Estate Planning Defined – Can The Trustee of a Continuing Trust Who is Also The Beneficiary Withdraw Trust Principal?

James B. Creighton | December 27, 2010 | 2 Comments

Issue: I recently received the following question from a Caller:

I am a beneficiary of a “Bypass Trust,” which was set up after my Father’s death and had been managed for the benefit of my Mother during her remaining lifetime. My Mother just died. I have been told that my share of the property remaining in The Bypass Trust is to be put into a Continuing Trust for my lifetime benefit. I was also told that I am the Trustee of the Continuing Trust. Since I am the Trustee of the Continuing Trust and I am the only beneficiary during my lifetime, do I have to keep the property in the Continuing Trust? The property that will go into the Continuing Trust for my benefit is real estate, which I had hoped to contribute to an LLC. What are my options?

I responded as follows:

First and most important: Always, always, always start by reading all of the provisions of the document (or documents) that will govern your Continuing Trust. What document might that be? That document will almost always be the same document that your parents signed when they first created their own Trust. You must also familiarize yourself with any amendments your parents, or either of them, made to that original trust document. I know it’s boring and may seem like a useless exercise, but you will find some real gems hidden in the provisions of that document—and you will help yourself at the same time.

Pay close attention to the sections of the document that discuss your rights—as a beneficiary—to distributions of trust principal and to trust income. Trust Income may take the form of interest on bank accounts held in your Continuing Trust, or rental payments by the tenants renting real property held in your Continuing Trust, or dividends paid on any mutual funds or shares of stock held in your Continuing Trust.

Generally, even if you are the Trustee of your own Continuing Trust, the property deposited into your Continuing Trust must stay in the Continuing Trust (with some exceptions, explained below). Even though you are the Trustee, you cannot simply pull the property out of the Trust and put it in your name. Your parents would have left the property outright to you if they wanted you to have the property in your own name. However, depending on your personal financial and health-related circumstances, you—as Trustee—may be entitled to distribute to yourself—as the beneficiary—trust principal of the Continuing Trust for your bona fide health, education, support, and maintenance needs. You will almost always be entitled to all of the net trust income earned by the assets held in the Continuing Trust. However, with regard to distributions of trust principal OR trust income, you must read the document that governs the Continuing Trust to know for sure what your rights are as a beneficiary of the trust.

In addition, even though you are the Trustee of your Continuing Trust, you may have to account for your actions as Trustee to other persons (other beneficiaries) who would inherit the property, if any, that remains in your Continuing Trust upon your death. This is a primary reason that you cannot simply take the property out of the Trust and put it in your own name—you would have to notify those other beneficiaries of your intention to pull the property out of the Trust and may even have to get their approval before doing so.

You also said you wanted to contribute the real property that is to be held in your Continuing Trust to a Limited Liability Company (an “LLC”). Even if you could not take the property out of your Continuing Trust and put it in your own name (and then contribute it to an LLC), you MAY be able—in your capacity as Trustee of your Continuing Trust—to contribute the real property to an LLC. It’s just that your Continuing Trust would be a member of the LLC, instead of you, an individual, being a member of that LLC. In exchange for contributing property to the LLC, the Continuing Trust would receive a membership interest in the LLC. However, before you, as Trustee, do this, you MUST BE SURE that the terms governing the Continuing Trust—especially the terms governing your actions as Trustee of the Continuing Trust—permit the Trust to hold interests in entities like LLCs, and permit the Trust to transfer trust property into an LLC in exchange for an interest in the LLC. If you wish to transfer trust property into an LLC, you may also have to notify (and even get the approval of) the other beneficiaries of the Continuing Trust who would receive the property that remains at the time of your death.

Finally, I don’t know you, so please don’t take this personally, but please keep in mind that your parents had their reasons for keeping your share of The Bypass Trust in a Continuing Trust for your lifetime benefit. Many of my clients do the same thing. Their overall goal is to protect the property they want their children to enjoy—sometimes from the children themselves! Some children are not good with money, or are in marriages that could end in divorce (and subject the inherited property to division between the child and soon to be ex-spouse), or are disabled and easily taken advantage of. Any of these reasons are valid reasons for parents to leave property for their children in Continuing Trusts like yours.

eeeeeeeee

Disclaimer: Please note that the information in this blog post does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact-specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. Finally, the information provided to you in this blog post does not create an attorney-client relationship.

Notwithstanding the disclaimer, I hope this information has been helpful. Please leave a comment about this post if you have the time. Thank you. James B. Creighton, Esq., Creighton Law Offices

Related posts:

  1. Estate Planning Defined – What Is an “Estate Plan”? (Part 3 of 3)
  2. Estate Planning Defined – What Is an “Estate Plan”? (Part 2 of 3)
  3. Estate Planning Defined – What Is Community Property?

Comments

  1. You’re the best! great read. i blog about wellness and health with Life Dr. we hope you have a nice week!

Leave a Reply