In the previous Wealth Transfer Planning posts, Wealth Transfer Planning – Loans and GRATs, and Family Trusts and Family Limited Partnerships, I discussed how loans, GRATs, trusts and FLPs, can be used to transfer wealth efficiently and effectively.
In this post, I offer some tips on trust administration. Trusts are an effective estate planning and asset protection tool. As an attorney and financial planner, I have drafted trusts, counseled clients on their use, administered trusts, and assisted clients with fiduciary and beneficiary disputes. At Ackerman Capital Management, we can leverage that experience for the benefit of trustee clients.
Below are a few best practices, under three broad topic headers, that individual trustees may want to consider as they administer trusts under their authority.
As a starting point, would-be trustees should consider their desire and competence to administer a trust and manage its assets. Trust administration requires organizational skills and some familiarity with accounting, tax, finance, and relevant fiduciary laws. Generally, the more complicated the trust and its holdings, the higher the level of competence needed to manage the trust. For example, if the trust primarily holds marketable securities and cash, pay attention to the portfolio manager’s asset allocation relative to the terms of the trust and beneficiary needs. If the trust holds real estate, mineral interests, or businesses, an environmental review, leases, insurance policies, appraisals, loans, and other relevant information should be managed and reviewed regularly by the trustee. Family dynamics and the personalities of all interested parties also need to be considered. If a trustee is a successor trustee, a release and indemnification from all acts or omissions of prior trustees signed by all beneficiaries is warranted.
Post Acceptance Administration, Document Summary, Filing, and the Investment Policy Statement
Professional trustees aim to conduct a post-acceptance review within sixty days of accepting trusteeship. This review helps ensure that all interested parties have been notified, terms of the trust are understood, and establish investment parameters for trust assets. As part of the post-acceptance review, trustees should consider drafting a brief bullet point summary of the trust, including: title and date of the trust and all amendments, the trustee’s name and contact information, provision allowing for fees, current and future beneficiary information, distribution directives, whether outside sources of support are to be considered, and termination language. For each bullet, use simple citations directing the reader to the summarized provision.
A trust filing system with the following files will help with organization: trust and legal documents, annual accountings, tax returns, beneficiary information, investment statements, distributions, and miscellaneous. Be sure to establish the parameters for managing trust assets with an investment policy statement (“IPS”).
The IPS sets the investment strategy and defines allowable asset classes, benchmarks, performance objectives, risk parameters, rebalancing, and liquidity requirements. The IPS helps the trustee avoid making in-the-moment investment errors like panic selling during market volatility or investing in ill-considered investment opportunities.
Annual Trust Reviews and Distributions
Professional trustees conduct annual trust reviews. Individual trustees should conduct them as well. The review and checklist should include: calendaring important dates and deadlines, sending annual statements to beneficiaries, documenting distributions and communications, confirming accuracy of contact information, an investment review, and status of each beneficiary’s financial plan. Trustees should consider comprehensive financial planning for beneficiaries. This helps beneficiaries understand their finances and helps trustees make prudent distributions, particularly where the trust mandates consideration of other sources of support. The trust will dictate whether distributions are mandatory or discretionary and how they should be allocated between principal and income. Discretionary trusts often allow distributions for health, education, support, or maintenance needs. Discerning what qualifies as maintenance or support can be a challenge and the trustee may have to balance the interests of current and future beneficiaries. Having a system for beneficiary distribution requests helps the trustee and beneficiaries communicate and better understand the conditions under which distributions can be made. Trustees should have the beneficiary complete a distribution request form for each request. The form should be signed by the beneficiary and will include: date, amount and nature of the request, and supporting information. The trustee will want to keep a record of each distribution request, whether it was approved or declined, tax consequences, and importantly, a cumulative accounting of all distributions made during the year to help prevent premature trust depletion.
In Texas, trustees assume a set of fiduciary duties—loyalty, competence, disclosure, and reasonable discretion—and must administer a trust in the best interest of trust beneficiaries. Therefore, individual trustees may want to consider best practices to help with effective trust administration and risk mitigation. At Ackerman Capital, we counsel trustee clients on the process of trust administration. It’s an important component to the broad array of wealth management services we provide.
For questions or comments reach out to me by email.
Keith A. Pillers, JD, CFP®, CIMA®, CPWA®
Director of Wealth Management
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