Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 Executor Duties Named in a valid will to serve as personal representative of testator when will is probated Can be an individual or institution Locate, prove, and probate decedent’s will Collect decedent’s property

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 Executor Duties (cont’d) Pay debts, taxes and expenses Distribute remaining assets to beneficiaries specified in decedent’s will Executor duties usually last between nine months and two or three years

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 Attributes of a Good Executor Sensitivity Competence Understanding and appreciation of needs and circumstances of beneficiaries Knowledge of the nature, value and extent of decedent’s assets Experience in the administration of estates Business and investment experience

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 Attributes of a Good Executor (cont’d) Familiarity with decedent’s business Ability to serve Willingness to serve Geographic proximity to the estate’s beneficiaries and assets Lack of any conflict of interest Integrity and loyalty

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 Trustee Duties Named in a trust agreement to carry out the objectives and follow the terms of the trust Can be an individual or corporate fiduciary or combination Satisfaction of tax and non-tax objectives Investment, management, and protection of trust assets Compliance with dispositive intentions of the grantor

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 Goals of a Trust Reduce or eliminate income or estate or GST taxes at the federal or state level Reduce or eliminate probate costs Create a vehicle for unified administration of both probate and nonprobate assets to facilitate attainment of other estate planning objectives Provide for minor children with greater flexibility and customization than UTMA or UGMA allow

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 Goals of a Trust (cont’d) Provide for recipients who reach majority but lack emotional or intellectual maturity, physical capacity, or technical training to handle large sums of money, an investment portfolio, or a family business Postpone full ownership of trust assets until specific trigger ages or events occur Enable investment in an asset that does not readily lend itself to fragmentation (real estate, life insurance) Limit the parties who can obtain the assets

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 Role of Trustee vs. Role of Executor Trustee duties commonly last for a generation or more vs. one to three years for executor Trustee selection is tax-sensitive but executor selection is not tax-sensitive

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company9 Attributes of a Good Trustee Availability Impartiality and lack of conflict of interest Financial security Investment sophistication, policy, and track record Business sophistication Accounting and tax-planning expertise

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company10 Attributes of a Good Trustee (cont’d) Recordkeeping and reporting ability Understanding and appreciation of needs and circumstances of beneficiaries Fees Tax-neutral impact Decision-making abilities Competence

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company11 Attributes of a Good Trustee (cont’d) Standard to which trustee will be held Integrity Flexibility to meet changing circumstances Willingness to serve throughout the term of the trust Experience as a trustee Neutral state law impact

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company12 Trustee Powers Powers to affect beneficial enjoyment Administrative powers Powers over principal Powers to discharge legal obligations Note: Before naming the grantor or anyone with an interest in the trust as trustee, consideration must be given to income and estate tax consequences of powers held by various parties (grantor, nonadverse party, adverse party, independent third party)

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company13 Powers Affecting Beneficial Enjoyment 1.Power to distribute income to grantor or grantor’s spouse 2.Power to distribute income to beneficiaries other than grantor or grantor’s spouse without restriction of an ascertainable standard 3.Power subject to an ascertainable standard to distribute income to beneficiaries other than the grantor or grantor’s spouse 4.Power subject to an ascertainable standard to distribute income to a beneficiary or class of beneficiaries

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company14 1.Power to distribute income to grantor or grantor’s spouse Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeYes Nonadverse party as trustee YesNo Adverse party as trustee No

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company15 2.Power to distribute income to beneficiaries other than grantor or grantor’s spouse without restriction of ascertainable standard Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeYes Nonadverse party as trustee YesNo, unless power limited to temporarily withholding distributions Independent party as trustee NoNo, unless grantor can substitute himself as beneficiary

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company16 3.Power subject to an ascertainable standard to distribute income to beneficiaries other than the grantor or grantor’s spouse Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeYes, unless power limited to consent of adverse party No Person other than grantor as trustee NoNo, unless grantor retains right to substi- tute himself as trustee

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company17 4.Power subject to an ascertainable standard to distribute income to a beneficiary or class of beneficiaries Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeNo Person other than grantor as trustee No

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company18 Powers Affecting Beneficial Enjoyment (cont’d) 5.Power to distribute principal to current income beneficiary 6.Power to distribute or accumulate income for current income beneficiary 7.Power to make mandatory distributions of income or principal to specified beneficiaries other than the grantor or grantor’s spouse

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company19 5.Power to distribute principal to current income beneficiary Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeNoYes, unless power limited by ascertainable standard Person other than grantor as trustee NoNo, unless grantor retains right to substi-tute himself as trustee and no ascertainable standard

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company20 6.Power to distribute or accumulate income for current income beneficiary Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeNo Yes, unless power limited by ascertainable standard Person other than grantor as trustee No No, unless power can be exercised without an ascertainable standard and grantor retains right to substitute himself as trustee

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company21 7.Power to make mandatory distributions of income or principal to specified beneficiaries other than the grantor or grantor’s spouse Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as Trustee No, unless trust income used to discharge grantor legal obligations No Person other than grantor as trustee No, unless trust income used to discharge grantor legal obligations No

