Section 14
Estate Planning Alternatives for Family
Vacation Property – Keeping the Cabin in
the Family
Cameron R. Seybolt
Fredrikson & Byron, PA
Minneapolis
Michael P. Sampson
J.P. Morgan Private Wealth Management
Minneapolis
Real Estate Institute – November 4-5, 2011
ESTATE PLANNING ALTERNATIVES FOR FAMILY VACATION
PROPERTY:
KEEPING THE CABIN IN THE FAMILY
Cameron R. Seybolt
Fredrikson & Byron, P.A.
(612) 492-7053
cseybolt@fredlaw.com
Michael P. Sampson
J. P. Morgan
(612) 215-2116
michael.p.sampson@jpmorgan.com
I. INTRODUCTION ....................................................................................................... 1 A. Purpose of Presentation .................................................................................... 1 II. TAX ISSUES. .............................................................................................................. 4 III. Creditor Protection. ...................................................................................................... 6 A. Protecting Owners from Cabin Liabilities. ........................................................ 6 B. Protecting Cabin from Owners’ Liabilities. ...................................................... 7 IV. Pros and Cons of Structures for Co-Ownership. ........................................................... 9 A. Co-Tenancy. ..................................................................................................... 9 B. Partnership or LLC. ........................................................................................ 10 C. Trust. .............................................................................................................. 10 VI. Methods of Transfer. .................................................................................................. 12 A. Lifetime Gift. .................................................................................................. 12 B. Sale................................................................................................................. 13 C. Gift at Death. .................................................................................................. 13 D. Qualified Personal Residence Trust. ............................................................... 14 VII. SAMPLE DOCUMENT ............................................................................................. 16 I.
INTRODUCTION
A.
Purpose of Presentation
These materials discuss the issues families may confront in managing vacation property as a
group, and set forth a variety of legal structures that may be used to address these issues.
There is truly something special about the “family cabin.” This is the stuff of family history.
It invariably is a place filled with wonderful memories of special times when we were all
together. It was a place where we could almost believe the problems of our everyday lives
ceased to exist while we were together as a family. No wonder this is a special place that
families go to great lengths to preserve.
Objectively, however, we know that one of the principal reasons this family “hideaway”
works so very well is that it is mom and dad’s place, not ours. They call all the shots, make it
known when we are to come (and leave), who will be there, and what is expected of us
(usually very little). While not spoken of very often, they also pay for the place, maintain it,
pay taxes on it, and ensure that everything is in order from the ski boat to food in the
cupboards.
Unfortunately, when mom and dad are gone, the ownership and control of the family vacation
home can be anything but blissful. It is at this time that siblings’ divergent lifestyles,
economic resources, geographic separation, et cetera, can suddenly go from very natural
differences to dramatic sources of tension or even open conflict. Few estate assets can cause
more family conflict than the vacation home: “Who gets to use it over the Fourth of July,
how do we divide up the taxes, when and by whom will the maintenance be done, how do you
treat the distant brother fairly, what happens if someone gets divorced?”, and on and on and
on. None of these issues is insurmountable, but most are unique to each family and to the
asset under consideration. The following questions and the discussions it will engender
should give you and your clients much of the information and insight you need to ensure that
if the client decides to “keep the cabin in the family,” it will continue to be a place of
celebration.
B.
Discussion Questions
Clients often provide a simple direction – “I want to keep the cabin in the family.” Before
determining the appropriate strategy, however, you need to discuss the client’s goals and
expectations regarding long-term ownership of their vacation property in detail. The
following are some of the questions the client should consider:
1.
How much is the cabin worth in relation to the client’s other assets?
2.
What are the financial resources of the next generation?
1
3.
Will the client leave liquid assets to fund expenses of the cabin, or will the successor
owners be called upon to share expenses?
4.
Is the cabin free of mortgage debt? If not, what are the mortgage terms?
5.
What are the taxes and annual maintenance expenses?
6.
Are there other related expenses (such as slip fees, condo association dues, shared
expenses with neighbors for things like access road maintenance, etc.)?
7.
Are there other building sites on the land? If so, does the client contemplate additional
buildings (what type, cost, ownership and access to common areas is contemplated)?
8.
Are there any potential legal problems associated with the land (boundary disputes,
neighboring development, septic systems, water usage, zoning, etc.)?
9.
How would family members divide expenses for operating the property?
10.
How would “non-routine” decisions be made on maintenance (replace roof, resurface
the access road, replace the dock, etc.) and improvements (adding air conditioning,
winterizing, or expansion of existing structures)?
11.
How much personal property goes with the cabin (boats, motors, furniture, dishes,
linens, etc.); who would “own” it; how would it be maintained and, as necessary,
replaced; and could individual families keep their own things on-site?
12.
Who would speak for the “group” relative to outsiders in business matters such as billpaying, ordering work done, resolving disputes, etc.?
13.
How long would the spokesperson act for the “group,” how would the owners pick a
successor, what type and frequency of reporting to the group is expected of this
spokesperson, and under what circumstances would the spokesperson be expected to
step down?
14.
Under what circumstances would the property be sold, and how should that group
decision be made?
15.
Under what circumstances would a family branch or family member be “bought out”
and how would that purchase be paid for by the remaining members?
16.
Under what circumstances can the interest of a family branch or family member be
sold to an outsider? Under what circumstances would the entire property be sold?
17.
What should happen in the event a family member were to become divorced?
2
18.
Are there events that should trigger an involuntary buy-out (such as bankruptcy,
insolvency, etc.)?
19.
How should the interest of a deceased family member be treated? Can a family
member pass an interest on to his or her spouse, children, a trust for some or all of
them? What happens when that spouse dies?
20.
How will the use of the property be determined as among the families or family
members (i.e., use on holidays, dividing up the vacation year, etc.)?
21.
During a specific family’s time to use the property, do they have exclusive use of the
property, are there to be any restrictions on guests, and under what circumstances can
others just “drop in?”
22.
Is governance to be by majority rule or some other percentage? What items should be
put to a vote of the group and what can be delegated to management? Who gets to
vote?
23.
Does it make sense to have a managing “partner” or “caretaker?” How should such a
person be selected, re-elected and removed?
24.
How should a family’s interest be valued? Should there be any difference in value
depending on why a family’s interest is being sold (e.g., death, divorce, desire to be
bought out, etc.)?
25.
How should a family’s interest be paid for when there is a buy-out (e.g., cash
immediately or a percentage as a down payment and “X” years to pay balance and at
what interest rate, if any)?
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II.
TAX ISSUES.
A.
Estate, Gift and GST Tax.
i.
Federal Estate Tax.
Before advising a client regarding the appropriate strategy to transfer a vacation home,
it is important to determine whether the client should be planning to avoid federal
estate tax. You will need to do federal estate tax planning for clients who have (or
who expect to have) a gross estate, plus taxable gifts made during life, in excess of the
federal estate tax exemption (referred to in IRC § 2010 as the “applicable exclusion
amount”).
Year of Death
2011
2012
2013
ii.
Applicable Exclusion
Amount
$5,000,000
$5,000,000
$1,000,0001
Federal Estate Tax
Rate
35%
35%
55%
Federal Gift Tax.
Lifetime transfers can reduce the client’s taxable estate for estate tax purposes, but
such transfers may be subject to gift tax. The federal gift tax applies to taxable gifts,
which are gifts in excess of the annual exclusion amount (presently $13,000) that do
not qualify for the educational or medical exclusions. Gifts to a U.S. citizen spouse
are technically taxable gifts, but qualify for an unlimited marital deduction. Taxable
gifts do not trigger a current tax liability unless the donor’s cumulative lifetime taxable
gifts exceed the donor’s gift tax exemption. Gifts under the exemption do not trigger
current tax, but they use up unified credit – which essentially reduces the available
federal estate tax exemption equivalent.
