Trust Administration Default Rule: Trustee can use wide discretion in investing and maintaining trust assets. These can be altered by the trust agreement.

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Presentation transcript:

Trust Administration Default Rule: Trustee can use wide discretion in investing and maintaining trust assets. These can be altered by the trust agreement. Factors to take into consideration include: The long term purposes of the trust The risk tolerance of the client The level of trust the client has for the trustee The legal ramifications of the discretionary trustee powers

Trust Distribution Provisions Trustees may be given the authority to distribute trust assets in any way the trust agreement stipulates. Trusts often divide trust distributions into: Distributions of Principal Distributions of Income Distribution powers are also often divided based on recipient: Grantor “Lifetime” beneficiaries Ultimate beneficiaries of the trust assets

Distributions to the Grantor Distributions of principal to the grantor Upon request, in revocable trusts Discretionary, in some irrevocable trusts But this often has the effect of eliminating benefits of an irrevocable trust in the areas of: Estate tax Medicaid eligibility planning Creditor Protection Distributions of income to the grantor Mandatory in many trusts, including: Income only Medicaid trusts QTIP trusts Discretionary Also can cause problems in the areas referenced above

Distributions to the Beneficiaries Can be of principal and/or income Mandatory Common in many trusts Especially when the spouse is the beneficiary Will cause the assets that must be distributed to be considered the beneficiary’s assets for most legal purposes Discretionary That a beneficiary may receive a discretionary distribution does NOT usually mean that it is his or her money for most legal purposes Exception may apply for Medicaid eligibility

Other Trust Distribution Rules Be careful not to give the trustee a “general power of appointment” or it will be vulnerable to the trustee’s creditors, be part of the trustee’s estate, etc. A GPOA exists when a trustee can give the assets to himself or his creditors. Limitation of power to distribute by “ascertainable standard” prevents a power from being a GPOA. “Health, education, maintenance and support” is common Allowing distributions to charity by the trustee is also common. It gives the trustee the discretion to use the income tax charitable deduction when appropriate.

Trust Termination The time that the trust is to terminate can be established by: A specific point in time specified by the trust The occurrence of an event or condition specified by the trust Applicable law (ex, Rule against perpetuities) Upon termination, the trust assets may be: Distributed outright Held in subtrusts created by the trust agreement “Poured over” into other existing trusts

Common Types of Subtrust Provisions 1 General minor beneficiary provision This usually states that children under a certain age (e.g., 21) have their assets held for them by the trustee instead of receiving it outright Or it can be held for them under the Uniform Transfer to Minors Act, etc. Subtrusts to protect the benefits eligiblity of the beneficiary These trusts do not allow the trustee to pay for the beneficiary’s benefits that would otherwise be paid for by government assistance A supplemental needs trust is one such example

Common Types of Subtrust Provisions 2 Generation Skipping Transfer trusts For estate tax purposes Family Trusts This keeps the assets in a “pot” for several beneficiaries that can be distributed over time by the trustee These often terminate when the youngest beneficiary reaches a certain age Individual Single Beneficiary Trusts Each beneficiary gets a trust strictly for his or her share The beneficiary may be entitled to the income and/or a certain percentage of the principal The beneficiary typically receives all of the principal at a certain age

Termination of Subtrusts Also typically established in the initial trust or by law Assets are distributed outright upon termination of the subtrusts Powers of Appointment Upon Termination: General Power Causes the trust assets to be in the estate of the holder and be considered his for most purposes Limited (“special”) Power Fairly safe for a beneficiary to hold A convenient way of keeping some control over the trust assets for a beneficiary such as a spouse while removing it from the beneficiary’s name for most purposes