Editor Comment:
This Report covers all the Thursday morning General Sessions, including POAs (Berry), Split
Interest Trusts (Blattmachr), Trust Protectors (Sherby) and Ethics of Being a Fiduciary (Fox).
The next report will cover some of the Thursday afternoon Special Sessions.
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THURSDAY, January 15
9'00 - 9:50
Powers of Appointment in the Current Planning Environment
Presenter: Turney P. Berry
Reporter: Tiffany L. Walker
Powers of appointment are seemingly ubiquitous and have a myriad of family, administrative
and tax uses. This session examined the state law of powers of appointment focusing on the new
Uniform Powers of Appointment Act adopted by the Uniform Law Commission as well as the
federal income, gift and estate tax consequences of holding and exercising powers. Here are the
highlights.
Mr. Berry opened his presentation with a reminder to practitioners that general powers of
appointment often have real world consequences, which followed as a theme throughout the
remainder of his presentation. He then noted that the first several pages of the printed materials
provide an overview of basic concepts, beginning the discussion with a focus on state law and
the Uniform Powers of Appointment Act on page 14. A copy of the Uniform Act is also
included in the printed materials.
As an overview, Mr. Berry provided that the Uniform Powers of Appointment Act was
promulgated in July of 2013, and has been enacted in Colorado, as well as introduced or studied
for introduction in several other states. He further noted the need for the Uniform Act due to the
lack of state law on the matter.
Mr. Berry then noted several items of interest in the Uniform Act, including differences in
commonly used terminology. He pointed out that throughout the Uniform Act the traditionally
used term donee is known as the powerholder, and special powers of appointment are known as
non-general powers of appointment.
The discussion turned to the grant of general powers of appointment in practice. Mr. Berry
posed several questions regarding providing another individual with the power to grant a general
power of appointment. He continued by stating that practitioners have nudged state lawmakers
to provide that the power to create a general power of appointment is not the power itself.
The focus moved to choice of law, which Mr. Berry pointed out is an important deviation from
common law in the Uniform Act and deserved mention. Under common law, powers of
appointment are governed by the law where such power is created. However, Mr. Berry noted
that the Uniform Act modifies this aspect of the law, and provides that powers of appointment
are governed by the law of the powerholder’s domicile. He then introduced an example of when
the choice of law may be pertinent in governing powers of appointment, stating that the
definitions of spouse or descendants often vary across jurisdictions. More specifically, the
definition of spouse may not always include same-sex spouses.
Mr. Berry then mentioned a common issue with instruments providing a power of appointment
among descendants, which may include the powerholder in the class. He noted that state law has
provided for reformations in many jurisdictions under the premise that such a power was not
intended to create a general power of appointment. Addressing this issue, Mr. Berry pointed out
that the Uniform Act avoids creation of a general power of appointment by disregarding the
powerholder as included under the class.
The discussion turned to another potential issue often arising and recognized under the Uniform
Act. Under the terms of many documents, powers of appointment are only exercisable under a
will. However, as Mr. Berry discussed, there are some practitioners who do not like using wills
or would prefer to exercise powers of appointment under the terms of a trust. To remedy this
potential problem, he discussed the Uniform Act’s inclusion of a doctrine of substantial
compliance. Although, he warned against a document generally exercising all powers of
appointment, stating that the exercise of a power must at least include the name of the person or
entity creating the power. In the alternative, as a practice pointer, he also noted that it might be
necessary to include a clause in the powerholder’s document regarding the non-exercise of any
available powers.
The discussion touched on permissible appointees and fraud in the exercise of powers of
appointment. Mr. Berry provided that this topic would be discussed in more detail in the
afternoon during the Special Session. However, he did provide an example and noted that a
potential solution to protecting against fraud is to provide that the exercise of the power is
conditional upon the approval of a third party. However, later in the presentation, there was
mention that the approval of a third party for the exercise of a general power of appointment may
not provide protection against creditors.