Year of Gift
2011
2012
2013
Lifetime Gift Tax
Exemption
$5,000,000
$5,000,000
$1,000,0002
1
Federal Gift Tax
Rate
35%
35%
55%
The law is likely to change prior to 2013. The budget released by the Obama Administration
assumes an exclusion amount of $3,500,000 and a rate of 45%. Other possibilities include a
continuation of the current scheme or a total repeal of the tax.
2
See note 1 above.
4
iii.
Minnesota Estate Tax.
Minnesota does not impose a gift tax, but there is a Minnesota estate tax. The
Minnesota estate tax exemption remains at $1,000,000, where it has been since 2006.
A Minnesota estate tax return must be filed by a person with an interest in property
with a situs in Minnesota (i) if the total gross estate (not just the Minnesota situs
estate) plus taxable gifts exceeds the federal exemption equivalent, or (ii) if the total
gross estate (not just the Minnesota situs estate) is over the federal filing threshold
under the pre-EGTRRA Internal Revenue Code (over $1,000,000 for decedents dying
after December 31, 2005).
The Minnesota estate tax is based on the federal state death tax credit under federal
law in effect prior to 2002. In order to calculate the tax, use the calculator spreadsheet
on the Minnesota Department of Revenue’s website (www.taxes.state.mn.us). The tax
generally comes out to about 10% of the excess over $1,000,000. The tax on a
$5,000,000 taxable estate, for example, is $391,600 (9.79% of the $4,000,000 excess
over $1,000,000). This rule of thumb does not work for smaller estates. The tax on a
$1,100,000 estate, for example, is $38,800 (38.8% of the excess over $1,000,000).
Because there is no Minnesota gift tax, clients whose assets are under the $5,000,000
federal gift tax exemption but over the Minnesota $1,000,000 estate tax exemption can
reduce estate taxes significantly by making lifetime gifts. Note, however, gifts can
increase capital gains taxes paid upon an eventual sale of the gifted property (see
Paragraph B below).
iv.
Generation-Skipping Transfer Tax.
The generation-skipping transfer (“GST”) tax applies to gifts, devises and trust
distributions to individuals who are more than one generation younger than the donor
and to certain trusts for the benefit of such individuals. There is a GST exemption
equal to the federal estate tax exemption equivalent (currently $5,000,000), and the
GST rate is equal to the highest estate tax rate (currently 35%). You can take
advantage of the GST exemption by transferring assets (a) to trusts for the benefit of
grandchildren or more remote descendants or (b) to trusts for the benefit of children
that will not terminate upon the children attaining any particular age, and will remain
outside of the children’s estates for estate tax purposes.
B.
Income Tax Basis.
In determining what strategies are appropriate, it is important to be aware of the
difference in income tax treatment between lifetime transfers and inheritances. Under
current law, most assets passing from a decedent receive a “step-up” in income tax
basis to the date of death value. IRC § 1014. Gifted assets, on the other hand, have
the same basis in the hands of the donee as the donor. IRC § 1015. This can make
lifetime gifts increase overall taxation, especially if the client’s assets will not exceed
the federal estate tax exemption.
5
The following case study illustrates the problem:
Client A and Client B each have a vacation home worth $500,000 and other assets worth $3,000,000.
Each client has a $50,000 basis in his vacation home. They both expect their vacation homes to
appreciate and are interested in avoiding estate taxes. Client A gives his vacation home to his children
(or to a trust for their benefit). Client B does nothing. As expected, the vacation homes both
appreciate to $1,000,000. The other assets remain static. Client A and Client B both die in 2011, and
both vacation homes are then sold by the heirs. Both clients’ estates avoid federal estate tax. Client
A’s estate is $3,000,000, and Client B’s estate is $4,000,000 (and the federal estate tax exemption is
$5,000,000). Client A’s estate pays less Minnesota estate tax - $182,000 vs. $280,400, for a savings
of $98,400. However, Client B’s heirs pay no income tax upon sale of the vacation home, whereas
Client A’s heirs trigger $209,000 of state and federal capital gains tax assuming a federal rate of 15%
and a state rate of 7%. If the federal capital gains rate were to increase to 30%, Client A’s heirs
would pay over $350,000 of capital gain tax. Under this scenario, even though the estate tax planning
worked exactly as hoped, the overall tax burden was increased by over $100,000 (under current rates).
In addition, the client making the gift lost control over the property and gave up the ability to update
his plan based on changing financial and family circumstances.
III.
Creditor Protection.
A.
Protecting Owners from Cabin Liabilities.
i.
Co-Tenancies.
One of the disadvantages of outright ownership of real estate is that the owner may be
personally liable for liabilities arising with respect to the real estate.
ii.
Limited Liability Companies.
This is one of the benefits of transferring a vacation home to a limited liability company. If
the company is funded and operated properly, the members of the company will not be held
personally liable for debts of the company.
The seminal Minnesota case with respect to the piercing of a corporate veil in order to hold a
shareholder liable for the debts of a corporation is Victoria Elevator Co. v. Meriden Grain
Co., 283 N.W.2d 509 (Minn. 1979). In Victoria Elevator, the Minnesota Supreme Court held
a shareholder liable for a default judgment that had been entered against a corporation for a
breach of contract claim because the shareholder treated the corporation as the shareholder’s
alter ego. The court applied a two-part test to determine whether the shareholder should be
individually liable for corporate debts. The first prong of the test examines the shareholder’s
relationship to the corporation and asks whether the shareholder treats the corporation as its
instrumentality or its “alter ego.” Victoria Elevator has been subsequently interpreted and
modified. See Barton v. Moore, 558 N.W.2d 746, 749 (Minn. 1997); Almac, Inc. v. JRH
Dev., Inc., 391 N.W.2d 919, 922 (Minn. App. 1986) rev. denied (Minn. Oct. 17, 1986); White
v. Jorgenson, 322 N.W.2d 607, 608 (Minn. 1982), Almac, Inc. v. JRH Dev., Inc., 391 N.W.2d
919 (Minn. App. 1986), and Snyder Elec. Co. v. Fleming, 305 N.W.2d 863 (Minn. 1981).
6
The gist of all the above cases is that eight factors are usually most relevant to determining
whether the shareholders/members are using an entity as an “alter ego”:







insufficient capitalization for purposes of the corporate undertaking;
failure to observe corporate formalities;
insolvency of the debtor corporation at the time of the transaction in question;
siphoning of funds by the dominant shareholder from the debtor corporation;
leaving insufficient funds for the corporation to conduct business;
absence of corporate records;
existence of the corporation as merely a facade for individual dealings.
iii.
Trusts.
A trust can provide similar benefits. If a parent transfers a vacation home to a trust for the
benefit of his or her children, the children will not be held liable for debts of the trust. This
protection does not apply, however, to the extent a beneficiary of the trust (in this case a child
of the original owner) makes contributions to the trust. Under the laws of Minnesota and
most other states, self-settled trusts provide no creditor protection. See In re Simmonds, 240
B.R. 897 (8th Cir. Bankr. App. Pan. 1999) (applying Minnesota law). In certain jurisdictions,
including Alaska, Delaware, South Dakota and several foreign countries, it is possible to
create a self-settled asset protection trust. This type of planning is outside the scope of these
materials, but could potentially be appropriate for certain families.
B.
Protecting Cabin from Owners’ Liabilities.
i.
Co-Tenancies.
Another concern is protecting the vacation home and its other owners from claims of creditors
of an owner. For example, if three siblings co-own a vacation home and one of them files for
bankruptcy protection, his ownership interest in the home becomes part of the bankruptcy
estate. If the other owners cannot afford to buy out the bankrupt owner, the trustee of the
bankruptcy estate may force a sale of the entire property. When two or more persons take
title jointly, they take as tenants in common unless the instrument of conveyance expressly
indicates they are joint tenants. Minn. Stat. § 500.19, subd. 2. Each co-tenant has at all times
the right to enter and enjoy every part of the common estate. Petraborg v. Zontelli, 217 Minn.
