All posts in Trustees

08 Apr

Preparing for the Unexpected: Appoint a Successor Trustee in Case You Become Incapacitated

In Living Trusts,Trustees by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 2001

Among a living or revocable trust’s benefits is that you can draft it to manage your assets without court involvement should you become incapacitated. Generally, the trust’s creator also acts as its trustee. But who becomes trustee if you are declared disabled? To answer this question, let’s examine circumstances that may occur if you become incapacitated.

Declaring Incapacitation

Typically, a trust should provide a definition of incapacity and specify how the successor trustee will take over for the disabled trustee. The trust may also mandate that an attending physician, committee, court finding, or your spouse or child determine your incapacity.

And though you may worry about giving your spouse or child the power to declare you disabled, doing so may simplify and diminish the cost of using a court proceeding or physician. In the event that you disagree with the declaration, the court can protect your rights and allow you to manage your own affairs.

For example, Ed is the acting trustee of his revocable trust with approximately $3 million in assets. He has four children and eight grandchildren. The trust provides that his attending physician, Dr. Goodhealth, is to determine his incapacity and ability to serve as trustee.

But what if Ed suffers a stroke while traveling, and his family can’t reach Dr. Goodhealth? A physician at the emergency room — who is unfamiliar with Ed’s medical history — may treat him but refuse to sign a document attesting to his incapacity. Without a certification of disability, Ed’s successor trustee may not be able to make critical business or investment decisions, or make last-minute annual exclusion gifts to reduce Ed’s taxable estate.

If no other trust mechanism exists for determining Ed’s incapacity, his family may have to file a court action to declare Ed disabled. This can be costly and may not timely resolve the problem because of court-imposed notice requirements and waiting periods. And though Ed’s family can file a petition for guardianship immediately, they may have to wait up to a month before a judge rules on the disability.

Take Control Of Who Becomes Trustee

To avoid needing a physician to determine incapacity, some jurisdictions allow your successor trustee, a family member or committee to make the decision. In the case of Ed, his trust instrument may specify that his family can immediately attest to his disability and Ed’s successor trustee can then take control of the trust.

If you are uncomfortable with a family member having the power to determine your incapacity, you can name a special trustee. You can even empower the special trustee to make gifts. As further protection, you can name a co-trustee to act with authority and to act alone if you become disabled.

Be Prepared

When creating a revocable or living trust, you act as its trustee. But what if you become incapacitated? Plan ahead to specify who will take over as trustee. In addition, include in your trust document who — such as your attending physician, committee or a court finding — should declare you disabled. If you have an existing trust that you would like us to review, or have questions about a prospective one, please give us a call.

08 Apr

Should Your Spouse Be Your Trustee?

In Fiduciaries,Trustees by admin / April 8, 2013 / 0 Comments

Estate Planner Jul-Aug 1998
The selection of an ideal trustee often presents the most significant obstacle to implementing an estate plan involving inter vivos trusts or testamentary trusts. Should you have one trustee or co-trustees? A corporate trustee, individual trustee or a combination? Too often, people fail to consider the convenience and security of designating their spouses as 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:

  • Your spouse is a beneficiary of the trust (even if not a trustee), or
  • If the spouse’s authority as trustee over distributions is not limited by an ascertainable standard.
    After you have died, income will be taxed to the trust unless:
  • The income is distributed to your spouse,
  • Your spouse as trustee has the sole authority to make distributions of income or principal to himself or herself, or
  • Trust income is used to fulfill your spouse’s obligation of support.

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.


08 Apr

Understanding Fiduciaries

In Fiduciaries,Trustees by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 1998

Selecting Personal Representatives, Trustees and Guardians 

The disposition of your assets in accordance with your estate plan requires the services of one or more fiduciaries. You may also need other fiduciaries to perform other functions, such as guardian for your children. Understanding the role each fiduciary plays will help you select the right people.

Personal Representative

The first step is to appoint a personal representative or executor to oversee winding up your affairs. If you do not have a will, or if your will fails to name a qualified representative, certain heirs or the court may make the selection. The personal representative is under the control of and accountable to the probate court.
This is a relatively short-term role, and the principal duties are:

1. To inventory and collect your assets,
2. To manage your assets during the term of administration,
3. To receive and pay the claims of creditors and pay taxes, and
4. To distribute the remaining assets to those entitled pursuant to the terms of your will or according to state law.

The personal representative or executor may even be called upon to defend your will, prosecute or defend lawsuits, or temporarily run your family business.
You may select one or more individuals, a trust company, or a combination of both. In addition, select at least one alternate or successor. Personal representatives are entitled to a fee for serving, but some may waive the fee.

The Trustee

If your estate plan involves trusts, you must designate a trustee. The trustee administers the assets held in the trust on an ongoing basis and holds legal title to the assets. The beneficiaries have equitable interests in the assets.

When managing the trust assets, the trustee is held to a high standard of conduct and must administer the assets solely in the interest of the beneficiaries. The trustee must invest and preserve the trust property, keep the property separate from the trustee’s own property, and, according to the standards expressed in the trust instrument, determine the priority of distributions to trust beneficiaries.

Trusts can be long-term entities that span several generations, so you must designate one or more competent individuals or a trust company to manage trust assets. Who you can name as trustee depends on the type of trust:

  • For a revocable (living) trust, you may serve as trustee, or you may name others to manage your assets,
  • For an irrevocable insurance trust, you must designate someone else as trustee,
  • For an irrevocable gift trust, an independent co-trustee (a trust company or an individual) is preferable, but in some circumstances, you may be able to act as trustee as long as you don’t have discretionary authority, and
  • For a trust with a beneficiary as a trustee, generally either an independent party (a trust company or an individual) must serve as co-trustee or distributions must be limited to a narrower ascertainable standard to avoid adverse tax consequences.

Almost all large banks have departments authorized to administer estates, manage trusts and serve as personal representatives or trustees.

The Guardian

If you have minor children, you must designate one or more individuals to serve as guardian whose primary duty is to raise your children. You must also designate a guardian of the estate if the minor has or is to receive assets in his or her name upon your death. This can be the same individual, someone else or an authorized bank.

You Must Decide Which Fiduciaries Are Right for You

We have discussed only a few of the possibilities involved in selecting fiduciaries. Please contact us if you would like more information.