Next Mr. Berry discussed the narrowed form of a general power of appointment, powers
exercisable in favor of only the powerholder’s creditors. He provided that such a power might
pose an issue as a result of ambiguities in determining who is a creditor and whether the creditor
is entitled to only an amount equal the debt or the entire trust. Further, he also mentioned that
the use of powers of appointment has become more widespread, and therefore causes more of a
concern than in prior years.
The presentation expanded on the discussion of creditors, and turned to a creditor’s ability to
reach trust property as a result of a general power of appointment. Mr. Berry discussed the
general rules, noting that statutory laws and cases across jurisdictions vary, especially in states
with asset protection trust legislation. He commented on the aggressiveness of some states in
disallowing creditors to access trust assets subject to a general power of appointment, and
provided that the biggest change in the Uniform Act was that creditors may access trust assets
subject to a general power of appointment.
In concluding the presentation, Mr. Berry noted that jurisdictions might desire to revise some
aspects of the Uniform Act prior to enactment. More specifically, he noted the Uniform Act’s
treatment of Crummey Powers. He also added that the use of powers of appointment by entities
would be discussed in detail during the afternoon Special Session. As a final thought, he
provided that the scholarly debate regarding perpetual trusts is not so concerning due to the use
of powers of appointment, and as such, he noted the importance practitioner response to such
debates.
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9:50 - 10:40
Something Alien? Split Interest Trusts Created by Entities: Sometimes a Good
Notion (Charitable Giving Series)
Presenter: Jonathan G. Blattmachr
Reporter: Craig Dreyer Esq.
It may seem impossible, ridiculous or downright silly, but there are times when having a
partnership, corporation or trust create a charitable remainder trust or a charitable lead trust will
produce a superior result than having an individual do so. This presentation provides a map, a
GPS and coordinates to traverse this previously uncharted territory. Here are the significant
details.
Mr. Blattmachr provided an extensive outline. It covers everything from basic charitable
deduction rules to entity created split interest trusts with grantor and non-grantor status. The
presentation focused on the advantages of creating split interest trusts through entities. Mr.
Blattmachr noted that entities will be used more in the future for creating these trusts. He
discussed the history of corporations using trusts when they wanted to terminate corporate status,
but did not want to distribute the property to shareholders. Today corporations usually use
partnerships or LLCs, but there is a long history of entities creating trusts. The idea came to him
while looking at the benefits of using private placement life insurance to fund a charitable trust.
He briefly discussed the income tax deductions for individuals under 170(a) for certain items
given to a charitable organization. He also noted the trust income tax deduction under
642(c). This provides a trust deduction for gross income set aside or paid for a charitable
purpose pursuant to the trust terms. C –corps also gets deduction under 170(a), and SCorporations and partnerships generally distribute the charitable deduction to their owners.
Rev. Rul. 2004-5 provides that if a partnership makes charitable contribution and a trust is a
partner, the trust gets the charitable deduction as if it is made from gross income. The trust is
further allowed the deduction under 642(c). The IRS reluctantly agreed to this result after
multiple loses in court. However, if the gross income to the partnership would be Unrelated
Business Income (“UBIT”), Section 681, Unrelated Business income, applies and prevents the
deduction under 642(c). Mr. Blattmachr questions whether this should be true, but advises it is
still safer to make distribution from non-UBIT income.
He also discussed the charitable income tax limitation on Individuals of 50% of the contribution
amount for gifts of cash to a public supported charity, or 30% if it is a private foundation or long
term capital gain property. Individuals can get a deduction when made to or for the use of
charity. If the charitable gift is for the use of a charity you are limited to 30% of the contribution
amount. Any contribution to a CLT will be limited to 30% of the contribution amount. If a
partnership makes contribution and partner is a trust there is no 30% or 50% limitation. It is only
limited if paid with UBIT.
