Uses For Nominee Trusts In Estate Planning , By Attorney Brian F. Mahoney

Introduction

A Massachusetts nominee trust is (a) in writing, (b) has one or more persons or corporations named as trustees, (c) has an identified corpus, (d) has beneficiaries identified on a written schedule held by the trustees but not disclosed to the public, and (e) contains various trustee powers as to corpus dispositions that can only be exercised when authorized by the beneficiaries.

The beneficiaries are the owners of the corpus for all purposes, including income, gift and estate taxation, except being the owners of record of the corpus. There is a Principal/Agent relationship between the Trustees and the Beneficiaries, and it is somewhat the reverse where usually in a Grantor Trust, the Trustee instructs the Beneficiaries on what he will/is allowed to do for them, but in a Nominee Trust the Beneficiaries direct the Trustee.

The nominee trust was conceived as an estate-planning vehicle to allow a decedent’s real estate to pass to beneficiaries without the necessity of it being probated, e.g., the undisclosed beneficiaries would be also be the trustees of the Nominee trust (you can’t have the same trustee be the only beneficiary, but the same two trustees can be the same two beneficiaries!)

The trustees have liability in tort but not in contract if the trust has appropriate language stating that those dealing with the trust may look only to trust property when a dispute arises with the trustee and giving the trustee ostensible authority to deal with the trustee.

The reasons for holding title in such a trust are:

• Anonymity of ownership,
• Ease of title transferability: you do not need to re-record a deed every time you want to change the percentage of interest in a property held by the trust,
• Avoidance of state recording fees for deeds and a transfer tax (formerly known as tax stamps). Regarding new deeds (you can allocate and change a percentage of ownership in Realty merely be amending the percentage of ownership in the Schedule of beneficiaries)

Use In Estate Planning to Avoid Estate Taxes

Family Gifts Reduce Estate Size to Avoid Estate Taxes

Hypothetical Facts No.1:

Peter and Carol and their four children enjoyed the summer home jointly owned by Peter and Carol. The home is now worth $440,000; is mortgage free; and is now solely owned by Peter because Carol died. The four children are now married with families and use the summer place more than Peter. Assuming Peters’s estate will be subject to estate taxes, then the transfer of the summer home out of his estate could save estate taxes

Documentation Needed for Situation No.1:

• Written opinion of value from a realtor to support fair market value of $440,000;
• Record (a) Nominee Trust Declaration (not the whole trust but a certificate only) with Peter and one or more of his children as initial trustees, and (b) Deed of Summer Home to the trustees;
• Unrecorded Nominee Trust and Nominee Trust Schedule of Beneficial Interests showing Peter as 100 percent beneficial interest holder;
• Off-record assignments in Year 1 from Peter to each or his four children and their spouses of a 2.5 percent beneficial interest in the nominee trust worth $11,000 for a total of $88,000 for all assignments; thereby reducing his estate (without a gift tax) by that $88,000.00, and so in year one we merely (Off-record) revise the Schedule of Nominee Trust Beneficial Interests showing Peter as owning 80 percent and each of his four children and their spouses owning 2.5 percent;
• Off-record assignments in Years 2 through 5 or beyond, of percentage interests to each child equal to not more that $11,000 based upon current opinions of value.

Expected Results:

Peter’s estate will be reduced each year and there will be no gift taxes or gift tax returns required since each gift is within the annual exclusion amount. Please keep in mind that gifts over the $11,000.00 per anum reduce the allowable Estate Tax Exclusion (i.e. in Mass. Assume the exclusion is $950,000 and lifetime gifts of $100k were made and no gift tax was paid then the Exclusion is reduced to $850,000.00.) The children’s and their spouses cost basis of the real estate will probably be the same as John’s and will not be stepped-up upon John’s death.

Regarding Equitable Division: Second Marriage Residence:

Hypothetical Facts No.2:

Bill, a widower with two children, and Jean, a widow with three children, marry and contribute equally to the purchase of a new home and take title as tenants by the entirety. Their wish is to have a place to live and on the death of the survivor to sell the home and divide the proceeds by distributing one-half to Bill’s children and one-half to Jean’s children.

Documentation Needed:

• Unrecorded Trust Agreement establishing B&J Home Trust with one of Bill’s children and one of Jean’s children as trustees, to be revocable until the first spouse dies, to hold the home for Bill and Jean during their lives with a provision for all income to go to the survivor, and on the death of the survivor to distribute one-half of the trust to the children of Bill and one-half of the trust to the children of Jean (the trustees would typically sell the home and distribute the proceeds but they could sell to a family member at the then fair market value);
• Record: (a) Declaration of Trust establishing B&J Realty Trust, a Nominee Trust with Bill, Jean, and one of Bill’s children as trustees and (b) Deed from Bill and Jean to the trustees of B&J Realty Trust;
• Unrecorded Trust and Schedule of Beneficial Interests showing trustees of B&J Home Trust as 100 percent beneficial interest holders.

Expected Results:

There could be an estate tax marital deduction for the full value of the home in the estate of the first spouse to die, and if so an estate tax on the full value of the home in the estate of the surviving spouse. But, provisions could also be made to allocate an interest each year to the children of the remainder interest as in the first hypothetical to avoid gift taxes and to reduce the estate value before death. The tax basis of the home should step-up on the death of the second spouse.

Important Provisions

The following should be included in any declaration:

• Name and Purpose: i.e.: “This Trust may be referred to as the ‘The Smith Realty Trust’ and is intended to be a nominee trust for federal and state income tax purposes.”
• List of the names and addresses of the Trustees and Successor Trustees (so that if ever the property is to be sold, then a prospective buyer of that property can get clear title by establishing that the person who purports to be a Trustee of this unrecorded and private Trust actually has authority as a Trustee)
• Trustees Powers I.e. “…but the Trustees shall have no authority to maintain bank accounts in the name of the Trusts or Trustees but they may maintain bank accounts in the name of the beneficiaries.”
• Schedule of Beneficial Interests“ The terms of the Smith Realty Trust dated 4-14-05 (the ‘Realty Trust’) are hereby approved and the above-named beneficiary, in consideration of the execution by the Trustees of the Realty Trust therein named, agrees with said Trustees of the Realty Trust (a) to be bound by the Realty Trust; (b) to save said trustees of the Realty Trust and their successors and assigns harmless and indemnified from and against all claims and demands of every name and nature which they may suffer or incur by reason of the Trusteeship, unless caused by their willful act or default; (c) that the Trustees of the Realty Trust may withhold from any distribution, transfer, or conveyance such amount as they from time to time reasonably deem necessary to protect themselves from personal liability; (d) that each Trustee shall be responsible only for such Trustee’s own willful breach of trust; (e) to reimburse said Trustees of the Realty Trust promptly upon request for all costs and expenses, including their reasonable compensation incurred or suffered by them.”

Exculpatory Clauses Needed:

Most trust instruments contain a provision similar to:

“Every agreement, lease, deed, mortgage or other instrument of document executed or action taken by the Trustees or a majority of the persons appearing on record to be Trustees hereunder shall be conclusive evidence in favor of every person relying thereon of claiming thereunder that at the time if the delivery thereof or of the taking of such action this Trust was in full force and effect, that the Trustee’s execution and delivery thereof or taking of such action was duly authorized, empowered and directed by the beneficiaries, and that such instrument or document or action taken is valid, binding, effective and legally enforceable.”

Most grantees, mortgages and easement receivers require a certificate from all beneficial interest holders authorizing and directing the trustees to effectuate the transaction and a certificate of one or more of the trustees reciting their authority from the beneficial holders to carry out the transaction and other fact as to incumbency and trust existence.

The trustee’s certificate is usually recorded (although I think it unnecessary in view of the trust language); the beneficiary’s certificate is not recorded.

If the beneficial holder is also a nominee trust, don’t forget to obtain trustee and beneficiary certificates from the second level players.

Limitations of Nominee Trusts

It will do absolutely no good regarding MassHealth /Medicaid Planning, because it is not really a transfer in their eyes. Also, you cannot take a Homestead declaration on it, so creditors can attach it in a lawsuit, assuming liability.

Copyright by Attorney Brian F. Mahoney 2-25-05