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What Can my Trustee Do?

As we formed the Leavitt Lunch trust in our first article of this series, we (the grantor/trustor) gave direction to our son(trustee) to buy lunch for the group, and to return and distribute the food among identified beneficiaries, and close the trust by accounting to the grantor (me) and return any remaining funds to the grantor (me). This trust, with its limited purpose, limited assets, and short anticipated life did not need to include many powers to the trustee.

More formal trusts require more powerful trustees.

Nevada Statutes outlines some of the powers of a trustee in Section 163.265 through 163.410. These sections describe powers which can be included in a will (For Testamentary trusts) or a trust agreement (For a Living or inter-vivos trust) by simply referring to these sections. But these powers are in addition to powers granted to every trustee by common law or statute. So what are the powers granted by common law? Before we get to that, let’s talk about what lawyers mean by “common law.”

Common Law is law as interpreted over time by courts. It is based on the concept that people govern their affairs based on how things will be viewed by judicial authorities, and those decisions should be fairly predictable. At least once a case is decided, similar cases should be decided similarly. For example, if John is allowed to watch Superman on the television only when his homework is finished, Susan should be similarly required to complete her homework before she is allowed to watch Wonder Woman. (Of course, neither should be allowed to watch TV when it would disturb Dad’s nap, but this vital principal of law seems to be often debated at length. Usually during Dad’s naptime.) However, no two cases ever seem to be precisely the same, so lawyers continue to argue that their client’s case should be decided like cases that favor their client, and opposing counsel argues that the case should be decided like cases that favor theirs. (Would John v. Susan be decided differently if Superman comes on every day, but Wonder Woman only plays once a week? How about if John is a high school senior and Susan is in first grade?) Thus common law changes over time, but general principals come to be recognized.

So what powers does common law grant unto trustees?

The common law allows a trustee to have such powers as are specifically granted in a trust instrument insofar as that power is held by the grantor. So, if you can do it, you can give your trustee power to do it as well. But common law requires the trustee to act 1. In the best interest of the beneficiary, and 2. In a prudent manner. In these two requirements lies a universe of disputes and litigation.

Best interest of the beneficiary is commonly reflected in family law decisions about custody and visitation, medical care, education, vacation plans, and every other detail of a child’s life. And what is in someone’s “best interest” seems to change an awful lot over time as general cultural views swing seemingly from one extreme to another.

The “Prudent Man Rule” has likewise varied over time. It generally constrains the investments a trustee can make, or retain. Historically, this rule prevented investment in any corporate security whatsoever. Today, such investments in stocks and bonds have somehow become more “prudent” as economic views have changed over time. But “prudent” investments still need to be well diversified as to their types, their risk levels, and every other investment characteristic. Thus, a trustee may be compelled to sell most of your best ever stock investment, in order to satisfy a court’s opinion of what is a prudent diversification.
Nevada statutes likewise provide that “A trustee has the powers provided in the trust instrument, expressed by law or granted by the court upon petition, as necessary or appropriate to accomplish a purpose of the trust, but the court may not grant a power expressly prohibited by the trust instrument.” NRS 163.023.

So, what additional powers can I give my trustee?

