A Novel SECURE Design for a Tax-Deferred Retirement Accounts “Conduit” Trust

This post addresses a novel written irrevocable trust planning option under the current SECURE Act (effective beginning December 20, 2019). The SECURE Act eliminated the prior-law longer pay-out stretch option and, in general terms, allows only a 10-year payout period for non-spouse beneficiaries who inherit a retirement account from a deceased primary owner. [There are some other limited exceptions that allow a longer payout than this 10-year period that I do not address for purposes of this post.]

This planning centers on both Roth and non-Roth income tax-deferred retirement accounts, such as, but not limited to, corporate or self-employed (“Keogh”) pension, profit-sharing, defined-benefit, and stock bonus plans, SEPs, 403(b) plans, IRA and Roth IRA plans, 401(k) and Roth 401(k) plans, 457 plans. This trust design can work collectively for both Roth and non-Roth accounts.

An Example: You have decent sized non-Roth and Roth IRAs. You presently have four children, all different ages. The SECURE Act tax-law limitations generally now eliminate — after your death — the longer life-expectancy payout periods for beneficiaries for these retirement accounts; now limited in most cases to a 10-year maximum payout period. What is an effective planning option for your retirement accounts in this situation? For purposes of this blog post, I use both a Roth IRA and non-Roth IRA as examples.

For both these Roth and non-Roth IRA accounts, I recently designed a written tax-deferred retirement accounts trust that is a good SECURE option. [NOTE: this blog post is not a primer with fundamentals on how to set-up and use a trust for retirement accounts. It merely highlights key points to consider for this recent new trust design.]

The essence of this retirement account trust design is that:

(1) The trust agreement is a sprinkle trust that allows the trustee to make trust beneficiary distributions of periodic retirement account withdrawals to and among the named class of beneficiaries, depending on their needs, own marginal income tax rates, etc., in equal, unequal, or in no amount as to the class members;

(2) This is a key design point: The trust agreement must be drafted purposely so as to avoid each trust beneficiary from having substantially separate and independent trust shares. The reason is to enable trust distributions to carry out DNI only to those beneficiaries who, in a given year, actually receive distributions from the trust. Otherwise, for example, separate and independent shares can result in one beneficiary ending up with a trust distribution in excess of the trust’s total DNI, causing the trust to be taxed on such income at the trust’s substantially higher compressed marginal income tax rates. By contrast, the goal is for the trustee to sprinkle distributions from the trust to and among the class of trust beneficiaries depending on their needs, their own marginal income tax rates, etc.

As a relevant aside, creating separate and independent trust shares for retirement accounts trusts — now and prior to SECURE — requires that the retirement account beneficiary designation itself refer to separate trusts; e.g., 1/3 of my IRA at my death is payable to the Jane Doe Trust; 1/3 to the Susan Doe Trust; and 1/3 to the Sam Doe Trust, etc. My point here is that it is not easy under my proposed SECURE trust planning simply to fall inadvertently into an independent and separate share regime for this kind of retirement trust planning (see, e.g., IRS Private Letter Ruling 200317041). But, nonetheless, one optimally needs to understand these concepts in order to avoid a separate trust share situation for this SECURE trust design.

(3) In broad terms this SECURE retirement trust will be named as the retirement account beneficiary; and treated as a pass-through “conduit” trust. This means, again generally, that any periodic retirement account withdrawal the trustee obtains from a retirement account must — within that same taxable year — be sprinkled on out from the trust to and among one or more of the trust beneficiaries;

(4) One important point ideally is that this trust should not be used to accumulate withdrawals from non-Roth retirement accounts. Otherwise, a trust’s withdrawal from a non-Roth retirement account, if the trust thereafter holds and accumulates that withdrawal within the trust itself without distribution to a trust beneficiary, will cause the trust to be liable for income tax on that withdrawn amount at the trust’s own substantially higher, compressed income tax rates; than if taxed to a trust beneficiary at his or her lower marginal income tax rates.

