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Estate Planning refers to the process of specifying how YOU want your affairs to be handled when you cannot handle them yourself. This may be because of incapacity – if you are injured in an accident, or a medical condition diminishes your physical or mental capabilities. And one day (hopefully a long time from now) someone who cares about you will settle your affairs because you have passed away.

The planning process brings together emotional, legal, financial, and practical considerations. You might be focused on caring for minor children. As your family grows and assets accumulate, you may worry about taxes that could diminish your childrens’ inheritance. Still later, you may be focused on protecting your family legacy – from creditors – from the possibility of divorce – or from the costs of long term care. That is why it is important to make a plan; and then to review and update that plan as your personal, financial, or other circumstances change.

We can help explain the advantages and disadvantages of different planning strategies. Remember, an estate plan should be personal to you. Make sure that you understand all of your options.

Probate avoidance is one of the most common reasons people seek the advice of an estate planning attorney. This is usually because of a prior bad experience settling the estate of a parent or close friend without the benefit of a well-designed estate plan. The most common reasons cited to avoid probate are: time, extraneous paperwork and loss of privacy.

• Time. A probate estate takes time to open. This can slow down the process of accessing funds and even paying bills. A probate estate also takes time to administer. A probate estate must remain open for at least five months to give creditors time to present claims. Any distribution of assets prior to the expiration of the claims period is risky given that assets might be owed to someone else.
• Extraneous Paperwork. The probate process involves completing a series of forms designed to provide the Court with information deemed necessary to adequately supervise the Fiduciary. These forms have almost nothing to do with the actual collection and transfer of assets. That paperwork will be generated by financial institutions, real estate or business interests and tax requirements. Probate means completing MORE forms that do not actually accomplish anything more than satisfying statutory driven requirements.
• Loss of Privacy. Probate requires a detailed inventory of a Decedent’s assets. Now that every file is digitized, anyone can sit in the comfort of their own home and look up the value of the Decedent’s property and see when and to whom that property is being distributed.

If having assets bypass the probate process is an important goal, one way to accomplish that is by titling assets in a revocable living trust. Assets owned in trust do not require Probate Court approval to obtain access, use or move them. Your designated Trustee can obtain access immediately, and use those funds to pay your final debts and expenses, and then distribute property as you have instructed.

If you own property in more than one state, a living trust may be even more valuable. Real estate typically triggers probate in the state where the property is located. So, if you own property in three states, three separate probates may be required.

But simply having a revocable trust document does not accomplish probate avoidance. Assets must actually be moved (or transferred) to your trust for probate avoidance to work. Changing ownership of assets from an individual to a Trustee is referred to as trust funding. The process is the same whether you have named yourself as Trustee, or you have named someone else. Funding a revocable trust is detail oriented and requires completing whatever forms and account certifications are required by the financial institutions holding your accounts. Because this is such a critical step in making estate plans effective, our firm has invested in dedicated funding software that keeps us updated on the current requirements of most major financial institutions, allowing us to help you complete the funding process efficiently and effectively. Please contact us if you would like to set up a meeting to make sure that your trust is funded correctly.

Our tax system targets both the acquisition of wealth and transferring wealth to others. A comprehensive estate plan must provide sufficient flexibility to address multiple forms of taxation, not just estate tax. This process should not be done in a silo. Your team of advisors (accounting, tax, legal, and financial) should work together to develop effective tax strategies.

Federal Estate Tax and Portability. There still is a Federal Estate Tax, but in recent years that tax has applied to less than 1% of Americans. This is because under current law, individuals are credited with a $5,490,000 exemption (indexed for inflation); meaning that a federal tax is only owed if a person dies with more than $5,49 million and fails to qualify for sufficient deductions. Any value over $5.49 million is subject to a 40% tax. (There may also be an additional federal tax if the amount being transferred at death exceeds $5.49 million and the property is being transferred to a “skip” generation. This tax is referred to as Generation Skipping Tax.)

Federal law allows married couples to “share” exemption. If one spouse dies with less than the full exemption amount, the unused portion (or credit) can be transferred to the surviving spouse. This concept, called “portability,” means that a surviving spouse can essentially inherit the “unused” estate tax exemption of the deceased spouse.

