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.”

What a Great Line

I am currently reading the novel A Thousand Acres (1991), by Jane Smiley.  This is essentially a modern-day version of Shakespeare’s King Lear involving a father’s disinheritance of a daughter from the family farm (a 1,000 acre farm) and the destructive effects of deeply rooted, and long denied, family issues. This novel also is a powerful depiction of estate planning discord. [There are certain tragic elements in the novel that I fortunately do not see often in estate disputes.]

One line in this novel notably jumped out at me the other evening.  It refers to one of the farmer-neighbors named Harold who, often to the humorous and bemused talk of the other neighbors, marches to the beat of his own drummer, but who also is one of the most successful farmers in the community:

Here is the line referring to Harold:

It’s just that he’s [Harold] cannier and smarter than he lets on, and in the slippage between what he looks like and what he is, there’s a lot of freedom.

This line is powerful.  In contrast to Harold, many people are much too concerned about what others think about them. These people stifle their own freedom.

A tie between the above line and this blog post is that my great joy in lawyering is helping clients respond to the currents of life from a position of strength, power, and independence. Independence particularly in terms of having control over their lives, including preventing legal issues, disputes, litigation, not bowing easily to the expectations or judgment of others, and avoiding the time- and emotionally-draining interference and overreach by others.

In one of my earlier blog posts, captioned “Helping Clients Have Power;  Blog Post 2 of 3” (click here for this earlier post), I referred to two of the saddest characters in literature: Willy Loman in the play Death of a Salesman (Arthur Miller) and George Babbitt in the novel Babbitt (Sinclair Lewis). Each of these characters demonstrates so powerfully the sad, unhappy mistake of maintaining such a persistent, engulfing concern about what others think about them. The complete antithesis of power.

Finally, one ancillary legal point.  Liberty is the environment that (fortunately) allows us to be free;  Actually exercising our freedom in the above context is our own responsibility.

Just Say “No” to Financial Institution Intrusion into the Financial Power of Attorney Arena

I increasingly get calls from clients who are concerned when they run into the following situation.

The financial institution where the client maintains an account tells her she must use only that financial institution’s power of attorney form, rather than her own power of attorney.

Furthermore, if the client stands firm on using her own power of attorney, some financial institutions will thereafter attempt to mandate that she (or the agent named in her power of attorney) sign an additional institutional form that operates as an overlay for the client’s own power of attorney.  This overlay form is captioned along the line of “ABC Bank Attorney-in-Fact Agreement and Affidavit for Non-ABC Bank Power of Attorney.” This form gives the misdirected impression the client can now freely use her own power of attorney, without the institutional power of attorney form.

The above ostensible “must” also sometimes includes the institution telling the client that its legal department will have to review the client’s own power of attorney. This often is where I get the phone call from my client.  And the word “must” generally never sits well with me in many situations.

So, just say “no” to the above institutional power of attorney forms. “No” to all of the forms. Stand strong with a persistent “no” and inform the institution you will use your own power of attorney, without signing any additional institutional forms dealing with the power of attorney.

So, why do I strongly recommend against these institutional forms (including the above overlay “agreement and affidavit for non-ABC Bank power of attorney”)? Because these forms in most cases include features that are targeted to benefit the financial institution, not you.

Among the key institutional form features are:

  1. The agent must agree to indemnify the financial institution against a broad range of items;

  2. The institution’s form mandates what specific state law controls, which might be a state other than the principal’s home state.  Or, a state other than where the agent lives, etc.;

  3. The form requires an agreement to arbitration for issues that arise with the power of attorney.

Also, back to the above legal department mandate. Don’t be alarmed if the financial institution runs your power of attorney by their legal department. Just give them a pdf or photocopy for that purpose. I have had these run-thru-the-legal department situations occur numerous times with no negative consequences. And, with my clients not thereafter signing any of the institution’s forms.

And, quite frankly, if I am an agent acting for my principal under a power of attorney and my principal, if incapacitated, cannot weigh in on these institutional form requests, I (as the agent) likely do not have authority to agree to the institution’s mandate without some preexisting agreement or discussion with my principal. This is likely a reason financial institutions are now pushing these power of attorney forms on their customers as early as possible.

In order to help give you the strength to say “no”, I recommend you make sure you have an updated, comprehensive power of attorney in place that you can point to when you push-back against these financial institutions.

Also, as an important aside, in Georgia the statutory provisions for having a power of attorney under O.C.G.A. Section 10-6-140 state expressly that the Georgia statutory form power of attorney is not the exclusive method of creating the agency.

Therefore, Georgia law acknowledges use of either a Georgia statutory form power of attorney or your own format of a power of attorney. I have not seen the above financial institution mandate tested fully against the backdrop of Georgia law, but my view is an institution will be hard-pressed to succeed with its own-forms mandate against the existence of these Georgia statutes.

Finally, the New York Times had a good piece last year (May 6, 2016) about this same power of attorney push-back from financial institutions. Click here for the link.

Urgent Post re Beneficiary Designation for Inherited IRAs

This is urgent as it likely will require you immediately to revise your IRA beneficiary designation forms to name as part of the beneficiary designation form itself  a custodian (and successor custodian) for any account that may end up with a minor-age beneficiary. Such as an inherited IRA from grandmother, etc. This discussion also applies to adding a custodian designation to beneficiary forms for life insurance.

This is another preventive planning feature that can save you (and your family) the headache of wasted time and legal fees down the road.

Why?

Georgia law, by express statute under The Georgia Transfers to Minors Act, allows you, while you are alive, to name a custodian for a future property interest for a minor beneficiary. Such as your IRA account that later might end up as an inherited IRA in the hands of your minor child or grandchild. This statute is under Georgia O.C.G.A. Section 44-5-113.

If you don’t name the custodian while you are alive, then at your death two hurdles surface:  One.  A guardian has to be appointed for the minor-child; Two. The guardian has to petition the court for the court’s approval of a custodian under The Transfers to Minors Act provisions.  At the end of this post is Georgia O.C.G.A. Section 44-5-117(c) for this burdensome procedure.

How to avoid these two hurdles?

My suggestion here is not legal or tax advice you can rely on as advice from me for any particular situation. It is only my general response for how to add the custodian reference while you are alive to the beneficiary designation form.

  1. Many financial institution IRA beneficiary designation forms do not include an option or space to add the names of custodians. You have to adapt the form as follows:

  2. First, hand-mark on the form itself an asterisk next to the minor-beneficiary’s name.

  3. Then, in the margin of the beneficiary form add a legend for the asterisk: “See the attached Exhibit A , dated May __, 2017, that I incorporate herein by reference.”

  4. Then, prepare a separate Exhibit A that includes your naming of the custodian (and successor custodians if desired) and attach it as an exhibit to the beneficiary designation form. Sign and date the Exhibit A.

Finally, below is the burdensome Georgia statute I referred to above:

Georgia O.C.G.A. Section 44-5-117(c) [bolding added;  note in particular the “if a guardian .  .  .” reference]:

(c) If no custodian has been nominated under Code Section 44-5-113, or all persons so nominated as custodian die before the transfer or are unable, decline, or are ineligible to serve, a transfer under this Code section may be made to an adult member of the minor’s family or to a trust company as custodian for the benefit of the minor if a guardian appointed for such minor considers the transfer to be in the best interest of the minor and, on petition brought by the minor’s guardian, the transfer is authorized by the court as in the best interest of the minor.

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.