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________________________________________________ Fiduciaries / Trustees
You
Can Hire Expertise You may have doubts about naming your spouse as trustee. Of course,
if you feel that your spouse is not financially responsible, you
should not consider designating him or her as trustee. More likely,
however, the concern is that your spouse is not financially experienced.
But remember, expertise can be bought. A spouse acting as trustee
can engage a financial advisor on behalf of the trust. Such advisors
include money managers, accountants, bookkeepers and attorneys. Make sure your spouse understands the necessity of selecting qualified
advisors with whom he or she can communicate and in whom he or she
has confidence. Uncle Joe may be a family friend or relative but
will not be a qualified advisor if he doesn't have the knowledge
and experience necessary to protect trust assets and beneficiaries.
In the trust agreement, consider naming people or firms in whom
you have confidence and who you believe your spouse should consider
consulting. Or include guidelines to help your trustee spouse find
the needed talent. Avoiding
Inclusion In Spouse's Estate You also may hesitate to designate your spouse as trustee because
of a concern that the trust assets will be included in your spouse's
taxable estate. This is not necessarily the case. Even if your spouse
is a beneficiary of the trust, trust assets will not be included
in the spouse's taxable estate as long as his or her ability to
distribute trust income or principal to himself or herself is limited
to an ascertainable standard either by the trust agreement or by
state law. Accordingly, the trust agreement should clearly provide for either
nondiscretionary, mandatory distributions or discretionary distributions
to your spouse based on support, maintenance, educational or health
needs. In addition, your spouse should not have the power to satisfy
his or her legal obligations with trust assets. If you have minor
children, the trust should not permit the spouse to make distributions
for their support. Distributions on behalf of children that do not
discharge your spouse's legal obligations may be permissible. Another potential trap that could cause trust assets to be included
in your spouse's taxable estate may arise in connection with a "step
plan." For example, assume real estate is held by husband and
wife in joint tenancy, and, in connection with a plan, they transfer
title to the husband and then he transfers that property into a
trust with his wife as both trustee and beneficiary. The momentary
sole ownership of the property by the husband may not be enough
to sever the step, and the wife will be deemed a grantor of one-half
of the property. Accordingly, one-half the property could be included
in her taxable estate. Life
Insurance Trap Special concerns arise if the trust is to own life insurance on
your spouse's life or on the joint lives of you and your spouse.
In this situation, if your spouse acts as trustee, he or she may
have incidents of ownership over trust-owned policies. This could
cause the insurance proceeds to be included in your spouse's taxable
estate. Your spouse should generally not even act as a co-trustee
unless the trust agreement clearly provides that he or she has no
authority or power relating to the insurance policy. Flexibility
Is Key Appointing your spouse as trustee can increase trust planning flexibility.
It may permit you, as the grantor, to retain indirect control of
trust assets and have indirect access to trust assets if the spouse
is also a beneficiary. Also, consider whether having your spouse
as trustee would still be desirable if your marriage should be in
difficulty or end in divorce. Designation of your spouse as trustee
of a testamentary trust clearly places control of the trust assets
in his or her hands and within the framework of the trust agreement
may permit greater economic flexibility and tax planning. We would be pleased to help you decide whether your spouse should be your trustee. Please call us to discuss your estate planning needs. Income
Tax Consequences A number of factors determine the income tax consequences of a
trust when the spouse is the trustee. There are four possibilities:
Income can be taxed 1) to the trust, 2) to the grantor, 3) to the
spouse or 4) partly to each. While you, the grantor, are alive, income earned by the trust will be taxed if:
In addition, because of an income tax rule known as "spousal
attribution," the Internal Revenue Service will deem any power
or interest in a trust held by your spouse to be held by you. Accordingly,
if you should not act as trustee for income tax purposes, then your
spouse should not be trustee. There is no spousal attribution for
estate or gift tax purposes.
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©
Copyright 2001 Fahlman & Olson. All rights reserved.
LEGAL NOTICE
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