How are Trusts monitored and enforced?

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Ranunculus
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How are Trusts monitored and enforced?

Post by Ranunculus »

The many threads describing various options for estate planning have me wondering how these complex documents are monitored by the IRS. Are trust documents only reviewed during an audit, after suspected financial mismanagement? Corporate trustees are probably very good at data management and accounting, but it seems the potential for rule bending among individual trustees is high.
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Re: How are Trusts monitored and enforced?

Post by 123 »

I think the main control over trusts are their beneficiaries.
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Re: How are Trusts monitored and enforced?

Post by Lee_WSP »

A trust is not a business or person entity, it is a fiduciary relationship between the trustor and trustee.

As such, no one monitors or oversees the trustee except themselves. When questions arise as to actions the trustee has taken, it is up to those with the equitable interest in the property to bring action.
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Ranunculus
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Re: How are Trusts monitored and enforced?

Post by Ranunculus »

Lee_WSP wrote: Sun May 02, 2021 4:02 pm A trust is not a business or person entity, it is a fiduciary relationship between the trustor and trustee.

As such, no one monitors or oversees the trustee except themselves. When questions arise as to actions the trustee has taken, it is up to those with the equitable interest in the property to bring action.
I am referring to irrevocable trusts that require an independent trustee, created to remove assets from the beneficiary’s taxable estate. I just wonder how often the IRS monitors the language and administration of trusts set up to minimize estate taxation.
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RickBoglehead
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Re: How are Trusts monitored and enforced?

Post by RickBoglehead »

The IRS does not monitor anything. If they feel a return is fraudulent, then launch an audit.
Last edited by RickBoglehead on Sun May 02, 2021 6:40 pm, edited 1 time in total.
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Re: How are Trusts monitored and enforced?

Post by Lee_WSP »

Ranunculus wrote: Sun May 02, 2021 5:20 pm
Lee_WSP wrote: Sun May 02, 2021 4:02 pm A trust is not a business or person entity, it is a fiduciary relationship between the trustor and trustee.

As such, no one monitors or oversees the trustee except themselves. When questions arise as to actions the trustee has taken, it is up to those with the equitable interest in the property to bring action.
I am referring to irrevocable trusts that require an independent trustee, created to remove assets from the beneficiary’s taxable estate. I just wonder how often the IRS monitors the language and administration of trusts set up to minimize estate taxation.
Same way they monitor the rest of us.
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Re: How are Trusts monitored and enforced?

Post by BillWalters »

There is no trust police.

Which is a real problem for beneficiaries with a bad trustee. The trust document almost always allows the trustee to defend any legal challenge with trust assets, thereby creating a situation where the beneficiary has to deplete their own trust to pursue accountability. And unless it’s a corporate trustee, the money is usually long gone.
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Re: How are Trusts monitored and enforced?

Post by Gill »

Lee_WSP wrote: Sun May 02, 2021 4:02 pm A trust is not a business or person entity, it is a fiduciary relationship between the trustor and trustee.

As such, no one monitors or oversees the trustee except themselves. When questions arise as to actions the trustee has taken, it is up to those with the equitable interest in the property to bring action.
How can you say a trust is not an entity? It is just as much an entity as an individual, partnership, or corporation. Also, judicial intervention can be invoked over both inter vivos or testamentary trusts. In the case of corporate trustees, administration of the trust is overseen by governmental auditors and examiners, independent auditors and the firms internal auditors. Beneficiaries of most trusts have an interest in the proper administration of the trust. To state that the only parties involved are the settlor and the trustee is not accurate.
Gill
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Re: How are Trusts monitored and enforced?

Post by afan »

Ranunculus wrote: Sun May 02, 2021 5:20 pm

I am referring to irrevocable trusts that require an independent trustee, created to remove assets from the beneficiary’s taxable estate. I just wonder how often the IRS monitors the language and administration of trusts set up to minimize estate taxation.
The only times the IRS would have a reason to look would be perhaps when the gift tax return is filed and at the death of the grantor. That is when it might have an opportunity to collect gift or estate taxes. Once the estate has been settled and the estate tax return accepted, the only interest of the IRS would be whether the resulting trusts and beneficiaries are paying their income taxes.
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Re: How are Trusts monitored and enforced?

