I continue to believe the inter-vivos QTIP marital trust is one of the best options for tax / asset protection trust planning, especially during 2022 in view of the unsettled uncertainty about Congress reducing the estate / gift exemption. Click here for my 1.12.22 Leimberg newsletter. You are welcome to print, pdf, and forward this newsletter to anyone else. Please also contact me at email@example.com if you have any thoughts or questions about this QTIP trust planning.
Last week I attended the first virtual, remote University of Miami 2021 Heckerling Institute on estate planning. As usual, there was a great deal of good, thought-provoking information. I am, however, greatly looking forward to the actual post-Covid on-site 2022 Heckerling Institute next year.
Here, very briefly, are two take-aways. I plan periodically to present more of these short take-aways in future blog posts:
One is that the inter-vivos QTIP marital trust (my long-running favorite estate planning tool) appears to be one of the best options for a married couple to take advantage of the current $11.7 million estate / gift exemption before possible federal legislation to reduce that large exemption arises ($23.4 million combined for a married couple). This QTIP option is akin to using a SLAT (spousal lifetime access trust), but better, in my view, as the QTIP election feature provides the unique ability to wait-and-see so as to make, or not make, the QTIP marital deduction election for the inter-vivos QTIP trust, until after the smoke clears on what, if any, changes Congress might make in reducing the gift / estate exemption.
But, keep in mind the QTIP trust funding itself is locked-in in all events; only at play (a very important play) is whether the spouse who funds the QTIP trust ends up being able to use the current large exemption amount. As an important aside, some states (including Georgia) have a protective statute that prevents a creditor from reaching a secondary QTIP interest, by that creditor otherwise asserting the secondary interest is a self-settled interest back to the settlor spouse. This favorable statutory protection enables the inter-vivos QTIP trust, up front, to include a secondary QTIP interest for the settlor (funding) spouse in the event the other QTIP beneficiary spouse predeceases the settlor.
If use of the large gift exemption is thereafter thwarted — in part or in whole — for whatever reason (e.g., a Congressional retroactive reduction in the exemption amount), the amount of exemption applied to the QTIP gift can be effectively adjusted downward by the offsetting use of the QTIP marital deduction election. The QTIP election (including a partial election) does not have to be made until the due date of the gift tax return Form 709 for the 2021 QTIP trust gift. This gift tax deadline, if extended, is October 15, 2022. Thus, the binding exemption-effect of now using the excess gift exemption to fund the QTIP trust can be deferred with no fixed, rigid commitment until October 15, 2022.
Two is the importance of the separate trust share rules under Internal Revenue Code Section 663(c). This is very important when one’s estate planning set-up includes separate trust shares for each child, grandchild, etc. The separate trust share treatment under Section 663(c) insures that each child / grandchild, etc., is tagged only with the DNI arising from his or her trust share. [DNI is “distributable net income”.]
Otherwise, there can arise anomalies — without the separate trust share treatment — where one trust beneficiary receives a trust distribution that (undesirably) carries out excess taxable DNI to that recipient beneficiary, as a result of an inclusion in the DNI calculation of undistributed DNI as to the other trust beneficiaries. Adding separate share language to the trust instrument helps avoid this imbalance and makes clear the Code Section 663(c) separate trust share rule applies in these multiple-beneficiary trust situations. Below merely is a sample provision:
“8.9 Separate Trust Shares. As to each trust share under section 8.4 above, I intend that each such trust share be treated as a separate economic interest (separate trust share) as to each beneficiary for whom the trust is created under this Article VIII with the result that each separate trust share is not affected by the economic interests accruing as to the interests of another beneficiary or class of beneficiaries.”
I continue to believe the inter-vivos QTIP marital trust is one of the best options for tax / asset protection trust planning. Click here for my July 9, 2020 newsletter. At a minimum, I ask that you at least read the section of my newsletter captioned “Preface – The Notion of Asset Protection Planning“. Please contact me at firstname.lastname@example.org if you have any thoughts or questions about this QTIP trust planning.
Note: You have my permission to print, copy, or forward copies of this newsletter to any other third-parties.
I published a very good primer on directed trusts last week for Leimberg Information Services. Click here for a copy of the primer. You are welcome to reprint or email this pdf primer for other readers. For many of you I believe my discussion about using a directed trustee for investment management is important, and can greatly help prevent Madoff scams. Please contact me if you have any questions: email@example.com
Georgia is the first state in the nation to enact sweeping UDTA trust law changes, centering primarily on “directed trusts”, with these changes effective July 1, 2018 (I refer again to “UDTA” at the end of this post). These new laws are under O.C.G.A. Sections 53-12-500 thru 506. I will be providing brief posts in the near future about certain aspects of these changes. The “directed trust” is the current, progressive approach around the country for optimal trust planning.
The essence of what “directed trust” means is that the trustee of the trust, or even a named non-trustee advisor (called a “trust director” under the new Georgia law), can direct others — who each then become “directed trustees” — to handle certain aspects of the operation of the trust. For example, the trustee can direct an investment trustee to handle the investment management of the trust assets. Or, as another example, the trustee can direct an administrative trustee to handle the administration of the trust.
