Real Estate & Estate Planning Attorney

CHOICE OF TRUSTEE One of the most difficult and important tasks in preparing a trust for an individual is the selection of a trustee or trustees to manage the trust. Proper management of the trust can make a huge difference in the beneficiary's quality of life for years to come, if not for her entire life. Generally, there are three categories of trustees. Family/friends, Professional Trustees and Professionals serving as trustees (i.e... Attorneys and Accountants). Here are seven issues I have asked them to consider in making their decision: Temperament. Personalities to avoid as Trustees include emotional, confrontational, and dogmatic. Family and friends might sound good at first but if there is a potential for conflict of interest or excessive emotions you want to weight the value of retaining family harmony. Cost. Many people fear using a professional trustee -- trust companies, banks, attorneys, accountants -- due to the cost. Professional trustees usually charge between 1.0 and 1.5% of assets under management, the fee decreasing as the trust funds increase. Over time, these costs can add up, but not nearly as much as the cost of bad management. To put these costs in perspective, they are often the same or less as financial advisors or mutual fund companies charge, and they do not take on any of the fiduciary responsibilities of trustees. Alternatively, many attorneys’ fees will be the same as their hourly fees for any client. Number. In some case, clients are comfortable simply naming their son or daughter as the sole trustee but are nervous about what that might do to their relationship with other family members. Another trustee (co-trustee) would allow them to share decision-making and responsibility (and blame, perhaps), as well as the workload. It would also provide redundancy if one of the trustees was unavailable for any reason. While it makes a lot of sense to have more than one trustee, more than three starts to get cumbersome. While any single trustee can act for the trust in terms of writing checks and directing investments, they must be carrying out the decisions made by all the trustees. Keeping everyone in the loop and making joint decisions all the time can be difficult if too many people are involved. Stability . Trusts can last a long time. Will the person you appoint be able to provide the necessary attention to the trust for years or decades? Will they be able to keep up with the often-tedious jobs of paying bills, filing tax returns, and preparing accounts? Since we cannot be certain of the answer to this question if when appointing an institution -- banks get bought and sold, sometimes with ill effect on their trust departments -- the trust must include a mechanism for changing trustees. Financial acumen. The trustee will need to manage trust investments and spending, taking into consideration the needs and interests of both current and future beneficiaries. Trying to balance their current and future needs can be difficult. They may have $1 million in trust, which seems like a lot of money (perhaps not what it used to be), but to make sure that the fund keeps growing with inflation, they need to limit their trust withdrawals to $30,000 to $40,000 a year. This may seem incongruous with so much money invested, but otherwise the buying power of the trust will diminish and ultimately the trust could fall into a "death spiral" as the beneficiary must dip into larger and larger amounts of trust principal to make ends meet. Organization. In addition to all of the factors mentioned above, at least one of the trustees needs to be very well organized in order to meet all of the trustee responsibilities -- making distributions, providing account statements to beneficiaries, reviewing investments, filing timely tax returns. Personal touch. While cost is one reason many clients avoid using professional trustees, another is fear of working with an institution rather than an individual who personally knows the beneficiaries' situations and needs. This can be especially off-putting if the institution has experienced significant turnover in personnel. We've had cases where a parent chose a local banker to serve as trustee only to have that bank bought by a statewide bank which was bought by a regional bank which, ultimately, was bought by a national bank. In the end, the children were dealing with trust officers in another state. This is another reason it's important for all trusts to have a mechanism for changing trustees. As you can see, neither the choice of trustee nor the chosen person's decision to accept the appointment, should be taken lightly. Each client’s decision will be made based on his unique situation, including the available family members and friends, the likely longevity of the trust, the amount of assets under management, and other factors. We find that the combination of a professional trustee who can take care of the administrative side of the trustee's role and a family member who can bring the personal touch often works best. In a practical sense, the professional trustees are more often and attorney because many of the institutionalized trusteed are either cost prohibited or decline to serve because the trust assets are too small. Professional Trustees For large sized trusts (commonly of $1.5 Million in non-real estate holdings), due to the complications of the trustee's role, we strongly urge clients to consider professional trustees such as trust companies, and banks. They are equipped to handle the investment, accounting and tax sides of trust operations and can do so with little risk or difficulty. They should be better equipped to fend off inappropriate requests for distributions and to deal with conflicts of interest. On the other hand, many professional trustees are ill-equipped to deal with the issues presented by beneficiaries with special needs, whether they be eligibility for public benefits or responding to sometimes frequent requests for distributions for unusual purposes. They may be more comfortable simply managing trust assets. Anyone selecting a professional trustee must ask about the prospective trustee's experience with special