Wills, Trusts & Estates Prof Blog

Article: Stakeholder Fiduciaries

Evan J. Criddle recently published an article entitled, Stakeholder Fiduciaries, Wills, Trusts, & Estates Law ejournal (2020). Provided below is the abstract to the Article. 

Legal scholars and judges often assert that fiduciaries bear a duty of “undivided loyalty” that precludes concern for self-interest. This chapter explores the limits of selfless loyalty in American fiduciary law by showing that the law often permits parties to serve as fiduciaries while also maintaining a beneficial interest in their own exercise of fiduciary power. I coin the term “stakeholder fiduciary” to describe these fiduciaries who are formal beneficiaries of their own exercise of fiduciary power. I argue that stakeholder fiduciaries are genuine fiduciaries despite the fact that they claim a beneficial interest in their own performance. But I also make the case that fiduciary law does (and should) treat stakeholder fiduciary relationships differently than non-stakeholder fiduciary relationships.

Stakeholder fiduciary law departs from non-stakeholder fiduciary law in two important respects. First, the fiduciary duty of loyalty applies differently to stakeholder fiduciaries, requiring not complete self-abnegation, but rather solidarity with other beneficiaries. This means that a stakeholder fiduciary may retain an equitable share of the profits she generates through her position—even when those profits are the product of conflicted transactions or misappropriated opportunities. More striking still, when a stakeholder fiduciary exercises voting rights in collective governance, she may vote solely in her own interests as long as she does not misuse her voting power to undermine the purposes of the fiduciary relationship or dominate other beneficiaries.

Second, courts repose a different kind of trust in stakeholder fiduciaries. When a non-stakeholder fiduciary is alleged to have violated her duty of care, courts do not ordinarily accord any deference to the fiduciary’s judgment. The same cannot be said of stakeholder fiduciaries: as long as a stakeholder fiduciary’s interests are plausibly aligned with the interests of other beneficiaries, courts allow the fiduciary to decide for herself how much time and energy she should devote to a particular decision. Taking into account the stakeholder character of certain fiduciary relationships therefore clarifies why courts apply a highly deferential standard of review to the decisions of some fiduciaries (e.g., business partners) but not others (e.g., investment managers). The best explanation, I argue, is that courts trust stakeholder fiduciaries to exercise reasonable care without intrusive judicial oversight precisely because these fiduciaries have a direct personal stake in their own performance.

Article on Family Fiduciaries in the Protective Jurisdiction

Ben Chen recently published an article entitled, Family Fiduciaries in the Protective Jurisdiction, Wills, Trusts, & Estates Law ejournal (2020). Provided below is the abstract to the Article. 

Baby boomers in Australia are entering retirement with a higher life expectancy and more wealth than any generation before them. Mental and physical decline can make it difficult or impractical for many older people to safeguard their own financial interests. In particular, guardians and attorneys who manage property for the elderly have the opportunity to misuse their power to enrich themselves. Responding to recommendations from law reform commissions, Australian legislatures tend to impose the strictest form of fiduciary regulation on guardians and attorneys.

Bucking the trend, this article argues in favour of a flexible model of fiduciary regulation. This model originates from historical Chancery jurisprudence and continues to enjoy support in New South Wales. The prevailing, strict model not only tends to be overprotective, it also ignores the reality that litigation about the properties of the elderly is often driven by inheritance expectations. The flexible model can alleviate the potential overprotectiveness of fiduciary law and accommodate harmless conflicts in close families.

Article on Cooperative Compliance Program for Individuals and Trusts: A Proposal for a Compliance Passport

Philip Marcovici and Noam Noked recently published an article entitled, Cooperative Compliance Program for Individuals and Trusts: A Proposal for a Compliance Passport, Wills, Trusts, & Estates Law ejournal (2020). Provided below is the abstract to the Article. 

