The IRS has issued a Ruling that will impact Grantor Trusts

July 18, 2023

The IRS has issued a ruling that will impact grantor trusts. Completed gifts to grantor trusts will not receive a Section 1014 step-up in basis upon the grantor’s death. According to the IRS, Revenue Ruling 2023-2 concludes this is the appropriate result because such property is not acquired from a decedent for purposes of Section 1014(a) of the IRC of 1986 as amended in Section 1014(b) of the Code, as reported by Reuters in the article “IRS confirms that completed gifts to grantor trusts are not eligible for Section 1014 step-up.”

Upon their death, assets received from a decedent are afforded a basis step-up under Code Section 1014. These are assets usually included in the taxable estate for estate tax purposes. However, before the Ruling, many practitioners wondered whether the assets of an irrevocable grantor trust would be eligible for the same benefit.

The irrevocable “grantor trust” is an anomaly under the Code. A “grantor trust” is not recognized as a separate taxpayer for income tax purposes during the lifetime of the creator (usually referred to as the “grantor” or the “settlor”). All income earned during the grantor’s lifetime is reported on the grantor’s individual income tax returns. However, if the grantor trust is irrevocable and if transfers to the trusts are deemed to be completed gifts, then when the grantor dies, the assets of the grantor trust are not included in the taxable estate of the grantor for estate tax purposes. Thus, the grantor trust is deemed to be owned by the grantor for income tax but not estate tax. This led to uncertainty over the eligibility of the grantor trust assets for the Code Section 1014 basis step-up on the grantor’s death.

“Intentionally defective” grantor trusts are widely used, where the grantor is treated as the owner of the grantor trust for income tax purposes and is responsible for paying the income taxes incurred by the trust. The payment by the grantor of the grantor trust’s income taxes effectively lets the grantor make additional tax-free gifts to the grantor trust and increases the grantor trust’s rate of return.

However, since the grantor trust is not a separate taxpayer for income tax purposes, there’s no recognition of gain on the sale or interest income on the note. The interest rate on the note can be the lowest rate which will not cause adverse tax consequences. If the interest sold to the grantor trust grows faster than the applicable interest rate, the excess growth passes, transfer-tax-free, to the grantor trust.

The “Sale Technique” has been used many times since the IRS released Revenue Ruling 83-15, supporting the position that a property sale from a grantor to a grantor trust is not a taxable event. If no gain is recognized on such a sale, the grantor trust takes a carryover basis in the grantor’s property.

With the release of Revenue Ruling 2023-2, how should estate planning attorneys advise their clients? There are a few strategies to consider:

Power to Exchange Assets. Many grantor trusts allow the grantor to substitute trust property for other assets of equivalent value. If a grantor trust has an asset with a low basis, during the grantor’s lifetime, they could exercise the Substitution Power to exchange the low-basis asset for property with a higher basis but of equal value. The low basis asset now becomes part of the grantor’s estate and, as long as the grantor retains it until their death, will be eligible for the Code Section 1014 basis step-up.

Second Sale to Trust. If the trust agreement establishing the grantor trust doesn’t grant Substitution Power, the grantor could purchase low-basis assets from the trust for high-basis assets. The grantor may engage in a series of sales to ensure appreciated stock continues to cycle back to the grantor, so the estate may take advantage of the Code Section 1014 basis step-up.

Granting a General Power of Appointment. In certain situations, it may be possible to grant a testamentary general power of appointment over a grantor trust to a parent or other elderly relative, the “Powerholder.” The grant of a general power of appointment results in the assets subject to such power being includable in the estate of the Powerholder for estate tax purposes. The trust assets in the Powerholder’s estate will then be eligible for the Code Section 1014 basis step-up upon the death of the Powerholder.

The grant of the general power of appointment should not exceed the Powerholder’s available estate tax exemption and only apply to assets with built-in gain. This strategy will require consideration of the Powerholder’s creditors and any possible risks to the grantor trust.

The IRS has issued a ruling that will impact grantor trusts. These are complex strategies requiring the help of an experienced estate planning attorney. If you would like to learn more about irrevocable grantor trusts, please visit our previous posts.

