Mark Twain said it best: Nothing incites to
money-crimes like great poverty or great wealth. Over the years, countless
families have been torn asunder as the post-mortem battle over a loved one’s
wealth stresses family ties to the breaking point. That’s why one of the
major goals of estate planning is to control how wealth is distributed after
you’re gone so that family conflicts are keep to a minimum.
Still, tussles over money can’t be completely avoided, especially when a
trustee is also a beneficiary of your estate. In response, a growing number
of wise consumers are thinking twice about naming a beneficiary to serve in
this capacity. It has nothing to do with the competency of their loved ones.
Rather, it has everything to do with preserving family harmony.
THE ROLE OF THE TRUSTEE
A trustee has many important roles to play
in a successful estate plan. For instance, your trustee needs to be able to
make difficult personal decisions, such as whether a troubled young heir
should receive a distribution as planned when he’s not likely to put it to
good use. Your trustee will also need to take care of routine paperwork and
file tax returns, as well as make investment decisions to protect the value
of your assets.
While you live, you — and your spouse — will probably serve as the trustee
of your revocable living trust. If you’ve created an irrevocable trust, such
as an Irrevocable Life Insurance Trust, you can’t serve as the trustee or
you’ll forfeit the tax advantages. So, to manage your revocable living trust
after your death or disability and to manage your irrevocable trust now,
you’ll need to appoint someone else to serve as your trustee.
You can place the entire burden on the weary shoulders of a single trusted
friend or family member, or you can, as more and more consumers are now
doing, split the duties among a variety of players.
The latest technique involves promoting a friend or family member who is not
a beneficiary into the role of a “super” trustee, called a trust protector —
or simply, protector.
The protector’s job is to manage the other trustees and make those critical
personal decisions that he or she is in the best position to make. A
professional trustee or even an institution can be named as your trustee,
and will be responsible for the more tedious aspects of managing your trust,
such as tax returns and paperwork.
Finally, to manage the financial performance of your trust, you can appoint
a trusted financial advisor to perform this vital task.
THE
POWER OF A TRUST PROTECTOR
The protector is a planning concept that
has been around at least fifty years, but up until the last ten years, it
was reserved primarily for offshore trusts. Now, protectors are used more
and more as a safeguard in routine trust-based plans. The reasons why are
ample.
THE
TRUST PROTECTOR:
HOW IT CAN HELP YOU ACHIEVE YOUR GOALS
Consider how hard it is to predict the
future, especially when it comes to how young children may turn out when
they attain adulthood. There’s no guarantee that today’s cherubic toddler
won’t grow up to be a drug abuser, compulsive gambler or cultist. You must
also consider the frequency of divorce and remarriage in even “the best of
families.” The legacy you hope to leave a loved one today could easily be
lost to his or her exspouse should they divorce in the future.
You can solve these problems by empowering your protector to make tough
personal decisions about when — and when not — to make distributions from
your trust. If a child fails to demonstrate the emotional and financial
maturity to use your legacy wisely, for example, your protector can alter
your distribution scheme until the child has matured. Or something
unforeseen — such as a beneficiary’s unexpected disability — can be
addressed if the protector has the power to amend trust distributions to
reflect the beneficiary’s greater need for financial support.
Then, there’s always the risk that a trustee won’t perform his duties as
diligently as you might wish. Greed or personal motives can skew the
performance of a previously well-intentioned trustee, creating opportunities
for abuse. With mergers and acquisitions commonplace in the banking
industry, the institutional trustee you’re enamored with today could be
completely transformed by corporate transitions in the future. That’s why
many consumers empower the protector to remove or replace trustees. Say that
you’ve designated a trust company to serve as your trustee. If your
protector feels that the trustee isn’t doing the job properly, the protector
can order the trustee replaced. The protector can also install a financial
advisor to serve as a trustee for financial matters.
With the advisor’s appointment, your trust will have the benefit of greater
financial acumen governing investment choices.
Finally, there’s the issue of flexibility. As tax laws change, the original
design of your trust-based plan may need adjustments in order to preserve
your planning objectives. Without the proper mechanisms in place, your trust
may be stuck in the past without an opportunity to keep up with the times.
That’s why you may want to empower your protector to authorize substantive
design changes in your trust to reflect changing laws. If, for example, the
estate tax is ultimately repealed permanently, your protector can have your
trust documents redesigned to mirror this new tax environment.
