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Guidelines for Estate Trustees - Werner Law Firm

Guidelines for Estate Trustees

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Written by Troy Werner

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POSTED ON: October 18, 2022

Estate trustees are individuals in charge of managing a trust after the trust's creator (the grantor) has died. In most cases, these trustees are successor trustees because the living trust tends to be structured, so the grantor is also the first managing trustee. Estate trustees are part of the crucial trinity of individuals that make […]

Estate trustees are individuals in charge of managing a trust after the trust's creator (the grantor) has died. In most cases, these trustees are successor trustees because the living trust tends to be structured, so the grantor is also the first managing trustee.

Estate trustees are part of the crucial trinity of individuals that make up every trust agreement: the trustee, the grantor, and the beneficiary.

It's important to note that the trust's flexibility is so immense that these three individual roles can all be one person. As such, a trustee's role is just as flexible and all-encompassing as the trust itself, and a trustee must be ready for the tasks they may face.

What is the Role of Estate Trustees?

The trustee manages the assets within a trust, both in the life and death of the grantor.

If a trustee is named successor trustee, they may only need to step into their role after the initial trustee has died. Some grantors have enough foresight to name several successor estate trustees to ensure the management of a trust even if the first choice is unavailable, incapacitated, or has passed away.

A trustee's role depends on the kind of trust they manage. In general, these tasks include:

  • Managing and recording a trust's expenses and income.
  • Managing trust-related income taxes.
  • Defending claims against the assets within the trust.
  • Managing investments with trust assets.
  • Distributing a trust's income to its beneficiaries.
  • Bequeathing a trust's principal when the time is right, finally dissolving the agreement.

Some trusts are more straightforward to manage than others. Some require a tremendous amount of experience in wealth management and investment strategy. In other cases, the role of the estate trustees doubles as that of an executor of the estate. This role requires estate planning and probate knowledge. While many estate trustees are close friends, confidants, and trusted family members, some are banks, financial institutions, or brokerage firms.

Understanding the Trust

To understand the role of estate trustees, you need to understand trusts. Thankfully, trusts are pretty simple on paper.

Trusts are composed of three elements: the document, the entity, and the human element.

  • The document defines the trust's limits and purpose and provides an asset list corresponding to the assets the grantor must fund into the trust (separately).
  • Trusts, unlike wills, are named legal entities that can hold assets independently. The trust going "live" determines the estate trustees. This occurs as soon as the trust document has been officially witnessed, signed, notarized, and funded.
  • The human element consists of the individuals associated with the trust, their roles, and their respective relationship to the trust's assets.

It's the execution where things get a little muddier. Trust documents are needed to define and limit a trust's purpose, which means they are best used as a tailor-made solution for any given individual's estate planning needs. This precludes the use of any DIY template – trusts are only as strong as they are specific, so an estate planning professional's expertise is needed to craft a competent trust.

The trust entity being an independent element is essential because it helps explain why trusts are so unique and crucial as estate planning tools in specific contexts. For example, you cannot use a will to separate assets from their previous owners and hold them in trust for a beneficiary. A trust can, however.

To put this into perspective, imagine an estate worth $12,000,000 in a year where the exemption limit on the estate tax is just $10,000,000. This estate tax can be pretty hefty, with a tax rate of up to 40 percent.

Methods of Avoiding the Gift Tax

So, why not just gift the excess $2 million before death? You could, but it would incur a massive gift tax. Thankfully, there exists a lifetime gift tax exemption. However, that gift tax exemption is shared by the estate tax exemption limit. A $2 million "early bequeathment" to your child would cut your exemption limit down to just over $8 million, and you've got the same problem.

The grantor can use a specialized trust to place a vital asset worth $2 million into a form of holding that removes ownership and management rights from the grantor. It does so without transferring the property into the hands of a family member and thus without incurring a significant gift tax.

This is called an asset protection trust. While challenging to set up and incredibly specialized, this trust effectively removes the excess wealth from the estate without transferring it to any single individual.

Once the grantor passes away, the trustee managing the irrevocable trust and its assets can distribute them per the trust agreement's wishes. At this point, the additional benefit of an irrevocable trust is clear – because it passed through a trust, the property achieved a new basis, meaning any capital gains taxes owed on it are lower. As a result, the estate can be worth $10,000,000 and avoid a hefty federal estate tax.

Managing all of this as a trustee is no simple feat. This is why a grantor considering one of the more specialized trust options for their estate must discuss their ideas with an estate planning professional, a tax professional, and their trustee of choice.

The Fiduciary Duty of Estate Trustees

The trust document does not just define a trustee's tasks – there are a few cardinal rules. The first and simplest is a fiduciary duty.

These immutable responsibilities to the grantor and the beneficiary are crucial. Simply put, a trustee's actions must coincide with the grantor's wishes and the beneficiary's best interests. While this wording is vague, a trustee cannot carve up a trust for their benefit without being liable.

Estate Trustees vs. Executors

Depending on how an estate is structured, a trustee's responsibilities may overlap with the executor of the will. A probate court chooses an executor (often named in a will) to:

  • Manage the assets within a will.
  • Manage an estate's final debts and claims.
  • Manage the decedent's final affairs (such as their last tax return, etc.)
  • Manage the distribution of the estate's assets and the dissolution of the estate.

In the absence of a will, or if no executor exists, the closest competent family member may become the executor. Your roles may intertwine, or you may need to fulfill both roles. It's crucial to discuss these responsibilities with a CPA or an estate planning professional and seek out the assistance of a probate lawyer.

Guidelines for Estate Trustees - Werner Law Firm

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