An Introduction to Dynasty Trusts

When people create estate plans, they typically focus on handing down their money and property to their children, grandchildren, and other living heirs. But some people want to leave behind a more enduring legacy. For those interested in multigenerational wealth transfer, a dynasty trust could be the answer. 

A dynasty trust is an irrevocable trust that offers the tax minimization and asset protection benefits of other types of trusts, but unlike a trust that ends with outright distributions to your children or grandchildren, a dynasty trust can span more than two generations. Also known as a perpetual trust, a dynasty trust theoretically can last forever—or at least for as long as trust money and property remain. Because the trust could last for many years, and the rules generally cannot be changed once the trust is created, a dynasty trust must be set up with great care. 

How Does a Dynasty Trust Work?

A dynasty trust starts the same way as any other trust. The trust’s creator (i.e., the grantor) transfers money and property into the trust, either during their lifetime or at the time of their death, in which case the trust is a testamentary dynasty trust. Regardless, as an irrevocable trust, once the dynasty trust is funded, it is set in stone. It cannot be revoked, and the rules the grantor sets for the trust can only be altered under certain state statutes governing trust modifications. 

Who Should Serve as Trustee of a Dynasty Trust?

One role that the grantor must seriously consider is who will act as the trustee. It is common for the grantor of a dynasty trust to name an independent trustee, such as a bank or trust company, to serve in this role, because they can administer the trust for as long as it lasts. 

While it is possible to choose a beneficiary of the trust to serve as the trustee, this raises potential tax and creditor protection issues. A beneficiary-controlled trust can have income and estate tax consequences depending on the terms of the trust and the scope of the beneficiary’s powers. Not only does a beneficiary’s ability to control the trust affect the degree of asset protection the trust provides the beneficiary, but it also risks family wealth to misappropriation. In addition, a corporate trustee, like the dynasty trust, has an indefinite legal life, allowing for uninterrupted administration across generations. Corporate trustees typically charge an annual fee based on the amount of money and property in the trust. 

Who Should Use a Dynasty Trust?

Estate planners like to remind people that trusts are for everyone, not just the wealthy. However, an exception to this general rule can be made for the dynasty trust. While you do not need to have the dynastic aspirations of the Medici family or the House of Windsor to set up a dynasty trust, most of the time, it is used by families with significant wealth. 

There is no law that says you need a certain amount of money to set up a dynasty trust. But practically speaking, a dynasty trust only makes sense if you have money and property that will last for two or more generations (although this depends on the monetary needs of your beneficiaries and how fiscally responsible they are). Grantors who are thinking about multiple generations after their children set up dynasty trusts. 

Another way to utilize a dynasty trust, other than handing down money to future generations, is to keep a family business in the family. Anyone who owns a family business is probably familiar with the dismal statistics about their longevity (e.g., 40 percent transition to a second generation, 13 percent make it to a third generation, and just 3 percent survive to the fourth generation or beyond). Using a dynasty trust, the grantor can place shares of the business in the trust to benefit multiple generations of beneficiaries. The trustee could be a professional trustee that can manage business affairs and maintain continuity of operations, while the beneficiaries benefit financially from the business. The grantor can include terms that help ensure the business is run competently, such as requiring the trustee to have an advisory council that effectively serves as a board of directors. 

Tax Benefits of a Dynasty Trust

Part of keeping your legacy in the family is keeping your hard-earned money from being taxed. The federal estate tax exemption amount of $12.06 million per individual in 2022, or twice that amount for couples) can be used to fund a dynasty trust so that the money and property transferred directly to your grandchildren will not be subject to gift or generation-skipping transfer (GST) taxes. By placing accounts and property in a trust and timely filing a gift tax return to allocate appropriate tax exemptions to the trust or pay some amount of wealth transfer tax, those items are not included in your taxable estate. This goes for your beneficiaries as well, as long as the trust is fully exempt from GST tax. 

