Author name: Rocco V. Beatrice

What do you mean, I Shouldn’t be the Trustee of “my own” Irrevocable Trust? Have no discretion as the trustee with regard to trust asset distributions.   Being trustee of your own trust can undo what the purpose of the irrevocable trust should be doing; this is, protecting your assets. We understand the confusion. Some lawyer told you that you could be your “own trustee.” At Estate Street Partners, although we will honor your wishes in the end, we strongly believe and advise in the safest option, period.   Being “Your Own” Trustee   First, let’s take a look at why we believe that you should not be your own trustee. While you, as the grantor, may technically be allowed to serve as the trustee of your UltraTrust irrevocable trust, you may end up in a precarious situation. If you have any discretion, as the trustee, with trust asset distributions, these assets may be included in your estate for tax, Medicaid, bankruptcy, debt collection and other purposes.   The key here is: “any discretion.” As a trustee, you need to have a lot of discretion to manage the assets of the trust. If any of those discretions are types that cause the court or government agency to claim that you have discretion to distribute assets in such a way that would benefit you, at the very least you will have to pay a lawyer a lot of money to defend you. Estate Street Partners would rather see you relaxing on a beach than stressing in a court room.   Here is an example of the difficulties when a grantor merely “can become” the trustee:   Estate of McTighe v. Comm’r, 36 T.C.M. 1655 (1977).   Fred set up some irrevocable trusts for his sons. When Fred died, the IRS attempted to tax the money left in the trust. The trust challenged the IRS in court. The IRS argued that since Fred had left himself the power to appoint himself the trustee, that he had sufficient control over the trust and should therefore be taxed on it. The trust argued that he never was the trustee and therefore the assets should not be taxed. The IRS won the case because the power to appoint himself as trustee gave him enough control over the trust to keep it in his estate.   Here is an example of very little discretion:   Estate of Farrel v. U.S., 553 F.2d 637 (Ct. Cl. 1977).   Marian set up an irrevocable trust and funded it. She wrote into her trust documents the ability to “fill in” as trustee whenever there was a gap in trustees (i.e. a trustee death or resignation). Otherwise, she could not fill in as trustee. Twice, there was a gap in trustees during Marian’s lifetime, but neither time did she assume the role of trustee, but rather appointed someone else. When Marian died, the IRS imposed a tax based on the amount in the trust. The trust appealed and lost as Marian still had a “thread” attached to the trust.   As you can see, being the trustee of your own trust is a quagmire that can potentially eliminate the advantages of an irrevocable trust. We would like you to reap the full benefits of the UltraTrust irrevocable trust and therefore kindly encourage you to elect a trusted non-family member as a trustee.

What is a revocable or living trust?   First, a trust is a contract that names a trustee to manage any assets owned by the trust. A grantor (aka settlor) gives something to another person with contractual instructions as to what they can and cannot do with the property. Put simply, the grantor is giving an item to another person to hold for them until certain events occur. The trustee does not own the assets, the trust does. Revocable trusts can be changed by the grantor or “revoked” at any time. For this reason, the courts view the property within a revocable trust as still being owned by the grantor. The grantor continues to pay taxes on any income and can control the property as if it were their own.   What are the advantages of a revocable trust?   Two main advantages of a revocable trust are the avoidance of probate and the possibility of “controlling one’s assets from the grave.” A revocable trust can hold every type of asset. If one places all of their assets in a revocable trust, there is nothing left for the probate court to do and thus there would be no need for probate court. Essentially, all of the assets have already been gifted (to the trust).   The trust becomes irrevocable at death because the grantor is no longer alive to make changes or revoke the trust. The trustee must then follow the instructions outlined within the trust document. The document could just describe how to distribute all of the assets, such as in a will, and then dissolve, or it may contain provisions for the trustee to continue to manage the assets for the benefit of the beneficiaries. These provisions may be good for protecting assets for the heirs from the issues described above. For example, the young adult beneficiary may not have access to the full assets of the trust, but rather the trustee could give out assets at certain ages, for certain events or have instructions to cut out the beneficiaries payments if they do not graduate college or run up significant debt or become chemically dependent.   What are the disadvantages of a revocable trust?   Like a will, a revocable trust offers no protection from estate or death taxes. Because the assets are still considered property of the grantor, they are, before the time of death, considered an uncompleted gift. When the assets are then gifted to the trust at death, they are subject to the same estate tax as a will.   A revocable trust, however, offers no financial protection during the grantor’s lifetime. For example, if a grantor is successfully sued, the plaintiff may still take assets from the revocable trust to satisfy their claims. Medicaid also considers assets in a revocable trust as countable assets. In other words, a person entering a nursing home must “spend down” nearly all of the assets in a revocable trust to qualify for Medicaid to help pay for their nursing home care. All of these issues stem from the basic premise that if a person has access and/or direct control of assets (such as a revocable trust – they can be forced to revoke it and use the assets) then these assets are accessible to any creditors such as a nursing home or a winning plaintiff.   Protect your assets for yourself and your children and beneficiaries and avoid tax dollars. Assets can be protected from frivolous lawsuits while eliminating your estate taxes and probate, and also ensuring superior Medicaid asset protection for both parents and children with our Premium UltraTrust Irrevocable Trust. Call today at (888) 938-5872 for a no-cost, no obligatioin consultation and to learn more.   Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB – Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an “AA” asset protection, Trust, and estate planning expert.