Tests To Determine When A Fiduciary Needs Competent Legal Advice

 “We have children who are beneficiaries of trusts with lots of assets who are unable to get shoes from the trustee. What good is a trust that doesn’t take care of its beneficiaries?” That was the first question I was asked recently at a seminar sponsored by the local association for retarded citizens. The question centers on an issue that I believe at least as important as the proper drafting of the appropriate estate planning documents. Who will be the fiduciary i.e., trustee, power of attorney, personal representative to follow my wishes if I become incapacitated and when I die?

Traditionally both client and attorney tend to believe that the estate planning/life planning work is complete when the documents are signed and the assets correctly titled. Nonsense!

The completion of documentation is critical but is really the starting place for the equally important next phase - implementation. Planning starts the journey but you only get to your destination by implementing the plan. Does the person or company you have named to take over at your incapacity or death have the expertise of a seasoned trust department? If the person you have named to serve as your fiduciary cannot deal comfortably with the following questions, then the success of your plan implementation may depend on your fiduciary’s decision to utilize competent legal, financial, and accounting advice.

1.  Do you understand the terms of the trust agreement and can you explain them to the trust’s beneficiaries? Answer

2.  Is there a current beneficiary entitled to income for life? If so, do you know how to calculate the income distributions? Do you know when you may be required to distribute principal to an income beneficiary? Do you know how to calculate the amount of the principal distribution? Answer

3.  Is the current beneficiary entitled to discretionary principal distributions? Do you understand the standards which are listed in the trust agreement for making principal distributions? Do you need to consider the impact of all principal distributions on the remainder beneficiaries? Answer

4.  Do you know who the potential remainder beneficiaries are? Answer

5.  Do you understand your state's Principal and Income Act? Do you know how to determine if a receipt is principal or income or should be allocated between both? Do you know how to determine if an expense is principal or income or should be allocated between both? Answer

6.  Do you think that a brokerage statement is an annual fiduciary accounting? Answer

7.  Do you know who is entitled to receive copies of an annual accounting? Do you know what happens if an interested party does not receive annual accountings? Answer

8.  Do you know how to develop a portfolio that complies with your state's Prudent Investor Rule? Answer

9.  Do you know how to determine the tax cost bases of the trust’s assets? Answer

10. Do you know which tax returns you will need to file as trustee? Answer