Children Born after the Will is Executed

A good Last Will and Testament will address the issue of children born after the document is executed. Nonetheless, the Tennessee Code has the situation covered: A child born after the making of a will, either before or after the death of the testator, inclusive of a mother-testator, not provided for nor disinherited, but only pretermitted, in the will, and not provided for by settlement made by the testator in the testator’s lifetime, shall succeed to the same portion of the testator’s estate as if the testator had died intestate. The statute goes on to say that a pretermitted child’s share is to be funded pro rata out of the shares of the other beneficiaries.  Note that the quoted statute only […]

Read More »

Tags: , , , , , ,

Forms of Asset Protection

Ownership by the Other Spouse–It is not uncommon for a spouse with high liability exposure to transfer assets to his or her spouse with a lower risk profile. Tenancy by the Entirety (TBE)–TBE refers to assets titled in the name of husband and wife. A creditor of one spouse may not reach TBE property unless and until the non-debtor spouse dies or the TBE is severed by the divorce of the parties. Retirement Assets–State law protects IRAs from the creditors. Federal law protects qualified plans such as 401(k)s. This protection applies to the account owners. Whether it extends to beneficiaries who inherit the accounts is an open question. According to the Supreme Court, the answer is no, at least in […]

Read More »

Tags: , , , , , , ,

The Right for Trusts to Remain Silent

Under the Tennessee Trust Code, is a trustee required to give beneficiaries information about their trust? Not necessarily.

Read More »

Tags: , , , ,

Funding a Trust with Annuities? Beware.

There are income tax consequences to transferring annuities for less than full and adequate consideration. If you are considering making a gift of annuities in trust, keep the following in mind: If an individual who holds an annuity contract transfers it without full and adequate consideration, such individual shall be treated as receiving an amount equal to the excess of the cash surrender value of such contract at the time of transfer, over the investment in such contract at such time, under the contract as an amount not received as an annuity. In other words, gifting an annuity triggers gain to the annuity owner to the extent the cash surrender value exceeds basis, as a general rule. In may be […]

Read More »

Tags: , , , , , ,

Trust Funding & the Probate Omnibus Bill

An unassuming provision in the probate omnibus bill may prove to be a trap for some unwary practitioners. SB 0769, the 2017 Probate Omnibus Bill, has been transmitted to the Governor for his signature. One of the more perplexing provisions of the incipient law is Section 13, which adds the following to the end of T.C.A. § 35-15-402, Requirements for Creation [of a Trust]:  (d)   A lifetime trust is valid as to any assets held by the trust to the extent the assets have been transferred to the trust. For purposes of this subsection (d): (1)   Assets capable of registration, such as real estate, stocks, bonds, bank and brokerage accounts, and the like, are transferred to the trust through the […]

Read More »

Tags: , , , , , ,

Excess Distributions Prove Fatal (and Costly) for CRUT

A taxpayer, admittedly operating under bad advice from a financial planner and an attorney, nonetheless paid a steep price for failing to administer a charitable remainder unitrust (CRUT) properly. Grantor established a trust. He intended for the trust to qualify as a CRUT. He named himself as a co-trustee and initial beneficiary. The remainder beneficiary upon termination of the trust was, of course, a charity. The term of the CRUT was 20 years. During the term of years, the CRUT was required to pay Grantor, if living, otherwise a successor beneficiary “B”, a fixed percentage (presumably 5%) of the trust assets or the net income of the trust, whichever was lesser. If the net income in later years exceeded the fixed […]

Read More »

Tags: , , ,

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; […]

Read More »

Tags: , , , , ,

Savings Statute for Interested Trustees

Some easy to overlook statutes in the Tennessee Trust Code can save a poorly drafted trust with an interested trustee from inadvertent taxation and creditor exposure. An interested trustee is a trustee who is also a beneficiary of the trust. If the trust instrument gives an interested trustee the power to make distributions to himself, that power should be limited to an “ascertainable standard,” typically health, support, maintenance, and education. Otherwise, the trustee will possess a general power of appointment. Likewise, an interested trustee will be deemed to have a general power of appointment if he can make distributions for the purpose of discharging a legal obligation. This is a problem because assets subject to a general power of appointment are […]

Read More »

Tags: , , , , ,

Trustee’s Duty of Loyalty

A trustee owes a duty of loyalty to the beneficiaries of the trusts it administers. The Tennessee Trust Code succinctly describes this duty as follows: A trustee shall administer the trust solely in the interests of the beneficiaries. Generally, a trustee violates this duty if, with respect to trust property, it engages in a transaction in which the potential exists for a conflict between the trustee’s fiduciary and personal interests.  A blatant example is when the trustee enters into a transaction for its own account. Such transactions are irrebuttably presumed to be affected by a conflict between personal and fiduciary interests, regardless of whether the trustee acted in good faith or acted fairly. No further proof is necessary. In such cases, the transaction is […]

Read More »

Tags: , ,

Pledging a Beneficiary’s Interest in a Spendthrift Trust

The previous post refers to a scenario in which a trustee pledges trust assets to secure a beneficiary’s personal loan. But what if, instead of pledging trust assets, the beneficiary wants to pledge his interest in the trust as security for the loan. Is this possible? Most trusts contain a spendthrift provision. The Tennessee Trust Code defines a spendthrift provision as a “term of a trust which restrains both voluntary and involuntary transfer of a beneficiary’s interest.” Although the spendthrift clause found in most trusts is more verbose, it is legally sufficient to state the interest of the beneficiary is held subject to a spendthrift trust. A beneficiary’s pledge of his interest in the trust is a voluntary transfer. If […]

Read More »

Tags: , , ,

Pledging Trust Assets to Secure Beneficiary Loans

The beneficiary of an irrevocable trust wants to take out a personal loan. The lender requires collateral, and the beneficiary has nothing outside the trust that he can pledge. However, the lender is willing to accept trust property as collateral for the debt. The trust says nothing about using trust assets to secure the loans of a beneficiary. Can the trustee do so? Thanks to an easily-overlooked statute in the Tennessee Trust Code, the answer is yes: Unless the terms of the instrument expressly provide otherwise and without limiting the authority conferred by  T.C.A.§ 35-15-815, a trustee may: … Pledge trust property to guarantee loans made by others to the beneficiary. But what if the trust has a spendthrift clause? A […]

Read More »

Tags: , ,