Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Role of the Trustee

When Edna Sue Pate was appointed trustee of her 10 year-old grandson’s $100,000 college fund in 2003, it is unlikely that her relatives knew about her gambling addiction. Or perhaps they thought that her grandmotherly instincts would nevertheless make her a reliable protector of her grandchild’s money.

As far as we know, “Gambling Granny” is still on the run and the $97,000 she stole from her grandson will never be recovered. This sensational story only made headlines for a few days, but the consequences for the child are likely to last a lifetime. The importance of choosing your trustee wisely cannot be overemphasized – and if someone has asked you to serve as their trustee, do not accept the role unless you are prepared to properly manage the funds entrusted to you.

The role and powers of a trustee

A trust instrument provides instructions for management of trust assets during the capacity, incapacity and following the death of a trustee. In the case of a revocable living trust, the owner (also known as grantor or trustor) usually serves as the initial trustee, and names successor trustees who generally have all the power of the initial trustee to manage the trust assets.

Named trustees, however, must manage the trust in accordance with the trustor’s instructions and rules that govern the prudent investment of trust property. Trustees could be sued by the beneficiaries if they fail to:

  • Adhere to guidelines for asset management and expenditures during the trustor’s incapacity and following their death (e.g., buying and selling property, making investments for the benefit of the trust),
  • Follow instructions relating to the distribution of trust assets to the trustor and other beneficiaries of the trust, and
  • Prepare periodic accountings of their management activities.

Investing as a prudent person would

In the past, trusts were comprised mainly of real property, so the trustee was required to do little other than maintain it for a time and then transfer it to the beneficiaries. Today, however, trusts are funded with bank accounts, stocks, bonds and other investments, and trustees are charged with not merely safeguarding trust property but also managing it in a way that it appreciates and generates income.

The idea of setting forth rules for prudent investing by trustees followed the 1830 Harvard College v. Amory verdict. In Amory, the court stated that a trustee is obligated to conduct trust business in the same manner that “men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.” The common law Prudent Man Rule (also known as the Prudent Person Rule) thereafter held that unless the trust instrument specifically states what types of investments are permitted, the trust assets should be invested by the trustee as a “prudent man” would invest his own property, taking into consideration preservation of capital, reasonable income, as well as the interests of the beneficiaries.

The majority of states have now adopted the Uniform Prudent Investor Act (UPIA), which we will cover in more detail in Parts II and III.

Challenge and Counter-Proposal

The Coinbase "John Doe" Summons: Has the IRS Overtaxed Its Authority?

In Part I, we outlined the scope of the November 2016 summons served on Coinbase to identify its users and their transaction activity and the IRS’ justification for requesting this data under 26 U.S. Code § 7602. Section 7602 also provides, however, that any person who is entitled to notice of the summons may challenge it. Note that a taxpayer has a heavy burden to establish the illegality of a summons.

First challenge to the summons

One such challenge to the summons has already been made by a Coinbase user on the grounds that it is overbroad. The IRS has since claimed that the challenger, Jeffrey K. Berns, was no longer subject to its “John Doe” summons because he had revealed his identity. In his answer, Berns’ claimed that the IRS was trying to artificially moot the motion instead of defending an improper summons.

Coinbase’s response and counter-proposal

On January 14, 2017, Brian Armstrong, Co-Founder and CEO of Coinbase, Inc., posted an explanation of the company’s refusal to comply with the summons. In that explanation, Armstrong discusses Coinbase’s ongoing commitment to ensuring tax compliance, but without compromising the privacy of its customers. Armstrong argued that compliance is “key to digital currency’s success” and that although Coinbase has complied with other IRS summonses and strives “to comply with all IRS guidance,” the scope of this particular summons “is overly broad and incorrectly implies that all users of virtual currency are evading taxes.”

Armstrong suggests that the IRS should instead require virtual currency companies like Coinbase to issue Forms 1099-B, Proceeds from Broker and Barter Exchange Transactions. He also states that Coinbase is willing to be the first to implement such procedures in order to facilitate tax compliance while still protecting the privacy of virtual currency users. In addition, Armstrong points out that the IRS might wish to revisit its position on the taxation of virtual currency transactions and either treat the exchange like currency instead of property, or provide a de minimis exemption for transactions involving small amounts of digital currency.

California tax attorneys

The tax team at Moskowitz, LLP regularly defends individuals and businesses in tax controversy matters, white collar crime and regulatory issues. Contact our San Francisco office for a consultation.