Questions to Ask Before Serving as Trustee

Being asked to serve as the trustee of the trust of a family member is a great honor. It means that the family member trusts your judgment and is willing to put the welfare of the beneficiary or beneficiaries in your hands. 

But being a trustee is also a great responsibility. You need to accept your responsibility fully informed and with your eyes wide open. Here are six questions to ask before saying "yes":

• May I read the trust? The trust document is your instruction manual. It tells you what you should do with the funds or other property you will be entrusted to manage. Make sure you read it and understand it. Ask the drafting attorney any questions you may have.

• What are the goals of the grantor (the person creating the trust)? Unfortunately, many trusts say little or nothing about their purpose. They give the trustee considerable discretion about how to spend trust funds with little or no guidance. Often the trusts say that the trustee may distribute principal for the benefit of the surviving spouse or children for their "health, education, maintenance and support." Is this a limitation, meaning you can't pay for a yacht (despite arguments from the son that he needs it for his mental health)? Or is it a mandate that you pay to support the surviving spouse even if he could work and it means depleting the funds before they pass to the next generation? How are you to balance the needs of current and future beneficiaries? It is important that you ask the grantor while you can. It may even be useful if the trust’s creator can put her intentions in writing in the form of a letter or memorandum addressed to you.

• How much help will I receive? As trustee, will you be on your own or working with a co-trustee? If working with one or more co-trustees, how will you divide up the duties? If the co-trustee is a professional or an institution, such as a bank or trust company, will it take responsibility for investments, accounting and tax issues, and simply consult with you on questions about distributions? If you do not have a professional co-trustee, can you hire attorneys, accountants and investment advisors as needed to make sure you operate the trust properly?

• How long will my responsibilities last? Are you being asked to take this duty on until the youngest minor child reaches age 25, in other words for a clearly limited amount of time, or for an indefinite period that could last the rest of your life? In either case, under what terms can you resign? Do you name your successor, does the trust  or does someone else?

• What is my liability? Generally trustees are relieved of liability in the trust document unless they are grossly negligent or intentionally violate their responsibilities. In addition, professional trustees are generally held to a higher standard than family members or friends. What this means is that you won't be held liable if for instance you get professional help with the trust investments and the investments happen to drop in value. However, if you use your neighbor who is a financial planner as your adviser without checking to see if he has run afoul of the applicable licensing agencies, and he pockets the trust funds, you may be held liable. A well-respected Massachusetts attorney who served as trustee on many trusts used a friend as an investment adviser who put the trust funds in risky investments just before the 2008-2009 stock market crash. The attorney was held personally liable and suspended from the practice of law. So, be careful and read what the trust says in terms of relieving you of personal liability.

• Will I be compensated? Often family members and friends choose to serve as trustees without compensation. If the duties are especially demanding, however, it is appropriate for trustees to be paid for service. The question, then, is how much. Professionals generally charge an annual fee of 1 to 2 percent of assets in the trust. So, the annual fee for a trust holding $1 million would be $10,000. Institutions and professionals generally charge a higher percentage for  smaller trusts and a lower percentage for larger trusts. If you are performing all of the work for a trust, including investments, distributions and accounting, it would be inappropriate to charge a similar fee. If, however, you are paying others to perform these functions or are acting as co-trustee with a professional trustee, charging this much may be seen as inappropriate. A typical fee in such a case is a quarter of what the professional trustee charges, or .25 percent (often referred to by financial professionals as 25 basis points). In any case, it's important for you to read what the trust says about trustee compensation and discuss the issue with the grantor.

If after getting answers to all these questions you feel comfortable serving as trustee, you should accept the role. It is an honor to be asked and you will provide a great service to the grantor and beneficiaries.

For a list of things to do after being appointed a trustee, click here.

For more on the different kinds of trusts, click here.

COPD Patients Discharged to a Skilled Nursing Have Two Times the Risk of Death Within Year Compared to Those Who Go Home

According to a study recently reported in McNight's, patients who go to a skilled nursing facility after being hospitalized for chronic obstructive pulmonary disease (COPD) are about twice as likely to die within a year: 

"The probability of death within 180 days was nearly 34% for COPD patients discharged to a SNF, versus roughly 16% for those who were sent home, the investigators determined. These numbers were 46.5% and 24%, respectively, at a year after hospital discharge. These statistics are for patients hospitalized with a diagnosis-related group (DRG) code of 190, but DRGs of 191 and 192 had similarly high rates."

Patients who go to a SNF likely have more severe COPD, multiple chronic conditions and poorer overall physical functioning, the study authors acknowledged. Still, the authors suggest, based upon the findings, that more robust interventions might improve the mortality of this group. Further research could determine which patients are likely to benefit from more intensive management and which might be candidates for hospice and palliative care.