Trust funds may be used to pay a beneficiary’s living expenses or invested in a home for the beneficiary’s benefit without contributing toward the beneficiary’s taxable estate. Even better, creditors and divorce courts cannot reach accounts and property that you leave to your loved ones in a properly drafted dynasty trust. You and your beneficiaries will not receive these benefits if you give them money outright. 

Dynasty Trusts Not Available in Every State

The rule against perpetuities is a common law rule that limits the duration of controlled property interests, including interests in trusts. Although not written specifically with trusts in mind, the rule against perpetuities effectively prevents people from using legal instruments such as deeds and trusts to control the ownership of property for many years after they have died. But the rule is notoriously difficult to decipher, leading many states to modify it to extend the applicable term or get rid of it altogether. Keep in mind, though, that you may be able to set up a trust in a state that you do not reside in with the help of an experienced estate planning attorney. 

Creating Your Dynasty

If you think a dynasty trust might be right for you, the next step is to speak with an estate planning attorney at our firm. Among the items to be discussed are the selections of the trustee and beneficiaries, tax and creditor protection considerations, state laws on perpetual trusts, and how a dynasty trust fits into your overall estate plan. To start planning your legacy today, please contact us.


Footnote

  1. Family Business Facts, SC Johnson Coll. of Bus., Cornell Univ. (last visited Sept. 20, 2022), https://www.johnson.cornell.edu/smith-family-business-initiative-at-cornell/resources/family-business-facts/.

What Is a Blind Trust?

Trusts are typically set up for the benefit of a trustmaker’s loved ones, a charitable organization, or a third party, with the trust money and property being distributed to the beneficiaries upon the trustmaker’s death. But there are situations in which a person may want to set up a trust to be used during their lifetime for their own benefit to maintain privacy or avoid a potential conflict of interest. In such cases, a blind trust might be appropriate. 

No state or federal laws require the use of blind trusts, but they can be an effective tool for complying with laws that prohibit insider activities. Blind trusts are also used by lottery winners to remain anonymous. 

How Blind Trusts Work

The “blind” part of a blind trust refers to the idea that the trustmaker, or grantor (i.e., the person who establishes the trust), remains in the dark about how the trust’s money and property are managed. Although they may lay out general parameters for the trust such as investment goals prior to creating it, once the trust is formally established, the trustee (the person designated to control the trust assets) has full discretion to handle the trust’s holdings and has no communication with the trustmaker. 

The beneficiary of a blind trust also has no knowledge of what goes on with the trust. However, in most cases, the trustmaker is also the beneficiary. That is, the trust contains their personal money and property, and the trustee manages that money and property for the benefit of the trustmaker-beneficiary—the trustmaker-beneficiary just has no knowledge of, or control over, the activities of the trust. 

Blind Trust versus Nonblind Trust

A blind trust differs from a normal trust in several ways. The biggest difference is that in a nonblind trust, the trustmaker has discretion over trust money and property. Often, they give explicit instructions to the trustee about how to run the trust, such as when and how to make distributions to a beneficiary. Usually, the trustmaker and trustee consult each other, and in some cases are the same person. And, while the beneficiary may be at the trustee’s mercy as far as receiving trust distributions from a blind trust, with a nonblind trust, the beneficiary may be in contact with the trustee and be aware of trust activities. 

Revocable versus Irrevocable Blind Trust

Blind trusts can be irrevocable or revocable. A trustmaker has the authority to modify or terminate a revocable trust and take back control of the accounts and property upon termination. An irrevocable trust cannot be modified or terminated by the trustmaker. In other words, once the trustmaker places money and property in an irrevocable blind trust, the trustmaker permanently gives up control over that money and property. 

Blind Trusts and Public Figures

Viewers of the television show Billions may be familiar with blind trusts, thanks to the character Chuck Rhoades. For anyone who has not seen the show, Chuck is a New York prosecutor known for his flawless record of winning insider trading cases. Chuck put his investments in a blind trust managed by his father to show the public that his actions as a public figure will not be influenced by his personal financial holdings. 

