposes And Problems 152 (b) Separate Trust For Particular Descendant Until Stated Age(s) Or For Life 152 Form 6.6 Separate Trust 152 (1) Drafting 153 (c) Testamentary Power Of Appointment Of Predeceased Child 154 Form 6.7 Testamentary Power Of Appointment 154 (1) Drafting 155 6.03 Discretion To Create New Trust(s) From Existing Trust(s) 155 Form 6.8 Creation Of Separate Trusts 155 (a) Purpose And Drafting 156 CHAPTER 7 Allocation Of Death Costs 157 7.01 Executor Shall Pay Or Direct Trustee To Pay, Subject To Specified Reimbursement And Apportionment 157 Form 7.1 Charges And Taxes 157 (a) Purpose And Drafting 159 7.02 Trustee Of Revocable Trust Shall Pay To Extent That Executor Directs 160 Form 7.2 Charges And Taxes 160 (a) Purpose And Drafting 161 7.03 Exoneration Of GST-Exempt Property 161 Form 7.3 Tax Due To Death Of Wife 161 (a) Purpose 162 CHAPTER 8 Special Dispositive Provisions 163 8.01 Discountable Interests 163

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(a) First Scenario 163 (b) Second Scenario 164 (1) The Objective 165 (2) Implications Of Chenoweth 166 (3) Avoidance Of Phantom Transfers 168 (4) Effect Of Fiduciary Discretion To Allocate Assets To Dispositions 168 (5) Techniques To Remove Control Premiums 168 (A) Combined Use Of Lifetime And Deathtime Transfers 169 (B) Deathtime Transfers Only 169 (6) Summary Of Second-Scenario Strategies 171 (c) Third Scenario 172 (d) Fourth Scenario 175 (e) Implementation Of Deathtime Planning 175 (1) Death Costs 175 (A) Will Of Settlor 175 (B) Revocable Trust Of Settlor 175 (2) Specific-Asset-QTIPs And Residuary-QTIP System 176 Form 8.1 Specific-Asset-QTIPs And Residuary-QTIP System 176 (3) Special-Interests-QTIPs, Control-Interest-QTIPs And Residuary-QTIP System 184 Form 8.2 Special-Interests-QTIPs, Control-Interest- QTIPs And Residuary-QTIP System 184 (f) Purpose And Drafting 197 (1) Discounted Interests And Objective Number One 197 (2) NonDiscounted Interests And Objective Number Two 198 (3) Summary Of Results 198 (4) Flexibility To Pay Tax: Objective Number Three 199 (5) Uncertain Law 199 (6) Tensions 200 (7) Single Asset–Single Trust 201 (8) Reduction Of Costs 201 8.02 Allocations And Advancements 202 (a) Option To Acquire Property 202 Form 8.3 Purchase Rights 202 (b) Special Allocations 203 Form 8.4 Mandatory 203 Form 8.5 Precatory 204 (1) Discretionary 204 Form 8.6 Discretionary 204

