Sunday, July 16, 2017
Trusts have become a fundamental piece of a comprehensive, modern-day estate plan. But even with careful and meticulous planning on the part of an attorney, a settlor's choice of an incompetent or dishonest trustee can upend the best-laid plans. Some potential complications may be avoided if the settlor chooses to remain in control of the trust. Looking from the settlor's perspective, there are six key pitfalls that must be considered when the settlor chooses this option.
First, planners should ensure that the settlor is interested in making a complete gift for the purposes of the gift tax. If the settlor retains certain powers as the trustee, a gift will remain incomplete until the powers are surrendered. Next, it is important that the settlor not retain possession, enjoyment, or the income from a gift to a trust. Third, a settlor should not include broad distribution powers like the sprinkle power or a power to invade the principal. Fourth, if the settlor has chosen not to be a trustee, it is important to make sure he has no power to remove and replace the current trustee. Fifth, a settlor should not be the trustee of an IRC § 2503(c) minor's trust. And finally, if the settlor wishes to retain administrative powers while serving as trustee, it is important that there is sufficient court oversight.
A very complex rule structure has evolved around trust creation and trustee selection. Drafting an estate plan is not an opportunity to become a creative legal wizard. Though clients may pressure their planners to stray from these structures to gain some perceived benefit, this area of the law requires strict adherence to previously settled rules.
See Mark R. Parthemer & Sasha A. Klein, Client Dilemma—Whom Can I Trust?, Probate & Property, July 2017.