This is a tactic employed by real-life politicians as well. While no state requires public figures to use a blind trust while in office, most states and the federal government have laws that require government employees to recuse themselves and disclose when their public duties may affect their financial interests. These laws are intended to maintain trust in public institutions, helping to defend against legislative self-dealing, or the perception of it. 

Blind trusts are a workaround to real or perceived conflicts of interest. A public figure can place the money and property that might create a conflict of interest into a blind trust and turn the money and property over to an independent trustee. The official can then claim that they do not know how their actions in office will affect their private financial interests, because they have no control over those interests. 

A dozen states have laws that regulate blind trusts, and these regulations must be followed closely. Federal ethics laws also have rules about what qualifies as a blind trust and how it should function to comply with the law. 

Blind Trusts and Company Executives

Blind trusts are not just for government officials. Conflicts of interest can similarly impact officers, directors, and others who own shares in a company and have information not available to the public. Ownership of these shares can call into question whether a corporate insider is acting in the best interests of the company and its shareholders—as federal financial law requires them to—or in their own interests. 

The Securities Act restricts the sale of shares owned by corporate insiders for as long as they are affiliated with the company. Publicly traded companies usually only allow insiders to trade company stock during “window periods.” A blind trust set up during a window period can be a mechanism for avoiding these trading limitations. The trustee of the insider’s blind trust is given guidelines for selling company stock, and the trustee is then free to execute this plan without running afoul of insider trading laws. 

Blind Trusts and Lottery Winners

While politicians and company insiders may use a blind trust to avoid conflicts of interest, a lottery winner or person who receives a financial windfall may use this type of trust for a different reason: financial privacy. 

Let us say that you are the lucky winner of the $1 billion Powerball lottery. As excited as you are to spread the news and raise the big cardboard check on television, you decide that you want to remain anonymous. There are plenty of reasons to keep a low profile—reporters, scammers, harassment, and requests for money from friends and family, to name just a few. But not all states allow lottery winners to remain anonymous. 

If you do not live in one of those states and you want anonymity, you can use a blind trust to protect your identity. However, “blind” trust is a bit of a misnomer in this situation. It is just a regular trust that uses a name other than your legal name. You retain control of the trust and its money and property, but you are “blind” to the public because the trust is not easily linkable to you. 

Don’t Go Blind into a Blind Trust—Talk to a Lawyer

Establishing a blind trust can be complex. Depending on its use, there may be federal and state laws to comply with, including rules related to conflicts and disclosures, reporting requirements, who may serve as trustee, and allowable communications between the trustee and beneficiary. 

Blind trusts are set up for very specific reasons, and for them to function as intended, they must be set up carefully. If you want to prevent conflicts of interest or maintain privacy, it is vital that you work with an experienced estate planning attorney to ensure the accuracy and validity of your blind trust. Please contact us to schedule an appointment.

What if I Cannot Find a Beneficiary?

When someone has named you as the executor (also known as a personal representative) of their will or the trustee of their trust passes away, you are obligated to distribute that person’s money and property according to the document’s terms to the designated beneficiaries. (For convenience, the roles of executor and trustee will be referred to throughout this article as the general term fiduciary.) Sometimes, perhaps because of a family conflict or just falling out of touch, the whereabouts of a will or trust beneficiary are unknown. What should you, as the fiduciary, do if you cannot locate a beneficiary of the will or trust?

As a fiduciary, you have an obligation to use reasonable diligence to locate a missing beneficiary. What is considered reasonable depends on the circumstances, including what efforts have been made to locate the missing beneficiary and how much money or property is at stake.

