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2 Alternative Methods to Manage Your Business Inventory

2 Alternative Methods to Manage Your Business Inventory
2 Alternative Methods to Manage Your Business Inventory 850 500 smolinlupinco

Warehousing, salaries, insurance, taxes, transportation…. And don’t forget depreciation and shrinkage! Carrying significant inventory on your business’s balance sheet can be costly. Not to mention, when working capital is tied up in inventory, your business’s other strategic investment opportunities become limited.

Managing your inventory more effectively reduces these costs, improving profits and increasing operating cash flow.

Let’s take a look at two ways to get there. 

Highlights of the Just-In-Time (JIT) method 

Like the name implies, Just-In-Time (JIT) inventory management centers on timely deliveries of raw materials. By shipping them to arrive just prior to when you need them, you’ll have a lower inventory on hand. High production responsiveness and greater flexibility are two benefits of this approach. 

Smaller lot sizes

Smaller lot sizes make it easier to meet changes in market demand and decrease inventory cycle time, pipeline inventory, and lead times. Maintaining a consistent workload on the production system becomes much more achievable.

Tighter set-up times

The smaller lot sizes discussed above are directly associated with reducing set-up times and associated costs. Worth noting: you’ll likely change products less often if your company is inefficient on machine setups. 

Flexibility 

The ability to reassign tasks during bottlenecks or unplanned spikes in demand is crucial to succeeding with this inventory management system. 

Close supplier relationships

Supplier relationships are critical with the JIT approach, since on-time deliveries of high-quality materials are frequently needed. This is supported by establishing long-term relationships with suppliers, which can bring the added benefits of loyalty and higher-quality goods.

Regular maintenance schedules

Unplanned downtime can wreak havoc with this approach. Preventive maintenance is key to keeping productions and shipments running smoothly, especially for companies with a high degree of automation. 

Quality control

Quality is considered from the start with JIT systems. Production workers are responsible for their own work. Defective units are returned to the area where the defect occurred. As a result, employee accountability—and empowerment—are high. 

Key elements of the accurate response method

Forecasting, planning, and production are key tenets of accurate response inventory management systems. This approach features flexible processes and shorter cycle times, which allows for a better match between supply and demand.

Since the supply chain process is sped up, management may delay decisions regarding raw materials when needed, based on a need to obtain more market information or determine production requirements.

Overall performance

With accurate response inventory management, you measure the cost per unit of stockouts and markdowns. This information is then incorporated into the overall evaluation of the company’s performance.

Can’t meet demand? Lost sales are factored into overall costs. This could justify increasing production to obtain and maintain customers. 

Predictable and unpredictable products

Predictable products are manufactured further in advance to “reserve” capacity during the selling season for unpredictable products. This reduces the need to accumulate and pay for large inventories.

Questions? Smolin can help.

Incorporating these techniques can make a significant difference in your business’s efficiency by cutting operational capital needs, strengthening your balance sheet, and even improving cash flow.

If you’re wondering whether either of these systems makes good financial sense for your company, ask your Smolin accountant for more details.

Answers to Your Tax Season Questions

Answers to Your Tax Season Questions
Answers to Your Tax Season Questions 850 500 smolinlupinco

Ready or not—the 2024 tax season is officially open! The IRS is now accepting and processing 2023 income tax returns

Just as in years prior, we’re receiving an abundance of questions about this tax season. Let’s take a look at seven of the most relevant ones. 

1. What are the 2024 tax season deadlines?

For most taxpayers, returns and extensions must be filed by Monday, April 15, 2024.

However, Massachusetts and Maine state holidays will earn some taxpayers an extra two days. You may also be granted additional time to file if you live in a federally declared disaster area.

2. If I request an extension, when is my return due?

Taxpayers who request an extension must file before October 15, 2024.

Of course, it’s important to note that you will still need to pay any taxes owed before April 15. If not, you could face penalties. 

