Archive for the 'Trust Administration' Category

So You Say You Want To See A Trust That You’re A Beneficiary Of And An Accounting Of The Trust?

Well ok then!  If its an Ohio trust, all you have to do is ask.

Under Ohio law, the Trustee of a Trust is obligated to give a copy of the trust to the beneficiaries that ask for it.  The same goes for an accounting of the trust as well.  Ohio Revised Code Section 5808.13 reads as follows:

A) A trustee shall keep the current beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless unreasonable under the circumstances, a trustee shall promptly respond to a beneficiary’s request for information related to the administration of the trust.

(B) A trustee shall do all of the following:

(1) Upon the request of a beneficiary, promptly furnish to the beneficiary a copy of the trust instrument. Unless the beneficiary expressly requests a copy of the entire trust instrument, the trustee may furnish to the beneficiary a copy of a redacted trust instrument that includes only those provisions of the trust instrument that the trustee determines are relevant to the beneficiary’s interest in the trust. If the beneficiary requests a copy of the entire trust instrument after receiving a copy of a redacted trust instrument, the trustee shall furnish a copy of the entire trust instrument to the beneficiary.

So, if you’re the beneficiary of a trust or you even think you may be the beneficiary of a trust, all you’ve got to do is ask!

If your the Trustee of a trust and you receive one of these requests, you likely have to comply.  And typically – at least in my experience – all the requesting beneficiary wants is a little information.  In these situations sunlight really is the best disinfectant so unless you’ve got something to hide then responding timely is almost always advisable.

What is an accounting?  Well its not simply a listing of the assets owned by the trust – though that’s a nice start.  NO, an accounting should show all cash and property transactions during the accounting period, including compensation paid to the trustee and the trustee’s agents, gains and losses realized during the accounting period and all receipts and disbursements should be evident as well.  Finally, the account should identify and value the trust assets on hand at the close of the accounting period and for each asset or class of assets that are reasonably capable of being valued the accounting should contain two values, the asset acquisition value and the estimated current value.  This is the only way for beneficiaries to be kept reasonable informed about what’s going on with the trust.

I’ve had this issue come up a lot in the last two months and I am actually litigating 3 different matters right now all because a Trustee didn’t want to make the required disclosures.  So, beneficiaries, if you’re having a problem getting information from your Trustee just tell them they have to respond to your request.  If you’re a Trustee, either respond or risk getting removed as Trustee.  (If the latter happens, keep in mind, that usually all of my attorney’s fees incurred in removing you will come out of the trust thus reducing its value for all beneficiaries.  I’ll also usually take a long hard look at any compensation you’ve taken before your removal…  So think about that when contemplating not responding to a beneficiary’s request.)

If your the beneficiary of a trust or the Trustee, contact a qualified estate planning attorney in your area to talk about the best next step to protecting your interest and the trust.

The Trustee’s Duty to Disclose

Professor Beyer this morning pointed to an article by this (jolly looking) associate at McGuire Woods LLP, called, Navigating the Trustee’s Duty to Disclose, Prob. & Prop., Jan./Feb. 2009, at 40.

He intros his article thus:

Parents are rightfully concerned about the possible negative effects of inherited wealth on the lives of their children. Those concerns are frequently brought into the trust arena when trustees attempt to comply with their duty to disclose information about trusts to members of younger generations. The resulting tension is well-known to many trust officers—and they don’t like it.

Surcharge litigation is on the rise. The causes are many—the increasing transfers of larger amounts of wealth from older generations to younger generations and into trusts (and the corresponding rise of entities with freshly minted trust powers), changing tax laws, escalating beneficiary expectations, the dramatically increasing complexity and volatility of investments, and growing aggressiveness by lawyers. Regardless of the causes, the reality of fiduciary risk is aggravated when the trustee fails to fully understand its duties.  Those duties include the trustee’s duty to disclose information to beneficiaries, which, in turn, is shaped primarily by a combination of the terms governing instrument and state law.

Trust law is in a state of rapid development, in large part through the expanding enactment of the Uniform Trust Code. Although the UTC has been largely successful in making the law uniform across the enacting jurisdictions, divergent policy views and other interests have prevented uniformity on the issue of trustee disclosure. This article will look at the relationship between disclosure and fiduciary risk, the difficulty in defining the scope of the disclosure obligation and the strategic use of disclosure to manage fiduciary risk under the Uniform Trust Code.