In other words, the trustee alone does not have to carry the burden and liability for all trust functions. This team approach using other directed trustees enables the trustee to carve up the trust responsibilities, sometimes referred to as à la carte trust administration.
Below are a handful of my initial, brief comments about directed trusts for this first blog post:
(1) I really like Georgia’s statutory endorsement of directed trusts. Especially facing inescapable, impending aging, we and our families need a team approach for the care, protection, and oversight of our assets and affairs. I am not a fan of empowering only one individual to handle all of these matters, even if that one-person is a family member. There needs to be team input, and corresponding checks and balances where the team members each have a more independent view of the team’s efforts. And, certainly in some cases, a trusted family member can be the trustee with the power to put in place these other directed trustees;
(2) My general take on these new Georgia directed trust laws is that each team member (that is, each directed trustee) is subject to a fiduciary standard and liable for breach of trust if committed in bad faith or with reckless indifference to the interests of the trust beneficiaries [see, e.g., Georgia O.C.G.A. Section 53-12-303, captioned “Relief of liability”]. In other words, each directed trustee has to act with a fiduciary duty to the trust beneficiaries. This enhances the protective benefit of the team approach;
(3) Elder financial abuse is skyrocketing. For this reason, I strongly recommend families presently develop a relationship with a trusted, competent investment advisor who can help oversee the family’s investment assets. And, as needed, that trusted investment advisor can be, or later become, the family’s directed investment trustee. This advisory oversight, coupled with the above fiduciary duty standard and the now-stricter FINRA rules that address the financial exploitation of seniors, helps provide another team-member set of eyes and ears alert to the threat of financial abuse and fraud, etc.;
(4) These new Georgia directed trust laws are modeled after UDTA (the “Uniform Directed Trust Act”). These new laws are very dense, and appear well-drafted and comprehensive. But, easy, quick, no-thought, simple reliance on uniform laws can blind the lawyer drafting the trust. Even with these progressive laws, there needs to be artful trust document drafting so as to take advantage of these directed trust provisions, but without leaving unintended gaps or ambiguities in the trust document that cause problems down the road. Of course, artful drafting has always been the case with virtually any trust document.
This blog post is about whether the 2017 Georgia Supreme Court opinion in Gibson now opens the door wider for one spouse more easily – while married — to squirrel away his or her assets in a trust, and then later use that trust as a shield in a divorce proceeding. It does not.
In Gibson,the husband during his marriage funded two trusts with $3.2 million of property; the husband prevailed in keeping the $3.2 million out of his divorce proceeding without the trust assets being subject to equitable division. This is $3.2 million that otherwise would likely have been marital property in the divorce, absent the trust planning. Click here for a copy of Gibson v. Gibson, 801 S.E.2d 40, 301 Ga. 622 (2017).
The key factual distinction laying the foundation for the husband to prevail in Gibson was the lower trial court’s conclusion that the husband retained no interest in the trusts, including no interest as a trustee or beneficiary. As I touch on again below, my experience is that most spouses who unilaterally create and fund a trust during marriage do retain interests in the trust, albeit as part of the purposeful, stealth design of certain opaque, highly-technical trust provisions.
Back to the Gibson opinion. My sense in talking with other lawyers is that some have an over-optimism leading them to conclude Gibson opens the door wider now enabling one spouse to keep his or her trust out of the divorce arena. For the reasons I state below, I disagree. The backdrop to this misplaced optimism is the following portion of the Gibson opinion:
This is not an issue of first impression for our Court, which has permitted property placed in certain types of trusts to be exempt from equitable division. . . . Therefore, property that has been conveyed to a third party is not subject to equitable division absent a showing of fraudulent transfer. See id. If a spouse places property in a trust of which he is the sole beneficiary, that property may be subject to equitable division. See Speed v. Speed , 263 Ga. 166, 430 S.E.2d 348 (1993). But if a spouse is not the sole beneficiary of a trust, the corpus of the trust is not subject to the other spouse’s claim of distribution. See McGinn v. McGinn, 273 Ga. 292, 292, 540 S.E.2d 604 (2001).
Excerpt from the Gibson opinion (I added the bolding and underlining).
The optimists read Gibson (and the “sole beneficiary” excerpt above) to support the notion that a spouse who funds a trust – where that spouse is not a sole beneficiary of the trust – can now exclude the trust from claims in a divorce. This is a misreading of the above Gibson reference to sole beneficiary.
This sole beneficiary reference is merely a passing remark by the Georgia Supreme Court (what lawyers call obiter dictum) in stating the Gibson case was not a case of first impression on the question of how a trust created during marriage fares later in a divorce action. This sole beneficiary element also was not a fact for consideration as to the Gibson husband’s trusts and not part of the holding in Gibson. [I have not seen the Gibson trust documents.]