536, 15 N.W.2d 174 (1944). A co-tenant may sue for partition of the property, or for a sale of
the property if it appears that a partition cannot be had without prejudice to the owners.
Minn. Stat. § 558.01.
ii.
Limited Liabilities Companies.
A limited liability company can ameliorate this problem, but not solve it. A creditor of a
limited liability company member can attach the member’s membership interest in the
company. Once a creditor attaches a debtor’s interest in an LLC, the creditors steps into the
shoes of the debtor, and can use state law remedies to attempt to liquidate the interest. See
7
Ehman v. Fiesta Investments, LLC, 319 B.R. 200, 206 (Bankr. D. Ariz. 2005). In Ehman, a
non-managing member of an LLC filed for Chapter 7 bankruptcy protection and the
bankruptcy trustee filed suit claiming the assets of the LLC were being wasted, misapplied or
diverted for improper purposes, and requesting an order for dissolution and liquidation of the
LLC or appointment of a receiver for it. The LLC filed a motion to dismiss, arguing that the
LLC agreement was an executory contract, which would require application of Bankruptcy
Code § 365(e)(2), which in turn provides that a bankruptcy trustee’s rights and powers may be
restricted by state and contract law provisions. The trustee successfully argued that the
contract was not executory, which made Bankruptcy Code § 541(c)(1) applicable. Section
541(c)(1) renders state and contract law restrictions on a bankruptcy trustee’s rights
unenforceable. The Bankruptcy Court sided with the trustee, noting that an executory
contract requires that there be unperformed obligations by each party. The LLC agreement
provided very few obligations on a member, other than an obligation to refrain from
withdrawing as a member.
iii.
Trusts.
Trusts, on the other hand, provide much greater protection from claims of beneficiaries’
creditors. As long as (i) the trust includes a “spendthrift” provision (or such a provision is
inferred) and (ii) the trust was not funded by the beneficiaries (and is therefore not “selfsettled”), the beneficiaries’ creditors cannot attach their beneficial interests in the trust. Not
only will the creditors be unable to force a sale of the entire property, they will not even be
able to impede the beneficiary’s right to use the trust property in any way.
It is well established under Minnesota law that a beneficiary’s interest in a discretionary trust
may not be attached by any creditor, including in a spousal or child support proceeding. See
Smith v. Smith, 253 N.W.2d 143 (Minn. 1977); In re Moulton’s Estate, 46 N.W.2d 667 (Minn.
1951); Lamberton v. Lamberton, 38 N.W. 2d 72, (Minn.1949); Erickson v. Erickson, 266
N.W. 161 (Minn. 1936).
A spendthrift trust beneficiary has no power to assign his right to receive trust income in a
divorce proceeding, even where the trust instrument provides for mandatory distribution of all
income. Moulton’s Estate, 46 N.W.2d 667, 676 (Minn. 1951) (citing First Nat. Bank v.
Olufson, 232 N.W. 337, 338 (Minn. 1930)). In Moulton, the trust at issue required that the
income be paid in equal shares to three beneficiaries. 46 N.W.2d at 668. One of the
beneficiaries agreed to assign his income interest pursuant to a divorce decree, and signed a
document purporting to make the assignment. Id. The trustee refused to honor the
assignment, contending that the income of the trust was inalienable. Id. The Minnesota
Supreme Court held that the trustee was correct, even in the absence of an express spendthrift
clause. Id. at 676 (citing Olufson, 232 N.W. 337).3
3
The Olufson court also held that the income of a trust was not assignable, even where there
was no express spendthrift clause and the trust document required that all income be paid to
the beneficiary. 232 N.W. at 338 (stating “. . . during the existence of this trust, a creditor of
[the income beneficiary] cannot reach either the trust property or the income therefrom. After
the trust property comes into the hands of [the beneficiary], it then, of course, becomes part of
8
A Minnesota court will not allow assignment of a beneficiary’s interest in a trust in a divorce
proceeding, even if the trustee has the authority to terminate the trust. Kriz v. Kriz, No. C695-1853, 1996 WL 291616 (Minn. Ct. App. 1996). Under a recent case, the creditors will not
even be able to get an order declaring that if a distribution is made for the benefit of the
beneficiary, then it must be paid to his creditors. Fannie Mae v. Heather Apartments Limited
Partnership, A10-1336 (June 6, 2011) (citing Erwin N. Griswold, Spendthrift Trusts § 195, at
214-17 (2d ed. 1947) as “characterizing Minnesota caselaw . . . as upholding spendthrift
trusts in an extreme and wholehearted fashion.”).
IV.
Pros and Cons of Structures for Co-Ownership.
A.
Co-Tenancy.
i.
Pros.
Tenancy-in-common ownership is relatively simple to create – and, if a parent does no other
planning and simply leaves recreational real estate to children outright, this is the ownership
structure that the client will get by default.
In addition, tenancy-in-common ownership allows co-owners to own non-pro-rata interests in
the property (unlike joint tenancy ownership). So, for example, a parent could sell or give a
child a 10% interest in a parcel of real property, retaining 90%, and as a result of that small
fractional interest, the child would be entitled to use and enjoy the property as a co-tenant, and
would be jointly and severally liable for taxes, maintenance, and expenses – which means that
either the parent or the child could pay all of these expenses without any adverse gift tax
consequences.
ii.
Cons.
The biggest downside to outright ownership as tenants in common is that there is no simple
legal mechanism for decisions to be made other than unanimously. For example, if a majority
of the owners agree to pledge the property as collateral for a loan necessary to fund a capital
improvement to the property but one of the owners says no, the minority vote wins. This is
challenging enough when there are 3 owners; imagine the challenge if the property is owned
by 27 cousins 2 or 3 generations down the line. If the current owner wants future owners to
be able to act by committee or by majority, the best way to achieve that result is for the
current owner to set up that structure before making any transfers.
An additional challenge to co-tenancy is that there is no automatic mechanism to enforce nonpayment of a co-owner’s share of expenses, taxes, insurance premiums, etc. If one
beneficiary is perennially late with his or her share of the expenses (“The check is in the
mail,”) the others will have little choice but to pay more than their fair share in order to
her general estate, and subject in like manner as her other property to claims of her
creditors.”)
9
protect their own interests in the property. Over time, this can lead to significant conflict
between the owners. However, if there is an agreement in place in advance to give the parties
an objective mechanism to enforce the annual payment obligations of the owners, everyone
will have some degree of certainty as to 1) what is expected of them; 2) the consequences of
non-compliance; and 3) a mechanism to enforce those consequences.
The co-owners can, of course, enter into a tenancy-in-common agreement. However, the
relative bargaining positions of parties who are already owners is quite different than the
situation of a beneficiary who receives an interest in an entity where these decisions have
been made by the current owner in advance.
B.
Partnership or LLC.
i.
Pros.
Transferring recreational real property into a partnership or LLC gives the current owner a
couple of key advantages: first, it is easier to make gifts of small percentage interests in an
entity like a partnership or LLC (as a part of an annual exclusion gifting program, for
example) than giving sliver interests in real estate by deed. In addition, the current owner can
set up a mechanism for the payment of annual expenses (by means of a capital call system
with a pre-defined enforcement mechanism); include provisions governing the succession of
interests in the event of an owner’s disability, insolvency, divorce, or death; include
provisions for allocating use of the property among the owners; provide rules governing the
number of votes needed to sell the property or pledge it as collateral for a loan; and many
other administrative matters. In particular, the ability to set up a management committee
where each family group must elect a representative to make decisions affecting the property
can be particularly valuable where there are 27 beneficial owners across multiple generations.
An LLP, LLLP, or LLC structure also provides more protection for the individual owners
from creditor claims relating to the property than outright ownership of the property by cotenants.
ii.
Cons.
A partnership or LLC does not provide as much creditor protection for the owners as a funded
trust (especially in Minnesota). In addition, it is much more difficult to separate beneficial
ownership and management control through a partnership or LLC than it is with an
irrevocable trust.
C.
Trust.
i.
