Friday, June 24, 2016

Disclaimer Trusts


            You have been named as Trustee for a Disclaimer Trust.  A Disclaimer Trust is a trust that is provided for in a person’s will or revocable trust.  The beneficiary is the decedent’s surviving spouse.  However, whether the trust comes into existence depends on an election that the decedent’s spouse makes after the decedent’s death.  This election is called a “Disclaimer.” If the decedent’s spouse does not execute a Disclaimer, the Disclaimer Trust never gets set up and usually the decedent’s assets go outright to the surviving spouse.

            The reason for providing for the option of a Disclaimer Trust is to minimize estate taxes.  Estate taxes are supposed to be a tax on the rich.  So both the federal estate tax and the Minnesota estate tax laws, provide that if the estate is under a certain amount (the “Exemption Amount”), it is not subject to estate tax. 

            Each person has an Exemption Amount.  Federal estate tax law has a concept called “portability” that allows the surviving spouse to use the decedent’s Exemption Amount as well as the surviving spouse’s when the surviving spouse dies. So Disclaimer Trusts are not needed to avoid federal estate taxes.  However, Minnesota tax law does not have the portability concept.  The Disclaimer Trust is a substitute.

            To try to preserve the decedent’s Exemption Amount, the surviving spouse executes a Disclaimer for assets up to decedent’s Exemption Amount.  Those assets then go into the Disclaimer Trust and on the death of the surviving spouse go where the Disclaimer Trust provides that they go.  However, these assets are not taxed because they count for tax purposes as coming from the decedent, not the surviving spouse. What this usually means is that on the death of the surviving spouse all the assets in the Disclaimer Trust plus up to the Exemption Amount in the estate of the surviving spouse go to the family without paying Minnesota estate taxes.

            However, since the surviving spouse is the beneficiary of the Disclaimer Trust during the surviving spouse’s life time, the assets in the Disclaimer Trust are still available to be used to take care of the surviving spouse.  By executing the Disclaimer to fund the Disclaimer Trust, the surviving spouse subjects those assets to control by the Trust but does not absolutely give up having the assets available to take care of the surviving spouse.  

            The following are the normal duties and powers of a Trustee.

General Duties of a Trustee

Duty of Loyalty: A trustee must administer the trust solely in the interest of the beneficiaries, both life time and ultimate beneficiaries (the ultimate beneficiaries are called “Remaindermen”).

Duty to Collect and Protect Trust Property: A trustee has the duty of obtaining possession of the trust property without unnecessary delay.  Once having obtained the trust property, a trustee must act as a prudent person in preserving the trust property. 

Duty to Earmark Trust Property: The trustee must earmark the trust property by properly identifying the property as trust property.

Duty Not to Mingle Trust Funds with Trustee=s Own: The trustee must keep all trust property separate from the trustee=s own property.

Duty Not to Delegate without Care: A trustee may delegate to any person any trust function that a prudent person of comparable skill could properly delegate under the circumstances.  However, the trustee must exercise reasonable care, skill and caution in selecting an agent, establishing the scope and terms of the delegation and must periodically review the agent=s actions. 

Duty of Impartiality: A trustee has a duty to deal with both the life time beneficiary and the Remaindermen impartially.  The trust property must produce a reasonable income while being reserved for the Remaindermen.

Duty to Inform and Account to the Beneficiaries: The trustee is under a duty to the life time and Remaindermen beneficiaries to give them upon their request at reasonable times complete and accurate information as to the nature and amount of the trust property, and to permit them or a person duly authorized by them to inspect the subject matter of the trust and the accounts and vouchers and other documents relating to the trust.

Normally, this will result in the Trust preparing an Inventory of the assets in the Trust at the beginning of the Trust Administration.  Periodic accountings showing where the money is being spent, income being received and assets still on hand may be required depending on how long the trust lasts.  At the end of the Trust Administration, the trustee should prepare and furnish the beneficiaries with a Final Account.

Other Duties:  The Trustee also has the obligation to file any necessary income or estate tax returns.  The Trustee has to pay the bills of the Trust and the trust document may require payment of beneficiary’s bills.

General Powers of a Trustee

Specific Powers:  The specific powers given to a trustee are listed in the trust and in Minn. Stat. ' 501C.0809-0817.

Discretion as Trustee: The trust agreement may give the Trustee discretionary power.  This allows the Trustee to determine whether to distribute income or principal and how principal shall be invested.

Trustee=s Power to Resign: Any trustee may resign at any time by delivering a written resignation to the remaining Trustees, with the resignation becoming effective 30 days following its delivery.

Signing Your Name: In transacting business, it is important to make clear that the Trustee acts as trustee, not as a person. The best way to do this is for the Trustee to sign as follows:

Trust of John Smith
under Agreement dated 1/1/2001
by Jane Smith, Trustee

Alternatively, if the document is already clear that it is the trust that is involved, the Trustee would sign:

Jane Smith, Trustee

Specific Issues for Disclaimer Trustee

            Any time there is a lifetime beneficiary and Remaindermen, there is a conflict of duties for the Trustee.  This is especially true if, as is often true of Disclaimer Trusts, the life time beneficiary is to be paid any income.  Should the assets be invested so as to produce more income or more appreciation?  Should the trustee pay a given bill for the benefit of the life time beneficiary or save the money for the Remaindermen?

            This conflict of duties makes it most important that the Trustee keep good communication going with all beneficiaries and, if at all possible, operate by consensus.  Documenting consent by all is always prudent.  If it is not possible to operate by consensus, it may be worthwhile to ask for court approval of controversial actions.

            Since the point of the Disclaimer Trust is to minimize estate taxes, administering the trust so that the surviving spouse’s assets are kept below the Minnesota Exemption Amount can provide some guidance on how to resolve the conflict of duties.   Often the Remaindermen are also children of the surviving spouse and may help make the conflict of duties more apparent than real.  However, with families that have unresolved issues or a second marriage, the conflict of duties may be very real.


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