I Am Proud of Georgia (trust / estate law revisions)

Georgia’s newly enacted revisions to certain trust and estate law provisions bring Georgia up to speed with many other states with similar provisions.  The changes are effective July 1, 2018.  This is a good move for Georgia.  Click here for a link to the legislative bill with the numerous changes.

As an important first aside, I will blog later on how these changes add even greater benefit to my favorite trust – the inter-vivos QTIP marital trust (created during the lifetime of the spouses).  I also will provide other short blog posts from time to time with certain commentary about these law changes.

For today’s post, I include the following discussion about how long trusts can now last under Georgia law:

360-Year Trusts. The allowable duration for a trust changes from 90 years to 360 years.  This is referred to under trust law as the “rule of perpetuities”, and applies generally as a duration limitation for non-charitable trusts.  A trust can now operate for 360 years before the rule of perpetuities law mandates its termination.

However, as a practical matter, I do not think 360 years in and of itself is significant. But, now having a period longer than the previous 90-year limitation helps make sure a trust can run long enough to cover (at a minimum) the trust creator’s (settlor’s) grandchildren’s entire lives.

In other words, making sure the grandchildren get the asset protection benefit of the continuing trust for their entire lifetimes (rather than the trust having to terminate in 90 years, possibly before the deaths of the grandchildren; thus, the earlier termination removing the protective effect of the trust set-up for their benefit).

The reason I think the entire 360-year period is not significant is that the number of downstream descendants a settlor will have if his or her trust lasts 360 years will be geometrically expanded beyond anyone’s realistic ability to keep up with all the descendants. I have seen various projections indicating, on average for example, a person will have approximately 115,000 descendants in 350 years. This adds another level to the notion of “laughing heirs”.

The Delaware Tax Trap.  This point relates to the new 360-year change.  The Delaware Tax Trap is a complex part of trust tax law.  It essentially triggers potentially punitive gift and GST tax results if a trust is changed where the duration of the trust is extended longer than the trusts’ initial governing rule of perpetuities.

For example, assume I created an irrevocable trust in 1980 (when the law allowed a 90-year duration which means the trust essentially must end in 2070).  Is this trust now subject to the Georgia 360-year rule?  [There are some extensions to this 90-year period that get into the notion of “lives in being”; but I do not get into that point for this blog. You also can read one of my earlier blog posts on a creative potential use of the Delaware Tax Trap.  Click here for my earlier post.]

Under this Delaware Tax Trap rule, the tax law provides that if I extend the duration of my existing 1980 trust beyond its then-applicable 90-year period, the result is that I am deemed for gift and GST tax purposes to have withdrawn the trust property and re-contributed the property to the extended-duration trust.  In other words, I am treated as making a gift to the extended trust. This Delaware Tax Trap is a very esoteric tax law concept as a practical matter, but is an issue that most trust tax lawyers have many times grappled with (and debated) in great detail as part of their trust planning.

Below is my key comment for this blog post about Georgia and the the Delaware Tax Trap.

The above recent Georgia 360-year change to its trust and estate laws states “All laws and parts of laws in conflict with this Act are repealed.” Does this mean the prior 90-year limitation disappears with no continuing effect for an existing trust?

I am merely raising the above question and have not yet fully examined the scope of an answer.  Nor does a simple, quick answer jump out at me at this time.  More broadly, the question becomes: “How best do trust lawyers deal with this new extended 360-year rule of perpetuities both for existing trusts and in creating new trusts?”

This 360-year rule of perpetuities question needs to be on every trust checklist.

Your 18-Year Old is Off to College in the Fall. HIPAA Confidentiality.

This first paragraph is the essence of this post. One of my children is now 18 and an adult for HIPAA medical confidentiality and disclosure purposes. Without a HIPAA release, no educational institution, medical facility or other personnel of any type can disclose to me — even as a parent — information, including whether or not my child is a patient at any of the random medical facilities or hospitals I call. I could potentially be completely in the dark, and upended with worry if I were to run up against this HIPAA hurdle. Without the HIPAA release, my calling simply to ask any hospital if my child is a patient there will fall on deaf ears.

