Trustee Issues

Among the many requirements of managing a trust, new, difficult issues present new difficulties to trustees. Although it’s always been true that trustees must prioritize the interests of their beneficiaries, this fundamental duty occasionally contradicts their requests or demands.

Beneficiaries could request loans

This differs from receiving a taxable distribution and is usually allowed by a trust’s provisions. There are dangers to watch out for, even though it occasionally could be a good idea. Any loan should be issued and documented in the same manner as outright disbursements, which is a crucial rule to follow.

That brings up the subject of collateral. The trust beneficiary would simply borrow from a bank if the collateral requirements were as strict as those of a commercial lender, but they still need to be sufficient to support the loan. The trustee will be accountable for such collateral as it will become one of the trust’s assets. All the trust’s beneficiaries and occasionally even a court must hold the trustee accountable for that loan.

The beneficiary’s ability to repay the loan must be demonstrated to the trustee. If not, the Internal Revenue Service (IRS) might determine that the supposed loan was distributed, subjecting the beneficiary to unwelcome tax liabilities. Setting an interest rate advantageous to both the borrower and the trust and conforming with tax laws is another crucial issue a trustee needs to get right.

The issue of debt repayment is the last to be addressed. A beneficiary may decide to forgo dividends if the trust calls for them; in that case, the amount that would have been due is deducted from the loan balance. A trustee now has one extra thing to handle.

All of this can be intimidating and easily exceeds the skill of a trustee. Because of this, a qualified trustee with a strong tax law foundation may be far better equipped to decide on loans and manage all essential processes. Even a novice trustee should get reliable legal advice to prevent costly errors.

A beneficiary can suffer from addiction

This presents obvious difficulties. The goals of trust are defeated if it distributes funds to someone who would spend them on gambling, alcohol, drugs, and other vices.

Sometimes trust is established specifically because the founder does not want to leave money to a family member dependent on it. It might provide the trustee a lot of leeway in deciding whether to give or withhold money. Depending on the language of the trust, a trustee may be entitled to utilize trust funds to cover rehabilitation costs or hire third parties to ensure the beneficiary has access to basic needs like food and shelter. Another choice might be for the trustee to purchase necessities like furniture or clothing directly.

Beneficiaries’ needs should be balanced with prudent investing

A trustee has to use trust assets in a way that generates income now while preserving the principal for the future. This can be a difficult task, as anyone who has wanted to balance yield and safety in their own investing knows.

The same decisions, including how much money to invest in growth and value assets, foreign and domestic securities, stocks and bonds, etc., must be made by a trustee. Beneficiaries may have needs that are very distinct from one another. For instance, a single trust might call for immediate financial help for a disabled child and long-term investments for the grandchildren once they reach adulthood. Designing a portfolio that satisfies both objectives is no easy task.

Digital assets that require administration may be included in a trust

Email, social media accounts, and other digital assets will likely be included in an estate. Whether they have monetary value or not, electronic financial or medical records, digital images, or anything else saved on “the cloud” are parts of an estate that still need attention, even just to shut them off after their owner’s death. Additionally, these assets might include extremely private information that might compromise the privacy of actual people.

Thankfully, this problem has been addressed by the law. A trustee may still have to deal with “terms of service” agreements with companies like Google or Facebook. Obtaining control may still be difficult if the account’s original owner did not specify who should take over after death.

Who then needs to be worried about these issues? Anyone appointed trustee should know the numerous difficulties that call for professional advice. But when creating a trust, individuals should consider whether it makes more sense to choose a family member as trustee or appoint a professional.