Thursday, March 23, 2017
Phyllis Taite recently published an Article entitled, Estate of Purdue: A Blueprint for FLPing, 154 Tax Notes (2017). Provided below is an abstract of the Article:
In this article, Taite examines Estate of Purdue, in which the Tax Court held that assets of the decedent that were transferred to the family limited liability company were not includable in the gross estate, that transfers to the family trust qualified for an annual exclusion, and that the estate could deduct interest on loans from the estate’s beneficiaries.
Tuesday, March 21, 2017
Linda Kotis recently published an Article entitled, Nonjudicial Settlement Agreements: Your Irrevocable Trust Is Not Set in Stone, 31 Probate & Property 32 (2017). Provided below is an abstract of the Article:
A nonjudicial settlement agreement (NJSA) is a valuable tool for modifying trusts and addressing the construction of provisions when a trust is silent or unclear. It also can be used to resolve beneficiary and trustee disputes. Through an overview of the new Maryland law and a discussion of the ways in which NJSAs have been used and interpreted in other jurisdictions, this article will give the practitioner an understanding of the advantages and challenges presented by such agreements.
Friday, March 17, 2017
Lionel Smith recently published an Article entitled, Massively Discretionary Trusts, Current Legal Problems (Forthcoming 2017). Provided below is an abstract of the Article:
Trust drafting practices have changed dramatically in recent decades. A range of considerations has led to an increase in the dispositive discretions held by trustees. In some cases, the trustees’ dispositive discretions effectively govern the whole trust structure, leading to what the author calls a ‘massively discretionary trust’. These trusts create a series of legal risks. These include the possibility that the trust property is held on resulting trust from the moment of the trust’s constitution and the possibility that the beneficiaries can collapse the trust and take the trust property. Some drafting techniques may be based on a misunderstanding of the law; some may invite litigation; and the governing legal principles, as understood by some drafters, may be subject to revision and refinement by the courts. This paper will examine some of these possibilities using concrete examples.
Thursday, March 16, 2017
An irrevocable trust used to be truly irrevocable, but now, twenty-five states allow you to change the terms of an old trust through a process called decanting. The trustee of the trust must be the one to initiate the decanting, rewriting the terms of the trust to distribute assets from it into a new trust with all new terms. Thirteen states have passed decanting laws within the last five years in hopes to compete for trust business. South Dakota, Tennessee, New Hampshire, and Delaware are among the states with the most flexible decanting laws, but even they have their differences. As life progresses, old trust terms often do not keep up with the times, and decanting can be an important tool to help families preserve the intent of an original trust.
See Ashlea Ebeling, Old Money, New Bottle: Decant If You Don’t Like the Terms of an Old Trust, Forbes, March 16, 2017.
Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.
Tuesday, March 14, 2017
Les Raatz recently published an Article entitled, State Constitution Perpetuities Provisions: Derivation, Meaning, and Application, 48 Ariz. St. L.J. 803 (2016). Provided below is an abstract of the Article:
The Rule Against Perpetuities, over the last decade or so, has attracted greater attention within areas of the estate planning bar. There are interrelated factors that are the primary reasons for this attention. One is the marketing of trusts that are designed to better protect against the ability of creditors of the beneficiaries of a trust to reach assets of the trust to satisfy their claims. Lengthening the period that such assets may remain unvested in beneficiaries in the trusts is touted as enhancing their value and usefulness. The longer period to defer vesting also has beneficial estate tax consequences. If trust property can be held for generations in a trust not subject to the common-law rule requiring the vesting of interests of the trust in the beneficiaries of the trust within a period ending twenty-one years after the death of the last to survive of those living when the trust became irrevocable, then inclusion of trust assets in the gross estates of beneficiaries for federal estate tax purposes is avoided to a greater extent.
Another less considered estate and income tax consequence is the ability to cause inclusion of trust property in the gross estate of a decedent by means of the decedent springing the Delaware Tax Trap (“DTT”) in order to cause the basis of the property to be “stepped up” to its fair market value at the date of the decedent's death when no estate tax would arise. The DTT occurs when a person holding a power of appointment over property in trust appoints the property in further trust effective upon the person's death and grants another a power to thereafter appoint the property, which second power may be exercised to postpone vesting over a perpetuities period determined from a different date than the date of the perpetuities period applicable to the first power. The intentional triggering of the DTT is a new planning device that arose from the substantial increase in the federal estate tax exemption. If the beginning date applicable to the perpetuities period in which the property must vest pursuant to exercise of the second power would otherwise violate the common-law rule, then state legislation must permit the variance.
However, legislation alone might not assure the abrogation of the common-law Rule Against Perpetuities. Some states' constitutions contain clauses that at least raise the issue of whether such legislation may be prohibited. This Article discusses the proper interpretation of many of those constitutional provisions. The proper interpretation is dependent upon examination of the history of the early development of the constitutional provisions. This author concludes that the meaning of the states' constitutional prohibitions against perpetuities was not to address remoteness in vesting, but to address the historic meaning of “perpetuities,” that of restraints against alienation of title.