Reference: Reuters (June 21, 2023) “IRS confirms that completed gifts to grantor trusts are not eligible for Section 1014 step-up”

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What is the Purpose of a Blind Trust?

June 27, 2023

One type of trust offers a layer of separation between the person who created the trust and how the investments held in the trust are managed. The trust’s beneficiaries are also unable to access information regarding the investments, says the article “What is a Blind Trust?” from U.S. News & World Report. What is the purpose of a blind trust?

The roles involved in a blind trust are the settlor—the person who creates the trust, the trustee—the person who manages the trust—and beneficiaries—those who receive the assets in a trust.

Blind trusts, typically created to avoid conflicts of interest, are where the settlor gives an independent trustee complete discretion over the assets in the trust to manage, invest and maintain them as the trustee determines.

This is quite different from most trusts, where the owner of the trust knows about investments and how they are managed. Beneficiaries often have insight into the holdings and the knowledge that they will eventually inherit the assets. In a blind trust, neither the beneficiaries nor the trust’s creator knows how funds are being used or what assets are held.

Blind trusts can be revocable or irrevocable. If the trust is revocable (also known as a living trust), the settlor can dissolve the trust at any time.

If the trust is irrevocable, it remains intact until the beneficiaries inherit the entire assets, although there are some exceptions.

In some instances, irrevocable trusts are used to move assets out of an estate. Settlors lose control over the holdings and may not terminate the trust or change the terms.

Blind trusts can be used in estate planning if the settlor wants to limit the beneficiaries’ knowledge of the trust assets and their ability to interfere with the management of the trust.’

People who win massive lump sums in a lottery might use a blind trust because some states allow lottery winners to preserve their anonymity using this type of trust. They draft and sign a trust deed and appoint a trustee, then fund the trust by donating the winning ticket to the trust prior to claiming the prize. By remaining anonymous, winners have some protection from unscrupulous people who prey on lottery winners.

One drawback to a blind trust is the lack of knowledge about how investments are being handled. The blind trust also poses the issue of less accountability by the trustee, since beneficiaries have no right to inspect whether or not assets are being managed properly.

Do you need a blind trust? Speak with an experienced estate planning attorney to discuss what the purpose of a blind trust is, and whether or not your estate would benefit from it. If you want to separate yourself from investment decisions or would rather beneficiaries don’t know about the holdings, it might make sense. However, if you have no concerns about privacy or conflict of interests, other types of trusts may make more sense. If you would like to learn more about trusts, please visit our previous posts.

Reference: U.S. News & World Report (June 1, 2023) “What is a Blind Trust?”

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Tax Scams Involving Charitable Remainder Annuity Trusts

May 22, 2023

If you are a wealthy family looking into estate planning, beware of tax scams involving Charitable Remainder Annuity Trusts. The IRS has issued a warning about promoters aiming specifically at wealthy taxpayers, advises a recent article, “IRS Warns Of Tax Scams That Target Wealthy,” from Financial Advisor. Charitable Remainder Annuity Trusts (CRATs) are irrevocable trusts that allow individuals to donate assets to charity and draw annual income for life or for a fixed period. A CRAT pays a dollar amount each year, and the IRS examines these trusts to ensure they correctly report trust income and distributions to beneficiaries. Of course, tax documents must also be filed properly.

Some sophisticated scammers boast of the benefits of using CRATs to eliminate ordinary income or capital gain on the sale of the property. However, property with a fair market value over its basis is transferred to the CRAT, the IRS explains, and taxpayers may wrongly claim the transfer of the property to the CRAT, resulting in an increase in basis to fair market value, as if the property had been sold to the trust.

The CRAT then sells the property but needs to recognize the gain due to the claimed step-up in basis. The CRAT then purchases a single premium immediate annuity with the proceeds from the property sale. This is a misapplication of tax rules. The taxpayer or beneficiary may not treat the remaining portion as an excluding portion representing a return of investment for which no tax is due.

In another scam, abusive monetized installment sales, thieves find taxpayers seeking to defer the recognition of gain at the sale of appreciated property. They facilitate a purported monetized installment sale for the taxpayer for a fee. These sales occur when an intermediary purchase appreciated property from a seller in exchange for an installment note, which typically provides interest payments only, with the principal paid at the end of the term.

