Erskine Company Trust Administration Handbook

Table of Contents

phase 1. Implementation of the Trust

project 1.1. Types of Trust

subproject 1.1.1. Testamentary Trusts

Testamentary Trusts

Testamentary trusts (also known as trusts under will) are no longer used in Massachusetts, for the following reasons:

• the probate court has authority over the implementation of the trust, including the appointment of a trustee and the selection and appointment of successor trustees and the filing and allowance of accounts;

 

• because annual accountings must be filed with the probate court, the assets, performance of the trust, and beneficiary distributions are available to the public;

• any revisions to the testamentary trust require a codicil to the will, and the codicil must be signed in compliance with the requirements for executing wills; and

• trust assets may not be available until the will has been allowed by the probate court and the executor and trustee have been appointed.

Therefore, such trust are not referred to in the handbook.

subproject 1.1.2. Revocable and Irrevocable Trusts

Irrevocable Trusts

Irrevocable trusts are a common form of estate planning trust because neither the property transferred nor any subsequent appreciation is included in the donor's taxable estate.

Irrevocable trusts offer significant opportunities for tax savings as well as the ability to shelter assets from creditors. However, in order to take advantage of the tax savings as well as the creditor protection, the donor must not, in general, retain the ability to amend, revoke or benefit from the irrevocable trust.

Life insurance and stock in startup companies can be ideal assets for an irrevocable trust because the value of the asset at the time of the transfer (cash surrender value, with certain adjustments, in the case of a life insurance policy; pre-IPO stock value in the case of a startup) is generally much lower than the face value of the policy or the value of the stock following a successful IPO.

It is essential to comply with SEC regulations involving insider trading by directors and officers before funding an irrevocable trust with pre-lPO stock. See, e.g., Securities Exchange Act of 1934, §§ 13, 16; SEC Rule 144 (promulgated under the Securities Act of 1933), 17 C.F.R. §230.144.

It is assumed that most of the Trusts being administered with this Handbook are Irrevocable Trusts.

Revocable Trust

A revocable trust (also known as an inter vivos trust or living trust) may be funded during the donor's lifetime or after the donor's death. Because of the donor's ability to amend and revoke the revocable trust, any assets transferred to the trust remain in the donor's control and are included in the donor's taxable

estate. At the same time, however, any property transferred to a revocable trust prior to the donor's death is no longer part of the donor's probate estate and is, therefore, not subject to probate court supervision and intervention.

Massachusetts has passed the Uniform Testamentary Additions to Trusts Act. See G.L. c. 203, § 3B. This act states that a revocable trust is valid so long as it is identified in the donor's will and is signed concurrently with (or before) the will. The existence, size and character of the trust corpus prior to the donor's death are immaterial and do not affect the validity of the trust. G.L. c. 203, § 3B.

It is common to use a revocable trust that remains unfunded during the donor's lifetime, with a will providing that, after the payment of debts and expenses, the residue of the probate estate will "pour over" to the trust.

There are, however, several legitimate reasons to fund a revocable trust during the donor's lifetime.

(a)       Ability to Reach Assets Immediately upon the Death of the Donor

The ability of a trustee to administer trust assets (such as restricted or closely held securities) or run a business immediately, without having to wait for allowance of the donor's will and the appointment of an executor, can be extraordinarily important in the administration of an estate. To take advantage of this opportunity, however, it is crucial that there be a scheme for both the appointment of a successor trustee (if the donor is the sole trustee during his or her lifetime) and easy access to the trust assets (for example, by holding the assets in nominee or street name rather than in certificate form).

(b)   Ability to Reach Assets upon the Incapacity of the Donor

Funding a revocable trust during the donor's lifetime, if there is either an original trustee in addition to the donor or provision for appointment of a successor trustee upon the donor's incapacity, will allow the trust property to be administered for the benefit of the donor following his or her incapacitation. A funded revocable trust is preferable to an appointment of a guardian or conservator because these types of appointment will involve probate court supervision. A client who is reluctant to fund his or her revocable trust should consider specifically giving his or her attorney-in-fact the ability to fund the trust through a durable power of attorney. See § 2.2.3, below.

(c)      Privacy

Because the assets in a funded revocable trust are not probate assets, they are not subject to probate inventory or accountings. Therefore, the size of the trust and the identity of specific trust assets are not available for public inspection. Unlike a testamentary trust, a revocable pour-over trust instrument is not filed with the court. Thus, its dispositive provisions remain unavailable to the public.

 

task 1.1.2.1. ECO Attorney and Staff Determines if the Trust is Revocable or Irrevocable.

action 1.1.2.1.1 ECO Staff Gets an original of the most current Trust Agreement and Amendments

action 1.1.2.1.2 ECO Attorney reviews the Trust to Determine if it is Irrevocable or Revocable by its terms

task 1.1.2.2. ECO Staff adds the Key Data for Trust to Estateworks and Outlook

The Key Data is:

• The Name of the Trust

• The Date of the Trust

• The date of the most recent amendment of the Trust

• The Date when the Trust became Irrevocable

• The Date the Trust is/should be funded.

• When the income Tax return is due

• When will estimated Tax Payments be due

• Who is the Grantor of the Trust.

• Who is the initial Trustee(s) of the Trust

• Who is the Successor Trustee(s) if the Trust

• Who can appoint a successor Trustee to the Trust

• Are annual accountings required

• When should annual accountings be complete.

• If there a Spendthrift provision in the Trust.

• Does the Trust fall under the Uniform Principal and Interest Act

• If so, which state

• Does the Trust fall under the Uniform Prudent Investor Act.

• If so, which state

• Who are the income beneficiaries of the Trust

• If the income beneficiary is a minor or incompetent, who can take their interest in their stead.

• Are the income payments required or discretionary

• When are required income payments made

• By what standards are the discretionary income payments made

• When are the discretionary payments made

• Can Income Beneficiaries receive principal payments.

• What current principal payments are required.

• What Current Principal Payments are allowed and to whom

• What are the standards for current discretionary principal payments

• When does an income beneficiary's rights to the income or principal end.

• When the rights to income end, is income accrued but not yet paid distributed to the estate of the income beneficiary or to the remainder beneficiaries.

• Who are the current presumptive Remainder Beneficiaries of the Trust

• If the remainder beneficiary is incompetent or a minor on the termination of the Trust, who may take their interest in their stead.

• Can a Remainder Beneficiary receive an Advancement on their presumptive remainder bequest during the term of the trust, and is so when?

• Who will be the remainder beneficiaries if the current remainder beneficiaries are not living/in existence at the termination of the trust.

• If there are no designated remainder beneficiaries at the end of the trust, how are the remainder beneficiaries determined.

• What are the restrictions on the remainder bequests.

• What is the Taxpayer Identification Number for the Trust

• If it is a revocable Trust where the Grantor is the Trustee, it will be the Social Security Number of the Grantor.

• If it is a Revocable Trust, or an Irrevocable Trust, and the Grantor is not sole trustee, then a TIN will need to be applied for.

• What are the Restrictions on the Investments on the Trust

• Assets transferred to the Trust by the Grantor or Estate to be held regardless of whether the asset is a prudent investment

• Asset that the Trust is specifically prohibited from holding, even if deemed prudent investments.

• Does the Trustee have full Statutory Power to invest?

• Can the Trustee Appoint Trustees for specific property or purposes.

• Can the Trustee Divide the Trust Assets into separate shares for separate income beneficiaries or remainder beneficiaries?

• Is the division required or discretionary

• If the division is required, what is the required distribution for each Share of the Trust?

• Are the new Shares separate Trusts

• Provide key information for new trusts

• Does anyone have a power to appoint income or remainder interests in the Trust

• Who hold that Power of Appointment

• How is that Power Exercised

• Is that Power of Appointment limited or general.

• Does the Trust have an "Intentions" clause.

• Does the Trust exempt the Trustee from having a bond

• Does the Trust protect the Trustee from liability for actions of prior trustees.

action 1.1.2.2.1 ECO Attorney determines and Staff Inputs to Estateworks:

The Name of the Trust

The Date of the Trust

The date(s) of the most recent amendment(s) of the Trust

The Date when the Trust became Irrevocable

The Date the Trust is/should be funded.

When the income Tax return is due

Is the Trust and Simple or Complex Trust

When will estimated Tax Payments be due

Who is the Grantor of the Trust.

Who is the initial Trustee(s) of the Trust

Who is the Successor Trustee(s) if the Trust

Who can appoint a successor Trustee to the Trust

· Are annual accountings required

· When should annual accountings be complete.

· If there a Spendthrift provision in the Trust.

· Does the Trust fall under the Uniform Principal and Interest Act

· If so, which state

· Does the Trust fall under the Uniform Prudent Investor Act.

· If so, which state

· Who are the income beneficiaries of the Trust

· If the income beneficiary is a minor or incompetent, who can take their interest in their stead.

· Are the income payments required or discretionary

· When are required income payments made

· By what standards are the discretionary income payments made

· When are the discretionary payments made

· Can Income Beneficiaries receive principal payments.

· What current principal payments are required.

· What Current Principal Payments are allowed and to whom

· What are the standards for current discretionary principal payments

· When does an income beneficiary's rights to the income or principal end.

· When the rights to income end, is income accrued but not yet paid distributed to the estate of the income beneficiary or to the remainder beneficiaries.

· Who are the current presumptive Remainder Beneficiaries of the Trust

· If the remainder beneficiary is incompetent or a minor on the termination of the Trust, who may take their interest in their stead.

· Can a Remainder Beneficiary receive an Advancement on their presumptive remainder bequest during the term of the trust, and is so when?

· Who will be the remainder beneficiaries if the current remainder beneficiaries are not living/in existence at the termination of the trust.

· If there are no designated remainder beneficiaries at the end of the trust, how are the remainder beneficiaries determined.

· What are the restrictions on the remainder bequests.

· What is the Taxpayer Identification Number for the Trust

· If it is a revocable Trust where the Grantor is the Trustee, it will be the Social Security Number of the Grantor.

· If it is a Revocable Trust, or an Irrevocable Trust, and the Grantor is not sole trustee, then a TIN will need to be applied for.

·  What are the Restrictions on the Investments on the Trust

· Assets transferred to the Trust by the Grantor or Estate to be held regardless of whether the asset is a prudent investment

· Asset that the Trust is specifically prohibited from holding, even if deemed prudent investments.

· Does the Trustee have full Statutory Power to invest?

· Can the Trustee Appoint Trustees for specific property or purposes.

· Can the Trustee Divide the Trust Assets into separate shares for separate income beneficiaries or remainder beneficiaries?

· Is the division required or discretionary

· If the division is required, what is the required distribution for each Share of the Trust?

· Are the new Shares separate Trusts

· Provide key information for new trusts

· Does anyone have a power to appoint income or remainder interests in the Trust

· Who hold that Power of Appointment

· How is that Power Exercised

· Is that Power of Appointment limited or general.

· Does the Trust have an "Intentions" clause.

· Does the Trust exempt the Trustee from having a bond

· Does the Trust protect the Trustee from liability for actions of prior trustees.

project 1.2. Funding the Trust

subproject 1.2.1. Means of Funding

task 1.2.1.1. By Erskine Company

Lawyer

It will not be cost effective for the lawyer to handle transfers personally. With proper instruction, an assistant or paralegal should be able to handle virtually all transfer details.

action 1.2.1.1.1 ECO Attorney determines where the assets of the Trust should be held in Custody

action 1.2.1.1.2 ECO Attorney obtains the Taxpayer Identification Number for the Trust

The tax identification number is the donor's social security number as long as the donor or the donor's spouse serves as trustee, seeTreas.Reg. § 301.6109-1(a)(2))

If neither donor nor spouse is currently a trustee, obtain a tax identification number by sending Form SS4 to the IRS.SeeTreas.Reg. § 1.671-4(b). For grantor trusts described in Treas.Reg. § 1.671-4(b), in which either spouse is a donor and at least one spouse is a trustee, the trust does not obtain a tax identification number.SeeTreas.Reg. § 301.6109-1(a)(2). In such circumstances, the donor furnishes his or her own social security number and reports income as if paid to the donor, not to the trust.

action 1.2.1.1.3 ECO Staff Get the paperwork needed to open an account in the Trust's name at the designated custody agent

action 1.2.1.1.4 ECO Staff Drafts Letter of Instruction to Open Custody Account for Trustee's signature

action 1.2.1.1.5 Trustee executed the paperwork to open the Custody Account

action 1.2.1.1.6 ECO Staff sends executed paperwork, copy of the trust, and copy of the TIN to the Custody agent with Letter of Instruction to open the account

action 1.2.1.1.7 If the Funding is from an existing custody account, ECO Staff drafts letter of instruction for the Grantor's Signature

action 1.2.1.1.8 If the funds are in an estate, letter of instruction to the Executor of the Estate

action 1.2.1.1.9 If in certificate form, then stock powers and signature guarranties are obtained by ECO Staff and ECO Attorney

task 1.2.1.2. By the Client

Client

A client who is establishing a trust to avoid probate costs may well want to do the transfer work himself or herself. Warn the client that it is more work than may at first be apparent. Detailed instructions will be necessary. See Exhibit 2A(Letter to Client).

action 1.2.1.2.1 ECO Staff sends Letter of Instruction on Funding Trust

task 1.2.1.3. By a Professional Trustee

Professional Trustee

If a trustee is a professional trustee—whether a corporate trustee, private trustee or lawyer—the funding of the trust will be completed by the professional trustee as part of the trust administration. In general, the transfer of cash and registration of securities into the trust will be completed at no cost to the client. There may be some additional legal charges for transferring real estate and other more unusual assets into the trust.

task 1.2.1.4. By a Durable Power of Attorney

Power of Attorney

If the client becomes incapacitated before all assets are transferred, a durable power of attorney may be used to fund the trust. Durable powers are authorized by statute. SeeG.L. c. 20IB. For a sample general durable power of attorney, see Exhibit 2B.

A durable power of attorney may be limited to the power to fund a trust. SeeExhibit 2C(Special Power of Attorney).

Practice Note

Be careful if the donor wants the power to arise only upon incapacity (a "springing power"). This means the power of attorney must define incapacity. A better solution may be to leave the power of attorney with the lawyer, whom the attorney-in-fact must call to obtain the power. The lawyer may then investigate the situation and decide whether to release the power of attorney (or direct the donor to revoke the power).

If there is concern that a court-appointed guardian might act contrary to the donor's or trustee's wishes, the power of attorney should specify the donor's wish that the attorney-in-fact also be appointed guardian,seeG.L. c. 20IB, to prevent any possible "defunding" or amendment of the trust by the guardian under G.L. c. 201, § 38 (which allows guardians to do estate planning).

