The three stages are
1. the drafting of the trust instrument
2. the funding of the trust and
3. the administration of the trust
The drafting stage: IRS has provided specimen agreements for annuity trusts and unitrusts, which makes the drafting of CRAT and CRUT documents relatively easy. But there are some cautions here.
- Some lawyers who draft such documents work from 20-year-old or older agreements they’ve got archived on their computers. These old agreements sometimes are not quite right
- Some lawyers who draft CRAT and CRUT agreements are over their heads because of the gift transaction—such as a CRAT to be funded with multiple assets.
The funding stage: The funding stage is usually taken as a given. But it can be tricky, especially if the donor is going to use multiple assets to fund the trust. The key to avoiding problems in the funding stage is for the donor’s lawyer to monitor the funding. I’ve seen spectacular instances in which the donor’s lawyer did not monitor the funding, and things went spectacularly wrong.
The administrative stage: One rarely finds errors (problems) in the administrative stage if the trustee has been a professional trustee deeply experienced in managing CRUTs and CRATs. The situation can be quite different if the trustee has lacked such experience or the donor has been the trustee.
Consequences of errors: Pure drafting errors are often fixable. They are the easiest type of errors to fix.
Funding errors are sometimes fixable, sometimes not, depending on the error. A fix is likely to ring up the cash register in lawyer’s fees.
Administrative errors typically are not fixable and often disqualify the trust as a CRAT or a CRUT, which can be disastrous. A classic example here is the donor who, as trustee of her CRAT, decided not to take a payout for some years.
The devil is in the details, and qualified legal counsel and administration is critical to avoid potential problems at all three stages of CRT.
By Jon Tidd, Esq