Wills, Trusts & Estates Prof Blog

Article on The Prudence of Passivity: An Argument for Default Passive Management in Trust Investing

Bryon W. Harmon & Laura A. Fisher recently published an Article entitled, The Prudence of Passivity: An Argument for Default Passive Management in Trust Investing, ACTEC L.J. Vol 44, No. 2, 147-182 (Spring 2019). Provided below is an abstract of the Article.

Trustees, like all investors, are exposed to a wide-ranging marketplace of investment vehicles, techniques, strategies, and theories. Trustees have a threshold choice to make with respect to the manner in which trust assets are to be invested. Active management - historically, a conventional approach - aims to "beat the market" and surpass benchmark returns by picking and choosing among individual securities based on the trustee's determinations that they are mispriced (i.e., undervalued) and/or by timing transactions based on forecasting. Alternatively, trustees may choose to simply invest in and own entire markets, or asset classes, and accept overall market returns by using low cost asset class index funds. This latter approach is known as passive investing, or indexing.

This article traces both the historical development of financial scholarship regarding investment practices and legal scholarship addressing the evolution of fiduciary duties. It then reviews the modern prudent investing rules governing trust investment and explores several major issues: (1) whether a passive approach is encouraged or even required by law, (2) why so few professional trustees seem to employing passive investment management and (3) whether recent case law focusing on the costs of investing in the contexts of ERISA is a harbinger of similar arguments in the private trust area.

We conclude with a recommendation that a passive investment strategy become the default standard for corporate and professions trustess under modern iterations of the prudent investor rule.

Family Feud Continues over Estate Left by the Founder of Rush Enterprises

W. Marvin Rush II died at the age of 79 back in May of last year, but the battle over his estate is far from over, considering that he was the founder of one of the largest commercial truck dealership chains in North America. Rush Enterprises currently has a market cap of $1.32 billion. W.M. "Rusty" Rush III and his step-mother, Barbara, continue to take the fight to the Texas courts.

Rusty, 61, is the current chairman, current chief executive and president of Rush Enterprises, and began working for his father at the company in 1974. Barbara was Marvin's third wife and previously his secretary, and Rusty claims that his father insisted that she sign a marital agreement before the marriage occurred in 1991. The document stated that she "gave up any rights she might otherwise have, then or in the future, to claim any interest in any of Marvin's separate property or what might otherwise be community property," including any interest or title in Rush Enterprises, according to an amended lawsuit filed in Bexar County district court. However, the lawsuit also says that Marvin signed a durable power of attorney in 2013 that gave Barbara "unilateral control" over all of his assets. Rusty claims this is a clear sign that his father did not have the mental capacity to sign the document, because he did not disclose it to either of his sons, and prior to this Marvin had also been adamant about his wife staying out of the business decisions.

Barbara created the Rush Living Trust in 2017, transferring most of Marvin's assets into it, according to the lawsuit, including real estate, cash, automobiles, and stock to Rush Enterprises. The beneficiaries of the trust, valued at more than $44 million, are Barbara and her daughters. Barbara has also presented two 2013 wills that supposedly revoke the 2006 will Rusty filed.

See Family Feud Continues over Estate Left by the Founder of Rush Enterprises, MSN, June 26, 2019.

Special thanks to Laura Galvan (Attorney, San Antonio, Texas) for bringing this article to my attention.

Article on Property and the Interests of Things: The Case of the Donative Trust

Johanna Jacques recently published an Article entitled, Property and the Interests of Things: The Case of the Donative Trust, Wills, Trusts, & Estates Law eJournal (2019). Provided below is an abstract of the Article.

Within a liberal, ‘law of things’ understanding of property, the donative trust is seen as a species of gift. Control over trust property passes from the hands of settlors to beneficiaries, from owners to owners. Trust property, like all other property, is silent and passive, its fate determined by its owners. This article questions this understanding of the trust by showing how beneath the facade of ownership, the trust inverts the relation between owner and owned, person and thing. It analyses the relation that trustees, beneficiaries and settlors have to the trust property and argues that the role of each of these parties can be shown to consist in furthering the interests of the trust property rather than their own. It claims that this protects things from their owners at the same time as it ensures these owners’ ongoing care towards the things they own. This raises questions about the trust’s status within the institution of private property, justified as it is by the human autonomy it is said to enable.

Canadian Trust Subject to US Tax

If a trust that is created and operated in Canada suddenly has an American beneficiary due to them moving to the states, a practitioner should understand the requirements for the American side of reporting.

