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Selecting Your Trustee
Simply explained, trusts are legal contracts between its grantor and the trustee governing how trust assets are invested and distributed.
You usually serve as both the grantor (creator) of the trust and as the trustee (director) of the trust. You are also the primary trust beneficiary for your lifetime, and you can amend the terms of the trust or revoke it in its entirety. If the trust is revoked, then those assets are returned to you.
For all intents and purposes, the trust is another method for you to own and hold your assets. The trust uses your social security number as its tax identification number. There are no separate tax returns for your trust during your lifetime.
The trustee of the trust is the person or entity charged with the responsibility of carrying out its terms. During your lifetime, and so long as you are acting as the trustee of the trust, its terms are simple — you get to do what you want with the trust assets. You can invest in anything you choose, and you can take monies and assets from your trust whenever you want in whatever quantities you desire.
At your death, your trust contains your direction for who inherits your assets and how they inherit those assets.
Sally creates a revocable living trust for her lifetime. She is both the grantor of the trust and serves as the trustee. Her trust states that, upon her death, the trust assets are to be divided between her two children. Sally transfers her home, her bank accounts, her brokerage accounts and a vacant parcel of real estate into her trust. When Sally wishes to withdraw assets, she can do so whenever she wants and in whatever amount she desires. If she wants to move money from her savings account into her trust brokerage account, she can do so at will and can decide to buy and sell the securities titled in her trust brokerage account as she pleases.
More than perhaps any other decision you will make, who you name to serve as your trustee in the event of your disability and your passing affects the success or failure of your estate plan.
When considering successor trustee choices, a client’s mind will often fixate on the choice for the trustee who will administer the estate upon her death. However, more important to her should be the choice over who will serve as her trustee in the event of her disability.
Who makes the investment decisions or otherwise interacts with her financial advisor if she is stricken with dementia or Alzheimer’s disease? Who decides what monies to spend on medical or nursing home care, or to distribute trust assets for the benefit of her spouse or other dependents?
These are weighty decisions, and can have a real economic effect when you are most vulnerable. We’ll review your choices and what steps to take to arrive at your decisions in the following chapters.
Sally names her daughter Victoria as her successor trustee in the event that Sally should become disabled and unable to make legal, tax or financial decisions for herself. When Sally develops Alzheimer’s disease, Victoria takes over as Sally’s trustee. The trust assets remain for the benefit of Sally exclusively even though she is no longer serving as her own trustee. Victoria is now charged with the responsibility of working with Sally’s financial advisor, CPA and attorney to make the investment, tax and legal decisions that Sally would otherwise make. Victoria is a physician with a busy practice and two young children at home. She struggles to find the time to keep up with Sally’s affairs, but loves her mother and feels a duty to help in any way she can.
Naming a loved one to take care of your legal, tax and financial affairs in the event of your incapacity often places a significant burden on your loved one’s shoulders. It’s natural to name someone you trust. What can you do within your trust to make your successor trustee’s life any easier? These are questions we will explore further.
Following your death, your successor trustee will interact with your attorney, accountant, financial advisor and other professionals to administer your trust estate and distribute the assets in accordance with its terms. The trustee may decide which assets to sell and convert to cash to pay for taxes and expenses of your administration, and how best to preserve the estate for the beneficiaries during the administrative process.
When Sally dies her trust continues to name Victoria as the administrative trustee. Sally has two children who share equally under the terms of her trust, daughter Victoria and son Jeffrey. Jeffrey has had alcohol and drug dependency problems throughout his adulthood and has never held down a job for any length of time. Sally’s liquid assets total $600,000; she has a home worth $350,000 and a vacant lot worth $50,000. Jeffrey needs a place to live and wants Sally’s home as a part of his inheritance. Victoria must decide whether she will distribute the home to Jeffrey, but that would leave his share with little cash for him to maintain the home for the rest of his life. Victoria could, as trustee, instead sell Sally’s home and distribute cash and securities that enable Jeffrey to purchase a smaller residence so he will have more cash with which to maintain it.
The trustee named who will manage the administrative phase of your trust will have many important and weighty decisions to make, even in the best of scenarios. We’ll review these issues together to clarify and explain how your trust may best address your particular circumstances.
Some trusts don’t distribute the assets outright to the trust beneficiaries following the grantor’s death. Instead, the trusts continue on as testamentary (after death) trusts for the benefit of the beneficiaries. It is common for these testamentary trusts to divide into separate shares, and a different trustee may govern each share.
Sally’s trust divides into two shares at her death, one share each for Victoria and Jeffrey. While Sally named Victoria to serve as the trustee for her own share, she didn’t trust Jeffrey to manage his share competently as he has suffered from alcohol and drug dependency problems since reaching adulthood. Consequently, Sally named First National Bank & Trust Company to manage the investments and decide on the distributions for Jeffrey’s share.
Should you name one child to serve as trustee for a troubled child’s share? How do you best protect the inheritance you plan to leave your loved ones? What about protecting the inheritance from creditors, predators and divorcing spouses? Could those situations mandate an independent trustee to shield the inheritance from a divorce court, bankruptcy judge or similar problem? What about taxes?
Who you name to serve as trustee for each stage of your trust will shape the success or failure of your estate plan. Too often these issues are not addressed in the client/attorney estate planning conference. Within these pages we’ll explore together the pitfalls and opportunities that exist when making some of the most important decisions when planning your estate.
- During your lifetime you are the beneficiary of your own revocable trust and usually serve as your own trustee;
- If you should become unable to manage your own financial affairs because of illness or incapacity, your disability trustee makes important decisions regarding your financial, tax and legal affairs;
- Your administrative trustee will administer your trust following your death but before your trust is distributed to your beneficiaries;
- • The testamentary trustee will govern after-death trust shares that are created and continue on for your spouse and other beneficiaries