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Tag Archives: trustee

September 08, 2012 Uncategorized
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Adding Flexibility to Your Estate Plan

What is a Power of Appointment and how can it add flexibility to your estate plan?
A power of appointment is the power given by one person to another (referred to as the “holder” of the power of appointment) to designate who is to receive an asset. For example, if Husband creates a trust giving Daughter the power to determine who is to receive the trust principal, Daughter is the holder of the power of appointment. There are essentially two types of powers of appointment:

  • A general power of appointment allows the holder to appoint the assets to anyone, including himself, to his estate, or to the creditors of his estate. Property subject to a general power of appointment at the time of death will be included in the holder’s estate.
  • A special power of appointment is exercisable only to a group of persons defined in the trust instrument (for example, to the group comprised of the Trustor’s issue) or in favor of someone other than the holder, the holder’s estate, the holder’s creditors, or the creditors of the holder’s estate. Property subject to a special power of appointment is not included in the holder’s estate.

Special Power of Appointment May Add Flexibility to Estate Plan

A special power of appointment may be used to add flexibility to the dispositive provisions of an estate plan without subjecting the property subject to the special power to inclusion in the holder’s estate. For example, Husband and Wife may designate that the surviving spouse will have a special power of appointment over the principal of the exemption trust (also commonly referred to as the credit-shelter or bypass trust), a trust which becomes irrevocable upon the death of the first spouse. The special power of appointment in this scenario would allow the surviving spouse to make a later determination as to who should receive the principal of the exemption trust and make adjustments accordingly.

Special Power of Appointment May Not Be Appropriate in All Circumstances
The decision as to whether a special power of appointment should be used and the drafting of such a provision must be considered carefully, particularly where there are children from a previous marriage. The use of a special power of appointment in such a situation could result in the surviving spouse appointing all of the trust assets to his or her children, excluding the children of the first spouse to die.

The use of a special power of appointment may add flexibility to the dispositive provisions of an estate plan, allowing someone to make adjustments among beneficiaries, to take into consideration the increased need of a particular beneficiary, or other changes in circumstances. However, as illustrated above, the use of a special power of appointment may not be appropriate in all circumstances.

May 02, 2012 Uncategorized
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Revocable Bank Deposit Totten Trusts

The benefits of using totten trusts to avoid probate court. A decedent’s assets may be transferred upon their death to their heirs or other beneficiaries through probate. “Probate” is the legal process by which a court determines who receives a decedent’s assets under their will or, if there is no will, under the applicable state intestate succession laws. In some states, the probate process may be both costly and time consuming, involving court fees, commissions for estate representatives, attorneys’ fees and/or appraiser’s fees, etc. Another potential disadvantage of probate is that the process is a matter of public record; many would prefer that the details of the administration of their estate, including information on their assets and beneficiaries, be kept private.
To avoid the costs and potential time delays associated with the probate process, and to keep their estate administration private, property owners sometimes seek ways to distribute their assets outside of probate. Depending upon the jurisdiction, methods of achieving a non-probate transfer of assets include holding title to an asset as joint tenants with right of survivorship, establishing a revocable or irrevocable trust, or creating a contract with payable-on-death provisions or a multiple-party bank account, such as a “Totten trust.”
Totten Trusts in General
Totten trusts are also referred to as “savings account trusts” and are accepted in a large majority of jurisdictions. A Totten trust is not generally considered to be a true “trust” at all. Rather, these accounts are a specific type of multiple-party bank account which function as a “payable-on-death” (P.O.D.) savings account.
A Totten trust savings account is considered to be a “non-probate” asset. That is, the Totten trust account is a relatively simple way to pass assets at death while simultaneously avoiding probate. Further, rather than setting up Totten trusts in addition to a will, some individuals may establish Totten trusts as “will substitutes.” However, there are specific procedures, rights and limitations that should be considered.
Establishing a Totten Trust and Rights of Trustee
Generally, in order to establish a Totten trust, the settlor or “grantor” of the account holds the account as a trustee for a named beneficiary (or beneficiaries). For example, the grantor/trustee makes deposits in a savings account in the name of “O as trustee for A, a beneficiary.” Once established, the trustee retains several rights including:
  • Withdrawing funds;
  • Depositing additional funds; and/or
  • Amending the terms of the account.
The grantor has significant power to control the trust, in whatever way they choose, during their lifetime. However, once the grantor dies, provided they have not otherwise revoked the rights of the beneficiary, the contents are automatically transferred to the named beneficiary.
Contingent Rights of Totten Trust Beneficiary
The beneficiary of a Totten trust theoretically owns the account. However, ownership does not occur until the grantor dies. As such, the beneficiary’s rights are not vested while the grantor is still alive. Since the beneficiary has no immediate rights in the Totten trust, the beneficiary’s creditors cannot attach the account to satisfy the beneficiary’s debts during the grantor’s lifetime.
Grantor’s Power to Revoke a Totten Trust
The grantor of Totten trusts may revoke the trust at any time during their life. Revoking the trust extinguishes the contingent rights of the named beneficiary. The grantor may revoke the trust either by:
  • Spending all of the money in the account; or
  • Amending the terms of the account to name another person as the beneficiary.