Tax and beneficial ownership transparency regimes result in substantial costs and risks for many law-abiding individuals, family trusts, and private investment vehicles. Such parties suffer from substantial direct and indirect costs, legal uncertainties, and risks to their privacy. This article develops a proposal for a voluntary program which draws upon cooperative compliance programs such as the International Compliance Assurance Programme. Under the proposed program, the authorities of the relevant jurisdictions would determine on a joint basis whether the participant is in full compliance with their tax obligations and whether there are any money laundering concerns. The proposed program would ensure the participants’ compliance while reducing the costs and risks for the participants and the relevant governmental authorities.

Biden Won’t Enforce DOL's Revamped ESG Policy, State Street Says

President-elect Joe Biden's administration has gotten to work around the topic of retirement policy. It appears that the Biden administration will be focusing on ordering non-enforcement of the U.S. Department of Labor's "revamped ESG rule." 

The DOL modified the rule in response to a slew of criticism, but the Biden administration is "likely to do a sweep of all regulatory agencies to ensure that regulations encourage environmental social and governance investing and that companies address climate change, racial equity, and inclusion" said Melissa Kahn, State Street's managing director. 

Kahn further stated, “I think the Biden administration will say, ‘Let’s put a hold on any enforcement of this regulation.’ Whether they decide to pull back the regulation entirely or make revisions remains to be seen, but the first thing they can do is put in place a non-enforcement policy.” 

Kahn also predicted that the Biden administration will focus on fiduciary regulation. There still remains a great deal of uncertainty around the topic of fiduciary regulation, so it would not be surprising for the Biden administration to revisit the topic and possibly make corrections to the DOL's fiduciary rule pertaining to investment advice. 

The uncertainty has made it difficult for financial advisors regarding the recommendation of rollover space and whether it is a fiduciary act or not. 

Kahn stated that she does not believe the Democrats will win both Senate seats in Georgia, leaving control of the Senate in the hands of the GOP. 

See Tracey Longo, Biden Won’t Enforce DOL's Revamped ESG Policy, State Street Says, Financial Advisor Mag, November 17, 2020.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

Rothschild descendant claims initial victory in legal battle with Vienna

A Rothschild descendant has "claimed an initial victory" in a legal battle with the City of Vienna regarding the challenge of a medical trust set up by his ancestors. The medical trust was seized by Nazis in 1938 and is now controlled by the city. 

Geoffrey Hoguet is suing the Austrian authorities for control of the trust. "The case is the latest chapter in Austria’s long, slow reckoning with one of the darkest chapters in its history, the persecution of its Jewish citizens after it came under Nazi rule, and the theft of their property and assets." 

Hoguet was supported by a court when his lawyer claimed that the city of Vienna had a conflict of interest over the foundation's finances. The court held that "an independent figure, or "collision curator" must be appointed to represent the charity in legal proceedings over a 2017 change to its statutes." 

This decision was very important as it was a step forward in correcting "the course of Nazi-era injustices endured." Hoguet has now called on Viennese politicians to take action and reinstate and independent governing board. 

Hoguet, an American, learned that his great-grandfather set up a foundation for mental health and neurological conditions. "The Nathaniel Freiherr von Rothschild foundation flourished in the city known as the birthplace of modern psychiatry, and home of Sigmund Freud, with board members at one point including a Nobel laureate."

Hoguet has made it his mission to end the pattern of erasure that "scrubbed" the city of any remembrance of the Rothschild's philanthropy and investment that shaped the city. 

See Emma Graham-Harrison, Rothschild descendant claims initial victory in legal battle with Vienna, The Guardian, November 14, 2020. 

Special thanks to Daryane Couto for for bringing this article to my attention.

5 estate planning disasters you'll want to avoid

According to Fox Business, "over the next 25 years, as much as $68 trillion of wealth will be passed to succeeding generations." With wealth transfers rising, there are unique estate planning opportunities available for those who are prepared. However, due to the constant changes on the tax environment, there will also be great challenges. 

Luckily, there are steps you can take to protect you and your beneficiaries from unnecessary legal fees and taxes.

Below are five things you will want to avoid in your estate planning strategy: 

Not properly designating beneficiaries

This is one of the most common estate planning mistakes. For newly developed estate plans, this mistake can be easily overlooked, especially with retirement plans. 