[There are some extremely limited exceptions to this HIPAA constraint, but as a practical matter we all should plan as though HIPAA applies to all health and medical information.]

Now, a more expanded discussion. My 18-year daughter leaves for out-of-state college in the fall. I will MISS her, but she — for which I am proud — is developing her own strong, competent, and independent wings. As part of her continuing pathway as an adult, I had my daughter recently sign core estate planning documents, including a basic Will, a financial power of attorney, and a health care directive. The health care directive was the primary impetus motivating me to get my daughter to sign these core documents.

In broader terms, I do not anticipate problems that will trigger having ro rely on these documents at my daughter’s youthful, healthy 18-year stage in life. But, I also am well aware of the vast, difficult hurdles and challenges I would face if something completely unanticipated were to occur and I did not have these documents. More specifically, the following HIPAA element was the tipping point as to my getting these documents in place for my daughter.

Let’s assume my daughter, at college 1,000 miles away, is admitted to a hospital due to illness or an accident (let’s hope these events never occur!). We don’t hear from her for a few days; her dorm roommates and other friends do not know her whereabouts; there have been no phone texts, no Instagram, etc.  Let’s also assume we eventually learn my daughter has food poisoning to the extent she had to be hospitalized. But, where is she? No one will tell us.

However, my daughter has now designated my wife and me as agents under her health care directive. We have express authority from her for otherwise HIPAA- protected medical information. We can find out where she is much more readily and effectively, if ever necessary.

If you think this HIPAA worry is merely theoretical, then let me know if you change your mind after finding yourself in one of these worrisome, seemingly interminable, stonewall confidentiality situations. You can read a very good November 2017 WSJ piece on this same subject with reference to more examples. Click here for the WSJ link.

At a minimum, I suggest parents get a health care directive (that includes the HIPAA release) for their college-bound daughter or son before college starts. The fun college parties, beginning with fall football, start soon.

I will be glad to prepare these core documents, or you also can contact me at (470) 401-0101 if you have any questions or need additional information.

 

Horribly Annoying Music; Supreme Court Justice Felix Frankfurter

In restaurants, waiting rooms, dentist offices, airports, grocery stores, phone-hold, ad nauseam, we are bombarded persistently with music and television content, not of our own choosing.  This is akin to someone forcing a book or other reading material three inches away from our face with the admonition “READ THIS”.

U. S. Supreme Court Justice Felix Frankfurter and I would have likely agreed fully with one another. While reading a recent The New Yorker magazine, my wife ran across a short comment about Justice Frankfurter having recused [removed] himself from the following 1952 case.  Click here for a link to the supreme court opinion in Public Utilities Comm’n v. Pollak, 343 U.S. 451 (1952).

What triggered my interest was Justice Frankfurter’s spot-on reaction to this 1952 case, that I include further below. This 1952 anecdote also gives me pause (without my further comment) to ponder where Supreme Court justices (and potential justices) fall now in 2018 as to the notion that a Supreme Court justice lays aside private views in discharging his or her judicial function.

The issue in this 1952 Supreme Court case dealt with some Washington DC public transportation passengers who asserted their constitutional rights were violated by having to listen to streetcar, bus, and railway piped-in music, announcements and advertisements. This content consisted generally of 90% music, 5% announcements, and 5% commercial advertising. The Supreme Court did not side with these constitutional objections.