At a minimum, a fiduciary should call the last known phone number and send notice of the estate or trust administration to the last known address. If this initial effort yields no results, then the fiduciary should contact known family members or friends for information that may lead to the beneficiary’s location, search social media and people-search sites on the Internet, publish notice in the newspaper, check property records, and otherwise use their best efforts to locate the missing beneficiary.

If the value of property to be distributed to the missing beneficiary is very small, then the fiduciary will likely not be required to spend a lot of the estate or trust’s money to locate the missing beneficiary. If, however, the property value is significant, then the fiduciary may have to take additional efforts to locate the missing beneficiary to satisfy the reasonable diligence requirement. Such additional efforts may include hiring a private investigator or using an heir search service.

Heir Search Services

Heir search services are dedicated specialists to find missing beneficiaries. They employ forensic genealogists and estate investigators who conduct extensive searches throughout the United States or the world to locate missing beneficiaries. They often have access to additional records, such as birth, marriage, and death certificates, adoption and other court records, and genealogical databases.

Heir search services can provide the added benefit of verifying the identity of the beneficiary to ensure that you, as the fiduciary, make distributions to the proper person and not someone pretending to be the beneficiary to take advantage of a fiduciary’s ignorance.

If the missing beneficiary cannot be found even with the help of a professional heir search service, you can petition the court to allow you to make a preliminary distribution of money and property to the beneficiaries who have been located. The court will likely order that the missing beneficiary’s property be held in trust for a certain period of time, as specified by state law, allowing time for the missing beneficiary to claim it. You may also be able to obtain indemnity insurance to protect you in case a missing beneficiary later appears and makes a claim after the estate or trust has already been distributed.

Work with an Attorney

Locating a missing beneficiary can take considerable time and cause significant delays in an estate and trust administration. Meanwhile, beneficiaries who have been located and expect to receive their share can become impatient. In situations where a missing beneficiary adds a layer of complexity to an administration, it can be advantageous to hire a legal professional who has experience in navigating the demands of impatient beneficiaries while protecting your interests as the fiduciary.

Further, in cases where a missing beneficiary cannot be located and it becomes necessary to petition the court to allow a preliminary distribution to the known beneficiaries, using a legal professional’s expertise of the state’s laws and procedures can lead to a quicker resolution of the issue.

Being named as the fiduciary of a will or trust carries a large responsibility to locate the beneficiaries and make distributions to them in accordance with the terms of the will or trust. When a beneficiary cannot be located, the fiduciary has an obligation to be diligent in their efforts to find the beneficiary, including hiring a professional heir search service. We have the expertise and resources to help you navigate the additional complexities that come with a missing beneficiary. Contact us if you would like to discuss how we can help you with your administration or craft your own plan to provide your loved ones with a smooth administration.

Business owners

Can a Trust Own My Business after I Die?

In general, the answer to the title question is yes, your trust can own your business after you die. However, there are a number of considerations that may impact the answer to this and the following questions. One consideration is the type of business interest you own. Is your business a limited liability company (LLC), a partnership, a corporation, or a sole proprietorship? Another consideration is how your business is managed. Is your business managed as an LLC, a partnership, or a corporation?

How Does the Trust Get Ownership of the Business?

  • LLC: If your business is an LLC, a trust can receive ownership of your business interest when you execute an assignment of interest. If you are the LLC’s sole member, then after you have executed the transfer document assigning your interest to the trust, the trust will own 100 percent of your business. If your LLC has other members, your trust will own only the percentage of the business that you own. For example, if you have a 25 percent ownership interest in an LLC, your trust will own 25 percent. It is important to review the LLC’s operating agreement to see what restrictions, if any, there are on transferring your interest. Also, some operating agreements will require the other members’ consent prior to any transfer. If your LLC issues membership certificates, you should submit your assignment document to the LLC and have new membership certificates issued in the trust’s name.
  • Partnership: As with an LLC, a partnership interest is transferred to a trust by an assignment of interest. Again, it is important to review any partnership agreement to determine if there are restrictions or other conditions, such as consent requirements, to a transfer.
  • Corporation: If your business is a corporation, you should contact the corporation to determine what documentation will be needed to transfer your stock to your trust. For closely held corporations without specific documentation requirements, you can transfer your stock to your trust by executing an assignment of stock. You should submit this document to the corporation so that new stock certificates can be issued showing that the trust owns the stock. As with other types of business interests, you should check the corporate governing document, if any, to determine if there are restrictions or other conditions on making a transfer to your trust.
  • Sole Proprietor: If you own your business as a sole proprietor, you have not created any separate legal business entity that needs to be transferred. To transfer ownership of your business’s assets to your trust, you will simply transfer ownership in the same way as you would any other assets that are in your personal name. 