While corporation or partnership can create a trust, it will not be treated as created by the entity
unless it is for a genuine business purpose. A CLT can do this by creating a non-charitable
entity for philanthropic purposes. One example of this is Google.org, which is Google’s
philanthropic organization. It is not a non-profit, but the purposes are philanthropic. This means
that when creating a partnership to form a charitable lead trust, one of the business purposes of
the partnership should include philanthropic purposes.
In a CLT, you can create it with a series of unitrust or annuity payments usually followed by a
payment to children. The code also allows it be grantor or non-grantor. Mr. Blattmachr noted
that it will likely be a non-grantor trust. With a non-grantor trust there is no income deduction
for property going to charity, but you will get a 642(c) deduction each year, unless you have
unrelated business income. If you do a CLT with grantor status and it terminates early (such as
death), the code recaptures the deduction and puts it in gross income, to the extent of the present
value of all income. This is a bad result. However, subsequent regulations provided recapture
only if and to the extent of the PV of payments made to charity are less than the deduction
taken. However, In Rev. Proc. 2000-45, the service gave sample charitable lead trusts, but
appears to have reinstituted the draconian recapture rules under the code. It is unknown whether
this was intentional. You will always have recapture in a grantor CLT when the grantor dies,
but if a partnership, trust, or other entity creates the CLT you can prevent this termination of
grantor status.
Mr. Blattmachr then went through a series of options for implementing CLT. How do we get an
upfront deduction and not get income on back end with a grantor trust? You could fund the trust
with municipal bonds. However, the return on municipal bonds is lower than section 7520
rate. You need growth or income in excess of the 7520 rate for success in a CLT. Other people
have discussed using a Roth IRA to fund the CLT. This seems to work under Rev. Rul. 85-13,
and regulations that anything owned by grantor trust is treated as owned by the grantor. It
appears funding a grantor CLT with a Roth IRA makes some sense. However, Natalie Choate
disagrees and so may someone at the IRS. The concern is that the IRS will say transferring an
IRA to a grantor trust may terminate the IRA status. The effect of this is so bad that it is not
worth the risk of the IRS taking this position.
Mr. Blattmachr then noted the one time he has done a grantor CLT, he used a longtime held
insurance policy of a client to fund the CLT with a large cash value. It was owned long enough
to avoid the Modified Endowment contract rules, and they borrowed against the policy to make
the annuity payments. He noted that most clients will not want to transfer such an asset into a
CLT, but that it worked well for his client who was looking to cancel the policy.
Mr. Blattmachr then discussed many ideas on ways to fund grantor CLTs and the problems with
trying to get a grantor CLT to work. He noted the Atkinson case where the Tax Court and 11th
Circuit held that trust was not a qualified charitable remainder trust because the annuity
payments were not made on time. The same premise has been applied to GRATs in audit. Mr.
Blattmachr has added language to try to address scenarios where clients fail to make
payments. He discussed the shark fin CLAT idea and funding with cash and later swapping for
an insurance policy but noted the self-dealing issues that arise with CLTs. He also discussed the
issues you run into with funding with cash and a non-paid up insurance policy under the Splitdollar life insurance, annuity and endowment rules of 170(f)(10).
Alternatively, he discussed how one could contribute cash in a CLT and after many years then
the CLT could buy an insurance policy. The IRS could argue step-transaction and apply
170(f)(10). Also you can’t substitute property into the grantor trust CLT by the grantor, because
you will run into self-dealing rules that may result in an excise tax of up to 200%.
How do we get to the impossible dream of a grantor CLT? Mr. Blattmachr points to 7702(g). If
you can have multiple life policies you may be able to structure a steady income stream, and then
you may be able to structure a charitable lead trust like a GRAT with increasing payments. Then
you have no annual income, and no borrowing that triggers income. Mr. Blattmachr said he
would discuss this further in his afternoon special session.
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10:55 - 11:45
In Protectors We Trust: The Nature and Effective Use of Trust Protectors
Presenter: Kathleen R. Sherby
Reporter: Joanne Hindel Esq.
