After the estate planning documents have been signed or an estate administration has closed and distributed all the assets, we are often left with trusts which require long-term administration.
Whether a trust was established in someone’s lifetime or upon their death, the intent was to protect assets from creditors or save estate taxes for the grantor’s eventual estate, and/or the trust is intended to last for a limited period of time or generations – trust administration often requires different skillsets than if the asset was gifted or inherited outright and directly.
The role of a Trustee is sometimes complicated by its fiduciary nature – meaning that a Trustee is tasked with administering the trust in a way that is in another person’s best interest rather than the Trustee’s own. In situations where a grantor’s intentions do not align with a beneficiary’s needs, this can be even more complicated and stressful for a Trustee. Even when all parties are on the same page, the administration of the trust may require flexibility on the part of the Trustee throughout the life of the trust. Additionally, as tax laws and regulations change on the state and federal levels, the Trustee may be required to adapt trust administration to better suit the new environment.
The attorneys and staff at Sessa & Dorsey have decades of experience in all areas of trust administration – from guiding and assisting fiduciaries in their duties and responsibilities, to connecting Trustees and beneficiaries to other resources, and continually educating themselves on the legal and financial landscapes. Whether we are assisting a Trustee or serving as Trustee ourselves, we are available to guide Trustees and other interested parties through all stages of trust administration.
When a trust is irrevocable (whether established that way or following an estate administration) there are ongoing matters which need to be considered and which may be different for each trust. While each trust is unique, most of the trusts we encounter will fall into one of a few categories which we can expect to have specific roles for the Trustee.
Here are the common trust agreements and the fiduciary’s role:
- Children’s Trusts or Trusts for Descendants. Trusts for children or descendants are quite common, though this category covers a broad range of possible needs. These trusts are typically drafted to provide some level of financial support for a grantor’s children. The distributions may be required or at the Trustee’s discretion, but the trust will provide some direction as to who is allowed to receive distributions and should provide guidance when these are made at the Trustee’s discretion. Ideally, when a trust is created to serve multiple people as a group or to last for multiple generations, the trust agreement should provide some manner of guidance on whether the Trustee has a primary duty to provide for current beneficiaries or will be required to preserve assets for future generations. Whatever the case, the Trustee’s role is to invest and preserve the assets of the trust to meet the trust objectives, make distributions as permitted or required under the agreement, maintain accounting and other administrative records, file any required income tax returns, and provide certain notices to beneficiaries as may be required under state laws.
- Discretionary/Supplemental Needs Trusts. While like the children’s trust described above, a trust created for a beneficiary who either currently receives or may receive public benefits due to a disability will require heightened levels of attention and flexibility. When a grantor establishes a trust to supplement the assets and income of a disabled beneficiary, the trust should be designed and administered in a way that does not impact the benefits a beneficiary receives. Many of the trusts for disabled beneficiaries with which we work are created by a parent, guardian, or other family member and are officially established as a Supplemental or Special Needs Trust (“SNT”). In Maryland, SNTs may be created under statutory guidelines like the Maryland Discretionary Trust Act, or the Trustee may ask a court to “bless” or modify a trust agreement to qualify as an SNT for state and federal benefits purposes. Regardless of how the trust came to be, Trustees of SNTs should be especially mindful of changing state and federal laws and regulations to ensure that distributions from the trust do not interfere with certain benefits that the individual beneficiary receives. Trustees should also be flexible and adapt to the changing needs of the beneficiary, and they should also be prepared to be more involved in the beneficiary’s life as the trust progresses.
- Irrevocable Life Insurance Trusts (“ILIT”). An ILIT is generally set up by a grantor to hold a life insurance policy on the grantor’s life or the life of the grantor’s spouse. The grantor contributes assets to a trust to purchase a policy, or sometimes transfers ownership of a policy already in the grantor’s name. During the lifetime of the grantor, the Trustee should ensure that all premiums are paid. If the grantor is still paying the premiums themselves, the Trustee may be required to notify a beneficiary that a “gift” has been made to the trust which may be subject to certain withdrawal rights. If there are other assets within the trust, the Trustee will need to ensure that the assets either produce enough income for premium payments or sell assets, or otherwise raise cash to make these payments. When the life insurance policy benefit is paid, the Trustee should be prepared to transition their role – either to make distributions, lend money to the grantor’s estate, or invest assets for trusts which may shift into something like the descendants’ trusts discussed earlier.