How Is the Business Managed?

How the business is managed after it has been transferred to the trust is very fact specific and will depend on several factors, such as what kind of business has been transferred and how that business was managed prior to the transfer. 

  • LLC: After a business interest has been transferred to a trust, the trustee will own the interest. If the interest is a single-member LLC where the member runs the business and is also the trustee, the trustee would continue to run the business’s day-to-day affairs, just like prior to the transfer. After the member’s death, the successor trustee would manage the business unless the trust and operating agreements have specified otherwise or the trustee has delegated their business management duties to another person. If, however, the business interest is a manager-managed multimember LLC where the member has not participated in day-to-day management decisions and such decisions have been delegated to a manager, the LLC would continue to be managed by the manager both prior to and after the member’s death.
  • Partnership: In a partnership where the partner participated in day-to-day management and has now transferred their ownership portion to a trust of which they are the trustee, the trustee will continue to manage the business as before the transfer. As with an LLC, after the partner’s death, the successor trustee will step in to manage the business unless the trust and partnership agreements specify otherwise or the trustee has delegated their management duties to another person. If the partnership has delegated these duties to its officers or employees, then depending on what the trust and partnership agreements direct, the trustee will most likely continue to allow the other officers/employees to manage the business, both prior to and after the partner’s death.
  • Corporation: After transferring the corporate stock to the trust, the trustee, as the owner, will be entitled to vote that stock according to the terms and conditions of the corporation’s governing documents. Normally, a transfer of stock to a trust will not change the corporation’s management.

What Do the Beneficiaries Receive?

The trust’s terms will determine what the beneficiaries are entitled to receive. The trust is entitled to receive income or profit distributions to owners or stockholders. Whether that income is distributed to the beneficiaries, and on what terms, will depend on the trust agreement’s terms.

Special Note About S Corporations

If your business is taxed as an S corporation (and you do not have to actually be a corporation to be taxed as an S corporation), there are special rules about who can own an S corporation. It is important to seek the advice of a qualified legal or tax professional prior to transferring ownership of your S corporation business interest to a trust and after the death of the grantor/trustmaker.

Although your trust can own your business after you die, you must consider many factors when transferring your business ownership interest to your trust. Therefore, it is important to consult a qualified professional who can ensure that you have considered all the factors and help you properly complete the transfer.

Silent Trusts: Could I Be the Beneficiary of a Trust and Not Know It?

People who have accumulated a substantial amount of wealth during their lifetime are often reluctant to disclose the full extent of their wealth to their children. Although there may be a number of good reasons for high-net-worth individuals to create a trust with their children as beneficiaries, the phrase “trust fund baby” immediately brings to mind images of apathetic adults living lavish, substance-abusing lifestyles with no need or desire to work and no purpose or direction in life. Creating a silent trust may be the solution to such nightmarish beneficiary-gone-wrong scenarios.

What Is a Silent Trust?

