Reviewing Your Trust

The following column by Pamela Yip was written for the Dallas Morning News and included in their edition on Saturday, April 5, 2014.  It captures well certain matters to focus on when using a trust in estate planning.

TrustsA Checklist for Reviewing Your Trust

One of the best ways to leave assets to your heirs is to establish a trust. But once you’ve created one, it’s important not to let it sit there without reviewing it periodically. You want to ensure that the trust is current with the law and is still in keeping with your intent for your beneficiaries.

A trust is a legal relationship in which a person or trust company holds property for his or her own benefit or that of another person, called the beneficiary.

Trusts can be revocable or irrevocable. A revocable trust can be changed at any time by the person who created it. An irrevocable trust can’t be changed or terminated before the time specified in the trust.

You should review your estate plan anytime there’s a change in the family or your assets, said Marvin Blum, an estate planning attorney in Fort Worth.

“Our rule of thumb is to review the plan at least once every four years,” said Blum, founder of The Blum Firm PC. “So we encourage our clients to review their plans each time we have a presidential election.”

Here are things you should consider:

The right trustee?

The trustee’s role is the most important within a trust. Consequently, you need to make sure that he or she is still the right person to carry out your wishes.

The trustee stands in a fiduciary role and should be held to the highest standards.

“The job of being trustee is a very complicated job,” Blum said. “It’s complicated, and it’s risky.”

The trustee has to handle lots of record keeping, accounting, tax planning and filings, and investment decisions, so you want someone with business skills.

You don’t want someone with a questionable background.

For instance, you don’t want someone who has been convicted of a felony or a crime of moral turpitude, or who is being treated for a drug, alcohol, gambling or other dependency disorder.

“We usually set parameters when someone doesn’t qualify to act as a trustee,” said Michael B. Cohen, a Dallas elder law attorney.

The trustee has the delicate job of distributing assets from the trust, so he or she must be able to navigate relationships with beneficiaries, who might be unhappy with how much they receive.

“It can be very delicate and you get into cases of pitting family members against each other,” Blum said.

Typically, the trust will state how the assets will be distributed, but “there’s a lot of room for interpretation,” Blum said.

“You can give the trustee a lot of guidance, but you’re still not going to be able to answer every question that will arise,” he said. “The trustee inevitably ends up having to exercise discretion.”

You can always hire a professional trustee, such as bank, trust company or lawyer to provide objectivity.

But for one Fort Worth investment executive, that wasn’t the route to go.

The 48-year-old man and his wife, neither of whom wanted to be identified, have three trustees for several trusts created for their two children, who are both under 10 years old.

“I didn’t want to be in a situation where a bank or a trust department was trustee of the trusts, where there would be no personal relationship,” the man said. “I want them to have a personal relationship [with his kids] so they go to dinner together and they would be able to say, ‘This is what your father, your mother, would have hoped that you could have done or what their values were and what they would like you to do.’”

His trustees are an associate, “whose opinion I highly respect,” a family friend who works in the financial industry and a lifelong friend “who is able to know the full story of what our values, what our interests are, what our desires are.”

The three, who will work together, “know us personally and would be able to work in a better capacity than would a commercial trust officer,” the man said.

He wants the trustees to be able to remind his children of the values their parents want them to learn: to be good stewards of their inheritance, to contribute to society and to have a strong work ethic.

The man and his wife have given the trustees the ability to alter distributions from their trusts according to how well the children manage what they’ve been given.

“The trustees have the capacity to use some discretion,” the father said. “If they’re [the children] well-prepared through this mentor relationship, then they can accelerate some of the distribution.

“If there’s something else happening that we felt could be detrimental, that they’re not exercising good judgment, they have the ability to delay, but not withhold distributions.”

It’s also a good idea to consider a backup trustee. The Fort Worth executive has a backup for each of his three trustees.

“Do you have enough people back there if the trust might last for a real long time like a lifetime trust?” said John McNair, elder law attorney at Barnett McNair Hall LLP in Dallas. “You need multiple successor trustees because any person whom you name can die or become incapacitated.”

Removing the trustee

McNair said you need to address who can remove the trustee, and why.

“You may think that somebody’s trustworthy and the beneficiaries realize that they are not or they’re not as competent as you thought they were and they really do need to be removed,” he said.

For that reason, Blum said, it’s a good idea to include a provision in the trust document that gives someone the power to remove the trustee.

“If you don’t do that, then you can only remove a trustee by going to court, and that’s an expensive process,” he said.

You can give the power to remove a trustee to an independent third party or you can give that power to the beneficiary.

“You can either spell out the grounds [for removing a trustee] or you can give that person the open discretion to remove a trustee for whatever reason that person deems appropriate,” Blum said.

Providing protection

Does the trust protect your heirs from lawsuits and divorce claims?

“If you leave your inheritance outright to your children, then it’s not protected, but if you leave it to your trust for your children and grandchildren, then it is protected from lawsuits and divorce,” Blum said.

A key here is that you stipulate that the trust becomes irrevocable at your death.

If the child has the power to revoke the trust, “then the child’s spouse can attack it on divorce,” Blum said. “The child’s creditors can reach it if there’s a claim against the child.”

Nothing’s more important in estate planning than taking steps to protect what you want to pass on to your heirs. So make sure you review your trust regularly, particularly if family circumstances have changed.

Follow Pamela Yip on Twitter at @pamelayip.

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