CREATIVE WEALTH
PLANNING
Professor Randall Roth
University of Hawaii
rroth@hawaii.edu
Copyright © 2009, Randall W. Roth
All rights reserved in all media
IMPORTANT NOTICE
Circular 230 and General Disclaimer
These slides and the companion presentation do not constitute tax or
legal advice, and cannot be relied upon for purposes of avoiding
penalties under the Internal Revenue Code. They are intended to
stimulate thought and to provide general guidance to experienced estate
planning professionals. Each reader and seminar participant should
review original sources to determine the law and its applicability to each
situation. In no event should a reader or participant rely on these
materials or companion presentation in planning any specific transaction
or litigation. These slides and the companion presentation may omit
discussion of exceptions, qualification, definitions, effective dates, and
other relevant authorities and considerations. Neither the sponsoring
organization nor Professor Randall W. Roth will be responsible for any
error, omission, or inaccuracy under any circumstances.
CREATIVE WEALTH PLANNING
 Peace of mind
A plan that fits the client
A plan the client chooses
A plan the client understands
A plan that evolves with the client
A trusted adviser
WHY WEALTH PLANNING?
WHY WEALTH PLANNING?
THE REASONS JUST KEEP COMING
Non-lawyer’s Role
• Estate planning is often a team effort,
but it always involves the practice of law.
• Be careful not to engage in the
unauthorized practice of law.
• Do not rely on lawyers who are not
competent in estate planning.
• Define and document your role.
POSSIBLE ROLES FOR NON-LAWYERS
•
•
•
•
Estate planning expert
Captain of estate planning team
Co-Captain of estate planning team
Position player (e.g., financial adviser, return
preparer, appraiser, trustee, protector)
• Cheerleader
• Trusted Adviser
FIRST TOPIC
SAVING ESTATE TAXES
(on the transmission of wealth
to future generations)
WAYS TO REDUCE ESTATE TAXES
 Spend wildly
 Invest poorly
 Make gifts to charity
 Make gifts to other donees (e.g., the
kids, grandkids, etc.)
NATURAL VS.
UNATURAL GIFTS
 Natural Gifts
Donees need financial help
Donees deserve financial help
Donors can “afford” it
 Unnatural Gifts
Exploit “loopholes”
MY EXPECTATIONS
The 2009 exemptions and tax rates.
Sooner or later, Congress will look to the
wealth-transfer tax system as a logical source
of significantly more revenue.
If a significant tax is incurred when your
wealthy clients die, their children will ask,
“Why didn’t mom and dad do more to avoid
estate taxes?”
Hindsight bias is a powerful force.
ESTATE TAXES ASSUMPTIONS
 Unified Credit = $3.5 million exemption
 $1 million available to offset gift taxes
 $13,000 annual exclusion
 45% federal rate
 Combined 50% rate (thinking ahead)
WHY GIFTS SAVE ESTATE TAXES
TAX-FREE TRANSFERS
TAXABLE TRANSFERS
1.
2.
3.
4.
5.
6.
7.
8.
$13,000 annual gifts
Payment of tuition
Post-gift appreciation
Post-gift income
Taxes on IDIT income
Interest paid to IDIT
Discounts
Gift taxes three years
prior to death
9. Etc.
(tax-free transfers)
GIFTS ARE GOOD
(for people who want to save taxes)
The Kids,
Grandkids, Etc.
Uncle Sam lets the
exemption go by, then
grabs at the rate of 45
cents per dollar of value.
WHY GIFTS SAVE ESTATE TAXES
1. The $13,000 annual exclusion
Example: Mr. and Mr. Client each make annual gifts
of $13,000 to each of their two children, two
children-in-law, and four grandchildren.
 16 annual gifts
 Total annual gifts = $208,000
 After 10 year: $2,080,000
 Projected tax savings@50% = $1,040,000
 Present value (4% inflation) = $678,704
TEN YEARS IS NOT A LONG TIME
 If Mr. and Mrs. Client are each 60 years old,
they have life expectancies of about 20 and 23
years, respectively.
 If they are 70 years old, they still can
reasonably expect to live another 13 to 16
years.
 A person’s life expectancy does not shrink to
less than ten years until reaching 75 to 78
years of age.
WHY GIFTS SAVE ESTATE TAXES
2. Annual payment of tuition and medical
expenses
Example: Mr. and Mrs. Client pay the private school
tuition of their four grandchildren, the total of which
averages $40,000 annually (2009 dollars).