- Grantor Retained Annuity Trusts (“GRAT”). A GRAT is used to gift certain assets to future generations when they are expected to appreciate significantly – locking in a gift at a low-value today for the grantor with the expectation that the actual value transferred later will be significant. A Trustee must be aware of all the terms and conditions of these trusts, especially when making the required annual payments to the grantor for that specified period and then distributing the trust once that period has ended. If the conditions of the annuity payments aren’t met precisely, the gift tax consequences to the grantor can be significant.
Qualified Personal Residence Trusts (“QPRT”). Like a GRAT, a QPRT is often used to transfer wealth to future generations later – this time in the form of either a client’s primary residence or vacation home. Instead of an annuity payment made to the grantor like in a GRAT, the grantor retains the right to use and occupy the residence for an extended period before the title to the property is transferred to the beneficiary. Here, a Trustee is generally minimally involved during the period where the grantor retains rights to the residence (unless the property is subject to a mortgage or is sold before the trust’s termination) and may only be needed to transfer the property at the end of the period.
When a trust is designed to provide assets or income to both individuals and charities, the Trustee’s duties will change at certain points throughout the lifetime of the trust, serving either the charitable objective or the needs of individual beneficiaries. In general, these time periods and interests will be very clearly stated when the trust is established, which is often why charitable trusts are also referred to as “split-interest” trusts.
In general, there are two types of charitable trusts created – the Charitable Lead Trust (“CLT”) and the Charitable Remainder Trust (“CRT”). As the names suggest, a CLT will provide for payments to the charity at the beginning of the trust term (the charitable interest being the leading interest), whereas a CRT will provide for payment to the charity at the end of the term (the charitable interest being the remainder interest). The structure of the payments made during that initial term of the trust will be structured in the document so that the trust is either an Annuity Trust or a Unitrust. For example, a trust with a charitable leading interest where the payments to the charity are structured as an annuity will be referred to as a Charitable Lead Annuity Trust, or a CLAT.
These trusts are often designed to provide income tax benefits and/or gift tax benefits to the grantor, so it becomes vital that certain formalities are followed when working with a CLT or CRT to avoid negative tax consequences later. The Trustee will be required to follow the payment structure for the life of the trust and ensure that the stream of payments made during the leading term are paid according to the precise structure of the trust agreement and within the prescribed time – whether the payments are made to a charity in a CLT or to an individual in a CRT.
We often assist in the various tasks required in trust administration. We frequently assist with the ongoing administration needs such as: providing any required fiduciary accountings or reports, facilitating investment decisions, documenting discretionary distributions when the trust has certain standards or objectives to be met, providing statutory notices to beneficiaries as may be required, and so on.
Sometimes, circumstances will arise where a trust may benefit from the services of a professional or independent Trustee. When a trust has complex terms which must be carefully managed or holds assets that warrant a professional eye or when family dynamics would benefit from an independent party, our attorneys are available to step in as successor Trustee or Co-Trustee to guide administration and manage the administration process.
Many trusts require or will require separate income tax returns to report income and expenses of the trust and may need to report income that must be attributed to a beneficiary because of the distributions made during the year. Much like individuals, when a trust is required to file income tax returns, they do so on a calendar year basis, which means that returns are generally due on or around April 15, unless an extension has been requested.
Because so many trusts will issue a beneficiary statement (such as a Schedule K-1 or a Grantor Statement) which will affect that beneficiary’s income tax return, we are especially mindful of these deadlines. We provide information to these beneficiaries promptly to minimize issues or delays with their personal income tax returns. Depending on the nature of the trust and the assets it holds, we may also pay special attention to updates to the federal and state tax laws to protect and preserve the trust and ensure that any income passing out to a beneficiary has the least possible impact on that beneficiary’s income tax return.
Related blog posts:
- The Top 5 Benefits of a Trust
- Estate Planning 101: Who Should I Choose as My Trustee?
- Revocable vs. Irrevocable Trusts: Which is Right for Me?
- Best Practices for Irrevocable Trusts
- Should You Consider an Irrevocable Life Insurance Trust (ILIT)?
- Understanding Grantor Retained Annuity Trusts (GRATs)
- Is a Qualified Personal Residence Trust (QPRT) Right for You?