Posts Tagged ‘income beneficiaries’

Things to Consider When You’re Named as Successor Trustee


When a family member dies, you will need to address a number of items. One that might come up: handling the revocable living trust they created.

If you are named as successor trustee you will have a number of obligations you need to discharge. You might need help from a lawyer and/or an accountant; you should not hesitate to consult one or both to figure out how much help you do need. Many of the successor trustees who consult us can do just fine without continuing legal help, but the process is not always easy or obvious.

We can provide you with an introduction to the considerations involved in handling a trust after the death of the trust’s settlor. Before we start, though, these caveats/warnings are appropriate: we’re only writing about Arizona law, and your situation might be very different than the other facts we assume here. Any questions in your mind about what needs to be done? Ask a lawyer.

With that in mind, here are some of the issues to consider shortly after the death of someone who named you as successor trustee:

What law applies? It’s not always obvious. If your mother signed her trust in Arizona and lived and died in Arizona, and you live in Arizona as well, her trust will almost certainly be governed by Arizona law. But what if she lived in another state and you live in Arizona? Or if the reverse is true? Or the trust says that another state’s law will apply?

The general rule: the law of the state where the trustee lives usually applies. That’s you, not your now-deceased mother. If you are the trustee, start by talking with a lawyer in your own community, and ask her whether she is the right person to advise you (of, if not, if she can refer you to someone in the right state).

Notice to beneficiaries. The law of many states — including Arizona — requires specific written notice to the beneficiaries of a trust after you take over as trustee of an irrevocable trust. Did you manage the trust for a time before your father’s death? Ask your lawyer about the applicable state law. This is an area where state laws differ.

Arizona says that notice is due within sixty days of a trust becoming irrevocable (as, for instance, upon the death of the settlor):

Within sixty days after the date the trustee acquires knowledge of the creation of an irrevocable trust or the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable, whether by the death of the settlor or otherwise, shall notify the qualified beneficiaries of the trust’s existence, of the identity of the settlor or settlors, of the trustee’s name, address and telephone number, of the right to request a copy of the relevant portions of the trust instrument and of the right to a trustee’s report as provided in subsection C.

That’s Arizona Revised Statutes section 14-10813(B)(3). Note that it refers to a list of items the notice must include. You can read that description at the same link, but it basically requires information about the settlor, the trustee, the trust and its assets.

Identifying the beneficiaries. Who is a “beneficiary.” Suppose your father’s trust says that if you, all your children, and all your cousins die in a common accident, everything goes to a charitable organization. Does that mean that all notices have to be sent to that charity, too? Not necessarily.

Arizona defines people and organizations who need notice (they are called “qualified beneficiaries”) to include everyone who is entitled to (or even can receive) income or principal right now, plus anyone who could receive trust money if one thing happened (like the death of a beneficiary). That’s a bit of a simplification, but it should help figure out who is entitled to notice. The details are in Arizona Revised Statutes section 14-10103(14). It’s a little hard to read and interpret — talk to your lawyer about it if you have any difficulty figuring out who is a “qualified beneficiary.”

Review the trust. Not just the parts identifying the beneficiaries, or the list of successor trustees. Read the entire trust. It might tell you to do more than the law requires. In some cases, it might tell you that you can do less than the minimum spelled out in the law — though sometimes those provisions are ineffective. Talk to your lawyer if you have any questions about minimum or maximum requirements.

Certificate of trust. When your mother signed her trust, she probably created a short (two- or three-page) document that listed the trust’s name, her status as trustee and the name of her successor trustee (among other things). You will probably want to prepare a similar document as successor trustee, and it might need to be filed with the County Recorder’s office in any county where the trust owns real estate. Arizona Revised Statutes section 14-11013 tells you what you might include in that certification, but it doesn’t provide a form. Having a hard time finding a good form? That’s because every case is so different — depending on how many and who the beneficiaries are, what kinds of assets the trust holds, the relationship of the successor trustee, and other things. Ask your lawyer for help.

