A trust beneficiary is a person or other legal entity (like a charity) that is named in the trust documents as being entitled to benefits from the trust.
Removal of a Fiduciary However, many situations are not as straightforward as the grounds listed in SCPA § 719. While you may be working with a fiduciary that does not act in the manner that you wish, oftentimes, the conduct does not rise to the standard that would warrant their removal. Courts have held that the removal of a fiduciary pursuant to SCPA §719 is equivalent to a judicial nullification of the testator's choice and can only be done when the grounds set forth in the statutes have been clearly established. The Court may remove a fiduciary without a hearing only where the misconduct is established by undisputed facts or concessions, where the fiduciary's in-court conduct causes such facts to be within the court's knowledge or where facts warranting amendment of letters are presented to the court during a related evidentiary proceeding. Requirements for Removal Pursuant to SCPA § 711 a person interested may petition the court to remove the fiduciary. Some of the grounds listed in the statute include: that the fiduciary wasted or improvidently managed property; that the fiduciary willfully refused or without good cause neglected to obey any lawful direction of the court; or the fiduciary does not possess the necessary qualifications by reason of substance abuse, dishonesty, improvidence, want of understanding, or who is otherwise unfit for the execution of the office. Again, while there are many cases where fiduciaries have behaved badly, courts are generally hesitant to remove fiduciaries unless the assets of the estate/trust are put at risk. Not Breaches are Created Equal Even though you may be unhappy with the conduct of a fiduciary, not every breach of duty will result in the removal of the fiduciary. Many breaches can be addressed in an accounting proceeding either through surcharge or denial of commissions. While a fiduciary can be removed if conduct that violates SCPA § 711 or § 719 can be proven, it is often a lengthy and expensive process that involves the exercise of discretion by a court that is hesitant to remove a fiduciary chosen by the testator. Removal Proceeding A proceeding to remove a fiduciary should only be undertaken if it can be proven that the assets of the estate/trust are in danger under the fiduciary’s control. Mere speculation or distrust will not be enough to remove a fiduciary. If you believe that the fiduciary of an estate or trust is not managing the estate or trust properly, you should consult with an attorney experienced in estate administration matters that can review the facts and determine the best course of action.
Executor Nomination The person selected to act as the Executor can be anyone that the testator wants to conduct the administration of the estate. There is no requirement that the Executor have any experience or expertise. The Courts give the selection of an Executor by the testator great deference and it is honored unless there exists a ground for disqualification of the person nominated. Circumstances for Not Appointing an Executor There are certain circumstances in which the Court will not appoint the Executor nominated by the testator. Surrogate’s Court Procedure Act § 707 states that a nominated executor is ineligible to serve it if they are: (a) an infant; (b) an incompetent or incapacitated person as determined by the Court; (c) a non-citizen or non-permanent resident of the United States; (d) a felon; and (e) one who does not possess the qualifications required of a fiduciary by reason of substance abuse, dishonesty, improvidence, want of understanding, or who is otherwise unfit for the execution of the office. The grounds for disqualification contained in (e) contemplate a nominated Executor that is likely to jeopardize estate assets, and put the interests of beneficiaries at risk. The party alleging that the Executor chosen by a testator is ineligible to serve based upon one of the grounds listed above has the burden to prove such ineligibility. Grounds (a)-(d) are generally not the ones that cause significant controversy and are relatively easy to prove. Ground (E) Ground (e) is the one you likely believe your sister falls under due to her bankruptcy. This is understandable since she has likely had difficulty managing her own finances in the past. However, pursuing disqualification on this ground can be a costly and time-consuming process involving litigation. This will ultimately delay the administration and settlement of the estate for many months or even years. There are certain circumstances where it is worth to partake in litigation to disqualify the nominated fiduciary. However, general mistrust is not enough to disqualify the nominated executor and would likely be a waste of time and money to pursue. Conclusion Many situations do not rise to the level of commencing a proceeding to disqualify the nominated Executor at the outset of the administration. A better way to proceed would be to retain an attorney experienced in estate administration matters to represent your interests in the estate. This attorney would communicate with the Executor or their attorney and get periodic updates on the progress of the administration. If that attorney felt something inappropriate was being done by the Executor, they would be able to advise you and to take the appropriate and tailored steps to protect your interests.