After a trust has been created, the trustee has certain legal duties to the beneficiaries. Although a trustee’s duties vary by state, in most states, a trustee must disclose the trust’s existence, identify themselves as the trustee, and send the beneficiaries yearly accounting statements on request with information about the trust’s assets (accounts and property), taxes, distributions, and performance.1

A silent trust eliminates the legal requirement that the trustee tell the beneficiaries about the trust’s existence or terms for a period of time. Typically, a silent trust’s terms will provide for a triggering event, such as the beneficiary reaching a certain age or achieving a certain milestone or the trustmaker’s death or incapacity. The trustee’s obligations to inform the beneficiary begin only upon the occurrence of the triggering event.

Benefits of a Silent Trust

A silent trust that does not require the disclosure of information to beneficiaries has numerous benefits:

  • Keeps the trustmaker’s financial affairs and estate plans confidential
  • Reduces the risk that beneficiaries will engage in financially irresponsible behavior because of their expectation of receiving trust money
  • Reduces the risk that beneficiaries will become the targets of fraud, scams, theft, or frivolous lawsuits
  • Avoids beneficiary scrutiny of trust asset management, particularly when the management of a family business is included

Downsides of a Silent Trust

A silent trust also has downsides. Reduced trustee supervision is one of the most obvious drawbacks. If a beneficiary has no knowledge of or information about a trust, they cannot supervise the trustee and ensure that the trustee is acting in their best interests. A trustee’s breach of fiduciary duty may not be discovered until years later after a great amount of damage has already been done. This downside may not be much of a concern, however, in states that require the selection of a beneficiary surrogate or designated representative who receives the required information and notices on the beneficiary’s behalf.

Another downside is that a silent trust may not actually be very effective at discouraging a beneficiary’s financially irresponsible behavior. Although children may not know the full extent of their parents’ wealth, they know that the wealth exists, and they probably expect to receive a share of it in some form, even if they do not know of the trust’s actual existence. Choosing to keep children in the dark about the family’s wealth can result in missed opportunities to involve them and educate them about how wealth can be acquired, managed, and beneficially used and preserved. 

Should I Consider a Silent Trust?

High-net-worth individuals who expect to have a taxable estate may want to consider creating a trust that will transfer their assets during their lifetime to avoid including the assets in their estate at death. Currently, an estate larger than $12.06 million is subject to estate tax, although in 2025 that amount will drop to $5 million (adjusted for inflation). Parents who want to create trusts to transfer wealth but who worry about the effect such large wealth transfers may have on their beneficiaries may want to consider including silent trust provisions.

Silent trusts are permitted in only a handful of states: Alaska, Delaware, New Hampshire, South Dakota, Nevada, Tennessee, and Wyoming.2 If you live in a state with a silent trust statute, you can include silent trust provisions when you create a trust. If you do not live in a state that allows silent trusts, you can create the trust in a state that does. You will, however, have to use a trustee (such as a trust company) located in that state.

If you worry about your beneficiaries becoming trust fund babies, or if you just prefer to keep your financial and estate plan as private as possible, we are happy to meet with you to discuss various estate planning strategies that can help you meet your unique goals and wishes.

References

  1. Confidential Trusts, Wealth Management at Northern Trust (Jan. 2017), https://www.northerntrust.com/documents/white-papers/wealth-management/insights-on-confidential-trust.pdf.
  2. Al W. King III, Should You Keep a Trust Quiet (Silent) from Beneficiaries?, WealthManagement.com (Mar. 25, 2015), https://www.wealthmanagement.com/estate-planning/should-you-keep-trust-quiet-silent-beneficiaries.
man on computer looking at trust documents

How to Protect Yourself from Claims of Self-Dealing When Serving as a Trustee

What Is Self-Dealing in Trust Administration?

A trustee usually has quite a bit of discretion in their management of a trust’s accounts, money, and property (known as assets). At the same time, as a fiduciary, a trustee also owes the trust’s beneficiaries a duty of loyalty, which prohibits the trustee from self-dealing. In the simplest terms, self-dealing happens when a trustee uses the trust’s assets for their own benefit instead of for the beneficiaries’ benefit. Despite this simple definition, self-dealing can be much harder to identify in practice and is often done in ignorance, particularly when there are complicating factors such as the trustee also being a trust beneficiary.