As to the above income tax, generally a trust’s receipt of income is not taxable to the trust itself in situations where (under the tax law) that trust income is shifted out to a trust beneficiary by a distribution of that trust income as a trust distribution out to a recipient beneficiary. For 2021, a trust that pays its own income tax (when the trust itself holds undistributed taxable income) hits the top 37% marginal income tax rate beginning at $13,050 of trust taxable income; for a single individual, this 37% marginal rate kicks in when that individual’s taxable income is more than $523,600.

(5) But, contrary to the preceding point, note the following Roth account exception is important for this SECURE trust design: As stated above, the trust is a “conduit” trust for non-Roth tax-deferred retirement accounts. However, the trust also includes an express exception clause that allows the trustee to accumulate (thus disregard the conduit mandate) for any Roth account distributions the trustee receives. The trustee can accumulate and invest these Roth distributions for later distribution to the trust beneficiaries, well outside the 10-year SECURE distribution period;

(6) Back to broader comments. This SECURE trust design must still meet the requirement that all beneficiaries are qualified beneficiaries so as to avoid application of the five (5) year payout no-beneficiary distribution rule, rather than the 10-year rule;

(7) As to any mandated conduit distributions from the trustee to the beneficiaries, this trust design provides additional flexibility for the trustee to deal with minor-age or disabled trust beneficiaries, etc., using the following (or similar) trust provision:

“The Trustee may (without court approval) make distributions of any portion of a distribution required or permitted to be made to any person under this trust agreement in any of the following ways:  (i) to the person directly; (ii) by distribution in further trust in the manner provided under section 20.1; (iii) to the guardian of the person or the person’s property; (iv) as to such distribution by selecting and designating an individual or financial institution to serve as Custodian for such minor beneficiary under the Uniform Transfers/Gifts to Minors Act of any state; or (v) by reimbursing the individual who is actually taking care of such person (even though the individual is not the legal guardian) for expenditures made by the individual for the benefit of such person. Written receipts from the persons receiving such distributions (other than if held in continuing trust under section 20.1) shall fully and completely discharge the Trustee from any further responsibility for such expenditures. The Trustee shall not exercise any power under this section 17.7 in a manner that would cause any trust holding S corporation stock not to qualify as a permitted shareholder of that stock for federal income tax purposes.”; and

(8) Finally, under the SECURE Act’s 10-year distribution mandate, the trustee has the option to make no withdrawals from the retirement accounts until late in the 10th-year so as to let those accounts continue to be invested income-tax deferred within the retirement accounts until later withdrawn. In essence, this substantively allows for an accumulation of tax-deferred value continuing within the retirement accounts during the 10-year period, although this SECURE trust is ostensibly a conduit trust during that same 10-year period.

A Third 2021 Heckerling Estate Planning Take-Away: “Conduit Trusts”

This is my third 2021 Heckerling Institute take-away. It centers on Natalie Choate’s fine (as usual) presentation about the SECURE Act and its effect on 10-year conduit trust planning as part of one’s estate planning. A conduit trust is a “see-through” trust that receives a deceased participant’s periodic qualified retirement account distributions (such as from an IRA), with the conduit trust thereafter passing along that retirement account withdrawal from the trust to the trust beneficiaries.

The particular narrow focus of this blog post is how the retirement account distribution from the trust is thereafter taxed for income tax purposes to the recipient trust beneficiaries. This gets into the income tax DNI rules (distributable net income) and a goal of sprinkling these trust distributions to and among the trust beneficiaries so as to take advantage of their respective (in many cases lower) own personal income tax rates, etc.

