Trust and Trustee FAQs
A revocable living trust can provide ongoing financial services if you should become mentally or physically disabled. A trust also ensures that your assets will not be controlled by a spouse or child who may not be able to handle that burden. Accounting and recordkeeping services are provided for your trust investments, as well as collection of income and safekeeping services for all trust assets. As trustee, Covenant Trust also provides professional investment management. At death, distribution to your heirs is private, since trust assets pass outside the probate process. A revocable living trust:
- Gives you peace of mind, knowing your affairs are in order and your loved ones are provided for
- Puts you in control–carries out the objectives you have established
- Relieves you of financial management and record-keeping details. When Covenant Trust is the trustee, you get regular reports showing all the details about your trust, and you can review assets online
- Provides continuity in case of illness or incapacity, since there is no interruption in the management or availability of your assets
- Distributes your assets exactly as you wish
- Saves possible costs and delays from probate and may include provisions to reduce estate and/or inheritance
NO. We recommend a Pour-over Will, which covers any assets not included in the revocable living trust at the time of death and ‘pours them over’ into the trust for distribution. This simplifies and speeds up distribution of the estate, and can save legal fees and court costs. The Pour-over Will also handles the distribution of personal property.
We also recommend a Financial Durable Power of Attorney, a Durable Power of Attorney for Health Care. The Financial Durable Power of Attorney gives power of attorney to a person you choose to handle financial affairs if you cannot. It applies to assets outside the trust. The Durable Power of Attorney for Health Care (not available in all states) gives one or more persons of your choice the authority to make decisions regarding your medical care if you are unable to do so yourself.
The financial power of attorney gives authority to a person of your choice to handle legal and financial affairs in case you are incapacitated. This includes access to bank accounts, purchase or sale of assets and investments, employment of caregivers or service providers, payment of taxes, etc. Significant delay and hardship may result if you become incapacitated and have not granted this authority through a power of attorney.
In case of accident or illness, important decisions regarding medical treatment, care and personal needs must be made. The trust can provide payment for care and services; it has no authority to determine what care or services are provided. By using the powers of attorney, you choose a person you trust to make those choices if you cannot. (Laws regarding powers of attorney vary from state to state.) We strongly recommend the pour-over will and both powers of attorney be used in conjunction with the revocable living trust.
The grantor is the person who sets up the trust. There may be more than one grantor, such as a husband and wife. The grantor gives instructions in the trust document on how to manage and distribute the assets of the trust both during life and after death.
The trustee is the person or institution who carries out the provisions of the trust.
Choosing a trustee is one of the most important decisions you will make. There are significant responsibilities in being a trustee and providing quality service requires expertise and knowledge that individuals may not always possess. Naming a corporate trustee for a trust is almost always a better long-term choice. The consequences of inadequate or incompetent trustee services can be significant, both to you and to the trustee. Covenant Trust® provides professional trustee services and asset management and is an excellent choice to serve as trustee of your revocable or irrevocable trust, or IRA account.
Following are few things to consider when selecting your trustee
- Do they have longevity? Will they be around after your passing to handle the detailed responsibilities?
- Do they have legal expertise?
- Do they have any asset management skills?
- Are they skilled with record keeping? Do they have the tools to report income separately as required?
- Will they act with impartiality?
- Do they have 1041 trust tax knowledge?
- Will they have complete integrity to act according to your written instructions?
- Will they have loyalty to your trust document or choose to do things their own way?
- Will the cost escalate if they need to hire attorneys, accountants and other outside advisors?
The trustee has specific duties:
- Take possession of and maintain control of fiduciary [trust] assets
- Collect amounts due and pay expenses
- Keep fiduciary assets separate from all other assets
- Maintain clear and accurate accounts and records; provide regular accounting of actions as trustee
- Exercise the same care and skill in administering the trust as a person of ordinary prudence would exercise in dealing with his/her own personal property
- Administer the trust solely in the interest of the beneficiary(ies), thus preventing the trustee from doing anything where his/her/its own interests conflict with those of the trust
- Valuation of assets for tax purposes, insurance, sale, disposition, performance measurement, and capital gain reporting
- Payment of estate, inheritance and income taxes
- Make all payments in a timely manner to avoid penalties and punitive interest charges
- Review of estate tax return
- Supervision of audit to substantiate values and deductions claimed
- Preparation and filing of all fiduciary income tax returns
- Investment of trust/estate portfolio
- Investment expertise is an important advantage
- Assets managed according to terms of the document
- Consider potential tax impact of investments
- Review investment decisions as economic outlook and beneficiary(ies)’ circumstances change
- Custody of assets
- Administer the trust in adherence to the provisions of the trust document
The most common sources of fiduciary liability usually stem from:
- Imprudent management of account investments [e.g. poor investment decisions]
- Failure to manage cash appropriately
- Engaging in self-dealing or other conflicts of interest
- Failure to properly manage real property [e.g. failing to have proper insurance, to pay taxes, etc.]
