As you prepare to meet with your estate planning attorney, you will undoubtedly agonize over questions like these: Who will take care of my kids when I die? How will I leave my assets? How will I treat my son, Bobby, whom I haven’t heard from in years? Who takes care of me when I’m incapacitated? Etc., etc....
But one of the most important questions-that isn’t often treated that way-is: who will be my trustee? Too often trustees are selected by default, like choosing a brother or sister just because they are family or the oldest child just because he or she is the oldest-as if being trustee is based on primogeniture. Too often little consideration is given to this important decision, and your beneficiaries and family are left to deal with it.
See, even the best lawyer, asked to draft a “bullet-proof” trust, can’t protect against the unfit or, even worse, rogue trustee. So to help make sure that all the consideration you’ve given to how each piece of your property will be distributed isn’t for naught, select the right trustee. The one who has the acumen and fortitude to carry out your wishes. The one who will serve as the right manager of your assets. The one who understands what his or her expectations are.
To help you make that decision, here is a list of some of the qualifications your trustee should have:
3. People skills. Trustees should have the ability to deal with the beneficiaries and all their particularities and demands.
4. Managerial Skills
. Trustees should be able to multi-task and manage advisers (i.e., lawyers, accountants, and investment advisers).
5. Integrity
. Most importantly, trustees should have the utmost integrity.
Contact any one of our qualified attorneys at the law office of Jeffrey Burr to discuss choosing the right trustee for you.
In a recent decision by the United States District Court, District of Nevada, in the case of In re Cleveland, that Court affirmed its position that a trustee in a Chapter 7 bankruptcy succeeds to all of a debtor’s rights in such debtor’s single-member LLC. 2014 WL 4809924 (D. Nev. Sept. 29, 2014). These rights include the power to control the LLC and to sell the assets of the LLC.
Under Nevada state law, a judgment creditor of an LLC member is entitled only to a charging order to enforce its judgment. NRS § 86.401. The charging order is the exclusive remedy, and this is the case no matter if the LLC has only a single-member or not. With a charging order, the judgment creditor can only claim distributions that would have been made to the member. In other words, each time the LLC is to make a distribution to a member subject to a charging order, the creditor that obtained the charging order can direct the LLC to make the distribution to it instead of to the member. The judgment creditor cannot, however, reach the LLC’s assets with a charging order.
The In re Cleveland decision, although decided by the United States District Court for the District of Nevada, does not limit the trustee in a Chapter 7 bankruptcy to only a charging order when it comes to single-member LLCs. Instead, in a bankruptcy situation, which is governed by federal law and which preempts state law, the trustee is permitted to control and otherwise sell the assets of a single-member LLC – something that cannot be done with a charging order. This distinction between state and federal law is important and should be considered when forming an LLC and certainly when a member of a single-member LLC is contemplating bankruptcy.
When a Trustee is ready to terminate a Trust and make distributions to the Trust beneficiaries, it is important that a written Receipt And Release signed by the beneficiary is obtained. Oftentimes a Trustee will ask why is this necessary as there will be a cancelled check that is evidence of the distribution to the Trust beneficiary and the amount thereof. There are a number of good reasons for the Receipt And Release.
First, a written Receipt And Release signed by the beneficiary will avoid any future dispute as to whether the beneficiary received all that he or she is entitled to under the terms of the Trust agreement. For example, a beneficiary may die shortly after the distribution and the deceased beneficiary’s surviving spouse and/or children may dispute that the decedent received his or her full share. The Trustee will be required to prove that the decedent received all he or she was entitled to, possibly in a court of law. This situation can be avoided with a signed Receipt And Release that states that the beneficiary acknowledges that the beneficiary has received any and all Trust property and assets that he or she is entitled to under the terms of the Trust agreement.
Second, a Trustee does not want a beneficiary to use the distribution to hire an attorney to sue the Trustee for alleged wrongdoing in the administration to the Trust. The Receipt And Release will state that the beneficiary releases the Trustee from any and all claims, damages, legal causes of action, et cetera, known or unknown, regarding the administration of the Trust.