This presentation explored the state of the law in the U.S. governing trust protectors, what is
meant when referring to a trust protector, the differing roles a trust protector can fulfill to
maximize flexibility of a trust and carry out the settlor’s intent, the extent of the trust protector’s
duties, if any, and to whom these duties might be owed, the terms essential to include in a trust
when providing for a trust protector, and what a person should confirm prior to agreeing to serve
as a trust protector. Here are the significant highlights from this session.
The emergence of third party decision makers in trust administration is one of the most
significant recent developments in American trust law.
Kathleen began using trust protectors 20 years ago when her London partners described them at
her law firm. When she learned that a litigator was looking forward to challenging a trust
“protector” she changed her documents to say trust “adviser”. Eventually, she found however
that the change in name added to the confusion and she researched how each state’s laws handles
the terms and the distinctions.
There is confusion and controversy over the role and nature of a third party decision maker, there
is also a lack of consensus as to what such a person should be called. Trust protector, trust
adviser, investment adviser, trust director, distribution adviser etc are some of the names used.
Best approach is to use trust adviser for a person who holds one or more powers that may direct
the trustee in carrying out traditional trustee duties and the term trust protector should be used to
identify a person who has powers that relate to one or more specific trust matters without
involving or infringing on the trustee’s performance of traditional trustee duties.
Kathleen pointed out that the early states that adopted these laws made these distinctions.
The use of the term trust protector does not have an independently understood legal role. Most
state statutes either do not address the powers of a trust protector at all or almost uniformly
provide that the trust protector only has those powers that are expressly provided in the trust
terms.
When deciding whether to designate a trust protector the best question to ask is “is there any role
or function that would be important in this trust to give to a third party decision maker that would
require the appointment of a trust adviser or trust protector?”
Trust protectors are not for every trust – use them carefully and only when needed.
Trust protectors are third parties to whom powers are given by the settlor to work with the
trustee.
The term and concept has been used for a long time in England and in other foreign jurisdictions.
Settlors have used trust advisers in the US for some time to bifurcate the powers of the trustee,
giving some powers to persons other than the trustee to determine investments, direct
discretionary distributions of principal or to consent to the sale of trust assets and the
reinvestment of sale proceeds in other investments or to discretionary distributions.
In the early 1980s settlors began to expand the powers given to persons other than trustees
creating new roles for trust protectors in self-settled spendthrift offshore asset protection trusts
that were then gaining in popularity.
Eventually, states started to develop statutes addressing the appointment and duties of third
parties with respect to trusts.
In the late 1990s the ULC was working on the Uniform Trust Code that included Section 808
entitled “Powers to Direct”. This section provides that a person , other than a beneficiary, who
holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith
with regard to the purposes of the trust and the interests of the beneficiaries.
This UTC section deals primarily with trust advisers. The comments to the UTC indicate that
this section is intended to ratify the use of trust protectors, however.
The UTC has been adopted in 29 states and 15 of these still provide Section 808 as the only
provision in their laws touching on trust advisors and trust protectors.
Of the states that have not adopted the UTC, a few have general statutes that are virtually
indistinguishable from UTC Section 808.
There are, however, 11 states that have no state statute addressing either trust advisors or trust
protectors.
In fact, more than half the states have either no statutory provision or a very limited and
ambiguous statutory provision as to trust protectors and trust advisors.
The state statutes vary as to whether they provide a list of powers available to a trust protector –
most indicate that the trust protector only has the powers set forth in the trust document.
The state statutes vary as to whether or not they treat a trust protector as a fiduciary.
A lot of states indicate that the trust protector is a fiduciary but this can be changed in the trust
agreement.
Most states use the term trust protector and trust adviser interchangeably which adds to the
confusion.
Only Virginia makes the distinction between the two and its trust protector statute makes the
trust protector a fiduciary that cannot be changed by the trust terms.