Not only should the trust distribution be filed on a form 1040, U.S. Individual Income Tax Return, but also the beneficiary must also file a form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, as well as form 8938, Statement of Specified Foreign Financial Assets, which may have specialized valuation rules. The reporting requirements do not stop there. If the beneficiary receives as a distribution equal to more than 50% of the trust's income, they must file FinCEN form 114, Report of Foreign Bank and Financial Accounts.

There is also individual state income tax reporting to consider. Many states impose a state-level income tax on trusts, and the rules vary widely from state to state. New York only taxes trust income if the trust was created by a New Yorker or the trust makes its income from within the state. California, on the other hand, will attempt to tax any trust income that any resident of their state receives. To makes this even more complicated, a Canadian practitioner should also consider estate tax issues and whether the trust falls above the exemptions amount, both at the federal level and the individual state level (if applicable).

See Catherine B. Eberl, Canadian Trust Subject to US Tax, Canadian Tax Highlights, Volume 27, Number 6, June 2019.

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

Discovery of Aretha Franklin's Handwritten Wills Throws Her Estate Into Turmoil

Originally thought to have died intestate, two possible handwritten wills written by the musical diva Aretha Franklin have caused quite a commotion with her estate. The appointed representative is now asking the court to determine if either of the wills are valid under Michigan law.

The wills are seen as holographic, or handwritten, and must meet certain qualifications. They must be entirely in the testator's handwriting, must be dated, must be signed, and must have been intended to be a will. Two were dated 2010 and a third was dated 2014, and it unclear whether any of the documents will meet the other standards, being as they go off on tangents and are difficult to read. Two of Franklin's four sons are contesting the validity of the wills, and though a niece is acting as the representative, one of the documents appoints one of the sons to act as the representative.

All of this expense and turmoil could have been avoided if the diva had consulted with an estate planning attorney and put together a will and/or trust. With a good estate plan, she also may have been able to keep the details of her estate private through the trust instead of having the battle play out in public. 

See Discovery of Aretha Franklin's Handwritten Wills Throws Her Estate Into Turmoil, Elder Law Answers, May 31, 2019.

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

Kaestner Trust — Supreme Court Guidance for State Trust Income Taxation

Steve R. Akers and Ronald D. Aucutt recently issued a summary of the unanimous Supreme Court decision of North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust. Provided below is the introduction to the summary.

North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, 588 U.S. __ (June 21, 2019) is the U.S. Supreme Court’s first opinion addressing the constitutionality of state taxation of the undistributed income of trusts in almost a century. In a 9-0 opinion, the Court upheld lower court findings that North Carolina’s income tax imposed on the Kaestner Trust over a specific 4-year period violated the Due Process Clause where the beneficiaries received no income in those tax years, had no right to demand income in those years, and could not count on ever receiving income from the trust.

States employ a variety of factors (or combination of factors) in determining whether the state can tax the undistributed income of trusts, such as the residency of the settlors, trustees, beneficiaries, or where the trust administration occurs. The opinion provides minimal guidance as to the constitutionality of those various systems (or the North Carolina beneficiary-based system under other facts), but reiterates and applies traditional concepts that due process concerns the “fundamental fairness” of government activity and requires “minimum contacts” under a flexible inquiry focusing on the reasonableness of the government’s action.

See Steve R. Akers & Ronald D. Aucutt, Kaestner Trust — Supreme Court Guidance for State Trust Income Taxation, BessemerTrust.com, June 24, 2019.

Special thanks to Scott M. Deke for bringing this article to my attention.

Was the unanimous SCOTUS wrong in deciding North Carolina Department of Revenue v. Kaestner Family Trust?

On June 21, 2019, the Supreme Court of the United States decided North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust. By a 9-0 margin (7 joining the majority and 2 strong concurring opinions), the court decided that North Carolina cannot tax nonresident trust payments.

In Due Process, State Taxation of Trusts and the Myth of the Powerless Beneficiary: A Response to Bridget Crawford and Michelle Simon, 67 UCLA L. Rev. Disc. (2019), Prof. Carla Spivack (Oxford Research Professor of Law and Director, Certificate in Estate Planning, Oklahoma City University School of Law), takes issue with Bridget Crawford and Michelle Simon’s arguments (the ones that prevailed in the case) in their article The Supreme Court, Due Process and State Income Taxation of Trusts, 67 UCLA L. Rev. Disc. 2 (2019).

Here is a brief excerpt from Prof. Spivack's article:

Taxing the beneficiary in this case is entirely consistent with the basic principle of tax law that a person who controls and receives benefit from income should pay taxes on it. The real question here is whether the beneficiary controlled, and received enough benefits from, her trust income while she lived in North Carolina to pay state income taxes on it. The trustee by definition is barred from enjoying any beneficial interest in the trust property—the only person who may receive beneficial interest is the beneficiary. If and when the beneficiary receives the benefits of trust income, she should pay the corresponding tax in her state of domicile. This is uncontroversially consistent with due process. The trustee here makes ample use of the myth of the powerless beneficiary by trying to direct all eyes to the trust in the question of tax jurisdiction. But the Court need not fall for this sleight of hand.

