How to Pick a Trustee

Clients frequently choose to use trusts in their estate plans, and once they and their estate planning attorney have made that decision, they’ll need to decide who to name as trustee or trustees. Picking a trustee is not always an easy process, explains Kiplinger in the article “Guidance on Choosing the Right Trustee (or Trustees) for Your Estate.”

Serving as a trustee creates many duties under state law, including acting as a fiduciary to the trust. That means the trustee must be impartial about their own interests, put the beneficiary’s interests and well-being first and be prudent with how they invest funds. Law prohibits a trustee from self-dealing, although depending on the scenario, the trustee might also be the beneficiary.

Here are a long series of questions that will help to assess a person’s ability to serve as a trustee:

  • Will the person be able to separate their personal feelings and interests from those of the beneficiaries?
  • Will all parties be treated fairly, especially if your children are not also your spouse’s children?
  • Can your trustee manage finances and investments?
  • Is there any risk that your trustee will be tempted to take a risk to obtain money at the expense of beneficiaries, including their own money problems or addiction?
  • Are there concerns about the health, age or capacity of the person?
  • Will a child who is a trustee be fair to the other siblings, even if they are step siblings?
  • Will a child be able to stand up to the other siblings?
  • Will the person who is managing work and family have the time to take on the responsibilities of the trustee when they will likely be needed to do so?
  • Does the person understand the family dynamics?
  • Has the person served as a trustee before?

Another common problem is people are unsure of who to ask in their family or where to look for back-up trustees, especially where they might not feel comfortable with those closest to them.  With that in mind, here are some potential people to consider, although their suitability will vary greatly in different circumstances:

  • Spouse
  • Parents
  • Children, step children, and grandchildren
  • Siblings and step siblings, nieces and nephews, cousins
  • Spouses of children, step children, siblings or other close family
  • Friends
  • Neighbors
  • Members of social groups, fraternal organizations, religious communities or other similar groups
  • Financial Professionals (not necessarily financial planners who likely aren’t permitted to, but CPAs or some attorneys for example)
  • Professional Trustees (e.g. a bank or other similar trustee)

I should note as well that I’m focusing on trustees in this article, but many of these same considerations apply to other fiduciary roles.  See here for more information on the other roles to consider.  https://www.galliganmanning.com/the-difference-between-an-executor-a-trustee-and-other-fiduciaries/

There is no one size fits all approach to picking a trustee, but hopefully this will provide guidance on who is right for you.

Reference: Kiplinger (Sep. 8, 2020) “Guidance on Choosing the Right Trustee (or Trustees) for Your Estate”

Continue Reading How to Pick a Trustee

Can I Protect My Estate with Life Insurance?

Life insurance is a powerful estate planning tool which protects the estate by providing liquidity to preserve assets and to pay estate taxes and expenses.

With proper planning, insurance money can pay expenses, such as estate tax and keep other assets intact, says FedWeek’s article entitled “Protect Your Estate With Life Insurance.”

The article provides the story of “Bill” as an example. He dies and leaves a large estate to his daughter Julia. There are significant estate taxes due. However, most of Bill’s assets are tied up in real estate and an IRA. Julia may not want to hurry into a forced sale of the real estate. If she taps the inherited IRA to raise cash, she’ll be forced to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.

A wise move for Bill would be to purchase life insurance on his own life. The policy’s proceeds could be used to pay the estate tax bill. Julia will then be able to keep the real estate, while taking only the Required Minimum Distributions (RMDs) from the inherited IRA. It might make sense if Julia owns the insurance policy or it’s owned by a trust as well.  See here for more details on how that might work for you.  https://www.galliganmanning.com/trust-owned-life-insurance-in-your-estate-plan/

However, there are a few common life insurance errors that can damage an estate plan:

Designating the estate as beneficiary. If you make this move, you put the policy proceeds in your estate, where the money will be exposed to estate tax and your creditors. Your executor will also have additional paperwork, if your estate is the beneficiary. Instead, be certain to name the appropriate beneficiaries.

Designating a single beneficiary. Name at least two “backup” or contingency beneficiaries. This will eliminate some confusion in the event the primary beneficiary should predecease you.

Designating your revocable trust.  If estate taxes aren’t a concern and you use a trust-based estate plan, sometimes designating your trust as a beneficiary is a great idea as it provides liquidity to your family for estate expenses.

Placing your life insurance in the “file and forget” file. Be sure to review your policies at least once every three years. If the beneficiary is an ex-spouse or someone who has passed away, you need to make the appropriate change and get a confirmation, in writing, from your life insurance company.

Inadequate insurance. You may not have enough life insurance. If you have a young child, it may require hundreds of thousands of dollars to pay all of his or her expenses, such as college tuition and expenses, in the event of your untimely death. Skimping on insurance may hurt your surviving family. You also don’t need to be so thrifty, because today’s term insurance costs are very low.

As you can see, life insurance may be a powerful estate tool.  Speak with your advisor and your estate planning attorney on how best to incorporate life insurance in your estate plan.

Reference: FedWeek (June 11, 2020) “Protect Your Estate With Life Insurance”

Continue Reading Can I Protect My Estate with Life Insurance?

That Last Step: Trust Funding

A trust only controls the assets it owns, so don’t forget the critical last step in a trust estate plan: properly funding the trust.

Neglecting to fund trusts is a surprisingly common mistake, and one that can undo the best estate plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

If you read our blogs routinely, you’ll know we are fans of trust planning.  Done properly with appropriate trust funding, a trust helps avoid probate, provides for you and your family in the event of incapacity and streamlines the estate process.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor won’t have to do it when you die.

Note that if you don’t put assets in the trust while you are living, those assets may go through the probate process. While the executor will have the authority to transfer assets, they’ll have to get court to appoint them as executor first. That takes time and costs money. It is much better if you do it yourself while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, it may not do very much good.  Instead, an agent under a power of attorney, or if none, a court-appointed guardian may have to be appointed.

Move the right assets to the right trust. It’s very important that any assets you transfer to the trust are aligned with your estate plan. I cannot stress this enough, but you should speak with an attorney regarding how to fund your specific trust.  Not all plans and assets are the same, and different plans call for different trust funding.   That said, taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust either immediately during lifetime or upon death via a beneficiary designation. Some tangible assets may be transferred into the trust, as well as business interests.  Some assets, such as life insurance and retirement funds may designate the trust in some manner by beneficiary designation, but in light of the Secure Act changes you’ll definitely want to discuss that with your attorney.   See here for more:  https://www.galliganmanning.com/how-the-secure-act-impacts-your-estate-plan/

Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes. You should also consider trust funding when you review your estate plan to ensure it is updated with new assets.

You’ve worked hard to accumulate assets and protecting them with a trust is a good idea. Just don’t forget the final step of funding the trust.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

Continue Reading That Last Step: Trust Funding