Tuesday, December 6, 2016
Wealthy families can now transfer their wealth to the next generations at a transfer tax discount of up to 50% while receiving up to a 50% charitable income tax deduction. Two important developments have allowed ultra wealthy families to enjoin their desires for multi-generation wealth transfer and expansion of charitable visions. A 2004 revised regulation permitted charities to create new pooled income funds (PIFs) that distributed income in the form of post-contribution long term capital gain under a trustee as long as it was included in the trust document—or a total return PIF. This new regulation allowed PIFs to distribute significantly more over time. This opportunity has only recently become an opportunity as these total returns PIFs are now permitting multi-generation donor agreements. Further, any realized long-term capital gain that is not distributed is considered permanently set aside for charity and not taxed to the trust or beneficiaries. This feature allows income to grow and compound tax-free for the benefit of future generations. These availabilities create more opportunity for ultra high net worth families and their charitable desires.
See Richard Haas, Fusing Family and Philanthropic Visions, Wealth Management, December 5, 2016.
Monday, December 5, 2016
In the 1930s when gift and estate tax rates increased, wealthy families began to set up trusts. Now, these trusts are approaching mandatory termination dates, which leaves advisors considering how to help the beneficiaries. First, planners must identify the beneficiaries and review the state’s laws that govern the trust. Planners should then meet with these beneficiaries and make sure they understand the terms of the trust, allowing the beneficiaries to deal with any disparity and possibly affording opportunities for equalization strategy. These beneficiaries will need to balance their expectations with their estate plans and keep protected from creditors. Lastly, planners should develop an agreement with the beneficiaries for decision-making, governance, and use purposes.
See Dennis R. Delaney & Charles R. Platt, Six Tips for Depression Era Trusts’ Judgment Day, Wealth Management, December 2, 2016.
Naming a trust as your beneficiary for an IRA is not a good decision for everyone. Noncompliance with required minimum distributions (RMDs) can be costly, and naming a trust can be inflexible for individual beneficiaries, so it is a good idea to make sure that it is the right move for you.
To obtain tax efficiency for RMD rules, there must be a designated beneficiary, one who has a measurable life expectancy. This rules out trusts as they are entities, not individuals. However, there are ways to make a trust a designated beneficiary, following “see-through-trust” requirements. If an IRA leaves distributions to a non-see-through trust, then the trust will receive unfavorable benefits under the “no-designated-beneficiary” rules. In order to receive the RMDs, you must use the life expectancy of the oldest beneficiary. If a trust has a younger beneficiary, naming the trust as a beneficiary of an IRA may prevent that individual from maximizing the “stretch,” which would be afforded had the beneficiary been named as an individual. So, should you name a trust as a beneficiary for an IRA? It depends, so you must consider the complexities and limitations before doing so.
See Rockwell T. Gust IV, Is Naming a Trust as Beneficiary of Your IRA a Good Idea?, Financial Advisor, December 2, 2016.
Friday, December 2, 2016
Sarah Pursglove decided to take a deeper look into her husband’s finances when the Finnish entrepreneur left her. Robert Oesterlund swore in court that his fortune only totaled a few million dollars, but Pursglove could think of several family purchases that cost above and beyond that amount. She flew to the Bahamas to figure out what her husband was really worth. There she found an accounting statement that claimed Oesterlund was worth at least $300 million. As she packed her bags for the flight back home, her family’s fortune immediately began disappearing into various shell companies, bank accounts, and trusts under a worldwide financial system catering to the ultra rich. The system effectively offshores wealth and makes the richest people appear to own very little.