The seller gets the larger share of the proceeds but improperly delays recognition of gain on the appreciated property until the final payment on the installment note, often years later.

Anyone who pressures an investor to invest quickly, guarantees high returns or tax-free income, or says they can eliminate taxes using installment sales, trusts, or other means, should be dismissed immediately. Beware of tax scams involving Charitable Remainder Annuity Trusts. Your estate planning attorney is well-versed in how CRATs, LLCs, S Corps, trusts, or charitable donations are used and will steer you and your assets into legal, proper investment strategies. If you would like to learn more about charitable giving, please visit our previous posts.

Reference: Financial Advisor (April 24, 203) “IRS Warns Of Tax Scams That Target Wealthy”

Avoid Unintended Consequences with your Planning

May 11, 2023

The mistake can be as simple as signing a document without understanding its potential impact on property distribution, failing to have a last will and testament properly executed, or expecting a result different from what the will directs. Unfortunately, these unintended consequences are relatively common, says the article “Advice for avoiding unintended issues in estate planning” from The News-Enterprise. You can avoid unintended consequences with your planning by working with an estate planning attorney.

The most common mistake that leads to unintended consequences is leaving everything to a spouse in a blended family. Even if children don’t have a close relationship with their stepparent, they’re willing to get along for the sake of their biological parent. However, when the first spouse dies, the decedent’s beneficiaries are generally disinherited if the surviving spouse receives the entire estate.

If the family truly has blended and maintains close relationships, the surviving spouse may ensure that the decedent’s children receive a fair share of the estate. However, if the relationships are tenuous at best, and the surviving spouse changes their will so their biological children receive everything, the family is likely to fracture.

Using a revocable living trust as the primary planning tool is a safer option. An experienced estate planning attorney can create the trust to allow full flexibility during the lifetime of both spouses. Upon the first spouse’s death, part of the estate is still protected for the decedent’s intended beneficiaries.

This way, the surviving spouse has full use of marital assets but can only change beneficiaries for his or her portion of the estate, protecting both the surviving spouse and the decedent’s intended beneficiaries.

Another common mistake occurs when married couples execute their last will and testaments with different beneficiaries. For example, if they’ve named each other as the primary beneficiary, only the survivor will have property to leave to loved ones.

An alternative is to decide what the couple wants to happen to the estate as a whole, then include fractional shares to all beneficiaries, not just the one spouse’s beneficiaries. This protects everyone.

Many people assume that if they die without a will, their spouse will inherit everything. Unfortunately, this is not always the case, and a local estate planning attorney will be able to explain how your state’s laws work when there is no will. Children or other family members are often entitled to a share of the estate. This may not be terrible if the family is close. However, if there are estranged relationships, it can lead to the wrong people inheriting more than you’d want.

Failing to plan in case an heir becomes disabled can cause life-altering problems. If an heir develops a disability and receives government benefits, an inheritance could make them ineligible. The problem is that we don’t know what state of health and abilities our heirs will be in when we die, and few will want their estate to be used to reimburse the state for the cost of care. A few extra provisions in a professionally prepared estate plan can result in significant savings for all concerned.

Estate planning is about more than signing off on a handful of documents. It requires thoughtful consideration of goals and potential consequences. Can every single outcome be anticipated? Not every single one, but certainly enough to be worth the effort. You can avoid unintended consequences with your planning by working with an experienced estate planning attorney. If you would like to learn more about mistakes in your estate planning, please visit our previous posts.

Reference: The News-Enterprise (March 25, 2023) “Advice for avoiding unintended issues in estate planning”

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Protecting Assets with a Trust vs. LLC

May 10, 2023

While trusts and Limited Liability Companies (LLCs) are very different legal vehicles, they are both used by business owners to protect assets. Understanding their differences, strengths and weaknesses will help determine whether protecting assets with a trust vs a LLC is best for your situation, as explained by the article “Trust Vs. LLC 2023: What Is The Difference?” from Business Report.

A trust is a fiduciary agreement placing assets under the control of a third-party trustee to manage assets, so they may be managed and passed to beneficiaries. Trusts are commonly used when transferring family assets to avoid probate.

