Trusts

You have completed your estate planning and have created a trust.  Do you know what the duties of your named trustee are?

You are probably thinking – the trustee has to take care of the assets, pay any related bills, file any required income tax returns and make distributions.  Am I on the right track to your thinking?  Well, you are not wrong, but you are not entirely right.  Here are duties which are usually silent when thinking of what the trustee should be doing:

• Duty of Good Faith.  The trustee has a duty to administer the trust “in good faith”. This includes protecting the trust property. 
• Duty of Loyalty.  This is defined as loyalty to administer the trust solely in the interest of the beneficiaries.  It prohibits the trustee from engaging in self-dealing transactions or activity that involves or creates a conflict between the trustee’s fiduciary duties and their personal interests. 
• Duty of Impartiality.  When there are multiple beneficiaries, the trustee must act impartially with investing, managing and distributing trust assets. 
• Duty of Prudence.  Administering the trust prudently includes the exercise of reasonable care, skill and caution.  The test of prudence is one of conduct not of performance.  The trustee is to be judged on their action or decision and not on the outcome.  This would also include prudent investing. 
• Duty to Make Trust Property Productive.  The use of reasonable care and skill to make the trust property productive includes the duty to obtain suitable investment returns and other benefits consistent with the purpose and intent of the trust. 
• Duty to Inform and Report.  Beneficiaries are to be kept reasonably informed about the trust and its activities to allow them to protect their interests. 
• Duty to Control and Protect Trust Property.  The trustee shall take reasonable steps to take control of and protect the trust property. 
• Duty to Enforce and Defend Claims.  Reasonable steps to enforce claims of the trust and to defend claims against the trust are one of the duties of a trustee.  If attorney fees and costs are incurred by the trustee in doing so, the trustee is entitled to reimbursement as long as it is determined that the trustee did not breach the trust. 

So, as you can see, there is more to being a trustee than may be thought.  It is important to ensure that the party you are selecting as trustee will be able to “perform” these duties.  Otherwise, there could be claims against the trust and/or trustee for mismanagement of the trust. 

While these “duties” are addressing the duties of a trustee, they also pertain to executors of an estate.  Does your trustee and/or executor measure up to carrying out these duties?

You would like to benefit your favorite charity through your Estate or Trust, but is leaving a specific bequest in your Last Will and Testament or Trust the only option?  Simply, the answer is NO.  You have options.  Here’s one for you to consider.

You have an IRA or retirement-type account for which you can designate beneficiaries to benefit from the same when you pass.  However, when any distributions are made from an IRA or retirement-type account, there are likely to be income tax consequences to the beneficiaries.  If your asset has been in existence for a considerable period of time, the asset has likely appreciated in value and that appreciation – the income earned – is income taxable to the beneficiary.  So, when the beneficiary receives the distribution from the asset, they will have to report an amount from the distribution on their income tax return. 

Let’s look at the analysis.  What you leave to a beneficiary via a Will or Trust is not income taxable (only to the extent there may have been income earned on the asset for one tax year), however if a beneficiary receives distribution of a retirement-type account, there could be significant income tax consequences to the beneficiary in the year(s) of distribution. 

For income tax purposes, human beneficiaries are subject to income tax while qualified charities are exempt from income tax.  So, why not benefit your favorite charity through your retirement-type asset?  Definitely something to think about. 

If you think this may be something you would like to do, you should contact a professional – attorney, accountant, financial advisor – to get more information and have them analyze if this may be something that would be beneficial to you. 

In closing, a couple of additional thoughts – beneficiaries of a retirement-type account can have access to their inheritance much sooner than waiting for an estate to be administered, but please make certain that your favorite charity is a qualified non-profit organization. 

For New Jersey residents, the New Year delivered the scheduled increase in the New Jersey Estate Tax exemption from $675,000 to $2,000,000. Absent a change in the law over the coming year, the tax will be eliminated altogether at the outset of 2018. So many are likely asking the question, “Do I still need a trust?”

For those who have undertaken some form of estate tax planning, there may be no need to modify existing estate planning documents at all. The minimization of the New Jersey Estate Tax has typically been undertaken in one of two forms: (1) a Disclaimer Trust, or (2) an Applicable Exclusion Trust. These trusts can be part of a Will or a Living Trust.

Those who have a Disclaimer Trust do not need to change their Will or Living Trust in response to the increased exemption amount. The reason is that a Disclaimer Trust is merely an option for a surviving spouse. When one spouse dies, the survivor inherits the deceased spouse’s estate outright. The Disclaimer can be exercised to provide for the benefit of the survivor but exclude those assets from his or her taxable estate when he or she dies. For couples who have this form of planning, nothing needs to be done. When one spouse dies, the survivor merely transfers the assets of the deceased spouse into his or her name.