Pros.
An irrevocable trust created and funded by a third party provides the best creditor protection
for the beneficial owners (as a concrete example, a trust beneficiary’s personal assets would
not be exposed to claims of creditors who are injured on the property, where as a co-tenant’s
10
personal assets would be). Equally important, the assets of an irrevocable trust created and
funded by a third party are not generally available to satisfy claims brought by the
beneficiary’s creditors (for example, the creditors of a child who is involved in a failed
business venture would have no claim against the beneficiary’s interest in the trust, and the
beneficiary could not assign his or her interest as security for a debt). This is especially true
in Minnesota, where spendthrift protection for third-party irrevocable trusts is particularly
powerful.
A second advantage of an irrevocable trust is that it is very possible to separate management
responsibilities from beneficial interests. In an irrevocable trust, the trustee is responsible for
all management decisions, while the beneficiaries are entitled to the use and enjoyment of the
trust’s assets. Absent a breach of the trustee’s fiduciary duties (self-dealing, inattention, etc.),
the beneficiaries do not have the same sort of rights to object to the trustee’s actions as
minority owners of an LLC or partnership might under state law. The trustee need not be a
beneficiary; in fact, there are often significant advantages to having the trustee be someone
other than a beneficiary (especially when minimizing conflict between beneficiaries is
important).
ii.
Cons.
One significant factor where a trust is to be the owner of the real estate is that, since the
trustee (and not the beneficiaries) is generally responsible for the payment of expenses and
taxes associated with the trust’s ownership of the property, the trust must be funded with
additional liquid assets or another source of cashflow to cover those payments. This will most
likely require additional gifts to be made to the trust.
If the trust is not funded with liquid assets and the beneficiaries contribute cash to the trust to
cover these expenses each year, there will be potential estate, gift, and income tax
complications for the beneficiaries that could erode the tax benefits of the trust structure. In
addition, if the beneficiaries contribute assets to the trust each year (or make indirect gifts to
the trust by paying the trust’s obligations directly), the creditor protection that normally
applies to third-party-funded trusts could be undermined.
For this reason, it makes sense to select between a trust or an entity structure by asking one
key threshold question: does your client want to fund the trust with sufficient liquid assets to
cover its ongoing expenses, or does your client want the new owners to assume and fund these
expenses directly, with appropriate, objective enforcement mechanisms to govern their
behavior? A trust is the best solution for the former, while an LLC or partnership is the best
solution for the latter.
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VI.
Methods of Transfer.
A.
Lifetime Gift.
If the client wishes to transfer ownership currently, the simplest option is for the client to
make a gift to the client’s intended beneficiaries. The client can make the transfer outright or
in trust. If the value of the transfer exceeds the annual exclusion limit ($13,000 per donor per
done per year), the client will need to file a gift tax return disclosing the gift to the IRS, and
the gift will use all or a portion of the client’s gift tax exemption (currently $5 million, but it
may not stay at that level forever). As noted above, the client can give away interests in the
real estate itself, outright or in trust, or transfer the real estate to an entity (a partnership or
LLC) and make gifts of interests in the entity, outright or in trust. The client will need to
obtain a current appraisal of the value of the real estate (and the client may wish to obtain a
valuation of the interests in the entity if the client wishes to claim valuation discounts beyond
those available for fractional interests in real property generally).
From a tax perspective, one downside of making a current gift is that the recipient of the gift
will assume the client’s income tax basis in the property (locking in a built-in capital gain if
the property is ever sold). By contrast, if the client holds onto the property until death and
transfers it by will, the property will be subject to estate tax in the client’s estate, but the
income tax basis of the property will be stepped up to its value as of the client’s date of death.
For family vacation properties that will never be sold, the step-up in basis may well be
irrelevant.
If the current owner is older and is worried about qualifying for medical assistance at some
point in the near future, keep in mind that the Department of Human Services will look back
at gifts the client made within five years of applying for medical assistance. Depending on
the client’s health outlook and other assets, this may be a reason to make a gift now (and get
the look-back clock running) or to hold off on making a gift without other medical assistance
planning. Either way, if medical assistance is a concern for your client, the best advice is to
consult an expert in that area.
Note that a gift of a remainder interest with a retained life estate will cause estate tax
inclusion at the client’s death (with the corresponding step-up in income tax basis) and may
also be accessible by the Department of Human Services if medical assistance was paid to the
client during the client’s lifetime. In many ways, a gift of a remainder interest combines the
worst features of several other options. It is a completed gift requiring the filing of a gift tax
return (and the use of gift tax exemption), but it provides no estate tax reduction. It transfers
partial control and beneficial ownership to the recipients of the gift (thus subjecting the
property to claims of their creditors and spouses, requiring their consent for a sale or
refinancing and reducing the amount the current owner would receive in the event of a sale
during his or her lifetime) but it does not provide full protection from the transferor’s
creditors.
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B.
Sale.
If your client is not interested in making a current gift of the property (or if the client wishes
to keep the property in the family but is looking for a way to get more liquid assets and the
next generation is willing to provide it), another transfer option might be a sale. If the
successor owners have the capital to purchase the property, a sale will give them a greater
sense of investment in the property (“skin in the game,” so to speak). There are a couple of
tax issues that need to be considered, however, before pursuing this option.
First, in the event of a sale directly to individuals, the seller will recognize capital gains on the
sale (assuming the property has appreciated – in certain circumstances, the client may
recognize a loss on the sale), and the buyer will have a cost basis in the property. If the
property has appreciated significantly, the payment of capital gains taxes may not be
particularly desirable. If the client wishes to avoid triggering a capital gain – particularly if
the property will “never be sold” – the client can sell the property instead to an irrevocable
trust that is treated as a separate entity for estate and gift tax purposes but will be treated as
the client’s alter ego for income tax purposes. In tax parlance, we call such a trust a “grantor
trust.” When a client sells an appreciated asset to a grantor trust, the transfer is not treated as
a taxable event for income tax purposes, and the trust takes over the client’s basis in the
purchased property. As noted above, there are several advantages to having the property
owned by an irrevocable trust, but the client should note that the trust will need to be funded
with additional liquid assets or an additional source of cashflow – in this example, to pay
expenses and taxes as well as to pay for the purchase price of the property.
Many clients will wonder whether they can get the benefits of “sale” treatment by selling the
property to their children for a bargain price. Unfortunately, this will not work: under federal
gift tax law, the difference between the fair market value of the property and the sale price is
treated as a taxable gift.
C.
Gift at Death.
If the client wishes to hold onto the ownership and control of the property and transfer
ownership only at his or her death (particularly if the client is unconcerned about estate taxes
because of the size of the client’s estate relative to the tax exemption then in effect), the client
can transfer the property in one of many possible ways: a transfer of a remainder interest with
a retained life estate; a transfer-on-death (TOD) deed if permitted under applicable state law
(note: these are now permitted in Minnesota); or a transfer by will or revocable trust.
If the cabin is the client’s most valuable asset and the client wants to give the cabin to one but
not all of the client’s children, a transfer can sometimes lead to challenges in equalizing the
shares of the client’s estate passing to the other children. One solution to this may be to
purchase life insurance to help equalize the value passing to the other children. Alternatively,
if the child who is to receive the cabin has the resources, he or she can buy out the other
children (either with cash or a promissory note, or a combination of the two).
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If the client’s estate is large enough to generate an estate tax liability, the client will need to
consider the source of payment of taxes – it would be counter-productive to engage in
complex planning around a family cabin only to have to sell it to pay federal estate taxes.
As noted above, if the real estate is included in the client’s estate for estate tax purposes, it
will receive a step-up in basis for federal estate tax purposes.
D.
Qualified Personal Residence Trust.
A transfer to a qualified personal residence trust (QPRT) is a lifetime gift of a remainder
interest in a trust. A “remainder interest” is the right to receive the property remaining in the
trust after a term of years. Although the trust property will not pass to the remainder
beneficiary until expiration of the term, the gift is complete for federal transfer tax purposes
as soon as the trust is funded. Because of the delay in the beneficiary’s receipt of the trust
property, the value of the gift is substantially less than the value of an immediate transfer of
the property, which has tax benefits described below.
