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Planning Resources
Occasionally people have difficulty in choosing a successor
trustee of their living trusts. This
article will hopefully outline some of the major issues and help to guide you in
your choice. The following choices
include your major options. Each has several advantages and disadvantages: 1)
Naming your children as successor trustees.
This choice is often appropriate when the children are older and very
responsible and savvy with money and their own financial situation.
It is also appropriate when there is little likelihood of lawsuit or
divorce diverting the funds inherited by the children.
It has the advantage of giving the children maximum control and saving
the trust from incurring outside trustee fees.
The children can always hire an accountant to do the tax returns and an
attorney should they have legal questions regarding the trust.
This is not appropriate, however, when there is a significant chance of
lawsuit or divorce affecting the children, as there is greater likelihood of
funds being diverted to the creditor or son/daughter in law.
Protection of assets is greater when using an outside trustee. This
choice is also inappropriate when children are spendthrifts or immature and
would simply blow the inheritance, or if you would like to insure that some
funds be left over for grandchildren.
Some liken this choice to “the fox guarding the chicken coop.”
However, if you do not mind the possibility of the children draining all
of the trust assets, this still gives better protection and advantages than if
you had simply left the inheritance outright in a will.
This choice is also problematic in second marriage situations where there
is a potential for conflict between unrelated parties.
In such cases it is often better to name an independent party.
2)
Naming a bank
or a trust company.
This choice is appropriate if the children are less mature, are
spendthrifts, or if you would like to better protect the children’s
inheritance from creditors, divorces and the like.
It gives the children a relief from responsibility over the management of
the trust. Many
banks and trust departments have a long history of providing such services to
families and this can often be the best choice.
Banks and trust companies understand the law and are experienced at
interpreting trust documents.
They also understand the income tax issues of beneficiaries and trusts.
There are several drawbacks, however.
Many banks have minimum deposit requirements for a trust.
Some will not take trusts under half a million dollars.
Also, banks charge an annual trustee fee that is often a minimum fee plus
roughly 1% of trusts assets annually.
This can be more prohibitive, especially for smaller accounts.
Many banks have merged in recent years and they sometimes move the trust
departments to Columbus or Chicago, thus moving the trust officers offsite and
more unavailable for personal contact.
Some companies still have trust officers in the local area though.
Also, banks are somewhat notorious for being overly conservative with
investments and distributions.
This is somewhat due, I believe, to prior limitations on investments
under trust law, and should be ameliorated in the future due to recent changes
in the Uniform Prudent Investor Act.
Those establishing larger long term trusts should consider this choice. 3)
Naming a
stockbroker or financial planner.
This is usually a poor choice, but may be appropriate in the right family
situations. The
advantage to such an arrangement is that you have an objective party as an
independent trustee.
In contrast to a bank, the stockbroker or financial planner may be more
aggressive and provide a better return on investment than a bank.
However, unlike a bank or attorney, they are not familiar with the law of
fiduciary obligations and trusts.
They are not typically experienced in interpreting trusts or dealing with
trustees or beneficiaries.
They might or might not understand the income tax issues and advantages
to using trusts.
The biggest problem may be that their broker dealer may prohibit them
from serving as trustees.
The SEC/NASD has restrictions on a planner being trustee and managing
money for that same trust.
Thus, this is usually a poor choice for trustee.
However, under relatively new Ohio laws, you can appoint such a person as
the Trust Investment Advisor, effectively directing the trustee to use such a
person for investment decisions.
This may give you the best of both worlds. 4)
Naming an attorney.
This may be an appropriate choice sometimes.
The attorney understands the rights and obligations of the parties and is
experienced at interpreting trust documents and legal issues.
An attorney experienced in tax law (this would not be most attorneys, but
only those concentrating in tax or estate planning), would also understand the
tax issues and loopholes that beneficiaries can take advantage of.
Thus, an attorney has many of the advantages of a bank in these respects,
and are usually less expensive.
However, attorneys are often less experienced than banks in day to day
trust operation issues and dealing with beneficiary legal issues.
Attorneys may also not outlive you, especially if the attorney is the
same age as the client.
Banks offer greater potential for longevity, although businesses also
fail and merge and go out of business as well.
Also, if the attorney is the same as the person drafting the document,
the bank would provide a more objective, “second opinion”, that the attorney
could not provide.
However, the attorney is more likely to understand the original intent of
the people setting up the trust, since he or she has met and discussed the
issues with them. 5)
Naming an accountant/tax preparer/CPA.
This can also be an appropriate choice.
