Grantor vs Non-Grantor Trusts

I received a call a couple of days ago from previous clients who asked whether or not they needed to get a tax number for their trust.  They did not understand that as their trust was a revocable trust (also known as a grantor trust) meaning they had full control of trust assets, their social security numbers were automatically the tax identification numbers for the trust and any trust income should be filed on the grantors' 1040. Only when a trust is or becomes irrevocable (or is known as a non-grantor trust) do the trustees acquire a separate tax identification number and file a 1041 as long as the irrevocable trust is in existence.

Choosing The Right Fiduciary--Trustee, Agent, Personal Representative

In an article written September 10, 2012, by Jeanne Skowronski of the Wall Street Journal, Ms. Skowronski writes about the importance of choosing the right trustee to serve as the fiduciary of your estate.  Ms. Skowronski talks about four questions which she feels should be asked in deciding who should serve as fiduciary.  She asks:




- How large and complex are the assets in the trust?
- Can anyone in your family do the job?
- How are the relationships between your beneficiaries?
- Have you explored other options?




Here at Hughes Estate Group, we emphasize the great importance of choosing the right individual or entity to serve as the fiduciary of a person's estate.  We ask a series of questions in order to help you determine the best fiduciaries for your estate plan. 




We feel there should be much more deliberation in determining who should serve than simply naming your first born child for example or even the child most able to handle finances.  The relationships between siblings and many other issues also hold great bearing on who should be named as the individual or individuals to take care of your affairs at your incapacity or death. It is important to ask the right questions in deciding who should serve as trustee of your trust, or agent of your power of attorney, or personal representative of your will or estate. 

Basic Stages of Life

There are three basic stages of life. Different estate documents are used for each stage of life.

The first stage of life is when an individual is alive and mentally competent. At this point in a person's life, not estate documents are necessary. However, this is the time an individual should put estate documents in place for the next two stages of life.

The second stage of life is when an individual is alive and mentally incapacitated. At this point, powers of attorney can be used to establish authority and begin acting for a person in the second stage of life. If powers of attorney have not been created, an individual seeking authority to act for a mentally incapacitated person must petition a court for that authority in a guardianship/conservatorship proceeding.

The third stage of life is when an individual dies. Once someone dies, the powers of attorney or a guardianship/conservatorship ends. At the point of death, trusts and/or wills are then used to establish authority and distribute a deceased person's estate to beneficiaries. If there is not a properly funded trust or there is only a will or there is no will at all, most likely authority to act on behalf of a deceased person must be sought through the probate court.

Foreign Citizen Named as Trustee of Trust

A recent question from a client has prompted this blog. The client asked whether a sibling who lived in another country could serve as the trustee of the client's trust.

Issue: Authority of a Canadian citizen as the duly-appointed trustee of a trust, created pursuant to U.S. and Utah law, to access the trust's Zions Bank account.

Hypothetical Scenario:

• U.S. Citizen and Utah resident--John Smith--creates a revocable trust: "The John Smith Revocable Trust, dated 12/10/2010" ("Trust").



• John Smith goes through the process of setting up a Zions Bank account owned by the Trust. Zions Bank secures for its records a certified copy of the Trust, and the account is set up using John Smith's social security number (the Trust being revocable and John Smith being the grantor and original trustee).



• On Zion's Bank records the account is listed as owned by "The John Smith Revocable Trust, dated 12/10/2010."



• The Trust names John's sister--Mary Smith, a Canadian citizen (not dual U.S./Canadian--only Canadian)--as the successor trustee upon John's death. (We can state without hesitation that nothing in the Utah Probate Code prohibits a foreign citizen from acting as a trustee of a domestic trust.)



• John dies.



• Mary Smith files an SS4, securing a TIN for John Smith's now irrevocable Trust.



• Mary Smith comes into a Zions Bank branch with a Canadian Passport and other identifying documents and the IRS letter showing the TIN, and asks to access the $100,000 Trust account.



• Zions Bank (1) examines the Trust on record to ensure Mary Smith is named as the successor trustee, (2) secures copies of Mary Smith's identification, and (3) confirms or secures a copy of the TIN for the now irrevocable Trust.

Questions:

• Given the above facts, can Mary Smith, as a Canadian citizen, manage the Zions Bank account, withdrawing and distributing funds as necessary and required under the Trust?



• What other procedures would Zions Bank require in this situation to allow Mary Smith to access the Trust account?



• Is there anything in banking law or Zions Bank policies and procedures generally that prohibits a foreign citizen from serving as trustee of a domestic trust?

Answer:
Mary Smith, as a Canadian citizen, can manage the Zions Bank account, withdraw and distribute funds as necessary and required under the Trust after doing the following:

• Fill out a W-8ECI to establish tax residency. (W-8ECI and Instructions)



• Give Zions Bank contact information.



• Prove identity (e.g. passport).

Financial Powers of Attorney Continued--Part 2

In Wilson Rawl's Where the Red Fern Grows, Billy says of his small hunting dog Little Ann, "Dynamite comes in little packages." Financial powers of attorney are as dangerous as dynamite in terms of their potential consequences for ill. Inadequate financial powers of attorney are at the heart of numerous expensive and painful probate cases. Financial powers of attorney are as important as revocable trusts and deserve as much attention.

In an article written by Linda S. Whitton, titled "Durable Powers as an Alternative to Guardianship: Lessons We Have Learned" (37 Stetson L.Rev. 2007), Ms. Whitton states there are three things to understand about durable powers of attorney when used as an alternative to guardianship.

1. A Power of Attorney is Only as Effective as the Willingness of Third Parties to Accept It.



2. A Power of Attorney is Only as Protective as the Agent is Trustworthy.



3. A Power of Attorney will Not Prevent Family Power Struggles over the Principal's Assets.

In this blog, we will look at the second point.

The most dangerous time in a person's life is when they are mentally unable to make decisions for themselves. The chances of being taken advantage of increases during this stage of life. And family members can be the worst perpetrators.

Most often it is family members who are named as the agent for an incapacitated person in a power of attorney. It is crucial that the individual acting as agent is trustworthy.

We have found that in addition to carefully picking the agent, agent accounting requirements adds a safety feature to a power of attorney. If an agent is accounting to the other family members on a regular basis regarding how money is spent for the incapacitated parent, it is less likely the agent will be skimming funds or paying themselves a very high agent fee.

Therefore, it is crucial that the agents are trustworthy. In addition, accounting procedures help facilitate an honest agent.

The Real Pain Of Being The Executor Of An Estate

The Wall Street Journal has an article in today's paper regarding the responsibilities an estate executor. It is more work than glory. We encourage parents to involve their executor child in the beginning stages of estate planning to completion and maintaining the estate plan so that the child executor will be as prepared as possible for the inevitable responsibility of executing the estate. Here is the full article for your review.