Miscellaneous Trust Options
In addition to the various options available regarding the types of provisions to include in the Marital and Family Shares, there are a number of additional options available that enables Lawyers Service Center to custom tailor documents for each client's particular needs. Some of these options include the following:
Minimum Age for Distributions
The Family Share contains a host of possible provisions for when a beneficiary may receive an outright distribution. In some cases, however, the beneficiary might be someone other than a child provided for in the Family Share (e.g., a grandchild or great-grandchild) and it is generally preferable to provide that the Trustee can continue to hold such beneficiary's share until the beneficiary reaches a specified age. Until then, the Trustee can give the beneficiary as much of the trust income and principal as the Trustee deems advisable or can accumulate it until the beneficiary reaches that age. Such an alternative is preferable to having no provision included and if a beneficiary was a minor, a court appointed Guardian might be needed before a distribution can be made. By setting a minimum age, the Trustee can hold a young beneficiary's share without the need for such a Guardian.
It is also possible in this situation to give the young beneficiary certain limited powers of appointment so he or she can direct what should happen to his or her share should the beneficiary die before attaining the minimum age. Such powers of appointment may be limited to the grantor's descendants, to descendants and spouses of descendants, or include any individual.
Ultimate Beneficiary
In the unlikely event that all the named beneficiaries included in the Family Share (typically children and all their issue) were to die before the trust assets were all distributed, provisions can be included to name one or more alternate beneficiaries. Often, the choice is to name the client's (and/or the spouse's) nearest relatives, e.g., parents, if any, and otherwise the siblings of the decedent and the descendants of a deceased sibling.
Some clients will prefer to name specific individuals and/or charities. All such choices can easily be incorporated into the documents Lawyers Service Center provides.
Special Business Powers
For clients who may own or have an interest in a closely held business, it is often advisable to include specific provisions in the trust and/or will enabling the fiduciary (either Trustee and/or Executor) to operate that closely held business. Such powers are often broader than would normally be given to a fiduciary, providing the Trustee and/or Executor with greater flexibility in continuing to operate the closely held business.
Medicaid Provisions
If potential long term care concerns are an issue for a client, and if the client is not yet ready to create an irrevocable trust (see the discussion on Medicaid trusts), it is possible to include a provision in the client's revocable trust which provides that if the client becomes mentally or physically disabled, and in need of long term medical care (e.g., nursing home care), which care might require the use of a significant part of the trust assets, the Trustee has the discretion to declare the trust irrevocable, and to give away any remaining trust assets so that the client will become eligible for Medicaid. The Trustee cannot exercise this power without the consent of the client while he or she is legally competent, of course, but the power can be used without his or her permission when he or she is not competent. The Trustee is directed to retain enough assets to support the client until such time as he or she will become eligible for Medicaid. In essence, the Trustee is empowered to give away assets on behalf of the client in the same manner the client could do so directly. Of course, the decision to declare the trust irrevocable and give away assets is always subject to the "look back" rules, but it may be possible to "protect" at least some of the client's assets.
It is imperative that the trust be “funded” (i.e., that assets actually be registered in the name of the trust) if this type of Medicaid provision is to work. Unless the title to all, or substantially all of the client's assets have actually been transferred into the name of the trust, the Trustee will not be able to effectively exercise this type of power.
In Terrorem Clauses
While there can never be any absolute guarantees that an heir or other interested party might try and contest the terms of a will or trust, it can often be helpful to include an “in terrorem” clause in the documents. Such a clause is designed to prevent, or at least discourage, anyone from contesting the provisions of the will or trust and upsetting the division of assets as set forth by the client.
Powers to Remove and Replace Trustees
A concern that many clients have about using trusts is that they or their family may "lose control" over the trust assets. If the client's family (and/or spouse) can access the trust assets only with the permission of the Trustee, many clients are concerned that they will be subject to the "whims" of the Trustee in making distributions. In point of fact, all Trustees are under a fiduciary duty to carry out the terms of the trust and administer the assets in the best interest of the beneficiaries. Thus, for example, if the trust document provides that the Trustee should be "liberal" in making distributions of principal, the Trustee cannot withhold distributions without good reason.