needs trusts and their methods for responding to these questions. When a large institution is serving as trustee, an inexperienced trust officer may be assigned to the account. He may have little experience dealing with special needs issues. And the person assigned may change over time as employees come and go and, in the case of many banks, as the identity of the bank itself changes from one to another. This can be extremely frustrating for beneficiaries and their families. Attorneys as Trustees For trusts of any significant net worth you can consider using a professional trustee such as an attorney. Attorneys don’t charge as much as institutionalized trustees and will handle much smaller trusts. Attorney also may have some history with the family especially the grantors which may aid the attorney in understanding the grantor’s purpose of having the trust. Attorney’s can also serve as a co-trustee with a family member and allow for the separation of work between trustees. Family Trustees Choosing family members and friends as trustees also has advantages and disadvantages. The advantage is that these are people who know and care about the beneficiary and may be able to you the trust funds to provide the greatest benefit for the person with special needs. Many clients are reluctant to give up control to an unknown third party. A further perceived advantage is that family members normally don't charge for their services. The reality, however, is that trustee fees - typically about 1 percent of trust assets per year, with a minimum for smaller trusts - is very reasonable given the services provided. The risk that a family member trustee will make mistakes or not be able to follow through on the basic trustee responsibilities of prudent investment and accounting are so great that the trustee fee can simply be seen as reasonably-priced insurance. Even the most skilled and responsible family member with the best of intentions may not be able to follow through on all the trustee details given the press of other matters in her life. In short, to appoint a family member is both a large compliment and placing a large burden on her shoulders. Co-Trustees Clearly, there are problems with both family trustees and professional trustees. One solution which we have used with success in our practice is co-trustees - both a professional and family member trustee working together. This can be the best of both worlds. Everyone can rest easily knowing that the basic trust functions will be carried out by the professional trustee. But the family member trustee will be on the scene to make sure that the trust is used to best serve the beneficiary. So, You've Been Appointed Trustee, Now What? You have been asked to serve as trustee on the trust of a family member. This is a great honor meaning that the family member trusts your judgment and is willing to put the welfare of the beneficiary or beneficiaries in your hands. However, it is also a great responsibility. You need to go into it with your eyes wide open. Fiduciary Responsibility. As a trustee, you stand in a “fiduciary” role with respect to the beneficiaries of the trust, both the current beneficiaries and any “remaindermen” named to receive trust assets upon the death of those entitled to income or principal now. As a fiduciary, you will be held to a very high standard, meaning that you must pay even more attention to the trust investments and disbursements than you would for your own accounts. May I read the trust? The trust document is your instruction manual. It tells you what you should do with the funds or other property you will be entrusted to manage. Make sure you read it and understand it. Ask the drafting attorney any questions you may have. The Trust’s Terms. Read the trust itself carefully, both now and when any questions arise. The trust is your road map and you must follow its directions, whether about when and how to distribute income and principal or what reports you need to make to beneficiaries. What are the grantor's goals? Unfortunately, most trusts say little or nothing about their purpose. They give the trustee considerable discretion about how to spend trust funds with little or no guidance. Often the trusts say that the trustee may distribute principal for the benefit of the surviving spouse or children for their "health, education, maintenance and support." Is this a limitation, meaning you cannot pay for a yacht? Or is it a mandate that you pay to support the surviving spouse even if he could work and it means depleting the funds before they pass to the next generation? How are you to balance the needs of current and future beneficiaries? It is important that you ask the grantor while you can. It may even be useful if she can put her intentions in the form of a letter or memorandum addressed to you. Investment Standards. Your investments must be prudent, meaning that you cannot place money in speculative or risky investments. In addition, your investments must take into account the interests of both current and future beneficiaries. For instance, you may have a current beneficiary who is entitled to income from the trust. He or she would be best off in most cases if you invested the trust funds to generate as much income as possible. However, this may be detrimental to the interest of later beneficiaries who would be happiest if you invested for growth. In addition to balancing the interests of the various beneficiaries, you must consider their future financial needs. Does a trust beneficiary anticipate buying a house or going to school? Will she be depending on the trust income for retirement in 15 years? All these questions need to be considered in determining an investment plan for the trust. Only then can you start considering the propriety of individual investments. Accounting. One of your jobs as trustee is to keep track of all income to, distributions from, and expenditures by the trust. Generally, you must give an account of this information to the beneficiaries on an annual basis, though you need to check the terms of the trust to be sure. In strict trust accounting, you must keep track of and report on principal and income separately. Taxes. Depending on