Michigan is now the 17th state that will allow wealthy individuals to set up domestic asset protection trusts, which can shield assets from creditors. The new law became effective on March 8, 2017, and also helps settlors save on estate taxes and keep their assets protected for several generations to come. The state has implemented a two-year statute of limitations for creditors to bring claims against the trust assets and a carve out for child support. Michigan residents can now rely on their own state laws to obtain good asset protection trust laws.
See Ashlea Ebeling, Michigan Debuts the Latest State Asset Protection Trust, Forbes, February 10, 2017.
Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.
Thursday, March 9, 2017
With the largest wealth handover in history about to occur, careful planning will be essential because without it, today’s fortunes will suffer substantial erosion. Approximately 25% of the United States and Europe’s billionaires are age 80 and older, compared to 20% in Asia. Tax-friendly holding structures are one way to control assets when the world’s richest people pass their wealth to the next generation. Further, to prevent a tug-of-war between their children, several wealthy elders have chosen to sell their businesses or donate a majority of their fortune to charity.
See Tom Metcalf, The World’s Aging Rich Are Plotting What’s Next, Private Wealth, march 3, 2017.
John P.C. Duncan recently published an Article entitled, The Private Family Trust Company: The Most Customized Financial Institution Ever Devised, Tr. & Est. 36 (March 2017). Provided below is an abstract of the Article:
No financial institution charter ever devised provides a greater level of involvement by its customers in its management or a greater range of services it’s empowered to deliver than the private family trust company (PFTC) as it stands today. That charter, and the trust laws it’s designed to take advantage of, are the conscious result of 24 years of work by a large number of dedicated people to integrate the hopes and aspirations of wealthy families for their futures with the legal environments governing their wealth, especially their wealth held in trusts.
The family visions are wide ranging and multidimensional, covering multiple branches and generations. They address keeping the family together for generations if possible and building strong and productive family members, living lives they find happy and meaningful in light of the family’s values. But, the visions and strategies for realizing them are as various as the families they serve and require legal environments that are supportive, flexible and adaptable.
Wednesday, March 8, 2017
Todd A. Flubacher recently published an Article entitled, How to Deal with Repeal: Dynasty Trust Planning Will Be an Essential Tool, Tr. & Est. 18 (March 2017). Provided below is an abstract of the Article:
Once again, it appears there’s a strong possibility that the federal estate tax and generation-skipping transfer (GST) tax may be repealed. President Donald J. Trump and the Republican majority in the House and Senate all support a repeal of the “death tax.” One must only revisit the last time Republicans held control of the House, Senate and the White House in 2001 to identify the last time the estate and GST taxes were repealed under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA was former President George W. Bush’s tax plan that gradually increased the gift, estate and GST tax exemptions from $675,000 to $3.5 million and lowered the tax rates from 55 percent to 45 percent, culminating in a single year of outright estate and GST tax repeal in 2010, followed by a “sunset” of the entire law on Jan. 1, 2011, returning the transfer tax system to its draconian pre-EGTRRA state. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act), signed into law on Dec. 17, 2010, established a $5 million exemption and 35 percent estate and GST tax rate beginning Jan. 1, 2011. However, heirs of wealthy individuals who died during 2010 benefited greatly from the only period in the last 100 years when our nation had no federal estate or GST tax.
Unless Congressional Democrats have a dramatic change of heart, or Republicans pick up eight additional Senate seats in 2018, it’s safe to assume that any bill that includes estate tax repeal will sunset in 10 years. Without the vote of 60 Senators, the only way repeal can pass without getting blocked by a filibuster is to enact the law as a “reconciliation” bill, which, under Senate procedure, can’t last beyond 10 years. Of course, it’s also possible that repeal could be undone in as little as four years if enough Democrats are elected to the White House and Congress. Thus, any future transfer tax relief is likely to be only temporary, lasting as few as four and not more than 10 years.
For several decades, Delaware has been the jurisdiction of choice for creating a trust due to its ironclad asset protection. However, a 2014 court decision, Kloiber v. Kloiber, has put Delaware’s trust shields to the test. The case involved a Delaware Dynasty Trust (DDT) in the matter of a couple’s divorce. The husband’s father originally set up the DDT for the benefit of his son, his son’s spouse, and their descendants. Throughout the years, the trust accumulated hundreds of millions of dollars in assets. At the time of their divorce, the trust’s assets totaled around $310 million. The settlement forced the trust to be severed, creating a separate trust for the wife, which was funded with some of the original DDT assets. The original protection of the assets was rendered useless when the now ex-wife received assets intended solely for the son, his spouse, and his descendants.
This case has led some investors to consider creating trusts in Nevada over Delaware. Nevada does not allow for claims from “exception creditors,” which includes claims for alimony and spousal support from an ex-spouse. Accordingly, when considering where to create your dynasty trust, it is important to measure the pros and cons of each jurisdiction because asset protection in Delaware can be quite risky.
See Jeffrey M. Verdon, Delaware Trust? You May Want to Consider Nevada Instead, Kiplinger, March 2017.