 

action 1.2.1.4.1 ECO Attorney drafts special instructions for Durable Power of Attorney

subproject 1.2.2. Mechanics of Funding

This article focuses primarily on funding the revocable trust because this is the most common form of trust. Generally speaking, the same guidelines should work for funding an irrevocable trust and for funding a testamentary trust, with the notable exception that the funding of a testamentary trust will be completed by the executor or trustee.

task 1.2.2.1. Funding the Trust with Cash

action 1.2.2.1.1 Client writes a check to "<name of Trustee> as Trustee of the <name of Trust>

action 1.2.2.1.2 ECO Staff deposits check into custody account in the name of the Trust

action 1.2.2.1.3 ECO Staff makes sure that cash is credited to the account within three business days of depositing of the check.

task 1.2.2.2. Funding the Trust with Stock In Certificate Form

Certificates

Mail certificates to the transfer agent with a letter giving transfer instructions. The stock power (or bond power) should be mailed separately from the certificate, because together the power and certificate are negotiable. The letter and stock power must have the transferor's signature guaranteed by a national bank or New York Stock Exchange member firm. SeeExhibit 2D(Letter To Transfer Agent).

action 1.2.2.2.1 ECO Staff obtains the Original Certificates from the Grantor

action 1.2.2.2.2 ECO Staff makes photocopies of the Original Certificates, noting the CUSIP numbers

action 1.2.2.2.3 ECO Staff prints one blank Irrevocable Stock Power per holding (not per certificate).

action 1.2.2.2.4 ECO Staff drafts and prints Letter of Instruction to Custody Agent

action 1.2.2.2.5 Owner of Stock signs the Stock Power and the Letter of Instruction

action 1.2.2.2.6 ECO Attorney obtains Medallion Guarranties on both the Letter and the stock powers.

action 1.2.2.2.7 ECO Staff sends certificates in one Federal Express envelope, and Sotck Powers and Letter of Instruction in another Federal Express envelope, to Custody Agent

action 1.2.2.2.8 ECO Staff confirms that the stock is transferred into custody account within two weeks

task 1.2.2.3. Funding the Trust with Stock held in a Brokerage Account or "Street Name"

Brokerage Account

Send a letter to the broker specifying assets to be transferred, the name of the new account (see § 2.3.1 above), and tax identification number if required. You may be required to send a copy of the trust instrument, although you should begin by sending only the first page, trustee appointment page(s) and the signature page to protect the donor's privacy as to the dispositive trust provisions. A trustee's certificate certifying the authenticity of the instrument may also be required.

An existing brokerage account registered in the donor's name may be easily transferred into trust ownership. This is in contrast to situations involving certificates and mutual funds, in which multiple (and perhaps inconsistent) transfer instructions may be required. Some brokerage accounts will now hold mutual funds issued by different mutual fund families. If full funding of the trust during the donor's lifetime is likely, consider the advantages of having a brokerage account that holds all of the donor's stocks, bonds and mutual funds.

action 1.2.2.3.1 ECO Staff drafts letter of instruction to Broker for Owner's signature

action 1.2.2.3.2 Owner signs letter of instruction

action 1.2.2.3.3 ECO Staff sends letter of Instruction by Federal Express

action 1.2.2.3.4 ECO staff confirms the letter has been received within two days.

action 1.2.2.3.5 ECO Staff confirms transfer is made within a day of receipt of letter by Broker

task 1.2.2.4. Funding the Trust with a Mutual Fund which is held by that Mutual Fund

Mutual Funds

Each fund will have its own requirements. The best method may be to call the fund and ask for a copy of its transfer instructions or forms, making clear that the transfer is to a revocable trust established by the present owner of the fund shares.

One mutual fund family has a form entitled "Change Registration/Transfer Ownership of An Account" which includes transfers into trust as one of the transfer options. A signature guarantee is required, but not a copy of the trust instrument or evidence of the trustee's power to own mutual funds.

action 1.2.2.4.1 ECO Staff calls Mutual Fund and asks for a copy of their transfer requirements

action 1.2.2.4.2 ECO Staff gathers the paperwork and signatures required to make the transfer

action 1.2.2.4.3 Trustee signs required Mutual Fund Transfer paperwork

action 1.2.2.4.4 ECO Staff Federal Express Transfer Paperwork to Mutual Fund

action 1.2.2.4.5 Staff Confirms that title to the mutual fund has been transferred within one week

task 1.2.2.5. Checking for Red Flags in Funding a Trust

action 1.2.2.5.1 ECO staff asks if the Stock is Section 1244 Stock

I.R.C.§ 1244 Stock

Internal Revenue Code § 1244 allows individuals to deduct losses on certain small business stock ("Section 1244 stock") against ordinary income. Under current law, the transfer of Section 1244 stock to a revocable trust would result in the loss of this tax benefit.

action 1.2.2.5.2 ECO asks if the Stock is Restricted or Qualified Stock Options

Restricted or Qualified Stock Options

It is an open question whether the transfer of qualified stock options would be a "transfer of legal title" sufficient to cause taxability.SeeTreas.Reg. § 1.425-1(c).

action 1.2.2.5.3 ECO staff asks if the stock is Professional Corporation Stock

Stock in a Professional Corporation

State law may require that the owner be a licensed member of the profession.SeeG.L.c.156A, § 10.

action 1.2.2.5.4 ECO Staff asks if the stock is Subchapter S Stock

Subchapter S stock may be transferred without immediately jeopardizing the Subchapter S election. SeeI.R.C. §1361(c)(2)(A)(i). The stock may stay in trust two years after the donor's death. Beyond this period, a qualified Subchapter S trust under I.R.C. § 1361(d)(3)(A)(i) may be suitable.

Business interests otherwise qualifying for installment payments of estate tax pursuant to I.R.C. § 6166 are not tainted by transfer to or from a revocable trust.

Transfer does not require reporting of accrued interest on E, EE, H, and HH Bonds.SeeRev.Rul. 58-2. Use form PD-1851, which can be obtained from the Federal Reserve Bank in Pittsburgh (1-800-245-2804).

task 1.2.2.6. Real Estate

Transfers of real estate title to a Trust are either done by deed (if an intervivos funding) or by probate (if the Trust is funded from a Pour over provision in the Will).

A transfer to a Trust is not valid if there is not either a copy of the Trust on record or a trustee's certificate on record before the deed is recorded.

If real estate is transferred by probate, and the real estate is located outside of the jurisdiction of the Probate Court in which the will is probated, then an ancillary probate will need to be filed to clear the title

action 1.2.2.6.1 ECO Staff checks to see if there is a copy of the Trust or a Trustee's Certificate on record in the Registry of Deeds in which the Deed will need to be filed

action 1.2.2.6.2 ECO Attorney drafts Trustee's Certificate to be recorded if there is no trust or certificate on record

action 1.2.2.6.3 Trustee executes the Trustee's Certificate

action 1.2.2.6.4 ECO Staff files the Trustee's Certificate either in person or by mail, in the required Registry of Deeds.

action 1.2.2.6.5 ECO Attorney draft Schedule of Beneficiaries if the Real Estate is being transferred into a Nominee Trust

Nominee Trust

If title to real estate is transferred to a revocable trust, the trust instrument will need to be recorded in the registry of deeds or filed with the land court registration office. One of the donor's likely goals when establishing a revocable trust is privacy, so recording or filing the revocable trust may be undesirable. It is common in this instance to use a nominee realty trust. See Exhibit 2E(Trust and Schedule of Beneficial Interests and Agreement). The nominee trust will be 100 percent beneficially owned by the trustee of the revocable trust.

Practice Note

Use the nominee trustonlyto hold record title to the real estate. Remember that the nominee trust isjustan agency agreement between the trustee of the revocable trust as beneficiary (principal), and the trustee of the nominee trust (agent). Keep all dispositive provisions in the revocable trust and out of the nominee trust.

action 1.2.2.6.6 ECO Staff prepares the paperwork for opening an Ancillary Estate Administration when real estate is not in the same County that the Will is probated in

Ancillary Estate Administration

It can be useful to transfer title to real estate that is located in other states to avoid ancillary administration. Title should be transferred to either the revocable trust or to a nominee trust as described above. If a nominee trust is not an option in the state in which the property is located, then recording a certificate of trust should be sufficient to satisfy the title requirements without having to record the trust instrument. See Exhibit 2F(Certificate of Trust).

Practice Note

Local counsel should be consulted prior to recording the deed and supporting documents to make sure the conveyance complies with local title standards.

action 1.2.2.6.7 ECO Staff drafts letter for attorney's signature, enclosing the original deed for recorded property and a copy of the deed for Registered property, an note in the letter the book and page when the deed is on record.

action 1.2.2.6.8 ECO Attorney should note the effect the transfer has on the Grantor's Income Taxes in the letter notifying the Grantor that the Deed is on record

Income Taxes

The donor does not lose the exclusion of gain from the sale of a principal residence under I.R.C. § 121. The donor may still deduct real estate taxes. So long as the donor is treated as the owner of the revocable trust under I.R.C. § 676, the trust is disregarded as a taxable entity. I.R.C. § 671.

action 1.2.2.6.9 ECO Attorney checks the status of any Mortgage that may be on the property and the effect of a transfer.

Mortgage

If there is a mortgage on the property, it may be accelerated by any change in title. Good practice suggests obtaining written approval from the mortgagee for the proposed transfer. Fannie Mae, Freddie Mac, and Ginnie Mae, the major secondary lenders who purchase mortgages, consider revocable trusts to be eligible borrowers. If the real estate may need to be financed or refinanced in the future, be sure that the trust document gives the trustee power to borrow.

action 1.2.2.6.10 ECO Staff checks that the title to Home Owners Insurance has been changed to the Trust

Homeowner's Insurance

After title to real estate has been transferred to the revocable trust (or to a nominee trust having the revocable trust as the sole beneficiary), insurance coverage should be transferred to the new title holder. The trustee or trustees should be named as additional insureds. It should be straightforward to transfer the insurance to the trustee of the revocable or nominee trust with a copy of the deed and a letter of instruction.

action 1.2.2.6.11 ECO Staff contacts Title Insurance Company to obtian an assignment of the Title Policy to the Trust

Title Insurance

The title insurance company may claim that the policy has lapsed upon the transfer of title to the trustees of the revocable trust or nominee trust. Prior to transferring title to the trust, steps must be taken to avoid losing the benefit of any title insurance policy that the donor had previously obtained. It is worth contacting the title insurance company to see whether it will assign the policy to the new titleholder. It is likely that the company will honor the transfer and revise the name on the title insurance policy for a nominal fee and perhaps the cost of a new title rundown.

Practice Note

It may help to use a warranty deed, rather than a quitclaim deed, from the donor to the trust because any title defects will remain the responsibility of the grantor (donor), who in turn may be able to rely on the title insurance policy.

action 1.2.2.6.12 ECO Staff checks to see if there is a Declaration of Homestead in the property.

Declaration of Homestead

There is some question whether the homestead exemption under G. L. c. 188, §§ 1 and 1A is valid if the title is held by the trustee of a nominee trust or a revocable trust. Compare Assistant Recorder v. SpinelU,38 Mass. App. Ct. 655, 659, 651 N.E.2d 411, 413 (1995) ("The [homestead] statute makes no provision for property held in trust for the benefit of a settlor who makes the property his or her principal residence."),with Dwyerv.Cempellin,424 Mass 26, 29 n.7, 31, 673 N.E.2d 863, 866 n.7, 867 (1996) (holding that a joint declaration of homestead by husband and wife is valid, but only as to the spouse whose signature appears first, and suggesting thatSpinelUused an unduly strict standard in construing the homestead act).

Practice Note

As application of the homestead act may be an issue, caution suggests not using a trustee of either a nominee or a revocable trust to hold title until either the statute or case law is changed to include appropriate trustees specifically among those who can declare a

action 1.2.2.6.13 ECO attorney checks wether the trasnfer effects Old Age Exemptions

Old-Age Exemption

Some Towns, such as town of Brookline,takes the position that real estate must be owned by an individual as an individual (and not as trustee) in order to qualify for the old-age exemption.

task 1.2.2.7. Funding a Trust with Life Insurance

Life Insurance

Assuming that one is dealing with a revocable trust, the donor should remain the owner of insurance policies insuring his or her life. The primary beneficiary of each life insurance policy insuring the donor's life should be 'The current trustees of the Hilda Hildebrand 2001 Trust, established March 24, 2001, as amended." Occasionally an insurance company will not be satisfied with the designation "current trustees" and will insist that a name be listed on the beneficiary designation form. If this is the case, the name of the current trustee (often the donor alone) and the name(s) of the likely successor trustee(s) may be provided to the insurance company.

action 1.2.2.7.1 ECO Attorney determines if the Trust is a "funded" or Unfunded" trust.

A so-called “unfunded” life insurance trust is one that holds only the life insurance policy and no other assets until the insured's death. After the insured's death the trust will receive the proceeds and administer them as assets of the trust under the provisions of the trust instrument. Other assets may be received by the life insurance trust and administered by the trust along with the insurance proceeds. Such assets might be death benefits paid over to the trust by the insured's employer or by an employee benefit plan maintained by the employer, assets poured over from the insured's estate under provisions of his will, etc.

 

A “funded” life insurance trust, on the other hand, holds not only the life insurance policy but also other assets transferred to it by the insured before his death. The purpose of the transfer of other assets to the trust is generally to provide the trust with a source of funds with which to pay premiums on the policy until the insured's death. These premiums may be paid out of the income or principal of the trust or both. Other assets may also be transferred to the life insurance trust for the purpose of eliminating estate tax on those assets in the insured's estate, shifting tax on the income from those assets to the trust or beneficiaries, coordinating disposition of those assets with the life insurance proceeds at the insured's death, or any other estate planning purpose which can be achieved by transferring assets to an irrevocable lifetime trust.

action 1.2.2.7.2 ECO Attorney determines if the Trust will be funded with an existing life insurance policy or a new life insurance policy

action 1.2.2.7.3 Insurance Agent prepares application for new life insurance policy with the Trust as the insured.

action 1.2.2.7.4 ECO Staff prepares Assignment of existing life insurance policy to Trust

Where the insured individual has himself taken out the policy of insurance on his life, the plans for saving potential estate tax, discussed in the preceding paragraphs, generally involve an irrevocable assignment by the insured to someone else of the policy and of all his incidents of ownership in the policy. This is generally accomplished by a physical transfer of the policy to the assignee, (with any notations on the policy that the insurance company may require) plus a written assignment of all the rights in the policy, plus a written notification to the insurance company of the assignment.

 

Insurance companies offer various sample forms of assignments, either for guidance in drafting the insured's own written assignment or for use by the insured as is. Because of the special nature of group life insurance, the forms of assignment for group insurance differ from the assignments of individual life insurance. Reproduced at ¶25,201 et seq. are forms of assignment provided by various insurance companies, for use in assigning group or ordinary life insurance.

 

   RIA caution:

 

   Where an individual in a community property state intends to assign group life insurance to someone other than his spouse, it is important to make certain that all requirements of the local law are met in transferring to the assignee not only the insured's rights but also his spouse's community property interest in the group life insurance.

 

   RIA recommendation:

 

   Not only must the insurance policy itself be effectively assigned, but the insured must transfer all of his incidents of ownership in the policy. The written assignment of the policy (or the schedule in the insurance trust listing the property being assigned) should contain the statement that the insured is assigning all his right, title, and interest (including all incidents of ownership) in and over the listed policies.

Absolute Assignment of Life Insurance template

See attachment(s): ABSOLUTE ASSIGNMENT OF LIFE INSURANCE POLICY.doc

Absolute Assignment of Group Life Insurance Template

See attachment(s): Absolute Assignment of Group Life Insruance Policy.doc

Absolute Assignment and Transfer of Life Insurance Template

See attachment(s): Absolute Assignment and Trasnfer of Life Insruance.doc

action 1.2.2.7.5 ECO Attorney determines if any gift tax return needs to be filed on funding of Trust with Existing Life Insurance, or on payment of Premiums

A transfer of a life insurance policy which avoids estate tax will generally be a gift for gift tax purposes. Also the insured's continued payment of premiums on a transferred policy will be gifts for gift tax purposes. 32 The estate planner's goal is therefore to avoid or minimize gift taxes by taking the fullest possible advantage of the annual gift tax exclusion for transfer of the policy and for payment of premiums on the policy.