3. When’s the best time to file?

Filing for an extension or waiting until the last minute can be tempting, but filing early has its benefits. Namely, filing your return early in the tax season offers some protection against tax identity theft. 

4.  How does early filing help protect me from tax identity theft? 

When a thief uses another person’s sensitive information to file a fake tax return and claims a fraudulent refund, we call this tax identity theft.

Oftentimes, taxpayers only discover these scams once it comes time to file their return, and the IRS informs them their return is being rejected since a tax return with the same social security number has already been filed for the year. 

Proving which return is valid and which one is the fraud can be a frustrating, time-consuming process. It may also delay your refund.

If you file early, however, the IRS will reject fraudulent returns filed after your return.

5. Why else should I try to file my return early? 

If you want your refund as soon as possible, filing early can help.

In fact, the IRS asserts that “most refunds will be issued in less than 21 days.” If you choose to file electronically and elect to receive your refund via direct deposit, your wait could be shorter.

As an added benefit, receiving a refund via direct deposit eliminates the odds that your refund check could be caught in a mail delay or returned to the IRS as undeliverable, stolen, or lost.  

6. When should I expect to receive my W-2s and 1099s?

Before you can file your tax return, you’ll need all of your Forms 1099 and W-2.

January 31, 2024, is the deadline for employers to file 2023 W-2s and, generally, for businesses to file Form 1099s for recipients of any 2023 interest, dividends, or reportable miscellaneous income payments (including those made to independent contractors).

If early February arrives and you still haven’t received a W-2 or 1099, contact the entity that should have issued it. If that doesn’t work, contact your accountant. 

7. When should I contact Smolin to prepare my return?

An accurate, timely return is crucial to ensure you avoid penalties and receive all of the tax breaks you’re entitled to. Make sure you contact us as soon as possible to get the ball rolling. 

Questions? Smolin can help.

If you still have questions about the 2024 tax season, you’re not alone. Reach out to the friendly accountants at Smolin for more personalized tax advice.

A hybrid DAPT may offer the asset protection you need

A Hybrid DAPT May Offer the Asset Protection You Need
A Hybrid DAPT May Offer the Asset Protection You Need 850 500 smolinlupinco

Asset protection is a vital part of estate planning. Chances are you want to pass on as much of your wealth to family and friends as possible. To do this, you may need to shield your assets from frivolous creditors’ claims and lawsuits.

One option available to you as you plan your estate is to establish a domestic asset protection trust (DAPT).

What is a DAPT?

A DAPT is an irrevocable self-settled trust that empowers an independent trustee to manage and distribute trust assets to beneficiaries. This unique structure enables the trust’s creator (known as the “settlor” or “trustor”) to enjoy the advantages of both asset protection from external creditors and the beneficial use of trust assets. 

Domestic asset protection trusts can offer creditor protection even if you’re a trust beneficiary, but there are risks involved. Bear in mind that DAPTs are relatively untested, so there’s some uncertainty over their ability to repel creditors’ claims.

Not all states currently recognize the DAPT. Those that do include: Alabama, Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. 

Keep in mind that you don’t necessarily have to live in one of those states to qualify; what matters most is where the asset is located. So you can explore the possibility even if your state doesn’t currently participate.

A hybrid DAPT in action

A “hybrid DAPT” may offer the best option to the person planning their estate and to the beneficiary. In this arrangement, you’re not initially named as a beneficiary of the trust, which virtually eliminates the risk described above. But if you need access to the funds down the road, the trustee or trust protector can add you as a beneficiary, converting the trust into a DAPT.

A hybrid domestic asset protection trust is initially set up as a third-party trust, meaning it benefits your spouse and children or other family members, but not you. Because you’re not named as a beneficiary, the trust isn’t considered a self-settled trust, so it avoids the uncertainty associated with regular DAPTs.

There’s little doubt that a properly structured third-party trust avoids creditors’ claims. If, however, you need access to the trust assets in the future, the trustee or trust protector has the authority to add additional beneficiaries, including you. If that happens, the hybrid account is converted into a regular DAPT subject to the risks mentioned above.

