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The implications of trustee discretion in simple, complex trusts

On Behalf of | Dec 18, 2013 | Estate Planning |

There are basically two types of trustee discretion that New Jersey residents need to know about when undertaking their estate planning. The first refers to the distribution of income. Authority is granted in a simple trust as is recognized by the IRS enabling the trustee to disburse income to the trust beneficiary. The trustee may also have the power to disburse income or to accrue it in what is called a complex trust as determined by the IRS as well.

The power to disburse principal to a beneficiary is another type of discretion. This is allowed under a provision for health, education, maintenance and support of the beneficiary, also known as the “HEMS standard.” The IRS recognizes the HEMS as a verifiable standard for purposes of determining estate and gift taxes under IRC Section 2041(b)(1)(A). The trustee may also have authority to distribute principal for “general welfare.”

The beneficiary may also be a trustee with the power to disburse or accrue income, but distributing principal to himself or herself may result in estate taxes. Some states limit disbursements to oneself except under the HEMS standard, which negates the estate tax consequences of IRC 2041. Trustee discretion to pay taxes on trust income may also depend on state law and may provide protection from creditors. The language used in crafting the trust may provide an important distinction, such as the use of “may” instead of the use of the word “shall.”

Although the language of a trust and federal and state law are important to how it is carried out, the intent of the grantor is also influential. The clearer the intent of the grantor is expressed in the language of the trust, the easier it is to carry out. Trusts are complex but very useful estate planning tools for providing for loved ones after death and protection of wealth.

Source: Wealth Management, “Estate Planning Shades of Grey Giving discretion to a trustee may be more complicated than you think“, Joseph C. Mahon, December 11, 2013