Taxes. You knew that taxes would be an issue, right? Someone (and it’s probably you) will need to sign and file a final federal income tax return for the part-year they lived. The trust will be a separate taxpaying entity, and will need to secure a taxpayer ID number (an EIN) and file at least one federal income tax return. There will need to be state income tax returns for the state where your family member lived, and for the trust in one or more states. This is a good item to discuss with your accountant.

There’s more. This list is far from complete. It’s an attempt to give you some idea of what you’re facing, and to help you figure out whether you need to consult a lawyer. Not sure? That’s the best evidence that you need to get good legal counsel.

What To Do About a Child Who Can’t Handle Money


A reader asks: “could you do an article on how to leave inheritance to a son who is not good at handling money? Should I leave his portion to another son who is good at it? They are very close and would get along.”

First we have a disclaimer, then the answer, then an explanation.

The Disclaimer

We don’t know our reader’s life situation, or her son(s), well enough to give her actual legal advice. The answer we offer will be based on generalities, and might not apply to her very well. This is why one hires a lawyer — to get actual advice based on one’s real circumstances (oh, and for drafting of the documents — but that’s usually less important than the advice).

We do have some observations and suggestions to consider, but they are based on situations that we have seen before and our knowledge of law and human nature. They are offered not as an answer, but as an exploration of some of the alternatives our reader — and you, if you are in a similar situation — should think about.

The Answer

What you probably need, dear reader, is a trust for the benefit of your son who is not very good at handling money. Whether your son who is good at handling money will serve as trustee or not should be a question that you discuss with your attorney. But if you meant to ask whether you should just disinherit your son who is not good with money and give a double portion to your other son (expecting him to take care of his brother) — the answer to that question is a clear and firm “no!”

Some Definitions

(Special bonus section. It will help the explanation flow more smoothly.)

An arrangement where one person handles money for the benefit of another is called a trust. A trust can be formal, with lots of legalistic provisions and directions to the trustee, or very simple. You can simply hand a check to one person, saying “here, take care of this for your brother” and create a trust. But don’t — that’s a sure way to destroy familial relationships and transfer family wealth to lawyers. It is important to have an actual trust document.

A trust can be created in your will (in which case it is called a testamentary trust) or while you are still alive (in which case it is usually called a living trust, though some lawyers prefer the term inter vivos trust). The person who is entitled to receive benefits from the trust, whether right now or upon the death of the current recipient, is called a beneficiary.

A trust that prohibits the beneficiary from transferring his or her interest in the trust’s assets to another person is called a spendthrift trust. That doesn’t necessarily mean that the beneficiary is a spendthrift, though he or she may be.

The person who handles money for another is a trustee, and a trustee is a fiduciary. A fiduciary has an obligation to report the finances of the trust to the beneficiary (beneficiaries, actually — the people who receive benefits on the death of the current beneficiary may also be entitled to reports. But that’s a topic for another day).

If you create a testamentary trust (in your will, remember?), you have pretty much assured that your estate will need to go through the probate process in order to fund the trust. That’s not necessarily a bad thing, but it often comes as a surprise to clients. Avoiding probate while establishing a trust usually means a more expensive estate plan.

The Explanation

The question is deceptively simple, and the answers have a number of repercussions to consider. Can you simply disinherit a child who is not good with money? Yes, you can (at least in Arizona, and assuming the child is not a dependent or minor child). That might lead to hard feelings, and even litigation, but assuming you are competent and your wishes are clearly stated, the disinheritance should be effective.

At the same time, you can leave a disproportionate share of your estate to someone else. You can even tell them you expect them to take care of a sibling (or a grandchild, or a spouse, or anyone else you are disinheriting). But you can’t expect them to actually carry through. They may be saintly and responsible, but they are not immortal. Your son will probably leave his estate to his wife or children — and they might or might not carry through on his obligations. Or your son might have business reverses, or be sued by someone he injures accidentally, or … you can begin to see the variety of problems that could arise.

