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Plan for possible incapacity

 

DEAR TRUST OFFICER:

Recently, a friend of mine was suddenly taken ill. Her recovery is slow, so we are trying to do all that we can to help out. A court appointed a guardian to handle her finances because, we gather, she hadn’t made any formal arrangements. From our conversations, we knew that the person chosen wasn’t particularly well liked—or trusted—by our friend.

That has caused me to worry, would happen if I became incapacitated? I’m particularly worried about who would manage my investments. How do I avoid guardianship?  —DOING THE LEGWORK

 

DEAR DOING:

A durable power of attorney is a good tool when you have someone whom you trust to act on your behalf and who has the right credentials. When you don’t, you need a different solution: a revocable living trust.

By naming a corporate fiduciary, such as our institution, to serve as the trustee of your trust, your assets will be managed by experienced and knowledgeable professionals who are held to the highest standards when making decisions on your behalf.

You can set out exactly what you want us to do in the trust agreement. You’re not “locked in” either. You can make changes or even cancel the trust at any time. Plus, there are other benefits of a living trust that are worth discussing.

 

Article ©2022 M.A. Co. All rights reserved. Used with permission. 

Social Security COLA for 2023

The Social Security Administration has announced an 8.7% benefit increase for 2023, based upon inflation for the twelve months ending September 30, 2022. It’s the biggest cost of living adjustment (COLA) since 1981. For the average worker, the increase comes to about $140 per month.

With the increase in average wages comes an increase in the wage base for those who are still working. It goes from $147,000 in 2022 to $160,200 in 2023.

Roughly 70 million Social Security beneficiaries will receive the increased benefit. The Social Security Administration did not project the total value of the COLA expense for 2023. A rough calculation would be $117.6 billion (70 million recipients x $140/month x 12 months). The increased expense will be offset by the additional 15.3% in Social Security taxes (employee plus employer share) on the $13,200 increase in the wage base (that comes to $2019.60 in tax revenue per affected taxpayer). Perhaps the Social Security tax revenue will also increase as workers obtain raises to keep up with inflation, and as labor force participation grows in the coming years.

In most years, the increase in Social Security benefits is offset by an increase in Medicare Part B premiums. That will not happen in 2023, according to a post from CMS.gov (Centers for Medicare and Medicaid Services). Inflation notwithstanding, the premiums and deductible for Medicare Part B are going down, not up, in 2023. Standard monthly premiums drop by $5.20, from $170.10 to $164.90, and the annual deductible falls from $233 to $226.

 

Article ©2022 M.A. Co. All rights reserved. Used with permission. 

Disadvantage of an individual trustee

Robert and Corinne Silver, residents of Illinois, created trusts to manage their wealth. They had two children, Elizabeth and Geoffrey, who were the remainder beneficiaries. After Robert died, Corinne became the trustee of both trusts. In 2012 she amended the trusts to name a grandnephew, Peter Horneck, as successor trustee (as well as the executor of her estate). Corinne also added a trust provision providing that, in the event trust distributions were delayed, the trustee was to pay certain of Elizabeth’s expenses, and that these payments were not to count against her one-half share.

Corrine moved to Florida in 2014, and resigned as trustee in 2015. Mr. Horneck, a Colorado resident, took over the trust administration, in consultation with the family lawyers who were still in Illinois. Corrine died in 2017.

In July 2017 Elizabeth asked for the reimbursement of some $14,000 in expenses. Horneck sent her a check for $50,000, but, when she learned that $50,000 had also been sent to her brother, Elizabeth did not cash the check. She thought her pre-distribution payments should be coming “off the top” of the trust. After two years of correspondence and fruitless negotiations, Elizabeth filed suit in Illinois for an accounting and an enforcement of the trust provisions.

The problem was that Elizabeth herself was a resident of Florida, the trustee lived in Colorado, and brother Geoffrey lived in Oregon. The trust document recited that it was to be governed by Illinois law, but went on to say that “The situs of any trust created hereunder may, however, be transferred at any time.” The trust situs became Florida when Corinne moved there, and Colorado when she resigned the trusteeship. The Illinois court held that it did not have jurisdiction over the case, under these circumstances.