Example: If a husband dies this year and leaves an estate with a taxable value of $3 million, his estate owes no federal tax and his wife’s estate may claim the unused $2.49 million exemption when she eventually dies. She would be entitled to her own 5.49 million exemption plus the additional 2.49 million from her husband – essentially sheltering from federal tax almost 8 million for children.

But Connecticut does not recognize portability. So there is no similar savings for Connecticut Estate Tax. And the shared exemption is not automatic. The surviving spouse must file a timely Federal Estate Tax Return electing portability, otherwise the shared exemption will not apply.

Connecticut Estate Tax. The State of Connecticut has its own Estate Tax and Connecticut is not nearly as generous with its exemption. The maximum amount a Connecticut resident can leave to beneficiaries (other than a surviving spouse) is limited to $2,000,000. Connecticut’s tax is staggered, starting at 7.2% and increasing to 12%, depending upon how far assets exceed the 2 million threshold amount. With proper planning, however, a married couple can double the Connecticut exemption, enabling a married couple to leave $4 million to their children (or other designated beneficiaries) free of Connecticut Estate Tax. This can cause a tax savings of $146,400.

Gift Tax. Gift Tax applies to transfers made while a person is living. Both the Federal government and the State of Connecticut assess gift tax, depending upon the amount of the gift and the purpose for which it is made. Every gift is not taxed.

Certain gifts are not taxed because of who receives the gift. For example, gifts to charitable organizations are exempt from tax. Likewise, gifts for education are exempt, as are gifts for medical expenses. To claim that a gift is exempt, it must be made in a specific way. Other gifts are exempt from tax because the amount is too small. The current exemption amount is $14,000 per person per year. A husband and wife together can double this amount and give $28,000. If a gift is below the exemption amount, no gift tax is owed and no Gift Tax Return is required. If a gift is over the exemption amount, a Gift Tax Return must be filed to record the gift, regardless of whether tax is owed. The value of all taxable gifts made during lifetime are added together and are then deducted from the each person’s lifetime gift allowance.

Income Tax, Capital Gains and Basis Planning

In today’s high-income tax environment, taking advantage of a step-up in basis at death provides meaningful tax savings. In the past, estate plans frequently diverted ALL assets under the Estate Tax Exemption amount into a “bypass trust” to shelter them from estate tax upon the death of the surviving spouse. The result was more-or-less a blind distribution of assets into these trusts, without regard to the character of the asset or its basis. Because the assets placed in a bypass trust are not included in a surviving spouse’s estate, they receive no step-up in basis once the surviving spouse dies. This can create a negative income tax effect, if assets in the bypass trust substantially appreciated while in the trust, and the beneficiaries later wish to sell the appreciated assets upon the surviving spouse’s death. The beneficiaries are stuck with the older carry-over basis. We typically recommend that tax focused estate plans be drafted to maximize flexibility to take advantage of the step-up in basis at a client’s death.

According to one count, at least 730,000 adult children with developmental disabilities are living with caregivers 60 or older. This figure does not include adult children with other forms of disability nor those who live separately, but still depend on their families for vital support. When these caregivers can no longer support their children due to their own disability or death, the responsibility often falls on other family members or community based services. Often, expenses increase dramatically when care and guidance provided by parents must instead be provided by a professional for a fee.

Planning can make all the difference in the life of the child with a disability, as well as the lives of siblings or other family members who may inherit the responsibility for caretaking (on top of the responsibility for career, caring for their own families and, possibly, ailing parents). Any plan for care of a disabled person should include these components:

A Care Plan that carefully establishes where the individual with special needs will live, who will be responsible for assisting with decision-making and who will monitor the quality of care. It will help everyone involved if parents create a written statement of their wishes for their child’s care. They know their child better than anyone else. They can best explain what helps, what hurts, and what upsets or scares their child, and what comforts or reassures him or her. When parents are gone, their knowledge will go with them unless they pass it on.

A Financial Aid and Assistance Plan, documenting the sources of funds that the child receives and the current requirements for maintaining those funds. This includes a list of any reports and documentation that must be submitted to be sure funds continued. The report should detail any specific advisors or counselors, including case managers, that are familiar with your child’s situation, including the types of services and funds received.

A Plan for Additional Financial Support, usually in the form of a Supplemental Needs Trust. In almost all cases where a parent will leave funds at death to a disabled child, this should be done in a special type of trust. Trusts set up for the care of a disabled individual are called “Supplemental Needs Trusts.” As their name implies, Supplemental Needs Trusts are designed not to provide basic support, but instead are designed to provide comforts and luxuries that cannot be obtained through public benefit programs. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. The funds are used to enhance the quality of life available to the beneficiary, rather than limit care to that accessible from public benefits. These trusts allow a disabled beneficiary to receive an inheritance without losing eligibility for certain government programs.

There are three different types of Supplemental Needs Trusts, depending upon the circumstances of the beneficiary and the source of funds: First-Party Trusts (established with the beneficiary’s own funds), Third-Party Trusts, established with funds from someone else like a parent or grandparent, and Pooled Trusts (which manage the funds of multiple beneficiaries together). All three name the person with special needs as the beneficiary, but they differ in several significant ways, and each type of trust can be useful in its own way. Choosing a Trustee is also an important issue in supplemental needs trusts. Most people do not have the expertise to manage a trust, even if they are family members, and so a professional Trustee may be a wise choice. For those who may be uncomfortable with an outsider managing a loved one’s affairs, it is possible to simultaneously appoint a trust “protector,” with the power to review accounts and to hire and fire trustees, and a trust “advisor,” who instructs the trustee on the beneficiary’s needs.

IRA’s and other tax-deferred retirement accounts are the traditional vehicle by which many individuals hold much of their wealth. Naming the proper beneficiary on these accounts is critical, not only because of the significance of these assets as a percentage of your accumulated wealth, but also because the owner can enhance these assets further by providing additional layers of asset protection. Rather than naming beneficiaries outright (which will expose the asset to beneficiaries’ creditors), there are several advantages to using a stand-alone retirement trust to safeguard retirement assets.

• Creditor and Divorce Protection

If you name a beneficiary outright, your retirement account could be available to the beneficiary’s creditors, spouse and ex-spouse(s), and even be exposed to a beneficiary’s potential accident or personal injury liabilities. If you name a stand-alone retirement trust as beneficiary, the account’s principal can be insulated from creditors and divorce claims. If additional protection is needed, the trust can be structured as an “accumulation trust” to shield income distributions as well.

• Protect Minor Children

If you name a beneficiary outright and the beneficiary is a minor, distributions must be paid to a guardian. If no guardian exists, one must be appointed by the Court. If you name a stand-alone retirement trust as beneficiary, no guardian is needed for minor children and there is no risk of Court interference because the trust, not the individual, is the named beneficiary and will hold distributions for the minor’s benefit.

• Spendthrift Beneficiary Protection

If you name a beneficiary outright, he/she can do anything at all with the inherited money, including taking large distributions, or even cashing out the account, disturbing your long-term, tax-deferred growth and incurring significant tax liability. If you name a stand-alone retirement trust as beneficiary, you can assure the continuation of tax deferred growth, and effective tax planning.

• Maintain Maximum Control

Naming individual beneficiaries outright requires that you be constantly vigilant. If a life event occurs that would affect your beneficiary, you must review and revise your election immediately. Likewise, if a beneficiary should pass away suddenly, he/she may forget to name a new beneficiary, or may transfer the account in a way that you would not have wished. If you name a stand-alone retirement trust as beneficiary, the trust already addresses many contingencies, which precludes the need for you to rush to change your elections. Likewise, you can name successor beneficiaries in the trust document and retain control over who will receive the proceeds if your initial beneficiary should die before the account is paid out.

These are just some of the major benefits of using a stand-alone retirement trust to transfer your retirement assets. If you wish to stretch out IRA payments over a longer period of years while also providing asset protection to your beneficiaries, consider using one of these trusts to ensure your loved ones are provided for in the manner you wish.

FORBES Magazine ranks Connecticut 49th out of 50 states (the second worst in the nation) for taxation. (March, 2016) As planners, this does not surprise us. We talk with clients and their advisors daily about opportunities to reduce that tax burden so the legacies that families have worked hard to build are not spent on additional taxes.

