How to Pick a Trustee

Clients frequently choose to use trusts in their estate plans, and once they and their estate planning attorney have made that decision, they’ll need to decide who to name as trustee or trustees. Picking a trustee is not always an easy process, explains Kiplinger in the article “Guidance on Choosing the Right Trustee (or Trustees) for Your Estate.”

Serving as a trustee creates many duties under state law, including acting as a fiduciary to the trust. That means the trustee must be impartial about their own interests, put the beneficiary’s interests and well-being first and be prudent with how they invest funds. Law prohibits a trustee from self-dealing, although depending on the scenario, the trustee might also be the beneficiary.

Here are a long series of questions that will help to assess a person’s ability to serve as a trustee:

  • Will the person be able to separate their personal feelings and interests from those of the beneficiaries?
  • Will all parties be treated fairly, especially if your children are not also your spouse’s children?
  • Can your trustee manage finances and investments?
  • Is there any risk that your trustee will be tempted to take a risk to obtain money at the expense of beneficiaries, including their own money problems or addiction?
  • Are there concerns about the health, age or capacity of the person?
  • Will a child who is a trustee be fair to the other siblings, even if they are step siblings?
  • Will a child be able to stand up to the other siblings?
  • Will the person who is managing work and family have the time to take on the responsibilities of the trustee when they will likely be needed to do so?
  • Does the person understand the family dynamics?
  • Has the person served as a trustee before?

Another common problem is people are unsure of who to ask in their family or where to look for back-up trustees, especially where they might not feel comfortable with those closest to them.  With that in mind, here are some potential people to consider, although their suitability will vary greatly in different circumstances:

  • Spouse
  • Parents
  • Children, step children, and grandchildren
  • Siblings and step siblings, nieces and nephews, cousins
  • Spouses of children, step children, siblings or other close family
  • Friends
  • Neighbors
  • Members of social groups, fraternal organizations, religious communities or other similar groups
  • Financial Professionals (not necessarily financial planners who likely aren’t permitted to, but CPAs or some attorneys for example)
  • Professional Trustees (e.g. a bank or other similar trustee)

I should note as well that I’m focusing on trustees in this article, but many of these same considerations apply to other fiduciary roles.  See here for more information on the other roles to consider.  https://galligan-law.com/the-difference-between-an-executor-a-trustee-and-other-fiduciaries/

There is no one size fits all approach to picking a trustee, but hopefully this will provide guidance on who is right for you.

Reference: Kiplinger (Sep. 8, 2020) “Guidance on Choosing the Right Trustee (or Trustees) for Your Estate”

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Will vs Living Trust: A Quick and Simple Reference Guide

Which is better for you? A will or a revocable living trust?
Which is better for you? A will or a revocable living trust?

Confused about the differences between a will and a living trust?  If so, you are not alone. While it is always wise to contact an estate planning attorney to help you decide which is right for you, it is also important to understand the basics. Here is a quick and simple reference guide:

What a Revocable Living Trust Can Do – That a Will Cannot

  • Avoid guardianship. A revocable living trust allows you to name your spouse, partner, child, or other trusted person to manage your money and property, that has been properly transferred to the trust, should you become unable to manage your own affairs. A will only becomes effective when you die, so a will is useless in avoiding  guardianship proceedings during your life.
  • Bypass probate. Accounts and property in a revocable living trust do not go through probate to be delivered to their intended recipients. Accounts and property that pass using a will guarantees probate. The probate process, designed to wrap up a person’s affairs after satisfying outstanding debts, is public and can be costly and time consuming.
  • Maintain privacy after death. A will is a public document; a trust is not. Anyone, including nosey neighbors, predators, and the unscrupulous can discover what you owned and who is receiving the items if you have a will. A trust allows you to maintain your loved ones’ privacy after death.
  • Protect you from court challenges. Although court challenges to wills and trusts occur, attacking a trust is generally much harder than attacking a will. If there is a challenge to a will, the probate court will stop all proceedings until the matter is resolved, which can put the will contestant in the very strong position of demanding to be paid to go away. Because there is no probate court involvement is no necessary in the administration of a trust, challenging a trust does not result in everything grinding to a halt. This puts the trust contestant at a disadvantage and removes the leverage the contestant would have had in probate court. For other ways on how to avoid conflict over your estate after you pass away, see https://galligan-law.com/how-to-avoid-family-fighting-in-my-estate/.