PROTECTING THE PROTECTOR
Assigning a trusted friend or family member
the role of protector also confers benefits upon the individual you’ve
tapped to serve in this daunting capacity. As a trustee, this individual
assumes legal liability along with great personal responsibility. For
example, the trustee takes on a fiduciary accountability to your
beneficiaries for all his actions, exposing him to potential lawsuits if the
beneficiaries are unhappy with his performance. And making a mistake that
generates liability is easier than you might expect. If the trustee makes a
bad investment decision or fails to file the required paperwork on time, a
disgruntled beneficiary may have an opening to sue your trustee for
malfeasance. By elevating your trustee into the role of protector and hiring
a professional or institution to perform fiduciary tasks, you’ve provided a
level of protection for your protector. Although there’s no guarantee that
some disgruntled beneficiary won’t take legal action anyway, protector
status limits the exposure to risk.
YOU ARE
STILL IN CONTROL
The powers of the trust protector are still
yours to decide. You can give the protector powers that are broad or
limited, as you see fit. You can even appoint several people to serve as a
committee of “protectors.” It’s up to you. So, who are you going to trust
with this important responsibility? In general, your protector probably
should not be one of your beneficiaries. A trusted friend, advisor or
disinterested family member who can make wise decisions on your
beneficiaries’ behalf is an excellent choice. And just as you would appoint
a successor trustee to fill in should your trustee become unavailable,
you’ll also want to name a successor protector. In this way, you’ll
significantly up the odds that your wishes for your loved will be fulfilled.
Quick as a wink, you can unwittingly unravel all the protections that your
business entity was designed to provide. In legal parlance, we call it
“piercing the corporate veil.” Here’s what your choice of business entity
confers upon you and why business owners should work hard to preserve its
status.
WHY
YOU SHOULD PROTECT YOUR BUSINESS ENTITY
When you created your business, you did
more than step out into the entrepreneurial world. With proper planning, you
made a choice of business entity that protected your personal wealth from
your business liabilities and your business assets from your personal
creditors. For example, you don’t want to lose your business assets to a
personal creditor if you can’t pay debts that have nothing to do with your
business activities.
Similarly, you don’t want a creditor to seize your personal assets to pay
for a liability created by your business. You also want to ensure that you
preserve your business’s favorable tax status.
PIERCING THE CORPORATE VEIL
Without exercising care, however, you can
easily provide your personal and business creditors with an open door to
assets that would otherwise remain off limits. Avoid such dangerous
transactions as:
• Using your personal credit card, cash
or checking account to pay for business expenses . . . or using your
business checks, credit card or cash to pay for personal items.
• Failing to properly title your property. For example, business equipment
should be owned by your business, while personal property should be kept
off your business premises.
• Failing to keep a proper paper trail. If you use part of your personal
residence to run your home-based business, then create a formal lease
agreement between your business entity and you, showing that the space is
actually dedicated to the operation of your business.
• Paying personal taxes with business funds — and vice versa. Make sure
you get qualified professional advice as to which tax deductions, credits
and liabilities you should claim personally and which should be claimed by
your business.
Remember that if there’s no distinction
between your business and your personal property, a potential creditor may
successfully claim that there is no real business entity. And then, all your
possessions — both business and personal — will be considered fair game for
any and all creditors — no matter whether the liability arises out of your
business or personal activities.
MINDING YOUR
BUSINESS
HOW
PIERCING THE CORPORATE VEIL CAN JEOPARDIZE YOUR BUSINESS
THE SMALL BUSINESS AND THE US ECONOMY
In the United States today, small
businesses:
• Represent more than 99.7 percent of all
employers.
• Employ more than half of all private sector employees.
• Pay 44.5 percent of total U.S. private payroll.
• Generate 60 to 80 percent of net new jobs annually.
• Create more than 50 percent of nonfarm private gross domestic product
(GDP).
• Are employers of 39 percent of high tech workers (such as scientists,
engineers, and computer workers).
• Are 53 percent of home-based businesses and 3 percent of all franchises.
• Numbered approximately 22.9 million in 2002. Sources: U.S. Bureau of the
Census; Advocacy-funded research by Joel Popkin and Company (Research
Summary #211); Federal Procurement Data System; Advocacy-funded research
by CHI Research, Inc. (Research Summary #225); Bureau of Labor Statistics,
Current Population Survey; U.S. Department of Commerce, International
Trade Administration.
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