- Mismanagement of trust accounts or funds [e.g. making improper or unauthorized distributions]
- Improper delegation of duties [e.g. no oversight of investment manager, or property manager]
- Taking actions without the approval of beneficiaries, co-fiduciaries, or a court with jurisdiction
Corporate trustees are subject to various laws, regulations, standards, and guidelines, which include:
- The provisions of the trust document
- Accepted fiduciary standards, a body of general principles adopted by state courts over the years
- State and federal statutory law and regulation
- Rules, regulations, and policies of the trustee’s own institution, state or federal regulatory agency
- Internal control, risk management, and checks and balances
- External audits and regulatory examinations
The basic choice is whether to choose a corporate or an individual trustee. At Covenant Trust, we believe that in almost all cases, the corporate trustee is a better long-term choice. Occasionally, some individuals choose to serve as trustee initially, naming Covenant Trust as successor trustee. There are significant responsibilities in being a trustee. Providing quality trustee services requires expertise and knowledge that individuals may not always possess. The consequences of inadequate or incompetent trustee services can be significant, both to you and to the trustee. Covenant Trust has been providing excellent trustee services for over thirty years.
Income beneficiary(ies): You may name another person in addition to yourself as income beneficiary (e.g. your spouse, a relative or friend.) The second person continues to receive payments from the trust after your death.
Payment options: You decide how often, and how much. You can receive a fixed payment amount or all the earnings. Your trust can also pay your monthly bill at a retirement facility, or your quarterly estimated tax payments. You may change the amount or frequency of regular payments or receive special payments from your trust at any time by written request.
Remainder beneficiaries: Remainder beneficiaries are persons and/or institutions named to receive a portion of the trust residue at the time of distribution. This may include family members and other individuals as well as charities.
You may include children, other relatives and/or friends, and charities. After the death of the last income beneficiary, the remaining trust assets are distributed to the remainder beneficiaries you have designated. Distribution is not immediate, as the trustee must wait until the claim period against the estate expires, final tax returns are filed and accepted, and all costs and fees paid. Partial distributions may be made sooner at the trustee’s discretion. There may be one or more income beneficiaries who receive payments from the trust. In most cases, final distribution of the trust is not made until after the death of the last surviving income beneficiary.
Part of the ‘peace of mind’ factor of a revocable living trust is knowing that you and your loved ones don’t have to worry about the details in case of unexpected events. Another ‘peace of mind’ element is the control that a trust gives you. When you have a revocable living trust:
- You decide who will manage the trust assets
- You state your personal objectives and tolerance for investment risk so the investment strategy for your account is one you’re comfortable with
- You determine who the trust will provide for, to what extent, and for how long
- You designate who will eventually receive the trust assets
The actual trust agreement is always the governing document. This means that the trustee is legally bound to comply with all provisions contained in the trust document. Any discretion given to the trustee is also specifically outlined in the terms of the trust.
When you work with Covenant Trust, all documents are prepared by qualified attorneys. Where we are named as trustee, documents are usually prepared by our legal counsel, subject to review by your own personal attorney. If you want us to work with your personal attorney for document preparation, we are happy to do that. If you do not have an attorney, we can provide names of attorneys in your area. Before accepting trusteeship, Covenant Trust reserves the right to review all documents where it is named as trustee or successor trustee.
Financial advice firms either adhere to a standard of suitability, which means they must only recommend investments that are suitable for an investor’s situation, or they can be fiduciaries, a higher standard where they have to act in the best interest of a client. Covenant Trust has adhered to the fiduciary standard since the beginning.
A fiduciary is any person or organization in a position of trust, loyalty and confidence, who has the legal duty to act for the benefit of another person, putting that person’s interest above his or her own.
The suitability standard requires broker-dealers or their representatives to use financial products that are suitable for the client’s objectives, means and age, but does not require broker-dealers or their representatives to give advice that is the best interest of their clients nor to disclose conflicts of interest, including how they are compensated.