Sounds like its worth reading…  Ohio is in the midst of (possibly) redrafting those sections of its recently adopted trust code that speak to a Trustee’s duties to disclose.  Some of the changes are welcome ones over Ohio’s previous duties imposed by common law and our woefully inadequate statues, now thankfully gone.  But, depending on your situation, a Trustee’s duty to disclose may be exactly what a Grantor is trying to avoid in setting up the trust in the first place – for reasons that are not necessarily always sinister either.

Washington Changes Its Mind & You Have 8 Days Left (in 2008) To Comply

According to these various & sundry stories, it looked like Washington was going to act to suspend the minimum distribution requirements for 401ks for 2008 and 2009.  No idea what I’m talking about?  Michael Keenan can help:

RMD’s are a specific amount of money, based on your life expectancy and the balance in the account, that must be taken as taxable income each year starting at the age of 70 1/2.  Technically, the deadline for your first RMD is April 1st of the year following the year in which you turn 70 1/2. 

Anyway, the tax code wields a pretty big stick for those who decide to ignore this requirement.  The penalty, which is 50% of the amount that was supposed to be withdrawn, is usually more than enough motivation for an IRA owner to fully comply.

But in light of the decimation of everyone’s IRA’s the thought was that it seemed cruel to accelerate the decimation by continuing the obligation to take RMD’s.  In fact, Congress apparently reached a bipartisan proposal for suspending RMD’s for 2008 & 2009, and many retirement owners have been delaying the withdrawal of their ’08 RMD in light of the plans.

However, according to a December 17 letter from a senior Treasury official to Congress obtained by CCH. “Individuals who are subject to RMDs for 2008 should take their distribution under existing rules[.]”

What does that mean for you, the taxpayer?  It means hurry up and take those distributions or you could see your friendly neighborhood tax guy come along and take their 50% penalty…  And after the year most of us have had, another 50% really stings.

Thank you Mr. Keenan for your great post.

FDIC Insurance & Trust Beneficiaries

The news regarding FDIC insurance limits and trust beneficiaries has been making the rounds this morning, both here and here…  But I thought it needed a little more context.

First, a little background:

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects against the loss of insured deposits if an FDIC-insured bank or savings association fails. 1

The bailout legislation, passed October 3 of this year, has the following details with regards to FDIC coverage:

Basic FDIC Deposit Insurance Coverage Limits*

Single Accounts (owned by one person) $250,000 per owner**
Joint Accounts (two or more persons) $250,000 per co-owner**
IRAs and certain other retirement accounts $250,000 per owner
Trust Accounts $250,000 per owner per beneficiary subject to specific limitations and requirements**
Corporation, Partnership and Unincorporated Association Accounts $250,000 per corporation, partnership or unincorporated association
Employee Benefit Plan Accounts $250,000 for the non-contingent, ascertainable interest of each participant
Government Accounts $250,000 per official custodian

Now, the context:

Over the last few days I have been culling through the vague and (merely) advisory opinions of a few state bar associations researching the following problem:  If I am acting as a trustee (or other fidcuary) for a client’s trust (or gaurdianship or estate) account(s), what liability (either ethically or civilly) do I face if the bank where those funds are held collapses?  …  I’m working on a memo on this subject so this news caught my eye.  Oh by the way, when I get an answer to the above question, I’ll post it here.  Nonetheless, this is good and welcome news!

As I am attempting to develop a policy for the firm with regards to the amount of due diligence we fiduciaries should bring to bear on our cutodial depository institutions, there will in the near future, be more details to come.

** The legislation authorizing the increase in deposit insurance coverage limits makes the change effective October 3, 2008, through December 31, 2009.

I know, I’ve been gone for a while now but lets not make a big deal about it. I feel bad about it too… I changed jobs, sold a house, moved, am trying to buy another house now while living in temporary shelter… Its been crazy.

Good to see you too 😉

“Breaking Up Is Hard To Do” …

… is the title of this great article in yesterday’s NYT. Dissatisfaction with trustees — particularly corporate trustees rather than individuals — has been growing over the last five years[…].

Most complaints center on investment performance, mostly because beneficiaries have become more financially sophisticated and more types of investments are now available.

So what to do about Trustees and beneficiaries that can’t get along with each other? The article discusses different options from multiple perspectives:

Newer trusts often spell out procedures for firing a trustee. A growing trend is to designate a so-called trust protector — typically, an accountant, a lawyer or a relative — [at BDB we call this a Trust Advisor] with the power to fire a trustee or change the investment manager. But Melvyn H. Bergstein, a partner at the law firm Walder, Hayden & Brogan in Roseland, N.J., said that even if there were provisions for firing, “friction or hostility between a beneficiary and the trustee alone is not enough to warrant removal. It takes essentially misconduct.”