• $40,000 for ten years = $400,000 (2009 dollars)
• Projected savings @ 50% = $200,000 (2009 dollars)
• Total projected tax savings = $878,704 (2009 dollars)
WHY GIFTS SAVE ESTATE TAXES
3. Post-gift income and appreciation
Example: In addition to their annual gifts, Mr. and
Mr. Client each make a one-time gift of $1
million to their children.
 If 7% total return, after ten years $2 million is
worth about $4 million.
 Projected tax savings@50% = $1 million
 Present value (4% inflation) = $676,000
 Total proj’d savings (2009 dollars) = $1,554,704
WHY GIFTS SAVE ESTATE TAXES
4. Donors pay income taxes on donees’ income
Example: Mr. and Mrs. Client make all their gifts using an
Intentionally Defective Irrevocable Trust (IDIT).
 If 3% yield, then income from the one-time gifts of
$2,000,000 is $60,000 per year (2009 dollars)
 Add $6,240 (3% of $208,000) per year for each set of annualexclusion gifts (55 sets by the end of ten years), totaling
$343,200 (2009 dollars)
 Income taxes@35% on total annual income of 403,200
(60,000+343,200) equals $161,280 (2009 dollars)
 Projected estate tax savings in 10 years@50% = $80,640
(2009 dollars)
 Total projected savings = $1,635,344 (2009 dollars)
WHY GIFTS SAVE ESTATE TAXES
5. Discounts
Example: Mr. and Mrs. Client make the above-described gifts in
the form of non-controlling interests in a family entity.
•
•
•
•
Because of minority, non-marketability, and possibly other
discounts, the projected tax savings are magnified
The size of the combined discount will depend on many
factors
Done properly, 25% is conservative estimate
Projected total savings = $2,180,459 (2009 dollars)
Petter, TC Memo 2009-280
• $22 UPS stock in LLC
• Gifts (10%) and sales (90%) to two GST-exempt IDITs
w/ value-adjustment provisions for donor-advised
funds
• 5% CRUT for cash flow; ILIT for estate taxes; specialneeds trust for 3rd child)
• Claimed 53.2% discount (Moss Adams, CPAs)
• IRS agreed to 35%
• Issue: deduct excess to donor-advised funds?
THE NUMBERS
GROW OVER TIME
• If Mr. and Mrs. Client continue the abovedescribed gifting program for 20 years, the
projected savings are well in excess of $5
million (2009 dollars).
• If Mr. and Mrs. Client are each 60 years old
when they start making these gifts, each had a
life expectancy of at least 20 years.
RETURN ON INVESTMENT
• Such planning costs money, but the issue
should be framed as one of expected return
on investment, rather than cost.
• We have projected tax savings of more than
$2 million in 2009 dollars.
• Let’s assume fees of $200,000.
• 10 to 1 is attractive despite the lack of a
guarantee.
WHY GIFTS SAVE ESTATE TAXES
Review:
1. The $13,000 annual exclusion
2. Tuition and medical expenses
3. Post-gift income and appreciation
4. Donors pay income taxes on donees’ income
5. Discounts
6. Tax-exclusive calculation
7. Other reasons not addressed today
A KEY QUESTION
• If projected savings from non-charitable
gifts can be this large, why are so many
wealthy people still “sitting on the
sidelines?”
• Why don’t more wealthy people make
tax-motivated gifts?
TOP 10 REASONS WHY PEOPLE DON’T
MAKE GIFTS TO SAVE ESTATE TAXES
1. Financial insecurity (how much is “enough?”)
2. Lost cash flow (how much is “enough?”)
3. Lost control over assets and activities
4. Lost control over donees
5. Stunted character development
6. Possibility of a donee’s divorce or of other creditors
7. Complexity
8. Inflexibility
9. Concern that IRS will question something
10. Loss of stepped-up basis
BUILDING BLOCKS FOR
CREATIVE WEALTH PLANNING
1. Trusts
2. Crummey powers
3. Non-general powers of appointment
4. Independent but friendly trustees (and protectors)
5. Power to hire and fire independent trustees
6. Opportunity to borrow, lease, or buy trust assets
7. Intentionally Defective Irrevocable Trusts (IDIT)
8. Closely held entities
9. Zeroed-out short-term GRATs
10. Alaska/Delaware/Nevada/etc Trusts
Not ready to give anything away to the
kids, kids-in-law, or grandkids?
