The phrase “Independent Trustee” is often used in estate planning when creating trusts. Estate planning lawyers frequently insist that a trust name a trustee, in addition to someone who will be a beneficiary, but also someone who is “independent.”
If a beneficiary is a trustee and his or her authority is not explicitly limited to authorizing payments to him- or herself necessary for his or her “comfort, support, or maintenance” (or some other phrasing of the “ascertainable standard”), then the court will hold that the assets are taxable in that beneficiary’s estate. A trustee who can distribute to him- or herself may also be taxed on the trust income under Internal Revenue Code § 678.
So, since I must have an independent trustee, what is it?
The phrase “Independent Trustee” generally means a person who has no beneficial interest (other than as a potential appointee under a power of appointment held by another), present or future, vested or contingent, direct or indirect, in the trust. As you can see from this language, we look very carefully to make sure that someone who will be an independent trustee is highly unlikely to have a beneficial interest in the trust assets, even if there is only a remote possibility of such an outcome.
The independent trustee also cannot be any of the following (a) a contributor to the trust; (b) a beneficiary; (c) a spouse, former spouse, ancestor, descendant, sibling or employee of a contributor or beneficiary (or of a spouse or former spouse of a contributor or beneficiary); (d) a corporation or other entity, or an employee of a corporation or other entity, in which the stock or other holdings of a contributor (or beneficiary, or a spouse or former spouse of a contributor or beneficiary) and the trust are significant from the viewpoint of voting or other control; (e) a subordinate employee of a corporation or other entity in which a contributor or beneficiary (or a spouse or former spouse of a contributor or beneficiary) is an executive or (f) any party, not described in (a) through (e) of this clause (iii), that is, or, if nonadverse (within the meaning of Section 672(b) of the Code), would be, a “related or subordinate party,” with respect to a contributor or a beneficiary (as if the beneficiary were a contributor), within the meaning of Section 672(c) (after application of Section 672(e)) of the Code, (iv) is not controlled, directly or indirectly, within the contemplation of income or any transfer tax, by any person or other entity that, according to the portion of this sentence preceding this clause (iv), is ineligible to be an Independent Entity and (v) under the United States internal revenue laws in effect at such time can alone (as though the only trustee), to such extent as some person or other entity (described in the portion of this sentence preceding this clause (v)) could alone (as though the only trustee), possess and exercise each power given a trustee by this instrument or by law
(a) without causing any attribution of the trust estate of the trust to any person (whether personally or as deemed transferor or otherwise) for purposes of income or any transfer (including without limitation gift, estate and generation-skipping) tax before the person becomes entitled to receive it outright (or, because of a power granted in or according to this instrument to the person as a beneficiary, the person becomes entitled to pay it to the person or the estate, creditors or creditors of the estate of the person) or it is paid to, or for the benefit of, the person,
(b) without otherwise causing any generation-skipping transfer and
(c) without causing any deemed sale or exchange, or transfer to a foreign trust, of any of the trust estate.
[“Corporate Trustee” shall mean the Trustee but shall not include any trustee that is not a corporation (or limited liability company) with more than $100,000,000 of trust assets under its supervision.]