Post by Lee_WSP »

Gill wrote: Sun May 02, 2021 6:06 pm
Lee_WSP wrote: Sun May 02, 2021 4:02 pm A trust is not a business or person entity, it is a fiduciary relationship between the trustor and trustee.

As such, no one monitors or oversees the trustee except themselves. When questions arise as to actions the trustee has taken, it is up to those with the equitable interest in the property to bring action.
How can you say a trust is not an entity? It is just as much an entity as an individual, partnership, or corporation. Also, judicial intervention can be invoked over both inter vivos or testamentary trusts. In the case of corporate trustees, administration of the trust is overseen by governmental auditors and examiners, independent auditors and the firms internal auditors. Beneficiaries of most trusts have an interest in the proper administration of the trust. To state that the only parties involved are the settlor and the trustee is not accurate.
Gill
How else would you explain it? I'm not going to requote the restatement or IRS guidelines every time someone asks this question.

Also I said it's not an entity like a person. Sure, I left that second part out before, but not this time.
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Re: How are Trusts monitored and enforced?

Post by Gill »

Lee_WSP wrote: Sun May 02, 2021 6:11 pm
Gill wrote: Sun May 02, 2021 6:06 pm
Lee_WSP wrote: Sun May 02, 2021 4:02 pm A trust is not a business or person entity, it is a fiduciary relationship between the trustor and trustee.

As such, no one monitors or oversees the trustee except themselves. When questions arise as to actions the trustee has taken, it is up to those with the equitable interest in the property to bring action.
How can you say a trust is not an entity? It is just as much an entity as an individual, partnership, or corporation. Also, judicial intervention can be invoked over both inter vivos or testamentary trusts. In the case of corporate trustees, administration of the trust is overseen by governmental auditors and examiners, independent auditors and the firms internal auditors. Beneficiaries of most trusts have an interest in the proper administration of the trust. To state that the only parties involved are the settlor and the trustee is not accurate.
Gill
How else would you explain it? I'm not going to requote the restatement or IRS guidelines every time someone asks this question.
I thought I explained it. A trust is an entity which can own property, enter into contacts, file tax returns, hire employees and do many other functions of other entities. Also, your description of a trust as a fiduciary relationship between the trustor and the trustee ignores the income beneficiaries and remaindermen and also trusts where the creator is no longer involved or alive.
Gill
Last edited by Gill on Sun May 02, 2021 6:25 pm, edited 1 time in total.
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Re: How are Trusts monitored and enforced?

Post by Lee_WSP »

Gill wrote: Sun May 02, 2021 6:16 pm
Lee_WSP wrote: Sun May 02, 2021 6:11 pm
Gill wrote: Sun May 02, 2021 6:06 pm
Lee_WSP wrote: Sun May 02, 2021 4:02 pm A trust is not a business or person entity, it is a fiduciary relationship between the trustor and trustee.

As such, no one monitors or oversees the trustee except themselves. When questions arise as to actions the trustee has taken, it is up to those with the equitable interest in the property to bring action.
How can you say a trust is not an entity? It is just as much an entity as an individual, partnership, or corporation. Also, judicial intervention can be invoked over both inter vivos or testamentary trusts. In the case of corporate trustees, administration of the trust is overseen by governmental auditors and examiners, independent auditors and the firms internal auditors. Beneficiaries of most trusts have an interest in the proper administration of the trust. To state that the only parties involved are the settlor and the trustee is not accurate.
Gill
How else would you explain it? I'm not going to requote the restatement or IRS guidelines every time someone asks this question.
I thought I explained it. A trust is an entity which can own property, enter into contacts, file tax returns, hire employees and do many other functions of other entities.
Gill
Of course it can. But how do you explain the trustee/beneficiary/trustor relationship simply every time someone asks why the trust can't do some thing a person or business normally can?
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Re: How are Trusts monitored and enforced?

Post by Gill »

Lee_WSP wrote: Sun May 02, 2021 6:22 pm
Of course it can. But how do you explain the trustee/beneficiary/trustor relationship simply every time someone asks why the trust can't do some thing a person or business normally can?
Come on, Lee. You’ve run out of support for your initial statement. I don’t even know what you’re saying here.
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Re: How are Trusts monitored and enforced?

