Do you need more than one trustee?

In the old days, trusts tended to be pretty simple.  Typically, a trustee was expected to invest the funds conservatively and pay interest to a beneficiary at regular intervals.  That was about it. Today, however, trustees are often expected to invest aggressively and successfully in a much more complex market.  They may be subject to far more tax, compliance and regulatory requirements.  And they may have to provide not for a single beneficiary but for a range of family members or generations, who may have conflicting interests. 

Some states have begun changing their laws to encourage the use of “co-trustees”.  The idea is to allow trustees to specialize.  One can handle complex investments, while another takes care of the tax returns and paperwork.  A third trustee might be a family member who is authorized to make decisions about distributions.  A family member would be much more likely than a bank, for instance, to be aware that a relative has developed a gambling or drug problem and shouldn’t be trusted with large cash payments.  [Read more…]

Some issues to consider when you create a trust

Here’s another story that shows the importance of picking a good trustee – someone who will adhere to your wishes and prevent disputes down the road.

It’s also proof that just because someone has died, that doesn’t mean they cant be the source of a lawsuit – so carefully drafting your document can save a lot of headaches.

Henry Hansen set up a trust to benefit his two daughters, Mildred and Ruth.  The trustee was to pay income to the daughters, and if either daughter needed additional money due to illness, the trustee was to provide it from the principal.  When both daughters had died, the remaining money was to go to his grandchildren. 

Mildred died in 1986 and Ruth died in 2005.  However, Ruth’s executor filed a lawsuit, claiming that in the last years of her life, the trustee had failed to pay her money from the principal to support her in her illness. 

In effect, the lawsuit pitted the creditors of Ruth’s estate against Henry’s grandchildren, both of whom claimed they were entitled to the money.  The dispute ended up in the Nebraska Supreme Court. 

The grandchildren claimed Ruth’s estate couldn’t complain because the trustee had discretion to decide how much to pay her.  But the court said that wasn’t true.

While the trustee had discretion to decide how much Ruth needed, the trustee didn’t have discretion to ignore her needs altogether and refuse to pay money from the principal if Ruth really was ill and needed money.

The grandchildren also argued the trustee had no right to pay any money to Ruth’s estate.  The purpose of the trust was to support Ruth in case she became ill – and now that she had passed away, paying money to her estate wouldn’t fulfill that purpose.  All it would do is benefit her creditors. [Read more…]

Avoiding the gift tax

Once a year, you’ll transfer to the ILIT enough money to pay the policy premiums.  This transfer to a trust would ordinarily be subject to the gift tax.  But there’s a way around that problem too.

Under the gift tax laws, you can give $12,000 per person per year to any individuals you want before the gift tax applies.  So the idea is to “give” the money to your trust beneficiaries for tax purposes, while actually having it go to the ILIT. 

This is done by making a transfer to the ILIT with the condition that the beneficiaries of the ILIT can claim it if they want to.  Whenever a transfer is made, the trustee will send a letter to the beneficiaries – or their parents or guardians, if they’re children – saying the beneficiaries have a specific period of time (usually 30 or 60 days) to withdraw the money if they want to do so. [Read more…]

Why share your life insurance with Uncle Sam?

If you own life insurance, you probably bought it to protect your family if something happens to you.  But did you know that half of your life insurance proceeds could end up going to the U.S. Treasury, rather than to your heirs? The proceeds themselves will go to your beneficiaries.  But the amount of the proceeds will be added to your estate for estate tax purposes. If you have enough assets to be subject to the estate tax, then roughly half the amount of the proceeds could be forfeited to the government in taxes – instead of going to protect your family.  Wouldn’t you want to avoid this outcome if you could?

There is a way around this problem.   It’s called an “irrevocable Life Insurance Trust,” or ILIT.  The idea is to create a trust to hold your life insurance policy.  You name the ILIT as the owner and beneficiary of the policy, and you name whomever you want to receive the proceeds as the beneficiaries of the ILIT.  If it’s done right, the policy proceeds will go to the beneficiaries you select and not be included in your taxable estate.