The grantor (creator) of a QPRT transfers ownership of a personal residence to the QPRT and
retains the right to live rent-free in the residence for a period of years, which the grantor
predetermines. Upon expiration of the specified term of years, ownership of the residence
passes to the remainder beneficiaries or to a trust for their benefit. Nevertheless, following
the expiration of the trust term, the grantor and the grantor’s spouse can continue to reside in the
residence provided that a fair market value rent is paid to the remainder beneficiaries or trust. Thus,
the value of the residence is excluded from the estates of the grantor and spouse, although they may
retain use of the residence. It is often the case that the carrying costs of a vacation residence
(property taxes, utilities, insurance, maintenance and repairs, etc.) are below the fair market rental
value of the residence. Therefore, the grantors can potentially continue using the residence without
paying rent to the remainder beneficiaries, as long as they continue to pay the carrying costs.
As noted above, a completed gift is made upon the transfer of the residence to the QPRT. The
value of the gift is the fair market value of the property transferred to the trust, reduced by the
present value of the grantor’s right to utilize the residence - free of rent - during the QPRT
term. This present value is determined by reference to the grantor’s age, the length of the
QPRT term, certain mortality factors (the likelihood the grantor may die during the QPRT
term) and the IRS interest rate for the month the QPRT was created.
Assuming the grantor survives the QPRT term, the remaining trust assets pass tax free,
because the gift was deemed to have been made upon the initial funding of the trust. This is
the key planning benefit of this type of trust. Generally, the value of the gift to the remainder
beneficiary for transfer tax purposes will be much less than the actual value of the residence
that passes to them at the end of the QPRT term. This is especially true if the value of the
residence continues to appreciate during the trust term.
If the grantor survives the QPRT term, the trust assets pass to the remainder beneficiary and
will not be includible in the grantor’s estate. If, on the other hand, the grantor dies before the
end of the QPRT term, all of the trust assets will be includible in the grantor’s estate for estate
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tax purposes. However, any of the grantor’s gift/estate tax exemption used to establish the
trust would be restored. Therefore, if the grantor dies before the end of the trust term, the
effect is as if the trust were never created. This type of transaction is sometimes referred to
informally as “heads I win, tails I tie,” because the worst case scenario is restoration of the
status quo. If the grantor dies before expiration of the QPRT term, the only losses would be
the expense of creating and maintaining the trust and the opportunity to have made other gifts.
If the grantor survives to the end of the QPRT term, the trust would recognize substantial gift
and estate tax savings.
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VII.
SAMPLE DOCUMENT
The following is a sample trust used to hold vacation property. With certain modifications,
such a trust could be used as the recipient of a lifetime gift, as the purchaser in a sale
transaction, as the recipient of a testamentary gift, or as the “back-end” trust of a QPRT.
THE _____________ FAMILY CABIN TRUST
I, _____________________, as Grantor, hereby establish the trusts created by this instrument upon the
terms and conditions described in this instrument, and ___________ agrees to serve as Trustee of such trusts.
ARTICLE 1
OVERVIEW
1.1
Purpose. I am establishing the trusts created by this instrument for the purpose of transferring
to my children and their descendants the ownership and management of the real estate legally described on
attached Exhibit A, the cabin located on such real estate, and all improvements and appurtenances to such cabin
(all of such property is referred to as the “Cabin Property”).
1.2
Limitations on Grantor. This instrument and the trusts created under this instrument are
irrevocable, and I shall not have any power to revoke, modify or amend this instrument or such trusts in any
respect. I shall have no interest either in the principal or income of such trusts. I understand that I may be taxed
on the taxable income of a trust created by this instrument that is not distributed to me. I hereby expressly
waive any right to be reimbursed for the income taxes on such income. Any usage of the Cabin Property by me
shall be permitted only pursuant to a lease arrangement on such terms and at such rates as is then fairly reflected
in the market between individuals who are not related or otherwise situated so as to provide terms less than on a
fair market basis.
ARTICLE 2
FUNDING
2.1
Establishment of Trust. I hereby convey all of my rights, title and interest in and to the Cabin
Property to the Trustee, who shall initially hold the Cabin Property in a trust known as the Cabin Trust to be
administered according to this instrument. I will confirm such conveyance by signing and delivering to the
Trustee any deed and/or other documents the Trustee may reasonably require.
2.2
Additional Property. Subject to the prior approval of the Trust Committee, any other property
acceptable to the Trustee may from time to time be contributed to a trust created by this instrument by me or any
other person by assignment, transfer and delivery of such property to the Trustee. The Trustee may request that
the transferor sign, deliver and record any documents as may be reasonably necessary to complete or evidence
such transfer.
ARTICLE 3
ADMINISTRATION OF CABIN TRUST
3.1
Prior to Division Date. Until the Division Date and subject to the direction of the Trust
Committee as provided below, the Cabin Trust and its assets shall be administered as follows:
(a)
General Administration. The Trustee will collect and manage all contributions,
income, and principal of the Cabin Trust and pay all proper expenses of the Trust as provided in this
instrument. The Trustee will allocate, for income tax purposes only, income and expenses of the Trust
among those individuals who are considered to be the owners of the Trust for federal income tax
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purposes as the Trustee determines reasonable, taking into account who made contributions to the Trust
to pay for such expenses and the proportionate deemed ownership interests of such individuals. The
Trustee will provide such allocations to such individuals to assist them in preparing and filing their
personal income tax returns.
(b)
Contributions. The Trustee will provide to the Family Representative of each Family
Branch written notice of such Family Branch’s share (the “Family Branch Contribution Amount”) of
the amount the Trust Committee determines from time to time is required to be contributed to the
Trust. Such Family Branch Contribution Amount shall equal the total amount the Trust Committee
determines from time to time is required to be contributed to the Trust divided by the number of Family
Branches then having a beneficial interest in the Cabin Trust. The Family Representative of a Family
Branch will be responsible to collect and contribute to the trust the Family Branch Contribution
Amount for such Family Branch. The Family Contribution Amount must be contributed to the Trust
within 30 days of the Trustee delivering written notice to the Family Representative. If a Family
Representative fails to contribute the Family Branch Contribution Amount by the applicable
contribution date, the Trustee will notify the Family Representatives of the other Family Branches of
the amount of such shortfall and the Family Branch Contribution Amounts of such other Family
Branches will increase to cover such shortfall. Any disproportionate contributions among Family
Branches shall be taken into account upon the termination of the Trust as provided in Section 3.2. If a
Family Branch fails to contribute such Family Branch’s Family Contribution Amount, the Trust
Committee may limit the use of the Cabin Property by any Family Member of such Family Branch until
such shortfall is satisfied. If at any time the sums furnished by the Family Representatives and the
principal of the Trust are insufficient to pay any expenses of the Trust, the Trustee shall be under no
obligation to pay such expenses and shall not be liable to any extent whatsoever in case any such
expenses are not paid. Any amounts to be contributed to the Cabin Trust pursuant to this Section 3.1(b)
are rental payments in exchange for the beneficial use of the Cabin Property. The provisions of this
Section 3.1(b) and Section 3.2(b) may be amended or deleted by unanimous written consent of the
Trust Committee.
(c)
Distributions. Except as provided in subsection (v) below, distributions from the
Cabin Trust may consist of any part or all of the income and principal of the Trust, may be made in
such shares and proportions as the Trustee may from time to time determine, and shall be made as
follows:
(i)
To such members of a Family Branch having a beneficial interest in the Trust
who are then living as the Trustee may from time to time deem necessary or advisable to
provide for the education, support, maintenance and good health of such individuals.
(ii)
principal.