Post by Lee_WSP »

Gill wrote: Sun May 02, 2021 6:30 pm
Lee_WSP wrote: Sun May 02, 2021 6:22 pm
Of course it can. But how do you explain the trustee/beneficiary/trustor relationship simply every time someone asks why the trust can't do some thing a person or business normally can?
Come on, Lee. You’ve run out of support for your initial statement. I don’t even know what you’re saying here.
Gill
How do you want to explain these trust nuances to those who did not pass the bar?
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Re: How are Trusts monitored and enforced?

Post by Cruise »

BillWalters wrote: Sun May 02, 2021 6:04 pm There is no trust police.

Not true for at least one state with which I am familiar. In that state, I’ve seen the Attorney General’s office spring into action in a rare case.
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Re: How are Trusts monitored and enforced?

Post by Gill »

Cruise wrote: Sun May 02, 2021 6:39 pm
BillWalters wrote: Sun May 02, 2021 6:04 pm There is no trust police.

Not true for at least one state with which I am familiar. In that state, I’ve seen the Attorney General’s office spring into action in a rare case.
This is certainly true for charitable trusts.
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Re: How are Trusts monitored and enforced?

Post by Ranunculus »

This article is 10 years old but chilling nonetheless. I would be interested to know whether trusts administered by corporate trustees are audited less frequently due to the internal and external oversight they receive.
https://www.thewealthadvisor.com/articl ... ax-returns
But over that period, the number of estate tax audits soared. By 2009, IRS examiners were looking at a full 10% of estate tax returns -- and those were all in-depth field audits that required an on-site interview.

Trusts tended to get postal or “correspondence” audits, at least in part because these long-distance reviews cost the IRS less and rarely recover quite so much lost tax revenue.

Field audits can be lethal. The vast majority (85%) of estate and fiduciary returns that get an on-site visit contain substantial enough errors to cost a big estate $800,000 and the average trust $221,000 in unpaid tax, Garbo says.

“As one might expect, they find more errors that way than someone just looking over the numbers somewhere might find,” he explains.

Red flags remain mysterious

The IRS continues to keep its audit triggers under tight wraps in order to keep preparers from gaming the system.

As a result, trustees who prepare 1041 returns may simply have to resign themselves to a greater possibility that their math will be checked more carefully this year.

“The amount examiners have been finding has been increasing and the average change per return has been increasing,” Garbo says.
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Re: How are Trusts monitored and enforced?

Post by illumination »

Someone has to have standing to sue, so you need a person involved with the trust and be able to claim some sort of harm to get the ball rolling on demanding "enforcement" . Like a beneficiary sues a trustee for how they are managing the trust.

The IRS only care if taxes are paid in full. Trusts can reach the highest marginal income tax rates at lower thresholds, so having income in a trust is not usually an effective tax dodge.

Where it gets in the weeds is some of the more elaborate estate planning techniques and the IRS just makes those decisions just like it decides to go after other tax cases. I'm betting there's usually much lower-hanging fruit than these sorts of things that have first gone through a lot of high priced lawyers and will likely have a lot of more lawyers fighting the IRS, but they obviously do go to battle all the time.
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Re: How are Trusts monitored and enforced?

Post by Gill »

Ranunculus wrote: Sun May 02, 2021 7:01 pm This article is 10 years old but chilling nonetheless. I would be interested to know whether trusts administered by corporate trustees are audited less frequently due to the internal and external oversight they receive.
https://www.thewealthadvisor.com/articl ... ax-returns
But over that period, the number of estate tax audits soared. By 2009, IRS examiners were looking at a full 10% of estate tax returns -- and those were all in-depth field audits that required an on-site interview.

Trusts tended to get postal or “correspondence” audits, at least in part because these long-distance reviews cost the IRS less and rarely recover quite so much lost tax revenue.

Field audits can be lethal. The vast majority (85%) of estate and fiduciary returns that get an on-site visit contain substantial enough errors to cost a big estate $800,000 and the average trust $221,000 in unpaid tax, Garbo says.

“As one might expect, they find more errors that way than someone just looking over the numbers somewhere might find,” he explains.

Red flags remain mysterious

The IRS continues to keep its audit triggers under tight wraps in order to keep preparers from gaming the system.

As a result, trustees who prepare 1041 returns may simply have to resign themselves to a greater possibility that their math will be checked more carefully this year.

“The amount examiners have been finding has been increasing and the average change per return has been increasing,” Garbo says.
I would guess trusts administered by corporate trustees are audited more frequently, simply because they tend to be larger. In my experience, it was extremely rare to have a fiduciary income tax return audited other than in conjunction with the audit of an estate tax return.
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Re: How are Trusts monitored and enforced?