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(A) Purpose 205 Form 8.7 Charge 205 (c) Advancements 206 Form 8.8 Lifetime Transfers As Advancements Against Deathtime Shares 206 Form 8.9 Equalization By Pecuniary Gift 207 Form 8.10 Deathtime Transfers As Advancements Against Other Deathtime Transfers 207 8.03 Gifts During Incapacity 207 Form 8.11 Gifts 207 (a) Purpose And Drafting 209 8.04 Severance Into GST Exempt, GST Nonexempt And Other Portions 211 Form 8.12 Severance 211 (a) Purpose 212 (b) Problem And Drafting 212 (c) Unallocated GST Exemption 212 Form 8.13 Unallocated GST Exemption 212 (1) Purpose 213 8.05 Availability Of A Qualified Severance (i) If The Severance Changes Beneficial Interests Or Otherwise Coincides With Changes In Beneficial Interests And (ii) If Remainder Dispositions Are Outright 213 (a) Issues 216 (b) Analysis 216 (1) Simultaneous Severance And Change 218 (2) Alteration Of Sequence 225 (3) Severance Before Change 226 (4) Change Before Severance 229 (5) A Disquieting Example 229 (6) Remainder Dispositions Outright 230 (c) Conclusion 230 (d) Drafting 230 Form 8.14 Direction Of Qualified Severance 230 Form 8.15 Notice Of Qualified Severance 231 (1) Grant Of General Power Of Appointment 232 (2) Allocation Of Assets Between Exempt And Nonexempt Portions 232 Form 8.16 Allocation Of Assets Between Exempt And Nonexempt Portions 232 (A) Purpose 234 8.06 Tax Elections And Beneficial Interests 234 8.07 Irrevocable Insurance Trusts 235 (a) Payment Of Death Costs 235 Form 8.17 Taxes 235 (1) Purpose 236 (b) Marital-Deduction Disposition 236

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Form 8.18 Marital Trust 236 (1) Purpose 237 (c) “Crummey” Powers For Trust That Has None 237 Form 8.19 Distributions 237 (1) Purpose 237 (d) Deferral Of Division 237 8.08 Tangible Personal Property 238 (a) Gifts To A Class 238 Form 8.20 Tangible Personal Property 238 (1) Purpose And Drafting 238 (b) Disposition By Memorandum 238 Form 8.21 Tangible Personal Property 238 (1) Purpose And Drafting 238 8.09 Residences 238 (a) Outright Gift 238 Form 8.22 Real Property 238 (1) Drafting 239 (2) Income Tax Results 239 (b) Retention In Trust 239 Form 8.23 Residence 239 (1) Purpose and Drafting 240 (A) Accommodation Of Residence In (i) Pay-All-Income Trust, (ii) Discretionary Trust, (iii) Ascertainable Standard Trust And (iv) Give-Me-Five Unitrust 240 (B) Rental Value As Income 241 (C) Marital Deduction 241 (D) Effect Upon Mortgage Debt 241 8.10 Insurance On Life Of Donee 242 Form 8.24 Insurance 242 (a) Purpose 242 8.11 Pour-Overs: “Back-Up” Systems 242 Form 8.25 Residuary Estate 242 (a) Purpose And Drafting 242 8.12 “Savings” Clauses 242 Form 8.26 Marital Deduction And 1022(c) Basis Improvement 242 Form 8.27 Code Section 2503(c) Trust 243 Form 8.28 Charitable Trust 243 8.13 Power Of Trustee To Reform Or Amend 243 Form 8.29 General 243 Form 8.30 Charitable Remainder Trust 243 Form 8.31 Wholly Charitable Trust 244 8.14 Sources Of Deductible And Nondeductible Gifts 244 Form 8.32 Funding Gifts 244 (a) Purpose 244

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8.15 Powers Of Appointment That Increase Flexibility But Preclude Diversion 244 Form 8.33 Flexible Provision For Stepchildren 244 (a) Purpose And Drafting 245 8.16 Authority For Fiduciaries To Receive Compensation 245 Form 8.34 Compensation 245 (a) Purpose 245 8.17 Distributions To Present Spouse 245 (a) Examples 245 Form 8.35 Alternative 1 245 Form 8.36 Alternative 2 245 (b) Purpose 246 8.18 “Pour-Back,” From Revocable Trust To Probate Estate 246 Form 8.37 “Pour Back” From Revocable Trust To Probate Estate 246 8.19 Direct Distribution To Beneficiary Rather Than Through Trust 246 Form 8.38 Direct Distribution to Beneficiary 246 8.20 Release Of Powers 246 Form 8.39 Release Of Power 246 (a) Purpose And Drafting 247 8.21 Consolidation Of Trusts 247 Form 8.40 Consolidation 247 (a) Purpose 247 8.22 Accumulated Income 247 Form 8.41 Accumulated Income 247 CHAPTER 9 Avoiding And Attracting Grantor-Trust Treatment 249 SUBCHAPTER A: EXCLUDING INCOME FROM GROSS INCOME OF GRANTOR 250 9A.01 Methodology 250 9A.02 Specimen Trusts 250 (a) Code Section 2503(c) Trusts 250 (b) Code Section 2642(c) Trusts 250 (c) Trust, With Crummey Powers, For One Non-Skip Person 251 (d) Trust, Without Crummey Powers, For One Person 251 9A.03 Specimen Powers And Interests 252 (a) Powers And Interests That Can Transfer Trust Estate To Grantor Or Spouse Of Grantor 252 (b) Powers And Interests That Cannot Transfer Trust Estate To, But Can Divert Trust Estate From, Grantor And Spouse Of Grantor 252