Alternatives to a hybrid DAPT

Before forming a hybrid domestic asset protection trust, you should determine whether you need such a trust at all. The most effective asset protection strategy is to place assets beyond the grasp of creditors by transferring them to your spouse, children, or other family members, either outright or in a trust, without retaining any personal control.

If the transfer isn’t designed to defraud known creditors, your creditors won’t be able to reach the assets. And even though you’ve given up control, you’ll have indirect access to the assets through your spouse or children, provided your relationship with them remains in good standing.

Questions about hybrid DAPTs? Contact Smolin.

The hybrid domestic asset protection trust can add flexibility while offering significant asset protection. It also minimizes the risks associated with DAPTs, while retaining your ability to convert to one should the need arise. 

Consult with your accountant today to assess whether a hybrid DAPT is right for you.

Higher Interest Rates Spark Interest in Charitable Remainder Trusts

Higher Interest Rates Spark Interest in Charitable Remainder Trusts
Higher Interest Rates Spark Interest in Charitable Remainder Trusts 850 500 smolinlupinco

If you wish to leave a charitable legacy while still generating income during your lifetime, a charitable remainder trust, or CRT, could be a viable solution. 

In addition to an income stream, CRTs offer an up-front charitable income tax deduction, as well as a vehicle for disposing of appreciated assets without immediate taxation on the gain. Plus, unlike certain other strategies, charitable remainder trusts become more attractive if interest rates are high. You may be considering this option as interest rates have been climbing. 

How these trusts work

A charitable remainder trust is an irrevocable trust to which you contribute stock or other assets. The trust pays you, your spouse, or other beneficiaries income for life or for a term of up to 20 years, then distributes the remaining assets to one or more charities. 

When you fund the trust, you’re entitled to a charitable income tax deduction (subject to applicable limits) equal to the present value of the charitable beneficiaries’ remainder interest.

Types of charitable remainder trusts

There are two types of CRTs, each with its own pros and cons. A charitable remainder annuity trust (CRAT) pays out a fixed percentage of the trust’s initial value, ranging from 5% to 50%. CRATs do not allow additional contributions once it’s funded.

A charitable remainder unitrust (CRUT) pays out a fixed percentage of the trust’s value, also ranging from 5% to 50%, but the value is recalculated annually, and you will be allowed to make additional contributions.

CRATs offer the advantage of uniform payouts, regardless of fluctuations in the trust’s value. 

CRUTs, on the other hand, allow payouts to keep pace with inflation because they increase as the trust’s value increases. CRUTs have the advantage of allowing you to make additional contributions, but you may want to consider the potential disadvantage that your payouts shrink if the trust’s value declines.

CRTs and a high-interest rate environment

To ensure that CRTs are used as legitimate charitable giving vehicle, the IRS requires that the present value of the charitable beneficiaries’ remainder interest be at least 10% of the trust assets’ value when contributed. 

Calculating the remainder interest’s present value is complicated, but it generally involves estimating the present value of annual payouts from the trust and then subtracting that amount from the value of the contributed assets.

The calculation is affected by several factors, including the length of the trust term (or the beneficiaries’ ages if you choose to make payouts for life), the size of annual payouts, and an IRS-prescribed Section 7520 rate. If you need to increase the value of the remainder interest to meet the 10% threshold, you may be able to do so by shortening the trust term or reducing the payout percentage.

In addition, the higher the Sec. 7520 rate is at the time of the contribution, the lower the present value of the payouts and, therefore, the larger the remainder interest. 

In past years, rock-bottom interest rates made it difficult, if not impossible, for many CRTs to qualify. But as interest rates soared, it has become easier to meet the 10% threshold and increase annual payouts or the trust term without disqualifying the trust.

Is now the time for a CRT? Smolin can help.

If you’ve been exploring options for satisfying your charitable goals while generating an income stream for yourself and your family, now may be an ideal time to consider a charitable remainder trust. Contact us if you have questions.

