|
 |  |
|
|
BROADER POWERS AVAILABLE FOR TRUSTEES |
By: Lawrence N. Berwitz, Esq. & Maureen Rothschild DiTata, Esq.
Berwitz & DiTata LLP
Garden City, New York |
|
The recent amendment to EPTL §10-10.1 eliminates the prohibition against empowering a trustee to make discretionary distributions from trust income or principal for his or her own benefit. The change, effective September 30, 2003, has extremely broad implications.
Section 10-10.1 previously precluded the exercise of a power conferred upon a person in his or her capacity as trustee of an express trust, with the exception of a person who has power to revoke a trust, from making discretionary distributions of either principal or income to himself of herself. Thus, for instance, a surviving spouse who was the appointed trustee of a credit shelter trust or of a qualified terminable interest property trust, could not make discretionary distributions to herself, or for her own benefit, even if the trust instrument expressly authorized her to do so, and even if it specifically delineated the circumstances under which such discretionary distributions were permissible.
Now, not only may a trustee be authorized to make discretionary distributions to himself or herself, limited to health, education, maintenance, support or some other ascertainable standard, but the creator of a trust who specifically references this section of the EPTL need not place any limitations on the exercise of such discretion by the trustee to invade principal or income for his or her own benefit. This change can result in negative tax consequences if the power is too broad. Under § 2041 of the Internal Revenue Code, unless limited by an ascertainable standard, the mere power to make discretionary distributions of principal or income for the benefit of a trustee/beneficiary will cause the assets subject to the power to be includable in the trustee’s taxable estate. Conversely, and to avoid this severe tax consequence, as long as the trustee’s discretion is exercisable within the context of an ascertainable standard, the property subject to such discretionary invasion will not be includable in his or her estate.
This does not mean that every trustee/beneficiary should necessarily be afforded discretion to invade principal and/or income for their own benefit, whether with an ascertainable standard or not. In a second marriage, a spouse may wish to permit a trustee to invade principal for the benefit of his surviving spouse, but may name members of his own family as the remaindermen of the trust. Often in this application, it is expected that the trustee will not exercise discretion to invade principal until the assets of the surviving spouse are exhausted. However, it’s unlikely that a surviving spouse/trustee will wait until their own assets are depleted before utilizing trust assets. In this instance, the family of the surviving spouse is benefited at the expense of the remaindermen of the trust. Also, if the surviving spouse is given unrestricted right to invade the principal of a credit shelter trust, the entire value of the trust will be includable in her taxable estate, thereby undermining the intent of the first spouse to die and the purpose of the credit shelter trust. The protection that a spendthrift provision provides against the creditors of the beneficiary is also lost if a beneficiary is also a trustee and possesses a discretionary invasion right.
While circumstances certainly do exist to justify giving a trustee/beneficiary these discretionary invasion powers, examination on a case-by-case basis is necessary to ensure that the ultimate intention of the client is not undermined.
Note: The authors are with Berwitz & DiTata LLP, a Garden City based Elder Law firm. This firm concentrates in Estate and Retirement Distribution Planning; Estate Administration and Elder Law. |
|
|
|
|
|
|
|
