Serving as Trustee of the A and B Trusts: Ongoing Issues

You've got a big set of duties if you're in charge of the A and B trusts, including responsibilities to the eventual inheritors.

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If you and your spouse made a bypass trust to reduce or eliminate your estate tax bill, and now you’re the sole surviving trustee, you may feel a little daunted by your responsibilities. And it’s true that as the trustee of a tax-avoidance trust, your job will much more complicated, and last much longer, than if you were the trustee of a simple probate-avoidance living trusts.

But with good professional help, you’ll be able to manage the trusts. Here are some of the big, ongoing issues you may need to deal with.

Learn about how bypass trusts save on estate taxes.

Conflicts of Interest

You’re managing two trusts now: the bypass trust and your own survivor’s trust. They are very different animals. You control the survivor’s trust, and you can use the trust assets in any way you please. You can revoke the trust altogether if you wish.

The bypass trust, in contrast, is irrevocable; you can’t change any of its terms. Those assets don’t belong to you anymore. If the terms of your trust are typical, you have the right to receive any income the bypass assets produce, and you probably have the right to use the assets—for example, to live in a house owned by the bypass trust. But assets in the bypass trust will eventually go to the beneficiaries you and your spouse named to inherit them. That means you have a legal responsibility to manage the assets for the beneficiaries.

This can create a potential conflict of interest between you and the final beneficiaries. What if you want to spend trust assets, while the beneficiaries want you to preserve the assets so they can inherit them? Or if you want to invest trust money in a way that produces more income now, but they want to invest it in assets that will grow in value?

Most families work out these issues without serious strife. After all, creating the trust is a generous act that ultimately benefits the final beneficiaries by lowering or eliminating estate taxes, so they can inherit more. Most (not all, of course) beneficiaries appreciate this fact.

You can go a long way to head off disputes by being open with the beneficiaries, discussing any investment choices they might find problematic and keeping good records. If you draw up an investment plan for trust assets with a professional, that should also show them that you’re taking good care of their eventual inheritance.

Learn more about investing trust assets.

Using or Spending Assets in the Bypass Trust

Most AB trusts give the surviving spouse broad rights over bypass trust assets. As always, you’ll need to read the trust document to find out exactly what powers you have. A lawyer can clarify things if the trust language isn’t clear (not an uncommon situation).

You will almost certainly have the power to receive and spend any income from trust property. That includes interest, dividends, rent, and other revenue. You can also use trust property—for example, a vacation home that’s held in the trust.

You may also have the right to spend (“invade,” in legal terms) the principal of the trust—that is, the trust assets themselves. A typical trust document gives you, the surviving spouse, the right to spend bypass trust assets if necessary for your “health, education, support, or maintenance,” in accordance with your “accustomed manner of living.” This is the broadest standard the IRS allows for an AB trust. If you had any greater power over trust assets, the IRS would consider you their owner—which would eliminate the tax advantage of holding the assets in trust.

If your trust document contains a clause giving you this power, you have the right to spend trust assets on anything that could be said to maintain your usual standard of living. According to the IRS, “support” doesn’t mean just bare necessities. Just about anything that is consistent with your previous standard of living should be okay.

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