With the selection of a trustee, the major attributes to consider are the trustee’s willingness to serve and at what cost; the trustee’s experience with trust, financial, business, accounting, and tax matters; the trustee’s temperament and relationship with the beneficiaries; and the tax effects of serving as trustee.
There are important tax considerations that go into the selection of a trustee. The grantor must consider whether a particular family member or related person can serve as trustee without creating unanticipated and adverse income, gift, or estate tax consequences.
During the grantor’s lifetime, the trustee of an unfunded revocable life insurance trust has a relatively simple task. If the trust is merely the policy beneficiary, the trustee has virtually no responsibilities, not even to ascertain if premiums are paid or the policy is in danger of lapsing. If the trust is the policy owner and beneficiary, the trustee will have to use the trust funds and contributions by the grantor or others to pay the policy premiums. At the insured’s death, the trustee must file the death claim, assuming the insured’s executor hasn’t already done so.
It is permissible and often the case, that the person who establishes the trust names himself as the trustee while the only asset in the trust is the right to receive policy proceeds. But in such cases, there must be at least one other individual named as beneficiary of the trust. The reason for this is an ancient trust rule known as the “doctrine of merger.” In a nutshell, this rule requires that the trustee and the beneficiary of the trust not be identical. Otherwise, the same party would hold both legal and equitable title; an event that nullifies the existence of the trust. If the sole trustee is the sole beneficiary, the trust is dissolved.
It is sometimes suggested that a trust should never have the following:
- One of two or more beneficiaries as sole trustee
- One of two or more trustees as sole beneficiary
- Beneficiaries who are the same persons as the trustees
Many expert planners suggest that someone other than the grantor be named as trustee because of the difficulty of accomplishing a smooth succession if the grantor becomes incapacitated. If the trustee is a corporate trustee, on the other hand, management of trust assets can continue without interruption even if the grantor becomes physically or mentally incapacitated. A potential compromise is for the grantor to be co-trustee. In any event, provision should be made for at least two or three successor trustees to take over administration of the trust in the event the current trustee, for whatever reason, cannot or will not continue to serve.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM