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Trusts are a formal legal relationship requiring a properly drafted and executed document and a willing Trustee to manage the assets and distribute the funds as directed. Some other ways to hold and transfer assets are:

1. Transfer by Will. The purpose of a Will is to name a fiduciary called the Executor (or Personal Representative) who only acts upon your death, and then only for as long as it takes to complete your affairs, pay taxes and transfer your remaining assets as you direct in your Will. The Executor opens an Estate account, collects all your assets; pays all final debts; files your final tax returns; files the estate tax returns; and distributes the remaining assets to Trusts, to charities, or outright as you direct in you Will.
2. Intestacy. If you do not have a Will when you die, all your assets not in other financial arrangements and owned outright by you will be part of your "intestate estate", meaning state law will determine how your assets will be divided. Typically an "Administrator" will be appointed by the local court to perform the duties of an Executor.
3. Totten Trust or a Transfer on Death Account. These are bank accounts where under state law you are allowed to name an individual who will own the account upon your death.
4. Joint Title. Real estate, brokerage accounts, bank accounts, and other assets can be titled jointly in the name of more than one individual. When one individual dies, the survivor becomes the owner "by operation of law" meaning the survivor is automatically the sole owner. No other legal action is necessary. The survivor may then need to have the title changed to reflect the sole ownership to avoid confusion later on.
5. Family Limited Partnership (FLP), or generally a Partnership (LP). A LP is a legal arrangement which can in some states be inferred by the actions of individuals working on a common venture, but usually requires an Agreement creating the partnership, listing the General Partner and the Limited Partners, their respective powers, obligations and entitlements. The General Partner (GP) typically has full responsibility for the management of the partnership and personal liability for the mismanagement of the partnership. To protect the individual making decisions, the General Partner may be a corporation run by the individual and the corporate entity should limit the liability of the GP to the assets of the corporation. The limited partner interests typically have no management authority, but also do not share in any personal liability of the partnership beyond the potential loss of value of their LP interests. The General Partner however does have potential personal liability for the actions taken by the partnership. That is why a partnership may name a corporation as the General Partner: the corporation can insulate the individuals making the decisions from liability. Distributions of funds are at the discretion of the GP and are pro rata to the LP interests unless the partnership agreement provides for a different allocation. Because the LP interest have no control over the partnership or the distributions, the value of their interests can often be discounted because of a lack of control. Because of the available discount Family Limited Partnerships (FLP) are often created to hold the family business or assets and then gift LP interests to other family members at a substantial discount to maximize the estate planning benefit.
6. Limited Liability Company (LLC). Similar to a partnership, a LLC requires an operating document and, in modern Trust states, a minimal filing requirement. A "Managing Member" runs the LLC for the other "members" whose interests and liabilities are spelled out in the operating agreement. Like a partnership the members liability is limited to their LLC shares. Unlike a partnership the Managing Member's liability is also limited to her interest in the LLC. The LLC arrangement has become increasingly more popular because it operates very much like a partnership, but limits the liability of all its members.

Not all beneficiaries are created equal. Some have a present interest, others a future interest. Some have mandatory rights to Trust funds, others have discretionary rights to Trust funds. However all beneficiaries have the following rights:

1. The right to know the name and contact information of the Trustee(s).
2. The right to a fair hearing for any discretionary request.
3. The right to be treated impartially vis-à-vis other beneficiaries.
4. The right to information upon request of the Trustee including a copy of the Trust agreement (or at least the parts applicable to them), and a current list of investments. [Note: (a) There are exceptions to every rule. A handful of states have authorized, under certain limited conditions, a "silent trust" where the Trustee is allowed to keep the existence of the Trust secret from the beneficiaries. A "silent Trust" must typically have specific language making it silent, and must provide for one or more individual to receive copies of statements until the beneficiary is allowed to know of the Trust. These individuals keep watch over the investments and distributions of the Trust for the beneficiaries. (b) A remainder or future beneficiary is usually not provided with current information unless they specifically request it. However, in some states the remainder beneficiaries who would take the balance of principal if it terminated today are called "Qualified Beneficiaries" and are entitled to an annual statement of the Trust assets. ]

A current income beneficiary has a right to his proportional share of net income if the Trust agreement is written for mandatory payments (e.g. "the Trustee shall distribute net income at least annually…").
A current income beneficiary has a right to request and receive, in the Trustee's discretion, some or all of the income if the Trust agreement is written for discretionary income payments (e.g. "the Trustee may distribute some or all of the net income of the Trust in the Trustee's discretion for …."). When the Trustee is given discretion to pay income (or principal) the Trust Agreement will provide a standard for the Trustee to use. This distribution standard may be broad ("…pay to the beneficiary for any purpose…", or "…for the comfort and happiness of the beneficiary…"); it may be defined ("…pay to the beneficiary for health, support, maintenance and education…"); or the standard may be limited ("…only for education and medical emergencies…"). Sometimes the discretionary standard the Trustee is to use may be expansively defined in the Trust Agreement, and go on to references types of schools, business ventures, and other items the Grantor of the Trust hopes the Trustee will fund (or not fund). If the drafting attorney is uncomfortable with including too much instruction for the Trustee in the Trust itself, the Grantor may create a Letter of Wishes (aka Letter of Instruction) which details for the Trustee how it is hoped the funds will be used. Such a Letter is outside the Trust Agreement has no binding legal effect, but is intended to help the Trustee in the use of the broad discretionary powers. This Letter may be modified by the Grantor at any time, but the most current version should always be kept with the permanent Trust records. While not legally binding, it does show the intent of the Grantor and may be used by the Trustee to help justify any approval or denial of a discretionary distribution request.

A current beneficiary may be entitled to principal funds from the Trust if they have a Crummey demand right after contributions to the Trust; a percentage annual withdrawal right (typically a "5 x 5 power" for 5% of the Trust); or an absolute power to withdraw funds. Otherwise, principal funds are usually available to the beneficiaries in the discretion of the Trustee using the standards set out in the preceding paragraph.

Current beneficiaries are also entitled to receive regular (typically monthly or quarterly) statements showing the investment activity and distributions from the Trust. The Trustee is obligated to answer any questions the beneficiaries may have on the operation of the Trust, however it is the Trustee (or designated power holders like an Investment Advisor) that always remains ultimately responsible for the management of the Trust.

Future (or Remainder) beneficiaries are typically not given regular statements or other information about the Trust. But the Trustee is generally required to respond to any direct questions or requests for information from the remainders. In states where the remainder is considered part of the "qualified beneficiary" group, they may be entitled to an annual statement of activity on the Trust or some other regular information. The Trustee should confirm the status and contact information of the remainder beneficiaries at the beginning of the administration of the Trust.

Animals can sometimes be beneficiaries of Trusts if the Trust is created in a state that has recognized by law Trusts for pets. In other states, and historically, a Trust could not be created for an animal as they did not legally qualify as a beneficiary because they did not have the legal standing to go to court and enforce their beneficial interest against the Trust. Only a "person" could enforce their beneficial rights in court. Prior to the enactment of laws granting pets rights as beneficiaries the only way a Trust could be set up to benefit a pet would be for a Trust to be created for a caretaker with "precatory" language (i.e. language of wish or hope) indicating the pet should be cared for using the Trust funds. This language however was not enforceable and so the caretaker could not be held accountable for the proper use of the Trust funds.

The operation of a Trust has many tax implications. The very act of funding a Trust usually has gift tax implications if the Trust is irrevocable. The creator of the Trust will be responsible for paying the gift tax or using their available exemptions. The attorney drafting the Trust or the creator's accountant should provide advice about any federal or state the tax liability incurred by funding a Trust. There may be exceptions to this rule (e.g. Revocable Trust or Grantor Trust), and funding certain charitable trusts may minimize gift tax by providing an income tax deduction for the creator. These taxes should not be the responsibility of the Trustee. However, once the Trust is funded, the Trustee will be responsible for other taxes.

The Trustee must ensure a tax return is filed for the Trust every year (1041). Like a corporation, a Trust is a separate tax paying entity. Unless the Trustee has a tax preparation background it is recommended a professional (accountant or attorney) prepare the returns as an expense of the Trust. While certain Trusts may be exempt from paying taxes (e.g. Revocable Trusts, Grantor Trusts, Charitable Trusts), often an informational return is required to be filed anyway. Remember, as a taxpayer, the Trust will be responsible for state taxes as well as federal taxes. Each state has laws addressing the tax liability of Trusts. As Trusts can often have multi state contacts (e.g. Grantor in one state; Trustees in multiple states; beneficiaries in multiple locations) it is especially important for the Trustee to get professional tax advice to sort out the appropriate tax filings for the Trust.

A typical irrevocable Trust will report and pay taxes on realized gains from the principal portfolio. In some instances where the Power to Adjust is being applied and some principal has been paid out as deemed income the Trustee may elect to pass out a proportional share of the realized gains to the income beneficiary. Whether the Trust pays income taxes will depend on who is the recipient of the income at the end of the taxable year. If all income is paid out during the year to the income beneficiary, then the income tax liability should flow out to the beneficiary as well. If some or all of the income is retained in the Trust, then the Trust will pay the appropriate (federal and state) income tax.

The Trustee is also responsible for sending out the Trust's K-1 advice or "tax letter" to the beneficiary of the Trust. Each beneficiary receiving funds from the Trust during a calendar year must report any tax liability on their tax returns. Depending on the nature of the distribution from the Trust, the beneficiary may have income tax liability, capital gain tax liability, or possibly receive a tax free distribution of principal. The Trustee must tell the beneficiary how much was distributed to them and the tax character of the distribution. A Trust does not produce a 1099 like an investment account, and is not held to the same reporting time frame as 1099 reporting. A Trust produces a tax letter for each beneficiary receiving income or principal distributions in the tax year as soon as the information is available. If the Trust owns certain investments that do not produce tax information by April 15th of the following calendar year, then the Trustee will have to put the Trust return on extension and advise the beneficiaries they will need to put their own returns on extension.

Trustees were historically responsible for every aspect of the administration and investment of their Trust, and continue to be so today in most states. However, the growth of the "modern" Trust laws has encouraged the "unbundling" of the classic Trustee's duties. While the offshore Trust practice (outside the U.S.) had these concepts for some time, they are relatively new to the U.S. Trust practice. These parties are usually found in Trusts located in "modern" Trust states like Delaware or South Dakota where the local laws protect the Trustee from liability arising out of the actions of these other parties.

Trustee Tip:

Confirm with the Trust's attorney if you as Trustee can rely on the directions given by these parties, and if you have any supervisory responsibility. As Trustee you should meet with these parties on a regular basis (at least by phone) to coordinate the administration of the Trust.

Trust Protector.

This position is often an individual given specific powers under the Trust, typically to move situs (geographic location), governing law, or replace the Trustee. The Trust Protector can be a family member or any other individual or committee, and may or may not be acting as a "fiduciary". This will be spelled out in the Trust.

Investment Advisor.

An individual or committee named in the Trust to exercise control over all or part of the assets of the Trust. The Trustee typically must follow the direction of the Investment Advisor who may have control over the entire portfolio or a specific asset like a parcel of real estate, a family business or a concentrated security position.

Distribution Advisor.

An individual or committee named in the Trust to exercise control (or to approve the Trustee's recommendation) over the distribution of funds and assets from the Trust.

If you like tales of Robin Hood and medieval Knights you will love the history of Trusts. The earliest concept of Trusts started in England back in 1535 with the Statute of Uses. Knights and landowners were looking for a way to have the title for their land (the primary sources of wealth at the time) to be held for their heirs:

1. While they were away at the Crusades and
2. To avoid the King's death tax applied against their wealth at the time they passed away (much like our estate tax today).

If title was held in a Trust (or "Use") there was never a death so no tax would apply, and the land could continue to be used by their heirs. The same concept applies today where assets placed in a Trust may continue on after death of the creator (Grantor) and, if structured correctly, avoid any estate or gift taxes at the time.

Eventually the King moved to limit the use and duration of Trust structures so the death tax revenue could be collected. This limiting law became known as the "Rule Against Perpetuities" as it was intended to prevent one individual from tying up wealth forever. The Rule required a Trust to terminate and pay out its assets after a period lasting no longer than "lives in being plus 21 years". Trusts continued to be used in England and developed its body of common law (law created by Judicial decisions rather than statutory enactments) which was then adopted by most of the various states in the U.S. when they sought to create their own body of laws. (Louisiana being one notable exception. As they were originally a French colony, their body of law developed around the French Napoleonic Code.)

Today, most states have a body of Trust law that is based on old English concepts and is a blend of common law (Judicial decisions in that state) and statutory law (laws enacted by the state legislature). Some states have recently adopted all or part of the Uniform Trust Code (a recommended body of modern trust law), and some have adopted new laws intended to allow perpetual trusts (aka "Dynasty Trusts"); the unbundling of the responsibilities of the Trustee; create asset protection trusts and other creative departures from the traditional Trust laws.

Trustee Tip:

The Trust document (Will or Trust Agreement) will govern your role and responsibilities. State law generally only comes into play where the Trust is silent. Always look to the Trust Agreement first as it supercedes state laws. When embarking on your role as Trustee we recommend an outline of the core responsibilities and authorities provided by your Trust Agreement as a way of understanding your role and as a reference tool for future use. MyTrustCo.com has a sample Trust Summary form in the members' section.

While volumes have been written about the laws, duties and role of a Trustee, the administration of a Trust can involve a lot of discretion by the Trustee and is therefore as much art as science. At its core you must remember a few simple rules:

• You owe your best efforts to preserving the Trust assets and making them productive for the current beneficiaries AND the beneficiaries that will have an interest in the assets at some point in the future (aka "remainders"; "remainder beneficiaries").
• An essential part of your job is to know the beneficiaries of the Trust: their needs and their entitlements under the Trust Agreement.
• You are responsible for making sure the beneficiaries receive income from the assets, part of the principal of the assets or both. The Trust document will guide you your powers to distribute funds and the entitlements of the beneficiaries. The right to receive funds may be mandatory (e.g. …the Trustee shall pay…) or discretionary (e.g. …the Trustee may pay in the Trustee's discretion…).
• Read the document and be sure you understand what it is asking you to do. Pay (from the Trust assets) for an attorney to explain anything you don't understand. (You should be able to pay reasonable legal fees from the Trust as an expense of administration; your attorney should confirm your ability to do so.)
• Do a professional job or see that it is done. What you can't do on your own (e.g. investing; tax preparation) you should hire professionals to do. The Trust, or state law, usually allows you to hire agents and compensate them from the assets of the Trust. (Confirm at the time you are appointed or asked to be a Trustee.) Note: while the Trustee can usually hire agents, the Trustee will be responsible for the selection of an agent with the appropriate skill set and for overseeing the work of the agent.
• Most important: document every decision you make and keep copies of letters, emails, tax returns and anything related to the administration of the Trust. This is your record of your administration. The record will be important to any successor Trustee, and it will be absolutely essential if you ever have to defend your actions as a Trustee.

Because the Trustee is the legal owner of the Trust assets, and therefore granted broad powers over the assets, the law of Trusts has also developed a comprehensive list of "duties" owed by the Trustee to ensure the Trust will be administered in the best interests of all beneficiaries. The duties are intended to guide the Trustee, and also to set a standard against which her performance can be judged. If a Trustee "breaches" (i.e. violates) one or more of the duties, the beneficiaries may be able to bring an action in court against the Trustee to restore the Trust. Possible remedies for a breach of Trust would be a "surcharge" (financial penalty) assessed against the Trustee; loss of commissions; and possible removal as Trustee. The origin of the duties of a Trustee go back hundreds of years and are pretty much the same in each state, except where specifically removed by a state law or by the Trust Agreement. (Note: some duties cannot be relieved entirely by the Trust Agreement and an attempt to do so would be considered "void". If you have a question about an attempt to release the Trustee from a duty, it is recommended you check with an attorney.) Remember, any duty that applies to one Trustee will apply to all Trustees if there are more than one. The duties are the responsibility of each Trustee individually and together as a group. In fact, if one Trustee appears to be harming the Trust in any way, the other Trustees are obligated to take all necessary steps to stop the harm and correct any damage.

Some examples of the duties owed by a Trustee:

1. Duty to receive, control and protect Trust property. One of the first duties of a Trustee is to ensure the assets intended to fund the Trust are actually placed in the Trust. If the asset is real estate, then the title needs to be changed into the name of the Trust. Insurance policies, partnership interests, and any other "illiquid" (i.e. not traded on a public stock exchange) should have the title reflect the name of the Trust as the owner. Liquid assets (stocks, bonds, mutual funds, cash) should be transferred to an account opened in the name of the Trust with the Trustee as the authorized party. After receiving all the assets into the Trust, the Trustee must then ensure he controls all property movement and distributions. The Trustee will protect the property by obtaining insurance for tangible assets and suing or defending lawsuits should it be necessary.
2. Duty to Keep Trust Property Separate. A Trustee must never comingle Trust property with her own property. The Trust assets must always be in separate accounts and title. Cash must always be held separately, and any interest earned must clearly be identifiable as Trust income.
3. Duty to Maintain Adequate Records. In addition to keeping the property separate, a Trustee must be able to produce distinct records of the Trust assets, investment activity, interest received, expenses paid and any funds distributed. The Trustee is also responsible for keeping track of what is principal and what is income as the beneficiary entitlements may be different for both.
4. Duty to Administer the Trust According to its Terms. While this may sound obvious, the Trustee must carry out their duties as outlined in the Trust document, and not on general feelings or favoring one beneficiary over another (unless expressly allowed by the Trust Agreement). So, for example, if the Trust restricts principal payments to emergencies, the Trustee should not distribute principal funds for any other reason.
5. Duty to Enforce and Defend Claims. Related to the duty to protect Trust property, the Trustee must enforce (often by lawsuit) any claims owed to the Trust. And, should the Trust be sued, the Trustee must defend the Trust property. Note: unless the Trustee was negligent in some way that caused the claims, all expenses relating to the enforcement and defense should be proper expenses of the Trust.
6. Duty to Furnish Information and Report. A Trustee owes a duty to all interested parties of the Trust to provide information about the investments, disbursements, the terms of the Trust and any other relevant information. Typically this means Co-Trustees, advisors, grantors (if alive) and current beneficiaries are provided with regular statements of the activity in the Trust account. The statements should show the current value of all assets held; all receipts in to and all distributions out of the Trust. Remainder (future) beneficiaries may be entitled to annual statements in some states (one item to verify when accepting a Trusteeship). While remainder beneficiaries are usually not provided with regular information, they may request information about the Trust (e.g. terms, market value) and the Trustee is obligated to provide it. As the remainders have a future interest in the Trust, they have a right to know if the Trust is being wasted so they could, in theory, bring an action in court against the Trustee. There are some exceptions to this rule in "modern" Trust states where "silent Trusts" are permitted. A silent Trust allows a person other than the beneficiary to receive statements for a period of time, typically until the beneficiaries have reached a mature age.
7. Duty Not to Delegate. In most jurisdictions a Trustee retains full responsibility for everything that happens with the Trust. While the Trustee is almost always authorized to hire agents (see the Powers clause of any Trust agreement or state law), the Trustee retains the ultimate responsibility and liability for the actions of the agents hired. So the Trustee's duty not to delegate really means the Trustee cannot delegate her job to someone else and then walk away. The Trustee can hire professional help (e.g. attorneys, investment managers), but the Trustee owns the result. The Trustee must be prudent in (1) selecting an appropriate agent with the necessary experience and (2) overseeing the work the agent does. If the Trustee is prudent in selecting the agent, and meets with agent regularly then the Trustee should be able to rely on the agent's recommendations. The exception to this rule is where the Trustee is relieved of a specific task in the Trust agreement. (E.g. the Trust gives the investment responsibility to an Advisor or Committee.)
8. Duty to Exercise Reasonable Care, Skill, and Prudence. A Trustee lives by the terms "reasonable" and "prudent". If challenged, a Trustee is never held to a standard of knowing everything or having acted well based on hindsight. A Trustee must prove (with records of the Trust) that she acted prudently under the circumstances and with the information available at the time. For example, a Trustee cannot know if the stock market will go up or down in any given year; but the Trustee should act prudently by diversifying the portfolio so the Trust is not unduly impacted by any downturn in the market. Also, the Trustee should hire a professionally manager if the Trustee cannot spend the time researching and following the stock markets and the Trust's investments. Another example would involve discretionary distribution of funds. If a Trustee acts reasonably on a request for funds, within the authority granted in the Trust Agreement, and with sufficient documentation for the request, then the Trustee has effectively done his job. If he acts without sufficient documentation for the request or distributes funds for a purpose not authorized by the Trust, then the Trustee has breached his duty to exercise reasonable care and prudence.
9. Duty to Make Trust Property Productive. A Trustee has the obligation to do more than preserve the assets of a Trust. [An exception here being a "Directed" or "Administrative" Trustee.] The Trustee must invest the assets of the Trust and ensure there is sufficient income being generated for the current beneficiaries. [See the Unitrust and Power to Adjust sections for information on how to make part of the total return of the Trust "income".] The Trustee must also ensure there is sufficient growth in the portfolio to maintain purchasing power over time and preserve the assets for future beneficiaries. Usually this means investing in a well diversified portfolio of stocks, bonds, mutual funds, etc. But where other assets are involved it will mean managing them for profit as well. E.g. ensuring commercial real estate is receiving market rents and is well maintained.
10. Duty of Loyalty. One of the most basic duties owed by a Trustee: loyalty to the beneficiaries of the Trust. Essentially it means the Trustee must make all decisions in the best interests of the Trust and the beneficiaries. The Trustee cannot profit from the Trust, although she may be allowed fees for her service. The amount of fees allowed to individual and corporate Trustees should be spelled out in the Trust Agreement, and if not most state laws will specify the fees allowed. Other than the fees allowed, the Trustee must operate the Trust only for the beneficiaries.
11. Duty of Impartiality. Similar to the Duty of Loyalty, a Trustee must be impartial to both classes of beneficiaries: current and future beneficiaries. A Trustee may not make decisions that favor one over the other. For example, the Trustee may not invest the Trust in such a way as to maximize the distribution to the income beneficiaries while wasting the Trust principal. Conversely, the Trustee may not maximize long term growth to benefit the remainder beneficiaries while providing insufficient income to the current beneficiaries. The needs of both must always be considered equally.
12. Duty to Co-Trustees. Except for rare occasions when the Trust Agreement carves out specific duties for different Trustees, every Trustee shares full responsibility for the administration of the Trust. Just as the Trustee owes a duty to keep the beneficiaries informed, he also owes a duty to keep his Co-Trustees informed. As the Co-Trustees share equally in the responsibility (and potential liability) it is only fair they should be informed of all matters pertaining to the Trust. Naturally, as a Trustee it is also your duty to inquire and ensure you stay informed, and do not blindly allow others to do the work of the office of Trustee. If you do not inquire, you run the risk of being held responsible for their actions.
13. Duty to Advisors. Just like the duty to Co-Trustees, if your Trust has Investment Advisors, Distribution Advisors, Trust Protector, or other Advisor, you have a duty to coordinate the administration of the Trust with them. There role may be immediate and ongoing (e.g. Investment Advisor), or it may be remote and limited (e.g. a Trust Protector whose sole job is to move situs or change Trustee if necessary). You duty may depend on the nature of their role, but it is your responsibility as Trustee to ensure the overall coordination of the efforts for the Trust and the beneficiaries.

Income and principal accounting:It is a fundamental requirement for a Trustee to keep track of income earned by the Trust separate from the principal appreciation of the portfolio. The basic Trust structure gives one class of beneficiary the entitlement to income, and the remainder class of beneficiary an entitlement to principal. While there are variations on this structure where the lines can be blurred, this is a record keeping obligation of the Trustee. Corporate Trustees have accounting systems designed to automatically record the income in a separate column or "bucket". Individual Trustees can use their systems by hiring them as agent, or rely on an accountant to break out the income earned by the Trust portfolio.Remainder/Remainderman, Remainder Beneficiaries, Future Beneficiaries:The individual or class of individuals (e.g. "heirs", "issue", "children") or institution (e.g. another Trust or Charity) named in the Trust Agreement to benefit after the current beneficiaries pass away or after a period of years defined in the Trust. The remainders will typically take the remaining balance of the Trust outright in their own name. If there are multiple remainders they will take the percentage share allocated to them in the Trust. Remainders are not to be confused with succeeding current beneficiaries who are named to become current beneficiaries of the Trust when an initial current beneficiary passes away.Current Beneficiaries:The individual, class of individuals, or institutions named to have an immediate (current) interest in the Trust. Typically they have either a mandatory right to income (e.g. "the Trustee shall pay the net income") or a discretionary right to all or some of the income (e.g. "the Trustee may pay in the discretion of the Trustee"). They may also have a right to principal of the Trust through the Trustee's discretion or a withdrawal power granted them in the Trust. If the right is discretionary, the Trust will typically give the Trustee either a blanket discretionary power or limit the discretion to certain needs (e.g. health, education, maintenance, support). If the discretion is broad it will often include terms like "comfort" and "happiness".Grantor/Trustor/Settlor/Creator:These are different names given to the individual creating the Trust by causing a legal document to be drafted and funding the Trust with cash, securities or other assets.Co-Trustee/Co-Fiduciary:Names given to any individual or institution named as a Trustee when there is more than one Trustee. A Co-Trustee will typically share the same duties, responsibilities and liabilities equally with the other Trustees. In some cases the Trust Agreement may carve out certain duties for each Trustee, but generally they share equally in the management of the Trust.Protector:The Trust may create the role of a Trust Protector which is different from that of a Trustee. While a Trustee it typically responsible for everything that happens with the Trust, a Protector is usually restricted to some specific duties such as change of situs for the Trust, and/or removal and appointment of the Trustee. The concept of a Protector was very common in the Offshore Trust practice but is gaining acceptance with domestic (U.S. based Trusts) as well.Offshore Trust:Any Trust having it's situs (legal location), Trustee and therefore place of administration outside the United States. [Trusts having a situs, Trustee and place of administration within the United States are typically referred to as "domestic" Trusts.]Distributions:Paying out income or principal from the Trust is one of a Trustee's most important duties, and if left to the discretion of the Trustee, one of the most difficult. It can also be one of the most contentious areas of the administration of your Trust and therefore has the potential for challenge and for liability. "Mandatory" distributions are required by the Trust (e.g. "The Trustee shall pay the net income."). "Discretionary" distributions are those permitted by the Trust in the discretion of the Trustee. (e.g. "The Trustee may pay to the children of the Grantor such sums as may be necessary…for health, support, maintenance, and education.").Distribution Committee:Usually found only in Trusts drafted for "modern" Trust law states, a Distribution Committee is given the responsibility to distribute funds from income or principal. The Trust is usually structured so the Trustee takes instruction from the Committee and is relieved of all liability for the result of following those instructions. Historically found in offshore Trusts, Distribution Committees are now finding their way into domestic Trusts.Unitrust:There are now at least two types of Unitrusts. The distinctive characteristic of both is a distribution based on a percentage of the market value of the Trust, revalued annually.

1. A Charitable Unitrust available under the IRS Regulations where an individual can create a "split interest" trust [meaning two unrelated beneficial interests within the same Trust Agreement] for a charity and for family. With a Charitable Lead Unitrust a fixed percentage is paid to a recognized (by the IRS) charity for a period of years with the remainder going to family members. A Charitable Remainder Unitrust reverses the order and a fixed percentage of the Trust is paid to the Grantor for life or a period of years with the balance (remainder) going to a recognized charity.
2. Private Unitrusts (meaning no charitable interest involved) are now available in many states that have adopted versions of the Uniform Principal and Income Act (UPAIA). Where available the law will allow the Trustee to elect (a discretionary decision that should be documented) to pay out a percentage of the market value of the Trust as "deemed income". The percentage paid is usually between three and five percent (3% to 5%) and will be considered income even if some principal funds are paid out as part of the percentage. Usually the Trustee must also elect to invest the Trust for "total return" meaning to have a fairly aggressive investment allocation that seeks to maximize the growth of the Trust within reasonable risk parameters.

Trustee Tip:While charitable unitrusts are baked into the Trust Agreement, private unitrusts are usually a discretionary election by the Trustee after considering the best interests of the beneficiaries, the purpose and the structure of the Trust. It is a decision that should also be reviewed every year or when circumstances change. MyTrustCo.com has sample Unitrust and Power to Adjust discretionary action forms in the member section.Power to Adjust:Like a unitrust, the Power to Adjust is available for private (non charitable) Trusts as a discretionary option for the distribution of income by the Trustee.

• The Trust must be governed by a state law which includes the adoption of the Uniform Principal and Income Act (UPAIA) which will in part authorize the use of the Power to Adjust.
• The Trustee can use the Power to Adjust to achieve fairness between the current and future classes of beneficiaries of the Trust.
• The Power can be used on a one time basis to adjust funds from income to principal, or from principal to income if that will further the impartial treatment of the beneficial classes. (For example, if an asset like undeveloped land or a family business is held in principal for many years without producing income for the income beneficiaries, and that asset is finally sold for a windfall, then the remainder beneficiaries will have benefited from the investment at the sacrifice of the income beneficiaries who received nothing during the holding period. In this case the Trustee could exercise her discretion to use the Power to adjust a sum from principal to income representing a fair share of the investment for the income beneficiaries. The Trustee would be advised to have professional advice on the right allocation documented and on file.)
• The Power can also be used on an ongoing basis to pay out a percentage of the market value of the Trust as "deemed income" to the income beneficiary. Again, the percentage is usually between three and five percent (3% to 5%) and the decision should be documented and reviewed annually. Once the Trustee determines the percentage to pay, principal may be used if necessary to make up the "deemed income" amount. The Trust is usually also invested for total return to maximize the overall growth of the portfolio within reasonable risk parameters.

Many professional Trustees prefer the Power to Adjust over the unitrust option as it is less formal and can be modified or cancelled at anytime by the exercise of the Trustee's discretion. [Note: the Trustee should also consider the tax implications of the percentage payment: will the payment be gross of its representative share of capital gains if principal is used, or net?]

Uniform Principal and Income Act (UPAIA):Also mentioned above, UPAIA is a uniform rule created by academics and recommended for use in each state's body of Trust law. Some states will adopt it in it's entirety, but most state will adopt a modified version of it. In addition to authorizing Unitrusts and the Power to Adjust, the act addresses how a Trustee should treat various expenses (legal fees, real estate taxes, etc.) and where certain extraordinary receipts (liquidating dividends for example) should be credited: principal or income? The Trust Agreement may address this as well, and will always override state law, but to the extent the Trust is silent, the Trustee may look to the state law.
Prudent Investor Rule:The current standard applied to a Trustee's duty to invest the assets of the Trust. A Trustee must act "prudently" when making investment decisions. This is a gray area with no bright lines. Generally it means no speculation, no investments made without research, no concentrations of any one investment, and each investment made to further the purpose of the Trust and the interests of the current and future beneficiaries.

• Will the investment provide income for the current beneficiaries?
• Will it provide growth to maintain purchasing power of the portfolio over time, and for the ultimate remainder beneficiaries?

(See also the discussion above about Unitrusts and the Power to Adjust.) Remember, as a Trustee you should have the power to hire an investment manager as an expense of the Trust. It is always a best practice to document your investment decisions and any discussions you have with the investment advisor you retain. You will be responsible for the selection and oversight of the investment advisor (unless you are a Directed Trustee) and will be responsible for hiring someone experienced in the field, and replacing them if they do not perform.

Uniform Prudent Investor Act (UPIA):A suggested law governing the investment of Trusts written by academics and proposed for adoption by each individual state as part of their body of Trust law. Most states have in fact adopted a version of UPIA. The Act addresses proper diversification of assets, appropriate delegation by the Trustee, and factors to be considered by the Trustee in constructing a portfolio appropriate for the Trust. In addition the Act allows the Trustee to view the portfolio as a whole, avoiding the older "Prudent Man" rule that held the Trustee responsible for each asset purchased in the Trust, and each asset would need to provide income for the current beneficiaries. Under the Prudent Investor, each asset need not produce income, but the overall portfolio should produce sufficient return for the current as well as the future beneficiaries. Note: the Uniform Principal and Income Act (UPAIA) is intended to work in harmony with UPIA so a percentage of the portfolio could be shared with the income beneficiaries. [See: Unitrusts, Power to Adjust]
Investment Committee or Investment Advisor:Once the exclusive responsibility of the Trustee, "modern" Trust laws have allowed the unbundling of many historic duties. The investment of Trust assets is one of the most common duties to unbundle. So if you are a Trustee for a Trust established under Delaware, South Dakota, or jurisdiction with similar Trust laws, you may find your investment duties assigned to an Investment Committee or Advisor. WARNING: be sure to confirm with the attorney for the Trust the extent you are protected following the directions of the advisor or committee. Some state laws allow the Trustee to be directed on the investments but still leave some responsibility with the Trustee to ensure the investments do not defeat the purpose of the Trust. When you are directed you should prefer to have the protection of state laws (e.g. Delaware, South Dakota) that allow you to follow the directions with no liability to you should they underperform or otherwise deplete the portfolio.
Tax Letter or K-1:A Trustee is responsible for the preparation and filing of tax returns for the Trust.

• A Trust is a separate legal entity and therefore must file a federal return and state tax return (unless the Trust's legal residence or "situs" is in a no income tax state).
• There may be certain exceptions to this rule, such as "Grantor Trusts" where the Grantor is taxed on all the income and capital gains generated by the Trust, but even then the Trustee is usually responsible for preparing an informational return.
• The Trustee is also responsible for notifying the beneficiary of their tax obligations for any distributions made during the tax year.
• The notice to the beneficiary is usually in the form of a "tax letter" or "K-1 advice" and will detail, much like a 1099, any income or capital gains/losses reportable by the beneficiary. Unlike a 1099, the tax letter is not due at the end of January. Instead the Trustee has until April to provide the information.

Powers:The Trustee is typically granted broad powers under both the Trust Agreement and the applicable Trust laws. Almost every Trust will contain a "powers clause" which sets forth all the powers given to the Trustee (e.g. purchase, sell, mortgage, borrow, lend, etc.). Each state's Trust laws will also have a section devoted to the powers granted to Trustees. Look first to the Trust Agreement, and then to the appropriate state's laws for the full extent of your duties. The Trust usually restates the powers granted under the state's laws but may also intentionally limit some powers given under the state's Trust laws. Trustees were given the very broad powers of ownership of property because they we in fact the legal owner of the Trust property, but for the benefit of the current and future beneficiaries. While the Trustees are given these broad powers, it is intended that they always be used to further the purpose of the Trust and the best interest of the beneficiaries.
Duties:The role of Trustee has always come with many "duties" imposed on the Trustee. (See more detailed discussion of individual duties later and in the member's section.) If a Trustee fails to adhere to any of these duties she can be sued for a "breech" of Trust, and face possible removal from the office of Trustee and surcharge for any damages to the Trust. Some examples of the duties follow.

• Duty to make the Trust productive: the Trustee must invest the assets of the Trust and generate a return for the beneficiaries.
• Duty of Loyalty: the Trustee must make every decision with the best interests of the Trust and the beneficiaries in mind. At no point should the Trustee benefit from any transaction for the Trust.
• Duty of Impartiality: the Trustee's actions must consider the interests of the remainder beneficiaries equally with the current beneficiaries.

As you can see from these examples, the Trustee must always act as a true fiduciary; making the best decisions, informed decisions, at all times considering the needs of the beneficiaries and the purpose of the Trust. (And don't forget to document your decisions.)

Executor or Personal Representative:Both are names given the fiduciary of an individual's estate, the one responsible for probating a Will. The role of Executor is similar to that of a Trustee in that he must preserve the assets of the Estate, pay any obligations, file tax returns, pay out debts, oversee the assets, and finally distribute the funds. The Executor must also make informed decisions in the best interests of the Estate and it's beneficiaries.
The difference between the role of the Executor and that of the Trustee is:

1. The Estate has a typical life cycle of three or four years while a Trust can last for generations or in perpetuity and
2. because of the short life of an Estate the investment duties are usually focused on preserving the assets for distribution instead of investing for long term growth.

Rule Against Perpetuities:One of the oldest laws related to Trusts dating back hundreds of years to English common law.

• The rule was created by the King to limit the time wealth (land) could be held in Trust before it "vested" in an individual, meaning before an individual owned it outright.
• Why? Because the King could tax the land upon the death of an owner, and if it was held in Trust beyond the owner's life then the King could not levy his taxes.
• The original rule stated that a Trust must "vest" (be owned outright by and individual) no later than lives in being at the time of creation plus 21 years. Assuming you had a child born on the day you created the Trust, the maximum duration would be the life of that child or any other individuals, plus the time it took any late born grandchildren to reach majority, or a total of approximately 60 to 100 years.
• The Rule lasted for centuries and made it into the American law of Trusts, which in most states was based on the English law rules. It still exists in many states today, but has been modified by many to a straight period of years (e.g. 99years; 360 years), or eliminated in a number of other states (e.g. Delaware, South Dakota, Alaska) to provide for perpetual or "Dynasty" Trusts.

Uniform Trust Code (UTC):The UTC was crafted by academics and practitioners in the field of Trusts and Estates in an attempt to modernize and standardize the American law of Trusts. Historically each state developed through judicial practice (common law) and legislative enactment (statutory law) a body of Trust law based on English Trust law principals. (Louisiana being the exception as with their French roots much of their laws have roots in the Napolionic Code.) The UTC did not contemplate the interest in each state's attorney organization (state Bar Association) desire to cling to certain state specific views on the practice of Trust law. So while a number of states have adopted the UTC, most have done so only in part or with modifications particular to their home state. The result is a commonality but not a complete consistency among states that have adopted the UTC.

Your Trust is created either by an "inter vivos" (meaning during life) legal document, or as part of the instructions left in your Will. If it is part of your Will, then your Will becomes the Trust Agreement for the life of the Trust. MyTrustCo.com will refer generally to "Trust", "Trust Agreement" or "document" meaning the legal document controlling your Trust whether it is a Will or an inter vivos Trust Agreement.

The Trust creates the rights of the beneficiaries to income or principal or both; sets the termination date; identifies those to receive the remainder of the Trust upon termination; and gives the instructions for the Trustee.

Trustee Tip:

When you first step into the role of Trustee, be sure to confirm with the Trust attorney who you will be required to report to; what information you must report; and how often.

The Grantor:

If the Trust is an inter vivos agreement it will begin by naming the Grantor (aka Trustor, Creator), the Trustees and the date it was created. If the Trust is part of a Will, then certain paragraphs will refer to funds set aside for a Trust, and the Grantor is understood to be the person creating the Will who has recently passed.

The Beneficiaries:

Typically the beneficiaries will be named early in the document, if not part of the title of the Trust. Beneficiaries can be individuals, charities, foundations, or other legal entities, and may have confirmed entitlements (e.g. "shall pay the net income to…"), or may have rights in the discretion of the Trustee (e.g. "the Trustee may pay in their discretion…"). Sometimes they are named later in the paragraphs describing how income and principal are to be distributed. The Trust may actually use the names of individuals (e.g. "my son Kevin") or name a particular group of individuals (e.g. "my children" or "my issue"). Typically the Trust will name one or more individual to receive funds now; one or more to receive funds at a later date (usually upon the death of the first group, or after a certain period of years). The Trust will also name the recipients of any remaining Trust fund at the termination of the Trust.

Distributions of Funds.

The rights of the beneficiaries to funds will be described as a mandatory duty of the Trustee (e.g. "shall pay") or as a discretionary act of the Trustee ("may pay in their discretion"). You must know this requirement as it is one of your most important duties: to distribute funds in accordance with the terms of the Trust. If you have mandatory instructions be sure to pay out the funds as directed. It is a best practice to involve the beneficiary and understand their preference for timing (monthly or quarterly), and method (check or wire). Your mandatory instructions may be for a variable sum ("pay the net income") or for a fixed sum ("pay 5% of the trust annually"). If your instructions are discretionary you distribution task becomes significantly more complex. Principal funds are typically paid in discretion unless part of a fixed payment that exceeds the income produced by the Trust (see Distribution section below), but income may be discretionary as well. If the Trustee must allocate among a class of beneficiaries, the complexity increases. It is most important here to communicate with the beneficiaries, understand their needs, understand the terms of the Trust and any intent left by the Grantor (e.g. a Letter of Wishes if available), and to KEEP RECORDS of the information you gather and upon which you made your decision to disburse the funds. This will apply equally for a one time exercise of discretion for a particular financial need, or the ongoing exercise to pay funds. Any decision to make ongoing payments should be refreshed at least once a year, confirming the information and reason for the payments.

Trustee Tip:

Draft a memo discussing the request or needs for funds, the relevant language in the Trust, and your analysis for approving the payment(s). Be sure to keep a copy of this memo in the permanent records of the Trust. MyTrustCo.com has a sample discretionary payment form available.

Records and reporting.

Most Trust agreements will require reporting (sometimes called "accounting") to the beneficiaries at least once a year, but it is a best practice to ask the beneficiaries their preference and provide the information monthly or quarterly. Reporting, or an accounting, typically consists of financial statements showing the market value of the Trust's assets at the beginning and end of the period, investment activity including income earned, fees charged, any receipts or additions to the portfolio, and any distributions or payments out of the portfolio including payments to any beneficiaries. If you have the assets of the Trust at more than one institution then you should provide copies from all the custodians so the beneficiaries, co-trustees and other interested parties will see the whole picture. Paper statements are often provided, but more and more emailed statements or access to view the portfolio via the internet is used. As Trustee you should keep annual statements as the record of your administration. These will be helpful to any successor Trustee and to you if you are ever questioned on Trust activity. It is possible you may be required to "account" (report on the investment and distribution activity in the Trust) to the beneficiaries directly or to a court on behalf of the beneficiaries. If you are, your records of investments, distributions, tax payments, and discretionary decisions will be invaluable. NOTE: If you cannot produce records when requested then you may have a legal presumption against you. Keeping records is you duty as a Trustee and your primary defense against any claims of mismanagement. Income beneficiaries almost always are entitled to current information about the Trust. Remainder beneficiaries may not have a current interest but may still be entitled to information if they request it. Under some state laws you may be required to provide statements to "qualified beneficiaries" who are usually described as including remainder beneficiaries who would receive the Trust funds if the Trust terminated today.

Trustee Tip:

Maintain a paper, or preferably an electronic, statement file at least until you are legally released from your time as Trustee when the Trust terminates or another Trustee steps into your role.

Appointment of Trustee:

current, future or contingent. You can be named as Trustee in the original document to serve immediately. If it is a Trust Agreement it will usually be in the first paragraph. If it is under a Will your nomination generally appears in a section in the document devoted to Executors and Trustees. You may be named to act now, or later on after a contingency (e.g. death or resignation of a Trustee). If later on, you may never be asked to serve as Trustee or not for many years. Sometimes the Trust gives the power to appoint a new (successor) Trustee after the removal or resignation of a current Trustee. In this situation the individual holding that power must create a separate legal document to exercise that power and appoint you as a Trustee.

Acceptance of your Role as Trustee.

Hopefully you will not be surprised to find you are named as a Trustee, and the person creating the Trust will have asked your permission first. But just because you are named as Trustee does not mean you are obligated to act. A Trustee can be deemed to have accepted the role of Trustee by "acting", meaning if you begin to take any steps on behalf of the Trust (e.g. investment decisions, paying funds) you can legally be considered to have accepted your role and all the obligations of the job will apply. Be careful if you do not want to act, but offer to help in the short term. However, it is more typical that your appointment will be evidenced by a legal document. If you are named in the original Trust, you will typically be asked to sign the document at the same time the Grantor of the Trust signs the document. If you are named to serve on a Trust created under a Will, you will typically be asked to acknowledge your acceptance in a writing which will be submitted to the probate court handling the Estate. If you are named later on in the life of a Trust by someone who has the power to appoint Trustees, you will typically be asked to sign the document accepting your appointment.

Trustee Tip:

Accepting the role of Trustee brings with it a host of responsibilities and potential liabilities if you do not manage the Trust effectively and keep records. Once entered into it is not easy to exit as you will see below. As a best practice, professional corporate fiduciaries do a review of the Trust before they agree to accept the role of Trustee or Co-Trustee. The review generally consists of reading the Trust document to understand what you will be asked to do; understanding who your beneficiaries are and their particular needs; and reviewing the assets placed in the Trust to be sure you can manage them effectively. MyTrustCo.com can help by providing a sample checklist for your pre-acceptance review.

Termination of Your Role as Trustee.

Once you accept the role of a Trustee your obligations to the Trust and the current and future beneficiaries begin and to exit the role you must formally (i.e. by a legal writing) resign or be removed. You CANNOT just walk away from the role out of frustration with the beneficiaries or other interested parties, boredom, or lack of time. Any loss to the Trust or to the beneficiaries caused by your inattention can be held against you and you may be subject to a "surcharge" or money damages to make the Trust or beneficiary whole again. (An example would be a missed investment opportunity or sale occurring while you were the Trustee.) You must therefore administer the Trust to its conclusion, or seek to be removed or resign your role. Usually you cannot resign or be removed until there is another Trustee willing and able to take over the role. Therefore if the Trust is small, has problem assets, or unreasonable beneficiaries it may be difficult to find an individual or an institution willing to step into the role. And until you do find someone willing you must still give your best efforts to the Trust and the beneficiaries. However, once you have found a willing successor, there is typically a formal legal document evidencing your resignation (or removal) and the appointment of the successor Trustee. This can be accomplished by applying to the state court having jurisdiction of the Trust if the Trust does not provide for resignation, removal and appointment of the Trustees.

Release of the Trustee.

As a best practice most professional Trustees require a legal release from liability by the beneficiaries when they leave office. Some state laws will provide for an automatic release of Trustee once a final statement has been issued to the beneficiaries, but this may only be effective to the extent the statements sent to the beneficiaries have disclosed every transaction, cost and fee to the Trust. If you are not formally released, your potential liability to the Trust; your exposure to be questioned on your stewardship, may remain open indefinitely. A legal release can be prepared by an attorney and circulated to the beneficiaries for signature. If there are allegations of mismanagement your attorney may advise you to "account" to the court having jurisdiction for a release, requiring the beneficiaries to raise formal objections to prevent your release. If challenged on your role, the records you keep of your actions and decisions will be critically important. Generally, if you have acted in the best interests of the Trust you will be allowed to pay your legal defense fees from the Trust.

Powers of the Trustee.

Within almost every Trust document there is a section referred to as a "powers clause" because it grants the Trustee many broad powers. It is typically a long section of the document and goes on to give to the Trustee the power to buy; sell; loan; mortgage; invest; reinvest; merge related Trusts; divide a Trust for tax purposes or ease of administration; and other powers. The purpose is to give to the Trustee all the powers in individual has over their property. Remember: the Trustee holds legal title to the Trust property while the beneficiaries hold "beneficial" title. For individuals the legal and beneficial titles are merged, meaning you enjoy the legal ownership of your property and the right to enjoy it. A Trustee has legal ownership, but the beneficiary has the right to enjoy it. Most states also have a law granting Trustees the same powers (i.e. invest, borrow, etc.) and to the extent a Trust document does not have a powers clause, or is missing powers, the Trustee may look to the state law.

Trustee Tip:

While Trustees are granted broad powers so they may manage the Trust assets, they must do so "prudently" and only in the best interests of all the beneficiaries. Just because a Trustee is granted a power, does not mean they should use it. The use of the powers is part of the Trustee's discretionary administration of the Trust.

Probably the most important duty to the beneficiaries is the Trustee's obligations to distribute funds from the Trust. This is also the task that may cause the most disagreement and potential for challenge. The Trustee generally is given power to distribute income and principal, although the standard for each may be different. The Trust document sets out the Trustee's powers and instructions for distributions. A Letter of Wishes (not legally binding but helpful in determining the intent of the creator when making discretionary decisions) may provide additional guidance to the Trustee. Distributions may either be mandatory (e.g. "the Trustee shall pay…") or discretionary (e.g. "The Trustee may in their discretion pay principal to …"); and may be allowed to draw from income or principal or both.

Advisory Language. Unless the Trust instructs the Trustee to make mandatory distributions, the Trustee must look to, and be guided by the advisory language in the Articles of the Trust concerning distributions. A good attorney will draft a Trust with discretionary language that achieves all the necessary tax planning goals of the Trust. (e.g. "The Trustee may distribute principal in the Trustee's discretion for the health, support, maintenance and education of the beneficiaries" is a common example.) However, often the advisory language, while sufficient from a legal and tax perspective, is unhelpful to the Trustee in determining the true intent of the Grantor of the Trust. Does education include basket weaving classes in Hawaii? Would support include an exotic sports car to commute to work? If you are lucky you will have the opportunity to speak with the Grantor to understand her true intent and make notes for the Trust records. If you cannot make notes, and the attorney has not drafted expanded advisory language into the Trust which includes broad guidance to the Trustee, then you will hopefully have a Letter of Wishes to guide you. Once used only in the off shore Trust world, Letter of Wishes is now more common in U.S. Trusts and simply is a side letter to the Trustee from the Grantor explaining their intent for use of the Trust and its funds. This is not binding on the Trustee but can certainly be considered in the use of discretion.

Mandatory distributions are common with Trust income. A Martial Trust for example must pay all the income annually to the surviving spouse to qualify for the marital deduction (deferral of estate tax until the death of the surviving spouse). Trusts also reach the maximum tax rate quickly (less than $15,000 of income) and so it is often tax advantageous to pay out the income to beneficiaries who will be in lower tax brackets than the Trust. While not all Trusts direct the payment of all net (after taxes and expenses) income, if they do the instruction to the Trustee is simply "The Trustee shall pay net income…." or "The beneficiary is entitled to receive…." Income is then generally paid out monthly or quarterly to the beneficiaries.

