The Wrong Successor Trustee Can Derail Your Final Wishes

Today many estate plans contain irrevocable trusts that will continue for the benefit of a surviving spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is crucial to choose the right succession of trustees.

Should You Name Family Members as Your Successor Trustees?

Choosing the right succession of trustees for your irrevocable trust that is intended to continue for years is critical to its longevity and ultimate success. 

Initially you may think that a family member, such as your spouse, a sibling, or an adult child, will be the best person to serve as your successor trustee. You may think family members will better understand the varying needs of your beneficiaries and keep the costs of administering the trust down. 

But in reality family members will not be able to fulfill all of their fiduciary obligations without hiring legal, investment, and tax advisors.  The expense of all these outside advisors will add up and can ultimately cost more than a corporate trustee, such as a bank or trust company. One advantage of a bank or trust company is that they can often meet all fiduciary obligations under one roof for one fee.  In addition, a corporate trustee will act in an unbiased manner in making distributions and investments which will benefit both the current and remainder beneficiaries, and a corporate trustee will not get sick or too busy to oversee the day-to-day administration of the trust.

Should You Give Your Beneficiaries the Power to Remove and Replace Trustees?

Forcing your trust beneficiaries to be stuck with the wrong trustee without a reasonable means for removing and replacing the trustees may cause an expensive visit to the courthouse.

It is necessary to build provisions into your trust agreement which will allow your beneficiaries or an independent third party, such as a trusted advisor or a trust protector, to remove and replace the trustees without court intervention.  The fact that the trustee can be removed and replaced without going to court is often an incentive for the trustee to work out any differences with the beneficiaries.

What Should You Do? 

Selecting a successor trustee is one of the most important decisions you will make when creating an irrevocable trust or a dynasty trust.  While family members may be your initial choice, you should give serious consideration to designating a corporate trustee, either alone or as a co-trustee with a family member or trusted advisor. 

 A corporate trustee will act as a neutral party to oversee discretionary distributions and investment strategies that benefit both current and remainder beneficiaries.  To create flexibility, specific beneficiaries (such as current income beneficiaries) or a trust protector should be given the right to remove the corporate trustee and replace it with another corporate trustee.

If you have family members named as your successor trustees, please contact our office so that we can discuss all of your trustee options.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

How Powers of Appointment Can Improve Your Trust

Today many estate plans contain trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is important for the trust creator to consider including powers of appointment in the trust agreement to allow trust beneficiaries to be added or excluded at each generation.

What is a Power of Appointment?

In broad terms a power of appointment is the right granted to an individual under the terms of a trust to change the provisions of that trust.

 Powers of appointment can be given to the current beneficiaries or trustees of a trust or to an outside third party such as a trust protector.  They also come in many different forms and include powers that can be exercised while the individual is living (a “lifetime” power of appointment), or after the individual dies (such as a power of appointment exercised in the individual’s own will or trust, which is a “testamentary” power of appointment).

Powers of appointment can be as broad or limited as the trust creator desires.  In other words, the trust creator can give the power holder the ability to make broad changes to the trust or to make very limited changes under limited circumstances.

Examples of Powers of Appointment in Action

 Below are some examples of how a power of appointment can be used to change the beneficiaries of a trust:

·        The trust creator’s spouse can be given the power to include or exclude children, grandchildren, and other heirs as trust beneficiaries after the spouse dies.

·        The trust creator’s child can be given the power to include or exclude the child’s own heirs or the child’s spouse, siblings (brothers and sisters), or heirs of the child’s siblings (nieces and nephews) as trust beneficiaries after the child dies. 

·        If the trust creator is married but doesn’t have any children, the trust creator’s spouse can be given the power to include or exclude the trust creator’s extended family members and one or more charities as trust beneficiaries after the spouse dies.

These are of course only a few examples; the possibilities are truly endless for how powers of appointment can be used to change the terms of a trust.

Do Not Attempt to Draft Your Own Powers of Appointment

If you are concerned about how your children, grandchildren, or even great grandchildren will eventually grow up, you can build flexibility into your trust by giving your spouse or other beneficiaries the ability to include or exclude heirs through the use of powers of appointment. 

But beware:  Poorly drafted powers of appointment can create all sorts of gift tax and/or estate tax problems for your trust beneficiaries and trustees. 

Therefore, powers of appointment should only be drafted or included in a trust with the assistance of an experienced estate planning attorney. 

If you would like to discuss how to incorporate powers of appointment into your trust, please call our office.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

Who’s Going to Get It: Do You Really Know the Beneficiaries of Your Dynasty Trust?

Today many estate plans contain irrevocable dynasty trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is important that they clearly define who will be included as trust beneficiaries at each generation.

Who Are Your Descendants?

 In the past the definition of “descendant” was straightforward:  A person who can be traced back to a specific ancestor through the same blood lines.  But the modern family now encompasses much more than just blood heirs:

·        Adopted beneficiaries.  In your trust, should the definition of “descendant” include a minor child who is legally adopted by your child, grandchild, or great grandchild?  What about an adult who is legally adopted by your child, grandchild, or great grandchild?  What happens if your child, grandchild or great grandchild gives up their naturally born child for adoption, should your blood heir who has been adopted away from your family be included as your descendant?  You should consider specifically including or excluding adopted minor and adult beneficiaries in the definition of “descendant” used in your trust agreement. 

·        Stepchildren.  In your trust, should the definition of “descendant” include a stepchild of your child, grandchild, or great grandchild who is never legally adopted by your heir but otherwise treated like one of their own?  While you may have the opportunity to get to know your stepchildren (and even your step grandchildren) and choose to specifically include them or exclude them in the definition of your descendants (in fact, you may want to include some and exclude others), it will be important to decide and communicate whether stepchildren in later generations should be included or excluded as beneficiaries of your trust.

·        Beneficiaries conceived using “assisted reproductive technology.”  In your trust, should the definition of “descendant” include a child, grandchild or great grandchild conceived using artificial insemination?  What about a child, grandchild or great grandchild conceived using a surrogate mother?  What about a child, grandchild or great grandchild conceived using an anonymous sperm or egg donor?  While no one knows what the future definition of “assisted reproductive technology” will encompass, the definition of “descendant” in your trust agreement should specifically include or exclude heirs conceived using assisted reproductive technology. 

Carefully Defining Your Trust Beneficiaries Will Keep Your Heirs Out of Court

Who may be your “descendant” twenty, thirty, or even fifty years into the future should be carefully considered when creating a trust that is intended to last for multiple generations.  Clearly defining the class of beneficiaries who will be entitled to receive distributions from your trust will allow for a smooth transition between generations and keep your heirs and trustees out of court.  

If you have questions about the definition of “descendant” used in your trust or would like to discuss how you can clearly define your trust beneficiaries, please call our office.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.