You can allow the trustee to retain for as long as the trustee deems advisable, any investments you delivered to the trustee. This avoids the sale of your assets to satisfy any diversification requirement. It makes the trustee the judge of what combination of investments should be kept or sold. NRS 163.265
Your trustee can have power to make sales or other disposition of trust property without any specific formal procedures. Where a personal representative would need to file a petition and get approval of the court, with all the notice requirements that entails, and the public nature of such a sale, a trustee with this power can do it completely privately, and on such terms as can be negotiated with the buyer. NRS 163.270
Your trustee can have power to make any investment in any type of property, without regard to diversification, and may delegate this power to another (Think of a professionally managed portfolio) though the trustee remains liable for the acts of the one delegated as for its own. NRS 163.275-80.
Your trustee can continue any business, of any type, and in any capacity, that you conducted. That includes formation of new legal entities, discontinuance of existing ones, receiving additional property, dealing with other fiduciaries (Trustees, agents, representatives, etc), paying taxes and expenses, lending and borrowing money or other property, negotiating new terms for any security held, exercising shareholder rights, and can sue and defend the trust in any kind of lawsuit. NRS 163.285-375, 410.
Your trustee can be empowered to employ and compensate other persons or organizations to assist by advising the trustee in any professional capacity.
You can allow your trustee to combine multiple trusts you create with one instrument until it is time for distribution, or to divide your trust into multiple trusts, providing proper accounting is maintained. NRS 163.385
Your trustee can establish reserves, distribute either in cash or in kind, can make payments to or on behalf of minors or incapacitated persons, all as seems advisable to the trustee. NRS 163.390-400.
Your trustee can have the power to determine what receipts and expenses are to be allocated to income or principal. This can have tremendous effect on taxation of income and distribution of trust assets, depending on other terms in your trust. NRS 163.405
Your trustee can sign and execute any contracts or instruments necessary to carry out any power granted. NRS 163.410

ALWAYS REMEMBER, as the grantor of the trust, you absolutely control the powers to be granted to the trustee. If you have any questions on any of these powers, your attorney should be able to discuss clearly how a specific power might be exercised, and in what circumstances it may be needed.
Be sure to drop in next week, when we will discuss whether you can change your mind about the terms of your trust.

This is one in a series of articles by Richard Leavitt, a partner at Leavitt and Leavitt, PLLC. If you have any questions, let us know by email at Richard@LeavittLeavitt.com or Allen@LeavittLeavitt.com or call us at 702-562-4069. We’ll give you a personal answer as well as address the question as it fits into the series topics.

Who Should I Make My Trustee?

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One of the first questions to be asked is who is going to be the trustee. Or in other words, “Who do you trust?” It really all depends on the purpose of the trust. As we spoke last week about a very short term, limited purpose trust, the answer was almost automatic: Whoever seems the most available! But with longer lasting trusts, involving more significant assets and issues, the appointment of a trustee may well be the most important provision of the trust.

In the most common formal, written trust, the Revocable Living Trust, The Grantor (the one who creates the trust, AKA Trustor) is usually the initial trustee. After all, who do I trust more than me? But even with this trust, appointment of the trustee should not be automatic. And I should be careful in deciding whether I should accept the responsibility. As trustee, I will need to keep careful records of any transactions involving trust property in order that I can give reasonably frequent reports to the beneficiary or beneficiaries, the person or persons for whose benefit the trust is formed.

But wait, I thought that was me too!

Yes, most often in the Revocable Living Trust, the initial beneficiary is indeed the same person as the grantor. But you will not be the only beneficiary of this trust, else, what is the point of having created it? Even if your sole purpose is to avoid the expense and public nature of a probate process, your future beneficiaries will greatly appreciate your careful attention to the details of administration so that the records you have kept can answer the inevitable questions of what belongs to the trust, what are the trust obligations, and what changes have happened over the years.

So, let’s start with a few basic questions. First, who can be a trustee? In Nevada, a trustee is a “person holding property in trust and includes trustees, a corporate as well as a natural person and a successor or substitute trustee.” NRS 163.020. So any entity that can hold property can be a trustee.

Second, what are the duties of a trustee, or in other words, what should a good trustee be able to do? Nevada Statutes outlines the powers of a trustee in Section 163.265 through 163. These powers described in these sections include:

retention, selection, and disposition of assets, whether for direct use of the beneficiaries or as investments;
the continuation of any business or farming operation,
the formation of entities to carry on such businesses or farms,
the management of any real property including maintenance and repair or construction of any buildings or facilities thereon,
pay all the taxes and expenses of the trust,
receive additional property,
deal with other fiduciaries,
borrow money,
loan money,
vote and participate in management or any business interest of the trust,
commence, prosecute, defend or settle any litigation,
employ people or entities to assist,
establish reserves for any related purpose,
decide what is income and what is growth of the trust assets, determine what and how much can be distributed, and
execute any contract for any of these purposes.