"Sprinkling" income and principal. If the Trust does not require mandatory payments of income, then the distribution of income (and usually principal as well) is left to the discretion of the Trustee to decide how much income is paid out, if any, and to which beneficiaries. The ability to pay funds among a class of beneficiaries is generally referred to as a "sprinkling" power, as if the Trustee was watering the beneficiary garden. The Trustee is also usually instructed to add any undistributed income to principal annually. Here the Trustee has all the usual obligations: to know the needs and circumstances of the beneficiaries; to ask for documentation to support a request for funds if required by the Trust; to decide how much to give (one time or ongoing); to justify any unequal distributions among the beneficiaries; and it is a best practice to document the decision. It is also a best practice to revisit the decision on at least an annual basis or as the circumstances of the beneficiaries change. It is also a best practice for the Trustee to perform a general annual review of the Trust and this would be an appropriate time to review the distribution plan as well. A Trustee should not forget to consider the tax implications of any distribution plan. What is the beneficiaries tax bracket? Will a distribution to a grandchild trigger Generation Skipping Tax. It would be worthwhile to have the attorney for the Trust or the Trust tax advisor review any distribution plan first. Their advice should of course become part of the Trust record.

Trustee tip:

A Trust's investment objective should consider the distribution plan, and be crafted to best support it. How much will be paid out from the Trust? How long will the Trust be expected to last (a few years or a few generations)? Will the distributions come all from income generated by the Trust portfolio, or will a percentage of the total return be used (see the Power to Adjust and Unitrust options). The Trust's investment should be crafted to consider the distribution approach and tax implications.

Income typically consists of dividends from stocks and interest payments from bonds. If your portfolio has basic investments like stocks, bonds and mutual funds, income is fairly straight forward. [Trustee Tip: when purchasing mutual funds be mindful of the election to have dividends and interest paid out or reinvested. Many individuals prefer to have interest and dividends reinvested as they are holding the funds for future growth. As a Trustee, you should probably elect to have them paid out so the Trust can in turn pay them to the income beneficiaries, unless you are using a Power to Adjust or Unitrust approach: see below.] The Trustee's obligations to identify income and principal become more difficult with many of the complex investments used today. How do you generate income from structured products, private equity funds or options? If your Trust portfolio contains complex investments (e.g. structured notes, options, hedge funds, etc.) you may not be able to effectively administer the Trust with the basic definition of income and principal. You may need to use the Power to Adjust or a Unitrust approach if it is available to you. Unique assets (limited partnership interests, limited liability company shares, real estate, oil and gas, etc.) may also make it difficult to administer the Trust using a pure income distribution approach. In situations like these it may make sense to use the Power to Adjust or Unitrust approach.

The Power to Adjust (PTA) is part of the Uniform Trust Code and has been adopted by many states as part of their Trust law. The PTA was created to give Trustees investment flexibility by allowing them to, as a discretionary action, adjust funds between income and principal as a way of being fair and equitable to both classes of beneficiaries, current and future. A Trustee typically will make a decision to adjust funds from principal to income or vise versa if one class of beneficiaries has received a windfall from some investment, or if the investment portfolio generates a lot of asset growth but insufficient income. The adjustment may take the form of (1) a one-time adjustment to equalize a windfall benefit or (2) an ongoing adjustment where a percentage of the portfolio is "deemed" to be income so the income beneficiary will receive an appropriate share of the investment portfolio's total return. For example, if the Trust holds some undeveloped land for many years which produces little or no income but appreciates substantially, when the land is finally sold the remainder beneficiaries will have received the benefit of a large increase in the principal funds. The income beneficiary however will have received less income over the years than if the value of the land was invested in stocks and bonds. Here the Trustee may make a one-time discretionary adjustment using the PTA to pay a portion of the sales proceeds from the land to the income beneficiary as their share of the return on the investment. Another example of the use of the PTA would be where a Trustee determined an aggressive investment portfolio would be in the best interest of both classes of beneficiaries by maximizing the potential total return. However, an aggressive portfolio would not generate sufficient income to meet the needs of the current beneficiaries. Here the Trustee can exercise discretion under the PTA to pay the current beneficiary a percentage of the market value of the Trust as "deemed income", meaning a reasonable share of the total return of the Trust which is deemed to be an appropriate income amount. Note: as with any discretionary action by the Trustee, the decision should be documented with a rationale and any supporting information used in reaching the decision.

Trustee Tip:

Once the Trustee has decided to exercise discretion under the PTA, in selecting the appropriate percentage to pay out the Trustee should also decide if the number will be a "net" percentage or a "gross" percentage, meaning will the percentage paid include a pro rata share of capital gains and losses to the extent principal funds are used? Or will the gains and losses continue to be kept at the Trust level? If the later, then the distributions will probably contain some principal funds which will be tax free to the recipient beneficiary. In general a net number should be slightly smaller than gross numbers to be fair to the remainder interests who will bear the entire capital gains tax burden, even on the principal funds distributed as "deemed income".

The Unitrust approach is similar to the exercise of the PTA. While Unitrusts have been used for Charitable Remainder Trusts and Charitable Lead Trusts for some time, it is a relatively new approach for personal Trusts. Like the PTA the income beneficiary's interest is expressed in terms of a percentage of the overall portfolio, revalued annually, instead of the net income earned by the assets. While the creator of the Trust may establish the percentage in the Trust document, it is more common for the Trustee to elect to "opt in" to a unitrust approach using the power granted all Trustees under the state law. Many states have adopted a unitrust option either alone or together with a PTA option for the Trustee. If the unitrust approach seems to be the best solution for the goals of the Trust and in the best interests of current and future beneficiaries, then the Trustee must make a series of discretionary decisions. First, the unitrust approach generally implies investing the portfolio for total return, so the investment objective should be aggressive. Hopefully this will maximize the growth of the assets benefiting both current (percentage payout on a larger base of assets) and future beneficiaries (preserving and growing their eventual remainder interest). Second, the Trustee must elect to use a percentage payout as the "deemed income" of the Trust. Depending on the state law, the unitrust percentage may be fixed in the statute (e.g. 4%) or provide the Trustee with a range (e.g. 3% to 5%). If a range is allowed the Trustee must also select the appropriate percentage within the range. [Trustee tip: When a percentage range is allowed by law the language of the statute will often give the Trustee complete discretion to select the number and provide that it will be presumed reasonable. It is recommended as a best practice to ensure the percentage number you have selected is reasonable under the circumstances and supported by the needs of the beneficiaries. Don't forget to document this part of the discretionary decision along with any supporting documentation and keep with the permanent records of the Trust.] Thirdly, if not provided by state statue, the Trustee should decide if the unitrust number will be net or gross of its proportional share of realized gains and losses. In many cases the Trustee will be required to provide notice to all adult interested parties to complete the process. The intent is to allow anyone potentially impacted by the conversion to a unitrust to object. Don't forget to document the entire process and keep a permanent record for your files.

Trustee Tip:For the Power to Adjust and the Unitrust, like all discretionary decisions it is considered a best practice to review these decisions annually to ensure they are still the appropriate options to maximize the benefits of the Trust for all beneficiaries. This is often done at the time of the formal annual review. If not done at the annual review, it is recommended to refresh the Trustee's decision memo at the same time each calendar year.

In the early days of Trustees the position was considered one of honor, and a Trustee was not entitled to compensation. As we entered the modern age, and a fiduciary was tasked with more than just holding real property but would invest funds as well, a commission or fee to the Trustee was allowed. However, most approved financial investments were at first only fixed income investments (e.g. government bonds, railroad bonds) that generated income but did not grow in value. To preserve the principal of the Trust, the early Trustee commissions were allowed only on income of the Trust. Later, in the mid-twentieth century as Trustees were allowed to invest in stocks as well as bonds, their commissions were allowed against both income and principal so both classes of beneficiaries (current and future) would share in the cost administering the Trust.

Today, a Trustee may be asked to serve without compensation if she is a member of the family. Typically, an individual Trustee will be entitled to a fee (aka commission) either (1) as specifically outlined in the Trust Agreement or a separate fee agreement or (2) if the Trust is silent on the topic or references state law, then the Trustee is entitled to fees allowed under the state law. In the latter case, the Trust will typically provide that the Trustee is entitled to "reasonable compensation" or to "fees as allowed by law". Trustee fees can vary depending on: size of the Trust; limitations in the Trust or fee agreement; and duties shared with other Co-Trustees or Advisors. If a Trustee has special skills (e.g. investments, accounting) that are used to benefit the Trust, then the fee may be higher. Also, if special assets or situations arise that require an extraordinary amount of work by the Trustee, additional compensation is usually allowed.

Corporate Trustee fees are often higher than an individual Trustee fees. The primary reason is the comprehensive services generally included by the corporate Trustee. Many corporate Trustee fees will include: custody of assets; asset management; tax preparation; and administration of the Trust in accordance with the Trust Agreement. An individual Trustee can administer the Trust, but usually has to hire as an additional expense of the Trust a custodian, and asset manager, and an accountant to prepare the Trust tax return and tax information letters.

Trustee Tip:

confirm with Trust counsel the amount of fees you are entitled as Trustee; how the fees are calculated; and the frequency of debiting the fees. Keep records of your fee calculations as they, like all actions of a Trustee, can be subject to review and challenge. MyTrustCo.com has sample fee calculation forms in the members' section.

The termination date of a Trust will be determined by the provisions of the Trust Agreement. The Trust may be created to last for a specified term of years (e.g. a GRAT or CRUT), or may terminate on the happening of an event (e.g. the death of a beneficiary, the age of a beneficiary). The Trust may be written to terminate in stages (e.g. ages 30, 35, and 40), or may be written to last indefinitely (e.g. a perpetual Trust under Delaware law or a similar state law). The termination may be mandatory on the occurrence of a legal event (e.g. age; death; time) or it may be discretionary when the Trustee is granted the power to terminate the Trust in the Trustee's discretion; or when the Trustee exercises the discretionary distribution powers over principal of the Trust to "decant" the Trust (pay over into) into another one govern by a modified legal document.

If the termination is by a legal event, the Trustee should gather sufficient documentation to prove the event occurred. If the termination is by a discretionary action, the Trustee should prepare a memo documenting the discretionary decision and include any supporting documents, information, or approvals necessary to justify the exercise of discretion as prudent and in the best interests all beneficiaries.

Some Trusts will be created with several terminating events or "partial terminations" during the life of the Trust. A common instance of partial terminations is where the Trust Agreement provides for principal distributions to the beneficiary at certain ages, say 30, 35, and 40 years of age. Here the Trustee is typically directed to pay out one third of the Trust to the beneficiary at age 30; one half of the remaining balance at age 35; and the balance of the Trust at age 40. The Grantor sets the age preference according to their belief in the stages of life and the anticipated maturity level. Another partial termination could be when each beneficiary receives their proportionate share of principal at a designated age, but the balance of the Trust will continue for the remaining beneficiaries until they attain the designated age.

Another type of Trust will terminate but the Trust Agreement will instruct the Trustee to fund continuing Trusts with the balance of the assets. While the continuing Trusts will be governed by the same Trust Agreement, they may have different provisions and beneficiaries, and are usually under a separate section of the Agreement.

The termination of a Trust, including a partial termination, is a critical phase of the life of the Trust and it is important for the Trustee to follow all the necessary steps to avoid problems and potential liability. First, confirm the terminating event has occurred by obtaining copies of a death certificate if necessary, or government document proving age, or any other document proving the event. If there is any uncertainty about the termination, obtain confirmation from the attorney for the Trust, or any qualified attorney specializing in Trusts and Estates. The Trustee must identify all the remainders who now share in the distribution of the Trust, contact them and advise them of their interest in the Trust. Typically the Trustee will write to the remainders to advise them of the market value of the Trust, the next steps to be taken in the termination process and ask if they want their shares in "cash or kind". This "cash or kind" letter is important as it relieves the Trustee from any liability for market action (i.e. devaluation of assets) during the termination process. Also, once a Trust terminates the principal balance is "vested" or legally owned by the remainders, so it is appropriate for the Trustee to ask for their input while the Trustee wraps up the administration of the Trust. So, the remainders are asked to elect, in writing, to receive their share of the Trust in cash or in kind. If they elect cash, their share of the Trust will be sold and eventually distributed to them in cash. This election will also incur capital gains (or losses) which will be taxed to the remainder on the final tax year filing. If they elect to receive their share in kind, then they will receive a proportionate share of all the assets in the Trust outright and minimize the capital gain or loss impact. However, by electing to hold the assets and receive them in kind, the remainders now have the risk of market action (possible devaluation) during the termination process. The cash or kind letter should make this clear. Even if the remainders elect to receive all their interests in kind, there is usually some gain or loss passed out to them from any trades done that year prior to termination and any asset sales necessary to raise cash for final expenses and to even out the asset shares before the in kind distribution.

Prior to final distribution of the Trust assets, the Trustee must ensure the business of the Trust is completed. The Trustee should confirm from the tax preparer any final taxes due from the Trust and estimated fees for preparation of the final returns and tax notices. An estimate of final commissions for the Trustees or any other paid fiduciary. Plus any final fees for any other service providers (investment managers, custodians, real estate managers, etc.).

It is a typical and best practice for a Trustee to have a legal release prepared by an attorney and circulated to the remainder interests. This document is often called a Receipt, Release and Refunding Agreement as it asks the remainders to acknowledge the amount of their share of the trust; agree to refund the Trustee for any valid expenses arising after the distribution is received; and to release the Trustee from any potential liability for their performance as a Trustee of the Trust. The remainder interests are usually entitled to an "accounting" of the Trust, meaning a financial summary of investment history and performance, receipts and disbursements. In the past this was prepared routinely and presented with the Release Agreement. However, the preparation of the accounting involved meaningful cost and delay of distribution. Today the accounting is usually not prepared unless requested by one of the parties; prepared by the Trustee in response to allegations of mismanagement; or required by a supervising court. The remainder interests usually have many questions about the termination process, and may have more once the accounting is received. The Trustee is obligated to respond to all reasonable requests for information.

Once all the remainder interests have signed off on the Release Agreement and all final expenses have been paid, the Trustee can then distribute the assets and cash to the remainders in their appropriate shares. If the Trust is very large or there will be a significant delay in the termination process, the Trustee will sometimes make a partial distribution to get funds to the remainders early, while ensuring there is sufficient assets left for any unexpected expenses. A separate Receipt, Release and Refunding Agreement is usually prepared for the early distribution. If a remainder interest or other interested party challenges the Trustee for any actions taken (or not taken), the Trustee is usually entitled to engage an attorney to respond to any allegation and if necessary prepare a formal accounting for submission to the appropriate court. As a general rule all related expenses should be payable by the Trust assuming the Trustee has in fact acted prudently and can prove it with supporting documentation. If the Trustee is found by the court to have not acted prudently and in the best interests of the Trust, then all the expenses of the legal defense may have to be reimbursed by the Trustee, and the court could asses other damages against the Trustee including reimbursement of commissions and possible money damages to make the Trust "whole".

Once the Trustee has finished the termination process, been released, paid final expenses and made final distributions, the business of the Trust is concluded. It is recommended that the Trustee maintain records of the Trust for some period of time should there be any subsequent questions from family members, the taxing authorities, or any other request for information.

Trustee Tip:

MyTrustCo.com has a Termination Checklist and sample "cash or kind" letter in the members section.

The Uniform Trust Code (UTC) was drafted by practicing attorneys and academics working with the National Conference of Commissioners on Uniform State Laws (NCCUSL). NCCUSL brings together top people in various legal fields to create a recommended collection of laws. The UTC is one of those efforts which attempts to take existing trust law concepts and recommend a comprehensive modern update. The UTC has been around in one form or another since 2000. However, the UTC like all Uniform law recommendations are academic suggestions for standardizing the laws in a given area, they are not the law itself. Each state must adopt the recommended laws by legislation.

If all 50 states did in fact adopt the UTC exactly as it is written we would indeed have a national uniform law of Trusts. What actually happens is each state will first have their own practicing lawyers (i.e. their state "Bar") review the UTC and recommend adopting all or parts of the UTC. In practice the states that have adopted the UTC have made numerous modifications to the original version. So when you see a reference to the UTC, it probably means the version of the original UTC that was finally adopted in your state. So while it would be nice to have a 50 state consensus on Trust law, Trustees will still need to be familiar with the law in each particular jurisdiction they use because even states that adopt the UTC will modify it to include some local preference.

The UTC is intended to provide a concise and flexible body of Trust law that has been updated to serve the modern estate planning environment. It is also intended to provide simpler methods of dispute resolution and modification to irrevocable Trusts that avoid court action.

