Estate Law Questions? Ask an Estate Lawyer.
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If the marital trust is set up to qualify for the marital deduction, then under federal law the spouse must receive all income whether the spouse actually needs the income or not.
Further, if the trust is for the purpose of qualifying assets in the marital trust for the marital deduction, then the trustee has a duty to produce an appropriate level of income for the surviving spouse. In other words, under federal law, the trustee cannot hold unproductive assets without the consent of the surviving spouse. So, unless the spouse consents, the trustee has a duty to convert non-productive assets to income-producing assets.
The following article is quite good on this subject:
No, as long as all income is distributed to her, the trust is safe. She can then add that to her own personal accounts and spend it, gift it, reinvest it, etc. It just can't stay in the trust. Now, while it's also acceptable to convert trust property to income to provide for her needs, it doesn't make sense to me why property would need to have been sold to produce income for her if she is not spending all of the income produced. If she's not using it all, why does she need more? But I don't have all the facts to make a determination of why property might have been sold, so I can't begin to say whether that was proper. What I can do is tell you that the law does require that all income be distributed from the trust to her.
O.K.,here is another one for you. When a property is sold, are the proceeds from that sale considered income,or principle? And furthermore, there are 3 other co-trustees,one of which is an estate lawyer and is the Independent trustee of both the Marital Trust and The Dynasty Trust. Are they not all,and especially the Independent Trustee, required by the UTC and bound by their fiduciary responsibilities to the beneficiaries of the trusts, both income and remainder, to administer the the trust assets under the prudent investor rule, if possible keeping the corpus of the trust intact? So, how in one breath can the trustees tell me that the family beach house was sold because my stepmother needed the money, yet it was sold during the worst real estate market since the depression, at half of it's appraised value,(at the very least not a prudent decision, or in the best interest of the trust and/or beneficiaries) and in the next breath tell me that my stepmother is not spending all the income she is entitled to, and not just entitled to,but HAS to spend. Now I just have a hard time believing that even though the federal government is taking away our freedoms at an alarming rate, that they can now tell a person that they must spend every dime of their income! Then in the next sentence they tell me that the reason some of the trust property is falling into disrepair, is because my stepmother doesn't have the money to fix it up,yet she gave,or put into an LLC land and a house worth about 1Mil.for the hired man as an incentive to stay on,although the place is a wreck, or as in the form of a compensation package,all kept a secret from me who is the beneficiary of said land after her lifetime. That isn't giving her any income, which is the only reason they are allowed to get rid of trust assets,right,for income? Which she has too much of anyway,sometimes. Do you see my point? Believe me,we have more lawyers on this than no doubt necessary,but I am asking you to settle an argument today between my brother and I. He says the stepmother has the right to do whatever she wants, and is not spending all of the income due her,and could get in trouble for that. I say yes,she is entitled to the income, but if she isn't spending it all, why are the properties falling down, and why is she selling/giving away land, wouldn't the logical thing to do with excess money be to BUY land? And, she and the trustees have laws under the Trust Code that they must live by, or why did Daddy bother setting up a trust in the first place? What say you? Who is right? Me,or my brother?
When a property is sold, it's just converting the asset to cash, so it's still principal. Yes, the trustees must serve both interests, but during the life of the spouse, the primary interest is maximizing income. They must, however, still make prudent investments to maximize income and cannot make high risk investments solely to maximize income if that is a major detriment to the principal of the trust. In other words, they have a balancing act to perform. That is well discussed in the article to which I referred you in my original answer. It does raise hairs in my mind to have them telling you that the house must be sold to produce income and yet she isn't spending all income. Keep in mind, though, that the sale of the home did not produce income. It just got rid of a non-producing asset that was potentially a drain on the trust resources because it needed so much work. However, selling far below market value (which must include market value at the time of the sale, which takes into account the depreciated value due to the market conditions), sounds possibly like a breach of duty to the remainder beneficiaries. Unfortunately, that is not a "yes" or "no" type of answer I can provide for you. Only a local attorney that spend thousands of dollars and countless hours would be able to file a suit against them on that basis and then begin gathering evidence to support claims for breach of fiduciary duty. You certainly might have a case, and one that you should explore further with a local attorney, but I unfortunately cannot say without a doubt that they did anything wrong or not. It certainly doesn't pass the simple smell test. She can't keep the income in the trust and reinvest it in the trust. It has to come out of the trust and she can then do something with it outside of trust including buying land, reinvesting in other assets, etc. But she cannot do that with it still in the marital trust.
However, for reasons of this argument with my brother to day, my stepmother can not do whatever she wants. There are limitations,wether in her capacity as trustee and it's fiduciary responsibilities, the Uniform Trust Code, or the advice of the co-trustees. It actually can be as simple as(although it never is) that had my father wanted my stepmother to have everything,and the power to dispose of the properties that have been in the family for hundreds of years, than he would have just left it all to her,as the wife does not have to pay income taxes. The reason he put the time and expense into creating all these trusts was a way to lessen the taxes for future generations,so the family property remained in the family.Not be sold. Correct? I know I am over simplifying, and frankly you have been more direct than the army of lawyers involved,which ain't saying much! But, despite the fact that you don't have all the details, would you not agree that something is rotten in Denmark, and my brother might want to consider the possibility that the trustees may be a little heady with power, and there is a possibility that I am right, and if he doesn't wake up,there will be nothing left to fight over?
Yes, there is a possibility something is being done that should not have been. You are correct that the marital trust is to avoid estate tax on the property in the marital trust by qualifying it for the marital deduction and that it places limitations on the use of principal (if it is a QTIP marital trust -- which is what you've been describing). As such, principal should only be used for health, education, maintenance and support. Property can, however, be sold to covert assets that are a drain on the trust to assets that are not. Any limitation on the sale of certain assets could certainly have been written into the trust, but without an explicit restriction the trustee is required to keep assets from being a drain under the prudent investor rules. While those rules can be waived and certain assets kept no matter how unproductive and draining on the trust, that must be written into the trust. It unfortunately is not just assumed. Again, though, it sounds as though something may have occurred that is a breach of duty.
Thank you! Sometimes it is a great help to ask an impartial lawyer,that knows nothing of the various personalities and or emotions or history involved, thereby returning to the basic, or salient point of it all. And to think that once upon a time in my youthful innocence, I believed the law was cut and dried and all about right and wrong and justice! Hah! It can be whatever anyone wants it to be it seems at times! Thanks a ton!