Post by Investing Lawyer »

Gill wrote: Sun May 02, 2021 6:06 pm
Lee_WSP wrote: Sun May 02, 2021 4:02 pm A trust is not a business or person entity, it is a fiduciary relationship between the trustor and trustee.

As such, no one monitors or oversees the trustee except themselves. When questions arise as to actions the trustee has taken, it is up to those with the equitable interest in the property to bring action.
How can you say a trust is not an entity? It is just as much an entity as an individual, partnership, or corporation. Also, judicial intervention can be invoked over both inter vivos or testamentary trusts. In the case of corporate trustees, administration of the trust is overseen by governmental auditors and examiners, independent auditors and the firms internal auditors. Beneficiaries of most trusts have an interest in the proper administration of the trust. To state that the only parties involved are the settlor and the trustee is not accurate.
Gill
A trust is not an official "entity" in most every state I'm aware of. The trustee holds legal title to all assets. When you sue a "trust", you actually sue the trustee. The "trustee" enters contracts and sells assets, not the "trust." See my username.

Some states may be different.
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Re: How are Trusts monitored and enforced?

Post by bsteiner »

Lee_WSP and Investing Lawyer are correct. A trustee is a capacity like an executor, guardian, receiver, or custodian, rather than an entity like a corporation, partnership or LLC. We represent executors and trustees in their fiduciary capacity, not estates or trusts. An estate or trust can't sue or be sued like a corporation, partnership or LLC. Rather, an executor or trustee may sue or be sued in his/her fiduciary capacity. A deed will say "John Smith, as Executor of the Estate of Mary Smith" or "John Smith, as Trustee of the XYZ Trust under the Will of Mary Smith," not "Estate of Mary Smith" or "XYZ Trust," though to protect the unsophisticated drafter some states have statutes saying that a deed that says "Estate of Mary Smith" or "XYZ Trust" will be valid.

Estate tax returns are often audited. Fiduciary income tax returns are rarely audited since their income is usually investment income, they don't usually have questionable deductions, and executors and trustees tend to be conservative on their tax returns.

The attorney general has jurisdiction over estates where a charity is a residuary beneficiary. We've had estates where the attorney general has questioned things in the executor's accounting. I also have a case on the other side. where we represent the charity that's the residuary beneficiary, and the attorney general is questioning to the executor's legal fees.

Beneficiaries are entitled to detailed accountings of estates and trusts. Usually this is done informally, for example by executors and trustees giving the beneficiaries copies of the bank and brokerage statements. Sometimes there are formal accountings listing each transaction. Occasionally the accountings are submitted for court approval.

Where there's a dispute between a beneficiary and a fiduciary, sometimes the beneficiary has unreasonable expectations, but sometimes the fiduciary did done something wrong. I've had two cases in recent years where administrators misappropriated the assets. We were able to have them removed and get our clients (who were beneficiaries) appointed. In one, the court required the administrator to post a bond, and we went after the bonding company. In the other, there were several rental properties, and we were able to get them sold and have our clients made whole out of the sale proceeds. I've also had cases in recent years where there were disputes as to the trustees' compensation (it's by formula in New York and New Jersey, but it's reasonable compensation in Florida), and as to the way the fiduciaries invested the assets.

I can't recall any disputes involving corporate executors or trustees though we're all familiar with cases such as Dumont where the bank didn't diversify (because of language in the Will requesting the bank to retain the Kodak stock).
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Re: How are Trusts monitored and enforced?

Post by Gill »

bsteiner wrote: Sun May 02, 2021 7:52 pm Lee_WSP and Investing Lawyer are correct. A trustee is a capacity like an executor, guardian, receiver, or custodian, rather than an entity like a corporation, partnership or LLC. We represent executors and trustees in their fiduciary capacity, not estates or trusts. An estate or trust can't sue or be sued like a corporation, partnership or LLC. Rather, an executor or trustee may sue or be sued in his/her fiduciary capacity. A deed will say "John Smith, as Executor of the Estate of Mary Smith" or "John Smith, as Trustee of the XYZ Trust under the Will of Mary Smith," not "Estate of Mary Smith" or "XYZ Trust," though to protect the unsophisticated drafter some states have statutes saying that a deed that says "Estate of Mary Smith" or "XYZ Trust" will be valid.
Bruce, agreed that “a trustee is a capacity” but does it follow that a trust is not an entity?
Gill
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Ranunculus
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Re: How are Trusts monitored and enforced?

