Trustees – Selection, Roles, and Responsibilities

Synopsis:

The person selected as trustee of a trust may shape your intentions for years — or
even decades — to come. The trustee is responsible for keeping the trust’s
financial blueprint on track in the face of random market events. He or she is
also expected to ensure that the trust continues to meet its objectives for
beneficiaries, even those whose goals and needs might evolve unpredictably over
time. The ideal trustee will have — or be able to summon — legal, tax,
investment, and administrative expertise, and deliver that expertise loyally,
decisively, and impartially.

Key Points

By its very nature, a trust must work best just when its creator cannot act.
Your trust may be carefully designed to address all the concerns you can
identify. But no matter how well you and your financial and legal advisors have
analyzed potential contingencies, the best-laid plans could be derailed by
unforeseen circumstances. And perhaps nowhere can a trust be more vulnerable
than in its trustees.

Trustees may be at the fulcrum on the levers of change, striking a balance in
the future that you might find unfathomable today. Trustees are expected to
keep the trust's financial blueprint on track in the face of random market
events. They are also expected to ensure that the trust continues to meet its
objectives for beneficiaries, even those beneficiaries whose goals and needs
might evolve unpredictably over time. In addition, trustees themselves might be
buffeted by the winds of fate. Individuals might someday choose to relocate or
change their occupation. They might alter their lifestyles, retire, or
otherwise become unable to fulfill the duties you have envisioned. Your
attention to sound trustee selection principles and self-correcting design
features now can help manage those future risks to your plans.

The Ideal Trustee May Be a Jack or Jill of Many Trades

The role of trustee may at any given time require legal, tax,
investment, and administrative expertise, as well as the wisdom to invoke that
expertise when needed. The ideal trustee should also be able to deliver that
expertise loyally, decisively, and impartially.

As the creator of the trust, you have the broadest possible discretion in selecting
someone to act as trustee. You can opt for a personal confidant or relative in
whom you have strong faith, such as a business associate, sibling, or spouse.
You can select a professional practitioner whose skills might be especially
useful to your purposes, such as a lawyer or accountant. Or you can designate a
bank or trust company to act as a corporate trustee. Each option presents a
unique balance of benefits and concerns.

Personal or Professional -- Weighing the Differences

A personal confidant or relative may already have a
well-established relationship with your intended beneficiaries and a detailed
knowledge of the unique circumstances in your bequest. That familiarity can
provide the context needed to interpret your wishes in your absence most
effectively. It can also lay the groundwork for a strong long-term relationship
between the trustee and the beneficiaries. However, someone chosen solely on
the strength of personal relationships and intimate knowledge may lack the
training or skills needed to act impartially in the face of duress or emotional
entanglement. What's more, a friend or relative acting as a trustee might have
a conflict of interest or be unable to devote sufficient time to the duties of
trusteeship, and these potential deficiencies may not become readily apparent
for some time.

A professional practitioner who has had significant involvement in your
family's affairs may offer many of the same advantages as a personal associate,
such as personal relationships with beneficiaries and historical knowledge of
unusual situations and special needs. They may also have the professional
distance needed to remain dispassionate under difficult circumstances. However,
like a lay trustee, an individual professional's tenure may be subject to the
vicissitudes of his or her life and may ultimately be unavailable at some
critical future juncture.

The Advantages of a Corporate Trustee

A bank acting as a corporate trustee can provide a high level
of impartiality and detachment as well as ready access to specialized
technical, tax, and legal expertise. A corporate trustee can also offer a high
level of continuity and stability, since its ability to serve is generally not
dependent upon any single individual. However, a bank cannot maintain the same level
of intimate knowledge as a family insider about your intentions or your
beneficiaries' needs.

You should keep in mind that different types of trustees may be subject to
different rules, insurance, and licensing requirements. Lawyers, for example,
must meet the terms of their state bar association licenses when they act as
trustees. Banks may be subject to regulatory audits and documentation
procedures. Also, professional trustees are often held to the highest fiduciary
standards under the "prudent investor" principle. Simply put, that
means that trust assets would have to be managed according to the best
practices of the asset management profession, with special attention to
appropriate risk management and diversification.

Trusts created in the Colonial era still function today, even as the laws
governing trust and inheritance change almost daily. Whether your goal is
ensuring your family's fiscal stability or creating a permanent legacy, a
properly crafted trust can be a powerful tool.

