Election of the Trustee for a Trust

Very often an attorney will name the surviving parent as trustee of a trust for children if the other parent dies. This approach has negative tax consequences. Firstly, since the surviving parent would have an obligation to support the child, under the grantor trust rules, the income is taxable to the surviving parent as trustee and not to the child. If we have a large estate, and the surviving parent is the trustee, the corpus will be included in that person's estate.

Such a problem can be alleviated even if the surviving parent is trustee if we limit the individual's power to an ascertainable standard. "Ascertainable standard" is defined by the regulations under Section 2041 as health, support, maintenance or education. Notwithstanding, I would be reluctant to name the surviving parent as trustee, because in all likelihood the remaindermen are the children, which could lead to litigation.

Therefore, an ideal trustee would be an aunt or an uncle or the beneficiary, who had no obligation and there would no tax or estate tax consequences for the trustee.

Another solution to the trust situation would be a trust having co-trustees whose interest is adverse to the other. That is, if they were both remaindermen, the distributions need not be limited to an ascertainable standard. However, having two trustee-remaindermen, gives rise to the problem of a disagreement. That is, if the co-trustees disagree, this might require a court proceeding which would be very costly.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.

© June 2012, Post 199