Quite a list! And this is just a brief summary. And the trustee is supposed to use good, even professional level, judgment in doing, or not doing, any of them. Not an easy job. Of course, your trustee can consult with and hire professionals to advise. Is this job something you really want to put on your 18 year-old child? Or your brother-in-law who could sure use the work? Or your spouse? Or even yourself, who derives no particular enjoyment from watching business news reports and reading annual reports?

So, what options are there?

Single natural person trustee: If you know someone who is likely to be able to handle all the duties and obligations, you can appoint that person as your trustee, or as a successor to you as trustee if you become unable to do it yourself. But successor natural person trustees have a bad habit of becoming unable or unavailable right along with you, so you should probably identify a series of them. Most family trusts name one of the children who are also the successor beneficiaries, to be a successor trustee as well. Most of the time this works out well, but not always. Do you remember the last time they shared a pizza? Or a box of assorted chocolates? And you will not likely be there to calm the waters, or to restore what may be lost over the single caramel delight among your assets.

Natural person co-trustees: you can name any number of persons to act together. If you are married you probably understand how beneficial is it to have somebody else to bounce ideas around with. I know my wife has saved me on many occasions, in many ways, with a simple glance that communicates most emphatically, “You Want to Do WHAT?” If you have two, any decision requires agreement of both, though you can provide that either can sign checks or contracts and such individually. If more than two, a majority will prevail unless you specify differently. You can specify different areas in which a trustee can operate, for example, name one trustee to manage real property, another to handle securities investment, and another to handle accounting, tax and legal issues that arise. Although these “officers” would have executive decision powers, you can make their decisions or recommendations subject to approval by the trustees together. The duration of the trust, the kinds of assets it is likely to hold, and the complexity of issues likely to present will guide you in such organizational decisions. Of course, a cursory view of nightly news shows the discord that can arise if there is little agreement on overall principles and objectives. A wise commanding officer once counseled me, “Keep it simple, soldier!” That’s not the title he used, but I’m sure that’s what he meant.

Professional trustees: You may have a relationship with a financial advisor, accountant, or attorney who you know is capable of the kind of management your trust will require. You may have worked with them as your advisor, and know their reliability in placing your interests above their own. The same issues outlined above would apply.

Corporate trustees: You can appoint a bank trust department, a trust company, an insurance company, even a charitable organization to become your trustee. One advantage here is that these kind of trustees don’t normally suddenly become unable to serve or die. Another is that they typically have extensive controls to prevent misuse of the power you are giving them, since they likely have many clients, and any default toward one would be disastrous to their entire business. They also usually have state or federal regulators reviewing their procedures.

No matter who you appoint as a trustee, you should provide a way that the trustee can be removed. If your trust is revocable, that’s easy during your capacity: you just revoke and amend that section of your trust agreement. But once you are disabled or die, while the courts will entertain a suit to replace a trustee, it is much more cost and time efficient to provide a simpler method. In court, misbehavior of a trustee has to be proven to remove them, but if you give them the power, your beneficiary, or a majority of them, can replace the trustee because they don’t like the car she drives, or the color of his tie. Alternatively, if your beneficiary should not have that power, you can appoint a trust protector to exercise that power on their behalf. Such a trust protector might be an attorney, accountant, or other advisor whom you trust, but who does not wish to be daily involved in the operation of the trust.

Sooo….. Who do YOU trust?

Income Tax Basis

Income tax basis is important in tax and estate planning. This article examines the concept of income tax basis, how one acquires a basis, how it gets adjusted, etc. The article then examines how the basis is subtracted from the sale price to determine gain or loss. The next article in the series will examine how income tax basis is an important factor in estate planning.

Income Tax Basis

Use Trust Protectors for Added Protection and Flexibility

Trust Protectors are increasingly popular in trusts. This article examines how Trust Protectors can add flexibility to your trust. This flexibility helps achieve your goals and can protect the beneficiaries and Trustee.

Use Trust Protectors for Added Protection and Flexibility

What is a Trust?