In short, prior to the SECURE Act most conduit trust provisions were designed to include separate trust shares for each named beneficiary. However, in my view, the new SECURE Act 10-year limitation now points optimally to avoiding this separate trust result. In its place is a more desirable single conduit pot-trust from which — from the one trust — the periodic retirement account distributions can be sprinkled, as necessary, by the Trustee among a class of trust beneficiaries, such as a decedent participant’s children. This sprinkle element gets back to the above point about the potentially lower individual tax rates among the beneficiaries.

This blog post addresses how one might best be able to sprinkle out these periodic distributions so as to take advantage of the recipient beneficiaries’ lower income tax rates. This post also assumes the reader has some background experience with conduit trusts.

Specifically, a conduit trust now under the SECURE Act ideally needs to allow the Trustee to sprinkle the trust’s retirement account withdrawal to and among any one or more of the trust beneficiaries with each beneficiary’s share of DNI based on the distribution the beneficiary actually receives; not otherwise based on proportionate separate trust shares.

For example, assume there are five children named as the class of the conduit trust trust beneficiaries. Two children currently need distributions during 2021 to help with living expenses while at college. The younger three children do not yet need distributions. Assume in 2021 the Trustee withdraws $200,000 from the retirement account and, thereafter (as a conduit), distributes $75,000 from the conduit trust to Child One and $125,000 to Child Two.

The question arises as to how the $200,000 total DNI is allocated for 2021 for each of these two recipient children. The DNI answer is not simply that a trust beneficiary is allocated a portion of the trust DNI simply based on how much the beneficiary receives. Rather, the DNI allocation method must be a purposeful goal of the conduit trust design. In this instance, purposely avoiding separate trust treatment.

Keep in mind a conduit trust also must pass-along all withdrawn amounts from the qualified retirement accounts — during the same taxable year — on to the trust beneficiaries. In the above example, to Child One and Child Two who presently need the trust distributions. These retirement account distributions for a conduit trust also cannot accumulate in the trust itself. But keep in mind any continuing income-tax-free growth and accumulation continues to the extent the retirement account itself remains in place with no withdrawal by the Trustee (under the SECURE Act 10-year payout rule).

Back to the DNI element for a conduit trust. The ideal DNI treatment is for Child One in the above example to be treated as receiving (and taxed at her own income tax rate) $75,000 of the DNI, with Child Two receiving and taxed on $125,000 of the DNI. This DNI allocation goal is logical; but must be the result of the purposeful design of the conduit trust. Keep in mind DNI effectively shifts the income tax obligation to the recipient trust befeficiarues at their lower marginal income tax rates. The trust, in this example, does not pay any income tax on the $200,000 DNI at its otherwise higher, compressed income tax rates.

Without the above purposeful DNI design and result, there is a risk the above two children who actually received the $75,000 and $125,000 trust distributions are otherwise treated as having received and taxed each only on $40,000 DNI. This is based on 2/5 of the $200,000 trust income [as to two beneficiaries compared to the total five beneficiaries].

This would likely be a costly, inequitable result, if Child One is taxable for income tax purposes only on $40,000 of her $75,000 distribution; Child Two taxable only on $40,000 of her $125,000. Here is the costly result: the conduit trust itself would be taxable — at its higher compressed income tax rates — on the $120,000 DNI that is not deemed to have been distributed out to anyone in this example. The trustee also may likely have to withdraw additional taxable retirement account funds in order to pay this trust income tax liability. A circular challenge.

For my own benefit, and hopefully for the benefit of readers, I ask you to review my conduit trust provision below that, if included in a conduit trust (along with other necessary conduit trust provisions), may help avoid the above inequitable DNI result. Let me also just say that in this new SECURE Act environment this DNI question is a very important, new planning issue that we practitioners must now grapple with and address.