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9A.04 Distributions To Grantor And Spouse Of Grantor: Code Sections 673, 676 And 677 253 (a) Enjoyment Contingent Upon Prior Death(s): A Framework For Application Of Code Sections 673, 676 And 677 254 (1) Effects Of Powers And Interests At (1), (2), (3), (12), (13) And (14) Of 9A.03(b) 262 (2) Effects Of Other Powers And Interests At 9A.03(b) 267 (b) Remainder Interests Described At (i) And (ii) 268 (c) Remainder Interests Described At (iii) 269 (d) Inter Vivos Nongeneral Power Described At (iv) 270 (e) Inter Vivos General Power Described At (v) 271 (f) Testamentary Nongeneral Power Described At (vi); Testamentary General Power Described At (vii) 271 (g) Ordering Of Powers And Interests 276 (h) Remainders To Avoid 276 9A.05 Powers To Affect Enjoyment: Code Section 674 277 (a) Powers And Interests Described At (i), (ii), (iii), (iv), (v), (vii), 1, 2, 3, 4, 5, (15) and (16): Powers And Interests Not Described In Code Section 674(a) 279 (b) Power Described At 6: Exceptions at Code Sections 674(b)(6) And (7) To Code Section 674(a) 279 (c) Powers Described At (iv), (v), (vi) And (vii): Exception To Exceptions At Code Sections 674(b)(5), (b)(6), (b)(7), (c) And (d) To Code Section 674(a) 281 (d) Power Described At 7: Exception At Code Section 674(b)(5) To Code Section 674(a) 281 (e) Power Described At 8: Exception At Code Section 674(d) To Code Section 674(a) 281 (f) Power Described At 9: Exception At Code Section 674(b)(5) To Code Section 674(a) 282 (g) Powers Described At 10 And 11: Exception At Code Section 674(c) To Code Section 674(a) 282

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(h) Power Described At (vi): Exception At Code Section 674(b)(3) To Code Section 674(a) 282 9A.06 Power To Withdraw: Code Section 678 283 9A.07 Conclusions With Respect To Specimen Powers And Interests 283 9A.08 Conclusions With Respect To Specimen Trusts 285 SUBCHAPTER B: POWERS AND INTERESTS THAT CAUSE INCLUSION IN GROSS INCOME BUT NOT IN GROSS ESTATE 286 9B.01 Spousal “Remainders” 287 9B.02 Powers In Gross 288 9B.03 Testamentary Powers That Do Not Create Any Reversion Or Spousal Remainder 289 9B.04 Powers To Add Beneficiaries 289 9B.05 Broad Powers Of Related Or Subordinate Trustees 290 9B.06 “Safe” Powers Of Spouse Of Grantor As Trustee 290 9B.07 Power To Borrow Without Adequate Interest Or Security 291 Form 9.1 Power To Borrow Without Adequate Security 292 (a) Purpose And Drafting 293 9B.08 Power To Reacquire Assets 293 Form 9.2 Power Of Substitution 295 (a) Purpose And Drafting 296 9B.09 Conclusion 297 CHAPTER 10 Accommodation Of Special Assets 299 SUBCHAPTER A: CODE SECTIONS 2032A AND 2057 299 10A.01 The Issue 299 10A.02 Problems And Solutions 299 Form 10.1 Code Sections 2032A and 2057 299 (a) First Problem 300 (b) Possible Solution 301 (c) Second Problem 301 (d) Possible Solution 301 (e) Third Problem 301 (f) Drafting 301 SUBCHAPTER B: S CORPORATION STOCK 302 10B.01 The Trust 302 Form 10.2 Remainder Special Assets Trust 302 (a) Purpose 303 10B.02 “Stub” Income 303