Experts disagree on how difficult it is to win a trustee-dumping case. Mr. Dardaman said that evidence like a log showing a long spate of unreturned phone calls or proof of poor investment returns could convince a judge. But Mr. Kahn said such complaints were not enough. “You have to do something egregious before the court will fire you as a trustee,” he said, like putting trust assets into an investment where the trustee has a personal interest. “The court may simply say you owe some money back to the trust.”

The situation gets very sticky if the beneficiaries disagree among themselves. Trust documents usually require majority or unanimous consent among the beneficiaries to fire a trustee.

Poor service — including high turnover among trust officials and phone calls that are not returned — is another common complaint. “The longer a trust lasts, the more you’re going to have a change in trustee personnel,” said Richard Kahn, a partner in the law firm Day Pitney in Florham Park, N.J., who specializes in trusts and estate planning.

Read the rest of the article here.

Top 12 Tax Scams

This list from the California Tax Attorney Blog (my other lists can be found here and here) is of the Top 12 Tax Scams. Check out Mitchell’s post for the full list.

6. Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. Most recently, the IRS expanded its list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of these positions on the list are subject to a $5,000 penalty. The most recent update of the list of frivolous positions includes: misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States, a nonexistent “Mariner’s Tax Deduction” related to invalid deductions for meals and the misuse of the fuel tax credit (see below). The complete list of frivolous arguments is on the IRS Web site at

7. Disguised Corporate Ownership

Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

8. Abusive Retirement Plans

The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.

9. Scams Related to the Economic Stimulus Payment

Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a “rebate.” To obtain the payment, eligible individuals in most cases will not have to do anything more than file a 2007 federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. For instance, a potential victim is told by phone or e-mail that he or she is eligible for a rebate but must provide a bank account number (or similar information) to get the payment. If the target is unwilling, the victim is then told that he cannot receive the rebate unless the information is provided. Individuals should remember that the only way to get a stimulus payment is to file a 2007 tax return. The IRS urges taxpayers to be extra-vigilant. The IRS will not contact taxpayers by phone or e-mail about their stimulus payment.

10. Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property. In addition, IRS examiners are seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations.

11. Phishing

Phishing is a tactic used by Internet-based thieves to trick unsuspecting victims into revealing personal information they can then use to access the victims’ financial accounts. These criminals use the information obtained to empty the victims’ bank accounts, run up credit card charges and apply for loans or credit in the victims’ names. Phishing scams often take the form of an e-mail that appears to come from a legitimate source. Some scam e-mails falsely claim to come from the IRS. To date, taxpayers have forwarded more than 33,000 of these scam e-mails, reflecting more than 1,500 different schemes, to the IRS. The IRS never uses e-mail to contact taxpayers about their tax issues. Taxpayers who receive unsolicited e-mail that claims to be from the IRS can forward the message to a special electronic mailbox,, using instructions contained in an article titled “How to Protect Yourself from Suspicious E-Mails or Phishing Schemes.” Remember: the only official IRS Web site is located at

12. Fuel Tax Credit Scams

The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

In Terrorem Clauses – An Important Distinction

In Terrorem clauses are often used by estate planner’s to coerce someone (usually a beneficiary, or someone who thought they should have been a beneficiary) to not sue the trust or estate. They can be useful but as this post by Professor Berry illustrates, they don’t prevent all actions against Trustees.

In Lesikar v. Moon, 237 S.W.3d 361 (Tex. App.—Houston [14th Dist.] 2007, pet. filed), a Beneficiary sued their Trustee for an alleged breach of fiduciary duty. There was a in terrorem clause in the trust and so the Trustee claimed that Beneficiary forfeited her share of the trust. The appellate court determined that the trial court was correct in not reaching the issue because Trustee’s motion for an interlocutory summary judgment was not timely filed.

In what is most likely dicta, the court concluded that even if the Trustee’s motion had been timely filed, Beneficiary’s conduct would not have triggered a forfeiture. The court explained that the right to challenge a fiduciary’s actions is an inherent part of a trust relationship and thus such conduct is insufficient to trigger a forfeiture.