Show Loyalty To All Trust Beneficiaries Even if the successor trustee is a beneficiary, the trustee has a duty of loyalty to all the other beneficiaries, including the remaindermen. Remaindermen are beneficiaries who have a future interest in the trust Deal Impartially With Beneficiaries The successor trustee cannot favor the income beneficiaries over the interests of the remainder beneficiaries unless the trust specifically directs otherwise. Typically, the trustee must walk a fine line that balances the interests of the income beneficiaries against the interests of the remaindermen. Make Trust Property Productive Of Income Trust assets are expected to achieve conservative growth. Therefore, this duty may be violated if the successor trustee keeps large amounts in a checking account that does not grow in value or if the trustee keeps land that does not produce income, such as commercial land that does not produce rental income in excess of maintenance costs. Follow the Prudent Investor Rule, F.S. §518.11 Generally the trust portfolio should be broadly diversified and invested in conservative investments designed to stay ahead of inflation but not in aggressive growth. Often, it is best to retain the services of a Certified Financial Planner (CFP) experienced in helping manage conservative portfolios. Account To Beneficiaries And Keep Beneficiaries Informed Upon commencement the successor trustee must inform all income and remainder beneficiaries of acceptance of the trustee duties. If a beneficiary requests it, the successor trustee is required to provide a complete copy of the trust document, including any amendments as well as relevant information about the assets of the trust and the particulars relating to administration. Keep Trust Assets Separate The successor trustee must keep the assets of each trust separate and keep her personal assets separate from the trust assets. This requires separate bank accounts, brokerage accounts, and safe deposit boxes for trust assets. If the successor trustee comingles other assets with the trust assets, this is a breach of fiduciary obligations and most likely has subjected these assets to taxation. Avoid Conflicts Of Interest And Self-Dealing The trustee cannot favor himself as a beneficiary at the expense of any other remainder beneficiary. He cannot make any distribution to anyone or any withdrawals from the trust unless specifically authorized by the trust to do so. The trustee is entitled to a reasonable compensation or as otherwise set forth in the trust for trust services. However, the successor trustee cannot otherwise profit or benefit from the trust unless also a beneficiary. Conflicts of interest and self-dealing is a broad area with many traps. Preserve Trust Assets and Uphold The Trust The trustee must monitor the performance of equities. When the trust owns commercial real estate, the trustee must monitor that the properties maintain a high occupancy level, the properties are insured, and rents are promptly collected and deposited in a trust account. This may require hiring a property manager. File Tax Returns And Pay Any Tax Due Each trust has a tax year, which like the personal tax year, ends annually on December 31. The trust must have a taxpayer identification number and file a tax return no later than April 15 of the year following the settlor’s death. The best advice here is to use a professional CPA who routinely prepares 1041’s. Such an expense is a typical cost paid by the trust. Minimize Income Taxes The trust has a high tax environment: income not distributed may be taxed at 39.6%. To minimize income taxes, the trustee may need to distribute income out to the income beneficiaries, if the trust terms so allow. Pay Trust Expenses The administration of the trust necessarily requires certain expenditures. Example of expenses include insurance, real estate taxes, CPA fees, and legal services. Good Record Keeping The trustee needs to keep accurate records of every dime that comes in and out of the trust. For small trusts, we recommend using QuickBooks or Quicken. If the successor trustee does not know these programs, it is highly advisable to hire a professional bookkeeper.