There are three cases dealing with trust protectors:
In the McLean case the question was whether the trust protector could be held liable in not
exercising the right to remove and replace the trustee of a Special Needs trust. The court held
that the trust protector had no duty to monitor the actions of the trustee and determined that the
trust protector was not obligated to remove and replace the trustee.
In the Schwartz case, the court held that the trust protector’s amendment of the trust added an
entirely new provision to the trust that purported to expand his own powers over the trust and
that exceeded the trust protector’s powers given under the trust terms.
The third case is the Manasean case from Florida where the authority of the trust protector was
upheld even though Florida does not have any statute specific to trust protectors but just the UTC
Section 808.
Three types of powers can be given to a third party:
Powers that would otherwise be subsumed by a trustee – these powers should go to a trust
adviser and include investment or distribution decisions.
Be sure to identify who still retains fiduciary responsibility for actions – whether it is the advisor
or the trustee.
The second type of power is a power that the settlor, beneficiary or trustee would not otherwise
have but might be reserved by or given to them in the trust instrument without adverse tax or
other consequences. Examples include the power to control trustee compensation and the ability
to change governing law.
The third group of powers would be the powers that are otherwise lodged with a court and for tax
or other reasons cannot be given to a beneficiary or trustee or reserved by a settlor. Examples
might include modifying the trust instrument or interpreting trust terms.
Top drafting considerations:
1.
Trust protectors are not necessary or desirable for all trusts
2.
Do not rely on state law, and try to avoid jurisdictions that provide mandatory statutory
provisions for trust protectors (Virginia).
3.
If the trust protector will hold powers beyond those inherently given to a trustee, will the
trust protector act in a non-fiduciary capacity? Make that option available in the trust terms.
4.
Be very specific in trust terms as to what authority the trust protector has and whether or
not the trust protector will act as a fiduciary. Make it clear whether the trust protector will
monitor the actions of the
trustee and be entitled to information about the trust.
5.
Make sure to use the terms trust protector and trust advisor appropriately and consistently.
6.
Give the trust protector discretionary, not mandatory, powers and provide guidance as to
the exercise of those powers.
7.
Clearly articulate the duty of care with which the trust protector is to act.
8.
Remember that the trust protector needs protection as well.
9.
Grant the trust protector access to the trust information. But be careful not to increase the
trust protector’s liability by giving access to information.
10. Provide detail with respect to the manner in which the trust protector is to be compensated.
11. Provide a mechanism to remove, replace and appoint trust protectors.
12. Remember that the trust protector does not “protect” the trust.
If a lawyer is acting as a trust protector, he or she may want to have an indemnification
agreement executed when acting in that role to ensure that he or she is not later sued for actions
taken as a trust protector.
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11-45 - 12:35
Ethical Considerations in Acting as an Executor or Trustee: Do You Really Want
to Do This? (Ethics Session)
Presenter: Charles D. “Skip” Fox, IV
Reporter: Michael Sneeringer Esq.
This session reviewed the ethical considerations that lawyers and other professionals must take
into account when deciding whether to be named as an executor or trustee and when acting as an
executor or trustee. Among the subjects covered were avoiding conflicts of interest,
communications with beneficiaries and third parties, hiring the lawyer’s firm to represent the
trust or estate, how to and not to charge fees, and confidentiality of information including
possible responsibilities to the IRS.Reported here re the significant highlights.
This session has been approved for ethics credit. Please refer to the ethics accreditation
information for your specific jurisdiction and profession.
Mr. Fox educated the audience on ethics, including considerations that estate planning
practitioners should take into account when deciding whether to be named as an executor or
trustee, and when acting as an executor or trustee.
Mr. Fox’s overarching theme was how should estate planning practitioners handle the
representation? What role do lawyers have? He noted at the outset that serving as a fiduciary for
a client can make for one of the estate planning practitioner’s most fulfilling relationships.