Moral: A no contest clause will not prevent a beneficiary from bringing a breach of fiduciary claim against the trustee. It would be against public policy to permit the settlor to trigger a forfeiture when a beneficiary merely seeks to enforce the trust as written and assure that the trustee obeys the trustee’s fiduciary duties.

Thanks Professor. You don’t see these cases too often but they’re usually interesting when you do.

Tolkien Trust Sues New Line – May Kill “Hobbit”

From today’s Slashdot:

“The AP is reporting that the Tolkien Trust and HarperCollins are suing New Line Cinema for $150 million in compensatory damages, unspecified punitive damages, and a court order revoking New Line’s rights to produce any more films on Tolkien properties.

The Tolkien Trust is managed (and was set up by) the youngest of the four Tolkien children, Christopher. At age 77 he established the trust to watch over the interests in dad’s estate after the last of his children pass away.

The AP reports here that, “[t]he Tolkien Trust says that New Line paid them only $62,500 to make ‘The Lord of the Rings’ trilogy of films — instead of the agreed-upon 7.5 percent of gross receipts of all film-related revenue. The suit may set back, if not kill, a film adaptation of Lord of the Rings prequel ‘The Hobbit,’ which Peter Jackson had recently signed up to make after his own legal row with the studio over payment for the sequels.”

Christopher Tolkien (who I think is the Trustee) is currently represented by Manches & Co in London… And man am I jealous of that client!

“Decanting” Trusts in Ohio

A recent and interesting development in trust administration has made its way to Ohio, that of allowing a trustee to distribute the assets of one trust into another trust with substantially similar administrative provisions and beneficiaries, called “Decanting.” New York looks to have been the first to allow it (as far back as 1992) and now Ohio is thinking about it. If the OSBA follows the direction of the New York statute, some of the parameters we may see could look like this:

    1. The trustee must have absolute discretion to invade the principal of the trust;
    2. the exercise of the power cannot reduce the fixed income right of any beneficiary;
    3. the exercise of the power must be in favor of one or more of the proper objects of the exercise of the power;
    4. and the new trust cannot contain certain provisions deemed to violate public policy

Why do it?
It looks like New York was hoping to extend the benefits of “exempt trusts.” “Exempt Trusts” in this context means trusts which were executed prior to October 22, 1986 when Congress passed the Tax Reform Act of 1986 which contains the current form of the Generation Skipping Transfer (GST) Tax that we all know and love. Decanting a trust may allow one to extend the benefits of such exempt trusts. According to Alan Helperin and Michelle Wandler of Paul, Weiss, Rifkind, Wharton & Garrison LLP in this article (PDF):

[T]he GST regulations have provided that an exercise of a special power of appointment over an exempt trust
in favor of another trust generally does not cause the second trust to be subject to [the GST]. For years, in private letter
rulings, the IRS had asserted that modifications of an exempt trust do not cause the trust to lose its exempt status, but
only if the modifications do not result in any change in the quality, value or timing of any beneficial interest under the

Great stuff! I’ll be keeping an eye on this as the OSBA works on their recommendations.

Trust Beneficiary Rights in Ohio – 3 questions by 3 potential clients

During the course of the last three months I have received three inquiries from potential clients all concerned about the same thing:

What right do I have as a beneficiary of a [Ohio] trust?

Usually I find the potential client just wants to see a copy of “their” trust but their Trustee is being difficult… This is easily cured. Other times, the issue gets a little more thorny but the answer to the question is simple – Its the relationships involved that complicate things.

The definition of “Beneficiary” is found in Ohio Revised Code Section 5801.01(C):

“Beneficiary” means a person that has a present or future beneficial interest in a trust, whether vested or contingent, or that, in a capacity other than that of trustee, holds a power of appointment over trust property, or a charitable organization that is expressly designated in the terms of the trust to receive distributions. “Beneficiary” does not include any charitable organization that is not expressly designated in the terms of the trust to receive distributions, but to whom the trustee may in its discretion make distributions.

If you want to see a copy of the trust in which Aunt Gladdis left you some money (whether you’re supposed to get that money now or later) your Trustee has a duty to furnish you with a copy if you ask for one. Specifically R.C. § 5808.13(B)(1) says:

Upon the request of a beneficiary, [the Trustee must] promptly furnish to the beneficiary a copy of the trust instrument[.]

But Trustees have many other reporting duties to their beneficiaries – you first need to know if you are a “Beneficiary.”

The three potential clients that called all had relatively simple questions that could have been answered by this post. If your issue is more complicated, custom advice from an attorney who is familiar with beneficiary rights should be contacted.