Of note, because Connecticut still has its own estate tax, there is still a role for traditional A/B trusts here in Connecticut. But in cases where more advanced planning is warranted, other strategies also may be appropriate.

Irrevocable Life Insurance Trusts (ILITs) are used to exclude the value of a life insurance policy from a decedent’s taxable estate. The trust owns the policy instead of the individual. So long as the transfer to trust was more than three years prior to death, the proceeds of the policy will not be counted as part of a Decedent’s gross taxable estate. For this reason, ILITs are used specifically to hold insurance so the proceeds can pay a large estate tax bill generated by other assets like real estate or securities; so these assets need not be sold to pay anticipated taxes.

Grantor Retained Annuity Trusts (GRATs) are another type of irrevocable trust that can be used to transfer highly appreciating assets to beneficiaries prior to death while minimizing or completely avoiding gift and estate tax. An asset with a low or modest value (relative to its anticipated future value) is transferred to trust in exchange for guaranteed annuity payments back to the original owner. If the asset appreciates while in the trust, all of the increased value (less the guaranteed annuity payments) go to the beneficiaries with little or no gift or estate tax.

Qualified Personal Residence Trusts (QPRTs) are sometimes called “house GRATS.” They are designed in a similar way. A personal residence is transferred to trust for a term of years and the original owner retains the right to live in the house for that time. Because the original owner still has a right of occupancy for those years, the value of the gift is not the fair market value of the property, but a fraction thereof. The longer the term of years, the lower the value of the gift. If the original owner survives the trust term, the value of the home is not part of the taxable estate at death. At the end of the trust term the original owner can either begin to pay rent (transferring even more value to the beneficiaries), or can move and purchase another property (with other funds, NOT the proceeds from the gifted home). This strategy requires that the donor have sufficient assets beyond the home itself, because if the QPRT is successful, the home will no longer be owned by the donor.

Charitable Trusts come in several varieties. A Charitable Lead Trust (CLT) is an irrevocable trust designed to provide regular income payments to one or more qualified charities for a set term of years or for the lifetime of the trust maker. At the end of the trust term, the principal then passes to designated beneficiaries. A Charitable Remainder Trust (CRT) is an irrevocable trust that transfers a principal amount to charity in exchange for a defined income back to the donor either for a term of years or for life. At the end of the trust term, the charity retains the right to the principal.

If you would like to discuss any of these enhanced tax planning strategies, please call is to schedule a meeting today.

Yes, You Can Handle Probate Yourself – But Should You?

When a loved one passes away, the process can be overwhelming. Grief, sadness and even loneliness are piled together with financial, tax and legal questions, and of course, paperwork. When the process of estate administration is discussed – often success is measured by whether anything had to be done, or how quickly and inexpensively the process was completed.

But if the only lens applied to whether an estate administration is good or bad is whether probate was required, important goals an estate plan was created to achieve may be overlooked, and additional opportunities to achieve better results may be missed entirely. Remember, the probate requirements are all about what the Probate Court requires to move matters through its “one size fits all” filing system. Probate has almost nothing to do with what is possible and/or optimal in a specific situation. There is no question that planning ahead is critical to this effort. When someone dies with an estate plan, particularly a plan that has been kept up to date with current asset information, the estate settlement process can be smooth and efficient. Anxiety is almost always caused by the unknown: uncertainty regarding how much money there is, anxiety regarding possible debts, and anxiety regarding how the process should be handled. A well-tended estate plan removes those concerns. But consulting with the attorney who prepared the plan, or another attorney who is experienced in creating similar plans, is an important step of that process.

One of the most frequent mistakes that can be made is transitioning ownership of assets too quickly, or taking short-cuts in how assets are valued. This may result in negative tax consequences down the line.

Similarly, it is not the job of the Probate Court to ensure that forms (particularly the Connecticut estate tax return) are completed correctly. If the estate tax return is seen only as a probate related requirement, it is worth nothing to the filer.

Another common assumption is that if property is jointly owned, that there is nothing to do. That is also an incorrect assumption. Connecticut attaches an automatic lien of every piece of real property owned by the decedent until an estate tax return is filed and taxes and/or probate fees are paid. You won’t know that the lien is there until someone tries to sell the property. But at the time of sale the liens need to be released. This means going back and preparing an itemized return of every asset owned by the decedent at the time of death (which may have been tens of years ago). This process can delay closings and causes a great deal of needless stress and anxiety.

