The Parking Lot Trust: Choose Your Own Adventure

Anticipating snags in the pre-distribution administration of a trust

This is a continuation of the series on everything you ever wanted to know about estate planning trusts.  For an intro and index to this series, please click here.  The linked article will have a series index that gets updated periodically as well, so please bookmark it.

Table of Contents

1. Intro

2. Slides

3. Who is the Trustee?

4. Compensation

5. Trustee Powers

6. Accounting, and Interim Distributions

7. Conclusion, and What’s Next

Intro

Trusts that are funded during life or by nonprobate transfers at the death of a settlor, whether revocable or irrevocable, are designed to streamline administration.  The intent is usually a shorter window of time (when compared to probate) to make final distributions of trust assets, whether outright or in subtrusts. 

Yet, despite best-laid plans, this in-between phase of the trust can take longer than expected.  Estate tax reporting, and payment, can take time – including the wait for (1) the issuance of an estate tax closing letter, or (2) if no closing letter is issued or requested, the passing of the 3-year limitations period, before final distributions can safely be made.  Complex assets, like business interests, may need to be valued for division, distribution, and tax purposes – possibly both at the time of death and the time of funding depending on the passage of time.  Buy-sell purchase options and associated notice periods may need to be addressed.  Environmental issues could apply to real estate held directly or indirectly by the trust.  And, a decision to satisfy distributions in-kind – even where the trustee has express authority – is not a quick and easy decision. 

Trusts are often not drafted to take into account this awkward, in-between phase – which I will call the “parking lot trust” – especially when this phase is protracted.  While trustees may be (but are not always) given the authority to make certain tax, valuation, and other property elections, trusts are often silent on which trustee will be appointed for these specific decisions.  In the meantime, trusts often accrue income and beneficiaries grow impatient about distributions.  After all, they do not understand why they have to wait, and the trustee’s satisfaction of fiduciary duties is often viewed as unimportant for those who are impatient. 

Speaking of fiduciary duties, trustees in the parking lot trust phase may end up taking on powers and obligations that resemble those of an executor.  This is a role that many professional trustees may eschew, because it is higher risk and may lack commensurate compensation.  And, the amount of this compensation could come as a shock.  Even where there is no probate estate, a trustee in this situation may assess an “administration” fee using a scale applicable to executors. 

So, what is a trustee to do when faced with a parking lot trust situation?  And, how can we better draft trusts to account for this period?  While this article is not designed to give you a complete solution or address all issues, the following are some ideas as a segue to follow-up content.  In subsequent articles, we will discuss issues such as application of the UPIA/UFIPA during this period – especially as pertains to marital trust funding and tax elections – along with broader discretionary authority rules applicable to the valuation and division of property. 

Slides

I have included some slides I put together from a recent presentation below, where we discuss some of the broader issues (such as trust EINs) that might come into play: