Dividing the Duties of a Trustee
A person creating a trust often serves as the first trustee. In that case, all the responsibilities of administering the trust are placed in one person’s hands. The trust documents should provide for how those duties will be performed if the first trustee loses the ability to handle them. The role of successor trustee can be performed by one individual, or it can be divided between multiple parties.
There may be benefits to separating the roles of managing the assets of the trust and deciding how to distribute those assets among the beneficiaries. Trust documents should consider the duties fulfilled by a trustee and assign those duties to the person or people most able to complete them.
The Skills and Abilities of Successor Trustees
There are several functions tied to trust administration. These functions involve a variety of skills that can be hard to find in a single individual. Breaking up the role of trustee into its component parts can make it easier to find people with the right knowledge and talent to administer the trust correctly.
For example, if one of your siblings has a financial background but lacks the temperament for delicate family dynamics, that sibling could be named as the investment trustee. In that role, the sibling would have the authority to make decisions about investing assets in the trust.
Many trusts include a level of discretion when it comes to how the trust’s assets are distributed to beneficiaries. While a trust can be divided by mandatory, predetermined payments, it can also provide for discretionary distributions based on several factors. The distribution trustee must be capable of overseeing potentially disputed payments. That requires an understanding of family dynamics, strong communication skills, impartiality, and knowledge of the beneficiaries and their circumstances.
Separating these roles can greatly improve the performance of the trust and the experience of the beneficiaries. It can also help prevent conflicts of interest and disputes amongst the various parties.
One common example of these potential conflicts is found in blended families. When a stepparent is named as trustee, conflict can arise around distributions to children of the first marriage. Conversely, if the distribution trustee is a third-party, free from accusations of favoritism, conflict between the new spouse and children of the prior relationship can be avoided or minimized.
Trusts and Creditor Claims
Trusts have many benefits, not least of which is the ability to shield assets from creditors. If one or more of the trust’s beneficiaries owes money to creditors, those creditors may be unable to gain access to the trust’s assets depending on the way the trust handles distributions. One example of this is trust payments tied to the health, education, maintenance, and support (HEMS) of the beneficiary. Protection from creditors may be possible even in cases where the beneficiary is also the trustee.
However, the general rule is that the less control a beneficiary has over the trust’s accounts and property, the more protection is provided against creditors’ claims. Even if the beneficiary of the trust is also the investment trustee, greater asset protection may be available if a separate distribution trustee is appointed who is empowered to make distributions to the beneficiary in their sole discretion. In some jurisdictions, the trust could also provide that the beneficiary could resign as a trustee and appoint another independent trustee to take their place. This might further enhance the level of asset protection if the beneficiary is concerned that they may become more vulnerable to creditors’ claims in the future.
NOTE: There are exceptions to the rules protecting trust assets from creditors. In some cases, “exception creditors” will be granted access by state law. An experienced estate planning lawyer can help you identify which creditor claims will overcome the protection of the trust.
Minimize taxes. When a trustee who is also a beneficiary has total discretion to make distributions from the trust to themselves or others, the value of the trust’s accounts and property may be included in the trustee’s estate for estate tax purposes, or the trustee may be taxed on the trust income under Internal Revenue Code (I.R.C.) § 678. Depending on the type of trust and the goals it is designed to achieve, an independent trustee could be appointed to minimize either estate or income taxes.
Example: To avoid having the property held by the trust included in their estate for estate tax purposes, a trustee who is also a beneficiary may be permitted by the terms of the trust to select an independent distribution trustee, as long as that distribution trustee is actually independent—not a related party or a person subordinate to the beneficiary as defined by I.R.C. § 672(c). In this situation, the investment trustee who is also a beneficiary will not have direct control over the amount or timing of the distributions, but they may still retain significant control over who serves as the independent co-trustee. In addition to choosing the independent distribution trustee, the trust document may provide that the beneficiary can replace the independent trustee at any time and for any reason.
Example: If your trust is a nongrantor trust—i.e., a trust that is a separate entity for tax purposes that pays taxes on trust income at the trust level—it is important for someone other than the grantor (the person who creates the trust) or any party who is related or subordinate to them to be the investment trustee. This is because the power to determine trust investments may be considered to be the power to control the beneficial enjoyment of the trust assets under I.R.C. § 674, which would mean the grantor, rather than the trust, must pay taxes on the trust income.
Contact Us to Discuss Your Trust Needs
At the Law Office of Janet L. Brewer, we’ll guide you and your family with experience and knowledge. By discussing your needs with a California estate planning attorney, you can make sound decisions to protect yourself and your loved ones.
The decision to separate the roles of investment and distribution trustee should be based on your specific situation. We can help you make that decision. Call 650-325-8276 to schedule a consultation today.