If you are successful in designating beneficiaries, they will be able to avoid the process of probate and assets will transfer to them directly. Doing so will allow them to avoid delays and costs associated with probate. 

Putting down a minor as beneficiary

When minors are set as beneficiaries, problems could arise if they are still minors when you die. Minor beneficiaries may not have the legal authority to take control of their inheritance until they reach the age of 18 or 21. If beneficiaries lack legal authority, a court-appointed guardianship will need to be established to watch over the assets on their behalf. 

You could avoid this process by adding a guardian for the minor in your will, which will likely lead to the court appointing that person as guardian over the assets. 

Another route is to set up a trust for the beneficiaries and name a trustee. This will also allow beneficiaries to avoid the probate process. 

Failing to fund a trust

Many people establish a trust, but fail to fund the trust afterward. It is imperative that you place assets into your established trusts to keep it properly funded. If you fail to properly fund the trust, it is possible that your intentions for the trust will be ignored, leading to the assets not covered by the trust to be required to go through probate.

Creating a tax nightmare for your heirs

When you pass on real estate or other highly appreciated investments to your heirs, they are not responsible for any income taxes not the appreciated assets when they receive them. 

However, this does not apply to inheritance of retirement accounts like 401ks and traditional IRAs. Aside from a surviving spouse, heirs inheriting these accounts will be responsible for the taxes owed on the accounts. This could lead to a devastating increase on income taxes.

To avoid this nightmare, you could convert portions of your retirement accounts to a Roth IRA, which will allow you to pay the conversion taxes at the current income tax rate. Upon your death, the money inside the Roth will transfer to your heirs tax-free. 

Not going through the estate planning process

Many people, if not all, do not look forward to the estate planning process. Therefore, many will avoid this process. However, estate plans are vital to taking care of your loved ones financially and have the potential of saving them a lot of stress after you die. 

See David Nichols, 5 estate planning disasters you'll want to avoid, Fox Business, November 12, 2020. 

Estate and Gift Tax Chart for Non US Persons (Greencard Holders and NRA’s)

Probate Stars provided the 2021 Estate and Gift Tax Chart for Non US Persons (Greencard Holders and Nonresident Aliens). 

The chart includes the IRS tax adjustments for tax year 2021 and updates the exemption and exclusions for estate and gift tax for Non US Persons. 

The current rate of taxation for taxable gifts and bequests is 40%. "Amounts gifted beyond the annual gift exclusions and beyond the lifetime applicable exclusion would be taxed at that rate.  Likewise, at death, any taxable bequest beyond the lifetime applicable exclusion is taxed at 40%." However, not all gifts are taxable. For example, gifts and bequests to US citizen spouses are not taxed. 

United States Citizens and Permanent Residents are subject to United States estate and gift tax on worldwide assets. Further, US citizen spouses can receive lifetime gifts at death from their spouse at an unlimited amount. "  With respect to bequests at death, a non-US citizen spouse can receive the benefits of citizen status through the use of a Qualified Domestic Trust (“QDOT”), where the estate tax is deferred until actually paid out to the non-citizen spouse, or the spouse does at some point become a citizen."

The Applicable Exclusion Amount is "the amount transferred prior to death that can be transferred free of gift tax." Upon death, the same Applicable Exclusion amount will apply, apart from any portion that was used to eliminate the gift tax during life. These portions will reduce the amount available at death.

See Estate and Gift Tax Chart for Non US Persons (Greencard Holders and NRA’s) , Probate Stars, (last visited November 9, 2020). 

Estate Planning Strategies: IRS Applicable Federal and 7520 Interest Rates Lowered

The Internal Revenue Service (IRS) published interest rates every month that taxpayers use to "determine the interest to be charged in income tax and estate planning strategies." 

