Fund refreshments: stale trust funding revisited.

• Author: Woodford, John R.

Stale trusts (subtrusts to be created and funded pursuant to a decedent's estate plan as a result of the decedent's death that were not so created and funded) are an ongoing hot topic for CPAs because they raise questions about the CPAs role and responsibility in dealing with them Here are some guidelines designed to help you ask questions that apply to your client's individual circumstances.

Let's assume Mom and Dad, a married couple, established the Smith Family Trust. The trust called for the division of its assets into three subtrusts--a Survivor's Trust, a Marital Trust and a Bypass Trust when the first spouse dies, which ended up being dad live years ago. The Survivor's Trust was to be funded with Mom's interest in the trust assets, and Dad's interest was to be divided between the Marital and Bypass trusts. Mom would have full control over the distribution of the assets of the Survivor's Trust upon her death, but would be granted only a limited power to change the distribution of the Marital and Bypass trusts. The Marital and Bypass trusts allow distributions of principal to Mom during her lifetime only if needed for her health, support or maintenance after considering other assets available to her.

Rather than divide the Family Trust into subtrusts, Mom continued on as she and Dad had prior to his death, never changing title to the Family Trust assets and treating the entire Family Trust as her own. Mom has now come to you, her CPA, with concerns regarding" the potential liability and tax consequences of failing to establish and fund the subtrusts.

Liability Concerns

In most cases, Mom will be the sole successor trustee of the Family Trust. Among the duties of a successor trustee are the duties to administer a. trust according to its terms, solely in the interest of the beneficiaries and to treat all beneficiaries of a trust impartially.

By failing to divide the Family Trust into subtrusts, Mom has failed to administer the trust according to its terms. By treating the assets of the Family Trust as her own she has placed her interests ahead of those of the other beneficiaries, and may have consumed assets for her own benefit that she would not have been entitled to had the assets been properly allocated to and administered under the Marital or Bypass trusts. This would unfairly harm the remainder beneficiaries of those trusts, especially if they are not the same beneficiaries as the remainder beneficiaries of the Survivor's Trust.

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