A family home could be placed in a trust to avoid estate taxes on the owner’s death, if the goal is to pass the home on to the children. The trustee manages the home as an asset until the transfer takes place.

There are several different types of trusts:

A revocable trust is controlled by the grantor, the person setting up the trust, as long as they are mentally competent. This flexibility allows the grantor to hold ownership interest, including real estate, in a separate vehicle without committing to the trust permanently.

The grantor cannot change an irrevocable trust, nor can the grantor be a trustee. Once the assets are placed in the irrevocable trust, the terms of the trust may not be changed, with extremely limited exceptions.

A testamentary trust is created after probate under the provisions of a last will and testament to protect business assets, rental property and other personal and business assets. Nevertheless, it only becomes active when the trust’s creator dies.

There are several roles in trusts. The grantor or settlor is the person who creates the trust. The trustee is the person who manages the assets in the trust and is in charge of any distribution. A successor trustee is a backup to the original trustee who manages assets, if the original trustee dies or becomes incapacitated. Finally, the beneficiaries are the people who receive assets when the terms of the trust are satisfied.

An LLC is a business entity commonly used for personal asset protection and business purposes. A multi-or single-member LLC could be created to own your home or business, to separate your personal property and business property, reduce potential legal liability and achieve a simplified management structure with liability protection.

The most significant advantage of a trust is avoiding the time-consuming process of probate, so beneficiaries may receive their inheritance faster. Assets in a trust may also prevent or reduce estate taxes. Trusts also keep your assets and filing documents private. Unlike a will, which becomes part of the public record and is available for anyone who asks, trust documents remain private.

LLCs and trusts are created on the state level. While LLCs are business entities designed for actively run businesses, trusts are essentially pass-through entities for inheritances and to pass dividends directly to beneficiaries while retaining control.

Your estate planning attorney will be able to judge whether protecting your assets with a trust vs an LLC is the best option for you. If you own a small business, it may already be an LLC. However, there are likely other asset protection vehicles your estate planning attorney can discuss with you. If you would like to learn more about business planning, please visit our previous posts.

Reference: Business Report (April 14, 2023) “Trust Vs. LLC 2023: What Is The Difference?”

Revocable Trusts Must Be Funded to be Effective

May 3, 2023

Revocable assets simplify asset management during life and facilitate private asset transfers at death. Therefore, you might think your estate planning is done when you sign the revocable trust agreement. Nevertheless, it’s not done until you fund the trust, advises a recent article, “’It Ain’t Over ‘Til It’s Over’ – Use of a Funded Revocable Trust in Estate Planning” from The National Law Review. Remember, revocable trusts must be funded to be effective.

A trust is a legal agreement allowing one person—the trustee—to hold and manage property to benefit one or more beneficiaries. The person who creates the trust—the grantor—can create a trust during their lifetime and modify or terminate the agreement at any time. The grantor is the initial trustee and the initial beneficiary. These dual roles allow the grantor to control the trust assets during their lifetime.

Upon death, the revocable trust becomes irrevocable. The trust agreement directs the distribution of assets and appoints the trustee to manage and distribute assets. Unlike a will, the revocable trust works during your lifetime to hold assets.

Funding the trust is critical for it to perform. Assets must be transferred, with an asset-by-asset review conducted to determine which assets should go into the trust. The assets should then be transferred—usually by title or deed changes—which your estate planning attorney can help with.

A funded revocable trust avoids having the assets go through probate. State statutes and regulations require several steps to be completed, adding time, effort and cost to estate administration. Suppose that the revocable trust at death owns the assets. In that case, the trust owns the legal title to the assets, and assets can be distributed to beneficiaries without court intervention.

Avoiding probate also reduces expenses. The expense of probate administration arises from two sources: probate fees and attorney fees. These vary by state and jurisdiction. However, they can add up quickly. A funded revocable trust minimizes both types of fees.

Unlike the will, which becomes a public document once it goes through probate, revocable trust assets and beneficiaries remain confidential, known only to the trustee and beneficiaries. Anyone who wants to can request and review your will and obtain information about assets and beneficiaries. However, the trust is a private document, protecting your loved ones from scammers, overly aggressive salespeople, and nosy relatives.

