Northeast Estate Planning Guide:
Independent Trustees
Recent cases have highlighted the value of independent trustees with discretion to protect assets held in irrevocable (including inherited) trusts. Interested trustees (most related persons are considered “interested”) are questionable in their objectivity and are often directed by the trust to “support” the beneficiaries. This instruction can be construed as a property right in the courts, as recent cases attest. Property rights can be taken away.
Independent trustees may be given discretion to distribute or not, as guided by the Grantors’ intentions. This discretion has the effect of protecting the inheritance or gift from creditors, during divorce, and while disabled.
Professional trustees may be used for distribution and accounting roles only and not for managing the investments. Anecdotal observation indicates that independent trustee firms, like Northeast Private Trustees, Ltd. (founded by contributors to this Guide), are on the rise. They separate the administrative role from the money management, removing a possible conflict, and allowing the Grantor’s management choices to remain intact.
Independent administrative trustees are useful after a death in order to get the job of administering the trust or estate accomplished efficiently. Professionals should be able to perform their duties without the delays and mistakes often caused by inexperienced family (“interested”) trustees. 2021 is a good time to look into this role that may have been overlooked before.
Real-World Case Study | Guarding Inheritance
Katie’s parents have passed away and left her $450,000 in a lifelong trust called an Inheritance Trust as her share of their estate. Her marriage is foundering and she needs the funds to stay afloat. She is advised that if she were to take the funds out of the trust, she will lose half in the divorce. Her parents provided for an Independent trustee with total discretion over the trust.
The Independent trustee pays her nothing except her attorneys fees consistent with the trust which says that absolutely nothing will be paid to anyone besides Katie. Katie’s funds are therefore protected from her divorcing spouse and will be available to her after the divorce is finalized.
Real-World Case Study | Intergenerational Wealth
Tanya and Joe are not yet 60 years of age and have amassed a $9M estate. They are not big spenders, and are still working and socking away their savings into investments and real estate. They value the security of a nest egg that will more than carry them through retirement. Tanya says, “We don’t know what’s in store for our grandchildren. I would love to see this money be there for another generation, at least.” Joe adds, “Our kids are doing fine and they don’t need several million more.”
They create and fund a Gift Trust to start the growth of the estate for future generations.They name an Independent Trustee to provide objectivity in distribution decisions as well as accounting and tax services, and keep investing with their current advisors’ help. They can remove the trustee during their lifetimes, and a committee that includes their children /beneficiaries over age 30 can do the same after they’re gone.
Real-World Case Study | Administration
Malcolm had seen first-hand how appointing a family member as trustee could be a mistake: It took four years and nearly $50,000 of fees to administer the estate of his parents, consisting of a single home, bank accounts, life insurance and IRAs. Siblings grew impatient and bitter over the delay. Fees rose as the estate attorneys had no choice but to continue to assist and sometimes work to undo the actions of the well-meaning older sibling who was the trustee. She had insisted on doing things herself, but she was either too busy, too unsure of herself or too cautious for her own good. Despite her advanced degrees, administration of the estate got away from her.
To avoid past family mistakes, Malcolm appointed an independent, professional trustee, to settle his own estate and even negotiated the fee up front (which would be adjusted for inflation and any new or unforseen responsibilities, and any reductions in work that would turn out to be unnecessary).
Northeast Estate Planning Guide © Copyright 2020-2024 Timothy B. Borchers