If Robert and Corinne had named a trust department or a trust company as successor trustee, it is probable that delays and lawsuits over the trust could have been avoided.

 

Article ©2022 M.A. Co. All rights reserved. Used with permission. 

A short course in fiduciary duties

The “fiduciary standard” is the highest standard of care recognized by the law. A salesman is under no obligation to determine that his product is appropriate for a buyer, or that the buyer can afford it, or that the purchase is in the best interests of the buyer. A fiduciary does have those obligations and more.

The fiduciary duties of every trustee

The fiduciary standard always has applied to trustees and their dealings with beneficiaries. The simplest way to explain it is that the interests of the beneficiaries must come first, ahead of the financial interests of the trustee. But that generalization can be expanded to cover more specific obligations or duties owed to beneficiaries.

  • Duty to administer a trust by its terms. Every trust agreement should make plain the purposes of the trust, as they provide the critical benchmarks for evaluating the trustee’s actions.
  • Duty of skill and care. A high standard of performance is required, even if an amateur is named who has no prior experience as a trustee.
  • Duty to give notices. Notices may concern legal rights of the trust beneficiaries, such as a power to make withdrawals, or they may cover such ministerial matters as designating a successor trustee or an agent to assist in trust administration.
  • Duty to furnish information and to communicate. The trustee must respond to requests from beneficiaries concerning the trust and its administration.
  • Duty to account. A written accounting of the assets, liabilities, receipts and disbursements of the trust must be provided to the beneficiaries regularly.
  • Duty not to delegate. Although a trustee may employ professionals to assist in trust administration, the trustee may not accept blindly the advice of such persons. The trustee retains supervisory responsibility. Matters concerning the exercise of judgment and discretion generally cannot be delegated.
  • Duty of loyalty. Trusts must be administered solely for the benefit of the trust beneficiaries.
  • Duty to avoid conflict of interest. This is closely related to the duty of loyalty, and it may come up when a beneficiary is named as cotrustee. Generally, the trustee should not engage in transactions with the trust unless such activities are authorized by the trust.
  • Duty to segregate trust property. Trust assets must not be commingled with personal funds or other nontrust assets.
  • Duty of impartiality. The trustee must not favor one beneficiary over another, unless the trust document directs that providing for a particular beneficiary is a principal purpose of the trust.
  • Duty to invest. Trust assets must not be left idle. In addition to making the trust investments, the trustee has a duty to diversify the investments and develop an asset allocation plan. This is a job for professional investors or corporate fiduciaries.
  • Duty to enforce and defend claims. Reasonable steps must be taken to protect the trust from adverse claims and enforce the rights of the trust and its beneficiaries.
  • Duty of confidentiality. Normally, the terms of a trust, the identity of its beneficiaries and their respective interests, and the nature of the trust assets cannot be disclosed to anyone except the beneficiaries and those who need such information in order to be able to administer the trust.

Add in corporate characteristics

Given this list of responsibilities, one quickly can see the value of corporate fiduciaries, organizations such as us, dedicated to trust administration as a business. To be in the business of administering trusts and estates, trust companies and bank trust departments are granted “trust powers” by financial regulators. With these powers come regulatory supervision as well as the legal duties of every trustee.

Individuals may serve as trustees. Some talented individuals do so serve. But as a rule, a corporate trustee will be a better choice because a team of professionals will have the responsibility for trust management. The team approach provides:

  • better infrastructure support for accounting and recordkeeping;
  • broader investment sophistication;
  • permanence and availability—the whole team doesn’t go on vacation at once;
  • judgment and experience.

Another very important advantage of a corporate trustee for many families is the ability to be impartial, and to be recognized by all family members as a neutral decision maker. A trust typically has current income beneficiaries and future or remainder beneficiaries. The interests of both types of beneficiaries must be balanced carefully. Conflicts need to be resolved by a trustee respected by all parties.

 

Article ©2022 M.A. Co. All rights reserved. Used with permission. 

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