The Meeting With Your Settlor

Introduction

Some Trustees have had problems understanding the true role of the Settlor in the Masters Trust.  We hope that this article will help you understand better how important the role is, and how what the Settlor does for the Initial Trustee is a protection for both.

Let’s first clear a couple of things up:

The Settlor has two roles:

  • Agree with the Initial Trustee who will accept and manage the initially conveyed assets
  • Convey initial assets into the Trust

Once the initial Assets are conveyed into the Trust, the Settlor is supposed to “ride off into the sunset” never to be seen again.  Why? For the protection of the Settlor, and for the protection of the Initial Trustee – it has to do with taxes, but we will discuss this in more detail later in this article.

Initial Assets

Many of our clients have asked what the Settlor should be conveying into the Trust.  Our reply is simple: anything of value – an asset or multiple assets.

What the initially conveyed assets are, will stay with the Trust documents for the rest of the life of the Trust.  Although the Initial Trustee may do with them anything the Terms & Conditions of the Trust allow him or her to do, the exact listing of what these initially conveyed assets are will stay with the Trust for as long as the Trust exists – so be creative!

Some have said that $10 is fine as initially conveyed assets.  While this is correct in principle, everything inside me revolts when I hear people say this.  Follow me for a bit… why on earth would someone who cared spend several thousand dollars for an Irrevocable, Non-Grantor, Complex, Discretionary Trust with Spendthrift provisions just to have the Settlor hand the Initial Trustee a $10 bill?!  Whom does that make sense to?  You can do better!  Although there is no rule against an initial conveyance of $10, we suggest that you get creative and have the Settlor at least convey $10, and other items of value as an initial conveyance… like some nostalgic family property which the tax man will have much more difficulty putting a price on due to it’s “value” to the family because it may have been in the family for a couple of generations or been given to Mom by Great Aunt Betty – you get the point!

There’s also another reason to be careful here.  This is a Non-Grantor Trust.  This means that it’s NOT the Trustees who have conveyed initial assets into the Trust to avoid taxation of the assets.  This Trust is constructed to protect assets and income within the Trust from being taxed while Trust property.  The Non-Grantor portion of the name essentially means that the Settlor is essentially equal to what the IRS calls the “Grantor.”

We all agree that the assets of the Trust are for the benefit of the Beneficiaries.  Further, this Trust is built for the protection of family wealth over generations.  It seems that some people think that the initial conveyance of assets into the Trust are sometimes just symbolic.  Although it’s possible, we like to think that the person who is opening the Trust for the benefit of the Beneficiaries has something else in mind!  Posterity… longevity, preservation of wealth for generations, protection of assets from lawsuits and more.   This is why I maintain that both the Settlor, and the initial assets conveyed into your Trust should be given some serious thought.

Ok, so what is your Settlor going to convey into your Trust?  Some clients who bought the Masters Trust have been very creative.  Here are some suggestions:  make it something with sentimental value for the family.  Some have conveyed generations old jewelry, some coin or stamp collections, and others, yep, this is the most unique to date… an early 1960’s Triumph TR3!  Wow!  Give it some thought… we’re sure you can come up with your own version of WOW! for future generations to look back on, and understand that your Settlor meant it!

Settlor: The Mother-in-Law Role

This name “Mother-in-Law Role”is said with some humor, but also with some deep affection for both the relationships and the roles within families.  Please don’t take umbrage when I speak about this as such!

Here’s the premise: The Settlor should “ride into town, agree with the Initial Trustee (son or daughter) that Grandma will open a Trust for the benefit of the Grandchildren, for example.  Why this word picture works so well is that Grandma really does have an interest in benevolence toward her grandchildren, while being ready to leave the assets in the care and keeping of the parents … and riding off into the sunset, never again to be seen or heard of again… in therms of the conveyed assets into the Trust, of course!  You see, the Settlor may never come back and try to retake ownership of the initially conveyed assets, they may never come back and manage those assets, and they can surely never come back and become a beneficiary of those assets.  As far as the Trust is concerned, once the Settlor lays down a few signatures and turns over (we call it conveying assets) the initial assets into the Trust, that’s it.  Bye bye Grandma!

Make sure to check out our Frequently Asked Questions!

Taxation of Trust Assets

As such, because the Trust has its own EIN number, in the eyes of the IRS, it stands as its own entity, similar to a corporation.  The difference is, that much of the income that is generated by putting Trust corpus (original Trust assets) into way of risk in the markets can, and should be classified by the Trustee as “Extraordinary Dividends.”  Thus, the Trust itself does not pay taxes in these situations.

If, however Trust assets are taken outside of the purview of the Trust – something which the Trustee may legally do in order to manage it outside the Trust, this benefit quickly disappears, even though the assets are legally Trust assets.  Because of this, we strongly suggest speaking with a tax professional before taking assets outside of the Trust for management under the Trustee’s name.

If an asset like US$ are brought into the Trust and converted, for instance into Euro, Yen, Rubles or Pesos, the ForEx transaction, whether generating a gain or a loss is non-taxable because of the IRS code requirements to treat this, as “Extraordinary Dividends.”

Who should sign up for the Trust EIN Number with the IRS, and When?

There has been significant discussion about this question.  Some say this, some say that.  The Masters Copyrights LLC paralegal states that it is best for the Settlor to apply for the EIN number for their own protection.  This proves to the IRS that the Settlor really did permanently give up ownership of the conveyed assets to the Trust.

Ask the IRS, and they say anyone can.  The Grantor (again, we call this the Settlor), the Trustee, or the Beneficiary.  Again, for the clear separation between the roles, we strongly suggest that the Settlor is the best person to apply for the EIN number for the Trust.

The Mechanics: Conveying Initial Assets

In order to get this “job” done, you need the Settlor, the Initial Trustee and one, or maybe two witnesses.

If you and your Settlor are in the same location so that you can have this meeting together at the same time, you can easily have only one witness for your signatures.  Otherwise, if you are in New York, and your Settlor in Florida, you’ll each need a witness for your individual signatures.  Sit down, fill out the Certification of Initial Trust Property Received form and have the Settlor convey the assets, the Initial Trustee accept the assets, and the witness acknowledge the two signatures, and you’re done!

Conveying Other Assets

Need to convey other assets into the Trust?  Use the Letter of Transfer And Conveyance Of Property form.  You can have as many people as you like convey assets into the Trust and whenever they want to.

Have questions? Use the Contact Us form to ask them!