The Trustee: Part II…Trustee Powers

Last month, I discussed the questions a settlor, or creator of a trust, needs to ask before selecting a trustee. Once a trustee is selected, a settlor needs to determine the trustee's powers with respect to the trust.

The trustee is charged with caring for and managing the trust property. To do this, the trustee must have the ability to control the property, and, depending on the property, the trustee can be given a vast array of powers. A few of those powers could include the power to:

• buy or sell property,
• rent or lease property,
• manage the related finances,
• invest related securities,
• encumber the property,
• appoint a successor trustee, or
• appoint agents.

Most times, the trust document provides an explicit list of the precise trustee's powers. Many states, via their code sections, also provide a list of powers with which a trustee is empowered. But, states also allow a settlor to opt out of most of the listed powers through the trust document. Further, I have even seen a settlor state that the trustee shall have all the powers according to the state code without expressly limiting the trustee's powers.

Most trust powers are permissive or "discretionary." The trustee is expected to use the trustee's own judgment to determine whether an activity should be undertaken. Required acts are considered "imperative" and must be done, unless the trustee is given grounds for deviating from this obligation. Given the mandatory nature of imperative powers, if the trustee fails to perform an imperative power, the interested beneficiary can petition the court to force the trustee to act.

A trustee's powers can also be expanded beyond what the trust document states. This occurs when the trustee needs a power to do something that is not covered in the trust document or by state law. Normally, the trustee will seek permission from the court to exercise these additional powers.

A trustee's powers can also be restricted. This is normally enacted when a beneficiary files a complaint in court. This generally arises when the trustee does something the beneficiary doesn't like or the beneficiary believes the trustee is required to do.

Next month, I will go into more detail concerning the trustee, including why it might not make sense to have co-trustees.

Basics of Estate Planning: Spousal Disclaimer and Mixed Assets

Last month, I wrote about a spouse using their legal rights to ensure they are not disinherited through election. There is also the reverse scenario: a spouse declining to receive inheritance. Most of the time, it is done by a surviving spouse in order to maximize the marital deduction due to tax implications.

The renunciation of a gift may be the wisest action, for example, when the costs of receiving a gift outweigh the benefits. Many jurisdictions have statutes that prohibit a disclaimer when the individual is insolvent or receiving certain public benefits due to low income. For purposes of Federal estate, gift and generation-skipping transfer taxes, a disclaimer is an irrevocable and unqualified refusal by a person to accept an interest in property. Properly disclaimed property will be treated as though it had never been transferred to the person.

Many taxpayers create a martial trust either by will or trust instrument, which, by election of the estate's executor/personal representative, uses the martial deduction to equalize the estates of the decedent and a surviving spouse (because the smaller the estate, the lower the tax). Unfortunately, not all estate-planning documents provide for such an election. In addition, some people have no estate planning documents at all and die intestate. In either of these situations, a well-thought-out disclaimer can enable a surviving spouse to take full advantage of the unlimited marital deduction.

To disclaim inheritance, the following requirements need to be met:

1. The disclaimant puts the disclaimer in writing;
2. The disclaimer is received by the transferor of the interest, his legal representatives, or the holder of legal title to the property to which the interest relates no later than nine months after the date of transfer, creating the interest (or nine months after the disclaimant reaches 21);
3. The disclaimant does not accept the interest or any of its benefits; and
4. As a result of the refusal, the interest passes without direction on the part of the disclaimant either to the spouse of the transferor/decedent or to a person other than the disclaimant.

Determining whether the third requirement is met by the disclaimant has proven to be controversial in many instances. Taking money from the decedent would prevent the surviving spouse-disclaimant from meeting requirement number 3. But, it is generally not that simple. For example, the IRS found that a widow had not made a qualifying disclaimer where all of her expenses were paid by the estate between the date of her husband's death and the date she filed a disclaimer. Although she eventually repaid the total amount expended on her behalf, she received a significant economic benefit from the interest-free use of the estate's funds between the date of death and date of the disclaimer. (IRS Letter Ruling 8405003).

