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: firstname.lastname@example.org
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.
For many years I have been, and remain, a fan of the inter-vivos QTIP trust. There is no perfect estate planning, but this QTIP is almost perfect. BTW, this is a brief, technical post primarily for advisors and practitioners who might find this topic useful for their clients.
This inter-vivos QTIP trust is a marital trust for a married couple designed under the QTIP tax laws. QTIP, in tax law jargon, is “qualified terminable interest property.”
Essentially, one spouse creates and funds this inter-vivos QTIP trust while alive. The other spouse is the beneficiary of the QTIP trust. “Inter-vivos” is an old legal term meaning essentially “between the living”. A trust someone creates while alive. By contrast, a trust that only becomes operative when the person dies is a “testamentary” trust. Such as a trust provision in that person’s Last Will and Testament.
As an important aside, and part of the inter-vivos QTIP design, it is possible for the funding spouse later to become a secondary beneficiary of the QTIP trust if the other beneficiary spouse dies first. Also, the written provisions of the inter-vivos QTIP trust can include provisions for the children after both spouses’ deaths, etc.
In broad terms, the above inter-vivos QTIP trust provides the following benefits:
- It gives a married couple – while they are still living — asset protection for the assets in the inter-vivos QTIP trust.
- The inter-vivos QTIP trust is defective for income tax purposes from inception up to the death of the second spouse. This both-spouses duration of the defective status means no trust income tax returns, no compressed trust tax rates, and no separate 3.8% Medicare tax during the remaining lifetimes of both spouses.
- I am purposely repeating this above point. That is, defective during the lifetime of the spouse who creates the QTIP trust and during the surviving spouse’s lifetime. This effect on both spouse generally is not available for testamentary QTIP trust planning.
- The defective income tax status of this QTIP trust also allows the substitution of assets, called a “substitution power“. This can allow, if needed, stepped-up basis planning by later substituting into the QTIP trust high-basis assets for low-basis assets, etc.
- The inter-vivos QTIP, in my opinion, provides the optimal flexibility for portability options.
- The spouse’s funding of the inter-vivos QTIP trust starts the 5-year lookback period for Medicaid nursing home eligibility. This may be important in the event later the spouses need governmental Medicaid nursing home assistance. Medicaid planning – although generally not at the top of most family’s estate planning checklist – can greatly help prevent financial impoverishment of the other spouse (and possibly the children).
- It gives a married couple – while they are still living — asset protection for the assets in the inter-vivos QTIP trust.
For readers who wish to delve into more technical aspects of this inter-vivos QTIP planning, I highly recommend the following breaking-ground 2007 article by well-known estate lawyers Mitchell Gans, Jonathan Blattmachr, and Diana Zeydel. Click here for the link. It is a well-written article.
I cringe (figuratively speaking) when I hear of individuals who include friends and ancillary family members as joint owners of real property. Such as joint tenants in common for owning grandmother’s old house, etc.
This is joint ownership of real property with the co-owners each named on the real estate deed. Such as “John Smith and Jane Doe, as tenants in common.” Or, “John Smith and Jane Doe, jointly with right of survivorship.”
[There are exceptions to my concern in certain cases (i) for married couples as joint owners and (ii) in states with joint “tenancy by the entirety” ownership (Georgia does not recognize tenancy by the entirety).]
Because real estate ownership is governed by publicly-recorded deed and lien records, jointly-owned property is a lightning rod for the other co-owners’ debts, judgments, unpaid income taxes, estate tax liens, etc.
Let’s assume Bill owns Atlanta undeveloped land with his distant nephew Pete. Pete owns 10% with Bill as the other 90% joint owner (joint tenants in common, to be exact). This is undeveloped land that belonged to Bill’s grandparents (Pete’s great-grandparents). Bill and Pete rarely visit the property. It is merely a long-term, passive asset.
Bill typically remains unfamiliar with nephew Pete’s ongoing financial and tax affairs and has no idea Pete has not been paying his (Pete’s) income tax. Unknown to Bill is that the Georgia Department of Revenue has been racking up recorded unpaid tax liens against Pete (called a recorded Fi-Fa), with Pete’s unpaid tax debt continuing to increase with interest and penalties.
Bill’s 90% share is now on the hook. Although technically Bill is not liable for Pete’s tax liens. Nor is the value of Bill’s 90% portion of the land technically available to satisfy Pete’s liens. The reality for Bill is that the entire land is burdened by Pete’s tax liens.
On the other hand, Pete essentially has no concerns about his unpaid taxes or these liens. Pete, 27 years old, works part-time, has no money, etc.
Bill’s unfortunate reality is that no buyer will touch this land until Bill clears these tax liens. The Georgia Department of Revenue also has been consistent with extending the duration of its recorded tax liens (called an “entry of nulla bona”).
Bill’s land over the years has increased in value. This results in Pete’s 10% share also increasing in value to the extent Georgia will likely demand its full claim for the unpaid taxes, penalties and interest in order to release the liens. These surmounting Georgia penalties and interest have transformed what started as nominal unpaid tax amounts into substantial issues. Bill has a costly problem.
The moral of this blog post.
Don’t — without thoughtful deliberation — become your brother’s keeper. Talk to your lawyer first about co-ownership of property. Possibly use an LLC. Or, a recorded written joint property agreement that allows a co-owner to charge the other owner’s portion of the property for these kinds of liens. Good legal advice is also an investment in tranquility.
Bear with me. There is a connection in this blog post between my reference to preventive planning and jazz guitar. I use the term “preventive planning” in reference generally to estate and asset-protection planning.
The top 1-percent. A roster of high net-worth clients is a badge of honor among estate and asset-protection planning lawyers. A plume signifying success, financial reward, larger law firm profits, etc. The work is high-end, interesting, technically challenging, and typically underpins the ever-increasing hourly lawyer rates for this market segment. I am fortunate to have a small share of these top 1-percent clients. But, I also have many clients in my own group. That is, the other 99-percent of us.
A focus narrowly only on the top 1-percent fails to address how important it is for our remaining 99% group to address preventive planning. Most current marketing efforts (and the bulk of related articles, commentaries) for estate planning and asset-protection continue to address options for the top 1-percent group. I find few discussions of what we (and our families) — in the bottom 99-percent — ideally need for excellent, cost-effective preventive planning.
The probable absence of estate tax liability for most of us in this 99-percent group also helps push this preventive planning to an even lower place on our “to-do” list. No pressure. No rush. Do it later.
This next point is for our 99-percent group.
One of my high-priority, personal goals is to prevent me and my family from wasting valuable time due to problems caused by lack of planning, outdated, flawed or missing documents, failure of estate planning, absence of asset-protection, etc. Coupled with this threat of lost time, I prefer my family not expend their financial resources on lawyer fees to clean up an oversight or mess I might leave for my wife and kids.
Now, why jazz guitar? I have played guitar since college and presently take improvisational jazz guitar lessons. I am committed to squeezing in 45 minutes of evening practice each day, as though it also is a job. I guard this 45-minute time-slot zealously.
I would be extremely perturbed if issues were to arise from a lack of planning, etc., that steal away my (and my family’s) valuable time. But, I have my preventive planning in place. And it gives me great comfort knowing my family and I will not lose time in dealing with problems, etc. We also will likely not incur substantial lawyer fees to fend off and resolve future problems.
But, bottom line for this post, I am far more concerned about wasted time than money (for fees, etc.). One can always make more money. But, can never get back lost time.