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Form 10.3 Accrued Income; Undistributed Income 303 (a) Purpose 304 SUBCHAPTER C: INTERESTS IN QUALIFIED PLANS AND IRAs 304 10C.01 Trusts As Beneficiaries Of Qualified Plans And IRAs 305 (a) Generic Provision 306 Form 10.4 IRAs And Qualified Plans 306 (1) Purpose 310 (b) “Conduit” Treatment 312 Form 10.5 IRAs And Qualified Plans 312 (1) Purpose 314 10C.02 Disposition Of Any Interest That Remains Undistributed When Primary Beneficiary Dies After Owner Dies 314 10C.03 Allocation Of Interests Among Dispositions 315 10C.04 Payment Of Death Costs 321 (a) Of Owner Or Participant 321 (1) General 321 (2) In Case Of QTIP 322 (b) Of Beneficiary 323 10C.05 Trusts That Suspend Ownership 323 (a) The Statutory Scheme 323 (b) Same Treatment For Same Situations 324 (c) Policy 326 10C.06 Avoidance Of Certain Beneficiaries, Plans And IRAs 326 (a) Effect Of Identity Of Beneficiary Upon Method Of Distribution 326 (b) Whether Participant Should Transfer Interest In Qualified Plan To IRA, Or Should Transfer Interest In IRA To Another IRA, To Avoid Undesirable Method Of Distribution 327 10C.07 Selection Of Method Of Distribution 328 10C.08 Overriding Questions 329 (a) Presentation In Common Scenarios 329 (b) Speculating About Answers 330 (c) Possible Solution 331 10C.09 Marital Deduction 332 Form 10.6 Certain Income 332 (a) Purpose And Drafting 332 CHAPTER 11 Inter Vivos Marital Dispositions 333 11.01 Qualification For Marital Deduction: Ability Of Donor To Control During Life And After Death Of Donee 333

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11.02 Inclusion In Gross Estate Of Donor: Ability Of Donor To Benefit. Or To Receive A Power, After Death of Donee 339 11.03 Illustration of Inter Vivos QTIP 345 Form 11.1 Disposition Of Trust Estate 345 (a) Purpose And Drafting 348 CHAPTER 12 Integration Of Exempt And Nonexempt Dispositions 353 12.01 Percentage Or Fractional-Share Dispositions 353 Form 12.1 Percentage Disposition 353 (a) Purpose and Drafting 353 12.02 Pecuniary-Amount Dispositions 354 Form 12.2 Pecuniary Sum 354 (a) Purpose And Drafting 354 12.03 Nonprorata Allocations And Distributions To Avoid Generation-Skipping Tax 354 (a) Single Distributee 354 (1) Income Interest 354 Form 12.3 Income 354 (A) Purpose And Drafting 355 (2) Unitrust Interest 355 Form 12.4 Unitrust Interest 355 (A) Purpose And Drafting 356 (3) Rights Of Withdrawal (Integration From Outset) 356 Form 12.5 Right To Withdraw 356 (A) Purpose 356 (4) Right Of Withdrawal (Integration After Qualified Severance) 356 Form 12.6 Right To Withdraw 356 (A) Purpose 357 (5) Annuity Interest 357 Form 12.7 Annuity Interest 357 (A) Purpose And Drafting 357 (6) Annuity Interest (Integration Additionally Between Spouses) 357 Form 12.8 Annuity Interest 357 (A) Purpose And Drafting 358 (b) Plural Distributees 358 (1) Particularized Style Of Integration 358 (2) Generic Style Of Integration 359 (A) Generic Provision 360 Form 12.9 Integration 360 (B) Purpose And Drafting 361 CHAPTER 13 Perpetuities And Power-Of-Appointment Issues 363