Some common examples of self-dealing are a trustee

  • making gifts to themselves from the trust’s assets;
  • borrowing money from the trust;
  • investing the trust’s assets in their own business;
  • investing in high-risk investments for their own benefit;
  • selling property to or buying property from the trust;
  • mixing the trust’s assets with their personal assets;
  • paying themselves more than a reasonable amount of compensation;
  • receiving kickbacks from a third party compensated from the trust’s assets; and
  • when also a beneficiary, making a distribution to themselves but not to any other beneficiary or making a larger distribution to themselves than to any other beneficiary.

Examples of Innocent Self-Dealing

Let us look at some real-life scenarios that demonstrate how a trustee may engage in self-dealing without even realizing it or while thinking that they are benefiting the beneficiaries.

Example 1. Tom is the eldest son of Dad and Mom. Over the years, Tom has proven himself to be hard-working and reliable and has assumed most of the responsibility for running the family business that supports Dad, Mom, Tom, and Tom’s three siblings. Not surprisingly, Dad and Mom select Tom as the trustee of their trust, with Tom and Tom’s brother and two sisters as beneficiaries. Prior to Dad’s death, Dad instructs Tom that the trust’s assets are available for Tom to use so long as, in the end, all the beneficiaries (Tom and his three siblings) receive equal shares from the trust. After Dad’s death, Tom spends many hours doing trust administration tasks and does not take one cent of compensation from the trust even though, under the trust agreement and state law, he is entitled to reasonable compensation for his time. Tom and his brother decide to buy a yacht together. Unfortunately, neither one of them has enough money in his personal bank account to buy the yacht. Tom makes a loan of trust money to himself and his brother to buy the yacht but does not make a similar loan to either of his sisters. Is this self-dealing? What if Tom makes the loans to himself and his brother under arm’s-length terms, charging a reasonable rate of interest and requiring security for the loan? Under these additional facts, is this self-dealing?

Example 2. Tom from Example 1 wants to expand the family business. Tom, his brother, and one of his sisters own equal one-third shares of the company as partners. Tom’s other sister has no ownership interest in the company but is a paid employee. Tom uses trust money to fund his business expansion plans. Is this self-dealing?

Example 3. Sue, a successful physician, and her two brothers are the beneficiaries of a family trust. Sue is the trustee. The trust owns a lake house that Sue’s parents purchased when she and her brothers were young, and many happy family memories were made at that vacation home. Unfortunately, the trust cannot afford to pay the mortgage and property taxes and keep up the required maintenance on the lakefront home, and neither of Sue’s brothers can afford even a one-third share of the amount needed for mortgage, taxes, and maintenance. Sue knows that the home must be sold, but she cannot bear to part with the property that represents so many happy childhood memories. Sue decides that she will buy the vacation home from the trust at fair market value. Is this self-dealing? What if, prior to Sue’s buying the home, the market crashes and the property loses a fourth of its value, but Sue purchases the home at the higher value? Under these additional facts, is this self-dealing?

How Do I Avoid a Claim of Self-Dealing?

As these examples demonstrate, there is not always a clear-cut answer to whether a trustee is engaging in self-dealing. An inexperienced trustee may not even realize that they are breaching their fiduciary duties. However, there are a few safe harbor rules that a trustee can follow to ensure that they will not be accused of self-dealing and find themselves involved in an unwanted lawsuit.

First, a trustee can engage in an action that might otherwise be categorized as self-dealing if the trust instrument authorizes it. So in Example 1 above, if Dad had wanted to allow Tom to use the trust’s assets in any way Tom saw fit as long as in the end all beneficiaries received equal shares, Dad should have made sure that such an instruction was included in the written trust instrument instead of being a separate oral instruction.