There’s a practical problem in addition to the legal/financial one. Your two sons get along well? We can tell you that cutting one out and telling the other to take care of his brother will end that positive relationship. The disinherited child will feel like he has to beg for something he is entitled to. The favored child will feel like he has been thrust into a parental relationship with his brother. Each will resent the other.

By creating a trust, you reduce that problem — but you do not eliminate it. The trustee son can now point to the document to explain his decision (“see? Mom said I was not to just turn the money over to you to buy as many cars as you thought you needed”), but there will still be a fundamental change in their relationship. You might want to consider making someone else trustee.

But who? The brother who already doesn’t get along with the beneficiary? (Don’t dismiss this idea so quickly — the question is asked half-humorously, but half-seriously.) The bank? Another family member (the cousin who is a bank officer, perhaps)? A professional (your accountant, your lawyer, your broker)? A professional fiduciary (they are set up in many, but not all, states)? Each of those choices has positives and negatives, and they are the topic for some future discussion here — and a more immediate one with the lawyer you hire to draft your trust.

Best of luck. It’s not easy to deal with your children’s different needs, abilities and expectations.

Trust for Surviving Spouse Leads to Dispute With Stepchildren


When Albert Findlay (not his real name) died in 2002, he left a trust for the benefit of his wife Sharon. Sharon was named as trustee, and the trust document directed that she was to receive “the entire net income” from the trust for the rest of her life. Albert specifically directed that, as trustee, Sharon would not have any right to take principal out of the trust, but he left at least a half million dollars of investable assets in the trust, so it could be expected to produce some income for Sharon. In addition, the trust included several pieces of investment property — Albert appears to have been a moderately wealthy and successful man.

Albert also had three daughters from his first marriage (that is, they were not Sharon’s children). One of the significant assets in the trust was a 20.28% interest in an apartment building in downtown Prescott, Arizona. Albert’s daughters owned the remaining interest and managed the building.

Already the description of Albert’s estate plan should give some clues about what ended up going wrong. In our experience, clients have a hard time imagining what the family dynamics will actually look like after their deaths. We can guess that Albert might have had such a failure of vision. Would Sharon handle the trust properly? Would she get along with her step-daughters? Would any of them, financially enmeshed as they were, seek to take advantage of the others? Would all of them understand their obligations to one another, providing information and responding reasonably when asked?

It is not clear from the court record (you predicted that there would be a court proceeding, didn’t you?) who acted first, but in the few years after Albert’s death several things happened:

  1. Two of his daughters, as managers of the apartment complex, took out a loan against the building. They did not put the proceeds into the limited liability company running the rental building. The building did not generate sufficient income to make the loan payments, and the property was ultimately lost to a foreclosure.
  2. Sharon began automatically transferring $3,000 per month from the trust to her personal checking account, regardless of how much income the trust produced. The value of the stocks held in the trust began to decline.
  3. Albert’s daughters requested accounting information for the trust, but Sharon did not comply for months. In fact, she did not provide any detailed account information until court proceedings had been filed.
  4. The daughters attempted to sell one of the other assets held jointly among them and Sharon’s trust; Sharon objected to some of the terms of the proposed sale and it did not go through. The daughters then formed a new limited liability company and transferred their share of that asset to the new LLC. Meanwhile, they received an offer on the struggling apartment building (before the foreclosure) but rejected it without consulting Sharon.
  5. Once litigation began, Sharon hired an attorney and paid about $70,000 in legal fees from the trust. She actually initiated the lawsuit, seeking damages for her stepdaughters’ handling of the apartment building. They countersued, asking that she be removed as trustee, ordered to account and ordered to return money she should not have taken from the trust.
  6. Meanwhile, Sharon was receiving trust checks for rental payments on another trust asset, a commercial rental building. She deposited those checks into her personal account directly, and reported the income on her own income tax return rather than showing it as trust income. In fact, Sharon didn’t even have a trust checking account set up for most of the time she acted as trustee.

The trial court heard testimony from the warring parties, and ended up removing Sharon as trustee (a non-family member took over after her removal), ordering her to return trust money she should not have received, and directing her attorney to return $70,000 in legal fees paid by the trust. Sharon appealed.