Here are my broader Gibson points for this blog post:
One. I am called upon from time to time to assist divorce lawyers with attacking a trust in a divorce proceeding. My job is to help attack the trust and keep it in the divorce proceeding. My attack at times is directed at the deficiency and shortcomings in the trust document itself, where the drafter failed to cross the “t”s and dot the “i”s. My attack also gets into the various quasi-hidden, stealth trust powers purposely built into the design and framework of the trust that do not easily – merely on the face of the trust document – alert a non-trust lawyer to the existence of continuing powers and potential benefits the spouse retained in the trust (such as powers of appointment held by a friend or other family member; powers to decant the trust to another trust; using someone other than the spouse as the purported settlor of the trust document giving the diversionary appearance the spouse did not create the trust, etc.).
One might ask “Why would a spouse hold these stealth ties to the trust?” The answer, in my experience, is that it is a rare instance where one spouse creates and funds a trust during marriage without making sure he or she still possesses indirect options either to get back the property after the divorce situation ends or ultimately later control the property for that spouse’s own benefit. Thus, arguably most unilateral trusts are not third-party trusts. I use the term unilateral for when one spouse puts this trust planning in place without the knowledge of the other spouse.
Two. Whether a trust is or is not a third-party trust is not merely an easy simple ‘yes’ / ‘no’ question. The status and nature of any trust depends in most cases (divorce and non-divorce cases) on the effect of the opaque, stealth technical provisions in the trust document, as part of the purposeful design of the trust. This opaque-stealth question, in my opinion, is where the heart of the fight lies when dealing with a trust in a divorce setting.
Three. When the trust at issue in a divorce is a third party trust (as in Gibson), that trust under the Gibson opinion will still be subject to a fraudulent transfer analysis in the divorce proceeding, as is the case with virtually any other third-party transfer of property prior to divorce.
The procedural rub is that the law requires, as generally in any fraudulent transfer attack, that the opposing party (the non-trust spouse in a divorce) bears the burden of proof for the fraudulent transfer attack.
Four. But, by contrast, I read Gibson as not changing the existing law or theories in divorce proceedings for trusts that are not third-party trusts. Those trusts are still subject to attack, but without the non-trust spouse bearing the burden of proof under a fraudulent transfer attack. Here the burden is on the spouse who created the trust — during the marriage – to prove the trust is not marital property.
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 trust’s 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 Delaware Tax Trap.
The legislative act for these Georgia revisions 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.
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?
Here is a link to my recent publication in Steve Leimberg’s Asset Protection Planning Email Newsletter – Archive Message #358 (dated February 15, 2018), titled “Augmenting the 2017 Nevada Trust Win in Klabacka“. Klabacka is the name of a 2017 Nevada Supreme Court opinion. You are welcome to pass along a digital or hard copy of my Leimberg piece to any other readers.
I suggest in this piece the possible use of a prenuptial (or in some cases postnuptial) agreement in conjunction with self-settled asset protection trusts, as a way to protect each spouse’s respective property in the event of divorce.
But, because from time to time I also assist divorce lawyers with attacking and finding chinks in the defensive armor of a divorcing spouse’s trust, this Klabacka piece also provides a backdrop highlighting the importance in any protective trust planning situation of crossing each “t” and dotting each “i”. The devil in the details most often is the tipping-point difference in whether defensive trust planning succeeds, or fails.
As I state in this Klabacka piece, some lawyers — with too much overconfidence — cut corners in their trust planning process, especially failing to give sufficient attention to long-arm jurisdiction exposure when (and if) the trust becomes the target of litigious attack.
There is an well-worn reply among lawyers to the line: “Why are divorces so expensive?” The reply is “Because they’re worth it.” Of course, this reply, no doubt, has multiple layers of meaning for every person. Especially depending on where one stands after a divorce.
But, on one level the reply makes a great deal of sense. I am a strong believer that clients benefit from having an experienced, knowledgeable lawyer. Obtaining good legal and tax counsel is a cost-benefit investment that in most cases produces benefits well beyond the expense and time. Lawyers can also help give their clients a comforting degree of repose and peace of mind.
Now, applying the above notion to asset protection and estate planning, unfortunately this planning often appears to clients, on the surface, to be nothing more than a transactional expense and time-consuming burden. Very easy to put off until later. There typically, and understandably, is no strong emotional motivation for this planning, compared to the threat of divorce.
But, I also believe most people are aware of the thousands of reported court cases and anecdotes among friends and family illustrating the vast number of costly problems arising from the absence of asset protection and estate planning. But, then again, we all tend to think these problems only happen to others. Not to our family.
So, a universal question most families need to ponder is the possible surfacing of a divorce by a son-in-law or daughter-in-law with war-like efforts to grab the other spouse’s inheritance. This question touches directly on asset protection and estate planning. In addition, and more subtle, are increased taxes (including income tax) that result from inadequate and inflexible estate planning.
Another universal point on this subject of preventive planning, that I repeat constantly, is: Don’t help line your lawyers’ pockets by getting caught in costly, and otherwise, preventable legal and tax issues. Seek out a lawyer’s preventive review of your situation ASAP. It is an investment, not simply an expense.