Over the next two years, Pursglove would rely on her wealth squad to untangle the defenses of the offshore financial world. It all started when Oesterlund created his businesses and was subsequently looking to avoid costly taxes. Eventually, he set up a Cook trust, suggested by his corporate counsel, who assured him he would be “untouchable.” As Pursglove’s lawyers began to figure out the scheme her husband was surmounting, they filed court documents for a divorce and to impose a sweeping asset injunction, which would prohibit Oesterlund from selling, merging, or borrowing against any of his assets and additional offshoring. The corporate fraud lawsuit proceeded in Florida, where the family’s companies were being run. It was eventually discovered that Oesterlund was using a Bahamas-based company to transfer all his assets and avoid all United States tax liability—a tactic referred to as “transfer pricing.” Pursglove’s attorneys claimed that Oesterlund began to shield assets from his wife as the divorce loomed near. Shortly after a judge ruled that Pursglove could see thousands of her husband’s documents, both sides’ lawyers met and discussed the possibility of Oesterlund going on the run if he had to fork the documents over. Consequently, this brought things to a head. Oesterlund would have to expose himself or threaten his fortune. Oesterlund’s one-time allies were now becoming his enemies to avoid fighting the greater good—the system. The wall of secrecy around Oesterlund’s accounts began to crumble. The case still remains open and the outcome is unknown, but it begs the question: is there justice in wealth battling wealth?
See Nicholas Confessore, How to Hide $400 Million, N.Y. Times, November 30, 2016.
Wednesday, November 30, 2016
Patrick J. Duffey recently published an Article entitled, Dude, Where’s My Income? Examining Property Conversion Clauses in Marital Trusts, 51 Real Prop. Tr. & Est. L.J. 1 (2016). Provided below is an abstract of the Article:
The “Marital Deduction” matters. As an instrument of public policy, it is a powerful statement by Congress that spouses are a single taxable unit. As a planning tool it is a flexible technique, subject to no dollar limitation, with few technical restrictions, and with relatively simple practical application. For these reasons and others, it is widely used both during life and at death. In fact, there is no single deduction that is more significant. It is, simply, the foundation of an estate plan for the quintessential married couple.
But there is a peculiar, technical, and inflexible requirement of the Marital Deduction that, though extraordinarily important, is often overlooked by planners who largely rely on form documents to provide the necessary “boilerplate” provisions required for modern trusts: spousal conversion of unproductive property. This required power, often effectuated by a trust provision (a Property Conversion Clause), operates to fulfill the substance behind the command found in the Treasury Regulations (Regulations) that trustees must distribute all income from trust property in order to qualify for the Marital Deduction. When a trust holds a significant amount of unproductive property, that rule is rendered toothless without a power, exercisable by the spouse, to force the trustee to sell that property and purchase income-producing property in its place.
The questions raised by the spousal conversion power are numerous. When, if ever, does underproductive property become “unproductive” for purposes of the Regulations? What timing requirements are associated with the spouse's right of conversion? When will local law suffice to fulfill this requirement? What portion of trust assets must be unproductive in order to trigger application of the conversion requirement? What portion of trust assets must be unproductive in order to trigger application of a given Property Conversion Clause? May the trustee use alternate methods to make adequate distributions to the spouse while preserving otherwise desirable (or unmarketable) trust property?
The Regulations, case law, and Internal Revenue Service (Service) provide guidance in this area that implicate these issues and more. All are worthy of comment. Although this Article does address those discrete issues, its central focus is the inexorably interrelated dichotomy between the role of Property Conversion Clauses as check-the-box requirements for a tax deduction and as substantive provisions in millions of trusts that hold billions of dollars in endlessly varying assets. This duality is examined both from the perspective of a planner looking to draft such a clause and the perspective of an administrator struggling with a flawed or missing provision. Towards that end, this Article includes sample provisions and practical suggestions drawn from analysis of state and federal law, including statutes, regulations, published guidance, and case law.