Any income of the Trust not so distributed shall be accumulated and added to
(iii)
Distributions from the Trust need not be equal, but all principal distributions
from the Trust shall be taken into account in the termination of the trust or the liquidation of a
Family Branch’s beneficial interest in the Trust.
(iv)
No distributions shall be made if to do so would discharge a legal obligation
of a Trustee or a member of the Trust Committee.
(v)
Notwithstanding the foregoing, no interest in the Cabin Property shall be
distributed from the Cabin Trust so long as I am living and competent.
3.2
Upon and After the Division Date. Upon and after the Division Date, all of the assets
remaining in the Trust of every kind and nature (the “Trust Assets”) shall be administered and distributed as
follows:
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(a)
Creation of Shares. There shall first be created as many shares as there are Family
Branches having a beneficial interest in the trust as of the Division Date. Each such share shall be
designated by a Family Branch (each a “Family Branch Share”).
(b)
Allocation Regarding Disproportionate Contributions. The Trust Assets shall then be
allocated to each Family Branch Share the amount (if any) by which such Family Branch’s Cumulative
Contribution Amount exceeds the Cumulative Average Contribution. A Family Branch’s “Cumulative
Contribution Amount” is the sum of the Family Branch Contribution Amounts contributed to the trust
by such Family Branch. The Cumulative Average Contribution is the sum of the Family Branch
Contribution Amounts contributed to the trust by all of the Family Branches designated shares pursuant
to the preceding subsection (a), divided by the number of such Family Branches. Any disputes
regarding the contribution amounts set forth in this subsection shall be resolved by a majority of the
members of the Trust Committee. The Trust Assets remaining after the allocation in this subsection are
referred to in the “Remaining Trust Assets.”
(c)
Add Back for Prior Distributions. There shall be added to the Remaining Trust
Assets, for computation purposes only, the total amount of any principal distributions made to or for the
benefit of any issue of mine under the preceding provisions of this Article, except no addition shall be
made for any such distributions made to or for the benefit of any issue of mine who are members of a
Family Branch not having a beneficial interest in the Trust as of the Division Date.
(d)
Allocation of Remaining Assets. The Remaining Trust Assets, plus any amount so
added for computation purposes, shall be divided into as many equal shares as there are Family Branch
Shares. One such share shall then be allocated to each Family Branch Share; provided that such share
shall be reduced (but not below zero) by the total amount added for computation purposes attributable
to distributions made to or for the benefit of any member of such Family Branch.
(e)
Allocation of Family Branch Shares. A Family Branch Share shall be allocated to
such child of mine who is then living and who is also a member of such Family Branch. A Family
Branch Share shall be allocated to the then living issue of any deceased child of mine who are members
of such Family Branch, by right of representation, provided that each such sub-share of such Family
Branch Share which is so allocated shall be reduced (but not below zero) by the total amount added for
computation purposes attributable to distributions made to or for the benefit of the issue to whom such
sub-share is allocated or his or her issue. Each share or sub-share so allocated to any child or other
issue of mine shall be held by the Trustee as a separate trust named for such person and shall be
administered and distributed as provided in Article 4 of this instrument.
(f)
In Kind Distribution. The assets of the Trust may be distributed in kind if the Trust
Committee so determines, but no beneficiary of the Trust shall have any right to demand or expect to
receive any distribution from the Trust other than a distribution of cash.
3.3
Liquidation of Family Branch’s Interest. In addition, the Trust Committee may, any time
before the Division Date of the Cabin Trust, liquidate the beneficial interest of a Family Branch as provided in
this Section. There will first be identified the share of assets which would be allocated to the Family Branch
Share that would have been established for such Family Branch if the Cabin Trust was terminated on the date of
such liquidation and all of the assets allocated as provided in subsections 3.2(a) through (d). Such Family
Branch Share shall be allocated and distributed as provided in subsections 3.2(e) and (f). The liquidation of the
interest of a Family Branch will terminate such Family Branch’s beneficial interest in the Cabin Trust, and no
member of such Family Branch will have any rights, title, or interest in or to any assets of such Trust from and
after the effective date of such liquidation.
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ARTICLE 4.
TRUSTS FOR ISSUE
4.1
During Beneficiary’s Life. Each trust named for any issue of mine (such person being referred
to in this Section as the “beneficiary”) shall be administered and distributed upon the following terms and
conditions:
(a)
Income. The Trustee may pay to or for the benefit of the beneficiary any part or all of
the income of the trust as the Trustee may from time to time deem necessary or advisable for the health,
education, maintenance and support of the beneficiary and shall accumulate the balance of the income,
if any, and add it to the principal.
(b)
Principal. The Trustee may pay to or for the benefit of the beneficiary any part or all
of the principal as the Trustee may from time to time deem necessary or advisable for the health,
education, maintenance and support of the beneficiary.
(c)
Termination. The Trustee may distribute any part or the whole of the principal to the
beneficiary if the Trustee deems such action appropriate in view of changes in circumstances or
applicable laws, the cost of maintaining the trust, the conduct and manner of life of such beneficiary,
and the Trustee’s opinion as to the probability of such beneficiary making reasonably prudent use of
such property.
4.2
Upon Beneficiary’s Death. Upon the death of the beneficiary, the remaining principal and any
accrued or undistributed income of the trust shall be distributed to or for the benefit of such one or more of my
issue (other than the beneficiary), in such proportions and subject to such trusts, powers and conditions as the
beneficiary may appoint by the beneficiary’s valid Last Will, expressly referring to and exercising this power of
appointment. To the extent that the beneficiary shall not effectively exercise such power of appointment, such
principal and income shall be allocated and distributed as follows:
(a)
To the issue of the beneficiary who survive the beneficiary, by right of representation;
or
(b)
If no such issue survives the beneficiary, to the issue who survive the beneficiary, by
right of representation, of the nearest lineal ancestor of the beneficiary who is among my issue and who
has issue then living; or
(c)
If no such issue survives the beneficiary, to my issue who survive the beneficiary, by
right of representation.
(d)
Each share so allocated to any issue of mine for whose benefit a trust is being
administered pursuant to this Article 4 shall be added to such trust. Each such share so allocated to any
issue of mine for whose benefit no trust is being administered pursuant to this Article shall be held by
the Trustee as a separate trust named for such person and shall be administered and distributed as
provided in Article 4 of this instrument.
4.3
If, after the initial funding of any trust under this Article, any additional property becomes
allocable or distributable to such trust, that portion of such property that would have been distributable to a child
or other issue of mine had it been a part of the initial funding of such trust shall be immediately distributed to
such person.
ARTICLE 5
MANAGEMENT OF TRUSTS
5.1
Trustee. The following provisions apply with respect to the Trustee of each of the Trusts
created by this instrument:
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(a)
Appointment of Trustee. The Trusts created under this instrument shall at all times
have at least one Trustee. _____________ is appointed as the initial Trustee of the Cabin Trust, and
agrees to act as Trustee as provided in this instrument. If at any time no one is serving as Trustee of a
Trust created under this instrument, the Trust Committee shall appoint one or more individual or
individuals (other than me), bank or trust company, or any combination thereof, as Trustee of such
Trust.
(b)
Removal of Trustee. The Trustee of any Trust created under this instrument may be
removed by me so long as I am living and competent. If I am no longer living and competent, the Trust
Committee may remove any Trustee of any Trust created under this instrument by written instrument
delivered to such Trustee. Any such removal shall be effected by written notice to the Trustee affected,
and shall take effect on the day specified in such notice.
(c)
Resignation of Trustee. A Trustee may resign by delivering such Trustee’s written
resignation to the Trust Committee. Such resignation shall take effect on such date specified in such
instrument of resignation, which date shall not be earlier than 30 days after the date of the delivery of
such written resignation unless waived by the Trust Committee.
