Tax Treatment of Testamentary Trusts

Posted in Blog, Featured Articles, Wills, Trusts & Estates

As our society ages, we are increasingly assisting clients where they do not have immediate or close family members, or any surviving family members at all. In such a situation, we are asked to help our clients  determine who will be in charge of managing their estate after they pass away, what will happen to them if they should become incapable, and what happens to their assets when they die.

Clients who are married with no children, siblings, or close relatives, will normally name each other as the initial choice for executor, trustee and beneficiary under their wills, their attorney under a power of attorney, and their representative under a representation agreement. The obvious next issue is what happens if they die at the same time, or upon the last of them to die?

If the client has a close friend, then the friend may be the right choice, provided the friend consents. Another alternative commonly used is to appoint a corporate executor and trustee. Several financial institutions have local offices that offer such services, and there are independent trustee companies that provide this service too. A corporate executor/trustee normally acts on the basis of a fee arrangement and works with the individual(s) to determine how the estate is to be distributed on the client’s death. We have agreed to be the alternate executor for several of our clients who are in this situation, as many are left with no other options and may not have a large or complex estate.

Assisting our clients in determining who acts on their behalf, should they require assistance under a power of attorney for financial matters, or under a representation agreement for personal and health care matters, is more difficult. The good-hearted friend is often a reasonable selection, but this may be a burdensome position for that person, so it should not be lightly considered. The corporate appointee may be the better choice, provided the individual has the means to pay for such services, and the appropriate directions are determined in advance. It would be essential that this person have detailed conversations with his or her family doctor, and explain their wishes to their doctor with notes on the file.

A person appointed as attorney under a power of attorney will have the opportunity to abuse this position, especially if a co-attorney is not appointed, or a monitor appointed to which the attorney must report. It may be better to have more than one friend appointed so there is a level of accountability and someone to share the responsibilities that come with the role.

When a client has no beneficiaries to which they wish to leave their estate, the appropriate choice is often to leave the assets to a charity or charities with which the client has a personal connection. The client can also leave their estate to an educational institution which may then create a legacy named after that client for years or decades beyond the client’s death. These types of bequests should be properly documented in the will.

If you or someone you know is facing this type of situation, we would be pleased to provide a free consultation to help determine available options and to create the appropriate estate plan.

image courtesy of mah_japan

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