What Both a Will & Trust Can Do:

  • Allow revisions to your document. Both a will and revocable living trust can be revised whenever your intentions or circumstances change so long as you have the mental ability to understand the changes you are making. (WARNING: There is such as a thing as irrevocable trusts, which cannot be changed without legal action. Irrevocable trusts are different estate planning tools from a revocable trust, which is what we are talking about here.)
  • Name beneficiaries. Both a will and trust are vehicles which allow you to name who you want to receive your accounts and property. A will simply describes the accounts and property and states who gets what. Only accounts and property in your individual name will be controlled by a will. If an account or piece of property has a beneficiary, pay-on-death, or transfer-on-death designation, this will trump whatever is listed in your will. While a trust acts similarly, you must go one step further and “transfer” the property into the trust or name the trust as beneficiary of your property and financial accounts – commonly referred to as “funding.” This is accomplished by changing the ownership of your accounts and property from your name individually to the name of the trust or by naming the trust as beneficiary of the property or account. Only accounts and property in the name of your trust  or designating your trust as beneficiary will be controlled by the trust’s instructions.
  • Provide asset protection. Both a trust and a will may include protective sub-trusts which can allow your beneficiaries to receive some enjoyment and benefit from the accounts and property in the trust but also keep the accounts and property from being seized by your beneficiaries’ creditors such as divorcing spouses, car accident litigants, bankruptcy trustees, and business failures.

While some of the differences between a will and living trust are subtle; others are not. An estate planning attorney can work with you to help you determine which is better for you, a will or a revocable living trust, so that you end up with an estate plan personalized to your needs.

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Locking in a Deceased Spouse’s Unused Federal Estate Tax Exemption

Preserving a deceased spouse’s unused federal estate tax exemption may protect the survivor’s estate from huge taxes if the exemption lowers.

Coping with the death of a spouse is one of life’s biggest challenges.  In addition to the emotional toll, there are many small details that need to be addressed with accounts, finances, taxes and other matters.  One thing that should be considered is locking in the deceased spouse’s unused federal estate tax exemption, says a recent article from Forbes titled “4 Things You Should Know About The Death Tax Exemption.”

The deceased spouse unused exemption (DSUE) is the amount of federal estate tax exemption the spouse’s estate did not use when they passed away. When a person dies, a federal estate tax, known also as the “death” tax, is imposed on any assets over a certain amount. The estate tax exemption amount covers the assets that fall below that amount.  If you properly elect to us it, the DSUE amount can be used by the surviving spouse in their own estate along with their own personal tax exemption.  If you want a longer primer on the estate tax for reading this article, see here:  https://galligan-law.com/what-exactly-is-the-estate-tax/

The threshold has changed over the years. It is at a historically high level of $11,580,000 in 2020 and is indexed to inflation, so it goes up slightly each year.  However, the current law will sunset in 2026, when it will drop to $5 million (adjusted for inflation), and as the federal government needs to pay for COVID-related costs, it is likely to drop sooner and possibly lower.

The DSUE is locked in when you file your deceased spouses’ estate tax return timely.  It is due nine (9) months after the date of death, but may be extended in some cases for up to two (2) years after death. If a spouse died in 2020 with the current exemption of $11,580,000 in place and used up $6,580,000 of the exemption amount, the surviving spouse will be able to add $5,000,000 to their exemption amount by filing the estate tax return appropriately.

The surviving spouse would then have their own $11,580,000 exemption (or whatever is appropriate in the year they pass), plus the $5,000,000 from the deceased spouse’s exemptions. As the current tax rate is 40% for amounts over the exemption, this is an exceptional tax benefit for high networth families, especially if the tax exemption plummets in future years.

I’ve said this a few times but it bears repeating: even if a spouse leaves all of their assets to their spouse and no federal estate taxes are due, an estate tax return still needs to be filed, if the surviving spouse is to lock in the DSUE. If the surviving spouse does not file an estate tax return in a timely fashion, the DSUE will be lost. The estate tax savings to the heirs could be in the millions.

If the estate tax exemption drops to prior levels, such as $3,500,000 which has been proposed in recent years, the family will still be able to claim the DSUE when the second spouse dies. This could be a big help for heirs in reducing or eliminating taxes on the second spouse’s estate. Many people may not have an estate worth $11 million, but by adding up the value of a home, retirement accounts, life insurance and other assets, a $5 million level of assets is not unheard of, and may be over the future exemption amount.

Your estate planning attorney will be able to analyze the federal estate taxes to achieve the best possible outcome for you and your spouse.

Reference: Forbes (Aug. 17, 2020) “4 Things You Should Know About The Death Tax Exemption”

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