(d)
Responsibilities of Trustee. Subject to the supervision and control of the Trust
Committee, the Trustee shall (i) administer each Trust according to the terms of this instrument; (ii)
implement the policies and decisions of the Trust Committee; (iii) maintain complete and accurate
accountings for each Trust, including without limitation, recording all income, contributions, and
expenses of the Trust; allocating income, contributions, and expenses among those individuals who are
considered to be the owners of the Trust for federal income tax purposes; and, for the Cabin Trust,
maintaining a cumulative schedule of contributions made by each individual and each Family Branch;
and (iv) accomplish such other tasks as may be delegated to the Trustee from time to time by the Trust
Committee.
(e)
Powers of Trustee. Subject to the supervision and control of the Trust Committee, the
Trustee shall have all of the power to carryout the Trustee’s responsibilities, including, without
limitation, all rights, powers, and privileges set forth in the Minnesota Trustees’ Powers Act, Minnesota
Statutes, Sections 501B.79, et seq., which is expressly incorporated in this instrument by reference.
The Trust Committee may expand or limit the powers of the Trustee, or allocate powers among
multiple Trustees, in each case as the Trust Committee determines appropriate. The Trustee may take
any action as Trustee without the necessity of notice to or approval of any court or person.
(f)
Delegation and Decision Making. If at any time there are two or more Trustees of a
trust established under this instrument, the following provisions apply where the context indicates:
(i)
A Trustee may, by written instrument, delegate to any other Trustee, with the
consent of the latter, any or all of such Trustee’s rights, powers, duties and discretions;
provided that no such rights, powers, duties or discretions may be delegated to a Trustee who
is otherwise precluded from exercising such rights, powers, duties and discretions under this
instrument or pursuant to state law.
(ii)
Any action or decision of the majority of the Trustees shall be effective as if
taken or made by all Trustees. A nonconcurring Trustee shall not be liable for any act or
failure to act of the majority.
5.2
Trust Committee. The following provisions apply with respect to the Trust Committee:
(a)
Number of Members. The Trust Committee shall consist of as many members as
there are Family Branches from time to time.
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(b)
Appointment and Removal of Members. The Family Representative of each Family
Branch shall appoint a Family Member to serve as a member of the Trust Committee. Such Family
Representative may at any time and from time to time remove any such member and appoint a Family
Member as a successor Board Member.
(c)
Resignation of Board Members. A member of the Trust Committee may resign by
delivering such member’s written resignation to the other members of the Trust Committee and to the
person or persons entitled to appoint such member’s successor under this instrument. Such resignation
shall take effect on the date specified in such instrument of resignation, which date shall not be earlier
than 30 days after the date of such delivery of such written resignation unless waived by the person or
persons entitled to appoint such successor.
(d)
Powers and Discretions of the Trust Committee. The Trust Committee may (i)
develop policies and guidelines for the proper administration of each of the Trusts created under this
instrument and the assets of such Trusts, including, but not limited to, establishing terms by which the
Cabin Property may be rented to non-beneficiaries of the Trust at fair market rates and establishing
policies by which the Cabin Property may be rented and/or used by beneficiaries of the Trust; (ii)
evaluate the Trustee; and (iii) make such other decisions reserved to the Trust Committee in this
instrument. The Trust Committee shall make all decisions relating to the value of assets allocated or
distributed from the Trusts, (including valuations for purposes of terminating the Cabin Trust and
liquidating a Family Branch’s interest in the Cabin Trust), and all of such decisions shall be binding
upon the parties affected thereby.
(e)
Meetings. Meetings of the Trust Committee may be called from time to time by two
or more Committee members providing the other members with written notice of the meeting and an
agenda of the meeting at least five days before the meeting. Items discussed at a meeting of the
Committee will be limited to those items disclosed on the agenda unless at least a majority of the entire
Trust Committee determines otherwise.
(f)
Quorum and participation in meetings. The presence of at least a majority of the then
current members of the Trust Committee is needed for a quorum to permit the Committee to act.
Presence at a meeting may be either in person or by telephone or other means of communication where
all of the members of the Trust Committee present at the meeting may simultaneously hear each other.
(g)
Decision making. The members of the Trust Committee will, through discussion,
strive to make decisions by consensus. For this purpose, consensus means each member can live with
the result, even though the decision may not be the preferred choice for some or all of the Committee
members. Should a situation arise where a decision cannot be reached by consensus, any member of
the Trust Committee may request a vote, whereby a vote will be taken and the decision of the Trust
Committee will be the decision supported by a majority of the then current members of the Trust
Committee. Each member of the Trust Committee has one vote. Decisions made by the Trust
Committee will be supported by all members of the Committee.
(h)
Chair. The Trust Committee will have a Chair. The Chair will be a Committee
member chosen by the Trust Committee. Before a meeting, the Chair will see that the agenda and other
arrangements for the meeting are in place. The Chair will solicit agenda topics from other members of
the Trust Committee and the Trustee. During the meeting, the Chair will see that the agenda is
followed, the Committee stays on task, all the members have the opportunity to be heard, and decisions
of the Committee are clear and understood. After the meeting, the Chair will see that minutes are kept
of the meeting, the minutes reflect the decisions of the Committee and action items agreed on, and the
minutes are distributed to all of the members of the Committee promptly following the meeting. The
Chair may delegate some or all of these tasks to another.
(i)
Written Action. Any action required or permitted to be taken at a meeting of the Trust
Committee may be taken by written action signed by all of the Committee members.
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5.3
Limitation on Authority. Notwithstanding any other provision in this instrument to the
contrary, the written consent of all of the then current members of the Trust Committee who are in good
standing is required to (i) sell or otherwise dispose of the Cabin Property; (ii) determine any issue of
competency regarding me or any other person; (iii) direct the complete liquidation of one or more Family
Branch’s interest in the trust prior to the Division Date; (iv) amending subsections 3.1(b) and 3.2(b) as permitted
in subsection 3.1(b); and (v) determine the Division Date leading to the termination of the Cabin Trust
established by this instrument; provided, the Cabin Property may not be sold or otherwise disposed of so long as
I am living and competent and the Division Date may not be determined so long as the Cabin Property is an
asset of any Trust created by this instrument. A member of the Trust Committee is in “good standing” if the
Family Branch whose Family Representative has appointed such member of the Board has contributed to the
trust all of the Family Branch Contribution Amounts (as defined in Section 3.1) required to be contributed to the
trust by such Family Branch as provided in Section 3.1.
5.4
Limitation on Distributions. Notwithstanding any provision in this instrument to the contrary,
no Trustee may participate in the exercise of (i) any power to make discretionary distributions of income or
principal to or for the benefit of such Trustee or member of the Trust Committee unless such discretion is
limited by an ascertainable standard relating to such individual’s health, education, maintenance and/or support
as described in Sections 2041 and 2514 of the Internal Revenue Code; or (ii) any power to make discretionary
distributions of income or principal to discharge any legal obligation of such Trustee or member of the Trust
Committee.
5.5
Compensation. Neither the Trustee nor any member on the Trust Committee will be entitled to
any compensation except as specifically approved in writing by the Trust Committee.
ARTICLE 6
GENERAL PROVISIONS
6.1
Specific Powers. The following provisions apply with respect to each of the Trusts created by
this instrument:
(a)
Initial Grant of Powers. So long as I am living and competent and until rescinded as
provided in this Section, I will have the power, exercisable in a nonfiduciary capacity and without the
approval or consent of any person in a fiduciary capacity, (i) to cause the Trustee of any Trust created
by this instrument to make loans to me, up to the value of the income and principal of such Trust,
without security but with adequate interest; and (ii) to add to any such Trust an exempt organization as
a beneficiary entitled to receive income and principal of such Trust as the Trustee deems necessary or
advisable in the Trustee’s sole and absolute discretion; in each case without the approval of the Trust
Committee. An “exempt organization” is any organization meeting any of the requirements of Section
170(c)(2) through (5) of the Code and the requirements of Sections 501(c)(3) and 2055(a)(3) of the
Code.
(b)
Rescission of Powers. So long as I am living and competent, I may rescind either or
both of the powers granted to me in subsection 6.1(a). If I am living but not competent, such powers
may be rescinded by my attorney-in-fact. Any such rescission shall be effected by written notice to the
Trustee of such Trust, and shall apply to the entire tax year or years specified in such notice.