One way to allay this kind of concern is to give the beneficiaries the power to remove the Trustee. Such a power is a strong weapon to ensure that the Trustee is responsive to the needs of the beneficiaries. It should be noted that there is some risk in a beneficiary having a power to remove trustees: the IRS had ruled that a power in the creator of a trust to remove and appoint trustees (of an irrevocable trust that otherwise would not be in the creator’s estate) is effectively the same as if the creator had retained the trustee’s powers himself (which could cause the trust property to be in the creator’s estate). The IRS had also indicated that it would expand its ruling to include a beneficiary who has the power to remove and appoint trustees. Its theory seemed to have been that such a power of removal and appointment amounts to a power of withdrawal being in the beneficiary, assuming the trustee’s power to distribute trust principal is not limited by an “ascertainable standard.” The theory would be that if the beneficiary had the power of the trustee and such a power would cause the property to be in the beneficiary’s estate, then the ability to remove and appoint trustees will amount to the same power. While the IRS has abandoned its argument with respect to creators of trusts, it has not specifically done so with respect to beneficiaries. To avoid any argument, therefore, the power to remove the trustee is not vested in the same person as is the power to hire trustees. That distinction should be sufficient to preclude any problem with the IRS someday. Of course, no tax planning can be certain, but the minor risk appears well worth the flexibility of having the power of removal. To further minimize the risk, however, the trust also states that no person participating in the appointment process can appoint himself as a trustee. That precludes a potential attack by the IRS that the power to appoint oneself as a trustee is fatal to the tax planning. Such an attack would be futile under current law, because the trust otherwise provides that no trustee may participate in any decision relating to distributions to himself. Nevertheless, because even a futile attack can be costly this remote possibility is avoided by eliminating any chance of self-appointment.
In some cases, clients do not want to give the beneficiaries the power to remove a Trustee. Rather, they want to be sure that the Trustee they have selected will serve. Even in these cases, it is often advisable to give the beneficiaries the power to fill a vacancy in the trusteeship, particularly if the Trustee named by the client is an individual. Often, if such a power to hire a new Trustee is to be given to the beneficiaries, it is advisable to consider limiting who the beneficiaries might appoint, e.g., naming only a trust company or bank, an attorney, or a CPA. In the case of an attorney or CPA, each case, language is generally included that any such individual successor trustee must not be directly related to the beneficiaries, nor be a spouse of the beneficiaries. This is designed to prevent subservient individuals being appointed; otherwise the IRS and creditors, perhaps, could argue that the beneficiaries are the absolute owners of the property because of their control over the Trustee.
Successor Trustee Choices
It generally is a good idea to include provisions regarding possible successor Trustees. While a number of possible options are available, the initial choice to be made is to decide whether the successor Trustee named must serve in any event at the client's death, even if there is a remaining Trustee. Thus, for example, if husband and wife create trusts and both are named as Trustees of each trust, when the husband dies, the wife remains as Trustee of his trust. The husband may want to require that the successor Trustee he has named become a co-trustee with his wife. The other option is to provide that the successor Trustee named will serve only if there is no Trustee serving and no successor otherwise appointed. Thus, in the example just cited, the wife may end up being the sole Trustee of her late husband's trust. Which option is best depends upon the amount of control the client may want to retain (i.e., requiring that the named successor Trustee serve in any event), or the amount of control he wants to leave to his beneficiaries (i.e., not requiring any immediate appointment of a successor Trustee as long as someone is serving at the client's death).
The choice of who should be named as successor Trustee is very broad. Some clients prefer to name family members, while others prefer to name professional Trustees. There are pros and cons to each choice, with no "right" or "wrong" choice.
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