Some highlights of the UTC recommendations:

• Directed Trusts. Allow Trustees to rely on investment advisors, usually selected by the Grantor or beneficiary, to "direct" the investments of the Trust. This is an updated position from traditional Trust law where the Trustee was fully responsible for the investments of the Trust. [Note: the UTC version of investment direction does not go as far as the direction statutes in states like Delaware, South Dakota, Alaska, etc. The laws in those states fully protect the Trustee from taking the instruction of an investment advisor and further protect the Trustee from any duty to review the investments or warn any beneficiaries. The Trustee can be truly a passive order taker. The UTC version however allows the Trustee to take investment direction as long as it is consistent with the terms of the Trust. This may imply a duty by the Trustee to understand the investment and its impact on the long term goals of the Trust, and possibly refuse the direction if the investment appears imprudent. Many therefore fee the UTC direction statute is not a true direction statute. This is a good example of a section of the UTC that varies quite a bit in its popularity. Some states in adopting the UTC will reject direction statutes entirely, while others would perceive it not to go far enough and would instead craft a direction statute of their own.]
• Non-judicial Modification of the Trust. Traditionally, unless a Trust was revocable, and therefore amendable by the Grantor, it could not be amended without going to court. The UTC recommended a more current practice already adopted in some states, where an irrevocable Trust can be changed (amended, modified, or even terminated) by agreement among all the interested parties. This may still require an attorney to draft the agreement and ensure that all the necessary parties are involved, but it should still be faster and less expensive than going to court to modify the Trust.
• The Power to Adjust and Unitrusts. The UTC gives to Trustees the power to "adjust" funds from principal to income and vice versa when it is in the best interests of the beneficiaries. This is typically done when there is an extraordinary dividend or return on investment that benefits one class of beneficiary (current vs future) over the other. It may also be used to pay a fixed percentage of the Trust to the income beneficiaries as "deemed" income, representing their fair share of the total return of the Trust. The ability of the Trustee to opt into a "unitrust" is similar in that the Trustee may elect to ignore the income earned on the Trust portfolio when considering the income beneficiary, and instead just pay out a fixed percentage of the market value. (Usually between 3% and 5%, to be revalued annually.) In both cases the Trust should be invested for growth to maximize the total return of the Trust's portfolio.

Trustee Tip:

References to the UTC may be helpful from a historical perspective, but what matters to the Trustee is the language in the Trust Agreement and the currently enforce state laws, whether or not they are based on the UTC.

Ideally the beneficiary should actively participate in the administration of the Trust and not just be a passive recipient of funds.

First the beneficiary should have a copy of the Trust Agreement, or at the very least the parts of the Agreement specific to them plus the general empowerment provisions. They should understand their entitlements under the Agreement. If they do not then they should review the Agreement with the Trustee or an attorney. While the Trustee is responsible for protecting the Trust and making it productive, the beneficiaries can help the Trustee and themselves by being involved with the administration and communicating their needs to the Trustee.

The Trustee should reach out to the beneficiary to discuss the Trust, the investments and the benefits available for the beneficiary. If the Trustee does not, then the beneficiary should reach out to the Trustee in the beginning and ask for a meeting at least once a year to discuss their needs, their family and to review the investments of the Trust. As a beneficial owner, the beneficiary is entitled to have all their reasonable questions answered to their satisfaction.

Current beneficiaries are those required or entitled to receive funds from the Trust now. Their right may be mandatory or it may be at the discretion of the Trustee. Regardless, the all have an immediate right to information about the management of the Trust from the Trustee. This should include copies of statements showing investments, receipts and disbursements, as well as a regular dialogue with the Trustee. Future beneficiaries are those who may be entitled to funds from the Trust after a triggering event (e.g. term of years, death of a current beneficiary). While they have no right to current funds, they may be entitled to statements (check the state law), and they are usually entitled to have discussions with the Trustee regarding the Trust and their potential interest.

The role of the remainder beneficiary is usually more limited. While she can share a similar role to that of the current beneficiary in keeping an eye on the management of the Trust, the remainders are typically given less information, with less frequency. It is therefore more difficult to stay involved.

[Note: the burden of review is not placed entirely on the shoulders of the beneficiaries. Any court involved in the administration would be concerned with the proper administration of the Trust and often a guardian is appointed by the court specifically for the purpose of reviewing the administration to ensure all the beneficial interests are being considered. Co-Trustees, Protectors, professional money managers, and any other participant in the administration should also be concerned with the proper administration of the Trust. The beneficiaries provide a supplemental role.]

In situations where the beneficiaries are incapacitated or minors, a guardian should fulfill their role as a beneficiary, communicating with the Trustee and reviewing statements.

In some states where a charitable entity is a beneficiary or remainder, it is required to have the Attorney General's Office involved (usually as a report or statement recipient), so they may protect the rights of the broad class of beneficial interests served by the charity, but who have no individual rights to review the actions of the Trustee.

A "Silent Trust" is available in some states (e.g. Delaware) where it is possible by law to draft a Trust that is "silent" for the beneficiaries until some specified event (e.g. death of a parent) or period of time. In this scenario the Trustee is specifically instructed not to give notice or provide statements to the beneficiaries. Typically there must be some individual who will receive statements and review the Trust with the Trustee. This role is often filled by the Grantor of the Trust or a Protector. In most cases this type of Trust is used by parents looking to promote self reliance in their children, and wishing to hide family wealth at least until a mature age is attained.

If a beneficiary suspects any improper actions by the Trustee, or if the Trustee is unresponsive, the beneficiary may obtain counsel to pursue a satisfactory response. If the Trustee continues to withhold information or be uncooperative the beneficiary may even consider court action to remove the Trustee.

While the beneficiary can be another pair of eyes to oversee the proper administration of the Trust, ideally the role of the beneficiary is to be a partner with the Trustee, communicating sufficient information and documentation for the Trustee to administer the Trust as intended by the Trust Agreement.

A Trustee is the steward of the Trust assets and so in most cases must exercise control over the assets to protect them. Remember the Trustee is the legal owner of the assets (while the beneficiaries are the beneficial owner). Financial assets should be placed with a bank, broker or investment manager in an account in the name of the Trust. Other assets (e.g. real estate, artwork, partnership interests, etc.) should be titled in the name of the Trust, inventoried by the Trustee and insured for their full replacement value. The Trustee must spend sufficient time and effort understanding the assets (e.g. stocks or artwork) and managing them to be prudent. To the extent the Trustee does not have the necessary skills to manage the assets, or the time, it is perfectly appropriate (possibly even required by law) for the Trustee to hire experts (e.g. investment managers, auction houses, insurance experts) to manage the assets as an expense of the Trust. The custodian selected for each asset should be appropriate or "prudent". Is the custodian insured? Do they have experience in holding these types of assets? Are the fees reasonable for the service provided?

Often the custodian will be the same as the manager of the assets as with a broker or bank. Other, non financial assets may require a different type of control. Commercial real estate may be placed in the care of a property manager to ensure it is rented, the rent is collected, expenses are paid and upkeep to the property is done. However, all leases and contracts should reflect the ownership by the Trust. Artwork will need to be appraised and insured, but it may hang on the wall of a beneficiary's home, be in an appropriate storage facility, or loaned out at the direction of the Trust to museums or exhibitions. The Trustee must ensure the art is properly cared for by controlling the use, transportation, preparation, etc. or by hiring an appropriate expert to manage the art for the Trust. Oil & Gas interests require a certain type of accounting to determine what is income or principal and for valuation. The point to the Trustee is every asset of the Trust must have an appropriate custody and control process in place as it is a primary duty of the Trustee to protect Trust assets and make them productive. The Trustee usually is given the power to hire the necessary expertise to manage assets for the Trust in the Trust or state law, but still must be prudent in the hiring and oversight of the experts to ensure they are qualified for the task.

Exceptions to the control rule would include a Trust Agreement that specifically gives the custody and control function to a Co-Trustee or institution. Often this would be done to establish "situs" (legal home) for the Trust in a particular state or country, or to entrust the safekeeping of the assets to a designated institution. A corporate Co-Trustee is often selected for this purpose as they will have an office in the jurisdiction of choice and will have the infrastructure for trading securities, collecting dividends and voting proxies.

Sole Trustee: the single fiduciary responsible for the Trust. This individual (or institution) has complete legal ownership of the assets for the current and future beneficiaries. The Trustee is responsible for:

1. Preserving the assets of the Trust and making them productive (growth to preserve purchasing power and income for the current beneficiaries).
2. Paying taxes owed by the Trust.
3. Distributing funds as directed or allowed by the Trust.

The Trustee is answerable to current and future beneficiaries for the preservation and productivity of the Trust's assets and the distributions paid out.

Co-Trustee: Possessing the same obligations and responsibility as the sole Trustee, but shared with one or more additional Trustees. Liability is usually shared for all actions taken on behalf of the Trust. Multiple Trustees usually must act by majority, but the Trust Agreement may require a unanimous vote on some or all decisions. If the Trustees become deadlocked on a decision, they usually must go to court to resolve the issues (i.e. ask the court for instructions).

Directed Trustee: Generally, this Trustee will have many of the usual duties of a Trustee (e.g. custody of assets; tax preparation) but will be directed on investments, distributions or both by the terms of the Trust. The Trust Agreement typically assigns the duties and responsibilities of investing the assets of the Trust to an individual or committee (often described as the Investment Advisor; Investment Committee), and the Trustee is only responsible for following the instructions. The same is true for any Trust that names a Distribution Advisor; the Trustee is only responsible for following the instructions of the individual named in the Trust Agreement with regard to payment of income or principal funds to the beneficiaries.

Trustee Tip: Directed Trusts are often viewed as relieving the Trustee of all fiduciary responsibility. This is incorrect. With the right state law governing and the necessary language in the Trust Agreement the Trustee should be relieved from any responsibility and liability with regard to the particular direction indicated: investments or distributions. But the Trustee will usually still have the fiduciary duties and responsibilities for all other aspects of the Trust. E.g. if a Trustee is directed on investments and the advisor asks the Trustee to make a distribution of assets, the Trustee will still have to consider if that is appropriate and in the best interests of the Trust and the beneficiaries.

Administrative Trustee: Very similar to a Directed Trustee, only here the Trust Agreement limits the Trustee's duties to a very specific and short list of duties designed to establish legal situs (e.g. custody of assets; providing tax information; sending statements) while the discretionary decisions are made by another Trustee or by advisors.

Trustee Tip: Directed and Administrative Trustees are most commonly used with "modern" trust states (e.g. Delaware, South Dakota, Alaska) having laws that allow a Trustee's duties to be unbundled without any residual liability to the Directed Trustee. If your Trust is not governed by the laws of one of these modern states you should consult with an attorney regarding any continuing oversight duties you may have.

Delegated Trustee: Unlike a Directed or Administrative Trustee, a Delegated (or delegating) Trustee starts off with full responsibility for the operation of the Trust, but then receives either beneficiary or court approval to delegate certain duties (typically the investment responsibility) to an individual or firm. Again, this option is more popular in modern Trust states where the liability protection is greater for the Trustee delegation the responsibility. (E.g. South Dakota has a good Delegated Trustee statute where all interested parties to the Trust must sign off agreeing to the delegation.)

In most situations a Trustee shares equally in the management of a Trust with her Co-Trustees. An exception may exist if drafted specifically into the Trust Agreement or if the Trust is under a "modern" Trust jurisdiction. (An example would be an "Administrative Trustee" who has only specific and limited duties, typically around establishing situs in a particular jurisdiction such as maintaining records and an available meeting place.)

If Co-Trustees share equally in the management of the Trust then each is responsible for sharing information they may have individually, and to ensure that each Trustee votes on decisions such as investment selection or discretionary distributions. Someone should be responsible for maintaining records of the Trust which would include the review and voting records of the Trustees. If there are two Co-Trustees and they disagree, they have three potential options: work out a mutually agreeable solution; check the Trust Agreement to see if one Trustee is given the controlling vote in a disagreement; or finally to go to court to resolve the disagreement. If multiple Co-Trustees disagree they should check the Trust Agreement to see if a majority vote will suffice or if decisions must be unanimous. If unanimity is required, they then have the same three options as two Co-Trustees who disagree. If majority vote controls, the dissenting or minority Co-Trustee should ensure her dissent is in the Trust records to avoid sharing in any potential liability for a decision later deemed imprudent. However, if the decision of the majority appears to be unsupported by the terms or authority of the Trust Agreement and therefore possibly a breach of the Trust, the minority Trustee may be obligated to hire counsel and go to court to block the action and prevent a breach of Trust. In this latter scenario a mere dissent is not enough as a Trustee's fundamental duty is to protect the Trust and it's assets.

Some Co-Trustees will have specific powers over the administration of the Trust as determined by the Trust Agreement. Typically these powers will be investment authority or distribution authority. Some Trust documents may carve out a purely administrative role (no discretionary decisions) for one Trustee usually to establish situs (legal location) of the Trust. In each case you should understand the extent of your authority, whom you share it with and the boundaries of each Trustee's powers. Be sure your instructions are in writing and you keep a copy for your records. Similarly, you should keep a copy of the instructions of any other Trustee exercising their powers over the Trust.

Sharing authority with advisors is similar to sharing authority with Co-Trustees. Some advisors may have very small, contingent roles such as changing situs of the Trust, or only to remove and replace a Trustee. Others may have broad powers over distribution of funds and investments. From the onset you should be sure to know the extent of each advisor's role and how that role interacts with the role of the Trustee. Any exercise of authority by Advisor or Trustee should be documented in writing and it would be a best practice for all parties to keep copies. Typically it will be the Trustee who is responsible for keeping the records of the Trust and so a copy of all instructions or decisions should be kept with the permanent records of the Trust. It would be a best practice for all Trustees and Advisors to consult together from time to time regarding the administration of the Trust. If any decisions are made or any discussions of importance held, a memo reflecting the result should find its way into the permanent records of the Trust.

1. Understand the role of Trustee. MyTrustCo.com can help: read through the basic information provided here. Have a conversation with the drafting attorney and any family members involved with your appointment as Trustee.
2. Understand the Trust Agreement and the specific duties that will be required:
   1. Investing the assets;
   2. Paying out funds
   3. Making discretionary decisions
   4. Keeping records.
      Speak with the attorney who drafted the Trust if you have any questions.
3. Meet with your Co-Trustee(s) and any other advisors named in the Trust (e.g. Protector, Investment Advisor, Distribution Advisor) if any.
   • Discuss how you will work together, invest the Trust funds, distribute funds, prepare taxes, and any other duties required by the Trust.
   • Develop a plan for responding to beneficiary requests for funds. Decide how often you will meet (in person or conference call) to review the status of the investments and the beneficiaries.
   • Agree on who will be responsible for the initial and annual reviews of the Trust and who will keep the official records. [Note: MyTrustCo.com has sample checklists; initial and annual reviews, letters and recommendations to assist you in your duties.]
4. Meet with the beneficiaries. Make sure they know how to reach you. As a Trustee you must know their needs now and if they change in the future. They should receive statements of the investment activity (typically the current beneficiaries, but in some states the "presumptive remainder beneficiaries" who would take if the Trust terminated today). A best practice would be to agree how often they would like to meet to discuss the Trust.
5. Read through MyTrustCo.com to ensure you have a good understanding of your responsibilities and some of the best practices used by professional Trustees (banks, Trust Companies).

Note: MyTrustCo.com is providing the following list as some of the most common examples of trusts. Individual circumstances and preferences of the attorney writing the Trust can create variations on these themes. Some financial firms or attorneys will take basic trusts and give them creative names suggesting their primary purpose (e.g. a "Dynasty Trust" or "Family Bank" is simply a discretionary Trust designed to last forever, creating a "dynasty" fund for all your future descendents or a "bank" of funds future generations can draw upon. A "Caring Trust" may simply be a revocable trust written with provisions to provide funds for the grantor if she becomes incapacitated, and after her death the trust would continue to provide funds for her children and grandchildren.)

Asset Protection Trust:

A Trust designed to hold assets so they cannot be reached by creditors. There are three basic categories.

1. Any irrevocable Trust created by one individual for the benefit of another. For example if a Mother creates an irrevocable Trust for her Son, the creditors of the Son generally cannot reach the assets of the Trust. They may be able to reach some of the income paid to the Son, but unless the Son has an absolute withdrawal right the Trust should be protected. In this way every irrevocable Trust created by a third person is an asset protection Trust.
2. A "self settled" asset protection Trust. Far less common these are only available in certain states (e.g. Delaware, South Dakota) that have enacted specific legislation allowing a Trust to be created where the Grantor is a permissible discretionary beneficiary. The general Trust rule would not allow an individual to place funds in a Trust for which they retained the ability to receive income or principal and not be subject to the claims of that creditor. This Trust works for asset protection because of
   1. The state law enabling it
   2. The availability of funds for the individual creating the Trust are in the sole discretion of the Trustee who must be an independent party
   3. The creator of the Trust must not have any existing or threatened litigation or claims against at the time the Trust is created and sign a "solvency letter" at the time of creation
   4. Only a portion of the creator's assets are placed in the Trust. The Trust cannot be used as a bank account but should be accessed by the creator only in emergencies.
3. Offshore asset protection Trusts. These Trusts use Trust Companies outside the United States and therefore outside the reach of the U.S. courts. The Trusts work because
   1. The creator's right to income and principal are only in the discretion of the Trustee
   2. Even if a lawsuit is won against the creator of the Trust, the winner will have to try to enforce the U.S. judgment against the Trust in another jurisdiction. The offshore jurisdictions used for these Trusts may require an entirely new trial on the issues, and ultimately it will be up to the Trustee in that country to decide if it is in the best interests of the creator to pay out those funds to a hostile party. In short, it may be impossible to collect any funds owed by the creator.

