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?

Asset Protection Trust Planning for Divorce (a Nevada Win)

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.

 

 

Why Are Divorces Expensive?

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.
 

 

 

Inter-Vivos QTIP Trusts; Almost Perfect

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:

    1. It gives a married couple – while they are still living — asset protection for the assets in the inter-vivos QTIP trust.
       
    2. 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.
       
    3. 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.
       
    4. 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.
       
    5. The inter-vivos QTIP, in my opinion, provides the optimal flexibility for portability options.
       
    6. 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).
       

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.

You are Not Your Brother’s Keeper. Tax Liens and Joint Ownership of Real Property.

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.

Preventive Planning and Jazz Guitar

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.

 

Estate Planning. Give this PDF Memo to Your Clients

For many people the topic of estate planning is very low on the list of priorities. This is understandable. Estate planning is, by analogy, like flossing. We hear the admonitions to floss (or to get our estate planning in order), but who really buys into these pleas?

I also find surprising the number of families who end up later with no choice but to pay large legal (and litigation) fees to deal with an abundance of problems. Problems — both tax and non-tax — arising from aging, incapacity, and death.  Problems in many cases avoidable.

Lawyers reap the financial benefit of this family expense. Virtually a captive market.   The hourly fee clock ticks on, almost perpetually.

So, in line with my persistent efforts to highlight the need for estate planning (and asset protection planning), primarily for preventive purposes, here is a memo that might help you, your friends, and clients get moving on this task. Click here for my memo.