These published rates are referred to as Applicable Federal Rates and "depend on the length of the term of a promissory note, the number of times interest is paid each year (i.e., monthly, quarterly, or annually) and the interest paid by the U.S. Treasury on its obligations. Also, the IRS publishes a rate under Section 7520 of the Internal Revenue Code. This rate is used for actuarial calculations. "The 7520 Rate equals 120% of the federal mid-term rate rounded to the nearest two-tenths of a percent." 

Due to Covid-19, banks have lowered interest and rates and bond yields have reduced dramatically, drawing close to historic lows. These reductions affect the Applicable Federal Rates and the 7520 rate. 

"For instance, the annual rate for November 2020 (compounded annually) applied to short-term obligations (1-3 years) is 0.13%, the mid-term rate (4-9 years) is 0.39% and the long-term rate (over nine years) is 1.17%. The 7520 Rate which is used to make actuarial calculations for several estate planning techniques is 0.4% for November transactions." 

The use of the lower interest rate results in a lower cash flow return to the lender, meaning more cash growth in the trust.

Grantor Retained Annuity/Unitrust Trusts and Charitable Lead Trusts all benefit from these low-interest rates. However, other trusts like, Qualified Personal Residence Trusts, do not share the same positive relationship with low-interest rates. 

Unfortunately, the low-interest rates will not last forever, so no is a great time to consider taking advantage of the low rates and implementing estate planning strategies that will allow you to do so.

See Christopher R. Gray, Estate Planning Strategies: IRS Applicable Federal and 7520 Interest Rates Lowered, The National Law Review, November 2, 2020. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Once You Create a Living Trust, Don’t Forget to Fund It

If you do not stay on top of your trust, your heirs could have a hassle in probate court. Many people set up trusts, but forget that their accounts do not "magically flow" into their trust.

Below are a few steps you can take to ensure that your trust is or will be funded successfully. 

1. Check all the deeds on your real estate holdings. 

"If you have a primary residence, vacation home, timeshare and/or rental property, you’ll want to confirm that these assets are in the name of your trust." 

2. Review your financial statements. 

"Gather any bank and investment/brokerage statements that are not part of an IRA or retirement plan and confirm that each of these accounts has your trust listed as the owner."

3. Examine your annuity and life insurance policies. 

"Verify the parties to these contracts: the insured/annuitant, owner, and primary and contingent beneficiaries."

4. Address IRAs and other retirement plans separately. 

"IRAs and retirement plans must be treated on a stand-alone basis when determining whether a trust should be listed as a primary or contingent beneficiary." 

See Michael Clark, Once You Create a Living Trust, Don’t Forget to Fund It, Kiplinger, October 26, 2020. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

The Alabama Supreme Court On Proving The Existence and Terms Of an Oral Trust

Ledbetter v. Ledbetter involved siblings disputing over the existence of an oral trust. "The Alabama Supreme Court reversed a summary judgment finding that the evidence was insufficient to support the existence of an oral trust under Alabama Law."

Lois, the mother of William (known as "Russell"), Laurie Ann, and Warren, died in August 2015. She was survived by these three children. 

Laurie Ann and Warren were expressly excluded from the will and unsuccessfully contested the will. When Laurie Ann and Warren contested the will, they learned that Russell was the beneficiary of the life insurance policy and was also trustee of the Lois Ann Ledbetter Family Irrevocable Trust. Russell had claimed the life insurance policy proceeds and deposited them into his personal checking account. 

Laurie Ann and Warren sued Russell and claimed that Lois had created an irrevocable trust for their benefit. 

Laurie Ann and Warren submitted evidence that Russell applied for a tax identification number for the Trust and made at least the initial premium payment on the policy. Lois and Warren also submitted an unsigned trust document prepared by another of Lois's attorneys. This document stated that there was an oral agreement between the "Grantor and the Trustee. 

Under Alabama Uniform Trust Code, you must prove an oral trust's creation and terms by clear and convincing evidence. 

The Alabama Supreme Court found that a reasonable jury could find that Laurie Ann and Warren showed by clear and convincing evidence the creation and terms of an oral trust. 

See The Alabama Supreme Court On Proving The Existence and Terms Of an Oral Trust, Probate Stars, October 27, 2020.