Below is the sample DNI trust provision:

” 7.11 There is no requirement under the preceding distribution provisions of this Article XXIV that the Trustee must make equal distributions to each member of the class of beneficiaries named in the preceding section 7.10.  As to any periodic conduit trust distribution to any one or more of the class of beneficiaries under this Article XXIV (whether equal, unequal, or in no amount as to any one or more of such beneficiaries), my intent is that each such beneficiary’s respective receipt of a distribution, if any, be treated as distributable net income (“DNI”) to that particular recipient beneficiary proportionate to the distribution amount he or she actually receives with the result that only the recipient beneficiaries as to periodic distributions hereunder are treated as receiving a proportionate share of DNI based on his or her actual pro-rata receipt of the total distributions.”

A Couple of 2021 Heckerling Institute Estate Planning Take-Aways

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.”

My 7.9.20 Steve Leimberg Newsletter: Inter-Vivos QTIP Trusts; Now Even Better in Georgia

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 james@ktlawllc.com 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. 

Essential (Preventive) Estate Planning Checklist Provisions

My sample estate planning document provisions below are essential in many cases for helping prevent issues that I see in my trust and estate litigation work.

My experience indicates these provisions are not used frequently enough among estate planning attorneys.  Also, readers of this blog cannot, and should not, rely on these sample provisions nor read this post as my recommendation for using any one or more of the provisions in a particular estate planning document or situation.  But, the provisions should be on your estate planning checklist.

The following are, therefore in my view, important sample provisions for a trust document (the last two deal only with a married couple situation):

Fiduciary Duty.  In exercising any power with respect to a trust created under this trust agreement, each Trustee, Co-Trustee, and directed trustee (Article XIII) shall at all times serve in a fiduciary capacity and act in accordance with fiduciary principles, including, but not limited to, the duty of care, loyalty, and confidentiality.

Allowable Self-Dealing.  The decisions by my spouse Jane while serving as a Trustee or Co-Trustee under this trust agreement that may or could be otherwise construed as self-dealing with respect to Jane’s exercise or non-exercise of any power hereunder, or the time or manner of the exercise thereof, made as a prudent person in good faith, shall fully protect Jane and shall be conclusive and binding upon all persons interested in the trust estate; provided, however, that no self-dealing as to any charitable or non-profit interest under this section 1.7 is allowable to the extent prohibited by any applicable tax or non-tax laws or related regulations.

Divorce[But, see my Important Note below.]  Although Jane and I do not contemplate a divorce, we each acknowledge and are aware that in the event either one of us (i) files a complaint or petition for divorce in any jurisdiction or (ii) obtains a decree or judgment of divorce in any jurisdiction, Jane shall, as of the occurrence of the earlier of either of these conditions (i) or (ii), at such time be deemed for all purposes (including any position as a fiduciary and as to any trust created by exercise of a power of appointment or distribution-in-further trust) to have predeceased me as of my date of execution of this trust agreement.

Contemplation of Remarriage. Although neither Jane nor I contemplate the occurrence of a divorce from one another or a remarriage to another spouse, if for any reason following my execution of this trust agreement, I were to enter into marriage with anyone else other than Jane, my express and clear intention is that that new spouse  shall not receive any property from my estate nor under the provisions of this trust agreement, with the result that all provisions in my Last Will and Testament and this trust agreement (whether or not either document is amended after my execution of this trust agreement) shall remain fully in effect and unchanged by reason of my marriage to that other spouse.

Important Note re the Above Divorce Provision

The estate planning lawyer who represents both spouses needs to memorialize and make clear to both spouses that each spouse understands the divorce provision can result in potentially adverse consequences to either or both spouses in the event of a future divorce. The estate planning lawyer, in my opinion, also should inform both spouses together that they have the option of seeking separate counsel to review this divorce provision before the estate planning lawyer includes it in the spouses’ documents.

And, I also believe the estate planning lawyer under the ethics rules cannot include the divorce provision only in one spouse’s document if that lawyer represents both spouses, even if the spouses consent; unless both spouses seek separate counsel.  Otherwise, including the provision only in one spouse’s document — by the estate planning lawyer who represents both spouses — is substantively akin to preparing a prenuptial agreement only for one of the two spouses while representing both spouses.