And, Justice Frankfurter had such a strong reaction (and opposition) to this forced audio content, that he recused himself from the case with the following comment (which is in the published Supreme Court opinion) [I added the underlining below]:

Justice Frankfurter:

The judicial process demands that a judge move within the framework of relevant legal rules and the covenanted modes of thought for ascertaining them. He must think dispassionately and submerge private feeling on every aspect of a case. There is a good deal of shallow talk that the judicial robe does not change the man within it. It does. The fact is that, on the whole, judges do lay aside private views in discharging their judicial functions. This is achieved through training, professional habits, self-discipline and that fortunate alchemy by which men are loyal to the obligation with which they are entrusted. But it is also true that reason cannot control the subconscious influence of feelings of which it is unaware. When there is ground for believing that such unconscious feelings may operate in the ultimate judgment, or may not unfairly lead others to believe they are operating, judges recuse themselves. They do not sit in judgment. They do this for a variety of reasons. The guiding consideration is that the administration of justice should reasonably appear to be disinterested, as well as be so in fact.

 

This case for me presents such a situation. My feelings are so strongly engaged as a victim of the practice in controversy that I had better not participate in judicial judgment upon it. I am explicit as to the reason for my nonparticipation in this case because I have for some time been of the view that it is desirable to state why one takes himself out of a case.

 

2018 Father’s Day; WWII; 1942; Courage

I assume it is universal that every son who is now a father contemplates what he both learned and did not learn from his own father, and what he (the son) will pass on to his children. This post is for my two daughters (I have no son).

My late father, while in 1942 a law partner with the then-Atlanta law firm Sutherland, Tuttle & Brennan, was drafted to serve in WWII. Shortly after his induction into Ft. Bragg (N.C.) boot camp, my father received the officer’s commission he had sought prior to his induction; but, he decidedly and purposely turned down the commission.

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The image above is the 1942 letter from my father’s then-law partner Bill Sutherland to the Army Signal Corps passing along my father’s non-acceptance of the commission   

My father later told me and my brothers that while at Ft. Bragg he concluded it was inequitable that he could avoid the hardship of WWII simply because he was a lawyer and entitled to the safehaven of a stateside lawyer-officer position.

He remained in the U.S. Army 78th infantry division and rose among the non-commissioned ranks to a captain in his field artillery battalion. His 78th infantry division was among the first allied divisions to cross east into Germany over the Rhine River. He received a Bronze Star and Purple Heart. My father in 1946 returned to Atlanta and practiced law for the remainder of his career.

My father rarely spoke of his war days; however, relevant to my post today, he did mention a 1945 Germany battlefield incident in which the commanding officer began to “run scared” and who informed his group of soldiers (including my father who was a Lieutenant at the time) that they needed to surrender. My father had the officer restrained and commanded the soldiers to a successful standoff. No surrender.

In a journal he maintained for several years after his return from WWII, my father in 1950 wrote:

“Aggressiveness! Somehow I feel that the great problem [in life] centers around aggressiveness. To start with we were animals and had to fight for survival. And we may still have to fight – – that is I don’t mind so much as if it is a fight for life or death. But not this petty pushing, this daily gnawing uneasiness lest someone pass us on the road [etc.]  .   .   . In the Army I should have known better than ever to push or fret about little things like a wait in line for chow, but I should have been ready – – as I was – – to take [I delete this name purposely for this blog post] place with the infantry when the chips were down.   .   .   .”

 

I use the above example for this Father’s Day post as an illustration of what, I conclude, was the most important characteristic my father sought to pass along to me and my brothers. That is, courage. And, not just simple courage such as if scared in the dark, etc.

But more specifically, the courage to accept where the chips ultimately fall, as to work, family, money, health, what others may think about you, etc. This also is not merely stoic, passive courage.

Rather, it means responding as honestly, directly, aggressively, and as fully as may be warranted in a situation. But, without fretting or over-worrying about the resulting outcome. Accept with courage that the chips will fall where they fall, with each of us possessing the strength and capacity to handle and deal with whatever that outcome produces. Good or bad.

Happy Father’s Day to each of you.

Avoid Derailing Your Valuable Time; Trust Delegation

My recommendation for most decisions in life goes primarily to a time question.  How much time for enjoyment does a person have, and what toe-stubs, hurdles, problems, unanticipated issues, etc., cut against this available time for enjoying life?  This time-formula does not get into the question of how one finds enjoyment (e.g., work, family, vacation, sports, music, books, hobbies, etc.), but rather focuses on what potentially derails that available time.

