Trust Funding Options - ACTEC Trust & Estate Talk

ACTEC Trust & Estate Talk

Episode Summary: Trust Funding Options

Date: April 7, 2026
Host: ACTEC Fellow Julia Meister
Guest Expert: ACTEC Fellow Stacy Singer

Episode Overview

This episode explores the crucial topic of trust funding options, focusing on how different funding formulas affect the distribution and taxation of assets within an estate plan. ACTEC Fellow Stacy Singer provides practical insight into the distinctions between fractional and pecuniary bequests, the implications for tax apportionment, and the special complexities that arise with hard-to-value assets and retirement accounts.

Key Discussion Points and Insights

1. Types of Funding Formulas

[01:14]

There are two primary types of trust funding formulas:
- Fractional Bequest
- Pecuniary Bequest

Fractional Bequest

Definition: “A fractional bequest, it is not surprisingly described as a fraction that is a numerator and a denominator.” (Stacy Singer, 01:26)
Example: “I give one half to my children.”
Characteristics:
- Each beneficiary receives an undivided interest in each asset.
- Assets are allocated proportionately among shares.
- No need to revalue assets if allocation is proportional.
- Taxes, claims, debts, expenses, and appreciation/depreciation are shared proportionately.
- Key Advantage: If assets are distributed in kind, there’s no capital gain recognized at funding.
- Particularly advantageous for funding with assets like IRAs and 401(k)s, as there’s no income recognition at the time of funding.
Implementation Note:
- Finalization often waits on receipt of the closing letter, but partial funding and later “true up” is a practical strategy.

Pecuniary Bequest

Definition: “A pecuniary bequest is literally the gift of an actual dollar amount.” (Stacy Singer, 03:04)
Examples:
- Fixed sum: “I give $500,000.”
- Formula: “I give to the trustee the smallest pecuniary amount that...”
Operational Insights:
- The residuary beneficiary bears the gain or loss from asset value changes between death and funding.
- Offers flexibility in choosing which assets go into each trust.
- Critical Issue: Funding with appreciated assets results in immediate capital gains.
- Assets must be valued at the date of funding, which can be challenging and costly—especially for hard-to-value or discounted assets.

2. Subtypes of Pecuniary Bequests

[04:54]

True Worth Pecuniary Bequest
- Satisfied using values at the date of distribution.
- The set dollar amount is not affected by appreciation or depreciation—those pass to the residue.
- Caution: Using a true worth formula with IRA or other IRD (income in respect of decedent) assets is problematic due to immediate income recognition.
- Quote: “Be really careful. You do not want to use a true worth formula when you have IRA assets that are going to be passing through the formula.” (Stacy Singer, 05:28)
Fairly Representative Pecuniary Bequest
- Amount is based on values as ultimately determined for tax purposes.
- Funded assets must fairly represent the appreciation or depreciation of available assets.
- Not required to allocate strictly proportionately, but total values must be representative of asset changes.
- Implementation Challenge: Assets must be valued at funding to demonstrate the representation of appreciation or depreciation unless pro rata funding is used.

3. Best Practices and Cautions

[06:52]

Not all formulations are equal—each approach carries different practical and tax consequences.
Review formula language regularly:
- “Go back, look at your formula, make sure it makes sense both as your default and for any particular client, because this is one of those areas that can trip you up simply because you haven’t looked at it recently.” (Stacy Singer, 07:09)

Notable Quotes

On Fractional Bequests:
- “Taxes, claims, debts, expenses, and especially appreciation or depreciation are shared proportionately between the different funded trusts.” (Stacy Singer, 01:51)
On Capital Gains and Funding:
- “If you fund with appreciated assets, you are going to incur capital gain.” (Stacy Singer, 03:54)
On Client Perceptions & Values:
- “Oftentimes they love discounts for tax purposes. They don’t love them for distribution purposes.” (Stacy Singer, 04:24)
Practical Advice:
- “You do have to make sure that overall the values in the pecuniary amount show the appreciation or depreciation since the date the funding was done.” (Stacy Singer, 06:16)

Important Segments with Timestamps

Introduction of Funding Types & Basic Concepts: [01:14–02:54]
Deep Dive: Fractional vs. Pecuniary Bequests: [02:54–04:54]
True Worth vs. Fairly Representative Pecuniary Bequests: [04:54–06:50]
Key Takeaways and Recommendations: [06:51–07:26]

Tone & Language

Stacy Singer’s commentary is practical, clear, and aimed at professionals in estate planning. She emphasizes the technical distinctions and practical consequences, pairing technical accuracy with front-line experience.

Summary

In this concise yet informative episode, ACTEC Fellow Stacy Singer demystifies the essential, yet sometimes overlooked, area of trust funding formulas. She draws clear lines between fractional and pecuniary bequests, further clarifying the critical tax and practical distinctions within pecuniary bequests. The key message: Careful review and thoughtful selection of funding formulas are vital to a successful estate plan, especially when dealing with complex or fluctuating assets. Practitioners are strongly encouraged to revisit their clients’ estate plan formulas to avoid unwelcome surprises during trust funding.

Transcript

A (0:05)

Trust funding options that is the subject of today's ACTEC Trust and Estate Talk.