Third, there may be unknown liabilities at the time of the distribution, most commonly income tax. The Receipt And Release should provide that the beneficiary agrees to immediately refund to the Trustee part or all of the distributed Trust property and assets (or the cash proceeds resulting from the sale thereof) that may be requested in writing by the Trustee if it is subsequently determined that: (1) part or all of the distribution should have been paid to someone other than the recipient, or (2) funds are needed for the payment of claims or other obligations entitled to be paid from the recipient’s share of the Trust. Item No. 2 is important in the event the decedent’s final income tax report has not been filed, plus the IRS can audit the decedent’s income tax returns previously filed. Generally speaking, the IRS has three (3) years after a return is filed in which to audit the return. However, there is no time limit if the IRS is claiming fraud.
For these and other reasons, it is always best practice that a Trustee obtain a signed, written Receipt And Release from a beneficiary at the time of distribution.
-Attorney John R. Mugan
In some unfortunate cases, a trustee of a trust may fail to follow the terms of the trust or may take actions inconsistent with their fiduciary duty as a trustee. Fortunately, Nevada law provides several remedies when a trustee beaches his or her fiduciary duty to the beneficiaries:
NRS 163.115 allows a beneficiary or co-trustee to maintain a court proceeding if a trustee (1) commits or (2) threatens to commit a breach of trust. The beneficiary or co-trustee can ask the court to apply the following remedies to correct or rectify any breach of trust:
These tools allow beneficiaries and co-trustee to request the court’s help to remedy any bad actions taken by existing trustees. The tools also provide peace-of-mind to clients who are creating new trusts or have existing trusts as the courts can take action against any future trustee who does not follow the terms of their trust. These laws and many other laws in the state of Nevada help protect you if your trusted trustee has gone bad.
In many cases, clients choose to name a professional trustee to serve either as the initial trustee or successor trustee of one or more of their trusts. The modern trend toward the use of professional trustees is likely the result of the complexities involved in: 1) the way a trust may be structured; 2) the management of certain types of assets contained in the trust; and 3) the application of the current tax rules and regulations to the trust. A professional trustee is typically comprised of a Bank’s trust department or a separate trust and investment company that specializes in the administration of trusts.
A professional trustee is an alternative to naming a personal trustee, such as a family member or friend. One reason some clients choose to shy away from naming a personal trustee is to avoid placing a burden on their families and friends. Being a trustee involves a great deal of work on the part of the trustee and can be quite disruptive to a person’s life. Another reason clients may consider a professional trustee is to avoid contention among the beneficiaries, such as in the case where one child is named as the trustee of funds being held in trust for the benefit of another child. In that situation, the child trustee may feel pressure to approve a distribution that may not otherwise be exactly in line with the terms of the trust. Conversely, if the child trustee refuses to make a distribution requested by a beneficiary child, it may create ill feelings among the siblings.
A professional trustee, on the other hand, is a neutral third-party. It is a fiduciary whose primary focus is on the language of the trust and doing what is in the best interest of the beneficiaries, both current and remainder. It is unbiased and acts objectively when it comes to favoring any one beneficiary over another. Consequently, a professional trustee will not cave to pressure or have any qualms saying no to a beneficiary when it finds that a distribution request is not authorized by the trust. A professional trustee handles each distribution request cautiously and often has committees in place to approve distribution requests that follow the provisions of the trust. To that end, a professional trustee ordinarily complies and maintains back-up documentation to support why a particular distribution is being made in case there is ever a dispute.
There are several advantages of utilizing a professional trustee aside from those considerations mentioned above. A professional trustee is just that—a professional who is in the business of acting as trustee. A professional trustee is well versed on what steps need to be taken in the administration of various trusts, while an individual trustee would normally be subject to some degree of a learning curve in ascertaining and prioritizing what needs to be done. Because a professional trustee keeps abreast of current laws and is able to read and interpret complex trust agreements, it usually does not require as much guidance as an individual trustee who is without any formal training in this area. As such, a professional trustee can generally step in and administer the assets while keeping overall costs down.