Privacy can be essential for business owners. For example, suppose you die owning a business interest as an individual. In that case, the description and value of business interests must be reported on the public record during the probate process and is available to potential purchasers to use as leverage against your estate. Transferring business interests to a revocable trust during your lifetime can keep that information private.

Trusts are also used for asset protection for assets with beneficiary designations, including life insurance, IRAs and retirement plans. For instance, if a life insurance policy is paid to your estate, creditors of your estate may have access to the proceeds. If it is paid to the trust, it is protected from creditors. A Revocable trust is only as good as its funding. Revocable trusts must be funded to be effective. If you would like to learn more about RLTs, please visit our previous posts.

Reference: The National Law Review (March 3, 2023) “’It Ain’t Over ‘Til It’s Over’ – Use of a Funded Revocable Trust in Estate Planning”

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Consider these Overlooked Elements in your Planning

April 26, 2023

When creating an estate plan, consider these overlooked elements in your planning. There are details which seem minor but are actually very important, says a recent article from mondaq, “Four Provisions People Often Forget To Include In Their Estate Plan.”

Don’t forget to name alternative beneficiaries and executors. If the will names a beneficiary but they are unable to take possession of the property, or they are deceased, the asset will pass as though you didn’t have a will at all. In other words, the state will determine who receives the property, which may not be in accordance with your wishes. If there’s an alternate beneficiary, the property will go to someone of your choosing. A backup executor is also critical. If your primary executor cannot or does not want to serve, the court may appoint an administrator.

Personal possessions, including family heirlooms. Most families have items with great sentimental value, whether or not they have any financial value. Putting a list in your will makes it very difficult if you want to change your mind over time. It’s best to have a personal property memorandum. This is a separate document providing details about what items you want to give to family and friends. In some states, it is legally binding if the personal property memorandum is referenced in the will and signed and dated by the person making the will. A local estate planning attorney will know the laws regarding personal property memorandums for your state.

Even if this document is not legally binding, it gives your heirs clear instructions for what you want and may avoid family arguments. Please don’t use it to make any financial bequests or real estate gifts. Those belong in the will.

Digital assets. Much of our lives is now online. However, many people have slowly incorporated digital assets into their estate plans. You’ll want to list all online accounts, including email, financial, social media, gaming, shopping, etc. In addition, your executor may need access to your cell phone, tablet and desktop computer. The agent named by your Power of Attorney needs to be given authority to handle online accounts with a specific provision in these documents. Ensure the list, including the accounts, account number, username, password and other access information, is kept safe, and tell your executor where it can be found.

Companion animals. Today’s pet is a family member but is often left unprotected when its owners die or become incapacitated. Pets cannot inherit property, but you can name a caretaker and set aside funds for maintenance. Many states now permit pet owners to have a pet trust, a legally enforceable trust so the trustee may pay the pet’s caregiver for your pet’s needs, including veterinarian care, training, boarding, food and whatever the pet needs. Creating a document providing details to the caretaker concerning the pet’s needs, health conditions, habits and quirks is advised. Make sure the person you are naming as a caretaker is able and willing to serve in this capacity, and as always, when naming a person for any role, have at least one backup person named.

Make sure your consider these overlooked elements in your planning. Discuss all of your options carefully with an experienced estate planning attorney. If you would like to learn more about drafting an estate plan, please visit our previous posts.

Reference: mondaq (March 16, 2023) “Four Provisions People Often Forget To Include In Their Estate Plan”

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Planning to Protect your Pet after Death

March 27, 2023

Pet trusts and other options are now available to owners to provide for their animals when they can’t—and they’re not just for wealthy people. Planning to protect your pet after your incapacity or death is detailed in a recent article, “6 estate planning tips for pet owners” from Puget Sound Business Journal.

First, address your desired level of care and the annual cost of your pet. Depending on the type of pet, breed, health and diet, costs can vary dramatically. If you have multiple pets, consider which one is most likely to outlive you. What do you spend on food, pet insurance, vet care, medications and supplements? Will your pet require additional care as they age?

