A Checklist of Suggested Trust Provisions
Here are some suggested provisions that should be in all trusts to make them work well for you. These might not be in the form books or in the trust prepared for you by your lawyer.
Keep in mind that these are suggested provisions, and the actual language used in the trust document should be written by your attorney in accordance with state law. Attorneys attend conferences and seminars on trusts and estate planning and are often given sample forms and language to use in legal documents of a shareware basis. This helps keep us all current with the law and practice. We use these or modify them to fit our needs, so after a while, it can be impossible to find who wrote the first version. So the following paragraphs might include some of these and are included to show how the suggested provisions might read.
Joint Trusts: Who Makes Decisions?
For joint trusts, specify who can make decisions on behalf of the trust. This includes trust asset management as well as amending or revoking the trust. There is a danger in allowing either of the grantors to act independently without the consent of the other. And you need to state whether the powers of the surviving grantor as trustee are limited in any way at the death or disability of the other grantor. Here are two examples:
1. Either grantor can act for the trust independent of the other.
Trustee Designation: Husband and wife are hereby designated as Co-Trustees. The Co-Trustees may serve jointly or severally and either shall have full authority to act for the Trust independently. Should either husband or wife become unable because of death, incapacity, or other cause, to serve as a Co-Trustee, or should either resign as Co-Trustee before the natural termination of this Trust, the remaining Co-Trustee, husband or wife, shall thereafter serve as sole Trustee.
Amendment and Revocation: Grantors hereby retain the following powers, exercisable at any time during their lifetimes:
- To withdraw, sell, invest, transfer, or encumber any of the property included in the trust estate.
- To amend the provisions of this trust declaration in any respect, without the necessity of securing the consent of the other grantor or trustee to such changes.
- To revoke this trust.
Or,
2. Both grantors must participate in all trust transactions.
Trustee Designation: Husband and wife are hereby designated as Co-Trustees. The Co-Trustees shall serve jointly and neither shall have full authority to act for the Trust independently. Should either husband or wife become unable because of death, incapacity, or other cause, to serve as a Co-Trustee, or should either resign as Co-Trustee before the natural termination of this Trust, the remaining Co- Trustee, husband or wife, shall thereafter serve as sole Trustee. Co-Trustees can agree to appoint by power of attorney the other trustee to act for him or her regarding specific actions or transactions of the trust.
Amendment and Revocation: Grantors hereby retain the following joint powers, exercisable by their joint action at any time during their lifetimes:
- To withdraw, sell, invest, transfer, or encumber any of the property included in the trust estate.
- To amend the provisions of this trust declaration in any respect.
- To revoke this trust.
Couples will often agree to allow either of them to act for the trust without the consent of the other. It does make management of assets, such as investing, check writing, taxes, and so forth, easier. As long as they act in good faith, this type of provision works fine. The problems come when they experience marital problems. One partner would have the ability to secretly transfer the trust assets without prior notification to his or her partner. Even knowing this, couples still often trust each other to have full authority over the trust assets.
Problems also occur at the death of one partner if the survivor decides to change the distribution provisions of the trust, especially if there are stepchildren involved. It is not uncommon to have a distribution plan that divides all trust assets equally among the children of both partners. When one dies, the survivor sometimes decides to amend the trust to favor his or her own children by either cutting out the partner’s kids or reducing the shares going to them. That possibility is less likely if a provision such as this is added:
Amendment by a Surviving Grantor: At the death or disability of one grantor before the other, the survivor shall continue to act as trustee and shall have the right to amend the trust, but shall not be able to amend it in such a way as to reduce the previous pro-rata monetary share of the children of the other grantor; nor shall the survivor have the power to remove assets from this trust ownership if such removal acts to effectively reduce the share to those children. This provision does not, however, affect the right of the survivor to use the trust assets for his or her own support and the beneficiaries shall have no right to supervise or approve any normal expenditure of the survivor, recognizing that the primary use of trust assets is for the benefit of the grantors during their lifetimes.
Successor Trustees
The grantor is usually the trustee—that is, the person who is in charge of the trust and its assets. But if the grantor becomes physically or mentally incapacitated or dies, someone has to take over the operation of the trust for the benefit of the grantor, or in case of the grantor’s death, to carry out the grantor’s instructions on management or distribution of the trust assets. The trust will become irrevocable at that point. As we know, irrevocable means unchangeable. So whatever terms were in the written trust at that point are the grantor’s final word. The successor trustee should not have the legal authority to change the terms of the trust but merely carries out its existing terms.