 

If a policy is transferred outright to an individual donee, without interposition of a trust, the transfer qualifies for the annual exclusion as the transfer of a present interest, even though payment of the proceeds of the policy is deferred until the death of the insured. 33 Similarly, each payment of premiums by the insured on the policy transferred outright is a gift of a present interest qualifying for the exclusion. 34

 

If, however, the policy is transferred to a trust, the terms of the trust may cause the transfer to be treated as a transfer of a future interest which does not qualify for the gift tax exclusion. 35 Where this is so, the insured's payment of premiums on the policy transferred to the trust is likewise a transfer of a future interest not qualifying for the gift tax exclusion. 36

 

   RIA recommendation:

 

   This undesirable result can be avoided by incorporating into the trust a so-called “Crummey” provision entitling the trust beneficiary to demand distribution from the trust each year during a limited time period of an amount equal to the exclusion. For a complete discussion of Crummey powers, see ¶15,471 et seq.

 

The gift tax annual exclusion for transfers to donees other than the donor's spouse can double if the insured is married and elects under Code Sec. 2513 to split the gift with his spouse.

 

For gifts to the insured's spouse, the value of the insurance policy transferred or later premium payments can qualify for the gift tax marital deduction.

 

Gifts in excess of the gift tax exclusion and deductions will generate gift tax against which the unified credit will be applied.

action 1.2.2.7.6 ECO Attorney determines if the Trust has "Crummy Powers"

Crummey powers are among the most commonly used estate planning techniques. A Crummey power is a power of withdrawal given to the beneficiary of a trust for the purpose of making gifts to the trust qualify for the gift tax annual exclusion as gifts of a present interest. Crummey powers are named for a Ninth Circuit case 1 which paved the way for the use of withdrawal powers as a means of making gifts to trusts qualify for the annual exclusion. They are most often used in connection with trusts for minors and life insurance trusts, but they can also be used in other types of trusts.

The planning considerations that have to be taken into account in drafting and administering a trust in which the beneficiary has a Crummey power. It begins with an explanation of how to meet the basic Crummey requirements, and then offers suggestions designed to help the drafter avoid pitfalls he might overlook if he focused only on those basic requirements. It discusses how to protect the holder of the power from being treated as making a taxable gift if he allows the power to lapse without exercising it. It includes sample forms of the notice to be given to the beneficiary of his withdrawal right, and a waiver by the beneficiary of his right to notice.

action 1.2.2.7.7 ECO Staff Prepares draft of any required Crummy Notice

action 1.2.2.7.8 Trustee needs to file income tax returns for funded ILIT

If a policy is transferred to a “funded” trust and income of the trust is sufficient to require filing, an income tax return will have to be filed for the trust. An unfunded life insurance trust will normally derive no gross income from the life insurance policy before the insured's death and income tax returns will not have to be filed if the trust has no other income. After the insured's death, however, if the trust continues in existence, income tax returns reporting income earned from the proceeds held by the trust will have to be filed.

task 1.2.2.8. Automobiles

Automobile

There is no theoretical reason why a trust cannot own an automobile. However, it is easy to transfer a car after death by voluntary administration (G.L. c. 195, § 16) or spouse's affidavit (G.L. c. 90D, § 15A). Putting a car in a trust may cause more problems than it solves.

task 1.2.2.9. Other Tangibles

Other Tangibles

If it is intended that the trust govern disposition of tangibles, then the tangibles need to be transferred into the trust. See Exhibit 2G(Trust Ownership of Personal Articles). If the tangibles are of substantial value or if there is likely to be discontent about their distribution, a will disposing of the tangibles may be safer.

action 1.2.2.9.1 Owner has Inventory of Tangible Personal Property to be transferred to Trust prepared, with estimated cost basis.

action 1.2.2.9.2 ECO Staff Prepares a Deed of Gift or Bill of Sale specifying the inventory as an exhibit.

action 1.2.2.9.3 Owner signs Deed or Gift or BIll of Sale

action 1.2.2.9.4 ECO Staff arranges with Property Insurance Agent that title to the items on the inventory are transferred to Trust as insured.

action 1.2.2.9.5 Trustee determines which items should be scheduled on the property insurance policy.

action 1.2.2.9.6 ECO Staff obtains paperwork required to transfer any title insurance there might be on fine art items.

task 1.2.2.10. IRA's and other ERISA Qualified plans

Individual Retirement Accounts (IRAs) and Qualified Retirement Plan Assets

Currently, assets from IRAs and qualified retirement plans cannot be transferred into a revocable trust. Under recently proposed regulations, however, a trust may be treated in effect as a designated beneficiary even though it does not have that status. See Prop.Treas.Reg. § 1.401(a)(9)-4, answers A-5, A-6, 66 Fed.Reg. 3928, 3938-39 (Jan. 17, 2001). If the necessary requirements have been met, the beneficiaries of the trust may be treated as the designated beneficiaries of the qualified retirement plan assets.

Under Proposed Treasury Regulation § 1.401(a)(9)-4, as modified on December 30, 1997, the requirements for such treatment are as follows:

• the trust must be valid under state law;

• all trust beneficiaries must be individuals;

• the beneficiaries must be "identifiable from the trust instrument";

• the trust must be irrevocable or become irrevocable upon the death of the participant and

• a copy of the trust instrument must be filed with the plan administrator prior to the end of the year following the year of the donor's death (or by the participant's required beginning date if the sole beneficiary of the trust and the plan is a spouse who is more than 10 years younger than the participant).

See Natalie B. Choate, Life and Death Planning for Retirement Benefits ch. 6 (Ataxplan Publications, 3d ed. 1999).

Practice Note

Natalie Choate's Life and Death Planning for Retirement Benefits is an invaluable resource when working with qualified retirement plans. The fourth edition, addressing the minimum distribution rules proposed in January 2001, is now available. See also www.ataxplan.com for a thorough discussion by Natalie Choate of the most recent proposed regulations.

Planning for distributions from tax deferred plans is a complex area. Designation of a revocable trust as primary beneficiary may lead to unfavorable income tax consequences. It may be preferable to designate the surviving spouse as beneficiary, with the trust or children as alternate beneficiaries if the spouse does not survive or disclaims in whole or in part.

The rules in this area are complex. Revised proposed regulations that simplify the minimum distribution rules were published in January 2001; a public hearing on the proposed regulations was scheduled for June 1, 2001. See 66 Fed.Reg. 3928, 3928 (Jan. 17, 2001). Designations should be considered carefully. Flexibility should be retained whenever feasible.

Practice Note

A client who has instructed that "everything should be transferred to the trust" must be made aware of the options and consequences. The reasons for the beneficiary designation should be carefully documented for the client and for the lawyer's file.

 

 

task 1.2.2.11. Partnerships and other interests

Other Interests

Partnership interestsmay be directly owned by the trust or transferred to the trust upon death or incapacity. Ownership by the trust does not affect any basis adjustment that I.R.C. § 743 would require following the death of the donor.

Aninstallment obligationtransferred to the trust is not a disposition that accelerates the reporting of the deferred gain (§ 453(e), (f)(1); nor is distribution by the trust.SeeI.R.C. § 453 (e), (f)(1); Rev.Rul. 76-100, 1976-1 C.B. 123.

Special use valuation propertyunder I.R.C. § 2032A may be transferred by a qualified heir to the heir's revocable trust as long as the heir retains the power to revoke the trust.SeePriv.Ltr.Rul. 81-09-073 (Dec. 8,1980).

subproject 1.2.3. Beneficiary Designation and other outside management of funding

A big practical problem is that donors lose focus. Life insurance, retirement plans, IRAs and annuities all require beneficiary designations. A client may open joint accounts without considering the possible survivorship consequences. "Payable on death" accounts may be opened for new assets with no thought of how the beneficiary designation fits into the overall estate plan.

Contrary provisions in a will cannot correct an erroneous beneficiary designation or a joint account that is inconsistent with the overall plan. A power of attorney is a possible but not well-tested tool for estate plan repair. What happens when $10,000 in a joint account intended for a favorite niece at death is used for expenses of the donor (so that other assets need not be sold during the donor's lifetime)? The donor needs to see the trust as the conduit through which all assets, with specified exceptions, should flow. Riding herd on the titling of assets is essential if the plan is to function as intended.

subproject 1.2.4. Exhibits

task 1.2.4.1. Letter to Client

See Estate works

task 1.2.4.2. Durable Power of Attorney

See Estateworks

task 1.2.4.3. Special Durable Power of Attorney

See Estateworks

task 1.2.4.4. Letter to Transfer Agent

See Estateworks

task 1.2.4.5. Nominee Trust

See Nominee Trusty Template in Word

task 1.2.4.6. Schedule of Beneficiaries

See Schedule of Beneficiaries Template

task 1.2.4.7. Trustees Certificate

See Trustee's Certificate in Word.

Phase 2. Required Trust and Documents and Annual Investment Reviews

See investment planning handbook

project 2.1. Basic Information required for all Portfolios

subproject 2.1.1. The names and identities if the Trustees, successor trustees and other fiduciaries, as well as who can appoint a successor trustee and to whom the Trustee must account.

subproject 2.1.2. If there is an investment committee, is the committee appointed in writing?

subproject 2.1.3. If there is an investment committee, is the selection criteria, duties and responsibilities of the investment committee members laid out in writing in sufficient detail?

subproject 2.1.4. Does the trust or other documents allow the Trustee to prudently delegate investment management to others?

subproject 2.1.5. Are the actual cash flows, and the anticipated cash flows, to and from the portfolio detailed?

subproject 2.1.6. Are the Goals and Objectives of the underlying beneficiaries and investors described?

subproject 2.1.7. Required Documents for a Defined Contribution Plan

subproject 2.1.8. Check

subproject 2.1.9. Plan Document, with amendment

subproject 2.1.10. Custodial and brokerage statements

subproject 2.1.11. Investment performance reports

subproject 2.1.12. Service agreements with investment management vendors

subproject 2.1.13. Minutes of investment committee meetings

subproject 2.1.14. Most recent asset allocation study

subproject 2.1.15. Due Diligence files on funds and managers

subproject 2.1.16. Monitoring Procedures for funds and managers

subproject 2.1.17. Participant Educational Materials

subproject 2.1.18. Enrollment meeting minutes

subproject 2.1.19. Records of any loan activity

subproject 2.1.20. Most recent three IRS form 5500, including schedules

subproject 2.1.21. Independent accountant audit report, if there are more than 100 employees,

subproject 2.1.22. Summary of plan description

project 2.2. Required Documents for a Defined Contribution Plan

subproject 2.2.1. Plan Document, with amendment

subproject 2.2.2. Custodial and brokerage statements

subproject 2.2.3. Investment performance reports

subproject 2.2.4. Service agreements with investment management vendors

subproject 2.2.5. Minutes of investment committee meetings

subproject 2.2.6. Most recent asset allocation study

subproject 2.2.7. Due Diligence files on funds and managers

subproject 2.2.8. Monitoring Procedures for funds and managers

subproject 2.2.9. Participant Educational Materials

subproject 2.2.10. Enrollment meeting minutes

subproject 2.2.11. Records of any loan activity

subproject 2.2.12. Most recent three IRS form 5500, including schedules

subproject 2.2.13. Independent accountant audit report, if there are more than 100 employees,

subproject 2.2.14. Summary of plan description

project 2.3. Required Documents for a Defined Benefit Plan

subproject 2.3.1. Plan Document, with amendment

subproject 2.3.2. Custodial and brokerage statements

subproject 2.3.3. Investment performance reports

subproject 2.3.4. Service agreements with investment management vendors

subproject 2.3.5. Minutes of investment committee meetings

subproject 2.3.6. Most recent asset allocation study

subproject 2.3.7. Due Diligence files on funds and managers

subproject 2.3.8. Monitoring Procedures for funds and managers

subproject 2.3.9. Enrollment meeting minutes

subproject 2.3.10. Records of any loan activity

subproject 2.3.11. Most recent three IRS form 5500, including schedules

subproject 2.3.12. Independent accountant audit report, if there are more than 100 employees,

subproject 2.3.13. Summary of plan description

subproject 2.3.14. Actuarial report showing projected benefit obligation (PBO) and accumulated benefit obligation (ABO) and assumptions used for interest rates, return and benefit increases.

project 2.4. Required Documents for Foundations, Endowments and Charitable Trusts

subproject 2.4.1. Applicable trust, endowment, gifting or other documents Document, with amendments and modifications

subproject 2.4.2. Mission based or socially responsible investment strategy restrictions (if any)

subproject 2.4.3. Equilibrium spending rate (Modeled return on portfolio less the sum of inflation and investment expenses)

subproject 2.4.4. Funding Support Ratio (Grants divided by the operating budget of the Charity) note that for non-operating Private Foundations, this must be at least 5%

subproject 2.4.5. Smoothing rules (moving average over three year, inflation adjusted amount over previous year, subjective determination of need)

subproject 2.4.6. Custodial and brokerage statements

subproject 2.4.7. Investment performance reports

subproject 2.4.8. Service agreements with investment management vendors

subproject 2.4.9. Minutes of investment committee meetings (if any)

subproject 2.4.10. Most recent asset allocation study

subproject 2.4.11. Due Diligence files on funds and managers

subproject 2.4.12. Monitoring Procedures for funds and managers

subproject 2.4.13. Investment Committee Educational Materials

subproject 2.4.14. Most recent three IRS form 900 and 990 PF, including schedules

subproject 2.4.15. Summary of recent grants

project 2.5. Required Documents for Private Trusts and family investment accounts

subproject 2.5.1. Applicable trust and other documents, with amendments and modifications

subproject 2.5.2. Socially responsible investment strategy restrictions (if any)

subproject 2.5.3. Equilibrium spending rate (Modeled return on portfolio less the sum of inflation and investment expenses)

subproject 2.5.4. Complete asset and liability study for Grantor, family

subproject 2.5.5. Estate and Philanthropic objectives

subproject 2.5.6. Family Tree

subproject 2.5.7. Five year cash flow projections

subproject 2.5.8. Major expenses anticipated in the next 5 years (college, house purchase etc.)

subproject 2.5.9. Custodial and brokerage statements

subproject 2.5.10. Investment performance reports

subproject 2.5.11. Service agreements with investment management vendors

subproject 2.5.12. Most recent asset allocation study

subproject 2.5.13. Due Diligence files on funds and managers

subproject 2.5.14. Monitoring Procedures for funds and managers

subproject 2.5.15. Most recent three State and Federal income and gift tax returns for trusts, grantors and beneficiaries, including schedules

project 2.6. Review of Diversification and Allocation of Portfolio

subproject 2.6.1. What is the expected model return required to meet the investment objectives of the Portfolio?

subproject 2.6.2. What risk level has been identified for this portfolio?

subproject 2.6.3. What is the investment time horizon?

subproject 2.6.4. What asset classes are consistent with the risk level, modeled return and time horizon for the portfolio?

subproject 2.6.5. Is the number of asset classes consistent with the Portfolio size?

project 2.7. The Investment Policy Drafting

subproject 2.7.1. Is there specific enough detail to Implement a specific Investment Strategy?

subproject 2.7.2. Does the Investment Policy define the duties and responsibilities of all parties?

task 2.7.2.1. Investment Adviser/Consultant

task 2.7.2.2. Investment Manager

task 2.7.2.3. Custodian

task 2.7.2.4. The Investor

subproject 2.7.3. Does the Investment Policy define diversification and re-balancing guidelines?

subproject 2.7.4. Does the Investment policy define the due diligence criteria for selecting investment options?

subproject 2.7.5. Does the Investment Policy define the monitoring criteria for investment options and service vendors?

subproject 2.7.6. Does the Investment Policy define procedures for controlling and accounting for investment expenses?

subproject 2.7.7. If Applicable, the Investment Policy defines appropriately structured socially responsible investment strategies.

project 2.8. Investment Policy Implementation

subproject 2.8.1. Has the Investment Policy been implemented with the required level of Prudence?

subproject 2.8.2. If the Fiduciary Elects to use Safe Harbor provisions, have those applicable provisions been followed?

subproject 2.8.3. Is the investment approach appropriate for the portfolio size??

subproject 2.8.4. Has a due diligence process been used for selecting and monitoring custodian and other service providers?

project 2.9. Monitoring and Supervision of Investment Plan

subproject 2.9.1. Compare the investment performance from the Quarterly Reports against the required index, peer group and Investment policy objectives

subproject 2.9.2. Periodic reviews have been made of qualitative and organizational changes at investment managers and advisors

subproject 2.9.3. Control procedures are in place to periodically review policies for best execution, soft dollars and proxy voting.

subproject 2.9.4. Fees for investment management services consistent with the Investment Agreement and the law.

subproject 2.9.5. Are the finder’s fees, 12(b)-1 fees, and other forms of compensation for asset placement been appropriately applied, utilized and documented?

phase 3. Annual Trust Distributions

Estate planning professionals can work for months or years to persuade a client to execute an estate plan. What often prevents clients from executing the necessary documents is their inability to choose beneficiaries and trustees for their estate, and the complexities involved in deciding the amount, timing and circumstances of distributions. An additional psychological deterrent is how difficult it is for many individuals, especially those with substantial resources, to relinquish control of decision-making to others.

