IT’S A GIFT IF YOU DO. IT’S A GIFT IF YOU DON’T. WHAT LURKS IN THE SHADOWS WHEN AN INTERESTED FIDUCIARY ACTS

By Michael Gerson,* Wendy M. Morodomi Esq.,** and Lucille Campbell, Esq.**

An estate plan will often name a spouse or child as sole trustee of a trust in which that spouse or child is also a beneficiary. To maximize gift and estate tax savings, as well as enjoy creditor protection afforded by trusts,¹ a beneficiary-trustee ("interested trustee" or "interested fiduciary") should not have unfettered control over the trust. Trust provisions commonly prohibit the interested trustee from using trust funds to discharge the trustee’s legal obligations and limit distributions to ascertainable standards.² What practitioners may not realize is that tax elections and administrative actions may also trigger gift and estate taxes, and that additional limitations to an interested trustee’s powers may be prudent to avoid those consequences.³

This article explores this issue in four parts. The first part addresses general principles and provides background in tax and other applicable law. The second part deals with administrative actions exercised at the beginning of an estate or trust administration or as a result of the initial establishment or funding of a trust or estate, referred to in this article as an "initial action." The third part deals with actions as part of an ongoing trust administration, such as a trust that has been in existence for a few years, referred to in this article as a "subsequent action." The last part analyzes possible approaches to address these fiduciary issues in a trust administration.

I. GENERAL PRINCIPLES