Create a list of your preferred veterinarians, groomers, daycare, pet walkers, food, sleeping preferences, treats, toys and any particular information you’d want someone to know if you are unable to tell them.

Name an appropriate trustee and caretaker and be sure they are willing to serve in these roles. Pets are considered property and legally may not own property of their own. If you leave an inheritance to them or name them as beneficiaries, state laws will determine who owns the assets. It won’t be the pet.

To ensure your pet is cared for, people typically designate a caregiver and a trustee. The trustee oversees the finances and is charged with ensuring that funds are used to care for the pet. The caretaker is similar to a custodial parent, and your pet will ideally live with them. Compensation for these roles is common, so factor this into your cost analysis.

Next, put it in writing. If you know your caregiver well and trust they will follow your wishes, you may put your request in your will. Your will disposes of all your property, including your pets, and leaves them to a beneficiary, who is your caretaker. It is important to understand that there is no guarantee or legal enforcement if you go this route. Informal agreements for pet care aren’t much better. If you give your pet to someone when you pass away, they can leave it at a shelter or give it to someone else.

Have your estate planning attorney create a pet trust. This is increasingly common, and not just for eccentric billionaires. Pet trusts were approved in 2000 under Section 408 of the Uniform Trust Code. The trust is a legal entity to plan for the care of your pet.

Make sure that your documents are reviewed every few years to be sure they reflect your wishes. This is especially true if you relocate or if caregivers pass away.

Fund your pet trust. This is the process of transferring assets into the trust, so the trustee can distribute them to the caregiver. Once the trust is created, it should be funded, even if you don’t expect to die tomorrow. Your estate planning attorney can discuss ways of funding the trust upon your death if you wish.

Provide directions for any remaining funds after your pet dies. If your beloved Woof passes shortly after you, what would you want to happen to the remaining funds? Beneficiaries could be an individual, a group, or an organization. It’s generally not recommended to leave the remaining funds to the caregiver or trustee—you don’t want to give them a reason to artificially shorten the pet’s life or provide bad care.

Estate planning for pets can easily be overlooked. However, if you are a pet parent, you’ll feel better knowing you’ve done the planning to protect your pet after your death, so they’ll enjoy a long and happy life, even in your absence. If you would like to learn more about pet protection, please visit our previous posts.

Reference: Puget Sound Business Journal (March 2, 2023) “6 estate planning tips for pet owners”

Trust can be Designed to be Millennial Friendly

March 22, 2023

If your named beneficiaries are Millennials—born between 1981-1996—you may want to consider three essential points about your trusts, as explained in the recent article “Trusts For Your Millennial Beneficiaries” from The Street. They’re different from their parents and grandparents, and disregarding these differences is a missed opportunity. Your trust can be designed to be Millennial friendly.

This generation’s distinguishing characteristics and traits include:

Valuing relations with superiors with a passion for learning and growth.
Desire to live a life with meaning and make a positive impact on the world and causes.
Creative and free thinking, looking for outside-the-box solutions and opportunities.

If your estate plan benefits Gen Y, some trust features recommended for Millennials may not be optimal for them. They’re different than their older Millennial counterparts.

Have your beneficiary serve as a co-trustee of their trust alongside an experienced advisor. Millennials appreciate the opportunity to ask for advice from a trusted advisor, secure positive reinforcement and get constructive feedback. Many heirs set to come into money are likely to work with an advisor once they inherit. For them, a co-trustee arrangement could be perfect. Consider naming a family member or friend with a background in finance as their co-trustee or naming a corporate trustee.

Consider giving your beneficiary a limited testamentary power of appointment to support their favorite charity. Millennials want to make a positive impact on the world, and there’s a trust feature you can build into a trust to support this goal: a limited testamentary power of appointment. In broad strokes, this gives the trust beneficiary the power to redirect where assets go upon their death. If the scope of power permits, they could redirect assets to charitable organizations of their choice.

Most people design trusts to last for the beneficiary’s lifetime and then structure the trust so assets remaining at their death will pass in trust to their children in equal shares. Trusts can also be created to change the distribution percentages between recipients. For instance, instead of a 50-50 split, the trust can redirect shares of 70-30 to better accomplish their personal objectives. You can also provide for new beneficiaries, like charities, if they weren’t part of the original trust.

