HOW TO MANAGE A TRUST Prepared by: THE LAW OFFICE OF WILLIAM J. BRISK 1340 Centre Street, Suite 205 Newton Center, MA 02459 (617) 244-4373 2011 PREFACE This very simple memo is designed to introduce two classes of people (clients about to create a Trust and the persons they are thinking of appointing as Trustees) to the basics of maintaining a Trust. Trusts are a special creature of Anglo-American law which allows individuals to protect assets for their own use or the use of later beneficiaries. Typically, a Donor or Grantor executes a Trust which is to be managed by a Trustee in the interests of Beneficiaries. Until the past fifty years, most Trusts were managed by professionals, often specialists working in the Trust departments of banks, whose tasks involved the four principal functions of Trust administration: investment tax planning and reporting accounting to beneficiaries distribution of assets Because banks generally eschew Trusts with less than $500,000 of assets, charge significant fees, do not always produce good investment results, and sometimes are excessively rigid in exercising their discretion, an increasing number of Trusts are managed by nonprofessionals. Often family members or close friends, non-professional Trustees have several virtues: they are likely to know the beneficiaries and can exercise discretion along lines the donors would applaud and they charge very little or nothing for their services. Unlike institutions, they are, however, mortal, so a significant issue in preparing any Trust for non-professional management is to assure orderly succession in case the original Trustees lose interest, lose capacity, or die. Sharing this memorandum with potential Trustees will help them to decide whether to serve and, even more important, may help them carry out their responsibilities without great strain or risk. TYPES OF TRUSTS: Despite the arcane vocabulary in which many of them are written, most Trusts are fairly simple. They give legal ownership over specified assets to a Trustee who is expected to be prudent in managing the assets, investing for a fair return without great risk, and distributing income and principal to the beneficiaries as the Trust dictates.
There are dozens of types of Trusts, but the ones with which we are most involved are the following: Marital Trusts often revocable and sometimes even testamentary (i.e. existing within one s Will) they make income available to a surviving spouse without subjecting their principal to estate taxes when the survivor dies. Real Estate Trusts used to hold real estate, often for several generations. Even simple Real Estate Trusts should include directions and authorities to rent, sell, mortgage, and maintain the property. Additional complexities arise when tax, environmental, and long-term family usage are considered. Irrevocable Insurance Trusts protect life insurance proceeds from estate taxes and are, therefore, prime tools for relatively painless estate planning. Special Needs or Supplemental Needs Trusts provide income and even some principal to persons who are disabled without their losing rights to SSI and public health insurance benefits. Income Trusts vehicles for managing assets for individuals who may not want to or may not be able to manage themselves. Such Trusts may in effect serve as the money manager. If irrevocable, such Trusts may serve estate planning purposes. REVOCABLE TRUSTS Individuals who create and fund Revocable Trusts reserve the right to amend or terminate them without any penalty. Even Revocable Trusts become irrevocable, however, when their creators die. In many Revocable Trusts (termed Grantor Trusts ) the Grantor/Donor is also the Trustee and the lifetime Beneficiary. Assets held in Revocable Trusts avoid probate. Revocable Trusts also provide asset management after the owner becomes incapacitated or simply chooses to let his or her Trustee manage the Trust s assets. Marital Trusts, which can double the amount which can be excluded from a couple s taxable estate, are often revocable as well. While standard Revocable Trusts do not typically provide additional tax advantages and do not shield assets from eligibility determinations when one seeks public assistance such as Medicaid, they provide maximum flexibility and minimize tax accounting. Since the IRS treats nearly all Revocable Trusts as Grantor Trusts, any income received by the Trust (usually in the form of interest and dividends) is treated as if it went directly to the Grantor, obviating the need for a separate tax identification number and, more important, separate tax filings for the Trust. Funding a Revocable Trust usually requires nothing more than changing the title of assets. For bank accounts, stocks and bonds held in a brokerage account, and most mutual funds, a meeting with the financial institution s representative should go smoothly if you present: a signed and notarized original copy of the Trust. The financial institution may want to copy it for its files, but should return the original. Note that the name of accounts and the current Trustees appear on the first page of your revocable Trust.
the Social Security Number of the Grantor identification and signatures of the Trustee or Trustees Since the principal purpose of Revocable Trusts is to avoid the publicity, cost, and time involved with probate, it is usually desirable to transfer as many as assets as possible to the Trust. We can provide a form which even transfers personal effects in your home to the Trust. IRREVOCABLE TRUSTS Appropriate Irrevocable Trusts provide maximum protection from creditors and are often motivated by appreciable tax savings. Such benefits must be weighed, however, against some burdens. Irrevocable Trusts: cannot be amended once they are created. cannot be terminated except as provided in the Trust itself. must have their own federal taxpayer identification number and may have to file their own income tax returns (called fiduciary tax returns) depending upon the amount and kind of income they produce. must be administered by a Trustee who is usually not the same person as the Trust s creator and, frequently, when discretion is granted in making distributions, an Independent Trustee must be appointed. INITIAL STEPS IN FUNDING AN IRREVOCABLE TRUST 1) Our office will obtain a tax ID number for your Trust, particularly if it is irrevocable. If it is revocable or until it is funded, the IRS will treat the Trust as a Grantor Trust which it views as a mere extension of the Donor, and therefore not a separate tax paying entity. In most cases, we should be able to provide you with that number, which is obtained from the IRS, within a week of your having signed the Trust. 2) You will want to fund the Trust. For most Trusts, funding occurs when the Donor deposits money into a checking account in the name of the Trust with the Trustee as the only signatory. Use the tax ID number to identify the Trust. Do not use your social security number or the Trustee s social security number. Some banks want to make copies of the Trust itself, so be sure to bring along an original of the Trust and, as a courtesy, a copy for the bank to keep in its files. 3) If the Trust is to hold life insurance policies, we can help you in purchasing or assigning existing insurance policies to the Trust.