B (0:12)

Welcome to ACTEC Trust and Estate Talk from the American College of Trust and Estate Council, a professional society of peer elected trust and estate lawyers in the United States and around the globe. This series offers professionals best practice advice, insights and commentary on subjects that affect our profession and clients. And now our ACTEC Fellow host with today's topic.

A (0:37)

This is ACTEC Fellow Julia Meister of Cincinnati, Ohio. The choice of funding formulas can dramatically affect how trusts are funded and how the overall estate plan operates. Careful planning is especially important when dealing with hard to value assets, retirement accounts and other complexities that can influence how taxes are apportioned among beneficiaries. ACTECH Fellow Stacy Singer of Chicago, Illinois will discuss trust funding options and the role they play in determining how assets are allocated within an estate plan. Welcome Stacy.

C (1:14)

Thanks, Julia. I'm really happy to be here to talk about one of those topics that many of us didn't really dig into until we were in practice and really had to learn and understand the implications of different funding formulas. I want to deal into those formulas right now and talk a little bit about the different types of formulas and when one or the other might be beneficial. So let's start with the basics. There are two types of formulas that one can choose. Generally those are a fractional bequest and a pecuniary bequest. And I'd like to start with the fractional bequest. Where you have a fractional bequest, it is not surprisingly described as a fraction that is a numerator and a denominator. I give one half to my children. I give a fractional share where the numerator is X and the denominator is Y. It's normally pretty easy to tell that you have a fractional formula. So what are the characteristics of that kind of bequest? First of all, at least in theory, it means that each beneficiary is entitled to an undivided interest in in each asset. It means that the assets are allocated proportionately among the shares and they don't need to be revalued if that allocation is done proportionately. It means that taxes, claims, debts, expenses, and especially appreciation or depreciation are shared proportionately between the different funded trusts. And if the assets are distributed in kind, there's no capital gain. Those are some very big advantages, particularly with respect to the capital gains issue, as we'll talk about in a few minutes. A pecuniary bequest can in many cases lead to a gain on Funding. This is especially important when you start thinking about things like IRA and 401 assets. If those assets are allocated using a fraction, there is no recognition of income at the time of funding. When we think about the fraction, we're going to apply that to the market value of the assets at the date of funding. That means you can't really finalize the funding until after you have a closing letter, but you can absolutely do a partial funding and then do a true up once you have that closing letter. I will say I am a fan of fractional formulas as someone who's worked at a corporate fiduciary and had to implement them, but there's lots of debate on this topic. So what's a pecuniary bequest? A pecuniary bequest is literally the gift of an actual dollar amount. And it can either be stated as an amount I give $500,000 or is part of a formula. So you'll often see things like I give to the trustee the smallest pecuniary amount. That and fill in the blank. That is, not surprisingly, a pecuniary formula. So generally a pecuniary formula means that the residuary taker either gets the upside or the downside through the funding date. If the assets go up in value, that residue is going to get more, but if they go down in value, that residue is going to get less. There's a lot of flexibility in choosing which assets go into each trust. But as I mentioned before, if you fund with appreciated assets, you are going to incur capital gain. And then perhaps most challenging in many cases is the assets that you use to satisfy the pecuniary bequest have to be valued at the date of funding. So that can lead to a lot of challenges, particularly if you have hard to value assets. Assets that were valued with a discount on the estate tax return, because, first of all, you need to revalue them. That's an additional cost. And secondly, that may actually not coordinate with what the family is thinking an asset is worth. Oftentimes they love discounts for tax purposes. They don't love them for distribution purposes. Now, I think many of us just think pecuniary is pecuniary. But there are two types and they have a very significant difference between them. The first is what's known as true worth. And that's also the one I think we think about the most often, although probably not the most advantageous. And here you're going to satisfy the pecuniary amount using values at the date of distribution. That means that the pecuniary amount is a set amount. It does not get any upside or downside at all. And again, the residue does. Now as I mentioned before, that means that using things like IRD, think IRA assets or 401k assets are going to have the recognition of income as soon as you fund. So be really careful. You do not want to use a true worth formula when you when you have IRA assets that are going to be passing through the formula. The other type of pecuniary formula, and one that is, I think more advantageous, is known as fairly representative. And that's a gift that uses values as finally determined for federal estate or income tax purposes. But the catch here is that the assets allocated to that pecuniary share have to fairly represent the appreciation or the depreciation of the assets that are available. So think everything has to somehow have the same up or downside. Now that does not mean you have to allocate proportionate shares, although that can be the easiest. You can still pick and choose. Try and get the assets you want outside of the pecuniary share outside. But you do have to make sure that overall the values in the pecuniary amount show the appreciation or depreciation since the date the funding was done. The other thing I'll just remind you is that assets that are allocated to that pecuniary share again have to be valued as of the date of distribution. And here it's because you have to be able to show that you've fairly represented appreciation or depreciation unless you use a pro rata funding. As you can see, these are very different results based on which of these different four formulas that you choose. So my suggestion is go back, look at your formula, make sure it makes sense both as your default and for any particular client, because this is one of those areas that can trip you up simply because you haven't looked at it recently.