This chapter will assist the practitioner who is helping a client make some of these important estate-planning decisions. It will also help the practitioner understand, once the planning decisions have been made, some of the distribution issues and complexities involved in administering trusts. The most basic and important decision is determining the beneficiaries of the trust. Second is determining under what circumstances fiduciaries can exercise their discretion when making distributions.

 

The key to successful administration of a trust is understanding the settlor's circumstances and intent when he or she established the trust. Even the most liberal grant of absolute discretion requires the trustee to make an honest attempt to act in the state of mind contemplated by the settlor when the instrument was created. Roche v. Boston Safe Deposit & Trust Co., 391 Mass. 785, 796,464 N.E.2d 1341, 1348 (1984). This can be particularly difficult when administering an irrevocable trust established by a settlor who is no longer living. Under such circumstances, the fiduciary must rely on his or her own judgment in assessing the family situation, taking into account if available the prior fiduciary's notes and the drafting attorney's notes. However, if the fiduciary is faced with ambiguity and conflict among family members, he or she should not hesitate to seek the guidance of the court.

If the fiduciary is administering an irrevocable or revocable trust where the settlor is still living, the issues of intent are readily defined, and conflict is not present as often. When the fiduciary is fortunate to be involved during the settlor's lifetime, it is critically important to begin the documentation of facts and circumstances that would be relevant for future administration. For such time when the settlor or even the current fiduciary is not available, this information can be an invaluable resource for those administering the trust. Some examples of facts and circumstances to document are the following:

• how the settlor made his money;

• the settlor's lifestyle, including travel and leisure activities;

• the settlor's gifting pattern;

• siblings or relatives who do not get along;

• marriages, including the circumstances of any troubled marriage;

• spendthrift concerns; and

• physical or mental impairments of beneficiaries.

Practice Note

When fiduciaries take on new accounts, the first thing they should do is draw a detailed family tree. This will serve as a reference that should be reviewed and revised as circumstances in the family change. A death, divorce or remarriage could result in a change of beneficiaries, and it is the duty of the trustee to know the class of recipients and to be aware of their circumstances and needs. Marsman v. Nasca, 30 Mass.App.Ct. 789, 796, 573 N.E.2d 1025,1030, review denied, 411 Mass. 1102, 579 N.E.2d 1361 (1991). Each trust should have a map of beneficiaries that can be used as a cross reference with the tree, and it should always be kept in the front of the fiduciary's file.

project 3.1. Determining the Beneficiaries

Determining the beneficiaries may appear to be a simple task. However, in today's society, it can often be quite complicated. Lawyers need to be more descriptive in their definition of issue and trustees need to read their documents carefully to determine the class of beneficiaries entitled to distributions. This is why having an accurate and current family tree for reference is important. A concern of trustees is the possibility of unknown illegitimate children, stepchildren, or adopted children. In recent years there have been increasing instances of litigation or threats of litigation demanding clarification of the rights of such heirs.

subproject 3.1.1. Adopted Children as Beneficiaries

In Massachusetts, if adopted children are not to be included in the class of issue, this should be expressly stated in the trust. Prior to 1958, the Massachusetts rule relative to adopted issue was that unless the settlor was the adopting parent, an adopted child would not have an interest in the trust, unless it clearly was the settlor's intent to include the adopted child. The statute was amended in 1958, to provide that adopted children, unless explicitly excluded, would be treated the same as if born to the adopting parents (no matter the generation) in lawful wedlock. See 1958 Mass. Acts c. 121. The current statute, which was made effective as of September 1, 1969, see 1975 Mass. Acts c. 769, § 4, provides as follows:

The words "child", "grandchild", "issue", "heir" or "heir-at-law", or their respective equivalents, in a grant, trust settlement, entail, devise or bequest, shall include one who is adopted to the same extent as if born to the adopting parent or parents in lawful wedlock, whether the adoption was decreed before or after the date of execution or the effective date of any such grant, trust settlement, entail, devise or bequest, unless the contrary plainly appears by the terms of the instrument.

G.L. c. 210, § 8.

Although children "adopted out" from a family are generally not entitled to inherit from their natural parents, a child adopted by the spouse of one natural parent may still inherit from the other natural parent. See G.L. c. 19IB, § 1(1), (2); G.L.c. 210, §7; Lockwood v. Adamson, 409 Mass. 325, 566 N.E.2d 96 (1991).

subproject 3.1.2. Illegitimate Children as Beneficiaries

Illegitimate children, like adopted children, must be expressly excluded, or they will be included in the class of issue. The Supreme Judicial Court has held that for trusts executed after April 16, 1987 the definition of issue, absent clear expression of contrary intent, includes all biological descendants, whether legitimate or illegitimate.See Powersv.Wilkinson,399 Mass. 650, 506 N.E.2d 842 (1987).

subproject 3.1.3. Minors as Beneficiaries

Illegitimate children, like adopted children, must be expressly excluded, or they will be included in the class of issue. The Supreme Judicial Court has held that for trusts executed after April 16, 1987 the definition of issue, absent clear expression of contrary intent, includes all biological descendants, whether legitimate or illegitimate.See Powersv.Wilkinson,399 Mass. 650, 506 N.E.2d 842 (1987).

subproject 3.1.4. Incapacitated Beneficiaries

Distributions to an incapacitated beneficiary can be a thorny area for trustees, and a trustee should not make the determination of incapacity. Often times a document will require the written opinion of a physician, or the consent of the spouse and children.

Practice Note

The thorny situations tend not to arise when it is clear that the settlor or beneficiary is incapacitated, for example, in the advanced stages of Alzheimer's disease. The most significant problems often occur in the earlier stages of incapacity, when there is the greatest likelihood of friction among family members. In these situations, absent direction in the trust, a trustee should not hesitate in encouraging a family member to petition the court for the appointment of a guardian.

The trustee needs to be sure to abide by the terms of the trust in determining where to pay the distributions on the settlor's or the beneficiary's behalf. If the trust permits the trustee to apply income for the benefit of a beneficiary who is under an incapacity, the trustee may pay the income directly for the beneficiary's benefit and need not pay it to the beneficiary's guardian. If the terms of the trust direct the trustee to apply income for the benefit of the beneficiary, the trustee cannot pay the beneficiary's guardian, as this would be an impermissible delegation. Austin W. Scott & William F. Fratcher, The Law of Trusts § 182.1 (Little, Brown 4th ed. 1987); George G. Bogert, George T. Bogert & William K. Stevens, The Law of Trusts and Trustees § 814 (West rev. 2d ed. 1977). If the document permits the trustee only to pay the beneficiary directly, the trustee should make payment to the beneficiary's legally appointed representative. If there is none, the trustee cannot make payment. If the settlor has a durable power of attorney, the trustee must confirm that the holder of the power is able to direct or receive distributions from the trust on behalf of the settlor.

Practice Note

Unless the terms of the trust specifically permit payment to the attorney-in-fact operating under a durable power of attorney, a trustee should exercise caution in making payment to the power holder. If funds are misapplied or misappropriated by the attorney-in-fact, the trustee may be held liable.

project 3.2. Distributions

Once a trustee has determined the appropriate beneficiaries entitled to distributions, the next challenge is to determine what they are entitled to receive. A trustee's power to make distributions is found within the terms of the trust. The phrase "term of trust"

is not limited to express provisions of the trust instrument, but includes whatever may be gathered as to the intention of the settlor from the trust instrument as interpreted in light of all the circumstances, and any other indication of the intention of the settlor. ... [T]he extent of powers conferred on the trustee does not depend only on the language used by the settlor in creating the trust but may depend also on the purposes for which the trust is created.

Austin W. Scott & William F. Fratcher, The Law of Trusts§ 186 (Little, Brown 4th ed. 1987).

There are two types of distribution provisions, mandatory and discretionary. Use of both types of distribution language can be used to enhance flexibility in estate planning, tax planning and the administration of trusts. For example, in order for a Qualified Terminable Interest Property (QTIP) Trust to qualify for the marital deduction, the trustee is required to pay out all the income to the surviving spouse. This mandatory distribution is drafted for tax reasons but could be used for planning purposes as well. For example, such a distribution could be used when the surviving spouse is the settlor's second spouse and the settlor wants the survivor entitled only to income from the trust, and on this spouse's demise, for the corpus to pass to the children from a prior marriage.

subproject 3.2.1. Mandatory Distributions

A mandatory distribution is a directive to a trustee that requires him or her to make a distribution to a beneficiary. For example, a trust might provide as follows:

The trustee shall pay all the income to my wife in quarterly installments.

The trustee shall pay out one third of the principal to my granddaughter when she turns twenty-five.

Mandatory distributions, alone, should be used infrequently because they are too inflexible. Unless sufficient discretion has been given to the trustee, judicial intervention will be required to resolve the kinds of unpredictable problems that so often arise in the administration of a trust.

Example 1

A settlor dies leaving a spouse and children from a prior marriage. The property passes into a Qualified Terminable Interest Property (QTIP) trust, where the trustee is to pay out only the income to the surviving spouse. There is no ability to access principal. Typically, the surviving spouse "needs" additional income and will call the trustee requesting a reallocation of investments in order to generate more income. Frequently, the remainder beneficiaries feel the surviving spouse is receiving too much income and would like the assets reallocated to produce more growth and less income. This leaves the fiduciary in a difficult position. If the document had allowed the trustee to access principal to ensure the spouse receives a total return of "x" percent, the likelihood of conflict or litigation among the income and remainder beneficiaries would be very much reduced.

Example 2

The trustee is directed to pay out one third of the principal when the beneficiary turns 25. When that time comes, the trustee is concerned that the beneficiary is suffering from a drug and alcohol problem. Absent any discretionary language allowing a withholding of distributions, the trustee would be forced to seek the intervention of the court, which would be quite costly, and would certainly destroy the ongoing fiduciary-beneficiary relationship.

Even if mandatory distributions are required for tax reasons, additional guidance for the trustee may decrease the potential for conflict and litigation.

subproject 3.2.2. Discretionary Distributions

One of the oldest and most commonly cited cases says it best when discussing the responsibility of a trustee in making discretionary distributions:

A trustee vested with discretionary power to distribute a fund in whole or in part is bound to use reasonable prudence. The possession of full power or wide discretion by a trustee means the kind of power and discretion which inheres in a fiduciary relation and not that illimitable potentiality which an unrestrained individual possesses respecting his own property.

Corkery v. Dorsey, 223 Mass. 97, 101, 111 N.E. 795, 796 (1916).

There are two types of discretionary trusts. An unlimited discretionary trust allows trustees to pay out income and or principal at their discretion. A trust with standards provides various circumstances and conditions under which trustees are permitted to make distributions. Regardless of the type of the discretion, the trustee will always need to ascertain the settlor's intent at the time the document was executed to ascertain whether a distribution would be appropriate. Even with unlimited discretion, "a power to invade principal conferred upon a trustee is not unrestricted even where the power is not conditioned by any statement in the governing document that such expenditures are to be made only upon the existence of certain facts or for certain stated purposes." Woodberry v. Bunker, 359 Mass. 239, 241, 268 N.E.2d 841, 843 (1971). The trustees' freedom to operate within certain broad constraints has been expressed as follows:

To the extent to which the trustee has discretion, the court will not control his exercise of it as long as he does not exceed upon him. The court will not substitute its own judgment for his. Even where the trustee has discretion, however, the court will not permit him to abuse his discretion.

Austin W. Scott & William F. Fratcher, The Law of Trusts § 187 (Little, Brown 4th ed. 1987).

the limits of the discretion conferred

task 3.2.2.1. Standards for distributions

Many trustees and donors are uncomfortable with unlimited discretion and prefer a standard for distribution. A discretionary trust that provides the standards for which a trustee may make distributions can contain varying degrees of limitation on a trustee's discretion. For example, a trustee may pay out so much of the income and principal for the beneficiary's comfort, maintenance and support; or a trustee may pay out so much of the income and principal for the education of the beneficiary. Standards can be useful for tax reasons or as a means of carrying out the settlor's intent, for example, by furthering a specific purpose (such as education) for a specific class, promoting equal treatment of beneficiaries, or protecting beneficiaries from creditors.

Certain restrictions on trustees' discretion, involving the use of general and limited powers of appointment, qualify as "ascertainable standards" for purposes of I.R.C. § 2041(b), which provides that "[a] power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment." I.R.C. § 2041(b)(1)(A). Treasury Department regulations provide further guidance on the types of restrictions that may qualify as ascertainable standards:

• support in reasonable comfort;

• maintenance;

• maintenance in health and reasonable comfort;

• support in his accustomed manner of living;

• education, including college and professional education;

• health;

• medical, dental, hospital and nursing expenses; and

expenses of invalidism.

Treas.Reg. § 20.2041.1(c)(2); Treas.Reg. § 25.2514-1(c)(2).

When ascertainable standards are used, the law requires a certain level of inquiry by the trustee prior to making discretionary distributions. Where the trustee is permitted to invade principal for the beneficiary's necessary health, comfort, maintenance, and support, Massachusetts common law warns that an annual questionnaire or a letter of inquiry with no follow up will not suffice. See Marsmanv. Nasca,30 Mass.App.Ct. 789, 573 N.E.2d 1025, review denied,411 Mass. 1102, 579 N.E.2d 1361 (1991); Old Colony Trust Co.v. Rodd,356 Mass. 584, 254 N.E.2d 886 (1970).

Practice Note

It is imperative that fiduciaries institute procedures for ensuring that they understand the beneficiary's circumstances, such as establishing and carrying through on arrangements for quarterly meetings or telephone calls.

action 3.2.2.1.1 Support and Maintenance

Where a trustee is authorized to pay income and or principal for the "support" of a beneficiary, the amount the trustee should distribute will depend on the intent of the settlor. However, "support and maintenance" encompass more than bare subsistence. Hartford-Connecticut Trust Co. v. Eaton,36 F.2d 710 (2d Cir. 1929). In Massachusetts, "support and maintenance" has been interpreted to permit maintaining beneficiaries in the manner of living to which they were accustomed before becoming beneficiaries of the trust. Woodberry v. Bunker,359 Mass. 239, 268 N.E.2d 841 (1971). The phrase also apparently encompasses the support of the beneficiary's family as well as the beneficiary. Bucknam v. Buck-nam,294 Mass. 214, 200 N.E. 918 (1936). See alsoAustin W. Scott & William F. Fratcher, The Law of Trusts§128.4 (Little, Brown 4th ed. 1987).

