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.
- What’s Estate Planning Got to do with Interest Rates – Part II - September 2, 2022
- What’s Estate Planning Got to do with Interest Rates – Part I - September 1, 2022
- What Can my Trustee Do? - November 18, 2019