SELECTING FIDUCIARIES

Often, one of the most difficult choices for a client to make is the selection of people to make decisions for them. These fiduciaries may have great control over ones affairs, typically at times when the he or she would be most vulnerable or already gone.

Let’s take a look at the various fiduciaries one might name:

• Personal Representative. You estate may need to me liquidated or managed and person who would manage these assets prior to distribution under the Will is the Personal Representative
• Successor Trustee. This person manages assets you may leave in a trust. The Trustee might manage the assets during your incapacity and after your death. A Trustee might also manage assets being left for a child, whether a minor or even an adult child.
• Guardian. If the client has young children or others for whom they have caregiving responsibility, their Will can nominate a person to become the new Guardian.
• Agent under Financial Power of Attorney. A Financial Power of Attorney allows the Agent to make decisions and actions for the client, who is the Principal. The power may be “immediate,” which would allow the Agent to act for the Principal even when the Principal is well. Conversely, the power may be “springing,” or only effective upon the incapacity of the Principal.
• Agent under a Health Care Power of Attorney. A Health Care Power of Attorney allows the Agent to make health decisions for the Principal when the Principal is unable to make them.
• Successor Owner. A 529 plan might have a Successor Owner in addition to a Beneficiary. The Successor Owner could take the funds and use them however they want and does not have to use them for the benefit of the Beneficiary. A Trust could be the Owner of the 529 plan, in which case the Trustee would have an obligation to use the plan for the Beneficiary.

One should take great care in choosing people for these roles who are appropriate and up to the task. For example, the financial management roles, such as the Trustee, Personal Representative, Agent under the financial power of attorney, etc., ideally should be organized and able to manage complicated tasks. On the other hand, the Agent under the Health Care Power of Attorney and the Guardian have different primary duties. Their personal caretaking ability may be more important than their financial ability.

There are many instances in which these decision-makers may have to work together. For example, the Guardian of a minor child will have to work with the Trustee of a Trust for the child’s benefit.

The choice of any fiduciary is of utmost importance and, perhaps most importantly, you should trust the person your select and their judgement.

TRUST PROTECTORS - Who, What, and When to appoint one

A Trust Protector is someone with special power over a trust. The Trust Protector is not the Trustee, although in some documents they could be called a Special Co-Trustee or a similar name. The Trust Protector does not have control over day-to-day operations of the trust. Rather, they are often given the power to do things the trustee could not or should not do for various reasons. For example, they might act instead of the trustee when otherwise there would be a conflict of interest. Another example might be life insurance. If the trust owned insurance on the trustee’s life, the exercise of incidents of ownership of the policy by the trustee would cause inclusion of the value of the policy in the trustee’s estate. Thus, the exercise of such incidents of ownership would be done by the Trust Protector, keeping the value of the death benefit from being included in the trustee’s taxable estate. (Either way, the life insurance would go as the beneficiary designation indicated. But, without the Trust Protector exercising control over the policy instead of the trustee/insured, the policy would be taxed to the trustee even though it was not received by them.)

In some circumstances, the Trust Protector may even have the authority to amend the trust, for example due to a change in beneficiary circumstances or a change in law. This can add great flexibility to a trust. For example, the Trust Protector might be used to change a beneficiary’s trust from being a “support” trust to a completely discretionary trust to allow the beneficiary to have more asset protection. The use of the Trust Protector’s amendment power can sometimes be another way to modify a trust.

As you can see, using a Trust Protector add great flexibility to a trust.

Trust for IRA

In this blog, we’ll see how trusts may be used with retirement plans and IRAs.

A retirement plan (like a 401(k)) or an IRA may name an individual, a trust, or something else as the beneficiary of the benefits. If an individual is named, that individual’s life expectancy is used. You’d use the single life table which can be found in IRS Publication 590B, Appendix B, Table I. For example, a beneficiary who is 18 at the death of the participant (owner) would have a life expectancy of 65 years. As a result, for their first required distribution, they would be required to take a distribution of 1/65^th of the prior year-end balance. In subsequent years, they would subtract one from the denominator of the prior year, so it would be 1/64^th of the prior year-end balance. By the time the beneficiary reaches their life expectancy, they will have taken out all the assets from the retirement plan or account. However, there can be disadvantages for an individual as the beneficiary.

• The individual may be underage

• The individual may be a spendthrift

• The individual could have creditors

• The individual could have special needs

• The individual may not be able to manage money

In order to address these concerns, the benefits may be left to a trust for the benefit of the beneficiary. A trust for the beneficiary has the following benefits:

• The trust can keep the assets during the beneficiary’s minority, thus avoiding a court proceeding

• The trustee can use their discretion regarding distributions to the beneficiary, within the standards set by the trust

• The trust may be drafted to provide asset protection

• The trust may be drafted as a special needs trust and thus not an “available resource” for the purposes of government assistance

• The trustee (not the beneficiary) manages and invests the assets in the trust

When a trust is the beneficiary of retirement benefits, the trust may be either an “accumulation trust” or a “conduit trust.” If there is any way distributions from the retirement plan/account may not be paid to (or demandable by) the beneficiary, then it is an accumulation trust. If the beneficiary will get the distributions under all circumstances, then it is a conduit trust.

This is significant because with a conduit trust you only look at the current beneficiaries of the trust, while with an accumulation trust you also must look at all remainder beneficiaries. Remainder beneficiaries include anyone who might get the assets and it includes contingent remainder beneficiaries like grandma or a charity.

So, let’s look at an example. Bill leaves a trust for his son Johnny, age 18. At Johnny’s death it goes to his kids, but if he has none it goes to grandma, age 70, but if she is not there the assets go to the American Red Cross. If this trust is an accumulation trust, we must look to the ages of all current and remainder beneficiaries of the trust to determine the identity of the beneficiary with the shortest life expectancy. Johnny’s life expectancy is 65 years and grandma’s life expectancy is 17 years. The American Red Cross, as a non-individual, has no life expectancy.

If the trust were drafted as a conduit trust, distributions could be taken by the trustee using Johnny’s 65-year life expectancy. If the trust were drafted as an accumulation trust, you’d have to look at all current and remainder beneficiaries. The worst beneficiary is the American Red Cross, which has no life expectancy. Sometimes, a trust may include language that eliminates a charity as the recipient of retirement plan assets. If the trust had such language, the 17-year life expectancy of grandma would be used.

Sometimes there is a trade-off between various concerns. For example, let’s say Johnny is a spendthrift. If Johnny has the ability to take the distributions from the retirement plan (a requirement for a conduit trust), he may waste them. In choosing how to draft the trust and counsel the client, this must be weighed against the income tax advantages of a longer stretch on distributions. Perhaps the trustee can use their discretion in the distribution of other assets. For example, let’s say the IRA has $300,000. The required minimum distribution will be about $5,000 in the first years. Without the retirement plan, perhaps the trustee would have paid for a place for Johnny to live and would have given Johnny $500 per month for an “allowance.” With the IRA distribution, the trustee might only give Johnny $100 per month. On the other hand, if the IRA is extremely large and the beneficiary has addiction issues, for example, there may not be a satisfactory way to achieve the stretch and the other objectives of the trust.