Category: Trustee

Frequently Asked Questions

 

Will or Trust?

 The Trust is the only Estate Plan that does not require Court involvement. A Will still requires the Executor to go through the Court Probate Process that can last years.

Any beneficiary designations on financial accounts or joint tenancy for real estate are not affected by the Will (the beneficiary designation and joint tenancy overrides the Will.)

 Gift v. Primary Beneficiary?

Gifts can be a set amount of cash, a personal item, or real property.

Gifts are distributed first and satisfied “off the top”, with the remainder going to the primary beneficiaries allocated out of 100% (e.g. 50%, 20%, 30%.)

If I am establishing a Trust, why do I also need a “Will”?

The Pour Over Will is complimentary and “part and parcel” of the Trust. One of the main purposes is to act as a “catch-all” by declaring that all property not held in trust at the time of passing is deemed to be transferred and held in Trust.

 What is the Difference Between a Trustee, Executor and Guardian?

The Trustee is responsible for administering (i.e. ensuring the written wishes are effectuated) the terms of the Trust. The term Trustee is exclusive to the Trust.

The Executor is responsible for administering the terms of the Will. The term Executor is exclusive to the Will.

The Guardian is the person you nominate to take over the parental responsibilities for your minor child(ren) in the event you pass prior to the child(ren) reaching 18.

Does the Trustee, Executor, and Guardian have to be the Same Set of Individuals?

Usually the Trustee and Executor is same individual in the same order/sequence.

The Guardian often is the same as the Trustee/Executor as it is administratively more efficient (no splitting of the power of the purse v. responsibility of day-to-day care among different individuals).

Who Should be the Successor Trustee or Executor?

While alive the settlor(s) or sometimes referred to as grantor(s) (individual establishing the Trust) will also be the Trustee.

For the post death successor Trustee/Executor, the settlor(s) will often look to qualified family members. (When spouses involved the surviving spouse is the first Successor Trustee/Executor.) Ideally the successor Trustee/Executor will be well organized and have a good grasp of financial and/or legal matters. The successor Trustee/Executor will be able to consult an attorney or CPA if he or she requires assistance regarding the Trust or Will administration.

Nominating a Non-U.S. citizen/resident spouse or relative should only be in conjunction with naming also a U.S. resident as co-trustee (2 Trustees acting together).

What Type of Compensation is Common for the Trustee?

While there is no set standard, commonly reasonable compensation, or an annual fee ranging from 0.5% to 5% of asset, depending on size of assets, prorated by number of days served.

Disclaimer

Naming a Foreign Relative as Trustee for a U.S. Trust

Introduction

In Metropolitan areas, such as the San Francisco Bay Area, it is common to have an estate planning client inquire about naming a foreign relative as Trustee or Co-Trustee.

Naming a Non-Resident Alien (“NRA”) relative as Trustee can cause the U.S. Trust to be re-characterized, for U.S. tax purposes, as a foreign trust due to the NRA’s exercise of substantial control of the Trustee powers.

If the goal is to maintain the Trust as a U.S. domiciled trust the requirements of Treas. Reg. Section 301.7701-7 of “court test” and “control test” must be satisfied.

Court Test

For this test to be satisfied a court within the United States must be able to exercise primary supervision over the administration of the Trust. There is a safe harbor if the following three requirements are met:

  • The trust instrument does not direct that the trust be administered outside the United States;
  • The trust in fact is administered exclusively in the United States;
  • The trust is not subject to an automatic migration provision described in Treas. Reg. Section 301.7701-7(c)(4)(ii).

Control Test

This test requires that one or more U.S. persons have the authority to control all substantial decisions of the trust. Treas. Reg. Section 301.7701-7(d)(1)(ii).

“Control” means “the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions.”

Tax Impact of Foreign Trust Status

Depending on the circumstances, capital gain realization may be imposed on the transfer of property to the “now foreign trust”, i.e. forced sale treatment.

One Year Period to Cure Unintended Loss of U.S. Trust Status

If a U.S. Trust becomes a Foreign Trust due to the nomination of a NRA Trustee, the Trust has 12 months from the date of cessation of U.S. Trust status to reassert U.S. status by satisfying the aforementioned requirements of the “court test” and “control test”.

Conclusion

While it is not impossible to have a NRA relative act as Co-Trustee, the NRA relative should never be nominated as sole acting Trustee.

Even if a NRA relative is nominated as Co-Trustee, the Trust terms must make clear that any tie breaking decision is made by the U.S. Co-Trustee.

Disclaimer