The central point of this post is that I recently added two new provisions to my revocable living trust expressly giving the trustee the ability to delegate both (i) the administration of the trust to an “Administrative Trustee” and (ii) the investment management for a portion or all of the trust assets to an “Investment Manager”.

Administrative Trust duties include, for example, the powers:

” (a) To maintain bank accounts, brokerage accounts and other custody accounts for the custody and safekeeping of the trust property, receiving trust income, making disbursements in payment of trust expenditures and, as directed by the Trustee, making distributions to or for the benefit of the beneficiaries;

(b)   To maintain the storage of stock certificates or other evidence of ownership of the assets held as part of the trust property;

(c)    To maintain the books and records of each trust established under this trust agreement;

(d)   To maintain an office for meetings with the Trustee and for other trust business;

(e)   To originate, facilitate and review trust accountings, reports and other communications pertaining to the trusts under this trust agreement with any Trustee, Independent Trustee, Administrative Trustee, Investment Manager, beneficiary and unrelated third parties who have a reasonable need as to that information;

(f)    To respond to inquiries concerning the trusts established under this trust agreement from any Trustee, Independent Trustee, Administrative Trustee, Investment Manager, beneficiary and unrelated third parties;

(g)    To prepare and file (or arrange with the Trustee for preparation and filing of) income tax returns for the trust and any other reasonably necessary compliance or information returns;

(h)   To execute documents as to trust account transactions; and

(i)    To retain accountants, attorneys, agents and other advisors as to the performance of the Trustee’s duties.”

These new trust revisions are also in line with the evolving greater use around the country for directed and delegated trust planning. The Trustee can continue being the Trustee quarterback of the trust, with the benefit of others handling the administration and investment management. These trust revisions also are in line with what I perceive as an exponential growth over the past few years of the complexity and choice-options we face in virtually all facets of our lives.

My revisions mean that a trustee (for example, a surviving spouse) does not have to be burdened with the entire gamut of trustee responsibilities.  Rather, in this example, the surviving spouse can delegate the administrative duties of the trust and/or the investment management of the trust assets, if he or she so desires.

Also, by inclusion of these delegation provisions in the trust document, an administrative trustee and an investment manager, if and when they accept these positions – by operation of these new trust revisions – become subject to a fiduciary duty as to the trust. This further provides protection of the trust assets, etc.

In addition, the delegation of the Administrative Trustee can be useful if circumstances arise where the legal situs of the trust needs optimally to be in another state (for example, moving the trust from Georgia to Delaware). This situs-change can be for tax and non-tax reasons.  The delegation of investment management also can help avoid investment scams, Madoff situations, cold-call / penny stock sales pressure, or simply poor, undisciplined or lack-of-attention investment management and oversight.

Finally, I understand that one reading this post might react with: “These new provisions make trust planning too complicated, with even more planning options to consider, etc.  I just want something simple.” This is an understandable response. And, there is always the available effortless option of having merely a “simple” outright estate plan, or no plan.

But, my reply to the notion of a “simple plan” or “no plan” is that these options do not avoid or eliminate the universal element that we all may face at some point in our lives. That is, upon our incapacity or death, someone will inevitably have to step in and oversee our affairs and property, etc.  This is a zero-sum game.  The question for all of us is (or will become) when, who and how?

Does a client wish now – prior to incapacity or death – to design an estate plan that gives the client input and control over these “when, who and how” factors?  Or, does the client wait and let these decisions and responsibilities fall to someone else?

The Difficulty with Retirement Accounts

Here is an important question: Who can (and will) oversee and help safeguard your tax-deferred retirement accounts? The absence of an easy answer creates the following difficulty. [1]

The point underpinning this difficulty is that the tax law does not allow ownership of a tax-deferred retirement account by the account owner’s living trust. The law allows no living trust option. Without this trust option, there can be no successor trustee who oversees and manages the living trust assets in the event of the account owner’s age-related incapacity, etc. [A qualifying trust is allowable only after the individual dies; but the point of this blog post centers on the owner while still alive.]