Intervivos Trust:

a Trust created during your life where your attorney creates a Trust to execute your goals; you sign it; and most importantly, you fund it now. It may be for your benefit or for the benefit of your spouse or other family members. Intervivos is primarily used to distinguish a Trust from a Testatmentary Trust.

Testamentary Trust:

a Trust created after your death. Your attorney creates a Will to execute your goals after your death, and, among other things, the Will creates one or more Trusts to be funded from your estate.

Revocable Trust:

a Trust you create during your life, typically fund with most or all of your assets, and you retain the ability to cancel ("revoke") it at any time. While a Revocable Trust may just pay all its assets into your estate upon your death, typically it continues on after your death for the benefit of others (although now "irrevocable" as you are no longer around to revoke it). Generally used to: consolidate assets; plan for your incapacity by naming contingent Trustees to take over the management of your assets; substitute for use of a Will and the probate process. Unlike a Will the Revocable Trust can pass all the assets it holds without the cost, delay and public filing of probate.

Irrevocable Trust:

a term given to any trust that is not a "Revocable" trust.

Marital Trust:

typically a trust created for the benefit of one's spouse using the federal marital tax exemption amount. This trust may be created during life or at death. General use.

By Pass Trust:

typically a trust created for family members using one's lifetime federal estate tax exemption amount. This trust is intended to avoid the payment of estate taxes.

GST Exempt Trust:

typically a trust created using one's Generation Skipping Transfer Tax (GST) exemption amount, and simultaneously one's federal estate tax exemption amount. This trust is intended to avoid estate and GST taxes, often for many generations (e.g. Dynasty Trust). Any companion trust created for family with assets above the GST exemption amount is typically referred to as a "Non-GST Exempt Trust".

Charitable Trust:

any Trust for the sole benefit of a charity.

Charitable Split interest trust:

Any Trust where one or more charities are either the initial beneficiary or the remainder beneficiary. Examples would be a Charitable Remainder Trust or a Charitable Lead Trust.

Charitable Lead Trust:

a "split interest" Trust where an IRS recognized charity receives the "lead" or current payments from the Trust (typically a fixed dollar amount or a percentage of the market value) for a period of years. After the defined period, the remaining balance (remainder) will go to one or more individuals (usually family members). Purpose is primarily to gift assets to family members at a discount, and secondarily to make a charitable gift and obtain a charitable deduction. By making the gift subject to a lead interest gifted to charity, the ultimate gift is discounted so less gift tax is paid, or less of your lifetime gift tax exemption is used. A charitable deduction should be available for the amount passing to charity.

Charitable Remainder Trust:

a "split interest" Trust where current payments are made to you, family or other individual you name for a period of years, or your life, or the life of you and your spouse. After the defined period, the remaining balance (remainder) will go to one or more qualified charities. Purpose is primarily to gift low basis assets to the Trust and take advantage of the capital gains deferral allowed, and secondarily to retain a stream of income (fixed annuity or a percentage valued each year) and make a gift to charity. A charitable deduction is allowed when the gift is made, although based on the actuarial value of the remainder estimated to pass to the charity. The IRS allows this Trust some unique tax benefits. Because the remainder goes to qualified charities, income and capital gains are not payable by the trust, but are trapped and passed out to the non-charitable beneficiary in a "tiering" system.

Qualified Domestic Trust (QDOT):

Created by the Internal Revenue Service rules, a QDOT is used to take advantage of the lifetime marital deduction to create a trust now or at death to benefit a non U.S. citizen spouse. U.S. citizens are allowed an unlimited deduction to delay the payment of estate tax at the death of the first spouse for funds passing (or held in trust for) the surviving spouse. This deduction (deferral) is not available for non U.S. citizen spouses as the IRS fears they will take the funds to their home country and the IRS will be unable to tax them at their death. As a compromise, the marital deduction (deferral of estate tax) is allowed if the funds are placed in a Trust for the benefit of the non U.S. spouse and that Trust has a U.S. resident Trustee. Estate tax on the assets from the first spouse held in this QDOT are payable upon the termination of the Trust (typically when the non U.S. citizen spouse dies), or on any amount of principal of the Trust that is paid out during the administration of the Trust.

Qualified Personal Residence Trust (QPRT):

Also created by the Internal Revenue Service, a QPRT is used to pass a family home, vacation property or other residence to family members at a discounted value. As gift tax will be owed on the gift, the discounted value can reduce the gift tax substantially. By placing the property in a QPRT, you retain the use of the property for 20 years [or life?], after which time the property passes to the designated family members. The retained interest (ability to reside) in the property for an extended period of time reduces the gift value of the property as the gift is deferred for 20 years [or…]. Therefore you pay gift tax only on the present value of the gift: what the residence is worth today. Often a rental agreement is signed concurrently with the QPRT running from the family members back to the owner of the property/creator of the trust to start when the QPRT terminates and allowing the creator of the QPRT to reside in the home for life as a renter paying the family members who are now the new owners of the property.

Grantor Retained Annuity Trust (GRAT):

The purpose of this Trust is also to pass assets to family member or other individuals by paying the smallest amount of gift tax. By "retaining" an annuity interest, the creator of the trust receives a discount for the future gift calculated on the amount of the annuity and the IRS published assumed return rates on the assets at the time the gift is made. The IRS rates are typically low, and the goal of the GRAT is to put assets into the trust that will outperform the IRS assumed rate. Any outperformance will then pass to the future beneficiaries tax free, and gift tax is paid only on what is assumed will be left over at the termination of the Trust using the IRS rates. A "Zeroed out GRAT" is typically a short term (as short as two years) GRAT where the annuity amount is calculated to leave zero assets remaining at the termination of the GRAT. Because zero assets are assumed to be left over, zero gift tax is paid. The trick is to put in assets (e.g. pre-IPO) that will appreciate substantially and very quickly. If they do, it can be a windfall gift. Some people have used "rolling GRATs" where annuity amounts received back by the creator of the gift are then put into new GRATs to keep trying to outperform the IRS return rates until all the assets are gifted, hopefully free of gift tax.

Purpose Trust:

a Trust allowed by specific statutory law in "modern" states created to empower the Trustee to perform certain acts, e.g. signing documents on behalf of an individual looking for privacy; taking certain specified actions.

Statutory Trust:

[also can be known as a Business Trust]. A Statutory Trust Differs from your standard Trusts for individuals as it usually is created to hold corporate investments or common investment funds and may link together several "series" under one Trust with each series treated as a separate entity for liability purposes, but still part of the main Trust. It is unlikely you will be named a Trustee of this type of Trust unless you are resident in a state recognizing this type of Trust and you are involved with the underlying business purpose of the Trust.

Other Trusts:

Estate planners and attorneys are constantly creating new twists on the Trusts above to take the most advantage of the tax code and state law to protect wealth and pass it down generations. There is often more marketing than law in the names used for Trusts by attorneys. You may see Trusts advertised with colorful names like "Family Love Trust" or "Lockbox Trust". Typically these are not new types of Trusts, but versions of basic Trust structures designed by the particular attorney and the name intends to convey the core purpose of the Trust (e.g. Family Love Trust will describe a Trust set up to care for generations of the family; or Lockbox Trust could describe a Trust set up to take advantage of asset protection laws). In the end the basic goals are the same and your duties as Trustee are still to know the terms of the Trust; know the beneficiaries; and manage the Trust prudently for the benefit of all the beneficiaries.

Your Trust is created either by an "inter vivos" (meaning during life) legal document, or as part of the instructions left in your Will. If it is part of your Will, then your Will becomes the Trust Agreement for the life of the Trust. MyTrustCo.com will refer generally to "Trust", "Trust Agreement" or "document" meaning the legal document controlling your Trust whether it is a Will or an inter vivos Trust Agreement.

The Trust creates the rights of the beneficiaries to income or principal or both; sets the termination date; identifies those to receive the remainder of the Trust upon termination; and gives the instructions for the Trustee.

Trustee Tip:
When you first step into the role of Trustee, be sure to confirm with the Trust attorney who you will be required to report to; what information you must report; and how often.

The Grantor:
If the Trust is an inter vivos agreement it will begin by naming the Grantor (aka Trustor, Creator), the Trustees and the date it was created. If the Trust is part of a Will, then certain paragraphs will refer to funds set aside for a Trust, and the Grantor is understood to be the person creating the Will who has recently passed.

The Beneficiaries:
Typically the beneficiaries will be named early in the document, if not part of the title of the Trust. Beneficiaries can be individuals, charities, foundations, or other legal entities, and may have confirmed entitlements (e.g. "shall pay the net income to…"), or may have rights in the discretion of the Trustee (e.g. "the Trustee may pay in their discretion…"). Sometimes they are named later in the paragraphs describing how income and principal are to be distributed. The Trust may actually use the names of individuals (e.g. "my son Kevin") or name a particular group of individuals (e.g. "my children" or "my issue"). Typically the Trust will name one or more individual to receive funds now; one or more to receive funds at a later date (usually upon the death of the first group, or after a certain period of years). The Trust will also name the recipients of any remaining Trust fund at the termination of the Trust.

Distributions of Funds.
The rights of the beneficiaries to funds will be described as a mandatory duty of the Trustee (e.g. "shall pay") or as a discretionary act of the Trustee ("may pay in their discretion"). You must know this requirement as it is one of your most important duties: to distribute funds in accordance with the terms of the Trust. If you have mandatory instructions be sure to pay out the funds as directed. It is a best practice to involve the beneficiary and understand their preference for timing (monthly or quarterly), and method (check or wire). Your mandatory instructions may be for a variable sum ("pay the net income") or for a fixed sum ("pay 5% of the trust annually"). If your instructions are discretionary you distribution task becomes significantly more complex. Principal funds are typically paid in discretion unless part of a fixed payment that exceeds the income produced by the Trust (see Distribution section below), but income may be discretionary as well. If the Trustee must allocate among a class of beneficiaries, the complexity increases. It is most important here to communicate with the beneficiaries, understand their needs, understand the terms of the Trust and any intent left by the Grantor (e.g. a Letter of Wishes if available), and to KEEP RECORDS of the information you gather and upon which you made your decision to disburse the funds. This will apply equally for a one time exercise of discretion for a particular financial need, or the ongoing exercise to pay funds. Any decision to make ongoing payments should be refreshed at least once a year, confirming the information and reason for the payments.

Trustee Tip:
Draft a memo discussing the request or needs for funds, the relevant language in the Trust, and your analysis for approving the payment(s). Be sure to keep a copy of this memo in the permanent records of the Trust. MyTrustCo.com has a sample discretionary payment form available.

Records and reporting.
Most Trust agreements will require reporting (sometimes called "accounting") to the beneficiaries at least once a year, but it is a best practice to ask the beneficiaries their preference and provide the information monthly or quarterly. Reporting, or an accounting, typically consists of financial statements showing the market value of the Trust's assets at the beginning and end of the period, investment activity including income earned, fees charged, any receipts or additions to the portfolio, and any distributions or payments out of the portfolio including payments to any beneficiaries. If you have the assets of the Trust at more than one institution then you should provide copies from all the custodians so the beneficiaries, co-trustees and other interested parties will see the whole picture. Paper statements are often provided, but more and more emailed statements or access to view the portfolio via the internet is used. As Trustee you should keep annual statements as the record of your administration. These will be helpful to any successor Trustee and to you if you are ever questioned on Trust activity. It is possible you may be required to "account" (report on the investment and distribution activity in the Trust) to the beneficiaries directly or to a court on behalf of the beneficiaries. If you are, your records of investments, distributions, tax payments, and discretionary decisions will be invaluable. NOTE: If you cannot produce records when requested then you may have a legal presumption against you. Keeping records is you duty as a Trustee and your primary defense against any claims of mismanagement. Income beneficiaries almost always are entitled to current information about the Trust. Remainder beneficiaries may not have a current interest but may still be entitled to information if they request it. Under some state laws you may be required to provide statements to "qualified beneficiaries" who are usually described as including remainder beneficiaries who would receive the Trust funds if the Trust terminated today.

Trustee Tip:
Maintain a paper, or preferably an electronic, statement file at least until you are legally released from your time as Trustee when the Trust terminates or another Trustee steps into your role.

Appointment of Trustee:
current, future or contingent. You can be named as Trustee in the original document to serve immediately. If it is a Trust Agreement it will usually be in the first paragraph. If it is under a Will your nomination generally appears in a section in the document devoted to Executors and Trustees. You may be named to act now, or later on after a contingency (e.g. death or resignation of a Trustee). If later on, you may never be asked to serve as Trustee or not for many years. Sometimes the Trust gives the power to appoint a new (successor) Trustee after the removal or resignation of a current Trustee. In this situation the individual holding that power must create a separate legal document to exercise that power and appoint you as a Trustee.

Acceptance of your Role as Trustee.
Hopefully you will not be surprised to find you are named as a Trustee, and the person creating the Trust will have asked your permission first. But just because you are named as Trustee does not mean you are obligated to act. A Trustee can be deemed to have accepted the role of Trustee by "acting", meaning if you begin to take any steps on behalf of the Trust (e.g. investment decisions, paying funds) you can legally be considered to have accepted your role and all the obligations of the job will apply. Be careful if you do not want to act, but offer to help in the short term. However, it is more typical that your appointment will be evidenced by a legal document. If you are named in the original Trust, you will typically be asked to sign the document at the same time the Grantor of the Trust signs the document. If you are named to serve on a Trust created under a Will, you will typically be asked to acknowledge your acceptance in a writing which will be submitted to the probate court handling the Estate. If you are named later on in the life of a Trust by someone who has the power to appoint Trustees, you will typically be asked to sign the document accepting your appointment.

Trustee Tip:
Accepting the role of Trustee brings with it a host of responsibilities and potential liabilities if you do not manage the Trust effectively and keep records. Once entered into it is not easy to exit as you will see below. As a best practice, professional corporate fiduciaries do a review of the Trust before they agree to accept the role of Trustee or Co-Trustee. The review generally consists of reading the Trust document to understand what you will be asked to do; understanding who your beneficiaries are and their particular needs; and reviewing the assets placed in the Trust to be sure you can manage them effectively. MyTrustCo.com can help by providing a sample checklist for your pre-acceptance review.

Termination of Your Role as Trustee.
Once you accept the role of a Trustee your obligations to the Trust and the current and future beneficiaries begin and to exit the role you must formally (i.e. by a legal writing) resign or be removed. You CANNOT just walk away from the role out of frustration with the beneficiaries or other interested parties, boredom, or lack of time. Any loss to the Trust or to the beneficiaries caused by your inattention can be held against you and you may be subject to a "surcharge" or money damages to make the Trust or beneficiary whole again. (An example would be a missed investment opportunity or sale occurring while you were the Trustee.) You must therefore administer the Trust to its conclusion, or seek to be removed or resign your role. Usually you cannot resign or be removed until there is another Trustee willing and able to take over the role. Therefore if the Trust is small, has problem assets, or unreasonable beneficiaries it may be difficult to find an individual or an institution willing to step into the role. And until you do find someone willing you must still give your best efforts to the Trust and the beneficiaries. However, once you have found a willing successor, there is typically a formal legal document evidencing your resignation (or removal) and the appointment of the successor Trustee. This can be accomplished by applying to the state court having jurisdiction of the Trust if the Trust does not provide for resignation, removal and appointment of the Trustees.

Release of the Trustee.
As a best practice most professional Trustees require a legal release from liability by the beneficiaries when they leave office. Some state laws will provide for an automatic release of Trustee once a final statement has been issued to the beneficiaries, but this may only be effective to the extent the statements sent to the beneficiaries have disclosed every transaction, cost and fee to the Trust. If you are not formally released, your potential liability to the Trust; your exposure to be questioned on your stewardship, may remain open indefinitely. A legal release can be prepared by an attorney and circulated to the beneficiaries for signature. If there are allegations of mismanagement your attorney may advise you to "account" to the court having jurisdiction for a release, requiring the beneficiaries to raise formal objections to prevent your release. If challenged on your role, the records you keep of your actions and decisions will be critically important. Generally, if you have acted in the best interests of the Trust you will be allowed to pay your legal defense fees from the Trust.