Will your court awards and out-of-court settlements be taxed

Will your court awards and out-of-court settlements be taxed? 
Will your court awards and out-of-court settlements be taxed?  850 500 smolinlupinco

Courts grant monetary awards and settlements for a range of reasons. 

For example, you may receive compensatory and punitive damage payments for personal injury, discrimination, or harassment. In this situation, some of the awarded amount you receive may be taxed by the federal government, and perhaps some will be taxed by your state government. 

Hopefully, you’ll never need to know how payments for personal injuries are taxed, but here are the basic rules if you or a loved one receive an award or settlement and need to understand the tax implications.

Under current tax law, you’re permitted to exclude from your gross income the damages received on account of a personal physical injury or a physical sickness. It doesn’t matter if the compensation is from a court-ordered award or an out-of-court settlement, and it makes no difference if it’s paid in a lump sum or installments.

Exceptions: Emotional distress, punitive damages, back pay

Emotional distress isn’t considered a physical injury or physical sickness and is excluded from the tax exemption. So, for example, you would need to include an award under state law that’s meant to compensate for emotional distress caused by age discrimination or harassment in your gross income. However, if you require medical care for treatment of the consequences of emotional distress, then you may exclude the amount of damages not exceeding those expenses from gross income.

Punitive damages for any personal injury claim, whether physical or not, aren’t excludable from gross income unless the court awards it under certain state wrongful death statutes that provide for only punitive damages.

The law doesn’t consider back pay and liquidated damages you may receive under the Age Discrimination in Employment Act (ADEA) to be paid in compensation for personal injuries. Therefore, if you receive an award for back pay and liquidated damages under the ADEA, you must include those awards in your gross income.

Court case examples

As you may suspect, the IRS and courts often decide that awards and settlements are taxable even if the recipient feels they should exclude them from taxable income. 

In one case, a taxpayer sustained an injury while at a hospital. She sued for negligence but lost her case. She then sued her attorney for legal malpractice, and the court awarded her $125,000. The IRS said the amount was taxable because her award wasn’t for any physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed. (Blum, 3/23/22)

In another case, the Tax Court ruled that married taxpayers weren’t entitled to income exclusion for a settlement the husband received from his former employer in connection with an employment discrimination and wrongful termination lawsuit. Although the settlement agreement provided for payment “for alleged personal injuries,” there was no evidence to support that it was paid on account of physical injuries or sickness. (TC Memo 2022-90)

Legal fees

You aren’t allowed to deduct attorney fees you incur to collect a tax-free award or settlement for physical injury or sickness. However, to a limited extent, attorney’s fees (whether contingent or non-contingent) or court costs paid by, or on behalf of, a taxpayer in connection with an action involving certain employment-related claims are currently deductible from gross income to determine adjusted gross income.

After-tax recovery

Keep in mind that while you want the best tax result possible from any settlement, lawsuit, or discrimination action you’re considering, non-tax legal factors, together with the tax factors, will determine the amount of your after-tax recovery. Consult with your attorney on the best way to proceed, and we can provide any tax guidance that you may need.

Questions? Smolin can help.

This article provides a basic overview of the tax implications of court awards and out-of-court settlements. If you need tax information about your award or settlement, the best course of action is to consult with your accountant.

Standard-Business-Mileage-Rate-Increasing-in-2024

Standard Business Mileage Rate Increasing in 2024
Standard Business Mileage Rate Increasing in 2024 850 500 smolinlupinco


The IRS recently announced an increase to the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business. In 2024, the cents-per-mile rate for panel trucks, pickups, vans, and cars will rise from 65.5 cents to 67 cents.

The increase is meant to reflect, in part, changing gasoline prices. According to AAA, the national average price of a gallon of gas rose from $3.10 in December 2022 to $3.12 in December 2023.