whether the trust is revocable or irrevocable and whether it is considered a “grantor” trust for tax purposes, the trustee will have to file an annual tax return and may have to pay taxes. In many cases, the trust will act as a pass through with the income being taxed to the beneficiary. In any event, if you keep good records and turn this over to an accountant to prepare, this should not be a big problem. Delegation. While you cannot delegate your responsibility as trustee, you can delegate all the functions described above. You can hire financial advisors to make investments, accountants to handle taxes and bookkeeping for the trust, and lawyers to advise you on questions of interpretation. With such professional assistance, the job of trustee need not be difficult. However, you still need to communicate with those you hire and make any discretionary decisions, such as when to make distributions of principal from the trust to one or more beneficiaries. Distributions. Where you have discretion on whether or not to make distributions to a beneficiary you need to evaluate his current needs, his future needs, his other sources of income, and your responsibilities to other beneficiaries before making a decision. And all these considerations must be made in light of the size of the trust. Often the most important role of a trustee is the ability to say “no” and set limits on the use of the trust assets. This can be difficult when the need for current assistance is readily apparent. Fees. Will I be compensated? Often family members and friends serve as trustees without compensation. However, if the duties are especially demanding it is not inappropriate for them to be paid something. The question then is how much. Professionals generally charge an annual fee 1 percent of assets in the trust or on an hourly basis or some combination. So, the annual fee for a trust holding $1 million would be $10,000. Often, they charge a higher percentage of smaller trusts and a lower percentage of larger trusts. If you are doing all the work for a trust including investments, distributions, and accounting, it would not be inappropriate to charge a similar fee. However, if you are paying others to perform these functions or are acting as co-trustee with a professional trustee, charging this much may be inappropriate. A typical fee in such a case is a quarter of what the professional trustee charges, or .25 percent (often referred to by financial professionals as 25 basis points). In any case, it is important for you to read what the trust says about trustee compensation and discuss the issue with the grantor.  If after asking these questions you feel comfortable serving as trustee, then accept the role. It is an honor to be asked and you will provide a great service to the grantor and beneficiaries. This can serve as only an introduction to your duties and responsibilities as trustee.

Credit Shelter Trusts for Massachusetts Residence Credit shelter trusts are a way to take full advantage of Massachusetts estate tax exemptions. Being a Massachusetts resident we have been very lucky in terms of the appreciation of our real estate and many of my clients don’t realize that they are “millionaires” just by starting to look at their “worth” from their real estate. Massachusetts Estate Tax Laws have two major differences from the Federal Estate Tax Laws. An Individual who passes away has a $2.0M Exemption before their estate/beneficiaries will owe an estate taxes. The FEDERAL lifetime gift/estate tax exemption is $13.99 million in 2025. The lifetime gift/estate tax exemption is projected to be $7 million in 2026. Massachusetts does not allow for “portability”. The Federal law does. Portability means that spouses may share in their individual exemption, essentially doubling it. So presently a married couple could exempt up to $28M if one of them died in 2025. To have portability requires that the surviving spouse, elects it by filing a Federal Estate Tax Return for the deceased spouse even though no tax may be due). In Massachusetts the best way to replicate the benefit of portability is the use by both spouses of separate credit shelter trusts. The way to preserve both spouses' exemptions (so potentially $4.0M vs $2.0M) has been to create a "credit shelter trust" (also called an A/B or bypass trust). Simplistically if a couple is worth $3.0M or $4.0M when the first spouse dies and after the surviving spouse is worth $3.0M or $4.0M then when the second spouse dies (assuming the same net worth) the estate tax would be $99,600 for $3.0M and $182,500 for $4.0M. By using these credit shelter trusts, which are unique to married couples, they will use $4.0M in exemptions instead of only having the benefit of $2.0M when the second spouse passes. Standard estate tax planning is to split an estate that is over the prevailing state or federal exemption amount between spouses and for each spouse to execute a trust to "shelter" the first exemption amount in the estate of the first spouse to pass away. While the terms of such trusts vary, they generally provide that the trust income will be paid to the surviving spouse and the trust principal will be available at the discretion of the trustee if needed by the surviving spouse. Since the surviving spouse does not control distributions of principal, the trust funds will not be included in her estate at their death and will not be subject to tax. This way, in Massachusetts the couple can protect up to $4 million from estate taxation while still making the entire estate available to the surviving spouse if needed. The rising federal estate tax exemption means that many older trusts drawn up for married couples contain outdated estate-splitting provisions that may cost them dearly in state or federal taxes, or both. As recently as 2020, if you have retirement funds landing in a trust after your death, it is almost a guarantee the language in your trust will not be up to date unless it was amendment after January 1, 2020. Couples would do well to have their revocable trusts that contain credit shelter provisions reviewed by a competent professional. If you're interested in learning more about CST, contact our office today !