Powers of the Trustee.
Within almost every Trust document there is a section referred to as a "powers clause" because it grants the Trustee many broad powers. It is typically a long section of the document and goes on to give to the Trustee the power to buy; sell; loan; mortgage; invest; reinvest; merge related Trusts; divide a Trust for tax purposes or ease of administration; and other powers. The purpose is to give to the Trustee all the powers in individual has over their property. Remember: the Trustee holds legal title to the Trust property while the beneficiaries hold "beneficial" title. For individuals the legal and beneficial titles are merged, meaning you enjoy the legal ownership of your property and the right to enjoy it. A Trustee has legal ownership, but the beneficiary has the right to enjoy it. Most states also have a law granting Trustees the same powers (i.e. invest, borrow, etc.) and to the extent a Trust document does not have a powers clause, or is missing powers, the Trustee may look to the state law.

Trustee Tip:
While Trustees are granted broad powers so they may manage the Trust assets, they must do so "prudently" and only in the best interests of all the beneficiaries. Just because a Trustee is granted a power, does not mean they should use it. The use of the powers is part of the Trustee's discretionary administration of the Trust.

One truly unique feature of Trusts is the separation of ownership title to the assets. The Trustee is the legal owner and the beneficiaries have the beneficial ownership (e.g. right to enjoy the property). Legal and beneficial ownership is typically merged in an individual, corporation or partnership. Because the Trustee is given legal title to the property, the Trust Agreement typically grants the Trustee all the powers any owner would have over their property: to sell, to borrow, to lend, to repair, to rent, etc. Today, with the sophistication of investment products, the Trust Agreement will usually also grant powers to margin, leverage, invest in affiliated products if a corporate trustee is used, and invest in other types of investment products like hedge funds, private equity, and structured products.

These powers are almost always found in the "Powers Clause" of the Trust Agreement. This is a section that begins with a grant of the powers to the Trustee and goes on to describe, usually in some detail, all the powers given to the Trustee so they may effectively manage the assets. Because the drafting attorney and the Grantor of the Trust cannot foresee every contingency the Trustee may face during the administration of the Trust, the Trustee is usually granted the broadest powers with the expectation they will use them as necessary in the prudent administration of the Trust. So while the Trustee is given these broad and virtually absolute powers over the assets, the Trustee will be judged on the application of the powers to protect, preserve and make productive the assets of the Trust for all classes of beneficiaries as "prudent".

It is in the Trust Agreement that the Grantor may specifically choose to limit the powers of the Trustee for a favored purpose. Some examples might be: no more than 50% of the Trust invested in stocks; or a prohibition on the sale of a family vacation home. As Trustee one of your first should be to understand the extent of your powers and if there are any specific prohibitions or limitations on your powers.

Trustee Tip:

MyTrustCo.com has a sample synoptic form, i.e. cheat sheet, for identifying your powers and limitations along with all the other key elements of your Trust Agreement.]

To the extent the Trust Agreement does not specify powers, or has a limited list, the state's Trust law should also have a list of the powers given to Trustees unless limited by the Trust Agreement. Remember, the Trust Agreement will always override state law, but to the extent something is not addressed in the Trust Agreement, you can rely upon the state law. Like the powers clause in a Trust, the state law typically grants the Trustee very broad powers, subject to their prudent use.

Simply put, as a Trustee you must act at all times in the best interests of the Trust and all classes of beneficiaries and should be able to prove you have done so by documentation. You should be safe when your decisions are thoughtful, reasonable, prudent, and free of any conflicts of interest. You may not be safe if you cannot prove you acted this way. Failure to properly carry out the duties of a Trustee can subject the Trustee to liability for investment losses; loss of commissions; money damages to the Trust or beneficiaries; and possible removal as a Trustee.

The most fertile ground for lawsuits against the Trustee is probably investments. Was expert advice sought out for the investments? If not, can the Trustee demonstrate from the Trust records sufficient research and market observation to justify the investment results? Are the investments free from self dealing by the Trustee, meaning the Trustee did not enrich himself or family members? Do the investments address the income needs of the beneficiaries and the long term goals of the Trust? Is the portfolio properly diversified? How should the Trustee defend herself? Have a written Investment Objective for the Trust that considers the anticipated duration of the Trust, the needs and requests of all beneficiaries, tax implications and is properly diversified. Update (even if it is to stay the same course) the Investment Objective each year. Document any conversations with beneficiaries, Co-Trustees, or Investment Advisors. If professional money managers are hired, document the due diligence in the hiring process and the periodic reviews done with the managers.

Trustee Tip:

Establish a written Investment Objective and document periodic updates to establish your due diligence and "prudence" in during the investment process. MyTrustCo.com has sample Investment Objective and Investment Review forms for members.

The next most common ground for lawsuits would be distributions of funds. Where the Trust directs the Trustee to pay out income or a certain amount, the Trustee will be in breach of Trust if she does not do so. If the Trust gives the Trustee discretion to pay income or principal, then the potential liability exists in distributing funds without the proper reason or sufficient documentation to justify the payment. A Trustee can be responsible for replacing any wrongly distributed funds and possibly the market return on the lost funds; return of commissions and dismissal as a Trustee.

Trustee Tip:

All discretionary distributions should be documented and kept in the Trust file. MyTrustCo.com has sample discretionary forms to help collect and document the approval or denial of any request for discretionary funds.

Failure to perform any of the duties of a Trustee prudently and impartially could lead to liability. A Trustee is responsible from the initial funding of the Trust to the final termination and complete distribution of assets to manage the assets, make appropriate distributions, and pay appropriate expenses. Failure to control any asset of the Trust (e.g. artwork, real estate) could result in a surcharge to the Trustee. Failure to invest the assets appropriately, to pay all appropriate taxes, or make any necessary filings would be the responsibility of the Trustee. Also, any "self dealing" where investments are comingled with that of a Trustee, or a Trustee somehow profits from the Trust beyond entitled commissions could result in their removal as Trustee and possible money damages.

Among the most fundamental duties of a Trustee are the duty to keep records of the Trust and the duty to keep interested parties informed. It is the Trustee's responsibility to maintain records of all the investments, mandatory and discretionary distributions, tax payments, correspondence, and any other relevant information. The primary record tool is often the regularly issues statements (or collection of statements if multiple custodians are used) from the financial institution where the Trust assets are held. The statement should reflect all assets held, their market value, sales and purchases of assets, fees paid, and distributions made from the account. If many institutions are used it may be more cumbersome and confusing to rely on the many statements. The Trustee may then consider having an accountant prepare a consolidated annual accounting from the statements summarizing all the activity. Statements are typically prepared and delivered to the Trustee and interested parties monthly or quarterly depending on the preferences of the beneficiaries. Typically a Trustee is required to deliver a statement (also referred to as an "account") to the beneficiaries at least annually. Check with the attorney for the Trust to determine who is considered a beneficiary or "qualified beneficiary" under the applicable Trust law. Some states require a Trustee to provide statements only to beneficiaries currently entitled to receive distributions from the Trust. Other state will require the Trustee to provide statements to "qualified beneficiaries" which include not only the beneficiaries currently entitled to receive distributions, but also include "presumptive remainders" who are usually the individuals (or charities) who would receive the remaining balance of the Trust outright if the Trust terminated today.

Trustee tip:

It is important to know who must receive statements from the Trustee. In some states like Delaware a Grantor may create a "Silent Trust", so called because the Trustee may withhold notification, and the usual rendering of statements, to the beneficiaries. In most cases this is done where the Grantor does not want his children to be aware of the Trust. The Trustee is then only required to deliver a statement to the Grantor or someone designated by the Grantor, for a period of years or until the Grantor becomes incompetent or passes away.

While statements will typically be a satisfactory record the financial activity of the Trust, the Trustee will also need to maintain copies of all the other documentation that is part of the record of the Trust. Any original legal documents should be maintained by the Trust's attorney who has the means for safekeeping legal documents. If the attorney won't keep the originals, or if an attorney is not regularly engaged with the family planning, then the Trustee should ensure original documents are kept in a safe deposit box, vault or lockbox. Other documents may be kept electronically, or in hard copy, but should be safe and easily accessible when needed. Any correspondence to or from the beneficiaries should be maintained. Where decisions were agreed to at meetings or conference calls, the Trustee should create a memo or detailed letter of the discussion and ultimate decision which should be kept as well. Where the Trustee made a discretionary decision to pay funds from the Trust, a memo should be created discussing the request, authority in the Trust to make the payment, and any supporting information. This memo should be available in the Trust records to explain any distribution shown in the statement from the financial custodian. Any mandatory payments showing on the statements can be justified by the terms of the Trust Agreement instructing the Trustee to pay out the net income, percentage of assets, etc.. Tax returns must be kept. Also, any advice received from accountants, lawyers, valuation experts or investment advisors should be kept. An annual review should be created by the Trustee and maintained as well, and should include an analysis of the investments and distribution needs, with a conclusion either maintain the current course or make changes because of changing circumstances.

Remember: keeping records is not only a Trustee's duty to the beneficiaries, it is also the only way a Trustee can prove he acted prudently and fairly while administering the Trust. Complete records are an essential part of a defense against possible legal action. Because it is a Trustee's duty to maintain all records of the Trust, if the Trustee loses records then in a legal action the presumption may be against the Trustee and for the party claiming the Trustee acted imprudently, lost funds, etc.

Trustee tip:

see members section for a sample annual review, sample checklists, sample letters and memos.

As noted above, reporting must be done to the "interested parties", so the Trustee must first confirm who is included in that group. It is almost always the beneficiaries receiving funds now, but could include "sprinkle" beneficiaries who are permitted to receive funds now but, in the discretion of the Trustee, are not currently allocated any funds. In a growing number of states it could also include the "presumptive remainders" who are first in line to receive the balance of the Trust when it terminates. It could include charitable entities and possible the Attorney General's office of the appropriate state who oversees charitable bequests. A "silent Trust" may only require reporting to the Grantor of the Trust. Guardianships, and other court supervised Trusts may require an annual or more frequent accounting to be filed in court. The Trustee must know who they are required to report to and should check with counsel if they are uncertain as to the required recipients or the frequency. Most reporting can be satisfied by statements, but some annual filing (e.g. for Guardianships) may require the Trustee to hire an accountant to prepare a summary of activity for the review period. The cost should be properly paid by the Trust.

In addition to the regular reporting a Trustee is required to provide, any interested party can "compel" an accounting by the Trustee. Interested parties would include Co-Trustees, current beneficiaries and remote beneficiaries, or anyone having a present or contingent interest in the Trust. If an interested party suspects the Trustee is not fulfilling their obligations or is just not providing information on the administration of the accounting, that party can ask the court having jurisdiction to require ("compel") the Trustee to provide information on the investment performance and distributions. A Trustee is always under an obligation to provide information until they are released from their obligations when they resign, are removed or when the Trust terminates.

A corporate Trustee is typically a financial institution that is named, alone or with an individual, as a Trustee. If you are asked to serve as a Trustee, you may have to work with a financial institution as a Co-Trustee. If you are a beneficiary you may have to communicate with a financial institution as your Trustee.

While the majority of Trusts use family members, friends or advisors as Trustees, banks and financial institutions have been in the Trust business since the 1800's. For a financial institution to be a Trustee they are required to obtain a Trust Charter from a state's banking department, or a national charter from the Office of the Comptroller of the Currency (OCC), or from the Office of Thrift Supervision (OTS). The Trust Company or Trust Department will typically have experienced staff, many with law degrees, who are familiar with all aspects of administering Trusts and Estate accounts. Each account will typically be assigned a Trust Officer who is responsible for understanding the Trust Agreement, knowing the beneficiaries, and ensuring the Trust is invested properly, pays taxes, and distributes funds as directed by the Trust Agreement.

Any discretionary requests for funds must be made to the Trust Officer who will then prepare a memo for a Discretionary Payments Committee. The Committee typically consists of several senior staff member who will review the beneficiary's request, any supporting documentation, and the applicable language in the Trust Agreement. Acting on behalf of the institution as Trustee, the Committee has the authority to approve the request, deny it outright, or approve a portion of the request. A request may be denied in whole or part if it appears to be outside the terms of the Trust, it will benefit someone who is not a current beneficiary of the Trust, or it is deemed excessive. Example #1: the Trust Agreement allows for discretionary payments of principal for "health and education". The beneficiary requests funds for a European vacation. Result: request denied as being outside the terms of the Trust (despite a strained argument that a luxury vacation in Europe is an education). Example #2: the Trust Agreement allows for discretionary payments of principal to children of the Grantor. The beneficiary, a child of the Grantor, requests funds for his spouse to attend school. Result: request denied as the spouse is not a "child of the Grantor". Example #3: the Trust Agreement allows for discretionary payments of principal for "support". The beneficiary requests funds for a new top of the line Mercedes to travel to her job at a coffee shop. Result: request denied as being too excessive. If the beneficiary needs a car, something more modest may be appropriate.

A corporate Trustee will generally approach the investment process in a very structured manner. They will have investment staff assigned to the Trust, or they will act as a "manager of managers" by structuring a portfolio of mutual funds or other available products. Corporate Trustees often run into legal issues with an ancient legal prohibition against Trustees "self dealing", meaning they profit at the expense of the Trust. The self dealing conflict is often apparent in the investment process where affiliates of the Trust Department may use a trading or investment department of the same firm that profits from transaction fees or inventory markups. Corporate Trustees try to solve this problem by requesting their standard language be included in the Trust Agreement which authorizes the Trustee to use affiliated departments and incur additional fees. The modern Trust law jurisdictions (e.g. Delaware, South Dakota) will allow the use of affiliated products and services, but usually only if disclosure is made to the currently interested parties to the Trust.

Corporate Trustees will prepare and file the tax returns (state and federal) for the Trust, and will send out the necessary tax information to the beneficiaries who have received distributions (or to the Grantor in certain situations) .

When the Trust terminates (ends by the terms of the Trust Agreement) the corporate Trustee will typically send out a "Receipt, Release and Refunding Agreement" for each interested party to sign. This is a legal document that attempts to have the remainders who are receiving the balance of the Trust outright: (1) acknowledge they are receiving the assets (cash and/or securities) listed in the Release; (2) legally release the Trustee from any potential claims regarding the investment and administration of the Trust; and (3) agree to refund to the Trustee any amount necessary to pay after discover valid expenses of the Trust (e.g. tax payments). The remainder beneficiaries should consider this carefully especially if they feel there may have been some mistakes or mismanagement of the Trust. But remember, a difference of judgment in hindsight is not grounds for a surcharge or lawsuit against the Trustee. The Trustee is usually protected if they can prove they were "prudent" at the time they made any decision. The proof will be in their records of administration. (investments/direction/advisors)

Reasons to use a corporate Trustee:

They will handle everything. The corporate Trustee will typically handle all the important tasks of administering the Trust. In fact as the corporate Trustee shares full responsibility for the management of the Trust, they are duty bound to see that everything is done correctly. A corporate Trustee is subject to a number of audits on a regular basis, by the institution's internal audit staff and by the government body that granted them their Trust Charter (e.g. the OCC or state banking authority).If an individual Co-Trustee is also named, the individual usually only confers with the corporate Trustee and either approves or rejects their suggestions. Unless the Trust is drafted with additional advisors (for investment, distributions) the Trustees must act together or at least by majority (as defined in the Trust Agreement). Because the corporate Trustee is equally responsible for the Trust you should be able to rely on them to keep records, collect income, take care of corporate actions and proxy voting, pay taxes, and provide expertise on best practices for investments and distributions.

Their fee should cover everything. Unless the Trust has created a group of advisors to work with the Trustee, the Trustee should cover the administrative responsibilities (keeping records, paying bills, making distributions), the tax work (preparing the Trust tax return and sending tax notices), and the investment of the assets. In contrast, an individual Trustee would be unlikely to prepare fiduciary taxes themselves and so would hire an accountant. Most individuals would not feel comfortable picking stocks, bond and mutual funds for the Trust portfolio and so would also hire a broker or investment manager. Also, certain questions regarding the right way to manage a Trust are bound to come up and so the individual Trustee may need to ask an attorney to advise them. The combined tax, investment and legal fees should be no more expensive than the fee for a corporate Trustee.

Favorable location. Certain states have favorable laws for Trusts and estate planning. However, to take advantage of the laws the Trustee must usually be a resident of that state. Corporate Trustees will have offices in those states and therefore are residents for purposes of the advantageous laws.

Reasons not to use a Corporate Trustee.

Privacy or family pride. You may have confidence in family members to provide the necessary stewardship of the Trust. Allowing strangers to know the details of the Trust and family assets may be distasteful.Cost savings. If the Trust is simple enough, or holds family real estate, a business, or LLC interests then there may be no need for professional investment advice. If no "income" is generated by the investments and the tax work is already being done together with the business holdings taxes, then there may be little need to incur additional legal or tax preparation expenses. If a special situs (Trust location) is not required there may be little a corporate Trustee can offer for their fee.