Post by Ranunculus »

bsteiner wrote: Sun May 02, 2021 7:52 pm Lee_WSP and Investing Lawyer are correct. A trustee is a capacity like an executor, guardian, receiver, or custodian, rather than an entity like a corporation, partnership or LLC. We represent executors and trustees in their fiduciary capacity, not estates or trusts. An estate or trust can't sue or be sued like a corporation, partnership or LLC. Rather, an executor or trustee may sue or be sued in his/her fiduciary capacity. A deed will say "John Smith, as Executor of the Estate of Mary Smith" or "John Smith, as Trustee of the XYZ Trust under the Will of Mary Smith," not "Estate of Mary Smith" or "XYZ Trust," though to protect the unsophisticated drafter some states have statutes saying that a deed that says "Estate of Mary Smith" or "XYZ Trust" will be valid.

Estate tax returns are often audited. Fiduciary income tax returns are rarely audited since their income is usually investment income, they don't usually have questionable deductions, and executors and trustees tend to be conservative on their tax returns.

The attorney general has jurisdiction over estates where a charity is a residuary beneficiary. We've had estates where the attorney general has questioned things in the executor's accounting. I also have a case on the other side. where we represent the charity that's the residuary beneficiary, and the attorney general is questioning to the executor's legal fees.

Beneficiaries are entitled to detailed accountings of estates and trusts. Usually this is done informally, for example by executors and trustees giving the beneficiaries copies of the bank and brokerage statements. Sometimes there are formal accountings listing each transaction. Occasionally the accountings are submitted for court approval.

Where there's a dispute between a beneficiary and a fiduciary, sometimes the beneficiary has unreasonable expectations, but sometimes the fiduciary did done something wrong. I've had two cases in recent years where administrators misappropriated the assets. We were able to have them removed and get our clients (who were beneficiaries) appointed. In one, the court required the administrator to post a bond, and we went after the bonding company. In the other, there were several rental properties, and we were able to get them sold and have our clients made whole out of the sale proceeds. I've also had cases in recent years where there were disputes as to the trustees' compensation (it's by formula in New York and New Jersey, but it's reasonable compensation in Florida), and as to the way the fiduciaries invested the assets.

I can't recall any disputes involving corporate executors or trustees though we're all familiar with cases such as Dumont where the bank didn't diversify (because of language in the Will requesting the bank to retain the Kodak stock).
Very interesting, thank you.
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Re: How are Trusts monitored and enforced?

Post by cchrissyy »

even if there was such a thing as "the trust police", why would it be the IRS?
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Re: How are Trusts monitored and enforced?

Post by Lee_WSP »

Gill wrote: Sun May 02, 2021 8:10 pm
bsteiner wrote: Sun May 02, 2021 7:52 pm Lee_WSP and Investing Lawyer are correct. A trustee is a capacity like an executor, guardian, receiver, or custodian, rather than an entity like a corporation, partnership or LLC. We represent executors and trustees in their fiduciary capacity, not estates or trusts. An estate or trust can't sue or be sued like a corporation, partnership or LLC. Rather, an executor or trustee may sue or be sued in his/her fiduciary capacity. A deed will say "John Smith, as Executor of the Estate of Mary Smith" or "John Smith, as Trustee of the XYZ Trust under the Will of Mary Smith," not "Estate of Mary Smith" or "XYZ Trust," though to protect the unsophisticated drafter some states have statutes saying that a deed that says "Estate of Mary Smith" or "XYZ Trust" will be valid.
Bruce, agreed that “a trustee is a capacity” but does it follow that a trust is not an entity?
Gill
The IRS defines a trust as an entity (I looked it up after you called me on it the first time), which is why I've changed my shorthand explanation to say not like a person or business. But again it's a short hand way to try to explain why trusts can't do certain things or are treated weirdly.
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Re: How are Trusts monitored and enforced?

Post by JackoC »

Ranunculus wrote: Sun May 02, 2021 5:20 pm
Lee_WSP wrote: Sun May 02, 2021 4:02 pm A trust is not a business or person entity, it is a fiduciary relationship between the trustor and trustee.