The Costs of Trustees
Each trust involves many unique considerations, so broad
generalizations about annual fees and one-time costs may not be meaningful in
relation to any specific trustee arrangement. The basic yearly trustee fee
may be expressed as a percentage of the assets in the trust. Each state has
its own rules governing the maximum fee that a trustee can charge and the
precise range of services that the fee might cover. In addition, many legal,
accounting, custody, and investment management fees may sometimes be billed
separately, even if the individual or organization serving as trustee also
performs those services.

 

Points to Remember

  1. The ultimate success of your trust's mission
    will depend in large part on how your trustee carries out your intentions, making
    the selection of a trustee one of the most important elements of trust design.
  2. The ideal trustee should possess or have ready
    access to legal, tax, investment, and administrative expertise, as well as the
    wisdom to invoke that expertise when needed. The ideal trustee should also be
    able to deliver that expertise loyally, decisively, and impartially.
  3. Personal confidants, relatives, lawyers,
    accountants, and banks are all commonly used as trustees. Family members,
    friends, and business associates are often the most knowledgeable about your
    intentions and your beneficiaries' needs, but may have less than optimal skills
    or temperament for the job. Professionals may offer a stronger skill set but
    can lack important personal connections to your family. Professionals may also
    be held to a higher standard of performance than lay trustees by probate judges
    and executors.

 

###

April 2012 — This column is provided through the Financial
Planning Association, the membership organization for the financial planning
community, and is brought to you by Ronald J VanSurksum, CFP®, a local member
of FPA.

Required Attribution

Because of the possibility of human or mechanical error by
S&P Capital IQ Financial Communications or its sources, neither S&P
Capital IQ Financial Communications nor its sources guarantees the accuracy,
adequacy, completeness or availability of any information and is not
responsible for any errors or omissions or for the results obtained from the
use of such information. In no event shall S&P Capital IQ Financial
Communications be liable for any indirect, special or consequential damages in
connection with subscriber's or others' use of the content.

 

© 2012 S&P Capital IQ Financial Communications. All
rights reserved.

Posted: 3 May 2012

Washington Hotline - May 1 2012

Reduced Interest on Student Loans

Members of both parties have introduced bills in the House and Senate that would avoid a scheduled increase in the interest rate on student loans.  If there is no action by Congress, the interest on Stafford student loans is scheduled to increase from 3.4% to 6.8% on July 1, 2012.

Leaders of both parties and President Obama have indicated a willingness to pass legislation to avoid that dramatic increase in interest rates.  While there is bipartisan support for maintaining the reduced 3.4% rate for one year, there are different opinions on the best methods to pay for the cost.  A one year extension of the lower rate is estimated to cost $5.9 billion.

Senate Majority Leader Harry Reid (D-NV) introduced the Stop the Student Interest Rate Hike Act of 2012 (S. 2343).  This bill extends the 3.4% rate for one year.  It pays for the $5.9 billion cost through a change in the law on Subchapter S corporations.

For Subchapter S corporations with one to three employees who have incomes over $250,000 per year ($200,000 for single persons), they would no longer be able to pass through income directly from the Subchapter S corporation.  Rather, the income would be reported personally and owners would pay Social Security and Medicare taxes on that income.

Rep. Judy Biggert (R-IL) introduced in the House the Interest Rate Reduction Act (H.R. 4628).  It also extends the 3.4% interest rate for one year, but reduces funds in the Prevention and Public Health Fund to pay the $5.9 billion cost.

It is anticipated both the Senate and the House will vote on bills to extend the 3.4% interest rate within the next few weeks.

Editor's Note: Your editor and this organization do not take a position on the best method for payment for the bill.  The good news for individuals with student loans is that both parties now support the lower interest rate extension.  In the negotiation over offsets, the parties are far apart.  Given the political differences and the fact that this is an election year, the bill may be passed without any offsets.

Federal Taxes and the State Budget Crunch

On April 25, 2012, the Senate Finance Committee held a hearing to discuss tax reforms at the federal level that impact state governments.

