Once you outgrow your initial estate plan, you will likely find that you need to incorporate a wide range of estate planning tools and strategies to ensure that your plan will achieve the ever-expanding list of inter-related goals now included in your plan. One of the tools you may choose to utilize is a trust. Trusts have become increasingly popular, due in large part to the flexible nature of a trust. When creating your trust you must focus on how the trust will be administered, starting with your choice of Trustee. You may also wonder how much discretion your Trustee should have. Ultimately, the decisions relating to the trust you create are yours to make; however, an Indianapolis trust administration attorney points out some things to consider when deciding how much discretion your Trustee should have.
How Does a Trust Work?
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also called a Maker, Grantor, or Trustor who transfers property to a Trustee chosen by the Settlor. The Trustee holds that property for the trust beneficiaries. The beneficiary of a trust can be an individual, an entity (such as a charity or political organization), or even the family pet. A trust must have at least one beneficiary but may have an unlimited number of beneficiaries.
All trusts can be broadly divided into two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason unless a court grants the right to revoke or modify the trust.
Choosing Your Trustee
One of the most important, and often most difficult, decisions you must make when creating a trust is choosing the Trustee. This is also where people frequently make their biggest mistake by appointing a spouse, family member, or close friend without taking the time to analyze whether that person is really qualified for the job. The overall job of a Trustee entails protecting the trust assets and administering the trust terms; however, within that broad job description are numerous and varied duties and responsibilities, including:
- Managing and protecting trust assets
- Abiding by the trust terms unless they are impossible, illegal, or unconscionable
- Investing the trust funds using the “Prudent Investor Standard”
- Monitoring trust investments
- Communicating with trust beneficiaries
- Resolving conflicts among beneficiaries
- Making discretionary decisions (if the trust allows)
- Distributing trust funds to beneficiaries
- Approving or denying requests for distributions if given discretionary authority
- Keeping trust records
- Preparing and paying trust taxes
Trustee Discretion – How to Get It Just Right
The Trustee of any trust will almost always need to make some decisions autonomously given the nature of the Trustee’s job. The issue is how much discretion a Trustee should have, not whether to grant any discretion at all. As the Settlor of the trust, you effectively decide how much discretion to give your Trustee through the trust terms you create. To a large extent the type of trust you create coupled with your trust purpose will dictate how much or how little, discretion your Trustee needs in order to successfully administer the trust. For example, if you are creating a testamentary trust to guard assets for your minor children, the Trustee will likely need a significant amount of discretionary authority to accommodate the unforeseen changes that will occur as your children grow up. On the other hand, if you create an irrevocable living trust for the purpose of protecting assets, your Trustee won’t likely need much discretion given the nature and purpose of the trust.
Contact Indianapolis Trust Administration Attorneys
For more information, please download our FREE estate planning worksheet. If you have questions or concerns related to Trustee discretion, or any other aspect of trust administration, contact the experienced Indianapolis trust administration attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.