Effective trust administration requires getting a clear understanding of all parties’ expectations at the outset. As you begin the conversation with your designated trustees, the first thing they will want to know is “What is expected of me?” Generally, the trustee’s role is to administer your wishes as far as distributing the trust assets for your beneficiaries after your death. This memorandum discusses: 1) how to administer the trust upon the disability or death of the surviving spouse, and 2) guidelines for distributing assets to the trust beneficiaries and others.
- Administering the Trust
The trustee would be wise to obtain legal counsel and guidance to assist with administration of the trust. In chronological order, this would entail:
Inventory – First, the trustee must prepare inventory of everything in the estate, which includes assets in the trust and assets in your name. This information should be maintained and updated as needed in the Trust Portfolio that we will prepare for you so that it contains the documents the trustee needs to follow your instructions.
Distributions – Next, your debts will have to be extinguished upon your death. This is done through the trust administration process by paying off the debts out of the trust assets. There is an exception for debts that are not yet due, like mortgage on real estate or remaining loan balance on a vehicle. These debts continue to exist and become the debts of the individual that receives the property that is securing that debt. For example, if the parents have a mortgage on their home and the parents die, the child receives that home subject to the mortgage. In other words, the asset is passed to the child subject to the encumbrance. As a practical matter, if the child will not be living in the home, the trustee would sell the property and pay of the note.
File Tax Return – The trustee will have to file a final Form 1040 from January 1st through the date of death (a short tax year return). Then, from date of death, it may be desirable to file an estate tax return to establish value of property for capital gains tax computation later on (like for sale of property).
At the end of the estate administration process, after all the debts, income taxes and expenses (for example, medical bills) are satisfied, then the trustee is going to distribute the remaining property such as gifts to individuals or charity, and distributions to new ongoing trusts to provide for the child beneficiaries.
- Distribution of Trust Assets
It is critical to make sure the trustee fully understands who you are, what defines your value system, and what particular concerns you might have regarding the welfare of the trust beneficiaries.
At the outset, it’s important to discuss amongst yourselves: what types of distributions you would like a beneficiary to receive, for what purposes can the beneficiary request a distribution from the trust, when you would like these distributions to be made and in what priority, who should be involved in the decision-making process, and how the decision-maker should measure the beneficiary’s need for a distribution (e.g., you may wish to: (a) provide funds for a child’s education, when he is ready to begin college, and/or (b) provide for your children to live comfortably, while at the same time avoid utilization of the trust for excessive activities).
Your trust document will state the terms for which distributions can be made to the beneficiary. These terms are health, education, maintenance and support (“Ascertainable Standard”). In using the Ascertainable Standard, you can be assured that there will be a balance between the prevention of distributions for extravagant purposes and provision for the beneficiary’s needs.
The following are examples of distributions which would be permissible under the Ascertainable Standard:
- The standard of “health” is generally thought to include the following:
- Emergency medical treatment;
- Psychiatric treatment;
- Psychological treatment;
- Routine health care examinations;
- Eye care;
- Cosmetic Surgery;
- Lasik surgery;
- Health, Dental, or Vision Insurance;
- Unconventional medical treatment;
- Home health care;
- Gym memberships;
- Spa memberships;
- Golf club memberships; and
- Extended vacations to relieve tension and stress
- The standard of “education” is thought to include the following:
- Grammar, secondary and high school tuition;
- Graduate school;
- Post-graduate school;
- Medical school, law school, or other professional school;
- Support of the beneficiary while in school;
- Support of beneficiary while not in school (between semesters);
- Studies for the student that makes a career out of learning;
- Technical school training;
- Career training;
- College in Europe as part of a study abroad program; and
- Related expenses such as supporting the beneficiary not only during the semester, but, also between semesters
- Maintenance and Support. The terms “support” and “maintenance” are considered synonymous. When applied, these terms do not limit a trustee to providing merely the bare necessities in life but allow for significant discretion.
- Regular mortgage payments;
- Property taxes;
- Suitable health insurance or care;
- Existing programs of life and property insurance;
- Continuation of accustomed patterns of vacation;
- Continuation of family gifting; and
- Continuation of charitable gifting
Might be included:
- Reasonable additional comforts or luxuries; and
- Special vacations of a type the beneficiary had never taken before
- Payments unrelated to support which merely contribute to the beneficiary’s contentment or happiness;
- Distributions to enlarge the beneficiary’s personal estate; and
- Distributions to enable the beneficiary to make extraordinary gifts
The Ascertainable Standard is interpreted to include not only the support of a beneficiary, but, also support of beneficiary’s family living with him at the time of the distribution request (e.g., siblings). It may also be deemed to require the trustee to consider the support available to the beneficiary from other sources, such as a spouse.
As you can see, absent any specific language constraining what the trustee can pay for, the standard is very broad.
The trust document includes a general statement of the purpose of the trust, and provides for the Ascertainable Standard relative to distributions to beneficiaries when making a discretionary distribution, to assist the trustee with decision making. In addition to the use of the standard discretionary terms in a trust document, you may choose to provide further guidance to a trustee. Another means of conveying intent is to write a Letter of Wishes to express intent more clearly. This is a separate non-binding document wherein you can more freely state your intentions when creating the trust. While it is not binding on the trustee, it is very useful in making sure that your thoughts and intentions are clearly communicated to the trustee.
The more clearly you can communicate both your value system and the needs of the proposed beneficiaries, the better advised the trustee will be.Please share:
- 19 Mar, 2018
- suzette blackwell
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