14.4 Individual Trustees

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

14.4 Individual Trustees

Frequently it is desired that individuals serve as trustees. Typically, the choice is for the surviving spouse or the children to act as trustee. The use of family members as trustees can create possible estate, gift, and income tax problems; however, most of these problems can be solved with careful drafting and without the loss of too much flexibility. The discussion that follows focuses on the use of an individual trustee for both a testamentary and a revocable inter vivos trust. The use of an individual trustee for an irrevocable trust is not considered because normally a corporate trustee should be used in those situations. For a limited discussion of irrevocable life insurance trusts and the use of a corporate trustee, see the illustration and trust agreement in Chapter 15, at 15.6.

14.41 Powers over Principal

An individual trustee who is also beneficiary of the trust should not be given broad power (whether held as fiduciary or beneficiary) to distribute principal from the trust for his or her own benefit. This power of distribution is a general power of appointment and will result in inclusion of the trust property in his or her estate.⁴ This may become important if the trust assets appreciate in value during the survivor's lifetime and the trust has been drafted to avoid inclusion in the survivor's estate.

Planning Pointer 1

This problem can be solved by limiting the trustee's power to distribute principal to an ascertainable standard, such as the health, education, and support of the surviving spouse.⁵ For a discussion of the use of this type of standard, see Chapter 6, at 6.32. Also, a "5 or 5" power can be granted to the beneficiary without any adverse estate or gift tax consequences.⁶ A discussion of this type of power is presented in Chapter 6, at 6.33.

Trust Form: Power Limited to Ascertainable Standard

The Trustee is authorized to distribute to the Settlor's wife or apply for her benefit from the principal of Fund ___ such amounts as are necessary to provide for her reasonable health, maintenance, and support, taking into consideration such other income and other resources as the Settlor's wife may have available to her.

Trust Form: 5 or 5 Power

During the lifetime of the Settlor's wife, she shall have the right during the last month of any calendar year to withdraw from the principal of Fund ___ an amount not to exceed the greater of Five Thousand Dollars ($5,000) or five percent (5%) of the market value of the principal of the trust valued on the last day of the calendar year in which such withdrawal is requested. This right of withdrawal shall be noncumulative.

Caution: Even these two planning alternatives have drawbacks. Either the limited standard or the 5 and 5...