Chair Max Baucus (D-MT) opened the hearing by acknowledging that the state governments were facing budget problems and seeking federal assistance.  He stated, "Most state governments are in tough financial shape.  In 2010, 48 states had budget shortfalls.  All states except one are required by state law to balance their budgets.  That has forced states to make tough decisions, such as raising taxes or cutting spending.  Since the financial crisis, 46 states have cut services and 30 states have raised taxes."

Sen. Baucus notes that the federal government provides substantial assistance to the states from stimulus funds.  In addition, he indicated that 36% of total state revenue is transferred through various grants from the federal government.

Baucus also observed that the states benefit through the federal tax exemption on state and local bonds.  In addition, many state and local taxes are deductible on IRS Form 1040.  The total benefit to states from these tax savings is $105 billion per year.

Ranking Member of the Senate Finance Committee, Sen. Orrin Hatch (R-UT),  stated, "Federal discussions about state finances frequently highlight budgetary pressures that have required cuts in spending.  These are no doubt difficult issues for states, but it simply is not the responsibility of the federal government to address state budget shortfalls."

In the view of Sen. Hatch, state governments are collecting more taxes.  He noted that the 2011 state tax revenues were 8% higher than those in 2010.  With the tax savings granted to the states through income tax deductions and the federal grants to states, Hatch suggests that "state officials need to take responsibility for their own spending decisions."

FLP Assets Included in Estate

In Estate of Lois L. Lockett et al. v. Commissioner; T.C. Memo. 2012-123; Nos. 8922-09, 8940-09 (24 Apr 2012), the Tax Court held that assets in a family limited partnership were included at fair market value in the taxable estate.

The decedent Lois Lockett was born May 2, 1912 to a pioneer family from Arizona.  Her parents had transferred business interests to her.  From 1976 to 2000, she made gifts of her interests in Lakin Cattle Co. and Lakin Milling Co. to her children and their spouses.

The decedent had married Robert W. Lockett, Sr. and he predeceased her.  Their heirs included sons Robert and Joseph and five grandchildren.

On February 2, 2000, the decedent created a revocable living trust with herself and ex-daughter-in-law Mary Lockett as co-trustees.  On March 13, 2000, her attorney filed Articles of Organization with the state of Arizona for Mariposa Monarch, LLLP (MMLLLP).

However, due to family discord and discussions, MMLLLP was not funded until 2002.  On March 26, 2002, the MMLLLP was formally organized with Joseph and Robert each holding a 1% general partnership interest.  Between May 6 and May 10 of that year, the decedent transferred $1,044,189 in cash and other assets to the MMLLLP.

After further family discussions, the decedent signed an amended certificate that effectively terminated MMLLLP on December 31, 2002.  The amended certificate was filed with the state of Arizona on January 27, 2004.  The decedent passed away on October 14, 2004.

There were several transfers to family members that were either loans or gifts.  Son Joseph received a loan of $200,000 on May 21, 2004 and an additional $100,000 on August 16, 2004.  The transfers were recorded with 10 year promissory notes bearing an interest rate of 5.85%.  MMLLLP filed a claim July 28, 2008 against the estate of Joseph for $315,000 based upon the note.  In addition, Joseph also received an added check for $20,000 on August 31, 2004.

Robert received a loan on a 10 year promissory note on May 2, 2002 for $200,000.  He repaid $150,000 later that year.  Robert subsequently borrowed an additional $80,000 on a similar note dated August 16, 2004.

Granddaughter Meredith received a check for $5,000 in 2004.

At her death, the decedent owned $1,109,102 in personal assets.  MMLLLP held assets valued at $1,106,841.  The estate claimed discounts for marketability and reported the value of MMLLLP as $667,000.

The IRS took two alternative and inconsistent positions.  It claimed that there either were taxable gifts in the amount of the notes and a gift tax deficiency was applicable.  Alternatively, the notes were valid and includible in the estate at full fair market value and there was a $706,110 estate deficiency.

The court noted that the first issue is the existence of gifts or loans.  The transfers to Joseph of $315,000 were measured against the facts and circumstances test for a loan.  If there is a note, interest is charged, there is security, there is a fixed maturity, the lender makes demands for payment, there is actual repayment, the borrower has ability to repay and there are appropriate records, then a loan exists.  In this case, the $315,000 amount was documented with a promissory note and the MMLLLP accountant recorded it as a loan.  There was a demand by Mariposa against the estate of Joseph for the $315,000.  Therefore, this was a valid loan.  However, the $20,000 transfer was not similarly documented and therefore deemed a gift.