Tracking expenses vs. standard rate

Generally, businesses can deduct actual expenses attributable to the business use of vehicles, such as:

  • Vehicle registration fees 
  • Licenses 
  • Insurance
  • Repairs
  • Oil
  • Tires
  • Gas

You may also claim a depreciation allowance for the vehicle. (Of course, it’s worth noting that certain limits may apply.) 

If maintaining detailed records of vehicle-related expenses feels tedious, the cents-per-mile rate may be a helpful alternative. However, you’ll need to keep track of certain information for each trip, including:

  • Destination 
  • Rate
  • Business trip

Businesses use the standard rate when reimbursing employees for the business use of their personal vehicles. This practice aids in attracting and retaining employees who utilize their personal vehicles for business purposes. The rationale behind this is that, according to existing laws, employees cannot deduct unreimbursed business expenses, including business mileage, from their individual income tax returns.

When employing the cents-per-mile rate, it’s important to note that adherence to various rules is necessary. Failure to comply may result in reimbursements to employees being treated as taxable wages for them.

How the rate is calculated

The IRS commissions an annual study about fixed and variable costs of vehicular operation, including depreciation, repairs, maintenance, and gas. The business cents-per-mile rate is adjusted each year based on this study.

Occasionally, the IRS will change the rate midyear if gas prices fluctuate substantially. 

Cases where the cents-per-mile rate is not allowed

The cents-per-mile method isn’t appropriate—or allowed—in every scenario.

  • How you’ve claimed deductions for the same vehicle in the past
  • Whether the vehicle is new to your business 
  • If you plan to take advantage of certain first-year depreciation tax breaks on it

Questions? Smolin can help.

Need assistance determining the best method to deduct business vehicle expenses? We’re here to help. Contact us to learn more about tracking and claiming these expenses on your 2023 tax returns and throughout 2024.

Q1 Tax Deadlines 2024

2024 Q1 Deadlines Employers Need to Know
2024 Q1 Deadlines Employers Need to Know 850 500 smolinlupinco

A new year means new tax-related deadlines! Here are the key dates that business owners and employers should keep on their tax planning radars in the first quarter of 2024. 

Jan. 16, 2024

  • Final installments of 2023 estimated taxes are due.

  • Farmers and fishermen must pay estimated taxes for 2023.

(If not, you must file your 2023 return and pay all taxes due by March 1, 2024 to avoid an estimated tax penalty.)

Jan. 31, 2024

  • File 2023 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration. Send copies to your employees.
  • Provide copies of 2023 Forms 1099-NEC, “Nonemployee Compensation,” to those who received income from your business, where required. File these forms with the IRS.
  • Provide copies of 2023 Forms 1099-MISC, “Miscellaneous Information,” reporting applicable payments to recipients.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2023.

You may pay undeposited tax of $500 or less with your return or deposit it. If the undeposited tax is higher than $500, you must deposit it. If you deposited the tax for the year on time and in full, you may file your return before February 12.

  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report income taxes, Social Security, and Medicare taxes withheld in the fourth quarter of 2023.

    You can pay tax liability of less than $2,500 in full with a timely filed return. You have until February 13 to file your return if you deposited the tax for the quarter in full and on time.



    (If you are an employer with an estimated annual employment tax liability of $1,000 or less, you may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2023 to report income tax withheld on all nonpayroll items.

    These include backup withholding and withholding on accounts, such as annuities, IRAs, and pensions. You may pay a tax liability of less than $2,500 in full with a timely filed return.

    You have until February 12 to file the return if you deposited the tax for the year on time and in full. 

Feb. 15, 2024

  • Provide the appropriate version of Form 1099 (or other information return) to give annual information statements to recipients of relevant payouts made during 2023.

    With the consent of the recipient, you may issue Form 1099 electronically.

    This due date applies only to the following types of payments:
  • All payments reported on Form 1099-B.
  • All payments reported on Form 1099-S.
  • Substitute payments reported in Box 8 or gross proceeds paid to an attorney reported in Box 10 of Form 1099-MISC.

Feb. 28, 2024

  • If you’re filing paper copies, File 2023 Forms 1099-MISC with the IRS.