Absent contrary intent, the beneficiary is entitled to support from the trust without the trustee looking at the beneficiary's other resources. The fact the beneficiary had other assets "would not alone justify a refusal to pay over principal for a reasonable purpose."Atwoodv. First Natl Bank of Boston,366 Mass. 519, 524, 320 N.E.2d 873, 876 (1974) (applying trust language that allowed distribution for "any other purpose which the trustees may deem proper in the exercise of their discretion"). However, if there are additional qualifiers, for example, "in need" or "if necessary," then a trustee could be required to take into considerationthe beneficiary's other sources of income prior to making any distributions.See Woodberry v. Bunker,359 Mass. 239, 240-43, 268 N.E.2d 841, 842^4 (1971); Copp v. Worcester County Nat'I Bank,347 Mass. 548, 549, 550-51, 199 N.E.2d 200, 202-03 (1964). In situations in which the fiduciary is required to take into account other resources, prior year tax returns or other fiduciary returns are helpful.

Practice Note

If the terms of the trust indicate that the trustee should look to the beneficiary's independent resources, what types of resources are considered? Should the trustee consider only additional income available to the beneficiary from other resources, or is it appropriate to consider principal assets of the beneficiary? Much depends on the particular facts and circumstances of each case. In Massachusetts, principal assets might be excluded. See Sheehan v. Sheehan,361 Mass. 196, 279 N.E.2d 684 (1972). It is also a question of interpretation as to whether the beneficiary's own earnings are to be considered when the terms of the trust require the trustee to take the beneficiary's independent resources into account. Many of the issues concerning whether a trustee may, must or need not consider a beneficiary's independent resources, as well the types of resources the trustee is to consider, can be resolved through careful drafting.

 

action 3.2.2.1.2 Comfort

The use of the word "comfort" expands the meaning of maintenance and support. Comfort relates to a beneficiary's enjoyment, happiness and pleasure in life. When words such as comfortable and generous are used, additional types of leisure activities can be provided. However, it would always be helpful to have the settlor define certain leisure activities intended to be included under these standards, such as luxury cars and leisure travel to exclusive locations.

action 3.2.2.1.3 Education

A trust that is drafted for the purpose of providing for the education of a beneficiary, or a class of beneficiaries, should include the types of education the settlor intends to provide for. Unless specifically stated in the trust, the term "education" generally includes undergraduate education but may not include graduate level or professional education. The following is an example of trust language defining education:

The term "education" includes, but is not limited to, all expenses of public and private education at any level, from elementary and secondary schooling, to college, graduate, professional, or technical training. Expenses such as tuition, room and board, books, allowance, and reasonable travel fees to and from home shall be included.

action 3.2.2.1.4 Health

The term "health" includes all routine medical care, medication, surgery, hospitalization, and mental health. It is broader than providing solely for medical emergencies and includes payments for mental health and other nontraditional health problems. Medical treatments have changed radically in recent years, however; if the donor wants to make sure nontraditional medical costs, such as costs for acupuncture, homeopathy, or herbal remedies, are provided for, he or she should specifically state it in the terms of the document:

The term "health " shall be construed liberally and shall include any and all traditional and nontraditional medical costs associated with any physical or mental health care matters, including and not limited to treatments, such as herbal remedies, homeopathy, and acupuncture, as well as any hospice or home health assistance.

Other standards commonly seen in trusts, not just for purposes of I.R.C. § 2041, are typically drafted to personalize the donor's intent. A settlor could be concerned about a child's spending habits or marital situation and want to provide as much asset protection as possible. Also, a settlor may want to incorporate his or her specific views on the relative treatment of multiple beneficiaries. Some commonly utilized provisions are set forth below.

action 3.2.2.1.5 Spendthrift Provisions

The mere use of ascertainable standards in a discretionary trust will not always protect a beneficiary's interest. Although discretionary trusts have not typically been subject to creditors' claims, once a trustee exercises discretion and pays out income or principal, those amounts can be attached. Augustus P. Loring & Charles E. Rounds, Jr., Loring: A Trustee's Handbook § 5.3.3.3(a) (Aspen 2001) (citing Restatement (Third) of Trusts § 60 (Tentative Draft No. 2, Mar. 10, 1999)). Also, when a beneficiary has an affirmative right to access the trust corpus, for example with mandatory distribution provisions, the clause may not be upheld.

Regardless, a spendthrift provision should be included in the trust instrument if the settlor's intent is to protect a beneficiary's assets from creditors. A spendthrift provision may prohibit a beneficiary from making a voluntary or involuntary assignment of his or her interest in a trust:

Except as otherwise provided by law, no interest of any beneficiary shall be subject to anticipation or to voluntary transfer without the written consent of the trustee, or to involuntary transfer in any event.

Such provisions have generally been upheld by the Massachusetts courts. See, e.g., Broadway Nat'I Bank v. Adams, 133 Mass. 170 (1882). See also Guy Ne-whall & Thomas H. Belknap, Newhall's Settlement of Estates and Fiduciary Law in Massachusetts § 36:38 (Lawyers Co-op., 5th ed. 1998). There have been a few exceptions, however. For example, Massachusetts, unlike Delaware and Alaska, does not recognize self-settled discretionary trusts. A settlor cannot fund a trust, be a beneficiary of that trust, and receive protection from a spendthrift clause. Ware v. Gulda, 331 Mass. 68, 117 N.E.2d 137 (1954). Also, a beneficiary entitled to distributions from a trust will not be relieved of spousal and child support obligations in a divorce proceeding. Lauricella v. Lauricella, 409 Mass. 211, 565 N.E.2d 436 (1991).

task 3.2.2.2. Multiple Beneficiaries

Trusts that have numerous beneficiaries can be more difficult to administer. If a settlor is setting-up such a trust, the more guidance provided to the trustee the better. The following are examples of provisions that can be helpful in multiple beneficiary trusts:

The trustee may make unequal distributions to my issue or may exclude one or more of them, and shall not have a duty to equalize those distributions.

[or]

If the trustee makes an unequal distribution to help any issue of mine start a business, that distribution shall be charged as an interest free advancement against the trust, and charged against that beneficiary's share upon final termination of the trust.

[or]

 

Upon my death, my primary concern during my spouse's lifetime to keep her in the standard of living she was accustomed to while I was living. This may result in the complete exhaustion of this trust.

If the settlor has any degree of preference, either with a beneficiary or a specific purpose, it should be stated in the trust.

The settlor may also have a preference for the care of current issue:

My primary concern is for the health, comfort, support, education and best interest of my issue, rather than for future preservation of principal for ultimate distribution.

If the settlor wishes to provide for a down payment on a home for his or her issue, he or she should indicate what resources should be taken into consideration. For example, if one child is earning one hundred and fifty thousand a year and the other is earning eighty thousand, the settlor should indicate whether those resources should have an impact on the amount given for a down payment.

 

task 3.2.2.3. Documentation of Discretionary distributions

See attachment(s): Trust Distributions.doc

The documentation process is one of the most important aspects of trust administration. To mitigate the possibility of a beneficiary challenging a trustee's decision, written documentation is imperative. Trustees are often dealing with a large class of beneficiaries, each with very different personal characteristics and circumstances, and proper documentation by the trustee justifying why the appropriate action was taken can prevent fruitless litigation in the future. Diligent documentation also facilitates a transition from one fiduciary to another and enables the successor to provide consistent administration. Thorough documentation will also make it more difficult for a beneficiary to try to use a change in account officers to obtain an unwarranted increase in distributions from the trust.

If a beneficiary is denied a distribution, he or she can become very angry. To avoid this situation, regular communication with the beneficiary explaining not only the terms of the document, but also the circumstances that will be taken into consideration prior to making a distribution, will realistically help shape the beneficiary's expectations.

Practice Note

Documenting the time spent with beneficiaries can help in many ways. It serves as a common reference for any administrators working on the account. It also enables the trustee to have a better

understanding of the beneficiaries and their wants and needs, a duty imposed upon a fiduciary by law. Marsman v. Nasca, 30 Mass.App.Ct. 789, 573 N.E.2d 1025, review denied, 411 Mass. 1102, 579 N.E.2d 1361 (1991). Finally, documentation provides evidence of prudent administration and can support the trustee if challenged by the beneficiary in the future.

Often institutional trustees delegate a certain level of discretionary authority to the individual administrator, requiring that only large requests be reviewed by a committee. Regardless of the size of the request, the administrator should document all the circumstances pertinent to the beneficiary as well as the discussion preceding the decisionmaking process. As a result of past negative experiences and oversight by regulators, large institutional trustees—as well as prudent smaller firms—typically use standard forms and procedures that require review by committee in handling discretionary requests. See Exhibit 10A (sample discretionary payment request form).

Practice Note

No matter how well you think you know the settlor, once the settlor is gone, each beneficiary typically feels that he or she knew the settlor better than the trustee. Proper documentation is essential.

The following is a list of recommended items to be included in a discretionary request form. Always remember that whatever you document on such forms serves as an additional form of evidence.

• Name of account

• Date opened

• Market value and annual income of trust

• Trustees

• Co-trustee approval

• Terms of discretionary language

• Termination provision

• Estimated determination date

• Current beneficiary

• Remainder beneficiary

• Distribution history:

• Prior 12 months

• Since inception

• By requesting beneficiary

 

• Reason for request

• Reason for approval/denial

• Signature of trustee

After a decision has been made regarding a request, the administrator should write to the beneficiary and explain the decision. The letter should state the request, the reason for the approval or denial, and the circumstances taken into consideration when reviewing the request. A sample letter is attached as Exhibit 10B.

The communication and documentation process is by far the most important aspect of trust administration. Communicating with the beneficiary not only provides the fiduciary with the understanding of the beneficiary's wants and needs, but also enables the fiduciary to establish reasonable expectations as to how the trust will provide for the various circumstances in the beneficiary's life. If this is done on a consistent basis, making the actual discretionary decision will be the easy part of the process.

Being well informed, impartial and consistent will facilitate a smoother administration process. When a trustee is reasonably exercising discretion, a court will not interfere with the decision. Thorough written documentation will serve to substantiate all that the trustee has done to fulfill his or her obligations.

action 3.2.2.3.1 Discretionary Distribution Request Form

Needs to be drafted to include:

• Name of account

• Date opened

• Market value and annual income of trust

• Trustees

• Co-trustee approval

• Terms of discretionary language

• Termination provision

• Estimated determination date

• Current beneficiary

• Remainder beneficiary

• Distribution history:

• Prior 12 months

• Since inception

• By requesting beneficiary

• Reason for request

• Reason for approval/denial

• Signature of trustee

phase 4. Annual Operations

project 4.1. Trust Administration Checklists

subproject 4.1.1. Monthly Checklist

task 4.1.1.1. Monthly distributions

Schedule routine monthly distributions with Custodian by Jan. 30th of each year.

Make a checklist of routine bills for each Trust and make sure they go out

Make list of quraterly, semi annually and annually paid bills and schedule

Check account balances to insure there is enough cash, if not call Manager and make sure assets are sold to fund payments

task 4.1.1.2. Asset List from Custodian

Download from Wealthtouch, save to client files, notice to MFE

task 4.1.1.3. Performance from Custodian

The performance of the overall investment portfolio of the Trust is to be monitored and reviewed on a quarterly basis, as noted in the Quaterly meetings, but I would like to see the performance against benchmarks monthly. This is also a download report from Wealthtouch

subproject 4.1.2. Quarterly Checklist

task 4.1.2.1. Download Reports from Custodian

task 4.1.2.2. Pay Estimated Taxes

Fax check request doe Estimated taxes to custodian

Mail Vouchers for Estimated Taxes for inclusion with Checks.

task 4.1.2.3. Pay Trustee's fees

task 4.1.2.4. Schedule investment meeting

action 4.1.2.4.1 1st. Quarterly Meeting

1 st Quarterly Meeting. The first quarterly meeting of the Trust will be convened after performance data is available for the prior calendar year, this means sometime in the last week of January. Call the respective managers and send them the Agenda for each trust they are responsable for, and ask them to supply the information,at least a week before the meeting date. They are not required to atttend this meeting. At the first quarterly meeting agenda is:

 

1. Review and approve the Minutes of the 4th quarterly meeting held near the end of the prior calendar year.

2. Review the performance of the overall portfolio funds against the custom benchmark established for the portfolio and, when possible, against the performance of similar institutions.

3. Review the performance of each manager engaged by the Trust against the benchmark established for that manager.

4. Review the compliance of the Trust's investments with all guidelines set forth in the investment policy statement.

5. Review the compliance of each of the Trust's investment managers with the specific guidelines created for that manager.

6. Identify any performance issues with regard to any of the Trust's managers, such issues to be attended to at the next meeting of the Committee.

action 4.1.2.4.2 2nd Quarterly Meeting

2nd Quarterly Meeting. The second quarterly meeting of the Committee will be convened after performance data is available for the first calendar quarter of the year. The Agenda of the second quarterly meeting are as follows:

 

1. Review and approve the Minutes of the 1 st quarterly meeting of the Committee.

2. To review (briefly) the first quarter performance of the overall portfolio and the performance of individual managers, it being understood that one quarter of performance is far too short a period of time for meaningful data to be generated about manager performance.

3. To attend to performance issues identified at the first quarterly meeting. In the event that the Trustee had identified concerns about the performance of any manager or managers at the first quarterly meeting, that manager or those managers will be invited to attend the second quarterly meeting to discuss the issues with the Trustee.

4. In the event that no manager performance issues were identified at the first quarterly meeting, the purpose of the second quarterly meeting (in addition to conducting a brief review of first quarter performance) will be to meet with a manager or managers who are investing in Large Cap Growth Style at the time.

action 4.1.2.4.3 3rd Quarterly Meeting

3rd Quarterly Meeting. The third quarterly meeting of the Trust will be convened after performance data is available for the first half of the calendar year. The main purpose of the third quarterly meeting is to insure that the Trustees and Beneficiaries continue to learn about the investment process and become ever more skillful at overseeing the Trust's portfolio. Thus, at each third meeting of the year the Agenda is :

1. Review and approve the Minutes of the 2nd quarterly meeting of the Committee.

2. Briefly review the second quarter and first half-year performance of the overall portfolio and the performance of individual managers.

3. Ask Managers to select an area of the investment process or the capital markets to examine in depth, generally with the assistance of an invited expert in the field. For example, the manager may wish to examine a particular asset class, developments in portfolio design and asset allocation procedures, particular investment styles, the details of performance reporting and monitoring, macro-economic issues, and so on.

action 4.1.2.4.4 4th Quarterly Meeting

4th Quarterly Meeting. The fourth quarterly meeting of the Trust will be convened after performance data is available for the third quarter of the calendar year. The main purpose of the fourth quarterly meeting is to review the asset allocation strategy of the Trust's portfolio both strategically and tactically. Thus at each fourth meeting of the year the Agenda is:

1. Review and approve the Minutes of the 3rd quarterly meeting of the Committee.

2. Briefly review the third quarter and rust three-quarter year performance of the overall portfolio and the performance of individual managers.

3. Review the long-term (strategic) asset allocation strategy of the portfolio to determine whether or not changes in that strategy may be merited. Typically, such changes will be appropriate only if (a) there has been a substantial change in the objectives, risk tolerance, or makeup of the income or remainder beneficiaries, or (b) the Trustee wishes to add or delete approved asset classes, usually as a result of studies undertaken at the third quarterly meeting.