Another theme of his was that the presentation was not just for lawyers; the topics covered
applied to other professions including accountants and insurance professionals among others.
Although he briefly touched on some caselaw and state ethics opinions, Mr. Fox relied primarily
on the ACTEC Commentaries on the Model Rules of Professional Responsibility and the
American Bar Association’s Model Rules of Professional Conduct.
Mr. Fox began with a summary of the five challenges facing estate planning practitioners
advising fiduciaries or serving as fiduciaries: competence; conflicts of interest; communication,
privilege, and confidentiality; compensation; and gifts. Mr. Fox then gave the audience some
statistics on active complaints against lawyers acting as fiduciaries. He highlighted the number of
complaints against lawyers acting as fiduciaries. He noted that when estate planning practitioners
have longstanding relationships with clients, many of the issues discussed in his presentation
come up as problems routinely occur. Mr. Fox explained that this was because the estate
planning practitioner has a comfort with the family due to the relationship, and may then fail to
adhere to the rules. The five challenges were then discussed in greater detail for the duration of
the presentation, with a great focus placed on conflicts of interest.
Mr. Fox then spoke about competence. He noted that Model Rule 1.1 was most important. He
then went through the Model Rule and ACTEC Commentary on 1.1 with the audience. Mr. Fox
referred to the cases in his materials on page 14-6 including Lewis v. State Bar of California and
Layton v. State Bar of California.
Mr. Fox next discussed conflicts. He explained that the parameters of the relationship between
the estate planning practitioner, the other parties, the estate and the trust need to be set forth at
the beginning of the representation. He noted the reasons that estate planning practitioners may
be tempted to leave the relationship as ambiguous on page 14-8 of the materials. He then
described the consequences for failing to define the client relationship as described on pages 148 and 14-9 of the materials.
Mr. Fox continued talking about conflicts by highlighting Model Rule 1.7(a) and (b) on page 1412 of the materials. He noted that estate planning practitioners need to think about whether there
is a concurrent conflict. He then discussed joint representation of co-fiduciaries, answering the
question of whether a lawyer can represent co-trustees or co-executors. He noted that co-trustees
and also co-executors must stay informed and participate in their respective trust administration
or estate administration.
Mr. Fox then discussed whether the estate planning practitioner owes a duty to the beneficiaries.
He noted that state law, in many instances, should be consulted as in some states, there is no duty
to beneficiaries while in other states, there is a duty. He pointed out that the ACTEC
Commentaries describe that a fiduciary owes few, if any, duties to estate beneficiaries.
Mr. Fox described the waiveable conflict of the estate planning practitioner representing both the
fiduciary and beneficiary; waiveable because what if the surviving spouse is both a fiduciary and
beneficiary? He noted the Baker case beginning on page 14-28 of the materials.
Mr. Fox then discussed whether the lawyer can name his or herself in the estate planning
documents to be the trustee or the executor. He noted that there are disadvantages to doing this,
and insisted that if it is done, the lawyer should get the client’s consent in writing and in some
states, the lawyer must get the client’s consent. He noted that the drafting lawyer has no right to
probate his or her client’s estate.
Mr. Fox then discussed communication with a focus on communicating with unrepresented third
parties. He was particularly adamant that lawyers must not give legal advice to persons not
represented.
Mr. Fox went on to discuss confidentiality of information. He noted that if you have joint clients
and tell one client something, the other client must also be informed.
Mr. Fox then discussed compensation and fees. He noted Model Rule 1.5 on page 14-54 of his
materials. The test on reasonableness of fees is based upon numerous factors. He noted that
estate planning practitioners must ask themselves what type of fee arrangement makes the most
sense. He noted the Estate of Hughes case in his materials on page 14-59.
Mr. Fox concluded with a brief discussion on gifts to lawyers. He noted some of the distinctions.
His final thought was (paraphrasing): If you do ethics wrong, you will get screwed!