    (If you’re filing electronic copies, the filing deadline is April 1.)

March 15, 2024

  • Calendar–year partnerships and S Corporations: File or extend your 2023 tax return and pay any tax due.
  • Last day to make 2023 contributions to profit-sharing and pension plan (if return isn’t extended). 

Questions? Smolin can help. 

While helpful, this list isn’t exhaustive. Additional tax deadlines may apply to you and your business. To ensure you’re meeting all applicable deadlines, please contact us to discuss your situation in more detail. 

11 Scenarios Avoid 10% Penalty Tax Early IRA Withdrawals

11 Scenarios Where You Can Avoid the 10% Penalty Tax on Early IRA Withdrawals
11 Scenarios Where You Can Avoid the 10% Penalty Tax on Early IRA Withdrawals 850 500 smolinlupinco

When financial challenges arise, it can be tempting to take an early withdrawal from your traditional IRA. However, making the decision without understanding the tax implications is risky.

Here’s what you need to know, including your options for avoiding the 10% early withdrawal penalty tax.

First off, the penalty doesn’t always apply.

A withdrawal from a traditional IRA will almost always constitute taxable income. The percentage of the withdrawal that will be considered taxable is dependent on whether you’ve made any nondeductible contributions to the account.

If you have made nondeductible contributions, each withdrawal consists of a proportionate amount of your total nondeductible contributions. This portion of the withdrawal is tax-free. The proportionate amount of each withdrawal that consists of deductible contributions and accumulated earnings is taxable.

Of course, 100% of a withdrawal is taxable if you’ve never made any nondeductible contributions.

Exceptions to the 10% penalty tax

If any of these 11 exceptions are met, you may be able to avoid paying the 10% early withdrawal penalty tax on the taxable amount of your withdrawal.

1. The withdrawal is a substantially equal periodic payment (SEPP)

These annuity-like withdrawals must be taken for at least five years—or until you turn 59½. The rules for SEPPs are complicated, though, so it’s best to meet with an accountant before deciding to proceed with this route. 

2. The withdrawal is for qualified medical expenses

Medical expenses are a common reason to make an early withdrawal. If your qualified medical expenses exceed 7.5% of your adjusted gross income, the amount of excess won’t be subject to the tax.

3. The withdrawal is to cover higher education expenses

If you make the withdrawal and pay qualified higher education expenses in the same year, an equivalent amount of the withdrawal will be penalty-free. 

4. The withdrawal will cover health insurance premiums during a period of unemployment

If you have received unemployment compensation for 12 consecutive weeks or longer from the state or federal government during the current or previous year, you can use the withdrawal to cover health insurance premiums without a penalty. 

5. There is a birth or adoption in your immediate family

For each eligible birth or adoption, you may make a withdrawal of up to $5,000 penalty-free. 

6. You’re purchasing your first home

You may make a penalty-free withdrawal within 120 days of the purchase to cover qualified principal residence acquisition costs. However, this type of tax-exempt withdrawal is subject to a $10,000 lifetime limit.

7. You are a qualifying military reservist

If you are a military reserve member called to active duty for at least 180 days (or an indefinite period), your early withdrawal will be exempt from the penalty. 

8. You’re making the withdrawal after a qualifying disability

If you become mentally or physically disabled to the extent that you can no longer do your job or a similar gainful activity, your withdrawal will be exempt from the penalty tax IF the disability is expected to lead to death or be of long/indefinite duration.

9. The IRS makes a withdrawal to cover debt

If the IRS makes a withdrawal to levy against the account, the tax won’t be charged.

10. Withdrawals after death

In most cases, withdrawals taken from an IRA after the account owner’s death are exempt from the 10% penalty. If, however, the funds are rolled over into the surviving spouse’s IRA or the surviving spouse elects to treat it as their own account, the penalty will still apply.

11. A personal or family emergency is expected

Starting in 2024, a new exception for withdrawals used for unforeseeable or immediate financial needs relating to personal or family emergencies will be available thanks to the SECURE 2.0 law. Only one distribution of $1,000 is allowed per year, and you may repay it within three years. 