There are more examples:

Before rushing to claim a life insurance policy; has anyone considered who should claim it? A typical beneficiary designation names both a primary and a contingent beneficiary. Do you know why the contingent was selected? In some cases, contingent beneficiaries are designated to take advantage of tax benefits that may be available at the time of death. They are not always simply alternates in case the primary beneficiary is deceased. Without first understanding how the policy was set up, and what potential benefits were to be achieved, a hastily submitted claim form can preclude consideration of tax benefits that the original designation was set up to achieve. Once claimed it is too late to make an alternate choice.

Retirement benefits offer similar planning opportunities. While a financial institution may contact you within a few days of death to transition a retirement account, there is absolutely no need to rush this process. In most cases, beneficiaries have until December 31^st of the year after death to make decisions regarding retirement benefits. As noted above, contingent beneficiaries are not always “alternates,” they may be designations to permit the optimal outcome at the time of death. The reasons those designations were made should be reviewed (hopefully with the planning attorney) before any distribution is selected. Likewise, when an account is claimed – the beneficiary designations should be re-examined. They should not be the same as they were before death! This is a common mistake with spousal roll-overs. The deceased spouse’s retirement account is merged into the surviving spouse’s account and because that account already had beneficiaries (that in many cases were reviewed by the planning attorney) those beneficiaries may not be appropriate now. It is critical that all advisors review and understand the rationale behind beneficiary designations before they are simply repeated. There may be important income tax and estate tax considerations to review before hastily completing paperwork to cross something off the list.

This is even true for paying expenses. Without even thinking, many family members write checks from personal accounts to cover things like the funeral, the cost of death certificates or tax preparation fees. These are just bills to get paid. But in this one context, most if not all of the expenses related to settling an estate are tax deductible if they are paid from the correct source! Certain expenses are deductible for both estate and income tax purposes. Others are deductible either for estate or income tax purposes. But no deductions will apply if expenses are not paid correctly. When inheriting assets from a deceased person, taking advantage of deductions means that every dollar spent on hiring trained professionals can actually reduce tax owed regardless sofa whether you hired a professional.

An experienced professional can help you see the whole picture. They can step back and luck of their puzzle pieces and then you can decide if you want assistance and with what tasks.

Individuals hoping to avoid probate may choose to use a revocable living trust to transfer assets prior to death, to avoid those assets passing through the probate process after death. As a result, the Probate Court has little or no supervisory role in settling an estate. But even when probate is not required, there are certain important requirements after every death that should be completed.

• File Estate Tax Returns

Connecticut requires a completed estate tax return after every death, regardless of the estate’s value, and regardless of whether probate is required. Not all states have the same requirements. Estate tax returns are separate from income tax returns. They do not report income. Rather, they reflect a “snapshot” of the value of every asset owned by the decedent, or in which the decedent had an interest, at the time of death. Every asset must reported: real estate, life insurance proceeds, retirement benefits, pension payments, and even property owned jointly with others or property held in a revocable trust. A Connecticut Estate Tax Return is due six months after the date of death. This deadline can cause confusion, because a Federal Estate Tax Return is not due until nine months after the date of death.

• Obtain and File Release of Estate Tax Liens

If the deceased person owned any interest in real estate here in Connecticut at the time of death, it will be important to secure a Release of Estate Tax Liens and file it on the land records. This Release confirms either that no estate tax was owed, or that all estate taxes have been paid. Real estate cannot be sold without this Release, and a Release must be obtained for every owner of the property, not just the last to die. (E.g., if a husband and wife owned the property together as joint tenants with rights of survivorship, a Release must be obtained upon the death of the first spouse and again upon the death of the second spouse.)

• Re-Title Trust Assets

When assets are titled in trust prior to death, those assets are almost always reported under the social security number of the trust’s Grantor. But when the Grantor passes away, that social security number “expires.” A new tax identification number must be applied for in the name or names of the Successor Trustees. Each account must then be “re-registered” with this new information. Signature cards or application forms must be completed by the new Trustees, as well as whatever other formalities the institution requires for new account holders.

