Among the many demands of managing a trust, some new and daunting problems are posing fresh challenges to trustees. It’s always been true that trustees have to put their beneficiaries’ needs first, but that fundamental duty sometimes conflicts with those people’s wishes and even demands.
That’s now truer than ever, with such factors as addiction and new technologies adding to the challenges. I’d like to touch on some of the challenges that trustees face today and offer some ideas about how to manage them responsibly. The demands are the same, whether the trustee is a professional or just a well-meaning relative.
Beneficiaries may ask for loans. This is an alternative to taking a taxable distribution, and often possible under a trust’s terms. While sometimes it might be a good idea, there are pitfalls to beware of.
One important guideline is that any loan must be made and documented in the same way outright distributions are handled.
That gets to the matter of requiring collateral. Collateral requirements don’t have to be as strict as a commercial lender would require — otherwise, the beneficiary would just borrow from a bank — but do need to be sufficient to back up the loan. That collateral will become one of the trust’s assets, for which the trustee will be responsible. That trustee has to answer for that loan to all the trust’s beneficiaries, and sometimes even a court.
The trustee must have evidence that the beneficiary can actually repay the loan. If not, the IRS may conclude the “loan” was actually a distribution, and that could impose unwelcome tax liability on the beneficiary. One other important technicality a trustee needs to get right is to set an interest rate that’s beneficial to both borrower and trust, and complies with tax laws.
Finally comes the matter of how a loan is repaid. If the trust provides for regular distributions, a beneficiary may choose to forego them; the money that should have been payable is applied against the loan balance. That’s one more thing a trustee has to manage.
All of this can be overwhelming, easily beyond a trustee’s expertise. That is why a professional trustee with solid grounding in tax law may be much better positioned to make lending decisions and handle all the necessary procedures. Even an amateur trustee should seek solid professional advice to avoid making serious mistakes.
A beneficiary may have an addiction problem. This raises obvious challenges. If a trust puts money in the hands of somebody who would promptly use it up buying drugs, alcohol, gambling, etc., it defeats the purposes its founder had in mind.
Sometimes a trust is created precisely because the founder doesn’t want to leave money directly to an addicted family member. It may give the trustee broad discretion to provide, or withhold, funds. Depending on the trust’s language, a trustee might be able to use the trust’s assets to pay for rehabilitation, or pay third parties to ensure the beneficiary is supplied with such necessities as food and housing. A similar option might be for the trustee directly to buy necessities such as furniture or clothing.
One approach is to require evidence the beneficiary has been “clean,” not abusing drugs or alcohol, for a specified period such as six months after rehab. Only then would the trust begin, or resume, making direct cash distributions. Monitoring this may require expert help. Addicts are notoriously good at fooling or even bullying well-meaning family members, and at evading rules such as drug-screening tests, unless they are carefully managed by savvy experts.
If the trust doesn’t allow the discretion of withholding payments to a self-destructive beneficiary, the trustee faces a difficult choice. It may be necessary to appeal to a court or a trust protector to revise the trust’s provisions. Obviously, something so drastic requires expert legal (and likely medical and/or psychological) advice. It’s not a task for an amateur to take on solo. That doesn’t even address the emotional toll of acting as a trustee for an addicted relative, which may be too great for a family member to handle.
One additional wrinkle: an addicted beneficiary may depend on government or insurance benefits that are tied to income. The trustee needs to be careful that any distributions, even after successful completion of rehab, don’t jeopardize needed benefits.
Prudent investing must be balanced with beneficiaries’ needs. It’s no easy task to put a trust’s assets to work in a way that both provides current income and also preserves principal for the future. As anyone knows who has tried to balance yield against safety in their own investing, this can be a serious challenge.
A trustee must make the same sorts of decisions, such as allocating money between stocks and bonds, foreign and domestic securities, growth and value investments, etc. There’s also the reality that beneficiaries may have very different needs. For example, a single trust may require current income to support a disabled child, but also call for long-term investments to benefit grandchildren after they come of age. It’s no small thing to design a portfolio that accomplishes both objectives.
This is yet another argument for having experienced, qualified help. That might be getting an investment advisor to work with an amateur trustee or putting everything in the hands of a professional trustee with expertise in structuring a portfolio.
A trust may include digital assets that require management. An estate is likely to include such things as email and social-media accounts and other digital assets. Examples are electronic financial or medical records, digital photos, or anything else stored in “the cloud.” Whether they have monetary value or not, those parts of an estate still require attention, if only to shut them down after their owner’s death. These assets may also contain highly sensitive content that could affect the privacy of living persons.
Fortunately, the law has caught up with this issue. States including North Carolina have enacted model legislation to give executors and trustees the power to take over these assets. Even so, a trustee may still have to cope with “terms of service” contracts with companies like Facebook or Google. Unless the account’s original owner specified who should take them over after death, getting control could still be a hassle.
So, who should be concerned with these challenges? Certainly, anyone who’s been named as a trustee should be aware of the many complexities that require expert advice. But anyone who is setting up a trust should also consider whether it makes best sense to burden a family member with these headaches or designate a professional as trustee. The trust and estate experts at Old North State Trust have expertise in law, finance, government benefit program rules, and even interpersonal relationships, to ensure that a trust reliably accomplishes its creator’s goals.
Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends. The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics. Readers should be aware that the facts may vary depending upon individual circumstances. The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete, or timely.
As Marketing Director, Alyce works to develop, budget, and implement marketing plans, which include advertising, coordination of conferences, special events, and development and maintenance of marketing materials. She also oversees the company’s website, in-house articles, and fostering community initiatives within the organization. Alyce received a BS degree in Interior Design from East Carolina University with a concentration in Business Administration and obtained her teaching certification from UNCW. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.
Cece Nunn - May 29, 2020
Jenny Callison - May 28, 2020
Cece Nunn - May 27, 2020
Staff Reports - May 27, 2020
Cece Nunn and Christina Haley O'Neal - May 29, 2020
Of the six health systems that submitted proposals for buying or partnering with NHRMC, three have moved ahead of the rest of the pack for f...
RAWsalsa is a local, independent maker and seller of smallbatch, fresh salsas. Products include signature fresh tomato and fresh pineapple s...
As hardware and other do-it-yourself (DIY) home improvement retailers and gardening supply stores begin to enter their busy season, they are...