As such, no one monitors or oversees the trustee except themselves. When questions arise as to actions the trustee has taken, it is up to those with the equitable interest in the property to bring action.
I am referring to irrevocable trusts that require an independent trustee, created to remove assets from the beneficiary’s taxable estate. I just wonder how often the IRS monitors the language and administration of trusts set up to minimize estate taxation.
Irrevocable trusts created to remove assets from the grantor's taxable estate (usually whose it is, not the beneficiary's) might allow a beneficiary to be trustee. It depends. In that case it's a particularly good question. Who monitors the ongoing operation of the trust and the distributions (which in case of trustee/beneficiary are more tightly limited)? I think the answer as various other responses have said, is nobody basically, until the grantor dies, at which point an estate tax return audit is not that unlikely, and it may very well look into withdrawals at least in the years right before the grantor's death, and might look further back if a gross and deliberate problem is uncovered by that. But AFAIK it's extremely rare, if it ever happens, for the IRS to randomly audit the operation of say a Spousal Lifetime Access Trust of a living grantor in 2020 to see if the trustee/beneficiary spouse really stuck to the rules of the trust in withdrawing money only for their 'HEMS' (health, education, maintenance and support, an often specified limit on trustee/beneficiary withdrawals in that case). And if the behavior in the late 2030's isn't egregious and the grantor dies in 2040, what happened in 2020 is basically never going to be reviewed. So like many or most areas of the tax code, except for extremely high income/NW people who can count on constant audits, it's basically an honor system with some degree of deterrence from knowing the IRS *could* end up going over it with a fine toothed comb, however unlikely. Also like various other areas it therefore IMO breaks into two categories: stuff that's clearly illegal which you shouldn't do regardless of the likelihood of audit, and gray areas which it does actually matter how likely it is the thing gets audited.
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Re: How are Trusts monitored and enforced?

Post by mptfan »

Ranunculus wrote: Sun May 02, 2021 3:22 pm The many threads describing various options for estate planning have me wondering how these complex documents are monitored by the IRS.
Trusts are not monitored by the IRS.
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Eric
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Re: How are Trusts monitored and enforced?

Post by Eric »

Lee_WSP wrote: Sun May 02, 2021 10:01 pm
Gill wrote: Sun May 02, 2021 8:10 pm Bruce, agreed that “a trustee is a capacity” but does it follow that a trust is not an entity?
Gill
The IRS defines a trust as an entity (I looked it up after you called me on it the first time), which is why I've changed my shorthand explanation to say not like a person or business. But again it's a short hand way to try to explain why trusts can't do certain things or are treated weirdly.
Taxes are a different world, though. Many things are classified differently for federal tax purposes than they are generally understood to be legally. For example, the IRS says that some things are not entities that clearly are entities under state law. (Consider, e.g., a single-member LLC. Unless you elect otherwise, the IRS will generally ignore the LLC's existence.)

Just as a single-member LLC is an entity even though the IRS generally says it's not, a trust is not an entity even though the IRS generally treats it as if it is.

Eric
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Re: How are Trusts monitored and enforced?

Post by Lee_WSP »

Eric wrote: Sun May 02, 2021 10:52 pm
Lee_WSP wrote: Sun May 02, 2021 10:01 pm
Gill wrote: Sun May 02, 2021 8:10 pm Bruce, agreed that “a trustee is a capacity” but does it follow that a trust is not an entity?
Gill
The IRS defines a trust as an entity (I looked it up after you called me on it the first time), which is why I've changed my shorthand explanation to say not like a person or business. But again it's a short hand way to try to explain why trusts can't do certain things or are treated weirdly.
Taxes are a different world, though. Many things are classified differently for federal tax purposes than they are generally understood to be legally. For example, the IRS says that some things are not entities that clearly are entities under state law. (Consider, e.g., a single-member LLC. Unless you elect otherwise, the IRS will generally ignore the LLC's existence.)

Just as a single-member LLC is an entity even though the IRS generally says it's not, a trust is not an entity even though the IRS generally treats it as if it is.

Eric
Yes. But I'm referring to a history between me and Gill over the term.

He did correctly call me out over the too broad usage of entity in a different thread. Which is why I added like a person or business in this thread.
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Re: How are Trusts monitored and enforced?

