What do you mean, I Shouldn’t be the Trustee of “my own” Irrevocable Trust? Have no discretion as the trustee with regard to trust asset distributions.
of your own trust can undo what the purpose of the irrevocable trust should be doing; this is, protecting your assets. We understand the confusion. Some lawyer told you that you could be your “own trustee.” At Estate Street Partners, although we will honor your wishes in the end, we strongly believe and advise in the safest option, period.
Being “Your Own” Trustee
First, let’s take a look at why we believe that you should not be your own trustee. While you, as the grantor, may technically be allowed to serve as the trustee of your UltraTrust irrevocable trust, you may end up in a precarious situation. If you have any discretion, as the trustee, with trust asset distributions, these assets may be included in your estate for tax, Medicaid, bankruptcy, debt collection and other purposes.
The key here is: “any discretion.” As a trustee, you need to have a lot of discretion to manage the assets of the trust. If any of those discretions are types that cause the court or government agency to claim that you have discretion to distribute assets in such a way that would benefit you, at the very least you will have to pay a lawyer a lot of money to defend you. Estate Street Partners would rather see you relaxing on a beach than stressing in a court room.
Here is an example of the difficulties when a grantor
merely “can become” the trustee:
Estate of McTighe v. Comm’r, 36 T.C.M. 1655 (1977).
Fred set up some irrevocable trusts for his sons. When Fred died, the IRS attempted to tax the money left in the trust. The trust challenged the IRS in court. The IRS argued that since Fred had left himself the power to appoint himself the trustee, that he had sufficient control over the trust and should therefore be taxed on it. The trust argued that he never was the trustee and therefore the assets should not be taxed. The IRS won the case because the power to appoint himself as trustee gave him enough control over the trust to keep it in his estate.
Here is an example of very little discretion:
Estate of Farrel v. U.S., 553 F.2d 637 (Ct. Cl. 1977).
Marian set up an irrevocable trust and funded it. She wrote into her trust documents the ability to “fill in” as trustee whenever there was a gap in trustees (i.e. a trustee death or resignation). Otherwise, she could not fill in as trustee. Twice, there was a gap in trustees during Marian’s lifetime, but neither time did she assume the role of trustee, but rather appointed someone else. When Marian died, the IRS imposed a tax based on the amount in the trust. The trust appealed and lost as Marian still had a “thread” attached to the trust.
As you can see, being the trustee of your own trust is a quagmire that can potentially eliminate the advantages of an irrevocable trust. We would like you to reap the full benefits of the UltraTrust irrevocable trust
and therefore kindly encourage you to elect a trusted non-family member as a trustee.