• Update “Basis”

In most instances, when assets pass from one owner to another because of death, the cost basis used to calculate capital gains tax will need to change. This is commonly referred to as “stepping up” the basis. For example, if a decedent originally purchased shares of stock for $10 per share, but the value had increased to $50 per share on the day he/she died, the new tax basis would be $50 per share. If the beneficiary later sells the stock for $54 per share, capital gains tax would only be assessed on $4 per share (the difference between the date of death value of $50 per share and the sale price of $54 per share share). The laws providing for a step up in basis apply to property solely owned, jointly owned or even property held in a revocable trust. You should always consult with a qualified tax advisor regarding the rules for a step up in basis.

Probate is a court supervised procedure for collecting a deceased person’s assets, paying debts and/or taxes, and distributing property to designated beneficiaries (either according to the instructions the person in his or her Will; or as determined by state law if the person died without a Will). The time to administer a probate estate may be as short as a few months, or as long as a few years, depending on many factors.

In Connecticut, probate is required if a decedent owned land (real property) in his or her sole name, or if he/she owned more than $40,000 in his or her sole name, without a “pay on death” or beneficiary designation. It may be helpful to think about it this way: if the asset can move to the next owner on its own (because it has a beneficiary designation, a “pay on death” instruction, or because it has rights of survivorship in a joint owner, then the Probate Court has no role. The transfer can occur without a Court Decree. But, if the Will directs to whom and it what proportions assets are distributed to intended beneficiaries, then the Probate Court’s assistance will be required. If the total value of assets the Probate Court must transfer is small (less than $40,000); the Probate Court will expedite the process and issue a Decree after a minimal amount of paperwork is submitted. If the Court must supervise the transfer of real estate or more than $40,000, then a full probate estate must be opened.

A probate estate involves time, because certain mandatory waiting periods must be observed when a probate estate is opened. Typical probate filings include:

• All Wills and Codicils shall be delivered to the Probate Court within 30 days. CGS 45a-282.
• An application to admit the Will and/or open a probate estate requires that all interested parties (heirs, beneficiaries and sometimes known creditors) be provided with at least 14 days’ notice.
• Legal Notice to the Decedent’s creditors must be published within 14 days of the Fiduciary’s appointment. The notice must informs creditors of the decedent’s death and the right/requirement that claims be presented within 150 days.
• The Fiduciary shall file a complete Inventory of the decedent’s probate property within 60 days of appointment. CGS 45a-341.
• If the decedent owned real estate, a Notice for Land Records must be filed with the Town Clerk in each Connecticut town where real estate was owned.
• A surviving spouse has 150 days from the admission of the Will to claim a statutory share of the real and personal property passing under the Will of the deceased spouse. CGS 45a-436.
• A disclaimer must be filed within 9 months of date of death. CGS 45a-579. (A disclaimer can be a useful post mortem tax planning tool to reduce anticipated taxes upon the death of the second spouse.)
• In every estate, probate or non-probate, a Connecticut Estate Tax Return must be filed within 6 months of death. Interest accrues on unpaid probate fees if a bill from a Probate Court is not paid within 30 days or if an estate tax return was not properly filed within 6 months of death. Interest is added to the probate fee at 0.5% per month beginning 30 days after the due date of the estate tax return.
• The Fiduciary also must file a statement of Final Account, reporting all estate transactions, the accrual of income, purchases or re-investments of stock, expenses paid or reimbursed and distributing assets within 12 months of the decedent’s death. This report must be approved by both beneficiaries and the Court. The Fiduciary is responsible for providing complete transparency regarding all estate transactions, so that beneficiaries can understand what was paid, to whom and for what. It is also important that beneficiaries understand how their distributions of estate property were determined.

What Does it Mean to be a Fiduciary?

As a Fiduciary, you must understand your responsibilities and obligations as defined by the Trust Agreement and any special instructions that may have been provided by the Grantor (or Trust-Maker). This means reading the Trust Agreement in its entirety and making sure that you understand it. If you have questions, it is important to ask them. If you are not a professional Trustee, the expense of retaining professional assistance is well justified to make sure that you are aware of your legal, tax and reporting responsibilities.