The investigators analyzed Centers for Medicare & Medicaid Services data for about 500,000 patients in Ohio during 2008 and 2009. They are affiliated with not-for-profit hospital group OhioHealth, and presented their findings last week.

You can read more about the study here. 

Man Can't Challenge Discharge of Brother's Debt for Mom's Care under Filial Responsibility Law

A bankruptcy court has ruled that a man does not have standing to prevent the discharge of his brother's debt owed to their mother's assisted living facility under the state's filial responsibility law. In re: Skinner (Bankr. E. D. Pa., No. 13-13318-MDC, Oct. 8, 2014).

Dorothy Skinner lived in an assisted living facility until she was evicted for non-payment. The facility sued Ms. Skinner's sons, Thomas and William, under Pennsylvania's filial responsibility law. The court entered a default judgment against Thomas for $32,224.56. Thomas filed for bankruptcy and sought to discharge the debt.

William filed a claim in the bankruptcy court, arguing that Thomas's debt is non-dischargeable because it resulted from fraud and embezzlement. William argued that Thomas used their mother's assets for his personal expenses, so if William is liable to the assisted living facility, he is entitled to be reimbursed by Thomas.

The U.S. Bankruptcy Court, Eastern District of Pennsylvania, dismissed the claim, holding that William does not have standing because he is not a creditor of the debtor. According to the court, even if Thomas's actions injured Mrs. Skinner, that conduct was directed at Mrs. Skinner and her property, not at William. The court rules that William "may not invoke a cause of action that belongs to his [m]other to remedy the [Thomas's] liability for the Support Claim."  

Of course, underlying this case of one sibling fighting another is the liability created by filial responsibility; the siblings are jointly and severally liable.  Joint and several liability means that the creditor, in this case the assisted living facility, can enforce and collect the debt from the siblings jointly, or any one or more of the siblings severally.  If one sibling is unable to pay, the full debt falls to the other(s).  The assisted living facility can collect the full debt from any one of the siblings who is most likely to pay quickly.  Hence, one sibling seeks to stop a bankruptcy court from exonerating the other, leaving the sibling that does not file for bankruptcy solely responsible for the debt.  

Filial responsibility will only create more instances of familial discord and conflict as circumstances cast these obligations to fall inequitably among family members. Moreover, the court suggested that the Pennsylvania law does not allow for an action for contribution or reimbursement; if one family member is held responsible and another is not, the responsible family member may not be able to do anything about it.  Bottom line: parents' efforts to treat children equally or equitably will likely be sacrificed on the altar of Medicaid resource recovery in a filial responsible world. 

To read more about filial responsibility, click here, here, here, here, and here.  

Hapatitis Infection Risk in Nursing Homes Up 50%; Infection Risk Across the Board Increases

The rate of nursing home infections increased during a recent five-year period, with especially dramatic surges in multi-drug resistant organisms and viral hepatitis, according to recently published findings from Columbia University School of Nursing and the RAND Corporation, and reported in McNight's.

The prevalence of viral hepatitis in nursing homes increased 48% between 2006 and 2010, the investigators determined.  Outbreaks of Hepatitis C are common, including a recent outbreak in North Dakota involving ManorCare.  MDRO (multi-drug resistant organisms) prevalence increased by 18% and pneumonia by 11% during the same period. The rates of urinary tract infections, septicemia and wound infections also rose.

“Infections are a leading cause of deaths and complications for nursing home residents, and with the exception of tuberculosis we found a significant increase in infection rates across the board,” said lead study author Carolyn Herzig, MS, project director of the Prevention of Nosocomial Infections & Cost Effectiveness in Nursing Homes study at Columbia School of Nursing in New York City.

According to the authors, further research is needed to determine the cause of this troubling trend. They emphasized that potential residents and their families should look for facilities with strong infection control practices, including protocols to limit catheterization, easy access to hand sanitizers and isolation rooms for infected residents.

The results came from an analysis of data that nursing homes self-reported to the Centers for Medicare & Medicaid Services, and the study was supported by the National Institute of Nursing Research. 

Infection control has emerged as a top priority both for providers and the government. The White House recently launched a nationwide effort to reign in MDROs related to antibiotic prescribing practices.

Good News for Trusts that Manage Real Estate

In the recent Frank Aragona Trust case, 142 T.C. No. 9 (2014), the US Tax Court reached a taxpayer favorable decision, one that benefits trusts that materially participate in real estate business activities.  For years, the IRS has steadfastly refused to allow trusts to deduct net operating losses related to real estate activities against other ordinary income unrelated to the real estate; based on the so-called “passive activity loss” limitations.  Now, it may be possible for such trusts to deduct the losses associated with the real estate against other profitable activities to reduce income taxes.