Of course, a professional trustee is entitled to take a fee for its management services, which are customarily computed upon the value of the assets subject to its oversight on an annual basis. Most professional trustees have a standard fee schedule included in the trust administration package. The fees may differ as they pertain to various aspects of the administration process, including making investments, performing tax services and dealing with specialty assets, such as businesses, commercial properties and rentals to name a few. While some may see the charging of fees as an apparent disadvantage of using a professional trustee, it should be noted that any trustee has the right to take an appropriate fee from the trust, regardless of whether the trustee is an individual or a professional. For example, it is not at all uncommon for a child trustee to be deemed entitled to receive as much compensation as a professional trustee for performing like services.
It is good practice to interview your choice of professional trustees to confirm that the manner in which the trust will be administered matches with your expectations. You will want to feel comfortable with the professional trustee's approach since some may be more "hands-on" than others. Depending on the character of the trust assets, it may also be important to find out if the professional trustee is willing and equipped to handle certain non-investment properties that may involve a specific area of expertise.
Choosing a trustee is not a “one size fits all” decision. In many instances, it may make perfect sense to rely upon a family member, friend or trusted advisor, such as an accountant or attorney, to serve as trustee of a trust. Some clients may even prefer to use a hybrid arrangement by naming one or more individual and professional trustees to serve in particular circumstances. In other situations, there may be clear reasons that lend a trust to management by a professional trustee. Similar to entering into a relationship with any trustee, taking steps to clarify your expectations at the outset will go a long way in making sure that you select a professional trustee that most effectively meets your needs.
Assume John Smith established the John Smith Revocable Trust during his life with himself as the Trustee of the Trust. There are Trust assets with a bank or other financial institution, the records of which list the trustee as John Smith. John Smith dies, and under the terms of the Trust agreement Mary Jones is the successor trustee of the Trust. How does Mary Jones as successor trustee gain custody and control of the Trust assets?
In this situation, sometimes a bank or financial institution will request a copy of the complete Trust agreement, along with a death certificate of the deceased trustee. However, one of the advantages of a revocable trust is confidentiality, namely never making the complete Trust agreement a matter of public record like you are required to do so with a Last Will and Testament in an estate proceeding. A copy of the complete Trust agreement will contain the dispositive provisions (who the beneficiaries are and what their shares are) and may contain other provisions such as the disinheritance of a child. This information is not the concern or business of the bank or financial institution. All the bank or financial institution should be concerned with is the successor trustee provisions of the Trust. The response to the bank is an Affidavit of Successor Trustee, sometimes referred to as a Certificate Of Incumbency. This is a document which Mary Jones as successor trustee would sign that states in part that: (1) John Smith established the John Smith Revocable Trust and the date of the Trust agreement; (2) John Smith died and his date of death; (3) Mary Jones is the successor trustee under the terms of the Trust agreement, and (4) Mary Jones accepts the trusteeship and agrees to serve as trustee. A death certificate of John Smith is attached to the Affidavit. The Affidavit can then be shown to the bank or financial institution as proof of the death of John Smith and further proof of Mary Jones being the successor trustee of the Trust. The bank or financial institution will make a copy of the Affidavit or scan it into its records, and remove the name of John Smith as trustee and list the name of Mary Jones as the trustee on its records of the Trust assets. The bank or financial institution will then do whatever the new trustee, Mary Jones, instructs them to do regarding the Trust assets.
What about real estate is owned by the Trust? A search of the public records regarding the real estate will list John Smith as the trustee. Accordingly, if Mary Jones as the successor trustee tries to distribute or sell the real estate or place a mortgage or deed of trust thereon, the title company and bank would check the public records and want John Smith as trustee to sign the relevant documents. This is impossible since he is deceased. In a case where the Trust owned real estate, you add to the Affidavit of Successor Trustee a statement that the Trust owned the real estate and set out certain pertinent information regarding the real estate including its legal description. You then record the Affidavit with the county recorder in which the real estate is located. Upon recording, the county officials (recorder, treasurer, assessor, etc.) will change the public records regarding the real estate by removing John Smith as trustee and listing Mary Jones as the trustee. Any search of the public records after the recording of the Affidavit will show that Mary Jones is the successor trustee and the one who has legal title to the real estate.
In summary, a successor trustee can obtain control and custody of the Trust assets when the prior trustee dies through an Affidavit of Successor without having to disclose all of the terms of the Trust agreement.
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