By: Martin M. Shenkman, CPA, MBA, JD
Aunt Edna died and you just found out you were appointed trustee. Read on.
A substantial portion of wills establish trusts. Many wills include multiple trusts: bypass (applicable exclusion) trusts to safeguard the amount the first spouse to die can pass without estate tax, marital (QTIP) trusts for the excess, trusts for children and other heirs who are minors are the norm. Trusts established while the grantor is alive, to protect assets, save taxes and forth other reasons could trigger the issue of your being appointed trustee. Increasingly, trusts that last for a beneficiary's entire lifetime (not just to age 21 or 25) are used. Trusts protect against spendthrift heirs, divorce, lawsuits and so on. But a common denominator of all of these is a trustee.
What do you do if you're appointed a trustee? It's a lot harder than most people think. There's a tad more to it than just collecting trustee fees. There are scores of legal, tax, time and emotional pitfalls, especially if the others involved are family. You need to evaluate these carefully before you accept the position, and if you accept the position you have to discharge your duties with the requisite care and formality.
Hire a lawyer to represent you as trustee, and review the trust document from the perspective of your serving as trustee. Even if you were involved in the planning of the trust before it became effective, you should go through this exercise. This is a very different point of view as compared to the perspective taken by the grantor when planning the trust.
Compile a list of what you have to do and when you have to do it with the lawyer. This will vary greatly based on the trust document, state law, and the circumstances affecting the particular trust (beneficiaries, assets, etc.). You need to weigh the moral obligation of carrying out the request and wishes of a friend or family member who appointed you, and the responsibilities and commitments necessary to carry out the role. Objectively determine whether you have the time, ability and desire to carry out these duties. If you're going to reject the appointment, do it before you begin to serve, and do it with the appropriate formalities.
Hire an accountant to assist you with several important matters: tax planning (tax consequences of distributions, state tax filing positions, treatment of investment management fees), tax preparation (which returns are to be filed, what reporting positions should be taken, what returns and with what disclosures should be filed with which states), recordkeeping (what records should you maintain, which, if any, should the accountant assist with, what should be reported to the beneficiaries) and accountings (informal or formal records of the trusts activities). When you meet with the CPA, also set up a checklist of tax and accounting issues.
Understand the terms of trust and the needs, and current circumstances of the beneficiaries. Know that you, or investment professionals that you, as trustee retain, create an investment policy statement that documents how the trust objectives are met in light of current circumstances. This document should demonstrate compliance with the trust and applicable state law, in particular the prudent investor act of the state that governs the trust.
You should also carefully consider any unique aspects of the trust for which you are serving as trustee. If the trust is intended to hold only insurance, planning for insurance and meeting the unique requirements of an insurance trust will be vital. Make sure to document everything, as your records may come under critical review. If the trust holds a personal residence and is intended to qualify as a QPRT (special house trust to remove the value of a house from the grantor's estate in a tax advantaged manner), then those unique requirements must be addressed. If the trust owns S corporation stock, you have to address corporate governance of the S corporation, vote shares, and comply with special S corporation requirements.
Project what is needed and/or required in order to keep the trust active. Understand what the trust document says about distributions-who/what you can make contributions to, and spending limits. You may have to poll beneficiaries to determine needs, and you also may have to prepare a budget to coordinate investments and distributions.
When the trust terminates, you have to report to the beneficiaries, file a final tax return and make final distributions.
Crummey Powers are used in many irrevocable trusts to qualify for the annual gift tax exclusion and become the responsibility of the trustee to issue when new gifts are received by the trust.
Economic pitfalls are common, few families lack stuff to create issues out of. And, there's nothing like money to bring those issues to the fore.
Serving as a trustee can be emotionally rewarding and fulfill the wishes of a close friend or family member, but the task should not be taken lightly.
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