Tuesday, November 29, 2016
Sarah Worthington recently published an Article entitled, Exposing Third-Party Liability in Equity: Lessons from the Limitation Rules, Equity, Trusts and Commerce Ch. 14 (Forthcoming). Provided below is an abstract of the Article:
This article provides a re-examination of third-party liability in equity. The exercise was prompted by a difficult case on limitation periods in equity, but the conclusions – if correct – have far wider significance. Three major points are made. First, it has long been conceded that the language of constructive trusts and constructive trustees is confusing. It is suggested here that the language disguises a relatively straightforward search for situations where there are property splits (trusts) or property management responsibilities (fiduciary responsibilities). Secondly, accessory liability in equity looks to be something of a misnomer, since it appears that the drive is not to find individuals with particular associations with the wrongdoer and shared liability for the primary wrong, but instead to find individuals who are themselves trustees or fiduciaries because of their particular association with the original managed property. Liability follows accordingly, and is primary not secondary liability. Finally, where there are fiduciary responsibilities for property management, liability is in two forms: compensation for loss to the managed assets; and disgorgement of disloyal gains. The former is distinguishable from common law compensation in its focus on remedying loss to the property fund, not the loss to individuals interested in the fund. These insights – in particular the fiduciary characteristics of third parties in equity, and the workings of equitable compensation – have significant practical consequences.
Donald Trump is planning to put his business assets into a blind trust run by his oldest children. However, he does not plan to meet the legal definition of a blind trust due to the trust not being managed by an independent party and him possibly having his hand in some of the decision-making. If he were to set up a true blind trust, he would need to appoint an independent trustee and liquidate his assets. On the other hand, Trump will be required to disclose his assets under the Ethics in Government Act.
See Debra Cassens Weiss, Trump Plans to Place His Businesses in a Blind Trust Run by His Children; Will It Resolve Conflicts?, ABA Journal, November 14, 2016.
Sunday, November 27, 2016
What if, as a successor trustee, you realized that your family member left nearly $1 million to strangers or dead people and little to none to their immediate family? Would you contest this trust on lack of capacity? An individual signing legal documents must be of sound mind, memory, and understanding. If the instructions devised, appear to be rational and contain no irregularities that is a good sign that the individual had capacity. If you suspect that the individual lacked capacity, it is a good idea to consult a lawyer, petition the probate court, and appoint an independent executor. Do not sit back and let your families $1 million inheritance disappear.
See Quentin Fottrell, My Stepfather Left $1 Million to Strangers and Dead People, Market Watch, November 26, 2016.
Saturday, November 26, 2016
New Mexico has updated its trust and estate legislation in 2016. The state has amended the Uniform Statutory Rule Against Perpetuities, abolishing the rule for personal property held in trust and extending the time period to 365 years for real property held in trust. § 45-2-904 (A)(8), (B), New Mexico Statutes Annotated (NMSA). Additionally, New Mexico has adopted the Uniform Trust Decanting Act (§§ 46-12-1 et seq., NMSA) and the Uniform Powers of Appointment Act (§§ 46-11-1 et seq., NMSA). Finally, in its revision, New Mexico has made the Uniform Probate Code more uniform (§§ 45-1-1 et seq., NMSA).
Special thanks to Jack Burton (Attorney, Rodey Law) for bringing this information to my attention.
Friday, November 25, 2016
Stephen Liss & Marianne R. Kayan recently published an Article entitled, IRC Section 2801: What U.S. Estate Planners Need to Know, Trusts & Estates (Nov. 2016). Provided below is a summary of the Article:
The inheritance tax section of Internal Revenue Code Section 2801 will soon become effective, bringing with it unique and difficult challenges for advisors and taxpayers. While the U.S. estate and gift tax system impose obligations on the donor, the IRC Section 2801 inheritance tax requires the donee to prove a negative or pay a 40 percent inheritance tax. Specifically, whenever a U.S. domiciliary receives a gift, bequest or distribution from a foreign trust, the proposed regulations require the donee to determine whether tax is due under Section 2801. Unless an exception applies, it’s presumed that all gifts, bequests or trust distributions are subject to tax under Section 2801, unless the donee proves otherwise. Let’s review how U.S. domiciliaries may overcome that presumption and what domestic estate planners need to know to properly advise their U.S. domiciled clients.