On the other hand, those who have an Applicable Exclusion Trust may need to change their Will or Living Trust. The decision whether or not to do so will reflect the reason why the Applicable Exclusion Trust was established in the first place. If it was established solely to minimize estate taxes, then the Will or Trust in which it was created should be modified to eliminate it. Unlike the Disclaimer Trust which is optional, an Applicable Exclusion Trust is mandatory and will be funded when one spouse dies whether the survivor needs it or not.

Yet if the Applicable Exclusion Trust was established for other reasons, it may be worth preserving. For example, it is a valuable tool in the event there are children from prior marriages or if each spouse has different testamentary wishes. In that event, the Applicable Exclusion Trust insures that the needs of a surviving spouse are met during his or her lifetime. However, when the survivor dies, the balance of the trust will pass to the desired beneficiaries of the first spouse to die rather than the beneficiaries of the surviving spouse.

In conclusion, there may still be a need for trust planning for many New Jersey residents. Proper counsel should be obtained before any decision is made to modify or revoke a Will or Living Trust that contains either of a Disclaimer Trust or an Applicable Exclusion Trust.

In 2010, Claude Newsome, who was already legally blind due to macular degeneration, became a quadriplegic as a result of an automobile accident.  After a personal injury action was filed on his behalf, he received a settlement which netted nearly $4 million.  His attorney recommended that he establish a special needs trust with these funds.  In light of apparent undue influence from his agent under a power of attorney, Newsome rejected this recommendation and stated that he wanted his money paid outright to him.  In a management conference approving the settlement, Newsome’s attorney conveyed his concerns that Newsome may be subject to exploitation.  As a result, the Court, without Newsome’s participation, established a special needs trust and appointed an independent bank as trustee.

Within a year, Newsome hired a new attorney who sought to have the bank terminate the trust and pay the funds outright to Newsome stating that the trust was unnecessary.  After the bank went to court seeking directions, Newsome, through his new attorney, filed an application to terminate the trust.  In Newsome v. National Casualty Company (5th Cir., No. 15-30573, Aug. 11, 2016), the Fifth Circuit Court of Appeals rejected this application.  It did so by noting that the dissolution of the trust should have been made as part of an appeal from the order establishing it.  As Newsome had other counsel at the time the trust was established who did not file such an appeal in a timely fashion, the Court of Appeals found no reason to set aside the trust.  It particularly made this holding in response to the claim that establishing the trust was an error.  The Court stated that an error was nevertheless not going to be set aside if the concern for same was not brought to the court in the time period in which an appeal could have been filed.  Although not stated outright, some language in this decision seemed to affirm the need for a trust for Newsome.

The takeaway from this case is that special needs trusts will be protected once established.  In doing so, the case calls for a careful analysis of the need for a trust and selection of a trustee prior to its establishment.  Although not uniformly followed by all courts, the case demonstrates that a court, on its own accord, may set up a protective arrangement for those whom it feels may warrant special care.

In 1992, Ann Mark created two irrevocable trusts for the benefit of her three children. An attorney, Jared Scharf, assumed the role of trustee of these trusts in 1997. In 2008, Scharf established three separate trusts – one for each child – from assets held by one of these trusts.

In April 2010, Scharf invested $450,000 from these individual trusts in a hedge fund established by his son, Adam, and two other individuals although Adam was an attorney with no formal training or license relating to securities. It was agreed that Adam’s group would receive a 2% management fee plus 20% of all profits generated.

After an initial gain in 2010, Scharf increased the investments from these trusts to $2,200,000, notifying the trust beneficiaries of his intent in February 2011. Unfortunately, the hedge fund in which they were invested lost $869,702. Ironically, over the four year period in which a portion of the trusts were in the hedge fund, the overall value of the trusts increased from $20,260,499 to $36,127,538.

Notwithstanding, Ann Mark and her three children filed an action in the Superior Court of New Jersey seeking the removal of Scharf and requesting that he be held liable for the losses incurred by the trust investments in the hedge fund.

Although the trial court dismissed the relief sought, the Appellate Division reversed and held Scharf liable, stating there was a clear conflict of interest in his investments of trust assets with his son. The Appellate Division noted that he could have avoided liability if there was exculpatory language in the trusts. As same was absent, Scharf was deemed liable for the losses.

This case, in the Matter of May 1, 1992 Mark Family Trust, No. A-4056-14, 2016 N.J. Super. Unpub. LEXIS 1848 (App. Div. Aug. 5, 2016) highlights the importance of careful trustee selection as well as thorough trust drafting. Although it appears that Scharf may have done a commendable job in the overall investments, the trust beneficiaries and their mother were clearly dissatisfied with his strategy. Prior to selecting a trustee, an individual who wishes to establish a trust should vet any potential trustee to make sure that his or her investment strategy is acceptable. In addition, the powers of the trustee should be thoughtfully set forth to insure proper authority, but prudent limitations as well.