The Arizona Court of Appeals affirmed most of the trial judge’s findings, but disagreed about how much Sharon should have been entitled to receive from the trust. The trial judge had ordered Sharon to return everything she had received above the “distributable net income” (DNI) of the trust — that calculation was wrong, said the appellate court. DNI is a tax-related calculation — it is the maximum amount of the income tax deduction available to a trust for distributions to an income beneficiary — and “income” for trust accounting purposes is a different (and often somewhat larger) number, according to the Court of Appeals.

The appellate court sent the dispute back to the trial judge for further hearings to calculate the amount that Sharon owes back to the trust. It also directed the trial judge to conduct proceedings to determine whether Albert would have wanted his trust used to pay for administrative items like legal fees. In the first hearing, the judge had refused to allow Albert’s lawyer to testify about what he might have intended in that regard.

Two other holdings by the Court of Appeals are worth mentioning. First, the appellate judges noted that Sharon’s decision to sell the stocks held in the trust when she took over is not, by itself, evidence of any wrongdoing. Even though the value of the stock holdings had apparently gone down during her administration, that is not necessarily actionable. A trustee is not an insurer, but has a duty to manage trust assets prudently. The trial judge will need to inquire further into the kinds of changes made before deciding to order Sharon to return funds.

Finally, the appellate court noted that there is not necessarily any problem with naming a trustee who has an interest in the trust’s administration. In fact, it is common to name beneficiaries as trustees — they then have a duty to the other beneficiaries, but that does not mean that someone in Sharon’s position is precluded from seeking to assert her own interests in the trust. The trial court will need to review the earlier ruling to make sure that the “conflict of interest” analysis was not too sweeping in its application. Favour v. Favour, February 11, 2014.

It is a challenge to describe a court opinion like the Favour holding without dropping into technical jargon. But perhaps it is more useful and interesting to think about how the litigation — and the outcome — might have been avoided in the first instance. We have a few ideas to suggest — though we are quick to note that we never discussed Albert’s wishes with him, and he might have rejected any or all of these:

  1. Naming a beneficiary as trustee is not at all objectionable, and (as the appellate court notes) it is commonly done. But if the trust’s author intends that everyone be treated scrupulously fairly, it might make more sense to name a disinterested person (or organization) — even a professional — as trustee.
  2. It is uncommon to see modern trusts that require distribution of all income but preclude distribution of any principal. That is an invitation to this kind of dispute, since the characterization of income and principal can be subject to interpretation. It also puts the income and remainder beneficiaries at odds — income beneficiaries are not interested in growth of investment value, and remainder beneficiaries would rather skip current income in favor of that growth.
  3. Putting fractional shares of investment assets into the trust is another way to encourage disagreement — particularly when other trust beneficiaries have management authority over the fractional interests.
  4. Once any level of conflict arose, it might have been appropriate for Sharon to consider application of Arizona’s “total return unitrust” statutory authority. Using that approach, she might have set a presumptive rate of distribution from the trust regardless of the actual income — and reduced the possibilities of disagreement between herself and her stepdaughters.
  5. Including some sort of dispute resolution mechanism in a trust — especially a trust like this one, involving a surviving spouse and stepchildren from an earlier marriage — might make sense as a way of minimizing conflict, avoiding court proceedings and reducing legal expenses.
  6. A trustee has a duty to report to remainder beneficiaries. Someone should have explained that to Sharon early, and pushed her toward satisfying that obligation. Delaying or avoiding her duty did not work to her benefit in the long run.

With remand to the trial court, it may not be too late for Sharon and her stepdaughters to work out some less-costly resolution of their dispute. But some part of the cost (and the breakdown in the interpersonal dynamics) has to be laid at Albert’s door — he could have reduced the conflicts and helped his family avoid disputes by a little more careful thought about the drafting, funding and future of his trust plans.


