Tax & Business Insights


What Do I Do With These? (Part 2)

Volume 10 Issue 6-- November/December 1998

In our previous issue, we talked about what to do if you are not a whiz at estate planning and a client asks you to examine his Will and Trust. We focused on two of the three channels through which the assets of a decedent pass to others.

As we indicated in concluding Part I, Paul Maloney, CPA, of Abington, Massachusetts, had two sets of Wills and Trusts from two law firms in the Boston area. The lawyers were each alleging that the documents prepared by the “other” law firm were lacking in some material respect. Paul turned to The Tax and Business Professionals for an independent opinion in a very confusing situation and we assisted him.

This newsletter will focus on Trusts, the third channel through which a decedent’s assets pass to others.

What is a Trust and How Can it Benefit a Client?

Trusts, like corporations, partnerships, and limited liability companies, are figments of the imagination, so to speak. They can also survive the death of the creator of the Trust, often called a Grantor, Settlor, or Trustor. All Trusts have at least three players: (1) the Grantor — the creator, (2) a Trustee that performs fiduciary duties, and (3) the Beneficiary who receives the benefits or assets of the Trust.

A Trust created while the Grantor is alive is called a Living or Inter Vivos (Latin for Living) Trust. Trusts can also be created in Wills. This type of Trust is called a Testamentary Trust. In Paul Maloney’s situation, mentioned earlier, one set of Trusts was Inter Vivos Trusts, the other set was Testamentary (in a Will). This precipitated adverse comments from the opposing attorney who did not draft Testamentary Trusts.

Some estate planners don’t like Testamentary Trusts because Wills, by definition, can never be effective until death. Thus Trusts created by a Will cannot be funded during life, and the assets that eventually go into the Testamentary Trust must first go through probate.

There are some other weaknesses of Testamentary Trusts. What is the most likely thing to happen to an elderly person before death? Incapacity. While living trusts can be very useful in that situation, Trust provisions in a Will are of no help in such a situtation. While it would be unreasonable to categorically condemn Testamentary Trusts, they do have some limitations.

Effective During Life

As the name implies, Revocable Living Trusts (Inter Vivos) are created during life and are changeable or revocable. Most importantly, they can be funded during life and are effective immediately. The ability of Living Trusts to act now, rather than at death, creates some practical advantages. If the Grantor is incapacitated, elderly, or simply wants to turn management of Trust assets to a younger generation or a financial consultant, the Grantor can do so. Revocable Living Trusts afford the Grantor the ability to stop being the Trustee at any time.

In most revocable trusts, the Grantor usually performs (but is not required to perform) all three of the roles (Grantor, Trustee, and Beneficiary) while he or she is capable. Because most Revocable Living Trusts are designed to avoid probate and reduce estate taxes (in larger estates), these objectives can be met if the Grantor remains Trustee and Beneficiary until death. Moreover, most Grantors want to control the Trust assets and benefits (income) from them while they are of sound mind and body.

After the death of the Grantor, obviously the Grantor can’t be the Trustee, nor should the estate of the Grantor be a beneficiary of the Trust. This is when Successor Trustees and Beneficiaries come into the picture.

Why Trusts are Lengthy Documents

Some professionals and clients recoil in disbelief at the length of Trust documents. When a Trust is executed, no one knows how long the Grantor will live, or if the spouse and children will survive the Grantor. Covering the range of possibilities and having effective Trust provisions for grandchildren of the Grantor requires a few sheets of paper. Many Trusts are 20 or more pages because the range of what ifs is extensive.

Successor Trustees

Who should take over when a Grantor dies or becomes disabled? The surviving spouse and an adult child, two or more adult children, a family friend, a trust company, and a trust company in combination with a family member, are some of the choices. The choice of successors is not endless, but it is quite broad. There are some caveats.

While the surviving spouse, alone, can be the sole successor Trustee, such a choice is usually ill founded, in part because the surviving spouse is usually close in age to the Grantor and may be losing some abilities. For this reason, having an adult child or a trust company involved, seems to make sense.

Many trust companies prefer to be the Sole Successor Trustee, but there are problems with such an arrangement. With the advent of megabanks, the trust departments of many of them have been centralized and are often nowhere near the family of the Grantor. Communications and continuity can be problems. It usually is advisable, therefore, to have a family member as a Co-Trustee with the trust company.

Next issue, Part III of this series, will deal with Trusts and the distribution of assets.


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