Every trust is different. The terms of the trust agreement, the nature of the discretion given to Trustees, the size, nature and location of trust assets, and the number, temperament and specific needs of the beneficiaries are all factors that must be considered.

While it is a very common choice to name one or more beneficiaries as Trustees; a Trustee must set aside personal goals and preferences when managing trust assets for the benefit of others. Serving as a Trustee (or “Fiduciary”) means you place the interest of all the beneficiaries ahead of your own. If a Trustee has a personal interest in the outcome, this separation can be more difficult.

In addition, a Fiduciary must act prudently and competently throughout the process. Short-cuts or sloppy record keeping that may have caused no ill effects in your personal financial life are not appropriate when serving as a Fiduciary. Missing statements, a poorly maintained check register, and extended or late tax filings can be examples of an unprepared Fiduciary.

The most essential Fiduciary responsibilities are:

• Collect, Inventory and Safeguard Trust Assets. Trust assets must be collected, inventoried and valued. Depending upon the types of assets, formal appraisals and valuations may need to be obtained. There may be ongoing tax consequences for an incorrect valuation, so accuracy is essential for protecting and preserving trust assets, and for properly accounting for and distributing those assets.
• Management of Investments. The Trustee must appropriately invest trust property for the benefit of beneficiaries, subject to whatever restrictions or limitations may have been included in the trust. Generally, the Trustee must make trust assets economically productive of income.
• Make Distribution Decisions. The terms of the trust will provide instructions regarding distributions, often distinguishing between the trust’s principal and income. How income and principal is calculated and then distributed can be a sophisticated exercise, and failure to follow the appropriate distribution instructions could have significant adverse tax consequences.
• Regular Communication with Beneficiaries. The Trustee must keep Beneficiaries appropriately informed of the trust’s activities. This typically starts with making sure the beneficiaries understand their rights under the trust agreement and the nature and frequency of distributions to which they may be entitled.
• Periodic Accountings. Trust beneficiaries also have the right to understand how the trust assets are being managed. This not only requires detailed record-keeping and retention of records, it may also require reporting the transactions with taken place inside the trust in an “accounting.” The accounting may be required if the trust is subject to probate court supervision, or it may be requested by a beneficiary.
• Fiduciary Income Taxes. Trusts have to report income, track expenses and pay taxes just like individuals. They must file state and federal income tax returns (a Form 1041) annually. We recommend these returns be prepared as early each year as possible, because these returns frequently affect the personal income tax returns of the trust beneficiaries. The trust will issue a K-1 to the beneficiaries reporting the portion of the trust income that the beneficiary received and an appropriate portion of any deductions.

Before you accept the responsibilities of serving as a Trustee, you should clearly understand the nature of the commitment. Every individual Trustee should seek qualified professional advice to make sure they understand the nature and duration of their responsibility. In many instances, tasks that seem more burdensome can be delegated to qualified professionals, while the Trustee remains responsible for more essential functions.

Managing assets for someone else is a big responsibility. It is not one that should be delegated or accepted without careful consideration. It can be a significant time commitment, and financially stressful because records must be meticulously maintained. This isn’t a suggestion. This is required. A Fiduciary must know where every dollar went and for what reason.

• Insist on paper statements with copies of canceled checks. Fiduciaries may be required to produce complete statements and transaction reports to beneficiaries, to tax authorities, or to a Court that may have responsibility for supervising a trust. In addition to proof of payment, Fiduciaries should also retain proof of what was charged and for what. This means retaining every invoice. We recommend that at the time a bill is paid, the Fiduciary photocopy the invoice together with proof of payment.
• Identify and separate deposits. When transactions are grouped together, it becomes almost impossible to identify individual deposits. If a trust receives three separate refunds or payments, it’s best to deposit the checks in three separate transactions and label each one. That way, when an unusual or incorrect deposit is made (e.g., a refund check for $5.80 that should have been $58.00) it can be singled out and identified. Six months later, it will be difficult to recall whether the refund came, much less when it was deposited.
• Consider using accounting software or hiring someone who does. When you have legal responsibility for another person’s assets, you are required to maintain up to date reports regarding all transactions that take place each month. While this might be straightforward for a simple checking or saving account, when brokerage accounts are involved, this requires reporting all, purchases, sales, dividends and interest, stock re-investments and the like in addition to more straightforward distribution and expense information. When real estate is added to the mix, additional expenses and possibly income, as well as the long-term value/productivity of the property come into focus. To the inexperienced Trustee, these reporting obligations can seem burdensome and even overwhelming. But when the correct tools are utilized, the trust assets, expenses, distributions to beneficiaries, tax reporting obligations all can be viewed in a single report. Professional Trustees can produce these reports on demand because they use the correct reporting software to manage all of the reporting in place. If the prospect of handling these reports seems burdensome, you would be well served by outsourcing these responsibilities to a professional.