Second, a trustee can seek the approval of the trust beneficiaries for any action or inaction. If, after all facts are fully disclosed, the beneficiaries consent to the trustee’s proposed course of action or later ratify it, a trustee will not be guilty of self-dealing. So in Examples 2 and 3, if Tom and Sue had approached their siblings and explained what they planned to do, and their siblings had given them the go-ahead (preferably in writing), Tom and Sue would not be engaging in self-dealing.

Finally, a trustee can seek court approval of their actions. Nevertheless, any trustee looking to protect themselves from claims of self-dealing would be wise to avoid any transaction in which they stand to benefit unless the trust instrument specifically authorizes such action or they are transparent about the transaction and the beneficiaries consent to it.

If you are or will be a trustee of a trust in the future and have questions about the best way to fulfill your trustee duties, contact us. We would be happy to sit down with you and assist you with your role.

family overlooking sunset

Yours, Mine, and Ours: How Including a Pour-Over Trust Can Simplify Your Planning

A number of married couples think about their accounts and property as “yours, mine, and ours,” especially if either or both spouses have gotten or will be getting remarried, married late in life, or have brought or will be bringing significant amounts of money and property into the marriage. Deciding what should happen to all of these accounts and property at death can be a big undertaking. To help alleviate some of the stress that may come from making such decisions, we like to suggest a unique estate planning tool called the pour-over trust.

What is a joint pour-over trust?

A joint pour-over trust holds your and your spouse’s joint property. You can create the joint trust together and name yourselves as the current trustees. When the first of you passes away, half of the joint trust’s accounts and property is distributed (pours over) to the deceased spouse’s separate trust, and the other half is distributed to the survivor’s separate trust. 

Does this mean that we will need three trusts?

For the estate plan to work as intended, you may indeed need three trusts. Jointly owned property goes into your joint pour-over trust, and separately owned property goes into your own separate trust. This allows you to provide separate instructions for handling jointly and separately owned accounts and property. However, once the first of you dies and the accounts and property are distributed to the respective individual trusts, there is nothing more for the joint pour-over trust to do. Thus, it will not require a long, ongoing administration after the first death.

What are some other benefits of a joint pour-over trust?

Ease in funding the trust. A joint pour-over trust makes it easier to fund your joint accounts and property into it because both of you control it. While an account can be jointly owned by two people, some financial institutions may not allow two trusts to jointly own the same account. This technicality can sometimes derail your planning or increase the risk of probate should the two of you die simultaneously while still owning your accounts and property jointly as individuals.

Ease of administration. The joint trust allows for ease of lifetime administration because both of you retain control over your joint property.

Probate avoidance. Avoiding probate is a popular reason for considering a trust-based plan. If your joint accounts and property are in a trust and you and your spouse pass away simultaneously, your loved ones can avoid probate because the trust instructions will dictate what happens to the accounts and property. Your chosen backup trustee will carry out the instructions without court supervision. 

Keeping things separate.By allocating your joint property to the joint pour-over trust and your separate accounts and property to your individual trusts, your separate accounts and property remain separate, and it is easier to administer the trusts according to each of your wishes. Such an arrangement can be helpful if you or your spouse have children from a previous relationship whom only one of you wants to provide for at death. In some cases, however, these accounts or pieces of property may have already been handled separately, so commingling them in a joint trust may muddy the waters and run contrary to your desires.

Double step-up in tax basis. In a community property state, placing your joint accounts and property in a joint pour-over trust may enable the two of you to preserve the community property nature of your accounts and property, allowing for the double step-up in tax basis (once at each of your deaths). If you were to divide ownership of these accounts or property between two separate trusts, you may risk losing the double step-up in basis.

Having joint and separate accounts or property does not mean that you cannot carry out your estate planning wishes. Working together, we can assess what you own and how you own it and discuss your wishes about what should happen to those accounts and property at your death. Call us today so we can craft a plan that works best for you, your spouse, and the rest of your loved ones.