Estate Planning and Your Lawyer’s Bias

We are each inevitably biased based on our own life experiences, education, community and family values, etc.  The key in any discussion about bias is whether we are able, or willing, to step back and try more objectively at times to observe our own bias.

This blog post is my recommendation that you be aware of your lawyer’s own bias and how it may possibly influence your estate planning.  I provide below only limited examples. But, my broader point is for you, as a client, to feel comfortable questioning and challenging your lawyer’s recommendations for the design of your estate planning.

Example One — My experience is that an abundance  of estate planning documents I have read over the years include a descendants-only feature in the event, for example, a child (we will call her Susan) dies, who at her death has no children.  In this event, this typical descendants-only provision requires that Susan’s share of the property now is to be divided only among her other siblings (and their descendants). This provision is designed to make sure Susan’s parents’ property passes only along the parents’ line of descendants. It does not include spouses of those descendants.

Carrying this Susan example further, assume Susan had been happily married for 20 years to Bob at the time of her death. Remember, Susan had no children. Bob always fit in well with all the family members, including Susan’s parents. But, with this descendants-only provision at Susan’s death, Bob gets nothing.

I am not suggesting Bob should or should not get anything. My point is that most lawyers do not address this situation adequately with clients and often use the “descendants-only” language in the estate planning document as a matter of habitual rote. I also believe many clients would be shocked to learn there are no options for a spouse under a circumstance similar to this Susan example.

Maybe your lawyer has himself or herself had a bad divorce in the past;  or had a sibling or parents who experienced a painful and costly divorce. This is an example of the lawyer’s own experiential bias that can make its way into your estate planning documents — without sufficient discussion with you about other available options.

Example Two — To my “lawful” descendants is a term I still see frequently in estate planning documents that I believe may stem from the lawyer’s own bias (religion, community, political, etc.) and that is not sufficiently discussed with clients.

Here is what you need to know about this “lawful” reference to make sure you agree or disagree to use that term in your estate planning documents. Again, my point is this reference and its potential effects demonstrate another example of rote-mentality, too often not sufficiently discussed with clients. Here is an example:

Let’s assume I have a daughter who has a young son, but she is not married to the other parent. Assume also that we all love and treat that son (a grandchild in this example) fully as a family member with absolutely no distinction as to my daughter’s non-marital status.  Assume also my own estate planning documents provide for my property to be divided and held in trust only for my “lawful descendants”. Assume also I die, in this example.

It is my opinion that my grandson (in this example) is most likely cut out of my estate plan because he is not a “lawful” descendant. Technically, he was born out-of-wedlock at the time of my death. Also, arguably this non-wedlock status is locked-in at the time of my death relevant to the “lawful” definition in my documents. I do not believe my daughter’s subsequent marriage — after my death — to the other parent cures this problem.

More importantly, I would hate for my family to face the above problem, including costly efforts to try and convince a court, etc., to include this grandson as a descendant for purposes of my estate planning.

In other words, the modifier “lawful”, in my view, does nothing more than set the stage for disagreement, disputes, and legal issues as to whether I intended to leave out my grandson with my use of that modifier in my documents. Courts are generally bound by the wording within the four-corners of estate planning documents. The term “lawful” simply creates far more problems than benefits for an estate planning document.

For those of you who wish to read more about the potential limitations of this “lawful” element, click here for a relevant 2010 Georgia court opinion in Hood v. Todd, 287 Ga. 164, 695 S.E.2d 31 (2010). Note also the dissenting opinion, indicating even the court had difficulty in determining what “lawful” meant in this case.

My recommendation is that your estate planning documents include a more expansive provision for the definition of “descendants” so as to bring the definition more fully into the light of current cultural and scientific realities. Make sure you discuss with your lawyer and conclude with a clear understanding about the final “descendants” definition in your estate planning documents.