Depending upon the number of transactions involved, fiduciary accounting services can be retained don a monthly or quarterly schedule. Your only obligation is to keep the statements – and someone else can do the record keeping. The cost for this service is an expense of maintaining the trust – which is deductible against income for tax purposes.

Because we routinely assist all manner of Fiduciaries (Conservators, Executors, Trustees and even Agents under a Power of Attorney) we have the experience and the administrative tools to assist you. Accounting software, checkbook management, and other office capabilities allow us to act as a Trustee’s “back office.” The Trustee retains control over all decision-making, but the day to responsibilities of collecting rents and income, paying expenses, recording transactions on a monthly basis, and keeping accurate records falls to us. Please feel free to contact us about available Fiduciary Services.

What Does It Mean to Decant An Existing Trust?

Trust decanting is a strategy for changing the terms of an existing trust that no longer accomplishes the trust-maker’s original goals. This may be because of changed circumstance, or simply the passage of time. “Old” documents may not keep up with the changing law and tax requirements applicable to trusts. A newer document could take advantage of these changes to improve the trust’s performance for the beneficiaries.

The term “decanting” describes the process of distributing assets from an existing trust to a new trust designed by the first trust’s Trustee. (Most often this is because the original trust-maker has died, and can no longer amend the original trust him or herself.) Much like decanting a bottle of wine helps to “open” the wine to express its better qualities (and eliminate unfavorable ones), trust decanting allows a Trustee to establish more beneficial terms for a beneficiary in a new trust, eliminating unfavorable qualities in a previous trust. Assets in the first trust are then distributed — or “decanted” — to the new trust to be administered under the more beneficial terms.

A Trustee’s authority to decant generally comes from one of three sources: the original trust instrument, an applicable state statute, or common law applicable to trusts. Whether decanting an existing trust is appropriate will depend on many factors, including applicable income, gift, estate, and possible GST tax implications.

Some reasons to consider decanting an otherwise irrevocable trust are:

• Extending the term of the trust. Many trusts are drafted to make “birthday” distributions to beneficiaries at specified ages. This can open the trust assets up to unnecessary estate taxes, creditors, and divorcing spouses (not to mention the beneficiary’s own possible bad decisions).
• Changing a support trust into a discretionary trust. Some trusts are drafted to give the Trustee the power to make distributions to beneficiaries for reasons related to health, education, maintenance and support. But these “support” trusts are generally available to certain classes of creditors, including divorcing spouses. A discretionary trust gives the trustee absolute discretion over distributions and may protect assets from all classes of creditors (depending on the jurisdiction).
• Correcting drafting errors or ambiguous terms. Sometimes trusts can include mistakes. Simple drafting errors or ambiguous terms can sometimes cause problems with financial institutions or title companies. Decanting the trust into a new trust can cure these problems.
• Changing the governing law of the trust. The decision to locate or “situs” a trust in one jurisdiction can have far-reaching implications for income tax, asset protection, and other very important factors. Trust laws that are favorable when the trust is drafted may no longer provide the benefits a grantor intended. If a trust does not grant the trustee the power to change the trust’s situs, a Trustee may be able to establish nexus with a more favorable state and decant the original trust to a state with a better and more favorable regime.

Other opportunities include changing the appointment and authority of trustees, merging trusts for improved efficiency or severing trusts for greater privacy, adding provisions for a special needs beneficiary, qualifying a trust to own S corporation stock. Decanting may provide a path to much greater flexibility, and control for beneficiaries.