Be proactive

As you can see, exceptions to the 10% penalty tax are quite specific. As such, most or all of your early traditional IRA withdrawals will likely be subject to the tax. This can push you into a higher federal income tax bracket. This can possibly lead to you paying both a 10% early withdrawal penalty and higher state and federal tax payments.

Plan your finances accordingly if you plan to make a withdrawal. 

Questions? Smolin can help.

This article provides only general information, and many penalty tax exemptions have additional requirements we haven’t covered. If you’re considering making an early withdrawal from your traditional IRA account, the best course of action is to consult with your accountant.

Providing Beneficiaries Power Remove Trustee

Consider Providing Your Beneficiaries With the Power to Remove a Trustee
Consider Providing Your Beneficiaries With the Power to Remove a Trustee 850 500 smolinlupinco

Appointing a trustee who is, well, trustworthy is crucial to ensuring a trust operates as intended. As such, you may invest a large amount of time and mental energy in selecting the right person for the job. 

But what happens if your carefully chosen trustee fails to carry out your wishes? 

Your beneficiaries may want to remove or replace your trustee in this circumstance, but they won’t be able to without facing a lengthy and expensive court battle—that is, unless you grant them the power to remove a trustee.  

A trustee’s role and responsibilities 

A trustee holds the legal responsibility to administer a trust on behalf of its beneficiaries. This person’s authority may be broad or extremely limited, depending on the terms of the trust.

There are certain fiduciary duties to the beneficiaries of the trust that a trustee must uphold. For example, a trustee is expected to treat all beneficiaries impartially and fairly. They must also manage the funds in the trust prudently.

It sounds simple, but when beneficiaries have competing interests, a trustee’s role can quickly become complicated. When it comes to making investment decisions, the trustee must find a way to balance the beneficiaries’ variable needs.

In some ways, choosing an executor and naming a trustee are somewhat similar. Both roles require financial acumen, dedication to the beneficiaries and the deceased person, and great attention to detail. 

Since investment expertise is important to the role, many people opt to choose a professional trustee rather than a friend or family member. Those who don’t should encourage their trustee that they can—and should—consult with financial experts as appropriate.   

“Cause” for removing a trustee 

If you don’t grant your beneficiaries the option to replace or remove a trustee, they would have to petition a court to remove the trustee. For a petition to be considered, the beneficiaries must be able to prove “cause” for the removal or replacement.

While the definition of “cause” isn’t the same in every state, there are some common grounds for removal, such as: 

  • Bankruptcy or insolvency that impacts the trustee’s ability to manage the trust 
  • Conflict of interest between the trustee and at least one beneficiary 
  • Fraud, misconduct, or other mismanagement of funds  
  • Legal incapacity 
  • Poor health 

While cause isn’t always difficult to prove, going to court can be expensive and time-consuming. Plus, many courts are hesitant to remove a trustee who’s been chosen by the trust’s creator.

With this in mind, it may be wise to include a provision in the trust document that empowers beneficiaries to remove or replace a trustee without cause if they’re dissatisfied with their management of the trust.

As an alternative, you might choose to list specific circumstances in the trust document under which your beneficiaries may remove a trustee. 

Alternative options to limit beneficiaries’ power

If you’re concerned about your beneficiaries having too much power over your trust, you might choose not to have them elect a removed trustee’s successor. Instead, you could opt to list a succession of potential trustees within the trust document.

If one trustee is removed, the next person on the list automatically becomes the trustee, instead of the beneficiaries choosing the next one.

Appointing a “trust protector” may also be a viable option. A trust protector is a person you grant power to make certain decisions regarding the management of your trust, including whether to remove or replace trustees.

Questions? Smolin can help.

For additional information on the role a trustee plays—and what your beneficiaries can do in the event that your person of choice fails to perform the job—contact a knowledgeable Smolin accountant.

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