6.2
Spendthrift Provisions. No title in or to any Trust or Trust fund created by this instrument
shall vest in any beneficiary, and neither the principal nor the income of any Trust estate shall be liable for the
debts of any beneficiary, and no beneficiary shall have any power to transfer, encumber or in any manner, other
than by power of appointment or withdrawal expressly granted hereunder, to anticipate or dispose of his or her
interest in any Trust estate hereunder, or the income produced thereby, prior to the actual distribution thereof by
the Trustee to such beneficiary.
6.3
Reliance Upon Statement of Trustee. No person dealing with any Trustee purporting to act
under this instrument need inquire into the authority of such Trustee to act, but any such person may rely upon
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the statement of such trustee.
6;4
Accounting for Payments. No person need account for any payment made to him or her
pursuant to this agreement, and such person’s receipt shall fully discharge the Trustee with respect to any such
payment.
6.5
Perpetuities Period. No Trust established under this instrument shall continue beyond the
Perpetuities Period as defined in this Section. The Perpetuities Period is the period beginning on the date of this
instrument and continuing for my life and the lives of all issue of my grandparents living as of the date of this
instrument, and the life of the survivor of all of them, and for 21 years after the death of such survivor;
provided, however, if the life of any individual so designated is not a permissible measuring life under
applicable Minnesota law as of the date of this instrument, such individual shall be disregarded for purposes of
determining the Perpetuities Period. At the end of the Perpetuities Period, each such Trust which has not
already terminated shall terminate and all of the then-remaining principal and undistributed income of such
Trust shall be distributed outright to the persons then entitled (either absolutely or in the discretion of the
Trustee) to receive the income from the Trust or have it paid or accumulated for his, her or their benefit, and if
there shall be more than one such person, in the same proportions in which they are so entitled to receive said
income or to have it paid or accumulated for their benefit, or if no such provisions are specified in this
instrument, then distribution shall be by right of representation.
6.6
Administrative Waivers. To the extent such requirements can be waived, the Trustee shall not
be required (i) to file accounts or reports of the administration of the Trusts, or to register the Trusts in any
court, (ii) to furnish any bond or other security for the proper performance of the Trustee’s duties, or (iii) to
obtain authority from a court for the exercise of any power conferred on the Trustee by this instrument.
6.7
Applicable Law. The laws of the State of Minnesota shall govern the interpretation and
validity of the provisions of this instrument and all questions relating to the management, administration,
investment and distribution of the trust hereby created; provided, however, that the Trust Committee from time
to time, by writing filed with the trust records, may elect to have the laws of another state (the “new state”) so
govern if, at the time of electing, such election does not conflict with my statement of intent contained in Article
1 and at least one of the following conditions exists: (i) a Trustee resides or has its principal place of business
in the new state, (ii) an issue of mine resides in the new state, (iii) all or a significant portion of the trust assets
are located in the new state, or (iv) an agent for management of all or a significant portion of the trust assets is
located in the new state.
ARTICLE 7.
IDENTIFICATIONS AND DEFINITIONS
7.1
“Trustee” means the initial Trustee and each additional and successor Trustee, and shall also
include the plural if at any time there is more than one Trustee or where the context otherwise so indicates.
7.2
“My children” or “children of mine” or similar references mean my current children who are
___________________, ___________________, ___________________, ___________________.
7.3
A “Family Branch” will exist for (i) each of my children who is then living; and (ii) each child
of mine who is deceased but who has issue who are then living. Each Family Branch will be designated by the
name of the child of mine who is included or whose issue is included in the Family Branch. As of the date of
this instrument, there are four Family Branches:
The ___________________ Family Branch, the
___________________ Family Branch, the ___________________ Family Branch, and the
___________________ Family Branch.
7.4
“Members of a Family Branch” consists of the child of mine for whom such Family Branch is
designated and the issue of such child.
7.5
A “Family Member” is any person who is among my issue (including adopted persons).
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7.6
A “Family Representative” will represent each Family Branch as provided in this instrument.
The Family Representative of a Family Branch will be appointed and may be removed as follows:
(a)
Each child of mine who is included in such Family Branch is entitled to appoint any
Family Member (including himself or herself) to serve as the Family Representative of such Family
Branch, and such child is also entitled at any time and from time to time to remove any such Family
Representative and appoint a Family Member as a successor Family Representative.
(b)
Such child may delegate his or her authority to appoint and remove such Family
Representative to one or more Family Members who are then living and competent and may revoke
such delegation.
(c)
If such child dies or is otherwise unable or unwilling to appoint such Family
Representative, and he or she has not delegated the authority to appoint and remove such Family
Representative as provided above, a majority of the then living issue of such child who are then living
and competent shall have the authority granted to such child to appoint and remove such Family
Representative.
(d)
If at any time there is no Family Representative representing a Family Branch and the
individual or individuals having the authority to appoint such Family Representative fails to do so
within 90 days of such vacancy, the members of the Trust Committee shall appoint a Family
Representative to represent such Family Branch, subject to such Representative being replaced by such
child or such child’s issue as provided in this instrument.
(e)
Any such appointment or removal shall be accomplished by delivering written notice
of such appointment or removal to the Trust Committee and the Family Representative affected. Such
appointment and removal shall take effect on the dates specified in such notice. Any delegation of
authority to appoint and remove a Family Representative and revocation of such delegation shall be
accomplished through written notice delivered by such child to the Trust Committee and to the Family
Member or Members being delegated such authority.
(f)
The Family Representative of a Family Branch shall have the authority to make all
decisions and to sign and deliver any and all documents relating to such Family Branch’s interest in all
of the Trusts created by this instrument, and all such actions shall be binding upon all living and
prospective members of such Family Branch. This authority specifically includes, but is not limited to,
the authority to agree to have the beneficial interest of such Family Branch terminated, liquidated or
held as a separate trust as provided in this instrument.
7.7
“Issue” of a person includes both the singular and the plural, and includes the legitimate
natural descendants of such person, and also those who become such descendants through legal adoption.
7.8
“Cabin Trust” means the initial trust created upon the initial transfer of assets to the Trustee
and administered pursuant to Article 3 of this instrument.
7.9
“Division Date” of the Cabin Trust created under this instrument means any date following the
date that the Cabin Property is sold or otherwise disposed of and is not an asset of the Cabin Trust that the Trust
Committee determines in writing that the Cabin Trust shall be terminated.
7.10
“Code” means the Internal Revenue Code of 1986, as amended from time to time, or
corresponding provisions of any subsequent Internal Revenue Code.
7.11
Except where the context indicates otherwise, words in the masculine gender shall include the
feminine and neuter, and words in the feminine gender shall include the masculine and neuter.
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7.12
“Notice” when required to be in writing may be given by mail, in person, or any other means
by which written notice was actually received; and when permitted orally may be given by telephone, in person,
or by any other means by which notice was actually received. Notice given by mail shall be effective three days
after being sent by United States Mail, full postage prepaid, and addressed to the addressee at such addressee’s
current legal residence.
7.13
If any property is to be allocated to the issue of any person “by right of representation,” such
property shall be divided into as many equal shares as such person has children living on the date of the event
giving rise to such allocation and deceased children leaving issue living on such date. One share shall be
allocated to each child who is living on such date. One share shall be divided among and allocated to the issue
living on such date of each deceased child in the same manner, with repeated division and allocation as
necessary at each succeeding generation until such property is fully divided and allocated among the issue of
such person living on such date.
IN WITNESS WHEREOF, I have hereunto signed this instrument as of _____________________,
20___.
___________________________________
Witness
_________________________________
_____________________, Grantor
___________________________________
Witness
The undersigned agrees to act as Trustee of the trust under the foregoing instrument, effective as of the
date first set forth above.
___________________________________
Witness
_________________________________
_____________________, Trustee
___________________________________
Witness
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