The corporate Trustee is impersonal, does not know the family, and changes personnel often. Any Trustee is required to know the terms of the Trust and their beneficiaries, and a corporate Trustee should have their assigned Trust Officer explore the family needs and create a summary of the Trust which will be updated annually. However, no employee of a financial institution can get to know beneficiaries like an individual family member , nor would they have as much of the family dynamic and history. This can be both a plus and a minus, depending on how well the family gets along. Sometimes the objectivity of an institution is welcome, but sometimes beneficiaries will feel more comfortable working with known individuals (family members, family business associates or friends). While a corporate Trustee may stay on as Trustee of a Trust for many years, their representative, the Trust Officers, will often change frequently and require a new introduction to the beneficiaries and the family history.

An Executor (in some states called a Personal Representative) is the fiduciary responsible for the overall management of an individual's estate. (All assets owned by an individual at the time of their death will make up their "estate".)

Once named in the Will (Last Will and Testament) the Executor has no active duties until the individual dies. At that time the Executor's first responsibility will be to see that the most recent version of the individual's Will is submitted to the local court where the individual had his "domicile" (permanent residence) and apply to have the Will "admitted to probate". The Executor usually works closely with the individual's attorney on the management of the estate. The attorney typically retains all copies of the individual's Will, files the probate petition, and guides the Executor on the administration of the estate.

The Will is usually drafted by an attorney to ensure it is legally binding and takes advantage of all post death tax benefits. The Will names the Executor or Executors; provides instructions on the distribution or sale of all personal property (e.g. jewelry, furnishings, artwork, etc.); any gifts of specific dollar amounts to individuals or charities; and then divides the balance of the estate among family members, friends or charities. The Will may also create Trusts to be funded from the estate. (Trusts funded from the estate are Testamentary Trusts; if funded during the life of the individual they are called "Inter vivos" Trusts.)

Note: if the individual does not have a valid Will at death the law of his state of residence determines how his assets are divided: usually among the closest family members. Dying without a Will is called "intestacy" or "dying intestate". What is lacking in the intestacy laws are typically any flexibility to treat children unequally; provide for friends or charities; or to create Trusts. The intestacy laws merely divide the individual's assets up and provide for the payment of final expenses and taxes.

If you are named as someone's Executor, you are not obligated to serve in that that role when they die. You will have the option to decline the appointment and there is usually some provision in the Will for a successor or who may appoint a successor if you choose not to serve. If you do agree to serve, when the court recognizes the Will as valid and "admits it to probate" your official duties begin. Hopefully you will be working with a good attorney who can guide you in your duties and who can complete any legal work (e.g. changing title to assets) and prepare the estate's tax returns.

ACTION STEP:

If you are named as Executor for someone's estate obtain a copy of the Will. Discuss with the individual naming you to server and/or the attorney who drafted the Will any open questions you may have, the general nature and type of assets, the emotional make up of the beneficiaries to the estate (substance abuse issues, disinherited) and the likelihood of a challenge to the Will. Make sure you understand what will be expected of you before you commit to serving.

The role of Executor is similar to the role of a Trustee as the Executor is a fiduciary and responsible for the overall administration of the estate. The Executor may hire agents and professionals as an expense of the estate, but will be responsible for hiring the appropriate agents and is ultimately responsible for their work.

The role of Executor differs from that of a Trustee as an estate typically lasts three to four years. An estate can last much longer if there are extremely complex asset; beneficiaries who tie up the administration in litigation; or an IRS audit of the tax returns and deductions claimed. The role of the Executor is to open the estate, gather all the assets, pay expenses and taxes, distribute the funds and close the estate as quickly as possible. A Trust on the other hand, while it can be crafted to last for only a short period of years, will typically last much longer. Also, while both the Executor and the Trustee will be responsible for the assets under their control, the Executor manages the investments to raise the necessary amount of cash for expenses and then for the ultimate distributes of the assets on a relatively short term basis. The Trustee manages the assets for long term appreciation, proper diversification, and income generation.

Executor tip:

keep copies of all court records; correspondence; investment proposals; and any other records relating to the administration. At the conclusion of the estate, the Executor will usually file a final account of the administration of the estate with the court and seek to officially close the estate and be released from any potential liability. Until you are released you should keep a copy of all records, and include records of conversations where decisions were made with regard to the administration, tax payments or investments of the estate. MyTrustCo.com can help by providing a checklist of duties; sample letters and investment review forms.

Beneficiary Viewpoint.

As a beneficiary to an estate you should be entitled to know who is/are the Executors and your expected interest in the estate. You may be entitled to a specific bequest of property (e.g. a favorite painting); a specific bequest of cash (e.g. $50,000); or a portion of the net estate (after all debts and taxes are paid) either outright or in a Trust created by the Will. An estate may take on average two to three years to complete. Final distributions are typically made after the Executor receives a "closing letter" from the IRS indicating the estate's tax return has been accepted as filed and no further taxes will be due. Uncertain tax claims or litigation can cause substantial delays in the settlement of an Estate, as can problematic assets (e.g. a business, commercial real estate, etc.) but you should be kept informed of the situation by the Executor. If there appears to be no serious challenge to the Estate, substantial distributions may be made in the discretion of the Executor prior to the final closing of the estate. At the conclusion of the Estate the Executor will be entitled to circulate a Release to be signed by all the beneficiaries acknowledging receipt of the property and releasing the Executor from liability. If you have a simple bequest of property or cash, the receipt may be given earlier in the administration of the Estate when the property is distributed. The Executor should respond to all reasonable requests for information about your interests and the administration of the Estate.

While many states are in the process of adopting their versions of the Uniform Trust Code (UTC) or otherwise updating their Trust laws, a handful of states like Delaware, South Dakota, and Alaska have extensively updated their laws to include options not found in traditional Trust law. These states as a group are sometimes referred to as "modern" Trust law states, and their laws can be useful to address certain estate or tax planning needs.

Note: The catch written in to the Trust laws requires at least one "qualified" Trustee to be named in order to take advantage of the laws. A qualified Trustee is one residing in that state. So unless you have a relative you believe will make a good Trustee living in Alaska, Delaware, etc., you will need to name a local Trust Company as Trustee or Co-Trustee. These states are hoping these flexible laws will generate business for their economy.

The attorney for the Trust can best advise you on the reasons to set up a Trust in one of these jurisdictions, or as a Co-Trustee (remember you will have to work with a local Trust Company) what are the major advantages. But in general these states will offer the following benefits for Trusts.

1. 1. "Dynasty Trust" capability. The term Dynasty Trust most often refers to Trusts intended to last longer than the common law rule preventing perpetual Trusts (the "Rule Against Perpetuities" which limited the duration of a Trust to lives in being at the creation plus 21 years). But for a Trust to last longer than the common law limit, it must not only be drafted with that intent, but also be under a state law that allows dynasty or perpetual Trusts. Without the authority in the applicable state law, the Trust would not be allowed to extend the life of the Trust. Many states are now modifying the old prohibition to extend the period a private Trust can last to a longer period of years (e.g. 360 years in Florida), or forever in the "modern" Trust states like Alaska, Delaware and South Dakota. Because Trusts can be written to last indefinitely, lawyers have coined the term Dynasty Trust to indicate you can create an extended Trust for your heirs that will never be reduced by estate taxes, thereby creating a "dynasty" for your family
   2. Directed Trusts: adding an Investment Advisor or committee empowered with the full responsibility over investments, distributions, or both. Traditional Trust law holds the Trustee fully accountable for everything that transpires in the Trust. Even in states that allow the Trustee to delegate investment responsibility to an investment manager will still hold the Trustee responsible for the prudent selection and oversight of the investment manager, keeping the Trustee ultimately responsible for the investment performance of the Trust. (Was the investment manager experienced? If the manager underperformed did the Trustee replace him?) The modern Trust states have changed their laws to modify the old rule holding the Trustee responsible, and allows for a Trust to be written giving investment responsibility to an individual or committee. The Trustee can then be instructed to follow the directions of the designated individual or committee without any continuing responsibility to review the directions or warn anyone. This is an important legal tool for families who want to use a corporate Trustee but do not want the Trust to invest in a fully diversified portfolio. Instead the family wants the Trust to hold shares of a non-public family company, shares of a Limited Liability Company (LLC), units of a partnership (LP), family real estate, or some other concentration of assets that would normally expose a Trustee to potential liability if the investment lost value. Remember it is not required to take the investment responsibility away from the Trustee, but the option to make all or just some of the Trust assets directed can be very useful. [Note: The protection for a Trustee in following investment direction is only complete in the modern Trust states that relieve the Trustee from any responsibility to oversee the investments. The Uniform Trust Code (UTC) has a direction statute that has been adopted by a number of states. However it does not appear to go as far as the direction statute found in modern Trust states. The UTC statute indicates the Trustee can rely upon the investment directions given by an advisor so long as the directions do not violate the terms of the Trust. That implies the Trustee is safe only if they weigh each investment direction against the purpose and language of the Trust. The modern Trust state statutes allow the Trustee to take any investment direction without any review or oversight.]
   3. Self Settled Asset Protection Trusts. Asset protection has always been one of the advantages of placing property in Trust. Assets placed in Trust generally cannot be reached by creditors of the beneficiaries because the beneficiaries do not control the assets. The Trustee controls the assets for their benefit. The Trustee often has discretion to pay or withhold funds. Also, most Trusts are "spendthrift" by their terms or by state law, meaning the beneficiaries cannot legally assign their interests (rights to funds) to others. This is a significant benefit in protecting the family funds from the poor judgment, bad financial luck or bad behavior of the beneficiaries. However, it has historically been impossible for an individual to create a Trust for themselves and have the assets placed in that Trust protected from creditors. Going back hundreds of years in English common law this type of "self settled" (i.e. created by you for yourself) Trust has been seen as void against the claims of creditors of the individual creating the Trust. The argument was that you cannot create a Trust that both benefits you and will disadvantage your creditors. Now the modern Trust states have enacted laws to allow for the creation of "self settled asset protection Trusts" whereby the individual creating the Trust can include themselves as a discretionary beneficiary of income and principal. The funds may therefore be paid back to the creator of the Trust in the discretion of the Trustee. It is recommended that the Settlor place no more than 25% to 30% of their total assets in the Trust and the draw on it only in times of true need. The Trust is there to protect part of the Settlor's nest egg, but probably cannot protect all their assets. Even in modern Trust states if the Settlor places most of their assets in this type of Trust and receives frequent discretionary distributions from the Trustee, creditors of the Settlor may be able to reach the Trust assets claiming the Trust is a sham and not a true estate planning vehicle. Self settled asset protection Trusts can also be set up in off shore jurisdictions (e.g. Cayman Islands; Cook Islands, etc.) by U.S. citizens and is often the preferred location for individuals deeply concerned about asset protection. The assets and income in these Trusts must be reported and taxed in the U.S., so there is no tax advantage. However, the advantage to off shore Trusts is that any legal judgment a creditor obtains in the U.S. must then be taken to the off shore location to attempt enforcement of the judgment against the assets held in Trust there. The cost of local counsel, potential travel to the off shore jurisdiction to testify, and the low percentage of success against the off shore laws designed to protect assets within their jurisdiction, are factors that encourage the U.S. creditor to settle for pennies on the dollar.
   4. Silent Trusts. Another typical requirement of Trust law is for the Trustee to provide information to the beneficiaries. This would include a copy of the Trust Agreement so they would know the extent of their interest in the Trust and periodic statements of assets and activity (often called an "accounting") so they can keep an eye on how the Trust is being administered by the Trustee and, if necessary, file an objection with the court. However, parents creating Trusts frequently don't want their children to know the extent of the family wealth until such time they are mature enough to handle the information without becoming unproductive individuals. The modern states have responded by enacting laws that provide an exception to the obligation to provide information to the beneficiaries. In allowing this exception the law requires this "silent" Trust to provide information to someone else such as the Settlor or a Protector who can presumably keep an eye on the administration of the Trust on behalf of the beneficiaries. Also, the "silent" period of the Trust cannot last indefinitely, but must end after a period of years (say when the children attain age 35) or upon the death of the Grantor.
   5. Purpose Trusts. Trusts drafted without identifiable individuals (by given name or as a class such as heirs) were not permitted under traditional Trust law. A Trust must have a beneficial class that could enforce their interest in a court. For example, a Trust for pets was not allowed as an animal could not enforce legal rights in a court. Many states now allow Trusts for pets or for a specific non charitable purpose.
   6. No state income tax. Most modern Trust states either do not have a state income tax or do not apply their state income tax to property held in their Trusts. (There may exceptions to this rule for state residents creating Trusts or state real estate held in Trust.) This can be very attractive feature for individuals creating Trusts. At the very least the Trust will save meaningful amounts over time as the assets grow free of state income tax, especially compared to high tax states like New York or California. But the savings can be really significant for very large Trusts or for assets placed in one of these Trusts prior to a sale, thereby savings the home state income tax on a very large transaction.
   7. Unitrusts and the Power to Adjust. Although not restricted to the modern Trust states alone, the modern states usually have a non charitable unitrust statute allowing the Trustee to create a percentage payout of the Trusts total return as "deemed" income to the income beneficiaries. "Deemed income" is a substitute for the net income produced by the investment portfolio and is intended to be the income beneficiaries fair share of the total return of the Trust's portfolio. These strategies allow the Trustee to invest in private equity, hedge funds, and other assets that do not generate regular income in the form of dividends or interest payments and yet still be fair the income beneficiaries. [Note: the unitrust concept has been around for a long time with charitable lead Trusts and charitable remainder Trusts. Recently the concept has been adapted to trusts for individuals as a companion tool for the Prudent Investor rule and the ability to invest Trust portfolios for total return.]The percentage is usually between three and five percent and can be modified by the Trustee when appropriate for the Trust and the beneficiaries. In some states, like New York, once the Trustee elects to treat a Trust like a unitrust, then a court action is needed to convert the Trust back to a net income Trust. The modern states usually provide a more flexible approach and only require the Trustee to notice the interested parties to select a unitrust or net income option. The Power to Adjust (PTA) is similar to the unitrust and is a discretionary power given to the Trustee by (state) law that empowers the Trustee to adjust funds between income and principal when it furthers the best interests of the beneficiaries and the proper administration of the Trust. This power to allocate funds from the income ledger to the principal ledger or vice versa can be used for a one time equalization of benefits or on an ongoing basis similar to the unitrust option. Examples: (1) If a long held investment that did not generate income is sold for a substantial gain, the Trustee could use the PTA to transfer a reasonable portion of the gain to the income portfolio so the income beneficiaries could share in the windfall. The reasoning would be that the income beneficiaries received no benefit from the asset for many years and the remainder beneficiaries received a windfall when the asset was sold. The adjustment of a reasonable portion to income allows both classes of beneficiaries to share in the investment's return. (2) The Trustee deems it prudent to invest in a diversified portfolio that should provide good growth for the portfolio, but a number of assets do not generate income for the income beneficiaries. In this scenario the remainder beneficiaries would benefit more from the growth of the portfolio. The Trustee can exercise the PTA on an ongoing basis to pay the income beneficiaries a percentage of the portfolio (as discussed above) as the deemed income of the Trust. This is intended to allow both classes of beneficiaries to benefit from the aggressively structured portfolio.

Trustee tip:

both the unitrust and PTA option should be documented and kept with the Trust records. It is a best practice to review and document the reasoning for an ongoing application at least once a year to ensure these options are still in the best interests of the beneficiaries. This can be done at the time of the annual review.

1. Simplified dispute resolution and modification of irrevocable Trusts. Once an irrevocable Trust is created it usually takes a court action to resolve any disputes among the beneficial classes over the terms of the Trust. For the court action to be effective a guardian is often appointed to represent minor and yet unborn beneficiaries. This process can be both time consuming and expensive. Modern Trust states will have an expedited process where disputes can be resolved, or irrevocable Trusts modified, by the agreement of the interested parties. In addition, a guardian can be avoided as the state law allows for "virtual representation" of minor and unborn beneficiaries. This means the minor and unborn beneficiaries can be represented in the modification or settlement by one adult member of their class. So one adult member of the remainder class of beneficiaries can legally represent the entire class of remainder beneficiaries. In this case the law believes the interests of all remainder beneficiaries are the same, so if an objection needs to be raised, the one adult member will raise the objection to protect their interest and, by extension, the interests of all other remainders.
2. Experienced and efficient court system. The courts in the Modern Trust states are typically attuned to the statutory changes and understand the business comes to their state for looking for flexibility and expedited decisions. Therefore the petitions filed in these courts tend to be heard and resolved much quicker than in other states.
3. Responsive legislature. Many Modern Trust states are small and have the capacity to focus on supporting the unique business of their state. Unlike California or New York that have a very broad and diverse economy, Modern Trust states have a limited economy and their elected representatives have a genuine focus on supporting the state's business community. When changes to the law are necessary, they can be made much more quickly than in the larger states.