Post by restingonmylaurels »

bsteiner wrote: Sun May 02, 2021 7:52 pm A trustee is a capacity like an executor, guardian, receiver, or custodian, rather than an entity like a corporation, partnership or LLC. We represent executors and trustees in their fiduciary capacity, not estates or trusts. An estate or trust can't sue or be sued like a corporation, partnership or LLC. Rather, an executor or trustee may sue or be sued in his/her fiduciary capacity. A deed will say "John Smith, as Executor of the Estate of Mary Smith" or "John Smith, as Trustee of the XYZ Trust under the Will of Mary Smith," not "Estate of Mary Smith" or "XYZ Trust," though to protect the unsophisticated drafter some states have statutes saying that a deed that says "Estate of Mary Smith" or "XYZ Trust" will be valid.
Just to close the circle on the possible confusion of common practice, trust property is legally held by the trustee for the benefit of the beneficiary. Yet, it is pretty common for distributions to be made to "XYZ Trust," not "John Smith, as Trustee of the XYZ Trust."

For example, if anyone who currently has their trust as the beneficiary of their IRA went and checked, they probably have designated "XYZ Trust," not "John Smith, as Trustee of the XYZ Trust."

While it is common to think of a trust as an entity that receives and holds property and so the proliferation of designations/distributions naming trusts, it is the trustee of that particular trust that should legally be named as the recipient.

Besides this perception, I can imagine designations are done this way because trustees may be unknown or change, although it could be designated generically as "Trustee of the XYZ Trust."

You have mentioned statutory support for allowing a designation to support a distribution to a trust. Are you aware of how prevalent that is it or other support for it in the Restatement, UTC, or elsewhere?

And how do you advise your clients with a trust as IRA beneficiary to fill out the IRA beneficiary designation form?
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Sandtrap
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Re: How are Trusts monitored and enforced?

Post by Sandtrap »

Trust Protector

Co Corporate Trustee, etc.

Beneficiaries. . . .only if the trust is setup properly for transparency and accountability and remedies for trustee non compliance.

Depends on how the trust is written. . .

Trust litigation and forensic accountants, etc, can be extremely expensive with no guaranteed positive results.

Not legal counsel, based on experience with more than several trusts gone bad.
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bsteiner
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Re: How are Trusts monitored and enforced?

Post by bsteiner »

restingonmylaurels wrote: Mon May 03, 2021 6:52 am ... how do you advise your clients with a trust as IRA beneficiary to fill out the IRA beneficiary designation form?
Trustees of the XYZ Trust under [my Last Will and Testament] [trust agreement dated [date A].

or

My issue per stirpes except if a trust is created for any of them under my Last Will and Testament [or under a trust agreement dated {date]) then to the trustees of such trust. (This is an oversimplification, and is provided only for illustration.)
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Re: How are Trusts monitored and enforced?

Post by momm77 »

I'm a CPA and have done many trust returns over the year. None have ever been audited. Last year I attended continuing professional education where the presenter showed statistics regarding the audits of various entities. This information showed that the chance of a trust being audited is almost zero. I have seen trustees do things that I felt violated their fiduciary duty several times with no repercussions at all.
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Re: How are Trusts monitored and enforced?

Post by Ranunculus »

momm77 wrote: Mon May 03, 2021 8:53 am I'm a CPA and have done many trust returns over the year. None have ever been audited. Last year I attended continuing professional education where the presenter showed statistics regarding the audits of various entities. This information showed that the chance of a trust being audited is almost zero. I have seen trustees do things that I felt violated their fiduciary duty several times with no repercussions at all.
Interesting, and I'm not surprised given the work that is needed to evaluate a trust document and determine whether the actions of trustees are appropriate. Beneficiaries are probably unlikely to bring action against a trustee if doing so will result in large expenses to the trust, unless the trustee is blatantly committing fraud. Audit rates seem to ebb and flow with the political winds but it does seem likely that very large estates will garner most of the attention of the IRS.
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Re: How are Trusts monitored and enforced?

Post by MrsBDG »

For example, if anyone who currently has their trust as the beneficiary of their IRA went and checked, they probably have designated "XYZ Trust," not "John Smith, as Trustee of the XYZ Trust."
Isn't it commonly held wisdom to NOT make the beneficiary of qualified retirement accounts your trust? You lose some of the advantages, perhaps less with the stretch gone, but still, advantages. Of course, there could be overriding personal/familial reasons it's more critical to protect those funds.
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