Q: How often are family challenges a problem in estate planning? A: According to a survey by TD Wealth. 44 percent of planning professionals say family conflict is the biggest threat to estate planning this year, followed by tax reform (25 percent) and market volatility (12 percent). Q: What are some steps to avoid conflict interfering with estate planning? A: Use an experienced estate planner to ensure you have the proper planning documents in place to outline your intentions and appoint a fiduciary. Q: What internal dialogues should families have to avoid any drama? A: Hold frank conversations so everyone knows what to expect in the event of your death. Fewer surprises mean less discord. If you are giving unequal gifts, tell your heirs why and document your rationale in an estate planning letter. Q: How is it possible for families to avoid costly tax surprises? A: For most taxpayers, the Tax Cuts and Jobs Act reduced the overall tax burden. However, even though taxpayers will see an overall reduction in their taxes, many of them could still end up with a nasty tax bill at year end. Q: Does the Tax Cuts and Jobs act assist in anyway? A: Following passage of the TCJA, the IRS released updated withholding tables to reflect the new law. As a result, many people saw their paychecks increase. But the withholding tables didn’t take into account the wide range of individual circumstances affecting exemptions. Q: By withholding annually will this help taxpayers? A: By having your employer withhold taxes from your paycheck, you spread out your tax liability and avoid underpayment penalties. You may have withheld the right amount in the past, but TCJA changes may have altered your situation. The IRS advises that families with complex tax situations may have their income taxes withheld incorrectly and may end up owing more. Q: What families should make a particular effort to review their withholdings? A: People living in high-tax states, Two-income households, Households with children and people who itemized deductions in 2017 and anyone with a large tax bill or large refund in 2017. The loss of certain exemptions may not be offset by the higher standard deduction. Some taxpayers could end up with a larger return than expected while others will be saddled with a challenging tax bill. Q: What should families with complex financial situations do to properly prepare? A: It’s generally a good idea to review your withholding annually or when you have a significant life change. Use the IRS online withholding calculator to review your withholding. Better yet, sit down with your tax adviser to get a clear understanding of your upcoming liability. As always, talking with an adviser can help you figure out if you should be expecting a large tax burden next spring — and give you extra time to prepare.
My Will has a “No Contest” clause. Is it fullproof? A “No Contest” or “In Terrorem” clause is often thought of as a way of preventing a challenge to a Will. If properly drafted and used under the right circumstances, a “No Contest” clause can be advantageous and can disincentivize a person from challenging a Will. If improperly drafted or used, a “No Contest” clause can cause more harm than good. Why is it Important to Think about Whether to insert a “No Contest” Clause? An “in terrorem” clause is not always necessary. If you are leaving your estate to friends or charities, then you may want to avoid the use of “no contest” clauses because friends and charities have limited abilities to contest your Will in the first place. Similarly, just because you have a “no contest” clause does not mean that nobody can take any steps to question or investigate the Will. In fact, if you have a no contest clause in the Will, the Objectant, pursuant to EPTL 3-3.5, is still able to, among other things: contest a Will if they have probable cause to believe the Will was forged or later revoked by a subsequent Will. Argue that the Court lacks jurisdiction; Seek disclosure of information relating to the propounded last will and testament or any other relevant document; Refuse to sign a Waiver and Consent; Examine the witnesses to the Will and the person who prepared the Will, and the nominated executor in the Will, and the proponent of the Will, pursuant to SCPA 1404; or Engage in a construction proceeding of the Will. ** Note that without an “in terrorem” clause in the Will, an Objectant can only examine the witnesses and the person who prepared the Will. Without the no contest clause the Objectant cannot examine the nominated executor or the petitioner. This can be strategically advantageous to you because you want to expose as few people to pre objection discovery depositions as possible. What does a No Contest clause in a Will mean? A no contest clause, essentially says: if you contest my will, you get nothing. However, people must be properly incentivized not to contest your Will. This involves an analysis of your estate and the amount you are leaving to the individuals you hope will not contest your will. For example, if you are survived by three children and your estate is worth $5 million, then leaving a child $10,000 and putting in a “no contest” clause will not sufficiently disincentivize that child from not contesting your will. However, perhaps if you like your child $350,000, then, depending on the structure of your assets, perhaps your child will be less motivated to contest and instead, just take the bequest. How can you Stop Someone from Contesting a Will? There is really no way to stop somebody from contesting a Will. However, you can take steps to mitigate the changes of a Will Contest. Click here to read about preventing a Will Contest. You can also draft defensively, by properly and carefully thinking about whether you should use a “no contest” clause.
by attorney Tina Kelly Gehres
Learn the differences between wills and trusts, and when it might make more sense to choose one or the other.
by attorney Dera L. Johnsen-Tracy
This list explains common mistakes people make when designating a beneficiary, and how you can avoid making the same mistakes.