Happy New Year
A new cycle of duties begins. Please see our checklist of standard annual duties.
Trustees: the new year is a great time to reach out to your beneficiaries and ask for updates to their family and living situation. Not only is this helpful to keep your file updated, but it also will help you determine if you should continue, cease, increase or decrease any ongoing discretionary distributions. It will also provide helpful information for any one off requests for funds. Don't forget to review the investments as well, to ensure the portfolio is structured appropriately for the needs of the beneficiaries and in light of current market conditions. (See our annual review form for a more in depth analysis.)
The Trust and your beneficiaries are starting a new tax season. In addition to having the Trust's taxes prepared, be sure the beneficiaries know not to complete their returns until they receive the tax information from the Trust.
Beneficiaries: now would be a good time to think about your family needs for the coming year and, if appropriate, discuss with the Trustee any changes to your distributions. Please see our Beneficiary Checklist for more suggestions.
Best wishes to all for a healthy and prosperous New Year.
A Good Estate Plan Deserves Great Administration
As Trustee you may be instructed to "pay all net income" to the beneficiary. Or you may be allowed to pay income in your discretion to the beneficiary. What is Trust income?
The classic interpretation of Trust income is the dividends, coupons, interest, etc. received as income from the investments, net of any expenses such as fees. However, the Trustee now may have other options as well. Depending on the terms of the Trust and the state law, the Trustee may use a total return approach by electing into a Unitrust method, or exercising discretion under the state's income and principal act called the "power to adjust" (PTA). In both the Unitrust and PTA option income will be defined as a percentage of the Trust's total return. The concept is to free the Trustee to invest in such a way as to maximize the return of the Trust portfolio, and to share the total return with the income beneficiary. [In the classic model, any capital appreciation benefits principal and thereby usually the remainder beneficiaries.
A Unitrust option may be specified in the Trust document. If not, state law may allow the Trustee to elect a Unitrust method. Usually all current and future beneficiaries will need to receive notice in advance and given the opportunity to object.
The PTA option may be allowed under the state's Principal and Income Act. If it is, then the Trustee is typically authorized to elect this method. Notice to beneficiaries is typically not required, but is a best practice.
In all cases, the best interests of the beneficiaries should be considered and documented. How will you define income?
Members receive access to exclusive documentation forms, best practice information, and checklists.
Question: Why won't my Trustee agree to invest Trust funds in my start up business?
Answer: A Trustee must follow the Prudent Investor rule. While she should be open to discussing all aspects of the Trust with you, including the investments, the Trustee is ultimately responsible for making investment decisions that protect the Trust funds from decline, and produce a reasonable return. The Trust is intended to last for a long time and increase in value. The best way to reach this goal, and to maintain sufficient liquidity for distributions and expenses, is to invest in a diversified portfolio of securities.
While the Trust funds may look like a tempting pool of funds, investing in an unproven, illiquid business venture would be one of the worst investment decisions a Trustee can make. A Trustee should not speculate with the funds entrusted to her, but should make them productive and available for the beneficiaries.
If a Trustee were to invest in a start up venture, how would she respond to beneficiaries who needed funds for education, support, or medical issues when Trust funds were tied up in your business venture? If the business starts to fail, how should the Trustee respond? Walk away and admit to the beneficiaries a good portion of the Trust is gone forever? Or should the Trustee continue to invest more money into the venture hoping it can be turned around?
One exception would be if the Trustee is specifically directed in the Trust document to make funds available to beneficiaries for the start of a business.
Another exception would be if the Trustee is directed on investments. But then you would have to convince the Investment Advisor your business is a good idea!
~My Trust Co Staff
Every Good Estate Plan Deserves Great Administration.
Trusts can be short term but most are designed to last for many years or for generations. Trusts are often created during the life of the Grantor by writing a Trust Agreement which names a Trustee to be responsible for carrying out the Trust terms, and transferring assets to fund the Trust.
Estates are created only after the death of an individual. During life the individual may write a Will naming an Executor who like a Trustee has the fiduciary responsibility to see that all the terms of the Will are carried out including: collecting all the deceased's assets, paying all outstanding bills, dividing personal property (e.g. jewelry), paying any final income taxes, paying estate taxes, and distributing all the assets as the deceased instructed in the Will. An Estate, unlike a Trust, is typically short term, lasting two to four years. Unlike a Trustee, the Executor rarely makes long term investment decisions as their job is to preserve the assets until they can be distributed. [Note: if an individual dies without having written a Will, each state has laws directing how their assets are to be distributed. Typically a probate court will appoint a Public Administrator to see that the assets are distributed by law after all expenses are paid.]
Sometimes Trusts can act like Estates. In many states (like Florida and California) it is customary to create a Revocable Trust during life and transfer most of the individual's assets into the Trust. A Will is usually also drafted, but it has a limited purpose of gathering any assets not already in the Trust and transferring ("pouring") them into the Trust. The Trust then does all the work of the typical Estate (and the Trustee all the work typically done by an Executor). Here the Trustee ends up with all the deceased's assets and so is responsible for paying any outstanding debts of the deceased including income taxes, paying any estate taxes, and distributing the balance of the Trust. Often this type of Trust will be written to fund and operate continuing Trusts for descendants or charities.
And sometimes Estates can act like Trusts when the Will directs the Executor to take the remainder of the deceased assets, after all expenses, and fund continuing Trusts. A Trustee (who may or may not be the same person as the Executor) is named to manage these Trusts, and the Will, because it contains all the instructions necessary to administer the Trusts, becomes the Trust Agreement.
~My Trust Co Staff
Every Estate Plan Deserves Great Administration.
Robo Investing, also known as Robot Investing, refers to automated programs that dispense with the human advisor element and instead allow you to input information about your goals to reach a recommended investment program.
Can a Trustee use one of these programs to structure the Trust's investment portfolio? Probably yes.
A Trustee is tasked with knowing the purpose of the Trust, including the time horizon and expected cash requirements. The Trustee must also know the needs of the beneficiaries. Assuming the Trustee has that information in hand, she should be able to respond to questions in the automated program. As long as the Trustee remembers she is answering questions on behalf of the Trust, its current and future beneficiaries, and not an individual, then the resulting recommendation should be helpful in constructing the portfolio.
Remember, even if the Trustee is using a human investment advisor, the Trustee will have to task that advisor with finding an appropriate portfolio recommendation appropriate for the Trust and its beneficiaries.
Every good estate plan deserves great administration.