Grantor as Alter Ego of Trustee

Should the grantor of an irrevocable trust be treated as the alter ego of the trustee? The IRS and creditors would prefer the answer to be yes, but the Tennessee Trust Code generally says otherwise:

Absent clear and convincing evidence, no settlor of an irrevocable trust may be deemed to be the alter ego of a trustee of such trust.

What are some of the factors that would provide clear and convincing evidence that the grantor has too much control over the administration of the trust? NOT the following, whether taken alone or in combination:

  • The grantor is serving as a trustee, a trust advisor, a trust protector or other fiduciary;
  • The grantor has an unrestricted power to remove or replace;
  • The grantor holds a position of authority in an entity, and part or all of the trust property consists of an interest in such entity;
  • A relative is appointed as a trustee, a trust advisor, a trust protector or other fiduciary;
  • The grantor’s agent, accountant, attorney, financial advisor, or friend is appointed as a trustee, a trust advisor, a trust protector or other fiduciary;
  • A business associate is appointed as a trustee, a trust advisor, a trust protector or other fiduciary;
  • The grantor possesses the power to substitute property of equivalent value for property held by the trust;
  • A trustee, a trust advisor, a trust protector or other fiduciary has the power to loan trust property to the grantor for less than a full and adequate rate of interest or without adequate security;
  • Isolated occurrences where the grantor has signed checks, made disbursements, or executed other documents related to such trust as a trustee, a trust advisor or a trust protector, when in fact the grantor was not such a trustee, trust advisor or trust protector;
  • Making any requests for distributions on behalf of beneficiaries; or
  • Making any requests to the trustee to hold, purchase, or sell any trust property.

If these are not sufficient under the Tennessee Trust Code, query what it would take to make the grantor of an irrevocable trust the alter ego of the trustee.

Left unanswered is whether the grantor of a revocable trust should be considered as the alter ego of the trustee. In many cases, this will be a moot question, because the grantor actually is the trustee. Regardless, the implication of the language quoted above is that, even without clear and convincing evidence, the grantor will be deemed to be the alter ego of the trust, and the factors cited above will be relevant for the determination.

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