A Practical Guide to Trustee Selection: A Review of the Most Common Tax (and Nontax) Traps

When it comes to estate planning, trusts are important. Choosing the right trustee can be challenging and have consequences for taxes. There are three perspectives to consider: the person setting up the trust, the person who will benefit from it, and the trustee. This article focuses on six important things to consider when choosing a trustee for a trust. I.R.C. §672, 2036, 2038, and 2041 are important laws to know for advisors. I.R.C. §672 provides a safe harbor for determining who can be an independent trustee. I.R.C. §2036 and 2038 require certain property to be included in the gross estate under specific circumstances, unless it was a bona fide sale for full consideration. I.R.C. §2041 states that property to which the decedent had a general power of appointment is included in the gross estate. A general power is a type of authority that can be used to help the person who has passed away, their estate, creditors, or the estate’s creditors. There are some exceptions to this, such as when the power is restricted by certain rules about health, education, support, or maintenance, or when it can only be used with the permission of the person who gave the power.

For beneficiaries and trustees, their power to give money to themselves or others should be limited by certain rules. Trustees need to be legally allowed to act as a trustee, have good judgment, be fair and honest, and not use the trust for their own benefit when they shouldn’t. It’s important for a trustee to be located in a state with laws that support the goals of the trust, like tax laws and rules about when a trust ends. The settlor is the person who creates a trust and gives their assets to it. To avoid gift tax, the settlor must give up control of the assets and not be able to benefit from them in any way. If the settlor still has control or benefits, the gift may not be considered complete and could be subject to gift tax. So, the settlor must make sure to fully give up control and benefit from the assets they put into the trust. In some cases, a gift is considered complete even if the person who made the gift can still benefit from it. For example, if the person transfers the gift to a trustee who can decide whether to give the gift back to the person, it is still considered a complete gift. However, if the person can still change who will receive the gift, the gift may not be considered complete. There are five specific situations where the gift would be considered incomplete unless there is a specific rule that the beneficiaries can use to force the trustee to make distributions, which would take away the person’s control over the gift. The law says that if someone sets up a trust and still uses the property or income from it, that property or income could still be part of their estate when they die. But if they pay fair rent for using the property, it might not be included in their estate. Also, if the trust pays the settlor’s debts or supports their dependents, it could be included in their estate. However, if the settlor doesn’t directly benefit from the trust payments, it might not be included in their estate. If you set up a trust for yourself where you have control over the money, it might still be considered part of your estate for tax purposes. Also, if you give your spouse the power to give the money back to you, it could cause problems. But as long as there’s no agreement or plan for your spouse to do that, it’s okay. Just be careful about having too much control over the money in the trust. If you have the power to control when and how money or property is given out to beneficiaries, it could be included in your estate for tax purposes. There are some exceptions, like if the distribution powers are limited by a set standard, or if you can only appoint someone who is not related to you as a trustee. But if you serve as trustee of a trust for a minor, the assets could still be included in your estate if you die while serving as trustee. So it’s best to avoid being a trustee of a minor’s trust. In choosing a trustee for a trust, it’s generally best for the settlor’s spouse not to be the trustee. This is because if the spouse has the power to make distributions from the trust, the assets could be included in their estate when they die. Also, if the child becomes an adult and the spouse no longer has a legal obligation to support them, the IRS might see this as a gift from the spouse to the trust.

Certain administrative decisions within the trust, like how money is spent or invested, can also cause problems. The courts have decided that as long as the settlor’s actions are reviewed and subject to certain standards, they won’t cause estate tax problems.

In conclusion, there are a lot of complex rules when it comes to choosing a trustee, but there are some safe ways to do it. It’s important for lawyers to be careful and include certain clauses in the trust documents to avoid problems. These are references to different sections of the Internal Revenue Code and Treasury Regulations, as well as court cases and private letter rulings, regarding the taxation of trusts and gifts. They discuss when a gift becomes complete for tax purposes, and when assets transferred to a trust may still be considered part of the original owner’s estate for tax purposes. The content also includes examples of court cases and private rulings that illustrate these concepts. The IRS has rules that certain conditions in a trust can avoid triggering a specific tax law. For example, if a trust requires the trustee to consider the beneficiary’s other sources of support, it may not trigger the tax law. The wording of the tax law and court cases also provide some guidance on when the law may or may not apply. Treasury regulations also give guidance on what standards would constitute an ascertainable standard or a definite external standard. This text discusses different IRS rules and court cases related to including assets in a person’s estate for tax purposes. It also mentions the importance of including specific language in legal documents to avoid tax issues. Two professionals, Mark R. Parthemer and Sasha A. Klein, are experts in helping rich people manage their money. Mark works at a company called Bessemer Trust and oversees estate planning and other financial services. Sasha works at Sabadell Bank and Trust and does similar work for wealthy families in Southeast Florida. They are both highly respected in their field.

Source: https://www.floridabar.org/the-florida-bar-journal/a-practical-guide-to-trustee-selection-a-review-of-the-most-common-tax-and-nontax-traps/