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company22 Administrative Powers 1.Power to allocate receipts between principal and income 2.Power to use trust income to pay premiums on insurance insuring the life of the grantor or grantor’s spouse 3.Power to purchase, exchange, or otherwise deal with trust assets for less than adequate consideration

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company23 1.Power to allocate receipts between principal and income Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeNoNo, unless power can be exercised in nonfiduciary capacity Person other than grantor as trustee No

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company24 2.Power to use trust income to pay premiums on insurance insuring the life of the grantor or grantor’s spouse Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeYes, to extent income is or may be used for payment of life insurance premiums without consent of adverse party No, assuming trust owns and is bene-ficiary of proceeds Nonadverse party as trustee YesNo Adverse party as trustee No

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company25 3.Power to purchase, exchange, or otherwise deal with trust assets for less than adequate consideration Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as Trustee Yes, if can exercise power without consent of adverse party Yes Nonadverse party as trustee Yes, if nonadverse party can exercise power without consent of adverse party No, unless grantor retains right to substitute himself as trustee Adverse party as trustee NoNo, unless grantor retains right to substi- tute himself as trustee

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company26 Administrative Powers (cont’d) 4.Power to borrow trust income or principal without adequate interest or adequate security 5.Power to vote securities of a controlled corporation 6.Power to reacquire trust principal by substituting property of equal value

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company27 4.Power to borrow trust income or principal without adequate interest or adequate security Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeYes, unless approval of adverse party needed Yes Person other than grantor as trustee No, if person can make loans to anyone No, unless grantor can substitute himself as trustee

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company28 5.Power to vote securities of a controlled corporation Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeYes, if power can be exercised in nonfiduciary capacity and holdings constitute significant control Yes Person other than grantor as trustee Yes, in limited circumstances No, unless grantor retains power to substitute as trustee

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company29 6.Power to reacquire trust principal by substituting property of equal value Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeYes, if power can be exercised by anyone in nonfiduciary capacity without consent of fiduciary person Yes Person other than grantor as trustee Yes, if power can be exercised by anyone in nonfiduciary capacity without consent of fiduciary person No, unless grantor can substitute as trustee

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company30 Powers Over Principal 1.Power to revoke the trust and revest the principal in the grantor or grantor’s spouse 2.Power to terminate trust and distribute principal to beneficiaries

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company31 1.Power to revoke the trust and revest the principal in the grantor or grantor’s spouse Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeYes, unless can exercise power only with consent of adverse party Generally, yes Nonadverse party as trustee Yes, unless can exercise power only with consent of adverse party No, unless power exercisable by trustee and grantor can substitute as trustee Adverse party as trusteeNo

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company32 2.Power to terminate trust and distribute principal to beneficiaries Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as Trustee No, with limitationsYes Nonadverse party as trustee Yes, with certain exceptions No, unless power exercisable by trustee and grantor can substitute as trustee Adverse party as trustee NoNo, unless power exercisable by trustee and grantor can substitute as trustee Independent Trustee No, if half or more of trustees are independent No, unless power exercisable by trustee and grantor can substitute as trustee

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company33 Powers to Discharge Legal Obligations 1.Power to discharge support obligation Grantor taxed on trust income Trust assets includible in grantor’s gross estate Grantor as TrusteeYes, in certain circumstances Yes, if income may be used to discharge grantor’s legal obligation Person other than grantor as trustee No, unless actually used to discharge grantor obligation No, unless grantor can substitute as trustee

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company34 Co-Trustees Problem: It is impossible to select a trustee that has all of the desired advantages and none of the unwanted disadvantages Solution: Often one or more family members and a corporate fiduciary are selected Considerations: –Additional cost? –Tie-breakers for voting? Majority rules? –Responsibility dissenting trustee has for majority decisions?

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company35 Removal and Succession of Trustees The trust document should consider the following issues: –Who, if anyone should be given the power to remove trustees? –Should such power be given to Grantor? Beneficiaries? Trustee(s)? Outside party? –How narrow or broad should a removal power be?

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company36 Removal and Succession of Trustees (cont’d) The trust document should consider the following issues: (cont’d) –How often may a removal power be exercised? –How will succession be determined? –What restrictions will be placed on the successor trustee? –What are the tax consequences of allowing various persons to remove a trustee and without restriction appoint a new one?

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company37 Estate Planning Attorney Duties Duties depend on the client’s stage in the estate planning cycle: –Accumulation –Conservation –Distribution The attorney must gather data about: –The client, his family and other potential beneficiaries and their circumstances –Client’s sources of wealth, income, liabilities, and expenses –Client’s financial goals and fears Analyze client data to ascertain client’s current position

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company38 Estate Planning Attorney Duties (cont’d) Identify potential areas of weakness with regard to: –Liquidity –Disposition of assets –Adequacy of capital and income –Stability and maximization of value –Excessive transfer costs –Special Needs Communicate weaknesses and potential solutions to client to enable client to make informed decisions Organize the estate planning team Draft the necessary documents

Selection of Executor, Trustee, and Attorney Chapter 12 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company39 Attributes of a Good Estate Planning Attorney Competence Specific expertise: –CPA, CFP, CLU, ChFC –State certified specialist –Attorneys with LLM (masters) degrees in taxation –Teach estate planning in universities or law schools Compassion Clarity Affordability