By
Roberta M. Gubbins
Marlaine Teahan, co-chair of the Ingham County Bar Association Probate and Estate Section, called the meeting to order on October 15th at noon. Rooms one and two of the State Bar of Michigan Michael Franck building in Lansing were filled to the brim with members assembled to hear Catherine Jacobs and Pat Ouellette speak on Trust Administration.
Ouellette began with a discussion of the tax issues that arise during the administration of an estate. She presented a fact pattern that was the basis of her discussion. “The two beneficiaries of the fictional trust are sisters who do not get along. The advice Bonnie, trustee, received was to liquidate the stocks, bonds, and annuity and hold back on distributions until the four-month claims period passed.”
The advice was followed creating a Federal income tax of $226,000 and State income tax of $28,000, which was reported on a calendar year basis. The tax “substantially reduces the distribution to the beneficiaries.”
“There is a lot of planning that can be done,” she noted. The date of death was November 15th so the income was “bunched into a month and a half and the accountant elected a calendar year end.” That meant no expenses could be deducted since none were created in those few weeks.
Much of this cost could have been avoided had the trust elected to use a fiscal year for the tax return. “If,” said Ouellette, “Bonnie had elected a fiscal year such as June 10th, for example, and positioned the distributions from the IRA and annuities, she would have been able to match the expenses with the income” and made distributions to the beneficiaries who are taxed at a lower rate. Those steps could considerably reduce the tax burden to the trust.
This is where tax planning comes in, noted Ouellette. She recommended considering such things as “when to cash in the annuity to take the income, when will there be expenses, might there be a big lawsuit, attorney fees—the goal is to try to match the expenses with the income.”
“With revocable grantor trusts,” she said, “you can elect a fiscal year” for the tax return. With the fiscal year election, “it is possible to distribute income to the beneficiaries that is reported to the IRS on a fiscal year end. That means that if you have a June 30th year-end any moneys you receive in November of year one will be reported in year two.”
Jacobs began her discussion saying that she preferred to use the fiscal year in situations where the date of death is late in the year and the claims period will not have closed by then. “If distributions are made and there isn’t money for the claims, the trustee can be liable for those expenses.”
Jacobs noted “the general rule is if there is any income in the trust that has not been taxed, then the beneficiary will pay tax on it.”
Jacobs went on to discuss the position of trustee. Lawyers, she explained, can be trustees of a trust, however, be aware that legal malpractice insurance may not cover you for that role.
“As the attorney for the trust,” she said, “be sure your client trustee is qualified to be a trustee. Go to the trust code” for the requirements. Then collect all the documents that relate to the trust. There are several checklists, such as Schedule of Important Dates for a Trust, and forms such as a Fee Agreement, Sample Chart of Beneficiaries, etc. in the book “Trust Administration Under the Michigan Trust Code” that can be helpful.
She suggested that lawyers who represent the trustee read the trust document carefully with a highlighter to find the details such as powers of appointment for younger beneficiaries, lists of the household contents, maintenance of the house, etc. “For example, it is important to secure the real estate meaning to maintain it and its contents.”
Jacobs advised informing all the beneficiaries of the details of trust administration by your client, the trustee. She also recommended working with a CPA to determine all the tax advantages available.
Pat Ouellette, Bernick Radner & Ouellette is a graduate of Cooley Law School, a CPA and practices in the areas of Estate Planning, Trust Administration and Family Law. Catherine Jacobs, Loomis Ewert is a University of Michigan graduate and practices in the areas of Trust Administration, Estate Planning and Family Law.
Next month’s meeting will be held on November 19th at Cooley Law School, Room 911; George Strander, Ingham County Probate Register will present an update on court rules and forms. On December 17th, a social event is planned. It will be held at Kelly’s Irish Pub, where a room has been reserved. Attendees can order off the menu. For reservations for either or both meetings contact Marlaine Teahan at mteah@fraserlawfirm.com.
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