4. Review the tactical asset allocation strategy of the portfolio to determine whether, in light of market conditions and, especially, pricing and valuation considerations, it may be in the Trust's interest to adjust its asset allocation posture tactically in the direction of assets that appear to be under-priced or where there otherwise appears to be relatively short-term opportunity in the markets. Except in rare circumstances, such tactical moves should not exceed the pre-set maximum or minimum exposures already established for each asset class.

task 4.1.2.5. Summary meeting/ letter to client

subproject 4.1.3. Annual checklist

task 4.1.3.1. Annual Investment Review

action 4.1.3.1.1 Investment Policy

IV. The Investment Policy Statement

The Investment Committee will prepare and present to the Board a written investment policy statement. The purpose of such a written statement is to memorialize the policies, strategies and procedures that will be used in the management of the Corporation's investment portfolio. Over time, the reasons behind even the best-designed portfolio can be forgotten or become confused. This is especially likely to be the case during periods of market turmoil, when the temptation to depart from long-term strategies can seem overwhelming. It is crucial that the Investment Committee not succumb to such temptations. A review of the reasons why long-term strategies were adopted can temper the desire to make ill-considered short-term changes in the portfolio and can offer a measure of comfort during times of stress.

action 4.1.3.1.2 Asset Allocation Strategies

V. Asset Allocation Strategies

The first responsibility of the Investment Committee, and, in terms of long-term risk-adjusted performance, the most important responsibility, is to recommend to the Board an overall asset allocation strategy for the portfolio.

In developing the asset allocation strategy for the portfolio, the Committee will have in mind the tenets of modem portfolio theory, especially (i) the core relationship between risk and return and (ii) the key insight that the existence of imperfect correlations among asset classes enables investors to reduce the risk level of portfolios without a concomitant reduction in expected return. The Committee will also be mindful of the limitations of modem portfolio theory, especially the imprecision of forward-looking estimates for risks, returns and correlations, and the difficulty of translating theoretically compelling strategies into successful real-world strategies.

Thus, the Committee will

1. Determine, based on its understanding of the risk tolerance of the Board and the return and income needs of the portfolio, which asset classes will be included in the asset allocation strategy. In making this decision the Committee will be mindful of the fact that most investors erroneously prize liquidity over return.

2. Identify several possible asset allocation strategies that are "efficient," that is, which are designed to produce the best possible expected return per unit of risk incurred. (Viewed another way, these strategies are designed to incur the minimum possible risk for any desired expected return.)

3. Select, from among the efficient asset allocation strategies, that specific strategy which seems best to meet the return and income needs and the risk tolerance of the Corporation. That will be the "target" strategy to be presented to the Board for approval.

4. Determine, for each asset class incorporated in the selected asset allocation strategy, a maximum and minimum exposure for the asset classes. In other words, the portfolio may be permitted to fluctuate between the minimum and maximum exposures set for each asset class before the Committee will need to consider rebalancing the portfolio. (See "VI. Portfolio Rebalancing," below.) Rebalancing more frequently will tend to increase the investment costs and taxes incurred by the portfolio more than it will add in terms of risk control and enhanced return. The Committee will then present the target asset allocation strategy and exposure ranges to the full Board for their review and approval. In the event the members of the Board are not familiar with asset allocation exercises, the Committee may wish to make whatever presentations to the Board that may be necessary to assist the Board members in their understanding of what asset allocation is, why it is important, and how it is done.

5. Develop and present to the Board for approval a series of asset class strategies for each asset class to be included in the portfolio. It is understood that each asset class possesses its own peculiar investment characteristics and that, especially for a not-for-Profit Corporation, there will therefore be better and worse strategies to follow in gaining exposure to each asset class.

Once the Board has approved an asset allocation strategy and asset class strategies, the Committee will monitor compliance with the strategy on a quarterly basis and rebalance the portfolio as necessary. (See "VI. Portfolio Rebalancing," below.)

action 4.1.3.1.3 Portfolio Re balancing

VI. Portfolio Rebalancing

Once an asset allocation strategy has been implemented, it will almost immediately begin to fluctuate with market events. Some asset classes will rise in value, while others fall and still others move sideways. These movements are natural and, given that there is price momentum associated with most capital markets, they are not cause for alarm. However, if the Committee allows the portfolio to drift too far from its target asset allocation policy, it is in effect making a decision to change, sometimes radically, the risk/reward structure of the portfolio. Rather than allow such implicit decisions to occur, the Committee will review the asset allocation structure of the portfolio at the next meeting occurring immediately after any asset class has exceeded its minimum or maximum exposures. At that meeting the Committee will use its discretion to (i) rebalance back to the minimum or maximum exposure, or (ii) rebalance back to the target exposure, or (iii) determine that the costs (especially taxes) associated with rebalancing make the exercise unwise.

action 4.1.3.1.4 Manager Selection and Monitoring

vu. Manager Selection and Monitoring

 

It is an important responsibility of the Committee to select investment managers for the Corporatrion's portfolio, to monitor the performance of those managers, and to terminate underperforming managers. Regarding manager termination, experience has shown that most manager termination is mistakes in the straightforward sense that the replaced manager outperforms the new manager over the following market cycle. This unhappy result tends to occur because of the tendency of investment committees to terminate managers whose investment style has temporarily gone out of favor in the market and to replace that manager with a manager whose investment style has recently been in favor. In effect, committees tend to "sell low and buy high" when making manager decisions. In an effort to avoid this common mistake, the Investment Committee will, in carrying out its manager selection and monitoring responsibilities, typically proceed as follows:

1. Before terminating a manager, the Committee will review the guidelines prepared for that manager to ensure that the manager has been given sufficient time to demonstrate his capabilities. Managers will typically be terminated before the prescribed time period only (i) because of some fundamental change in the manager (e.g., loss of key personnel, overly rapid gain or loss in assets and! or accounts, etc.), or (ii) as the result of a change in strategy on the part of the portfolio.

 

2. Before engaging a manager in any asset class, the Committee will gather quantitative and, especially, qualitative information about several managers who are believed to be best-in-class in their sector of the market. Typically, the Committee will interview at least two managers before selecting a finalist to be engaged. It cannot be over- emphasized that the engagement of managers who have produced strong recent returns, but who lack the other characteristics of best- in-class managers, will almost always prove to be unrewarding.

 

3. The Committee will draft and submit to the finalist manager a set of manager guidelines that will be used to monitor and evaluate the manager during the term of its engagement.

 

4. Before engaging the manager, the Committee will, as appropriate, engage in fee negotiations with the manager. These negotiations may focus on the absolute level of the manager's fee, the structure of the fee, or the minimum account size typically enforced by the manager. As appropriate, the Committee may wish to attempt to structure incentive fee schedules designed to reduce the fee to the Corporation when the manager under- performs and to reward the manager when he outperforms.

 

5. As noted above (see "Ill. Meetings of the Investment Committee," above), each manager's investment performance will be reviewed against its benchmark on a quarterly basis. In addition, whenever possible, each manager will be reviewed against a universe of similar managers.

6. The Committee recognizes that individual money managers may be appropriate for carrying out certain strategies in each asset class and may be inappropriate for other strategies. Thus, prior to conducting manager searches, the Committee will settle on optimal strategies in each asset class, having in mind the Corporation's risk tolerance and return objectives, the tax consequences associated with investing in each asset class, the efficiency or inefficiency of the markets through which each asset class is accessed, and the other costs associated with investing in each asset class.

 

The Committee recognizes, as noted above, that most manager terminations are a mistake and that these mistakes overwhelmingly occur when the manager's investment style is out of favor in the market. In addition, the Committee recognizes that manager terminations tend to be especially costly even for not-for-profit investors, due to the cost in time and fees typically involved. Consequently, the Committee will proceed with great care in considering managers for termination.

 

action 4.1.3.1.5 Asset Custody

VIII. Asset Custody

The Investment Committee will determine whether or not it is in the interests of the Corporation to select a master custodian to hold the cash and securities owned by the Corporation. If so, the Committee will conduct a search for an appropriate custodian and will recommend a finalist to the Board. An asset custodian ensures the safekeeping of the Corporation's investments and also eases reporting and monitoring tasks, and, absent other considerations, using one master custodian is a best practice in the investment management business.

task 4.1.3.2. Prepare 1041, From 2, 990PF

task 4.1.3.3. Prepare probate style accounting

task 4.1.3.4. Audit

task 4.1.3.5. Adjust fees and distributions based on asset value

phase 5. Annual Accounting

project 5.1. Determine if an annual accounting needs to be prepared

A trustee should always refer first to the trust instrument in determining the extent of the duty to account. For inter vivos trusts, the duty to account is, in most cases, expressed specifically in the trust instrument. The grantor has the power to determine if court approval of the account is required and the time periods for which accounts are to be provided.

New UPC Duty to Account

Section 7-303 of the proposed Uniform Probate Code provides as follows:

The trustee shall keep the donor of a revocable trust and the beneficiaries of an irrevocable trust reasonably informed of the trust and its administration. In addition, unless the trust is revocable:

Within 30 days after his acceptance of the trust or the trust becomes irrevocable, whichever is later, the trustee shall inform in writing the current beneficiaries and if possible, one or more persons who under Section 1-403 may represent beneficiaries with future interests, of the Court having jurisdiction over the trust and the trustee's name and address. The information shall be delivered or sent by ordinary first class mail.

Upon reasonable request, the trustee shall provide the beneficiary with a copy of the trust and with relevant information about the assets of the trust and the particulars relating to its administration.

Upon reasonable request, a beneficiary is entitled to a statement of the accounts of the trust annually and on termination of the trust or change of the trustee.

Under the proposed UPC, trustees would most likely continue to send out annual accounts as before. The proposed UPC is less strict than G.L. c. 206, § 2, which requires an annual account. Trustees could choose to prepare accounts for longer periods of time, provided that the donors of revocable trusts and beneficiaries of irrevocable trusts are "reasonably" informed. Beneficiaries of an irrevocable trust may in any event request annual accounts.

subproject 5.1.1. Inter Vivos Trusts

task 5.1.1.1. Grantor-Type Trusts

If the Grantor of the Trust is also the Trustee, then no accounting is usually required so long as the Grantor remains the Trustee.  

  One the Grantor is no longer the Trustee, then an accounting should be made annually, based on the calendar year.

action 5.1.1.1.1 Determine if an accounting is required in the Grantor-Type Trusts

task 5.1.1.2. Irrevocable Intervivos Trusts

action 5.1.1.2.1 ILITs Accounting

No accounting is required for an Irrevocable Life Insurance Trust if the only asset is the life insurance policy, though a record should be kept of the payments made to the trust, the sent Crummy Notices and the payments of premiums by the trust for possible IRS audit.

action 5.1.1.2.2 Grantor Trusts after the Death of the Grantor

After the death of the Grantor(s) of an intervivos trust, the trust becomes irrevocable, and annual accountings have to be made.  

task 5.1.1.3. Probate Trusts

action 5.1.1.3.1 Probate Trusts require Accountings

These trusts require accountings annually, though they do not need to be filed with the Probate Court Annually, and often Banks will file several years at one time.

  We do not have any Probate Trusts, but sometimes we represent banks who are filing probate trusts.

project 5.2. Who Receives copies of the Accountings

The trustee should refer to the trust instrument to determine the beneficiaries who are entitled to receive copies of the trust account. The grantor has the power to determine who is entitled to receive a copy of each account and the individuals whose approval is necessary for the account to be final. See George G. Bogert, George T. Bogert & William K. Stevens, The Law of Trusts and Trustees § 963 (West rev. 2d ed. 1977).

The proposed Uniform Probate Code § 7-303 states that the donor of a revocable trust and beneficiaries of an irrevocable trust are entitled to be "reasonably informed" about the trust, and that a beneficiary of an irrevocable trust may make a reasonable request to receive annual accounts.

"Donor" is not defined in the proposed Code. "Beneficiary" is defined as follows:

"Beneficiary," as it relates to a trust beneficiary, includes a person who has any present or future interest, vested or contingent, and also includes the owner of an interest by assignment or other transfer; as it relates to a charitable trust, includes any person entitled to enforce the trust....

Proposed UPC § 1-201(3). Therefore, any person who has a present or future interest, vested or contingent, is entitled to be reasonably informed about the trust and may request annual accounts. The class of those entitled to receive annual accounts may be much smaller, however, than the class of those entitled to notice of the allowance of the account under proposed UPC §§ 1-401, 7-201(a)(2).

subproject 5.2.1. Check Trust Terms for those who are required to receive copies of the Accountings

task 5.2.1.1. Income Beneficiaries

All current income beneficiaries must receive a copy of the accounting.

task 5.2.1.2. Principal Beneficiaries

All beneficiaries who are entitled to principal distributions currently from the Trust must receive copies of the accountings.

task 5.2.1.3. Remainder Beneficiaires

Unless they are also current income or principal beneficiaries, remainder beneficiaries are usually not entitled to copies of the accounting.

task 5.2.1.4. Minor Beneficiaires

Minors who are entitled to receive current income or principal distributions from the Trust are entitled to receive the accountings, but they cannot legally accept the accounting so as to absolve the Trustee of any responsibility for their actions during the accounting period until they reach the age of majority.  

The interest of the minor can be represented informally by their parents, if so allowed unter the terms of the Trust Agreement, or formally by the appointment of a Guardian, or the appointment of a Guardian Ad Litem for this specific accounting.  

task 5.2.1.5. Guardian ad Litem

For Probate Trusts and other formal accountings, a court nominated Guardian ad Litem is appointed at the discretion of the Probate Court, and is required is there are 1) minor beneficiaries, 2) mentally or physically incompetent beneficiaries who are not represented by a formally appointed Guardian or Conservator, or 3) there are unknown or unascertained beneficiaries.

project 5.3. Initial Accounting

An initial inventory of trust assets is critical to the preparation of every subsequent account. The inventory identifies each asset and its value as of the date the trustee assumes responsibility over it.

The filing of an initial inventory is required by statute. General Laws c. 205, § 1 provides that a trustee under a will or appointed by the probate court must provide a bond conditioned on "mak[ing] and return[ing] to the probate court at such time as it orders a true inventory of all the real and personal property belonging to him as trustee which at the time of the making of such inventory shall have come to his possession or knowledge." In cases in which the court appoints a successor trustee, the court may dispense with the inventory requirement "if it appears to be unnecessary." G.L. c. 203, § 8.

If, however, the Trust is an unfunded "pour over" intervivos trust, the Federal and State Estate Tax Return will determine the initial inventory of the Trust Assets, as well as their cost basis, based on the beneficiary list on page 2.

For funded intervivos trusts, the initial inventory (and cost basis) is determined from the information given by the Grantor (or the Grantor's custody agent)

project 5.4. Accounting Format

The governing statute, G.L. c. 206, § 2, does not mandate a set format for an account. The statute does require that the period covered by the account be stated, and requires that certain information in an account be shown on separate schedules:

Trustees are required to number the items in each schedule sequentially, to make it easier for fiduciaries, beneficiaries, courts and interested parties to refer to the items listed in the probate account.SeeUnif.Prob.Ct.Prac. XV(C).

subproject 5.4.1. Example of Accounting Format

See document(s): SHERMAN - 2005 - 38th.doc

subproject 5.4.2. Title Page - Information Schedule

An information schedule is often included with the account. The information schedule shows all investments made during the accounting period, including assets sold as well as assets on hand. The information schedule also shows transactions, such as stock splits and corporate name changes, that do not affect the dollar amount for which the trustee is accountable but that are essential for a complete understanding of the account.