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13.01 Savings Clauses 363 (a) Common-Law Rule 363 Form 13.1 Limitation Of Duration 363 (1) Drafting 364 (b) “Elect-Out” Jurisdiction 364 Form 13.2 Limitation Of Duration 364 (1) Drafting 364 (c) Other Jurisdictions 365 Form 13.3 Limitation Of Duration 365 (1) Drafting 365 (d) Savings Clause For Different Periods 366 Form 13.4 Savings Clause 366 (1) Purpose 366 (e) Savings Clause For Appointive Property Subject To General Power To Appoint By Will 366 Form 13.5 Savings Clause 366 (1) Purpose And Drafting 367 13.02 Separate Receptacles For Appointive Property Subject To Different Periods 367 Form 13.6 Allocation To Portions 367 (a) Purpose 368 13.03 Contingent Disposition Of Appointed Property 369 Form 13.7 Contingent Disposition 369 (a) Purpose 369 13.04 Application Of Delaware Tax Trap To Exercise Of Nongeneral Powers Of Appointment If Rule Against Perpetuities Is (i) Common Law, (ii) Abolished, (iii) Term Of Years Or (iv) Elected Not To Apply 369 Form 13.8 Property Subject To Certain Powers Of Appointment 369 (a) Purpose 371 (b) Drafting 375 CHAPTER 14 Trust Management 377 SUBCHAPTER A: GENERAL LIMITATIONS 377 14A.01 Potential Problems 377 14A.02 Possible Solutions 378 SUBCHAPTER B: SELECTION AND SUCCESSION OF TRUSTEES 379 14B.01 Power To Resume Office After Resignation 379 Form 14.1 Power To Resume Office 379 (a) Purpose 379 14B.02 Power To Remove Trustee 379 Form 14.2 Alternative #1 379 Form 14.3 Alternative #2 380

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Form 14.4 Alternative #3 380 (a) Problems And Solutions 380 14B.03 Deferred Naming Of Independent Trustee 381 Form 14.5 Alternative #1 381 Form 14.6 Alternative #2 382 (a) Problems And Solutions 383 14B.04 Different Trustees For Different Trusts 384 Form 14.7 Trustee 384 (a) Problems 384 (b) Purposes 384 14B.05 Primary Beneficiary Can Serve; Trustee Can Appoint Successor; Trustee In Default Of Contrary Designation Consists Of Independent Trustee Or Successor Beneficiaries 384 Form 14.8 Succession; Selection Of Additional Trustee 384 SUBCHAPTER C: ALLOCATION OF POWERS AMONG TRUSTEES 385 14C.01 Delegation 385 Form 14.9 Delegation 385 (a) Purpose 385 14C.02 Addition Of Independent Trustee 385 Form 14.10 Number Of Trustees 385 (a) Drafting 386 (b) Purpose 386 14C.03 Allocation To Independent Trustee 387 (a) Always 387 Form 14.11 Always 387 (1) Drafting 387 (2) Purpose 388 (b) If An Independent Trustee Is Added 388 Form 14.12 Independent Trustee Added 388 (1) Purpose 388 14C.04 Allocation To Nonindependent Trustee 389 Form 14.13 Nonindependent Trustee 389 Form 14.14 Nonindependent Trustee 389 14C.05 Diversion Of “Sensitive” Powers 389 Form 14.15 Diversion Of “Sensitive” Powers 389 (a) Powers Described In Code Section 2041(b)(1)(A) And Treasury Regulations Section 25.2511-1(g)(2) 390 Form 14.16 Limitations On Powers 390 (1) Purpose 391 14C.06 “Sensitive” Property 391 Form 14.17 Alternative #1 391 Form 14.18 Alternative #2 391 (a) Problems And Solutions 392 14C.07 Section 2032A and Section 2057 Property 393

