Do you need an independent trustee?

Yes, you CAN name your brother as trustee of the irrevocable trust you created for your kids.

Next month marks 26 years of my being an estate planning lawyer. One of the statements I’ve heard repeatedly is that when you create an irrevocable gift trust, you *must* name an independent trustee.

That’s just wrong, and I’ll tell you why. But first, let me clarify that this post isn’t about whether trust companies and private fiduciaries are good ideas. This is just about requirements in the tax code.

Suppose I create an irrevocable trust meant to benefit my kids and give the trustee complete discretion. “Full discretion” means the trustee can distribute assets for any purpose or decide not to make any distributions. “Irrevocable” means I can’t change the trust once it’s in place.

Of course, I want to be the trustee so I retain control. But the tax code makes it clear: if I can control the “beneficial enjoyment” of the trust assets, they will be included in my estate for estate tax purposes. I gave the trustee complete discretion over the assets, so if I were the trustee, I would control the beneficial enjoyment of the assets, and the assets would be taxed as if I owned them.

I don’t want that. These kinds of trusts are meant to get assets OUT of my taxable estate.

So if I can’t be the trustee, can I control who will be? If I don’t think the trustee is doing a good job, can I remove them and put someone else in the role?

The tax code says I can remove the trustee and put someone new in the job, but I can only put an independent person in the role. Here, “independent” means someone who isn’t “related or subordinate” to me. My spouse, parents, kids, and siblings are all identified explicitly in the tax code as “related or subordinate” to me.

So, why do I say you can still have your brother be your trustee?

Because in 1995, the IRS issued a ruling that said I could name related people as my initial trustee and successor trustees so long as I did it in the trust document.

It’s only a problem if I can remove an acting trustee and replace them. I can name related people up front, but I can’t interrupt the administration of the trust by changing the trustee to someone else who is related to me.

That makes it look like I have the power to affect the beneficial enjoyment of the trust by playing games with who is the trustee.

This means that I can name a parent or a sibling as the trustee of my irrevocable trust. But once they’re in control as the trustee, I can’t pull them out and put someone else in who is related to me.

THAT is when I can only name an independent trustee.