This information schedule—typically entitled "Changes in Investment Holdings" or "Schedule Showing Changes of Principal Investments"—reconciles the opening and closing entries for particular securities, explains changes in carrying values and, most importantly, avoids the need for extensive searches for account information scattered among other schedules.

subproject 5.4.3. Schedule A Principal on Hand and Received

This schedule shows

• the amount of personal property, and ... the amount of the real property, according to the inventory, or

• the balance of the next prior account, as the case may be, and

• all other property received and gains from the sale of any property or otherwise." G.L. c. 206, § 2.

• This includes principal distributions made from partnerships, mutual funds, REITs etc. that show up on the K-1 or 1099 even if the funds have not yet been deposited into the trusts accounts

This schedule is commonly referred to as Schedule A.

subproject 5.4.4. Schedule B

The second schedule, commonly referred to as Schedule B, shows payments, charges, losses and distributions attributable to Principal

.If there is no specific attribution of where fees and expenses should come from, then the fees should be split 50/50 between principal and income. this includes

• Trustee's fees,

• Investment management fees,

• Accountant's fees,

• Tax preparation fees,

• Etc.

Costs which are specifically applied only to Principal include

• realized capital losses,

• commissions, fees and expenses associated with the sale of an asset,

• Principal losses from K-1s,

• Capital Gains Taxes paid by the Trust in the accounting year (if this is a complex Trust)

• Etc.

subproject 5.4.5. Schedule C

The third schedule, which shows the investment of the balance of the account (also called property on hand), is commonly referred to as Schedule C.

Assets on Schedule C that have a readily ascertainable market value must be shown at fair market value.

The trustee may choose a valuation date for these assets that is either at the end or within the last six months of the accounting period.

For assets that do not have a readily ascertainable market value, such as copyrights and closely held businesses, the trustees must state the basis for the asset's value (e.g., book value, tax cost).SeeProb.Ct.R. 29A; Unif.Prob.Ct.Prac. XV(B).

For accounting purposes, the sum of all items on Schedule A, less the sum of all items on Schedule B, must equal the sum of the cost bases of all items on Schedule C.

subproject 5.4.6. Schedule D

Accounts rendered by trustees must show the receipt of income separately from the receipt of principal, and payments from income separately from payments from principal. G.L. c. 206, § 2.

Schedule D begins with the income on hand (if any) from the prior accounting's Schedule F and includes any ordinary, passive or active income received as a result of ownership of any of the assets of the Trust.

Note that in many cases this income passes through for income tax purposes to the current income beneficiary of the Trust who have received a distribution from the trust, and this income carries through the same tax aspects that it has in the Trust Accounting.

subproject 5.4.7. Schedule E

Payments Made From Income

This Schedule is includes distributions of income as per the terms of the Trust to current income beneficiaries, as well as the 50% share of fees and expenses incurred by the trust that are the balance not taken into account on Schedule B.

  Note that for "simple" trust (which require that all of the net income be distributed annually) the sum of the items on Schedule D should equal the sum of the items on Schedule E.

If this is a "Complex" trust, then any income taxes paid in the prior year that where incurred as a result of non-capital gains income should be taken here.

subproject 5.4.8. Schedule F

Income on hand

If this is a "simple" trust, this schedule must read Zero.

If this is a complex trust, then this Schedule should equal the sum of all of the items on Schedule D less the sum of all of the items on Schedule E.

Usually, I list this amount as being held in the trust's checking account, or money market account.

project 5.5. Final Accounting

subproject 5.5.1. Nonjudicial settlement of intervivos trusts

Most trustees' accounts for inter vivos trusts are settled nonjudicially by relying on the provisions in the accounting clause of the trust instrument. The clause generally states how often accounts are to be rendered and to which beneficiaries they must be provided.

The grantor in a revocable trust reserves the right to define what actions will constitute binding approval of the trustee's accounts. This clause in a revocable trust usually provides that only the grantor is required to receive accounts. Assent by the grantor or the closing of a specified window of time in which to object (usually 90 days) will bind succeeding interests for accounts rendered during the grantor's lifetime.

When the trust becomes irrevocable, generally beneficiaries who are of majority and entitled to receive income during the accounting period are to be sent accounts. The beneficiaries' written assent, or their failure to object within a specified time (usually 90 days), will bind them and their succeeding interests (remaindermen).

Nonjudicial settlement has a number of advantages, not the least of which are efficiency and privacy. Statutory and judicial procedures for settlement, which are designed to accommodate conflicting interests, may be formal (including representation of unascertained and unborn persons), cumbersome and costly. Inter vivos trusts, by statute, are generally not subject to supervision by thecourts. They come under judicial supervision only upon action by a trustee or a beneficiary. Few professional trustees seek judicial settlement of inter vivos trusts, at least while the grantor is alive.

The accounting provision provides protection to the beneficiaries and to the trustee. The risk to the trustee with an inter vivos trust is that a beneficiary other than the holder of the power to approve the account will assert that the trustee is liable for breach of trust. Although the holder of the power will be barred by his or her own approval, the risk for the trustee is as to the more remote beneficiaries. It should be noted that whether or not the protections afforded by the accounting provision will cut off challenges by more remote beneficiaries is an open question in Massachusetts.

For further discussion of nonjudicial settlements, see John C. Novograd, Eileen A. Reardon & Marcia C. Holt, Private Settlements of Fiduciary Accounts: A Prescription for Achieving Finality, Trusts and Estates 28 (Dec. 28, 2000); David Westfall, Nonjudicial Settlement of Trustees' Accounts, 71 Harv.L.Rev. 40 (1957).

 

task 5.5.1.1. Obtain the Approval of Beneficiaries

In a number of circumstances, a trustee may want to seek the approval of all beneficiaries or some other form of judicial remedy before effecting certain transactions. Examples include situations where holders of life and remainder interests are in conflict or where the trustee has a concern that a life tenant may lack the capacity to understand trust transactions. Possible forms of pleading include complaints in equity for instruction, declaratory relief, approval of a compromise agreement, reformation and distribution.

action 5.5.1.1.1 Assent Form

Commonwealth of Massachusetts

Probate and Family Court

Trust under Article V of the Will of John Green

Plymouth, ss.   Docket Number 123,456

ASSENT

The undersigned, being a person interested in the Second Account of Jane Smith and Robert Jones, Trustees of the Trust under Article V of the Will of John Green for the benefit of Mary Green and others for the period June 1, 1999 to May 31, 2000, and having examined said Account, hereby approves the same and requests that it be allowed without further notice.

Dated:         Signed:    

subproject 5.5.2. Judicial Settlement

Judicial determination of a trustee's account occurs when the trustee files that account, stating the trust's investments and all transactions during the accounting period, and requests that the court allow the account.

Provisions for the settlement and allowance of trustees' accounts are set forth in G.L. c. 206, § 24. A trustee applies to the probate court for the allowance of the account or accounts. For an in-depth treatment of this topic, see William F. Kehoe, Accounts, in Massachusetts Probate Manual(MCLE, Inc. 1988 & Supp. 1996, 2000).

 

task 5.5.2.1. Citation

Following receipt of the application, the court issues a citation, requiring notice to "all interested persons." This broad class, defined in G.L. c. 206, § 24, includes all persons to or for whom income or principal was paid or could have been paid during the accounting period, and also all persons who at the time of the notice would be entitled to share in the income or principal if an existing life tenancy ended. In the case of a trust under will, a guardian ad litem will be appointed to represent minor beneficiaries and persons unborn or unascertained. The trust may provide that the court, to the extent permitted by law, dispense with the appointment of a guardian ad litem. Pursuant to G.L. c. 206, § 24, it is possible to dispense with representation by a guardian ad litem for persons unborn or unascertained, but not for beneficiaries who are minors or are incompetent. The following clause dispenses with the need for a guardian ad litem to the extent permitted by law:

/ request and direct that the representation of any persons or interests by a guardian ad litem be dispensed with, to the extent permitted by law, in the allowance or settlement of all accounts of my Executors or Trustees and in any other proceeding in connection with this will or the administration of my estate.

task 5.5.2.2. Closure

A trustee's account allowed by the probate court cannot be re-opened except for fraud or manifest error. G.L. c. 206, § 24. The phrase "fraud or manifest error" has been construed fairly strictly by the courts, see, e.g., Rochev.Boston Safe Deposit & Trust Co.,391 Mass. 785, 464 N.E.2d 1341 (1984), and the reopening of accounts has been relatively rare, but cf, e.g., Lowingerv. Herlihy,19 Mass.App.Ct. 935, 472 N.E.2d 676 (1985) (rescript) (allowance of account vacated where guardian ad litem stated that he had fully examined the account but had failed to do so).

phase 6. Income Tax Return Preparation

This should be handled by an outside accountant.

phase 7. Trust Terminations

project 7.1. Methods of Termination

The reason for a trust's termination generally falls into one of four categories:

• someone wants the trust to end,

• the trust is terminated according to its terms,

• the trust's purposes become impossible or illegal to carry out or

• the trust is invalid under the rule against perpetuitites.

subproject 7.1.1. Revocation

is irrevocable. See, e.g., Clune v. Norton, 306 Mass. 324, 326, 28 N.E.2d 229, 230 (1940); Lovett v. Farnham, 169 Mass. 1, 2-3, 47 N.E. 246, 246 (1897).

A donor who has reserved the right to revoke the trust may do so in the manner and to the extent that the trust's terms provide. The donor may not revoke the trust if he or she is legally incapacitated. Austin W. Scott & William F. Fratcher, The Law of Trusts § 330 (Little, Brown 4th ed. 1987).

The right to revoke a trust "must be exercised in strict conformity with its terms." Phelps v. State Street Trust Co., 330 Mass. 511, 512, 115 N.E.2d 382, 383 (1953). Where the trust provides that the donor may amend or revoke it by an instrument in writing that has been acknowledged by the donor and delivered to the trustee, the donor must comply with these requirements. In Phelps v. State Street Trust Co., an amendment delivered without the required acknowledgment was deemed ineffective. Phelps v. State Street Trust Co., 330 Mass. 511, 512-13, 115 N.E.2d 382, 383 (1953). Where the donor reserves the power to revoke the trust upon the consent of the trustee or a third party, the donor must obtain the requisite consent. Austin W. Scott & William F. Fratcher, The Law of Trusts §§ 330.9-.10 (Little, Brown 4th ed. 1987).

The donor must respect any limits on the trust's revocation that he or she has set. For example, in Lovett v. Farnham, 169 Mass. 1, 47 N.E. 246 (1897), the donor created a trust that directed the trustee to pay the donor "such portion of the principal as she [the donor], in her judgment, may deem necessary for her comfort and support." Lovett v. Farnham, 169 Mass. at 2, 47 N.E. at 246. The donor wrote to the trustee, requesting that the entire trust principal be returned to her because she deemed it necessary for her comfort and support. The trustee entered into a new trust agreement with the donor, and acknowledged that he was holding the principal from the former trust under the terms of the new agreement. The Supreme Judicial Court determined that the trust's terms did not give the donor the right to revoke the trust, except to the extent necessary for her comfort and support. The court decided that the donor's request for principal was not based on her judgment as to what was necessary for her comfort and support, but was an attempt to revoke the trust and create a new one. Contrary to the trust's terms, the donor wanted to divert the trust principal for a purpose other than the donor's comfort and support. Accordingly, the court ordered distribution of the funds in accordance with the original trust agreement, and the new agreement was disregarded. See Lovett v. Farnham, 169 Mass. at 6-7, 47 N.E. at 247.

subproject 7.1.2. Exercise of Withdrawal Power

Where the donor reserves the power to withdraw trust property, he or she is reserving the power to revoke the trust with respect to the assets withdrawn. Austin W. Scott & William F. Fratcher, The Law of Trusts §§ 330.9-.10 (Little, Brown 4th ed. 1987). The same reasoning applies to a power of withdrawal given to a beneficiary under the terms of the trust. Allowing the beneficiary to withdraw property from the trust, removing it from the governance of the trust's terms, is a termination of the trust with respect to that property.

subproject 7.1.3. By Trustee's actions

Without the specific power to do so provided in the trust's terms, a trustee does not have the power to terminate a trust. Augustus P. Loring & Charles E. Rounds, Jr., Loring: A Trustee's Handbook § 8.2.2 (Aspen 2001).

A trust may provide the trustee with the power to terminate the trust when, for example, the trust property becomes too small to manage economically. If the trust does not provide such a power, the trustee or any other interested party may petition the court to terminate the trust and distribute the trust property if the administrative costs for the trust's continuance would be uneconomical. G.L. c. 203, § 25.

A trustee's power to pay the trust property, in his or her discretion, to a beneficiary may have the practical effect of granting to the trustee the power to terminate.

The trust may provide a standard for the exercise of the trustee's discretion. In Corkery v. Dorsey, 223 Mass. 97, 111 N.E. 795 (1916), the trust directed the trustee to pay the trust property to the beneficiary when, in the trustee's judgment, the beneficiary was "deserving and in need of aid ..., in such sums and at such times as he may deem expedient or necessary." Corkery v. Dorsey, 223 Mass. at 100, 111 N.E. at 796. The trustee paid over the entire trust property to the beneficiary when she became engaged to be married. The Supreme Judicial Court determined that the trustee did not properly exercise his discretion. Although the beneficiary was "deserving," she was not at that time "in need of aid"—or at least did not need the entire trust property to be paid to her. See Corkery v. Dorsey, 223 Mass. at 101-03, 111 N.E. at 796-07.

Even if the trust appears to grant the trustee the broadest discretion to make payments to a beneficiary, the trustee's discretion is not absolute. The trust at issue in Boyden v. Stevens, 285 Mass. 176, 188 N.E. 741 (1934), provided that the trustee "shall at any time have power in his discretion to pay over to my wife, or to expend for her benefit. . . , such portion of the principal as he may

deem advisable." Boyden v. Stevens, 285 Mass. at 177, 188 N.E. at 742. The court held that the trust gave the trustee the power to terminate the trust, but only if he deemed it advisable "after serious and responsible consideration." Boyden v. Stevens, 285 Mass. at 180, 188 N.E. at 743. The court explained its position as follows:

There is an implication, when even broad powers are conferred, that they are to be exercised with that soundness of judgment which follows from a due appreciation of trust responsibility. Prudence and reasonableness, not caprice or careless good nature, much less a desire on the part of the trustee to be relieved from trouble or from the possibility of making a foolish investment, furnish the standard of conduct.

Corkery v. Dorsey, 223 Mass. at 101, 111 N.E. at 796.

subproject 7.1.4. In Accordance with the Terms of the Trust

Usually a trust ends because, according to its own terms, it is supposed to end. A specified event has occurred. The purpose for which the trust was created has been accomplished.

task 7.1.4.1. On the Occurrence of a Specific Event

Common examples of trusts that terminate upon the happening of a particular event include the following:

• A trust for the benefit of the donor's wife for her life. At her death, the trust property is to be distributed to the donor's children.

• A trust for the benefit of a minor child.

• A trust for the benefit of the donor's child until the child reaches thirty years of age, at which point, the trust property is to be distributed to the child.

Upon the happening of a specified event—the death of a spouse, the specified birthday of a child—the trust is designed to terminate. Some trusts provide for a partial termination. For example, the trust could direct the trustee to pay one half of the principal to the child when the child reaches thirty years of age and the balance upon the child's fortieth birthday.