The accountant often knows the family finances and situation as well if
not better than the family attorney.
Accountants’ familiarity with trust law and taxation varies with the
individual, but they undoubtedly understand the tax issues at least.
Like the attorney, they have more personal contact with the family and
know the situation better, but have less experience and depth in dealing with
potential trust issues than an experienced bank.
Like the attorney, it is important to consider whether the person is
likely to outlive the grantors and be able to help the children.
Attorneys and accountants both do not have the investment experience and
expertise of the bank, and especially not that of the financial planner.
However, the accountant is more personal than the bank, and offers more
objectivity than the attorney.
Another issue to address is that of liability insurance.
Banks have insurance that covers their mistakes or negligence.
Attorneys and accountants may have such coverage, but their policies do
not typically cover investment decisions (unless a separate policy is
purchased). Thus,
many will not serve as trustees unless a separate investment advisor is named. 6)
Naming other family members.
This is not the “fox guarding the chicken coop”, but the fox’s
uncle. Much
of this choice depends on the personality and experience of the family member.
Often people will name a brother or sister.
This is a good choice while the children are younger and the brother or
sister may also be guardian of the children.
It has the advantage of better objectivity than naming the children.
Also, the family member will hopefully better understand the family
dynamics and situation better than an outside professional or bank.
However, this person is unlikely to know trust or tax law.
This might be rectified by the trustee consulting with an accountant or
attorney. The
drawback is that your brother or sister may not outlive you, or perhaps not for
very long. However,
you likely trust this person more than outsiders.
Sometimes people name a professional trustee, and then direct that the
trustee consult with a family member for distributions from the trust.
This gives some contact and involvement for the family member, without
the burden and liability associated with it.
Sometimes a consultative role for the relative may be preferable to being
trustee, due to the legal burden if the relative is the sole trustee, and the
potential of trustee/beneficiary conflicts souring relations among the family.
Having an independent party lets the disgruntled beneficiary take it out
on an outside trustee and keeps any dispute from further poisoning the family.
7)
Naming a family member/bank/professional as trustee, with a financial
planner as Trust Investment Advisor.
This may give the best of both worlds.
It allows the trust to get the financial returns that a professional
financial advisor can achieve, but provides the more personal attention of a
professional advisor or family member, or affords the professional management of
a bank. Note,
however, that many banks are behind the times on this issue and either do not
permit this or do not give a discounted trustee fee.
Check with your preferred bank.
The only one I know for sure in the SW Ohio area that accommodates this
is National City Bank.
Another is the Capital Trust Company (based in Delaware).
Family members and other professionals like this idea because it allays
them of the investment responsibility and liability. 8)
Naming an independent company or individual as trustee and/or trust
investment advisor, but make family members the Trust Protectors.
This choice gives additional flexibility if non-family members are used
as trustees or trust financial advisors.
A trust protector is a person (or persons) who has the right to demand
accounting and can fire the trustee or financial advisor.
This enables the advantages of naming an outside trustee, but also
provides a mechanism to replace the outside trustee.
You can also name a professional or bank as co-trustee with a family
member. Although
the family member would still have some legal liability, the legal and tax work
would be done by the bank or professional, and the family would be assured by
the fact that a family member is required to co-sign on all distributions as
co-trustee. I hope that this article has been helpful.
Please call your preferred bank or accountant for more information regarding
their services. Our office can provide a fee schedule at your request as
well, and we have copies of many local bank trustee schedules.
IRS Changes IRA Rules Creating Money Saving Opportunities for Retirees Many financial planners strongly encourage IRA account
owners to withdraw only the minimum amount required by law.
This technique not only reduces the amount subject to income tax each
year, but also allows additional funds to continue growing tax deferred.
The IRS assisted taxpayers earlier this year by creating new rules on
mandatory distributions from IRAs and other retirement accounts.
Most people will find that their required withdrawals after age 70 ½ are
now smaller. The money saving opportunities under the new IRS rules are
two-fold. Not only can a retiree
save more money by withdrawing fewer funds from their account, but they can now
name a charity or a charitable trust as the beneficiary without accelerating the
rate at which funds must be withdrawn from their account, thus saving their
estate both income taxes and estate taxes. Please consult the table below to determine your required
distributions. This table applies
to distributions after January 1, 2001. This
does not apply to owners of ROTH IRAs, which have no required minimum
distribution until after the death of the initial owner.
There is also a more favorable table available for an owner that names
their spouse as the primary beneficiary, when the beneficiary/spouse is more
than 10 years younger than the owner/spouse.
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