Appointing the right trustee for your living trust provides peace of mind

A living trust is a cornerstone of many estate plans. During your life, you can serve as the trustee and manage the assets just as you would if you owned them outright. However, you must choose a trustee to oversee and administer the trust after your death (and during your lifetime, should you become unable to act as trustee).  Who should serve in that role?

Job description

The trustee must:

  • Manage all trust assets, perhaps including securities and business and real estate interests, until the assets are distributed,
  • Maintain detailed records and prepare transaction statements,
  • Handle collections, distributions and payments,
  • Ensure all tax returns are prepared and filed, and
  • Settle the trust.

In addition, the trustee must be available to respond to all inquiries from beneficiaries, which can be a time consuming and delicate task.

Trustee types to consider

You generally have two types of trustee to choose from. The first is an individual trustee. This person may be a family member or close friend, business advisor, accountant, or attorney. A family member or friend may seem like the natural choice because of the likelihood that he or she understands your wishes for your family’s future. It’s also likely that he or she will charge little or nothing in trustee fees.

But keep in mind that, ideally, a trustee should have financial knowledge, be familiar with taxes and accounting, and have good business sense. So it’s essential that individual trustees without professional expertise in managing trusts consult with accountants, attorneys and investment advisors to help them get the job done effectively.

The second type of trustee is a corporate trustee. This typically is a financial institution, bank trust department or trust company. A corporate trustee specializes in managing estates and trusts and generally is free of conflicts of interest, allowing it to carry out its duties impartially.  Some clients, however, do not like the perceived “coldness” or “outside” nature of using a corporate trustee.

A corporate trustee usually has direct access to investment advisors, tax planners and other financial experts. Most institutional trustees charge fees based on a percentage of the trust’s assets. An institutional trustee also can be beneficial because you don’t have to worry about whether the trustee will outlive you.

The hybrid option

In some cases, you can create a hybrid trustee by appointing an institution and an individual as co-trustees. The institution provides the professional experience and skills needed to effectively oversee the trust assets, while the individual is someone you’re fully confident will ensure that the trust acts in accordance with what your wishes for your family would be.  This is merely one option of several that can exist, including the use of a Trust Protector.

If you have questions about your trustee options, please contact us.

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Have you properly funded your revocable trust?

If your estate plan includes a revocable trust — also known as a “living” trust  or a “revocable living trust”— it’s critical to ensure that the trust is properly funded. Revocable trusts offer significant benefits, including asset management (in the event you become incapacitated) and probate avoidance. But these benefits aren’t available if you don’t fund the trust.

We consistently see clients who come to our practice with nice, shiny, thick binders containing their revocable living trusts and other estate plannings, and our usual first question is “what do you have titled in the trust?”  The blank stares coming from the clients can be disconcerting.   They have spent considerable time and money developing the documents, yet nothing has been moved into the trusts.  By failing to move assets into the trust, the administration of the estate will be more costly and less time efficient–this is because probate would generally be necessary to transfer title to your assets.

The basics

A revocable trust acts as a will substitute, although you’ll still need to have a short will, often referred to as a “pour over” will. The trust holds assets for your benefit during your lifetime.

You can serve as trustee or select someone else. If you choose to be the trustee, you must name a successor trustee to take over as trustee upon your death, serving in a role similar to that of an executor.  The successor trustee will manage the administration of your estate after your death ensuring that your bills would be paid and your assets are distributed according to the terms of your trust.

Essentially, you retain the same control you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. If you name a professional trustee to manage trust assets, you can require the trustee to consult with you before buying or selling assets.

The trust doesn’t need to file an income tax return until after you die.  Instead, you pay the tax on any income the trust earns as if you had never created the trust.  The trust will use your Social Security Number to set up accounts while you are alive instead of obtaining a separate tax identification number.

Asset ownership transfer

Funding your trust is simply a matter of transferring ownership of assets to the trust. Assets you should transfer include real estate, bank accounts, certificates of deposit, stocks and other investments, partnership and business interests, vehicles, and personal property (such as furniture and collectibles).

Certain assets shouldn’t, however, be transferred to a revocable trust. For example, moving an IRA or qualified retirement plan, such as a 401(k) plan, to a revocable trust can trigger undesirable tax consequences. And it may be advisable to hold a life insurance policy in an irrevocable life insurance trust to shield the proceeds from estate taxes.  This does not mean, however, that sub-trusts under the revocable trust cannot be named as beneficiary of your qualified retirement plans or life insurance proceeds.  To the contrary, such trusts can be named as the beneficiary; note, however, that special language is required in the trust to ensure the most favorable tax treatment when it comes to qualified retirement plans.  A qualified estate planning attorney should generally be engaged to make sure that proper drafting is achieved–most “self help” websites and software will not properly cover this issue.

Don’t forget to transfer new assets to the trust

Most people are diligent about funding a trust at the time they sign the trust documents. But trouble can arise when they acquire new assets after the trust is established. Unless you transfer new assets to your trust, they won’t enjoy the trust’s benefits.

To make the most of a revocable trust, be sure that, each time you acquire a significant asset, you take steps to transfer it to the trust. If you have additional questions regarding your revocable trust, we’d be happy to answer them.

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