A trust is actually a quite simple concept, though it is often couched in such mystery as to make it look very complicated and difficult to understand. As we do things, we create trusts, manage them, and terminate them often, often in a single day.

Let us imagine we take our family to the beach for the day. If yours is like mine, that’s two parents and 4 kids. (Actually, I have twelve kids, but this is supposed to be kept comprehensible.) As usual, we get an early start, and leave the house about 11 after waking everybody up for breakfast at 7. Yeah, it takes about 4 hours after breakfast to get everybody ready to go and the car packed. The beach is about a half hour away (Don’t we wish!) so we arrive just before lunch time. After getting the beach gear set up in our favorite spot, voices start asking when lunch will be served. Being a good parent, (and not wanting to do it myself) I give money to my son, our oldest child, with instructions to go get food, and take his sister along to pick it out, reminding him to bring back the change with the food.

I JUST CREATED A TRUST. Let’s review the terms: Who is the Grantor/Trustor? That would be me. Who is the trustee? That would be my son. I trusted him to handle the money, make the purchase wisely, and to bring the food and the change back. Who are the beneficiaries? That is me, my wife, and the four kids. What is the term of the trust? This trust will last until the food is distributed, an accounting given to the grantor (me), and the remaining funds returned to the Grantor( me). And this trust, since it deals with unusually complex matters (selection of foods for children), even appoints an advisory consultant, the sister who picks it out. We’ll call it the Leavitt Lunch Trust.

Is it finished? No, the Grantor has expressed his trust, but two important steps remain. First, the trustee(Son) must understand and agree to accept the trust and be bound by its terms. Of course, in this case, he is likely to do so since if he doesn’t, he gets no lunch. But perhaps he thinks a reasonable fee should be paid. Or he objects to the appointment of an advisory consultant, especially this one, who has been teasing him all day about his strange looking swimsuit and tan lines. Assuming he confirms his understanding of the terms and expresses his acceptance, what remains to be done? The trust needs to be funded, i.e. something of value (money) must be transferred to the trustee(Son) from the grantor(me). Without this step, the trust exists, but is totally useless.

So, how is this like a popular estate planning trust, a revocable living family trust? Let’s look at the words. First, is the Leavitt Lunch Trust (LLT) revocable? Can the Grantor (me) cancel the trust and get his money back? It is silent on this, but if silent, revocable is presumed. As a practical matter, revocation would be difficult, as the trustee (Son) will be quickly out of communication with the grantor (me), and not likely to be listening to receive notice of the revocation. And once the purpose of the trust is done, and the food is purchased, the Grantor (me) is bound to the acts of the Trustee (Son). Just because he (Grantor, me) doesn’t like the corndog, once purchased according to the terms of the trust, he can’t revoke and get all the money back.

Is LLT a living trust? Yes, I think it is fair to assume the Grantor (me) was alive when the trust was created, though to look at his pasty white skin, there could be some doubt. Another kind of trust often seen is the Testamentary Trust. That trust is formed within a Last Will and Testament, and comes into existence only on the death of the testator/grantor. (Oh, aren’t lawyer types clever with their fancy words and all!)

Is LLT a family trust? Yes, all that really means is the grantor and the beneficiaries share some family connection. Here, there are three beneficiary relationships, each with their own effects. First is the relationship of the Grantor (me) to himself. Because of this, the trust is ignored for Federal Income Tax purposes. If somehow on the way to the food court, the trustee (Son) invested the money and earned income, that transaction would be reported on the Grantor’s (my) personal tax return as though the trust didn’t exist. Second is the relationship to his spouse. Because of that relationship, this gift to his spouse is exempt from Federal Gift and Estate Tax. The third relationship, with the children, that of a parent and child, is subject to that tax, but, unless you’re at the beach in California, that gift is probably less than the $15,000 per person annual exclusion for 2019.

So, are you as hungry for a beach visit and lunch as I am? Let’s see, who can we get to go for lunch? See me next week when we will discuss “Who Should I Make My Trustee?”

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