Example Three — I remain surprised at the extent to which I see estate planning documents that fundamentally treat males and females differently. For example, the estate plan might provide for greater outright provisions for a son, but strict trust provisions for a daughter. Or, the estate planning document names only sons as fiduciaries, with the daughters not being named for these positions.

Again, I am not suggesting a right or wrong approach. But, in my experience, this is an area with a great deal of old-school lawyer bias, and without sufficient informed dialogue and consent from clients.

Age 18 / 21 Cheat-Sheet for Georgia Uniform Transfers to Minors Accounts

I typically do not recommend use of transfers to minors accounts, compared to the alternative of more-targeted trust planning. But, many clients still end up running into questions and situations dealing with transfers to minors accounts (sometimes called a minor’s custodial account).  Also, I get questions from time to time about whether a child will get the minors account property at age 18 or 21.

Here is a quick cheat-sheet. Depending on the situation, there are both age 18 and 21 answers.  This age 18 / 21 distinction under Georgia law is at O.C.G.A. Section 44-5-130.  Click here for a link to the full gamut of these Georgia transfers to minors statutes. These age 21 situations are limited exceptions to the adult age of 18.

Hands on the Account at Age 21

The minor gets the account at age 21 if the transfers to minors account was set up intentionally as a transfers to minor account. This is the most typical, garden-variety transfers to minors account where, for example, grandmother sets up and funds the transfers to minors accounts for grandchildren, etc.  Or, where the parents or anyone intentionally and purposely sets up the transfers to minors accounts.

In the above garden-variety situations, the minor has to turn age 21 before getting his or her hands on the account (even though the minor at age 18 is an adult for other purposes under Georgia law).

The other age-21 exception deals with trust and Last Will and Testament documents.  Read the following section of this blog post carefully, as it affects whether the minor gets hands-on at age 21 or earlier at age 18.

Assume a minor stands to get a distribution of cash or property from a trust or from someone’s estate under a Last Will and Testament.  If the trust or Last Will and Testament documents include an express reference — in the trust or Will document itself — allowing the trustee or executor to make the distribution into a transfers to minor account, then the trustee or executor can open and create transfers to minors accounts, make the distribution to the account, and age 21 applies.

The take-away point is that the trust document or Will must include an express reference to the trustee or executor having the power to distribute to a transfers to minors account in order for age 21 to apply.  In other words, the person who created the trust or Will must have intended for the trust and Will to use transfers to minors accounts.  This is the tie-in to my above comment about an intended use of these minors accounts.

The above age 18 / 21 point is that age 21 applies only under the above intentional circumstances.

For this intended age 21 element to apply for estate / trust planning, it is, therefore,  imperative that your trust and Will documents include express authority for the trustee or executor to make distributions to minors into transfers to minors accounts. The express power to create and make distributions into transfers to minors accounts also applies if the trust or Will document incorporates expressly by reference the Georgia fiduciary powers under O.C.G.A. Section 53-12-261 (see Section 53-12-261(b)(27)(B) referring expressly to the power to create and fund transfers to minors accounts).

Better yet, create longer-term trust provisions for the minor beneficiaries so that the trust can exist for longer periods beyond age 21.  My view is that age 21 is much too young for large amounts of property or cash to fall into the hands of any of these younger beneficiaries.

Hands on the Account at Age 18

By contrast, age 18 is the broader, general rule — even for transfers to minors accounts — when minors become age-18 adults under the law.  Accordingly, in virtually all other situations not falling under the above age 21 exceptions, the creation and funding of transfers to minors accounts is still allowable and can be created for a minor, but the minor gets the account at age 18, not 21.  The above link to the Georgia transfers to minors statutes provides much more detail than I include in this post.

Keep in mind in this age-18 situation there can (and will) exist a transfers to minors account to hold the property or cash, but the account will be subject to the age 18 element. This is because these age-18 minors accounts are not created under the above intended garden-variety and trust / Will exceptions.  The nuances above likely appear overly academic; but have real consequences for this age 18 / 21 distinction.