Here is a sample of typical language in the trust to be sure that happens:
Revocation or Alteration by Grantor Alone: The rights of revocation, withdrawal, alteration, and amendment may only be exercised by the Grantor or the surviving Grantor during the Grantor’s lifetime, and may not be exercised by any other person, including an agent acting under a power of attorney, a guardian, or a conservator.
It is important that anyone reading the trust document understands what a successor trustee, or a person who is the grantor’s power of attorney, can or cannot do. Sometimes those with a power of attorney (the agent or attorney-in-fact) think they have all the legal powers of the person giving them the power. Care must be taken that the agent’s powers, spelled out in the power of attorney document, specifically limit the power and prohibit creating a will or amending or revoking a trust. Also, it is a bad idea to name different people for the role of successor trustee and agent under a power of attorney since that could create a conflict of powers over the same assets. See paragraph 17 in the sample power of attorney in Appendix C.
Appointment of Successor Trustees and Alternates
I strongly recommend that alternates be named as trustees in the event the trustee you named is unable or unwilling to act as such. As part of your own annual review, be certain that your choice is still appropriate. If you created your trust while your children were minors and could not act as trustees, but now they are of age and sufficiently competent to act as trustee, you need to amend your trust. If there is no named trustee available, the document should specify a procedure for selecting a trustee. Otherwise the trust may end up in front of a probate court judge so that a trustee can be legally appointed. You don’t want that since it is typical for the judge to appoint a professional trustee at professional rates.
Trustees: All Trustees are to serve without bond. Co-Trustees may divide their duties among themselves as they may agree. The following will act as Trustees of any Trusts created by this Trust Agreement, in the following order of succession:
- First: The undersigned, Joseph Jones and Matilda Jones.
- Second: The surviving spouse.
- Third: At the death or incapacity of the surviving spouse, Timothy Jones and Linda Jones shall serve as Successor Co-Trustees.
- Fourth: If either of them cannot act as Trustee, then the other shall serve as sole successor Trustee.
- Last: If there is no Trustee named above who is able or willing to act as Trustee then a Trustee may be chosen by the majority of Beneficiaries, with a parent or legal guardian voting for minor Beneficiaries; provided, however, that the children of any deceased Beneficiary shall collectively have only one vote.
Trustees may be compensated if they choose at the customary rate paid to professional bank trustees for similar services. Trustees may divide their duties among themselves as they may agree in writing. Successor Co-Trustees, absent written agreement, must unanimously agree on Trust decisions.
Family members who are serving as trustees usually do not expect a separate fee to be paid to them. If, however, the named trustee is not also a beneficiary, most people have no objection to paying them for wrapping up the trust or carrying out its terms if it is to continue on for a time. This can be a flat fee that you can specify or may be a percentage of the trust estate, typically around 2 percent. It really would depend upon how complex the trust asset structure is and how long the trust is supposed to continue. Remember that if you name your attorney as the successor trustee, she is going to be charging hourly at attorney rates.
Trustee as a Fiduciary
Under the laws of many states, the trustee of a trust has a legal duty to be a fiduciary in regards to trust transactions. These fiduciary duties include:
- Duty of loyalty—The trustee must act solely in the interests of the beneficiary in carrying out the stated intent of the grantor of the trust.
- Duty of prudence—The trustee must make conservative and prudent investment decisions without significant risk to the trust assets.
- The trustee must be impartial in dealing with multiple beneficiaries.
- The trustee must not engage in self-dealing or comingle trust assets with her personal assets.
- The trustee must account to and inform beneficiaries of trust financial transactions including accounting for income, account balances, and expenses.
These duties should be specified in the trust document, although it might be sufficient to specify that the trustee is appointed with the direction and intention that she is under a fiduciary duty to the beneficiaries, since the word “fiduciary” has a settled legal meaning. Some state laws already state that a trustee is a fiduciary.
(To be continued...)
This excerpt is taken from “How to Avoid Probate for Everyone: Protecting Your Estate for Your Loved Ones” by Ronald Farrington Sharp. To read other articles of this book, click here. To buy this book, click here.
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