This lack of living trust oversight creates exposure, for example, for failing to make the required annual distributions, etc., resulting in substantial tax penalties; threats of Madoff investment scams; friends and others persistently pressing for financial handouts resulting in larger distributions from the account than what otherwise is prudent, etc.

Realistically, while the retirement account owner is alive, the tax law limits ownership either (i) in the owner’s name; or (ii) in a financial institution trustee’s name, called a “trusteed IRA”, that in most cases I do not recommend. The last paragraph of this blog refers to the unsuitability typically of the trusteed IRA option.

Due to this individual ownership option, I recommend a separate, well-drafted retirement accounts power of attorney (“RPOA”), expressly covering a broad range of specific powers for the named agent, plus with the RPOA designed to help overcome the following increasingly difficult hurdle.

This hurdle is the refusal of many financial institutions to honor a broader, more general power of attorney. This is where banks, financial institutions, etc., simply balk at acting under the directive of a power of attorney.

Why the hurdle?  Financial institutions are understandably concerned about their risks when dealing with an agent under a power of attorney (rather than directly with the principal), and the related significant pressure these financial institutions face for anti-terrorism transparency, and their need to avoid lawsuits among family members, etc. But, this institutional self-interest cuts against the interest of the retirement account owner.

The RPOA, therefore, helps balance these risks for both the institution and the account owner. And, although I can provide no guarantee these institutions will honor this specific, particularized RPOA, its detailed provisions arguably provide reasonable and substantive strength in support of the institution not so easily being able to deny the document. The RPOA might also support a position that a financial institution’s denial of the RPOA is unreasonable, potentially opening the door for damage claims against the institution.

As an aside to this RPOA situation, I am fully aware some financial institutions are mandating that account owners use only the institution’s power of attorney form. But, these institutional forms include overly-generous liability waivers with indemnification clauses favoring heavily the financial institution for its own protection; these institutional forms exist for the institution’s benefit, not for its customers.

As another important aside, below are the heading topics for the RPOA document I recommend:

  • Scope
  • Applicable Jurisdiction
  • Successor Designation of My Agent
  • Written Acknowledgment by a Successor Agent
  • Coordination With Other Powers of Attorney
  • Effective Date
  • Release and Indemnification of My Agent
  • Third-Party Reliance on this RPOA
  • Conservatorship / Guardianship
  • My Intent
  • Annual Minimum Distributions
  • Additional Distributions
  • Exclusive Power to Direct
  • Roth Conversion / Medicaid Annuity Planning
  • Checks on My Behalf
  • Spousal Roll-Overs
  • Modification / Change of Accounts
  • Naming of Custodians for Minors
  • No Power to Change or Revise Beneficiaries
  • Investment Delegation Powers
  • Tax Elections
  • Incorporation by Reference of Fiduciary Powers
  • Permitted Use of Certified Photocopies

Finally, back to “trusteed IRAs.”  Under the controlling tax law, a trusteed IRA (i) does not allow a spousal rollover for the surviving spouse and (ii) requires that the financial institution overseeing the account must be the sole trustee. I also find most often a trusteed IRA agreement locks the financial institution in as trustee after the account owner’s death, thus barring any change by the beneficiaries of the investment management platform or removal and replacement of that institutional trustee.

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[1] I refer to “IRA” in this blog post, but, the same discussion applies generally to corporate or self-employed (“Keogh”) pension, profit-sharing, defined-benefit, and stock bonus plans, SEPs, 403(b) plans, IRA and Roth IRA accounts, inherited IRAs, spousal rollover IRAs, 401(k) and Roth 401(k) plans, and 457 plans. It also applies to a judgment, decree or order for any retirement plan, for payment on the owner’s behalf of child support, alimony or marital property rights, referred to typically as a “qualified domestic relations order.”