4) If cash is to be used to create bank accounts in the name of the Trust, the Donor should draft checks payable to the Trustee, mentioning the Trust. You may transfer other assets (such as stock, a home, or mutual funds) by changing the title to such assets. For example: a bank may enable you to retitle an account, i.e. converting an account you own to one owned by the Trust, simply by assigning an existing account to the Trustee. Since most banks require not only the signature of the Trustee but also may want to file a copy of your Trust, we recommend that you or the Trustee (or both of you) bring to the bank an original of your Trust as well as a copy the bank may keep on file. Be absolutely certain that the new account names the Trustee and the Trust as owners and uses the Trust s new federal identifying number. Under no circumstances should you use your own or the Trustee s Social Security number. to transfer real estate to a Trust requires a Deed which we will prepare, you will sign, and we will record with the Registry of Deeds. to transfer stocks requires working with a transfer agent, a daunting prospect if several blocks of stock are to be transferred. We strongly recommend working with your stock broker to effect the changes. to transfer mutual funds requires completing particular forms which you should obtain even before the Trust is created. We will advise you on the transfer of such mutual funds and help you complete the assignment form at the same time you sign the Trust. 5) For most Irrevocable Trusts, you must comply with gift tax laws. In most cases, we will notify beneficiaries of their withdrawal rights in order to comply with the Crummey provisions which allow you to fund the Trust with up to $26,000 per beneficiary each year. 6) In order to take advantage of Crummey we recommend that you plan, each September, to contribute a gift to the Trust to cover taxes, administrative costs, and insurance premiums (if the trust owns insurance policies), providing sufficient time to go through the Crummey exercise. REGULAR MAINTENANCE The Trustee should receive an executed copy of the Trust and should keep that copy available whenever performing tasks as Trustee. Read the Trust carefully, particularly as to duties and obligations of the Trustee. Most of your duties involve investing the assets of the Trust, complying with tax laws, issuing annual accountings, and exercising judgment under the Trust in making distributions to the beneficiaries. Be prepared to perform the following functions on a regular basis: 1) Maintain a list (on Schedule A of your Trust) indicating the date and value of each contribution to the Trust. That record may be vital in calculating capital gains taxes and in distinguishing principal from income two of the most contentious issues which arise when Trust administration is scrutinized.
2) Make periodic payments, as required in the Trust, to each beneficiary. In some cases it may be possible to pay bills incurred by the beneficiary directly to the creditor or to pay (tuition bills, for example) directly. If periodic payments are to be made, good Trustees make them on a specific day of the month, to maintain consistency and (frankly) to avoid plaintive calls from a disappointed beneficiary. 3) Review your investment plan at least annually and, if at all possible, retain an investment advisor or at least a highly competent broker to advise you on yields, risks, and asset management strategies. If you are making investments on your own, you may want to read an article published over a decade ago on the Prudent Trustee Rule and how an investing Trustee paid for being ahead of his time. 4) Zealously maintain the separate identify of the Trust (which is imperative for the same reasons the trust was created), by keeping its records and finances entirely separate from anything else in which you are involved. Do not write a check from your own account to pay for any costs (including that of the tax preparer) of the Trust once it has been created. The Trust must pay its own costs, taxes, insurance premiums, etc. 5) Mark your calendar for each anniversary in which an annual report or accounting is due. We like to help Trustee-clients prepare at least their first accounting and tax filing. Afterwards, you may find it advisable to do your own work or you may want to consult an accountant or other professional. 6) In the case of Irrevocable Trusts, consult a tax professional each year, by no later than January, to prepare the Trust s annual tax returns which are likely to be due on April 15 for the previous year. Since Trusts pay taxes on their retained earnings at a higher rate than individuals, it is usually prudent to distribute all income to beneficiaries (who pay taxes at their regular rate). You may want to strategize on how best to make distributions well before the end of each year. If you have specific questions about maintaining the Trust or satisfying beneficiaries, consult the Trust first but, then, if any issues remain, contact our office. This article is offered for informational purposes only and should not be construed as legal advice. In drafting your estate documents we will take into consideration your particular circumstances and preferences and base our analysis on your needs and the current law. Before executing any documents, you should seek advice from our office or another qualified attorney. Changes in the law and your personal circumstances may significantly alter the strategies recommended.