April 18, 2018
Because a lot of our clients read the New York Times, and also just because it is a newspaper of great influence, I thought I would point out an article that ran recently (March 22 web; March 25 print) in the “Your Money” section of the Times: Life After Your Death? Here’s Why You Should Have a Trust.
We’ve already written extensively about why trusts can be advantageous, and why special needs families in particular have need of special needs trusts. So my point here isn’t to go over that ground again. Instead I have two reasons for bringing this article to everyone’s attention.
First, it is published in the New York Times. Estate Planning attorneys in the New York metropolitan area of New York State typically use revocable trusts much less frequently that estate planners in other areas of the country, so it is interesting to see this article in a New York publication.
Second, I wanted to comment on a few points in the article. I doubt very much that I would disagree substantially with either of the attorney/trust officers quoted in the article, but of course by the time their interview has been reworked into a necessarily too-short article, thoughts can be written in a way that may require more explanation for clarity than the article was able to provide. So:
- One of the interviewees was of the opinion that ability to invest over the long term was the most important trustee quality.
(The context indicates he was speaking of trustees after the death of the person who created and funded the trust (we typically call that person the “grantor” or “settlor”). For revocable trusts, usually the grantor is the trustee so long as alive and competent.)
There I must respectfully disagree. Of course a sound investment approach tailored to the particular current beneficiary and terms of the trust is important. But any conscientious trustee can buy investment advice or investment management; the trustee does not personally have to have that expertise. So in fact, when a client thinks of Uncle Fred as a trustee for the kids “because he’s good with investments,” we tell clients that “good with investments” is nice but not really very important at all.
There are a great many other qualities that in our experience are more important. And they tend to all be what we might call “mindsets”.
One is a pro-active attitude of diligently paying attention to the trust, its management (investments, expenses, tax returns, and other compliance), and its beneficiary(ies) (beneficiaries’ needs and wants, setting beneficiary budgets and expectations, paying beneficiary bills and expenses in accordance with budgets and expectations, understanding how public benefits programs impact distributions to or for the benefit of special needs beneficiaries, and understanding how the terms of the trust affect all of the preceding items).
Along with this is another mindset: a recognition that the trust is its own person under the law. Funds of the trust cannot be comingled with anyone else’s funds. Don’t get sloppy.
Another quality is that of being process-oriented. This is someone, for example, who schedules regular beneficiary meetings with a deliberate agenda and actually follows through, and has tax returns timely prepared each year.
- Now, in this vein, the question is asked “When is a professional manager a better choice as a co-trustee than a family member or friend?” You might think from what I just wrote above that we don’t think much of professional trustees, because investment expertise can be bought.
Not so. In fact, we believe that professional trustees (at least, after the death of the grantor) should be used more often than they are.
It is perfectly understandable, and probably a good choice, that most clients appoint family and friends as trustees to serve during the client’s incapacity.
And it should come as no surprised that most clients appoint family and friends to serve as trustee for children during their minority, young adulthood, or if the child is a special needs child.
But the hard truth is that often family and friends don’t do a good job as Trustee. They make mistakes because they don’t know any better and think they should not, or don’t need to, pay for an attorney to counsel them.
So while I don’t say you should always have a professional trustee, I can without hesitation say that that based on my nearly three decades of experience as legal counsel to trustees after the grantor has died, more people should choose professionals than do.
But don’t there is only one kind of professional trustee – there is a wide range of professional trustees. Some are large institutions, like the ones interviewed for the New York Times article. But there are also: small banks, small corporate trustees, large and small law firms, and CPAs. Each have their strengths and weaknesses, their pros and cons.
Whether a professional trustee makes sense for you, and if so what kind, is something to discuss with your estate planning attorney.
- The article asks “Is there income tax liability for the revocable trust?” It then answers “Tax returns for a revocable trust must be filed annually to the Internal Revenue Service.” That’s not really correct.
First, the question was never answered. The correct answer is that a revocable trust does not affect the grantor’s income tax at all. All income sourced from whatever assets may be titled to the revocable trust, are simply part of the grantor’s taxable income, just like the grantor owned the assets in his or her individual name.
Second, the answer given (to a question not asked) is wrong. There are rare exceptions, but the vast majority of revocable trusts do not file, and are not supposed to file, a separate federal income tax return. All of the revocable trust’s income simply shows up on the grantor’s personal federal income tax return.
Technically, Massachusetts requires the grantor of a revocable trust to file a one page “Form 2G” income tax return each year (but again, having no affect on the grantor’s income tax liability). In practice, I’m not aware of anyone so doing.
- Finally, there is a question about asset protection. Asset protection is a vast field of study and practice that cannot be adequately discussed even in a legal treatise! A few points:
- It matters a lot who you want to protect with whose Protecting assets you leave your child on your death from your child’s creditors is far easier, certain, and less expensive than protecting your own assets for your own benefit from your own (future) problems. And if your problems are already here (e.g., the lawsuit has already been filed against you), it is too late for most of the things you could do to protect yourself.
- It matters a lot what you are trying to protect from. There are different rules governing general creditors, bankruptcy, “exception creditors” like child support claims, divorce, and public benefits. And most of those rules are different in each of the 50 states, and may depend not on where you are, but (for example) where your child lives when your child eventually divorces.
- Revocable trusts don’t protect you from anything during your life. They weren’t designed for that.
- Trusts can be extraordinarily powerful tools to achieve many goals, including asset protection, but they are just one set of tools. Asset protection employs a very wide array of tools, both trusts and non-trust approaches.
Learn more about Special Needs Law Group of Massachusetts here.
Posted by Attorney Mark Worthington.
This blog post does not constitute legal or tax advice, even if you are presently a client of Special Needs Law Group of Massachusetts, PC, nor is an attorney-client relationship created by reading it. If you want legal or tax advice, you should retain a licensed attorney or tax advisor for that purpose.