[Originally published in and © The Charles Arthur Newsletter. Reposted by permission.]
Geo. McCalip
Webmaster and Former Trustee
Wow! You finally have your Trust Indenture. Congratulations! Job finished. Right?
Wrong. More like just getting started. A properly run trust will result in a couple of three ring binders full of paper, of which the indenture makes up maybe 30 pages.
On the other hand, your Policies and Procedures can take over 300 pages. You will find that your Trust needs these 300+ pages as much as or more than most other things in those binders. Why?
- The Trustees can rely on the stated Policies and Procedures to show they have acted within their authority and have no personal liability.
- The Trust Protector can cite the Policies and Procedures to help them carry out their responsibilities.
- The Beneficiaries can refer to the Policies and Procedures if they have questions regarding the handling of the Trust.
- The General Manager and Executive Secretary can use the Policies and Procedures as guidance while performing their responsibilities.
So, what would you expect to find in those 300+ pages? Policies and Procedures cover a full range of subjects from Trustee qualifications to real estate management to a pet as a beneficiary.
Before we go into further detail on the subjects of Policies and Procedures, let us take a brief look at the format employed for these documents:
- The top right corner should have a first line of “Policies and Procedures” and a second line stating the section of the Policies and Procedures (e.g., Beneficiaries).
- The name of the Trust appears centered below that.
- After that comes a table as shown here:
- Subject refers to the reason for the document.
- The Trustees assign the Number for any new document. This consists of one or two letters followed by a three digit number.
- References cite the authority for the document (e.g., Experience or a published source).
- The Trustees assign the revision for any revised document.
- Objective states the reason for the document.
- Distribute to would include, as appropriate, Trustees, Trust Protector, Beneficiaries, Executive Secretary, General Manager, contract employees, other business associates of the Trust.
- Date Created would obviously have the date the Trustees created the document. Should the Trust purchase a set of Policies and Procedures, this should have the date of the indenture.
- The actual Policy follows the table. Usually a half page or less, this lays out the reason for the procedure.
- Following the Policy, the Procedure lays out the actual steps for implementing/following through with the Policy.
Having discussed the format, let us survey the Sections of the Policies and Procedures and some of the items in each of them.
Accounting and Finance
Given the purpose of a trust, the fact that this section deals with more topics than any other section should surprise no one. Topics included range widely to cover the full scope of Trust activities.
Aside from the obvious Financial Record Keeping, you need to know about a number of other subjects and how to handle them. You will definitely require knowledge of how to open and use bank accounts. That requirement may extend to foreign bank accounts. You will need to understand the Trust’s ability to both borrow and lend money, and the paperwork involved for those undertakings.
An essential understanding of the Trust’s cashflow includes both active and passive income, as well as expenses such as Trustee fees, billings by officers of the Trust, reimbursement of expenses authorized by the Trust, and payments/distribution (and the difference between the two) to children.
While most of the above transfers easily from the corporate world, you will also need an understanding of distributions and how to properly carry those in the year end report.
You will find all of this and more, much more, in the Accounting and Finance section of the Policies and Procedures.
Assets
Trust assets can vary widely, from computers to cash, from intellectual property to insurance policies, from a coin collection to a car. This section deals with how to transfer items into the Trust, and how to identify and track them once they have become Trust property or part of the Corpus. It also has information on such esoteric matters as how to transfer assets between trusts, when and how to convert assets to cash, and purchase of new assets. You will also find instructions for insurance and dealing with asset loss in this section. While most of this would have an analogous equivalent in a corporate, or non trust, environment, the Asset Policies and Procedures show how assets relate to the corpus of the Trust, and the need to handle them to properly maintain that relationship.
Beneficiaries
Your Trust exist for the Beneficiaries. While the indenture will cover those born into the status of Beneficiary, the Policies and Procedures may well cover those marry into such status, as well as those who achieve it by adoption. This also holds true for non-human beneficiaries such as organizations and pets. Having established the identity of each beneficiary, the Trustees then need to notify each beneficiary of their/its status. Further, Trustees should have guidance on how to handle such things as the possibility of guardianship for an underage beneficiary, dealing with a difficult beneficiary, and the education of beneficiaries. Beneficiary Policies and Procedures should also address direct gifts to a minor and discretionary payments, as well as normal distribution from both the management trust and any asset holding trusts.
Business Procedures
Having a business can generate revenue for the Trust to cover overhead, increase the corpus, and/or add to the distributions to the beneficiaries. The Business Procedures Policies and Procedures provide the Trustees, Executive Secretary, and General Manager with the information necessary to set up and run a business within the Trust structure.
