- Monitoring Irrevocable Trusts - Trustee Responsibililty
- May 12, 2009
- Law Firm: Buckingham, Doolittle & Burroughs, LLP - Cleveland Office
A low-interest-rate economy with depressed values for stock, closely-held companies and real estate is often an ideal time for wealth-transfer planning. Although the simplest method of wealth transfer is by making outright gifts, you can take advantage of the economy and specialized estate planning techniques to leverage your gift of assets with depressed value at a low (or no) gift-tax cost. Many forms of specialized wealth transfer planning involve irrevocable trusts. Some examples are Dynasty Trusts, Charitable Lead Annuity Trusts, Grantor Retained Annuity Trusts, Charitable Remainder Unitrusts, Installment Sale to an Intentionally Defective Grantor Trust (which is often, but not necessarily, structured as a Dynasty Trust), and Qualified Personal Residence Trusts. The most common irrevocable trust in estate planning and wealth transfer planning is an Irrevocable Life Insurance Trust.
The reason an irrevocable trust works to effect wealth transfer is that properly planned transfers to the irrevocable trust are treated as gifts to the trust beneficiaries. Once the transfer is complete, the trust assets can continue to grow in value without causing any additional tax consequence. However, irrevocable trusts and most transfers to irrevocable trusts involve certain duties on the part of the trustee. The administrative duties of a trustee are often essential to achieve the desired tax results of the trust. There are also fiduciary requirements of the trustee to protect the trust assets and to protect the trustee from any potential liability.
For example, a trustee must send withdrawal letters, commonly known as “Crummey Letters” (named after the lead case authorizing this technique), any time a contribution is made to many types of irrevocable trust, e.g., premium payments to an Irrevocable Life Insurance Trust or annual exclusion gifts to a Dynasty Trust. Crummey Letters notify beneficiaries of withdrawal rights, qualifying the transfer to trust for the annual gift tax exclusion (currently $13,000 from each donor to each beneficiary annually, adjusted annually for inflation).
A trustee must monitor the performance of the investments of the trust, including the performance of brokerage accounts, life insurance policies and other investments, on a regular basis. The trustee is under obligations to manage the trust investments as a reasonably prudent person would and to balance the interests of the current beneficiaries and the remainder beneficiaries, in accordance with the terms of the trust instrument. Note, however, that under ORC 5808.07 a trustee may delegate investment authority so long as the delegation is made prudently. To delegate investment authority, the trustee (or the delegee) may want to use an investment policy statement for guidelines, and the trustee and the delegee should still periodically review the investments and the investment strategy.
In addition, a trustee of an irrevocable trust is required under the Ohio Trust Code to do all of the following:
- Notify current beneficiaries of their rights and the trustee’s acceptance of the trusteeship. Current beneficiaries are the current or permissible distributees of trust income or principal.
- Keep current beneficiaries reasonably informed. Until the trustee makes the final distributions and terminates the trust, the trustee has a proactive duty, whether or not a beneficiary makes a request, to provide each current beneficiary with reasonable information about ongoing administration of the trust and other material facts; advance notice of changes in the trustee’s compensation; and a detailed trustee’s report (i.e., an accounting) that describes trust property, liabilities, receipts, and disbursements.
- A trustee must promptly respond to requests from any beneficiary. This duty is not limited to “current” beneficiaries but applies to all beneficiaries. A trustee is required to respond promptly to any beneficiary’s request for information about administration of the trust; a copy of the trust instrument; and a trustee’s report.
Irrevocable trusts are often desirable methods to achieve your wealth-transfer goals. It is important to make sure that the trust meets your goals, including wealth transfer, wealth management and tax benefits, because in general, an irrevocable trust cannot be modified once it is signed. Because the trust is irrevocable, However, keep in mind that the Ohio Trust Code allows for various administrative matters related to the trust to be modified using a written private settlement agreement. Therefore, if the trustee’s duties are unclear or could be streamlined or revised to more efficiently manage the trust assets and trust objectives, the trustee and trust beneficiaries can enter into a private settlement agreement to modify the administrative terms of the trust.
The use of irrevocable trusts has become more frequent as individuals take advantage of the wealth transfer strategies in the current economy. When creating an irrevocable trust or accepting a trustee position, consider the responsibilities of the trustee as well as the goals of the trust. Since the trustee often serves as a courtesy to the family, it is important to make sure the trustee’s responsibilities are clearly outlined in the trust instrument. Creators of trusts should consider the trustee’s duties when creating a new irrevocable trust and may want to review existing irrevocable trusts in light of the increased flexibility offered by the Ohio Trust Code to determine whether the trust’s goals could be better met by revising the administrative responsibilities of the trustee. People serving as trustees should periodically review their responsibilities to notify and report to beneficiaries and to monitor the investment of the trust assets. A trustee’s job does involve important notification and reporting duties. Make sure that those duties are clear, streamlined and fulfilled.