Advantages of Totten Trusts over a Joint Tenancy

A Totten trust is just one method of transferring assets at death while avoiding probate. A similar and common alternative method is to establish a “joint tenancy” bank account with the right of survivorship. In general, under a joint tenancy, each party takes equal title to the account, has an equal and undivided interest in the funds and retains the right of survivorship on death of one party. On the death of one joint tenant, the assets in the joint tenancy account pass by right of survivorship to the surviving joint tenant, without the need for probate administration.
Unlike a Totten trust, the named beneficiary’s rights are immediately vested in the joint tenancy, rather than being contingent upon the death of the grantor. The beneficiary and the grantor become “co-owners” of the joint tenancy account. This can have adverse consequences for the original grantor due to the following:
  • Each co-owner has the right to draw on the account at any time; and
  • Creditors of either co-owner may reach the account.
November 30, 2001 Uncategorized
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Duties of an Estate Trustee

Every trust must have an estate trustee to properly administer the elements of the trust. Trustees can be individuals, financial institutions or even organizations.

A trustee follows the precise instructions of the trustor (or the trustor’s authorized representative), and also adheres to rules imposed by law.

Prudent Person Rule
Trustees are subject to the “prudent person” rule. This rule states that trustees should use the same standard of care and diligence that any sensible person would use in managing property. Additionally, a trustee should make a strong effort and utilize all of his/her skills in caring for the trustor’s property.

Responsibilities
A trustee has the duty to accomplish the following:

  • Administer internal affairs
  • Manage property
  • Invest property
  • Distribute income and principal
  • Deal with beneficiaries impartially
  • Use discretion over the important areas of the trust

Beneficiaries
A trustee has a fiduciary duty to the trust’s beneficiaries as well as to the trustor. In dealing with beneficiaries, a trustee should:

  • Use property only for the beneficiaries’ interest
  • Disclose important facts
  • Provide additional information related to the trust upon request of the beneficiaries

Improper Activity of an estate trustee should not:

  • Use trust property for personal benefit or purposes not related to the trust
  • Acquire interests in conflict with those of the beneficiary
  • Sell property to himself/herself
  • Delegate his/her duties to another individual

If an estate trustee is suspected of improper activity or misuse of his/her discretionary decision-making powers, the court will review the trustee’s actions after a petition is filed by the trustor or any beneficiary. A trustee may also petition the court for a review if beneficiaries question his/her decisions.

March 30, 2001 Uncategorized
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The Annual Exclusion and Gift Taxes

Gift taxes is a tax on the privilege of making gifts to others while the taxpayer is still living. Gift tax supplement the estate tax, which taxes gifts made upon death. The gift tax was created to frustrate the attempts of those who tried to evade the estate tax by gifting away all of their assets prior to death.
What Constitutes a Gift?
The Internal Revenue Service (IRS) takes a broad view of what constitutes a gift. The IRS advises that gift taxes may apply to the transfer of any property or assets or the use of income producing property, without expecting something of equivalent value in return. Selling something for less than full value or making an interest-free or reduced interest loan may constitute a gift. A gift can be direct, such as a cash gift to a child, or indirect, such as a cash gift to a child’s trust.
The Annual Exclusion
The annual gift tax exclusion is the amount that the taxpayer may gift in a calendar year to an individual without being subject to gift taxes. The annual gift tax exclusion amount was increased to $14,000 per recipient beginning in 2013, subject to adjustment for inflation. Gift tax applies to the amount of the gift in excess of the annual gift taxes exclusion.
Additionally, if both spouses consent, they may split the gift so that it is considered as having been made one-half by each spouse. The annual exclusion amount is thereby doubled to $28,000 per individual recipient.
While gifts between U.S. citizen spouses are generally not subject to any gift tax, the annual exclusion for gifts made by U.S. citizens or residents to their non-U.S. citizen spouses is $143,000 for the year 2013, subject to adjustment for inflation.
The Exclusions are not Cumulative
The annual exclusion is not cumulative, therefore the taxpayer cannot withhold making a gift to his child one year, in the anticipation that in the following year he can make a gift twice as generous free of gift tax. Also, the annual exclusion for gifts does not reduce the available lifetime credit for estate and gift tax.
Unlimited Exclusions for Certain Gifts
If a taxpayer pays tuition directly to a qualified educational institution, or pays a health care provider directly for medical services, such payments are not subject to gift tax, and are not counted toward the $14,000 annual exclusion from gift tax for the individual benefiting from the payment. A common misconception is that this exclusion for education and medical expenses only applies where the taxpayer and the individual benefiting from the payment are related, or where there is a duty on the part of the taxpayer to make such payment. Regardless of the relationship between the taxpayer and the individual benefiting from the payment, direct payments for educational or medical expenses are not subject to gift tax.

Filing a Return on Gift Taxes:

Federal tax law requires taxpayers to file a special gift tax return by April 15 of the year following the gift when:
  • Gifts were given to at least one person (other than a spouse) that exceeded the annual gift tax exclusion amount for the year.
  • The taxpayer and spouse are splitting a gift.
  • A gift was given, other than to a spouse, that cannot be possessed or enjoyed, or income cannot be received from it, until some time in the future.
  • The taxpayer gave a spouse an interest in property that will end sometime in the future.
A gift taxes return is not required for gifts to political organizations or for payments of another’s tuition or medical expenses.