Start by adding a business trust, registering a DBA, and opening a checking account. Just follow the directions in the Policies and Procedures, including the Settlor’s checklist.
In lieu of starting a business from scratch, the Trustees may opt to purchase an existing business or business Trust, or partner with an existing business. Once again, just follow the Policies and procedures.
Once the Trust has a business, or a portion of a partnership, it will need to conduct correspondence with customers and other businesses. It may need to lease equipment, deal with banking problems, or arrange for employee business travel or vacation time. The business may find it necessary to remove Employees, or even a Trustee. Replacements will require proper training, as wlll any new employees, especially those starting the business. Yet again, refer to the Policies and Procedures for directions on these issues.
One more thing; the business will need to keep minutes along with copies, or originals of other important documents (e.g., a Trustee’s resignation, and Acceptance of Trust from the replacement Trustee). A Policy and Procedure document explains the necessity of, and steps for, an internal audit of the Trust Books.
Legal Forms and Procedures
As an entity created by contract, your Trust lives and dies by legal documents. Trustees, in particular, but also the Executive Secretary and General Manager, need to have a heightened awareness of the importance of legal documents in the life of a trust.
While many issues covered in this section fall under the cover of common sense, it helps to know the details, as the devil lives in them.
The Legal Forms and Procedures section acts as the first line of defense when your Trust or Trustee(s) come under attack from state or federal agencies, or private citizens. Properly drafted Policies and Procedures will guide you in such a way as to insure you stay strictly within the bounds of what you can do without jeopardizing your Trust.
Trustee training should include scanning through all sections of the Policies and Procedures at least once, but require reading of the Legal Forms and Procedures section at least twice. A Trustee can reference the material in other sections as necessary, but needs to know how to respond in certain situations without having to look up the information, or at a minimum have an awareness of the need to refer back to the material.
It would obviously also behoove the Executive Secretary and General Manager to well acquaint themselves with the contents of the Legal Forms and Procedures section.
Personnel
What qualifies a person to act as a Trustee? What experience should an Executive secretary have? Do you have a job description for the General Manager you need to hire? How do you go about contracting for the services of a Bookkeeper/Accountant?
If things don’t work out with a Trust employee, what termination rights do the have? How do you properly and legally end their employment?
As you may have guessed, the Personnel section of the Policies and Procedures has the answers to all of these questions.
Protector
What does your Trust Protector do? What do you ask a potential Protector to determine their ability to do the job? Who does the Protector work for?
Once you have hired the Protector, how do you train them? What Trust documents do they need? How do they interface with the Trustees, and who does the Protector represent?
While the Protector need not become involved in minor disputes, should they become involved, what documentation should they produce? Who should receive copies of said documentation, and how should they receive it?
What constitutes breach of trust by a Trustee or an employee of the Trust? How can the Protector properly remove a Trustee?
In case you haven’t guessed by now, you can find the answers to all of these questions in the Protector section of the Policies and Procedures.
Real Estate
Your Trust may want to acquire real estate for either of two reasons, or both. First, real estate presents a good place to invest part of the Trust’s assets. Second, the Trust may with to provide housing for a beneficiary (and possibly their family), or own the site for a trust business.
However, your Management Trust should never own the property. Holding trusts exist, or get created, for that. How do you move the property into a holding trust when your Trust acquires it? How do you move it out of the holding trust when selling it? What documents will you need in either case?
Assuming you have the property in the holding trust, who makes any mortgage payments? How do you lease it out?
Speaking of leases, if the Trust, or one of its Business Trusts, has a lease on space, can a Trust sublease? If so, how?
In case you haven’t guessed by now, you can find the answers to all of these questions in the Real Estate section of the Policies and Procedures.
Registers and Certificates
Given that it concerns money, and who gets how much, distribution can easily become a major area of contention. It shouldn’t and won’t given that the Trustees and Executive Secretary do their jobs correctly.
With the exception of certain special distributions, the amount distributed to any person depends on their Trust Capital Units (TCUs) and/or Units of Beneficial Interest (UBIs).
As long as the Trustees allocate the TCUs and UBIs fairly per the indenture and any applicable Policies and Procedures, The actual distributions come down to simple math that, most likely done in a spreadsheet.
For further information on these matter we, of course, refer you to the Registers and Certificates section of the Policies and Procedures.
But wait! There’s more!
Assuming you read the previous article, “Should You Let an AI Write Your Trust Indenture?”, you have learned about the Trust Indenture, Oath of Privacy, and Policies and Procedures. This puts you well ahead of a large majority of those people who already have a common law trust.
In our next article we will round out not only what you need to know about beyond what we have already covered, we will also have exciting news on how you can get these things for your Trust.