Powers of appointment can be complicated and making them overly broad can have serious and adverse tax consequences. Therefore, speak with your estate planning attorney to make sure the scope of power is clear and properly designed.

Broadly define the standards for which distributions can be made to your beneficiary. Millennials think differently, so the commonly used trust distribution standards of health, education, maintenance and support (“HEMS”) may stop them from being able to tap into trust funds for philanthropic or entrepreneurial efforts. The HEMS standard only allows for distributions generally for purposes to align with the beneficiary’s current standard of living. If you want beneficiaries to be able to do more, they need to be given the ability to do so.

Another way to accomplish this is to allow a disinterested trustee (someone who is not a beneficiary) an expansive distribution authority. Having the ability to make a distribution of trust funds to your beneficiary for any purpose can be a little unsettling. However, naming a disinterested trustee you trust will ensure that funds are distributed responsibly.

Leaving assets in trust for beneficiaries can be part of an effective estate plan supporting planning goals and your loved one’s future. However, if the trust’s structure doesn’t meet their unique needs and talents, then their potential may be dimmed. Talk with your estate planning attorney about how a trust can designed to be Millennial friendly. If you would like to learn more about trusts and wills for younger adults, please visit our previous posts.

Reference: The Street (Feb. 24, 2023) “Trusts For Your Millennial Beneficiaries”

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Some Best Practices for a Trustee to follow

March 9, 2023

Many people find they have been named a trustee and generally have no idea what responsibilities they have, or how to ensure they do not make a huge mistake. There are some best practices for a trustee to follow. Forbes’ recent article entitled “How To Be An Effective Trustee” provides some great best practices for those asked to be a trustee.

Make a team. No one person can have all the necessary skills and experience to be an effective trustee. Work with an experienced estate planning attorney, an investment advisor and a tax accountant knowledgeable about the taxation of trusts. It’s a good practice for the trustee to have regular meetings with the team of advisors, both as a team and individually.
Understand the key trust terms. Understand what the trust document says and what the key terms mean. When you are named as trustee, a best practice is to read the entire trust document and go through the document with an attorney and have them explain the key terms. Some of these key terms may involve the following:

Distribution standards
Special provisions for investing, particularly direction to sell or not to sell certain assets
Provisions the trustee should act upon, like the power to appoint a successor; and
Knowing whether the beneficiary’s age will trigger distributions or any other actions.

Work productively with beneficiaries. Dealing with beneficiaries is frequently the most challenging part of being a trustee. There can be differences of opinion over distribution amounts, investment strategy, or other matters relating to the management of the trust which can lead to disagreement. To avoid potential issues with beneficiaries and facilitate a productive relationship, trustees should try to practice following:

Communication
Transparency
Education
Clear Distributions; and
Providing Required Information.

Documentation is Crucial. Although trustees can’t guarantee perfect results, they must act with care, skill and impartiality. They must have rational reasons for their decisions and documenting them is critical because it substantiates the trustee’s decision-making. Some examples of decisions that should be thoroughly documented include:

Distribution Decisions
Decisions That Set Investment Policy
Initiation or Termination of Investments and Hiring and Firing Investment Managers/Funds
Principal and Income Allocations;
Verbal Communications with Beneficiaries; And
Decisions to Hire Experts or Agents, like an attorney or an accountant.

This is not full list. It is very important to seek out the advice of an estate planning attorney. He or she will help you identify some of the best practices for a trustee to follow. If you would like to learn more about the role of a trustee, please visit our previous posts.

Reference: Forbes (May 31, 2022) “How To Be An Effective Trustee”

Category: Trustee

The IRS has issued a Ruling that will impact Grantor Trusts

What is the Purpose of a Blind Trust?

Tax Scams Involving Charitable Remainder Annuity Trusts

Avoid Unintended Consequences with your Planning

Protecting Assets with a Trust vs. LLC

Revocable Trusts Must Be Funded to be Effective

Consider these Overlooked Elements in your Planning

Planning to Protect your Pet after Death

Trust can be Designed to be Millennial Friendly

Some Best Practices for a Trustee to follow

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