When formulating a Revocable Living Trust, selecting the right individual to oversee the trust’s assets is crucial. Typically, the creators (Trustors) of the trust manage it as Trustees during their lifetime. However, after their demise or incapacity, it’s common for a child to assume the role of Successor Trustee. While this can be a prudent choice, it’s vital to recognize the potential complexities of this decision.
Tax Implications for the Trustee
One must exercise caution when a child is a Trustee and a trust beneficiary. If the child, as Trustee, has extensive discretion in distributing assets, these assets might be subject to estate taxes upon the child’s death. This scenario arises if distributions lack a clear, defined standard, transforming the authority into a “General Power of Appointment,” leading to estate taxation as if the child owned the assets. The trust agreement can restrict the child-Trustee’s discretion to specific, measurable standards, typically encompassing the beneficiary’s health, education, maintenance, and support (HEMS).
Alternatively, appointing a Special Co-Trustee—an independent third party—can mitigate tax repercussions. This Co-Trustee would manage any Trustee powers potentially causing adverse tax consequences, minimizing the child-Trustee’s role but allowing them to conduct other trustee duties.
Avoiding Unintended Estate Inclusion
Even with ascertainable standards, estate inclusion may occur if the Trustee can utilize trust assets to fulfill personal legal obligations. A trust permitting Trustee distributions to a beneficiary’s descendants might inadvertently lead to estate taxation on the child-Trustee. To prevent this and the associated gift tax implications, careful drafting of the trust document is essential, potentially involving a Special Co-Trustee to manage specific powers.
Navigating Family Dynamics
Appointing one child as Trustee out of several can breed family discord, especially if it leads to perceived favoritism. While there are valid reasons for such a decision—ease of decision-making, financial acumen, or a strong parent-child bond—it’s crucial to weigh these against potential familial tensions. A possible solution is designating each child as the Trustee of their respective trust, though this might not be practical if the Trustors doubt the other children’s capacity to manage this responsibility.
Selecting a Trustee is a significant decision, laden with potential tax implications and family dynamics. Consulting a qualified estate planning attorney is imperative to ensure your trust agreement is carefully crafted, safeguarding your wishes and your loved ones from unintended tax burdens or relational strains.
From the desk of Attorney Brandon McGee, McGee Law Firm
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