Define the following terms.

Question

- Charitable remainder trust
- Pet trusts
- Charitable remainder annuity trusts
- Life insurance trust
- Discretionary trusts
- Spendthrift trust
- Qualified Terminable Interest Trust
- Charitable remainder unitrusts
- Sprinkling or Spray Trust

Answer 1

Charitable remainder trust:
Created to benefit the public at large, it must be made for religious, scientific, charitable, literary or educational purposes. The beneficiary must be an organization and not an individual. In a remainder trust, the trustor retains the income for his or her lifetime for him or herself or a beneficiary of the trustor’s choice (children, nieces and nephews, for example) and upon his or her, or the beneficiary’s death, the principal is distributed to the charity.

Pet trusts:
Trusts in which an amount is left to a living person, essentially in trust, for the benefit of the care of the pet. Thirty-nine states and the District of Columbia recognize pet trusts.

Charitable remainder annuity trusts:
Created to benefit the public at large, it must be made for religious, scientific, charitable, literary or educational purposes. The beneficiary must be an organization and not an individual. A charitable remainder annuity trust, also called a CRAT, a fixed amount of income totaling not less than 5% nor more than 50% of the initial net fair market value of the trust is paid at least annually to one or more beneficiaries. This amount is fixed at the time the trust is created and can never change regardless of the needs of the beneficiary in later years. Should the income become insufficient to pay the beneficiary, the difference will be paid from the principal. Should the income be in excess of the fixed amount, however, the excess becomes part of the trust principal and will not be paid to the beneficiary. The remainder of the property is given to the charity upon the death of the beneficiary.

Life insurance trust:
An irrevocable trust providing that the trust is named the beneficiary of a life insurance policy with the trustor as the insured. The trustor pays the premiums and pays the gift tax, if any. When the trustor dies, the insurance company pays the trustee who in turn distributes the money to the beneficiaries according to the terms of the trust. The insurance proceeds are not countable in the trustor’s estate for estate tax purposes.

Discretionary trusts:
A trust in which the trustee has the sole discretion to make the determination regarding how the trust assets are distributed. Also called a “sprinkle and spray trust”.

Spendthrift trust:
A trust, or a provision in a trust, that restricts the trust assets for the protection of the beneficiary from himself and his creditors.

Qualified Terminable Interest Trust:
Also called a QTIP Trust (qualified terminable interest property): Tax provision that allows the trustor to create a trust giving a life interest in the trust income to a surviving spouse with the remainder of the property to someone other than the spouse upon the surviving spouse’s death. Often used in conjunction and part of a marital deduction, credit shelter trust.

Charitable remainder unitrusts:
Also called a CRUT, a fixed amount of income totaling not less than 5% nor more than 50% of the net fair market value of the trust property as valued annually is paid to one or more beneficiaries. Unlike an annuity trust, this amount is not fixed for the life of the beneficiary. When the trust property’s value increases, causing an increase in the income, the beneficiary receives the greater amount. The remainder of the property is given to the charity upon the death of the beneficiary.

Sprinkling or Spray Trust:
A trust in which the trustee has the discretion to “sprinkle” or “spray” the income and/or principal to one or more beneficiaries, as the trustee deems necessary.