Now, a final, negative kicker. If the trust or Will document does not include the above authorization for use of a transfers to minors acccount and the distribution amount exceeds $10,000, then a legal guardianship (and conservatorship) will be required for oversight of the property (or cash) until the minor turns 18.  This is not an easy, cost-free option.  For readers interested in technical details about this conservatorship result, start with the link above for reference to O.C.G.A. Section 44-5-116(c)(3).  See also O.C.G.A. Section 29-3-6.

A “Directed Trust” Primer (my recent 9.19.19 Leimberg Information Services newsletter)

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:  james@ktlawllc.com

Cryptocurrency and Digital Assets

This is my second blog post dealing with the increasing Brave New World of “digital assets” and how these assets fit with a person’s estate planning. Below are a few of my brief comments about cryptocurrency:

(1)  In the cryptocurrency world, a person’s “private key” is the crucial element separating access to one’s cryptocurrency and its loss (likely permanent). The private key is analogous to a password. My strong point here is to keep a backup of your private key, and let trusted family members know where they can find your private key in the event you are unable to provide it (your death, disability, etc.). There are hundreds of web references to individuals having permanently lost millions of dollars in cryptocurrency due to lost private keys.  Click here for an example from Wired magazine referring to a CEO who recently died;  and no one can find his private key to an estimated $137 million in cryptocurrency;

(2)  The above access / backup problem is particularly elusive, and difficult, as many cryptocurrency users are extremely private about this subject, often to the intentional exclusion of their family members, etc.;

(3)   As a related aside, the IRS, no doubt, is interested in your cryptocurrency.  IRS Notice 2014-21 is its first published guidance in the form of answers to frequently asked questions.  Click here to read this notice;

(4)  The above IRS Notice includes a great deal of information. Two points likely a surprise to most readers are:  (i) the IRS is treating cryptocurrency transactions for income tax purposes as a “sale or exchange”. For example, if you use $50,000 of  cryptocurrency to purchase an item;  you will trigger gain or loss on the $50,000 depending on your cost basis in your cryptocurrency, etc. I purposely do not include more detail about this gain / loss treatment for this post; and (ii) Notice 2014-21 expressly states the IRS will treat cryptocurrency as property, not as currency.  For estate tax planning purposes, this means cryptocurrency will be inludable in the owner’s estate at death, with a stepped-up (or stepped-down) cost basis based on the cryptocurrency FMV at the person’s death;

(5)  Finally, I strongly recommend an express provision dealing with crypocurrency be included in a person’s estate planning documents (trustee, executor, power of attorney powers, etc.). Below is my current draft of possible language for dealing with cryptocurreny (again, this is merely my example language for this post;  no reader may rely on this provision as legal or any other advice from me or my law firm):

“To handle on my behalf any of my digital asset “cryptocurrency“, defined for purposes of this DPOA [durable power of attorney] as digital assets that are exchanged electronically and based on a decentralized network or exchange, with such exchanges not requiring a reliable intermediary and managed using distributed ledger technology. In broad terms I give my agent under this DPOA the power to accept or pay on my behalf any cryptocurrency, digital asset currency, funds, or other value that substitutes for currency from one person to another person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. The above term “other value that substitutes for currency” encompasses situations in which the transmission does not involve the payment or receipt of cryptocurrency, but does include, but is not limited to, my private and public keys, blockchain and ledger information, bitcoins, bitcoin addresses, and any other cryptocurrency user or account data or information related to such transactions or to any convertible currency related thereto on my behalf. My intent also is that my reference to “cryptocurrency” under this paragraph be read together as broadly as possible in the broad context of my reference to electronic communications content and the definition of “digital assets” under O.C.G.A. Section 53-13-2 (as amended) included in paragraph (gg) below;”

Georgia; The First Progressive UDTA “Directed Trust” State in the Nation

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.