Remainder Beneficiaries Not Entitled to Trust Beneficiary’s Financial Info

Imagine with us for a moment: you are the trustee of an irrevocable trust created by a now-deceased woman for the benefit of her daughter. The trust says that her daughter is to receive all the income generated by the trust. You are also given the discretion to give the daughter some of the trust’s principal if she needs it. When the daughter dies, whatever is left in the trust will go to her nieces and nephews, the grandchildren of the original trust settlor.

You have just gotten a letter from the daughter, asking you for an additional $3,000 per month to pay for her care. You know that the remainder beneficiaries — the nieces and nephews — might object to that extra distribution. What should you do?

That is essentially the problem faced by Citigroup Trust, which is trustee of just such a trust. It was established by Esther Caplan for the benefit of her daughter, and it is administered in Arizona. After Citigroup began making regular distributions to the daughter, one of her nephews questioned whether the trustee should be giving her additional funds. Eric Bistrow told Citigroup that he wanted more information about his aunt’s finances, and that he wondered whether the trust was funding a too-lavish standard of living.

To make sure that they understood the daughter’s needs, Citigroup requested (and got) tax returns and a budget. They decided to keep making the distributions, but also to ask the Arizona courts for direction.

Citigroup filed what in Arizona trust law is called a “Petition for Instructions.” They essentially asked the probate judge to tell them whether they were right to make the discretionary distributions of principal.

In the course of the proceedings, Mr. Bistrow and his attorney asked to look at his aunt’s budget, tax returns and financial information. Citigroup declined, saying that the information was private and should not be shared. How, then, would Mr. Bistrow know that they had properly considered her financial needs? The trustee suggested that it would give the records to the probate judge, and let him review them privately; if there were concerns or questions, the judge could make the decision to share them, or some portion of them.

The probate judge agreed, looked at the records, and approved the past and proposed future distributions to Ms. Caplan’s daughter. It also confirmed that Mr. Bistrow and the other nephews and nieces were entitled to statements showing how much was actually distributed, as well as how much was earned by the trust and what other expenses it incurred.

The nieces and nephews appealed, arguing that they were not being given enough input into the decision to distribute trust principal to their aunt. Their position was that they should be notified before any distributions could be made, that they should be given full financial information, and that they should be given an opportunity to weigh in on their aunt’s need for funds.

Not so, ruled the Arizona Court of Appeals. Mr. Bistrow and the other remainder beneficiaries are entitled to be treated fairly. They are entitled to know what the trustee is doing. They are entitled to ask the courts to intervene if they think the trustee has exceeded its authority. They are not, however, entitled to see their aunt’s financial records, or to vote on whether the trustee should exercise its discretion to make distributions to her. In Re the Matter of Esther Caplan Trust, September 1, 2011.

The Caplan case is focused on a narrow question, but it has broader application. It also raises (but does not answer) a number of interesting questions. It gives important guidance to trustees on how to safely exercise the discretion given by a trust document.

What are some of the lessons of Caplan? A few come to mind:

  1. Asking for court review of decisions which might be challenged should always be considered. It may be that the amount in controversy is too small to justify court involvement, or that the trustee’s decision is simply unassailable, or that the remainder beneficiaries are agreeable. But in any case in which there might be disagreement, the Petition for Instructions is a good safeguard for the trustee.
  2. Remainder beneficiaries are important, and their interests need to be considered in administering a trust. But the income beneficiary’s interest is usually paramount. Remainder beneficiaries are not in charge of trust administration.
  3. Notwithstanding that remainder beneficiaries are not in charge, they are still entitled to sufficient information so that they can determine if their interests are being adequately protected. But “sufficient information” is not the same thing as “complete information.” It may sometimes (rarely, but occasionally) be appropriate for a trustee to withhold sensitive or personal information. Usually, it would be wise to identify the information which is not being shared, so that the remainder beneficiaries can make a reasoned decision about whether to challenge that determination, too.
  4. Creative thinking can come up with solutions that protect everyone’s interests and violate none. Giving the judge a chance to review the financial records in camera (privately) was just such a creative solution.
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