Frank Aragona formed a trust In 1979, naming himself as the grantor and trustee and with his five children as beneficiaries. Frank Aragona passed away in 1981 and he was succeeded as trustee by six trustees. One of the trustees was an independent trustee and Frank Aragona's children comprised the other five trustees. Two of the five children had very little involvement with the trust or the business of the trust. Three of the five children worked full time for a limited liability company (LLC) that was wholly owned by the trust. This LLC managed most of the trust's rental real estate properties. It employed several people in addition to Frank Aragona's children including a controller, leasing agents, maintenance workers, and accounting clerks. In addition to receiving a trustee fee, the three children who were employed by the wholly-owned limited liability also received wages from the limited liability company.

During 2005 and 2006, the Frank Aragona Trust incurred substantial losses from its rental real estate properties. The trust also reported gains from its other (non-rental) real estate activities. In the Tax Court, the IRS argued that the trust's rental real estate activities were passive because a trust is incapable of materially participating in rental real estate activities. Alternatively, the IRS argued that even if a trust could materially participate in rental real estate activities, in the Aragona case, the court should disregard the activities of the three trustees who also work for trust's wholly-owned LLC because these trustees performed their activities as employees of the LLC and not in their duties as trustees. The trust contended that it could materially participate in its rental real estate activities, and that the activities of the three trustees who were also employed by the wholly-owned limited liability company should not be disregarded.

The material participation exception applies when more than one-half of the personal services performed in trades or businesses by the taxpayer are performed in real-property trades or businesses where the taxpayer materially participates and performs more than 750 hours of services during the year in real-property trades or businesses in which the taxpayer materially participates.

More than ten years ago, in Mattie K. Carter Trust v. United States, 256 F. Supp.2d 536 (N.D. Tex. 2003), a Texas district court held that the material participation of a trust in ranch operations should be determined by reference to the persons and agents who conducted the ranch's business on the trust's behalf, including the trustee.  According to the court, in determining whether the trust materially participated in the real estate activities, the trust's non-trustee's fiduciaries, employees, and agents should be considered.

In the years since the Mattie K. Carter Trust case, the IRS has issued a series of rulings in which it disagreed with the holding of the case and stated that only a trustee could be considered in making the determination.  Further, according to the IRS, if the trustee is also an employee of the underlying business, a taxpayer could only consider the time spent by the trustee in his duties as a trustee, and not in his duties as an employee.

Prior to 2012, the issue did not garner much attention because it only affected those trusts involved in rental real estate activities whose operations incurred losses.  However, with the recent enactment of the 3.8% Net Investment Income Tax, this issue has become a hot-button issue among tax practitioners.  Material participation is important in the context of the 3.8% Medicare tax because under §1411, "net investment income" includes income from a "passive activity (within the meaning of section 469) with respect to the taxpayer." Therefore, all rental real estate activities conducted through a trust or estate will not have to be concerned with the material participation rules.

    

The Tax Court held that, “[a] trust is capable of performing personal services [because …] services performed by individual trustees on behalf of the trust may be considered personal services performed by the trust.”  The Tax Court rejected the IRS’s argument that a trust is incapable of providing personal services, reasoning that, “[I]f the trustees are individuals, and they work on a trade or business as part of their trustee duties, their work can be considered ‘work performed by an individual in connection with a trade or business.’”

    

Also, the Tax Court rejected the IRS’s argument the work of certain trustees as employees of an LLC that managed most of the Trust’s rental real estate properties – which was wholly owned by the Trust – should not count because such work was performed as employees and not as trustees.  The Tax Court counted the work of the trustees which they performed as employees of the Trust’s wholly owned LLC because, “trustees are not relieved of their duties of loyalty to beneficiaries by conducting activities through a corporation wholly owned by the trust.”

The Tax Court did not, however, “decide whether the activities of the trust’s nontrustee employees should be disregarded.”

Given that the IRS expressly disregards the work of non trustee employees towards the material participation test, what is certain is that trusts can count the work of their trustees (even if performed as employees of a corporation wholly owned by the same trust).  Work performed by trustees as employees of a corporation that is unrelated to the trust might not count.

The Frank Aragona Trust decision is good news for those ongoing trusts that actively manage real properties as a business and have income tax losses in such activities. It may now be possible for such losses to be deducted against other activities.  

While the case resolves some uncertainties it does not resolve all uncertainties, most importantly whether to include the activities of trust employees who are not themselves trustees towards satisfaction of the material participation requirement.

Sources: Estate Planning: Good news for trusts that manage real estate

               Tax Court Gives Taxpayer a Victory in Frank Aragona Trust Case -- But Doesn't Go All the Way