There are also numerous ways people own property, adding further questions. Disclaimers of jointly owned property are generally the biggest issue. A disclaimer can only be made by the transferee or donee of property. For example, if the surviving spouse is considered to be the original transferor because the surviving spouse used their own funds to purchase the jointly held property, a qualified disclaimer cannot be made with respect to the property. All jointly held property should be evaluated to determine whether or not it can be disclaimed by the surviving joint tenant.

A jointly held bank account by husband and wife can also be a concern. You can make a disclaimer of a joint bank account or jointly held mutual fund shares if properly made. A gift of a survivorship interest is not complete until the death of the first joint tenant unless a withdrawal of funds is made. For example, if husband died and the wife drew money out of their jointly held bank account, those funds in the bank account would not be eligible for making a qualified disclaimer. The wife violated requirement number 3. Owning property by tenancy by the entirety is even more complex because the survivor is treated as acquiring the survivorship interest at the time the property was acquired and placed in the tenancy by the entirety, rather than at the death of the first tenant. (IRS Letter Ruling 9427003).

Regardless, a person that wants to disclaim property should seek experienced probate and accounting assistance to make the right financial decisions. Otherwise, you could owe additional estate taxes.

Estate of the Month: Trouble with Trouble

This month's estate is unique. Instead of two legs, the decedent had four legs and a tail and was the hair; I mean heir, to a good portion of Leona "We don't pay taxes. Only the little people pay taxes." Helmsley's estate. Who is this pooch? It was Helmsley's white Maltese named Trouble.

Leona Helmsley was the surviving spouse of Harry Helmsley. Harry Helmsley was a billionaire whose empire comprised mostly of high-end hotels and buildings throughout New York City and Florida. Leona Helmsley purchased Trouble as comfort after her husband's death in 1997.

When Leona Helmsley died in 2007, she left most of her estate, estimated at $4 billion to the Leona M. and Harry B. Helmsley Charitable Trust, for the benefit of dogs¹. Leona Helmsley also left trusts of $10 million to benefit her brother and trusts of $5 million each to benefit two grandsons. She also left $5 million to each of the grandsons outright, provided the two grandchildren visited their father's grave once a year and $100,000 to her chauffeur. But she completely disinherited two other grandchildren "for reasons which are known to them." Hey, she was not known as the Queen of Mean for nothing.

But, the real big winner was Trouble. Trouble inherited $12 million established in a pet trust to care for the dog. But, the real big winner was Trouble. Trouble inherited $12 million established in a pet trust to care for the dog. A New York Surrogate Court cut the amount in Trouble's trust to $2 million. This was done to lower estate tax liability. Also, under the New York State Pet Trust Code, the court can reduce the amount in a pet trust if it is deemed excessive and in Trouble's case he was out $10 million. Nothing to bark at. but that did not even make him closest to the top dog. Gunther IV, a German Shepard, inherited $124 million from his father Gunther III, who inherited his wealth from German countess Karlotta Liebenstain when she died in 1992.

Trouble led a pretty comfortable life until he passed away on June 10, 2011. Caretakers spent $100,000 on Trouble annually including $8,000 in grooming costs and $1,200 for dog food. But there was trouble in paradise for Trouble. Trouble had a full-time security guard and faced over 20 death and kidnapping threats because of the pet trust. Even with the threats, Trouble lived until he was 12 i.e. eighty-four (84) in dog years, in the lap of luxury.

However, one stipulation in Leona Helmsley's will would not be honored regarding her dog. Trouble was to lie beside Leona Helmsley in the Helmsley mausoleum but the Cemetery denied that request.

Even with expenses over $100,000 a year, Trouble's estate had somewhere over $1 million when he died. The money remaining in Trouble's pet trust will flow back to the Helmsley's charitable trust.

In short, Trouble had a dog's life.

¹ The trust has not quite honored that edict and has focused on improving "lives by supporting effective nonprofits in health and medical research, human services, education, and conservation."