This brings me to Crawford and Simon’s second major point. They assert that the fact that the beneficiary did not receive distributions from the trust while in North Carolina means the state cannot tax her proportionate share of trust income. I argue that the mere fact that the trustee did not literally write checks to the beneficiary does not mean she failed to benefit from her share of trust income or control it for tax purposes. First, as discussed below, the record shows that her interest in the trust alone, even without distributions, allowed her to benefit from her share of trust income, in ways that should subject her to taxation in the state. Second, the beneficiary requested that the trustee not make distributions to her during the relevant period. Under tax law, her power to decline distributions showed she had control over them, and thus was required to pay income taxes.

Article on Trusting Marriage

Allison Anna Tait recently published an Article entitled, Trusting Marriage, Wills, Trusts, & Estates Law eJournal (2019). Provided below is an abstract of the Article.

Marriage settlements are back. Complex trusts intended to protect family fortunes were once the centerpiece of wedding planning and family negotiations. In more modern times, these trust-based settlements ceded their popularity to premarital contracting and the prenuptial agreement. But in recent years, new trust forms with unprecedented asset protection features have prompted a resurgence of trust usage in marriage planning. Playing on notions of family money and legacy building, these new asset-protection trusts function much like their predecessors, except in one noteworthy respect. Conventional trusts have always provided asset protection based on the notion of third-party freedom of disposition. The new marriage trusts give asset protection to trusts created by a first-party to the marriage. Accordingly, one spouse can create an asset protection trust—for his or her exclusive benefit using what is potentially marital property—without the knowledge of the other spouse. That individual spouses are seeking new ways to protect wealth is not necessarily surprising. The new powers being given to individual spouses to shelter assets within marriage are, nevertheless, alarming. In practice, the new trusts are disconcerting because they allow for a significant amount of unilateral decision-making. In theory, the new trusts are troubling because they disrupt the precarious equilibrium that exists between two competing value-spheres: family wealth preservation and marital partnership. This Article proposes a distinctive framework, based on the notion of competing value-spheres, for assessing the growing phenomenon of asset protection trusts in marriage and concludes that these trusts represent an invalid incursion of wealth preservation into the realm of modern marital partnership. That is to say, the new asset protection trusts undermine personal trust and financial transparency within marriage.

SCOTUS Decides North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust

Earlier today, June 21, 2019, the Supreme Court of the United States decided North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust. By a 9-0 margin (7 joining the majority and 2 strong concurring opinions), the court decided that North Carolina cannot tax nonresident trust payments.

Here is an excerpt from the opinion:

This case is about the limits of a State’s power to tax a trust. North Carolina imposes a tax on any trust income that “is for the benefit of ” a North Carolina resident. N. C. Gen. Stat. Ann. §105–160.2 (2017). The North Carolina courts interpret this law to mean that a trust owes income tax to North Carolina whenever the trust’s beneficiaries live in the State, even if—as is the case here—those beneficiaries received no income from the trust in the relevant tax year, had no right to demand income from the trust in that year, and could not count on ever receiving income from the trust. The North Carolina courts held the tax to be unconstitutional when assessed in such a case because the State lacks the minimum connection with the object of its tax that the Constitution requires. We agree and affirm. As applied in these circumstances, the State’s tax violates the Due Process Clause of the Fourteenth Amendment.

Insight on Estate Planning: Do you know when an FBAR Must be Filed

The IRS has been stepping up enforcement of foreign account reporting requirements, and therefore knowing when and what to report is vital. Either if you have a financial interest in or signature authority over a foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year, you must file FinCEN Form 114, “Report of Foreign Bank and Financial Accounts” (FBAR).

What is a foreign financial account? It is any financial account that is located outside of the United States, regardless of the nationality of the financial institution. Meaning that if the account is maintained by an American bank but within a branch outside of the country, it is a foreign financial account.

Anytime you designate another person to act on your behalf or transfer interests in your foreign financial account to other people or entities, you may trigger additional FBAR reporting obligations. If you own or control foreign financial accounts, consult your estate planning advisor to discuss your FBAR and other reporting obligations and their potential impact on your estate plan

See Joseph Marion, III & David Riedel, Insight on Estate Planning - June/July 2019: Do you know when an FBAR Must be Filed, Page 5, June 13, 2019.

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