In Jones v. Jones, 304 Mass. 653, 24 N.E.2d 669 (1939), the Supreme Judicial Court was asked to interpret the trust's terms to determine whether the specified event had occurred. When Everett Jones died, his will created a trust for the benefit of his wife and his two children. The will provided, "each of my two children shall be paid five thousand dollars ... when they arrive at the age of twenty-five years, and when said two children arrive at the age of thirty-five years, then two-thirds of my estate ... shall be divided equally between said two children." Jones v. Jones, 304 Mass. at 654, 24 N.E.2d at 670. Shortly after his thirty-fifth birthday, son Bradley asked the court to instruct the trustee then to pay one third of the estate to him. Bradley's sister was eight years younger than he. The court determined that the event specified had not yet occurred. Only when Bradley's sister also reached thirty-five years of age could two thirds of the estate be "divided equally" between them. See Jones v. Jones, 304 Mass. at 655-67, 24 N.E.2d at 670-71.

The specified event at issue in Cronan v. Cronan, 286 Mass. 497, 190 N.E. 721 (1934), was the termination of a ten-year period. Thomas Cronan died in 1923. In his will, he directed his executors not to dispose of any of the trust property for ten years. "If at the end of that time the Executors wish to dispose of any of the property and can do so to a good advantage it is my wish that they do so," the will continued. At the end of ten years, the property was to be distributed among twelve individuals. The trust property consisted mostly of real estate. After the ten-year period had ended, the trustees were doubtful that they could dispose of it to "a good advantage" (in the middle of the Great Depression) and asked the court for instruction. The court decided that the trust did not terminate after ten years but was to continue until it could be sold under "fairly settled market conditions," at which time the trustees were to exercise "sound judgment" in terminating the trust. See Cronan v. Cronan, 286 Mass. at 502, 190 N.E. at 723.

Practice Note

As a practical matter, when the trust terminates upon the occurrence of a specified event, the trustee should confirm that the event has, in fact, taken place. For example, if the trust is to terminate upon an individual's death, he should obtain a copy of the death certificate. If the trust is to terminate upon a child reaching a certain age, the trustee should obtain a copy of the child's birth certificate if the trust instrument itself does not list the birthdate of the child.

task 7.1.4.2. On the accomplishment of the Trust's Purpose

When the terms of the trust do not provide a specific termination date, it may be terminated when the donor's purpose in creating the trust has been accomplished. Austin W. Scott & William F. Fratcher, The Law of Trusts§ 334 (Little, Brown 4th ed. 1987). As long as the main purpose of the trust has been accomplished, the trust will not be permitted to continue to finish an incidental one. George G. Bogert, George T. Bogert & William K. Stevens,The Law of Trusts and Trustees§ 1002 (West rev. 2d ed. 1977). Only the courts can determine when a trust should be terminated because its purposes have been achieved. Franklin Found,v. Attorney General,340 Mass. 197, 205, 163 N.E.2d 662, 668 (1960).

For example, inBowditchv.Andrew,90 Mass. (8 Allen) 339 (1864), the decedent left a trust that directed the trustee to retain his home for the use of his wife and family and to pay to the wife such amounts as the trustee deemed necessary for his family's maintenance. Almost twenty years after the decedent's death, all of his children had died and his wife no longer lived in the home. The court terminated the trust because its purposes had been accomplished and all of the trust interests had vested.

Even if all interests have vested and all parties, including the trustee, agree to a premature termination of the trust, the court will not terminate it if to do so would frustrate a material purpose of the donor.Claflinv.Claflin,149 Mass. 19, 20N.E.2d454(1889).

subproject 7.1.5. Termination due to illegality or impossibility

When a trust's purposes become impossible or illegal to carry out, the trust will be terminated. Austin W. Scott & William F. Fratcher, The Law of Trusts § 335 (Little, Brown 4th ed. 1987).

Example

Yetta Gordon's will left the family home in trust for her six children, who were to be permitted to stay there whenever they wished. If the trustees—two of the six children—decided to sell the home, the trust provided that the proceeds were to be divided equally among the six children. After Ms. Gordon's death, the children took sides in a bitter family dispute, and no one lived at the house. One trustee and three of her siblings wanted to sell the house. The other trustee, who wanted to live there in the future, along with the remaining sister, refused. When the matter was brought to court, the Supreme Judicial Court decided that Ms. Gordon did not anticipate the rift in her family and would not have wished the trust to continue for the exclusive use of one child. The Court terminated the trust because its purpose had become impossible to fulfill. Gordon v. Gordon, 332 Mass. 193, 197, 124 N.E.2d 226, 228 (1955).

subproject 7.1.6. Termination due to invalidity under the Rule Against Perpetuities

A noncharitable trust governed by Massachusetts law may not have an infinite term. Massachusetts enacted a statutory rule against perpetuities in 1989, G.L. c. 184A, to replace its common law rule against perpetuities. Under both the common law and the new statute, the rule against perpetuities gives an outer limit to the duration of a Massachusetts trust.

In general, the statute provides that a property interest is valid if (i) when the interest is created, it is certain to vest or terminate no later than 21 years after the death of an individual who was then alive or (ii) the interest actually does vest or terminate within 90 years after its creation. G.L. c. 184A, § 1. The first test codifies the common law rule against perpetuities. The second test allows a non-vested interest a 90-year grace period in which to vest or terminate.

The statute applies to interests created on or after June 30, 1990. Interests created prior to June 30, 1990, still are subject to the common law rule against perpetuities.

If an interest created on or after June 30, 1990, is invalid under the statute, an interested person may petition the court to reform the disposition "in a manner that most closely approximates the transferor's manifested plan of distribution" but vests within ninety years. G.L. c. 184A, § 3. If an interest created prior to June 30, 1990 is judicially determined to be invalid under the common law rule against perpetuities, an interested person may petition the court to reform the disposition "in a manner that most closely approximates the transferor's manifested plan of distribution" but vests within the terms of whatever rule against perpetuities was applicable when the interest was created. G.L. c. 184A, § 6.

project 7.2. Mechanics of Termination

Once the trust's term has ended, the trustee has a duty to distribute the trust property to the remaindermen. First, however, the trustee must conduct the process known as "winding up" the trust.

subproject 7.2.1. Post-Termination Powers and Duties of the Trustee

A trustee's powers to act with respect to the trust and his or her duties as trustee do not cease immediately upon the cessation of the trust's term. After the trust's term has ended, the trustee has such powers and duties as are appropriate to completing the administration of the trust. Austin W. Scott & William F. Fratcher, The Law of Trusts§ 344 (Little, Brown 4th ed. 1987). The trust terminates only upon the conveyance of the trust property to the beneficiaries. In re Rothwell's Estate,283 Mass. 563, 570, 186 N.E. 662, 665 (1933).

Until the trust property is conveyed, the trustee must take steps necessary to preserve it. Thetrustee inBoston Safe Deposit & Trust Co. v. Boone,21Mass.App.Ct. 637, 489 N.E.2d 209, review denied,397 Mass. 1103, 494 N.E.2d 388 (1986), knew that there would be a delay in the distribution of trust assets because of litigation over the trust's interpretation. The court held that the trustee's decision to keep the assets of the trust reasonably productive by keeping them invested was not improper.See Boston Safe Deposit & Trust Co. v. Boone,21 Mass.App.Ct. at 641,489 N.E.2d at 212.

Practice Note

When a trustee is confronted with a situation in which it is reasonable to conclude that distribution of the trustee's assets will not occur for some time due to circumstances beyond the trustee's control, the trustee should consult with counsel. A petition to the court may be advisable and would clarify the trustee's duties during any delay in distribution.

When the end of the trust's term is approaching—for example, because of an aging life beneficiary or a beneficiary who is approaching the stated birthday for distribution—it may be wise not to invest in something that will not be readily distributable or convertible into cash.

subproject 7.2.2. Winding Up the Trust

task 7.2.2.1. Identify the Beneficiaries

At the end of the trust's term, the trustee must determine the identity of the remainder beneficiaries. The trustee should obtain the full name, address, taxpayer identification number and, if an individual, age. It may be a good idea to check with family members for recent births or deaths in the family.

The terms of a well-drafted trust will contain a provision for dealing with amounts to be distributed to a minor beneficiary or to a beneficiary who is incompetent, usually instructing the trustee to keep the distribution in trust until the beneficiary reaches majority or becomes able to manage his or her own affairs. Absent a provision in the trust, payment to a minor should be made only to the formally appointed guardian for the minor (who may or may not be the minor's biological parent) or to the custodian of an account under the Uniform Transfers to Minors Act (UTMA). Similarly, if the beneficiary is incompetent, distribution should be made only to the beneficiary's court-appointed guardian or conservator. SeeG.L. c. 201 A, §§ 5,6.

Practice Note

Note that if the will or trust does not specifically authorize payment to an UTMA custodian, the trustee may transfer no more than $10,000 to the custodian without court approval.

The trustee should review the trust itself to determine to whom the income that was accrued prior to the trust's termination should be paid. If the trust instrument is silent, the general rule is that where the interest of a beneficiary who was entitled to income ends because of death or the happening of an event, that beneficiary (or the beneficiary's personal representative) is entitled to the income that accrued until the end of the beneficiary's interest. Austin W. Scott & William F. Fratcher, The Law of Trusts§ 238 (Little, Brown 4th ed. 1987).

In the absence of a court decree directing distribution, a trustee who makes a distribution to the wrong person is personally liable. This is so even if the trustee acts in accord with the advice of counsel. Guy Newhall & Thomas H. Belknap, Newhall's Settlement of Estates and Fiduciary Law in Massachusetts§ 36:37 (Lawyers Co-op., 5th ed. 1998).

Practice Note

Trustees who are unsure of the identity of one or more beneficiaries should petition the court for instructions. SeeRestatement (Second) of Trusts § 345 cmt. j (1959).

task 7.2.2.2. Final Accounting and Income Taxes

The trustee must determine the remainder beneficiaries' share, after setting aside a reserve for the payment of taxes and final expenses.

action 7.2.2.2.1 Taxes

The trustee should estimate the federal and state tax consequences—both to the trust and the remaindermen—of the terminating distributions and any post-termination sales. Under Section 641(b) of the Internal Revenue Code, the trustee may be personally liable for the payment of tax.

The trustee should work closely with the trust's accountant during the winding-up period. The relative tax brackets of the trust and the beneficiaries may play a part in whether the trust's assets are sold by the trust or, after conveyance, by the beneficiaries. The trustee and accountant should determine the most effective use of income tax deductions by the trust, considering, for example, distribution fees and attorney fees. Capital gains incurred by the trust prior to termination may be carried out to the beneficiary by a distribution in the termination year. The trustee and accountant must determine whether the trust's termination triggers any generation-skipping tax. If the termination does incur a generation-skipping tax, it is the trustee's responsibility to file the applicable return and pay the tax.

Early in the winding-up period, the trustee should assemble information about the tax costs of the trust assets.

Practice Note

Keep in mind that if the trust has terminated because of the death of a beneficiary, the tax costs will change if the trust is included in the beneficiary's gross estate for federal estate tax purposes.

action 7.2.2.2.2 Expenses

The trustee should set aside an amount for the payment of final legal and other fees, as well as for the payment of miscellaneous expenses such as recording expenses and ordering certified copies of documents. Even the most experienced trustee may not be able to predict every expense, and the reserve set aside should be large enough to accommodate unforeseen expenses.

 

task 7.2.2.3. Timing of Final Distribution

The trustee must wind up the trust within a reasonable time. Austin W. Scott & William F. Fratcher, The Law of Trusts § 344 (Little, Brown 4th ed. 1987). What is "reasonable" depends on the facts and circumstances of the case. For example, in Judge of Probate v. Mackintosh, 267 Mass. 86, 95, 165 N.E. 881, 884 (1929), the court (unsurprisingly) found that a trustee's failure to terminate a trust more than sixteen years after the death of the last life beneficiary was unreasonable.

The court speculated that a two-year period following the last life beneficiary's death "would have been ample time within which to terminate the trust and distribute the estate." Judge of Probate v. Mackintosh, 267 Mass. at 95, 165 N.E. at 883.

The trustee "cannot... be compelled to make distribution until her accounts have been settled." Guy Newhall & Thomas H. Belknap, Newhall's Settlement of Estates and Fiduciary Law in Massachusetts § 36:37 (Lawyers Co-op., 5th ed. 1998). The trustee should prepare his or her final account and have it approved or, if necessary, judicially allowed. Prior to making a distribution, the trustee should obtain a final receipt, release and indemnity agreement from the beneficiaries.

task 7.2.2.4. Manner of Final Distribution

When the time for conveyance arrives, the trustee is presented with several options. The trustee may

• liquidate the trust property and distribute the proceeds to the remainder beneficiaries;

• convey the trust property to the remainder beneficiaries in kind as tenants in common;

• divide the trust property into equal shares and transfer those shares in kind to the beneficiaries; or

• use some combination of the three approaches above.

Which option to choose depends on the facts and circumstances of the case. The trustee should consider, for example, the types of assets in the trust, market conditions and the number of remainder beneficiaries. Boston Safe Deposit & Trust Co. v. Boone, 21 Mass.App.Ct. 637, 489 N.E.2d 209, review denied, 397 Mass. 1103, 494 N.E.2d 388 (1986).

If the trust holds real estate, the terms of the trust will determine whether conveyance via a deed is required or whether title vests in the remainder beneficiaries upon termination. Guy Newhall & Thomas H. Belknap, Newhall's Settlement of Estates and Fiduciary Law in Massachusetts § 36:37 (Lawyers Co-op., 5th ed. 1998).

The trustee has no absolute duty to liquidate the trust assets and to convey the proceeds to the remainder beneficiaries. Phelan v. McCabe, 343 Mass. 585, 590-91, 179 N.E.2d 887, 890 (1962); Boston Safe Deposit & Trust Co. v. Boone, Mass.App.Ct. 637, 641, 489 N.E.2d 209, 212 (1986). In Phelan v. McCabe, the public administrators of Charlotte Dickinson's estate assumed responsibility for securities valued at about $78,500 at the time of their appointment on January 5, 1960. A few weeks later, on January 27, the securities' value had plummeted to $5,400. By April 25, 1960, when the administrators conveyed the securities to the beneficiaries, the value of the securities was $9,195. The court refused to adopt the view that there was a primary duty to liquidate the securities. See Phelan v. McCabe, 343 Mass. at 590-91, 179 N.E.2d at 890.

The trust document may state clearly the donor's intent that the trust property be conveyed to the remaindermen in kind. The trust may be silent as to the donor's wishes, or its general language may provide the trustee with a suggestion of what the donor intended. However, regardless of the donor's intent, the beneficiaries, acting together, may direct the disposition of the trust assets in a way that differs from the intended plan. Austin W. Scott & William F. Fratcher, The Law of Trusts § 347.1 (Little, Brown 4th ed. 1987).

Provisions for converting and distributing the holdings of a trust are set forth at G.L. c. 203, § 25, which provides in part as follows:

If under a written instrument a trust estate is to be distributed in whole or in part, the probate court, upon petition of a person interested ... may order the trustee to convert said estate, both real or personal, or either, into cash and distribute it among such persons as under such instrument are entitled thereto.

In Gleason v. Hastings, 278 Mass. 409, 180 N.E. 129 (1932), two of the four remainder beneficiaries petitioned the probate court under this statute to order the trustee to convert the trust property into cash and to distribute it among the remainder beneficiaries. One remainder beneficiary, who wanted to receive his share in kind, argued that the conversion of the securities into cash would result in a "great shrinkage" in the estate's value. The probate court granted the petition for conversion, and the Supreme Judicial Court refused to find that in so doing the probate court had improperly exercised its discretion. See Gleason v. Hastings, 278 Mass. at 415, 180 N.E. at 131.

Regular communications with the remainder beneficiaries should alert the trustee to whether they prefer to receive their distribution in cash or in kind. If an in-kind distribution is to be made, the trustee must obtain the appropriate transfer instructions from the beneficiary.