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Form 14.19 Special Valuation Property 393 (a) Purpose 393 SUBCHAPTER D: IMPACT OF PRUDENT INVESTOR RULE 393 14D.01 Applicability Of Prudent Investor Rule 393 (a) Effects Of State Law And Governing Instrument 393 (b) Avoidance Of Contrary Law Of The State 394 (1) State Law Governs 394 Form 14.20 Trust Management 394 (c) Avoidance Of Prudent Investor Rule 394 (d) Scope Of The Rule 395 14D.02 Requirement Of Skill 395 14D.03 Duty Of Diversification 396 (a) General Principles 396 (b) Comparison Of UPIA, Florida, Illinois And Restatement Third Versions 396 (c) Waiver 397 Form 14.21 Waiver Of Diversification 397 14D.04 Duty With Respect To Original Investments 397 (a) General Principles 397 (b) General Authorization To Retain Assets 398 (1) Example 398 (2) Comment 398 (c) General Authorization To Retain Business Interests 399 Form 14.22 Authorization To Retain Business Interests 399 (1) Comment 399 (d) Specific Authorization To Retain Particular Property 399 (1) Examples 399 (2) Comment 399 14D.05 Delegation Of Authority 399 (a) General Principles 399 (b) Allocation Of Investment Duties 400 (1) Concerning Investment Authority Generally 400 Form 14.23 Adviser Trustee 400 (A) Comment 400 (B) Purposes And Drafting 400 (2) Concerning Retention And Management Of Particular Investments 401 Form 14.24 Business Property 401 (A) Comment 401 (B) Purpose 401 (3) Reliance Upon Advisers 401

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Form 14.25 Delegation To Advisers 401 (A) Purpose 402 (4) Concerning Custody And Bookkeeping 402 Form 14.26 Ministerial And Administrative Duties Of Keeping Books And Records And Acting As Custodian Of Trust Property 402 (A) Purpose 402 CHAPTER 15 CONCLUSION 403 APPENDIX I. REVOCABLE TRUSTS AND WILLS FORM #1 Revocable Trust. Settlor is a widower. A-1 FORM #2 Will. Companion to Form #1. A-29 FORM #3 Revocable Trust. Settlor is married. A-37 FORM #4 Will. Companion to Form #3. A-53 FORM #5 Revocable Trust. Settlor is married. A-59 FORM #6 Will. Companion to Form #5. A-83 FORM #7 Revocable Trust. Settlor is married. A-89 FORM #8 Will. Companion to Form #7. A-125 FORM #9 Revocable Trust. Settlor is married. A-133 FORM #10 Will. Companion to Form #9. A-157

II. OTHER REVOCABLE DOCUMENTS

FORM #11 Power of Attorney for property management. Principal is married. A-163 FORM #12 Power of Attorney for health care. Designed to promote ultimate flexibility. A-167

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FORM #13 Beneficiary Designation for individual retirement account. Owner is married. A-169 III. IRREVOCABLE TRUSTS FORM #14 Irrevocable Trust. Settlor is divorced. A-171 FORM #15 Irrevocable Trust. Settlor is married. A-185 FORM #16 Irrevocable Trust. Settlor is married. A-207 FORM #17 Irrevocable Trust. Code Section 2503(c) Trust. A-227 FORM #18 Irrevocable Trust. Code Section 2642(c) Trust. A-239 FORM #19 Irrevocable Trust. GST-exempt, dynasty-style trust. A-253 Index Of Subjects I-1

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