The Building Blocks for Payments to Beneficiaries

• Author: Jerold I. Horn
• Profession: Lawyer
• Pages: 13-142

13

PART ON E

PRIMARY BENEFICIAR IES

Subpart 1

Mandatory Pay ments

Examples of mandatory accumulation and distribution are included for purposes of

orientation and comparison.

I. MANDATE TO ACCUMULATE INCOME

The Trustee is directed to accumulate the ordinary income.

A. Form 3.1: Trustee Directed to Accumu late Income

(A) Income. The Trustee shall accumulate the net income.

B. Taxation of Ordina ry Income

None of the ordinary income of the trust is deductible from the gross income of the

trust for income tax purposes. Code §§ 651, 652, 661, 662.

II. MANDATE TO PAY INCOME

The trustee is directed to pay all ordinary income currently to one person or in xed

shares to more than one person.

3

The Building Blocks for

Payments to Beneciaries

Chapter 314

A. Form 3.2: Trustee Directe d to Pay Income to Single Distributee

(1) Income. The Trustee shall pay the net income to my wife quarter-annually.

B. Form 3.3: Trustee Direc ted to Pay Income to Plural Distributee s

(1) Income. The Trustee shall pay the net income quarter-annually to my

children, in equal shares.

C. Taxation of Ordinar y Income

All of the ordinary income of the trust, to the extent of distributable net income, is

includable in the gross income for income tax purposes of (i) the distributee or (ii) the

distributees proportionately. Code §§ 651, 652.

II I. MANDATE TO PAY PRINCIPAL

A. Form 3.4: Fixed Number of Dolla rs

Section 2.01. Pecuniary Gift. I give to John A. Smith of Peoria, Illinois, the sum of

$5,000, if he survives me.

a [Interest on this pecuniary legacy shall be payable from my death

ai [at the rate of [#A]].]

b [This pecuniary legacy shall carry with it such net income of my estate as would

be payable if this legacy were in trust.]

For purposes of satisfying the pecuniary amount, each item of property distrib-

uted in kind shall be valued at its fair market value as of its date of distribution.

* * *

c [Section 4.09. Pecuniary Legacies Deemed to Carry Appropriate Interest. The purpose

of this Section is to cause each pecuniary legacy to be deemed to carry appropri-

ate interest according to Treasury regulations section 26.2642–2(b)(4)(ii). This

Section shall apply separately to each pecuniary legacy that is created upon the

death of the person who is the transferor of the legacy for generation-skipping

tax purposes. Either (i) the Trustee shall pay the entire pecuniary legacy, or

irrevocably set aside property to pay the entire pecuniary legacy, within fteen

months after the death of the transferor, or (ii) the pecuniary legacy shall carry

with it a pro rata share of the net income, between the date of the death of the

15The Building Blo cks for Payments to Beneciar ies

transferor and the date on which the legacy is paid, of the fund from which the

legacy is payable. For purposes of clause (i) of the preceding sentence, property

is irrevocably set aside if it is segregated and held in a separate account pending

distribution. Except according to this instrument (including without limitation

this Section), no pecuniary legacy shall carry with it any interest or income

ci [; provided, any pecuniary legacy outright to my wife or in a trust of which

the name is or includes Marital Trust shall carry with it the greater of (i) the

amount (if any) payable according to the portion of this Section that precedes

this provisory clause and (ii) the amount (if any) payable absent this Section].]

* * *

1. Income Tax Results of Form 3.4

Satisfaction of a xed-pecuniary gift, not required to be paid in more than three install-

ments, does not carry distributable net income from the payer to the payee. Code § 663(a)

(1); Treas. Reg. § 1.663(a)-1.

2. Drafting of Form 3.4

Specify whether, if the named legatee fails to survive the testator, the legacy (i) passes

to the surviving descendants, per stirpes, of the named legatee, (ii) passes elsewhere, or

(iii) lapses.

Consider including such language (if any) as is necessary to cause the legacy to bear

interest or income (or not to bear it) until the legacy is satised. See variables a, b, andc

in Form 3.4. Consider using variable c if (i) the governing instrument includes any pecu-

niary gift and (ii) the possibilities exist that (a) any generation-skipping transfer can occur

and (b) the trust estate can exceed in value any unallocated generation-skipping tax (GST)

exemption. The purpose of variable c is to cause pecuniary legacies to be deemed to carry

appropriate interest according to Treasury regulations section 26.2642–2(b)(4)(ii). The

form provides for payment of income, not interest. Thus, the form avoids creation of

taxable income if no deduction is available for payment of interest.

Consider providing explicitly that any satisfaction of the gift in kind shall be at date-

of-distribution values. Cf. marital-deduction legacies (formula or xed) for which this

(or other permissible) funding direction, according to the governing instrument or state

law is required for tax purposes. See Rev. Proc. 64–19, 1964–1 C.B. (pt. 1) 682. Cf. chari-

table-deduction legacies (formula or xed). If funding-in-kind requirements otherwise

are unclear under state law and in-kind funding of a nonmarital bequest can affect the

value of a bequest under the same document that is intended to qualify for the marital

deduction or the charitable deduction, specication about funding in kind probably

is required for tax purposes. See, e.g., Rev. Rul. 81–20, 1981–1 C.B. 471; TAM 8643003,