Similarly, the $135,000 amount transferred to Robert and Karen was documented with a promissory note.  It was reported on IRS Form 706 as an asset of the estate and therefore also a loan.

Finally, the $5,000 payment granddaughter Meredith received was not documented in any manner.  It therefore constitutes a gift.

The final issue was the claimed discount for MMLLLP.  While Robert and Joseph each received a 1% general partnership interest, they performed minimal services for the partnership and there was no other evidence of ownership.  All of the income was reported by the decedent prior to her demise.  There is no demonstrated evidence of intent on the part of the decedent to make gifts to her two sons of partnership interest.

Finally, the document filed with Arizona indicated that as of December 31, 2002, the partnership had been dissolved and that all of the assets were the individual property of decedent.  Therefore, the estate must pay the deficiency based on the fair market values of the assets.

Applicable Federal Rate of 1.6% for May -- Rev. Rul. 2012-13; 2012-19 IRB 1 (16 Apr. 2012)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2012.  The AFR under Sec. 7520 for the month of May will be 1.6%.  The rates for April of 1.4% or March of 1.4% also may be used.  The highest AFR is beneficial for charitable deductions of remainder interests.  The lowest AFR is best for lead trusts and life estate reserved agreements.  With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable.  During 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.

Posted: 1 May 2012

AAM Weekly Market Wrap - April 30, 2012

Weekly Market Wrap: Stocks extended their gains for the second
straight week as housing data and corporate earnings pushed stocks higher.  The S&P 500 index added 1.8% to close at
1,403.  Oil added 1.6% to $104.70 and
Gold moved higher as well increasing 1.24% to $1,662.51.  The Dollar dropped 0.52% against other major
world currencies to close at $78.78.

Year-To-Date for the major indexes:

  • The S&P index +11.59%
  • The Dow Jones Index +8.27%
  • The NASDAQ Index +17.81%
  • The Russell 2000 Small cap Index +11.37%
  • EAFE International Index +7.12%
  • The 10 year treasury is currently yielding 1.94%
    and the 30 year is yielding 3.12%.  Yields
    were slightly lower for the week and are higher for the year.

 

Monday the S&P 500 index dropped 12 points on moderate volume
as Euro-zone business decelerated and Chinese manufacturing slowed.

Tuesday stocks rebounded 5 points on moderate volume as new
home sales beat expectations, home prices showed signs of stabilizing,
mid-Atlantic manufacturing jumped and consumer sentiment moved slightly lower.

Wednesday stocks surged 19 points on moderate volume as the
Federal Reserve announced revised growth estimates slightly higher and future
unemployment slightly lower with a better chance of a rate hike before
2014.  March durable goods orders missed
expectations and mortgage apps declined.

Thursday the index added 9 points on moderate volume as jobless
claims were higher than expected, regional manufacturing slowed, but pending
home sales beat expectations.

Friday stocks added another 3 points on moderate volume as 1st
quarter GDP was lower than expected, S&P cut Spain’s credit rating, Japan
data disappointed but corporate earnings continued mostly positive.

Stocks began the week trending lower on news overseas
but quickly turned positive as US home data and corporate earnings pushed
stocks higher.  The Fed reinforced the
positive bias by revising projections higher, although only slightly
higher.

Much of the economic news was mixed
this week with GDP and durable goods orders missing expectations and home data
beating projections.

Overseas news continues to pressure
markets but not enough to offset positive US earnings announcements.

Mortgage rates were flat this week.  The Schwab Bank 15-year rate is at 3.5% and
the 30-year rate is at 4.25%. These rates are as of 4/27/2012 and assume a
$250,000 conforming rate mortgage and may include up to 0.5% points.

 

What to watch for on the economic calendar next week:

Monday – Personal Income and Outlays /
Chicago PMI / Dallas Fed Manufacturing

Tuesday – ISM Manufacturing / Motor Vehicle Sales / Construction Spending

Wednesday – ADP Employment / Factory Orders

Thursday – Weekly Jobless Claims / Productivity and Costs / ISM
non-Manufacturing

Friday – Employment Situation

 

 

Ronald J. VanSurksum,
CFP®

Advanced Asset Management, LLC

April 30, 2012

 

 

 

Posted: 30 Apr 2012
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