• Intervivos credit-shelter trust(s)
– Spouse can be trustee and current beneficiary
– Income and corpus as needed (ascertainable
standards)
– Kids, etc are “takers in default”
– Non-general powers of appointment
– 5 and 5 general power of appointment
– Grantor trust (which is good)
– “Spouse” as defined in the trust agreement
What about annual exclusion gifts?
– Cristofani version of Crummey powers
– New list of power holders each year
– Holders have way more to lose than to gain by
exercising a withdrawal power
– Court in Crummey didn’t require notice
(interesting but unnecessary variation)
THE CRUMMEY COURT
"It is likely that some, if not all, of the
beneficiaries did not even know that
they had any right to demand funds
from the trust. They probably did
not know when contributions were
made to the trust or in what
amounts."
Want to keep “power of the pursestrings,” or avoid “spoiling the kids?”
–Can prohibit distributions (except for
Crummey powers)
–Better to keep flexibility
–Friendly but independent trustees
–Power to hire and fire trustees
–Trust protectors
HOW FRIENDLY CAN A TRUSTEE BE?
“[T]he testimony elicited . . . in this case is insufficient to
establish that [the trustee] was a mere conduit for petitioner
and that it would automatically comply with any request of
petitioner. . . . Certainly [the trustee] was not going to turn a
deaf ear to suggestions from petitioner . . ., and indeed we
think [the petitioner's lawyer] would not have recommended
[the trustee] if he thought otherwise. . . . [A] mere willingness
to listen to and consider ideas and proposals is not
commensurate with an abdication by [the trustee] of its duty to
exercise its independent judgment. . . . Despite [the trustee's]
favorable disposition toward requests from petitioner, it had the
power to reject any and all requests as it saw fit . . . .” Hart, TC
Memo 1983-364.
WHAT INDEPENDENCE MEANS
Gift/Leaseback of dentist’s office building
IRS argued Step Transaction Doctrine
IRS contended that the trustees were not
independent
"Although the trustees were [the taxpayer’s]
wife and lawyer, such fact does not cause
them to lack independence. The trustees
were aware of their fiduciary duties.“ Wolfe,
TC Memo 1984-446.
HIGH-WATER MARK?
Taxpayer transferred his office building to himself as
guardian for his children. (Brooke, 468 F.2d 1155)
“Many decisions pivot on the issue of the
independence of the trustee.”
“The necessary independence of the trustee is
achieved in a guardianship.”
“The taxpayer . . . retained few, if any, controls over
the . . . property.”
“If the taxpayer should at some future date breach
his fiduciary duty toward his children, the
government might well renew its challenge.”
STATEMENT OF TRUSTEE
“I have read and understand completely each
provision of the attached trust agreement, and I
understand my fiduciary duties, which include
loyalty, impartiality, prudence, communication,
and obedience to the terms of the trust. I have not
agreed, expressly or by implication, to be subject
to the control of anyone. I understand that to do
so would be a breach of my fiduciary duty and
thereby subject me to personal liability.”
Want access to cash in the trust?
– Borrow it (high yet reasonable interest is
ideal)
– No income tax consequences if using IDIT
– Sell something to the trust (e.g., interests in
family entity)
– Again, no income tax consequences if using
IDIT
– Rid yourself of the 2036 “string”
Worried about inflexibility?
– Non-general power of appointment allows
complete change regarding who gets what,
when, and on what conditions
– Anticipate and facilitate change of trust
situs
– Protector can modify trust as circumstances
warrant
Worried about a valuation
dispute with the IRS?
– GRAT formula
– Automatic value-adjustment clause (marital
deduction formula)
– Relatively little incentive to question value of
gifted or sold interests in closely held entity
– If a gift tax is incurred, it probably will be just
another excellent investment
Loss of stepped-up basis?
Buy appreciated assets from IDIT
WORRIED ABOUT FINANCIAL SECURITY
AND/OR FUTURE CREDITORS?
Consider an Alaska (or Delaware,
etc.) Self-settled Spendthrift and/or
Discretionary Trust
Local law matters
Started with OAPTs and a fishing trip
Race to the bottom?
WORRIED ABOUT THE IRS?
 Intolerance for uncertainty can be a major
hurdle
 Tried and proven strategies
 Aggressive variation may save more
 Cannot just play the “audit lottery”
 What is the downside?
 Gift taxes paid more than 3 years prior to
death can be a great investment
GIFTS TAXES SAVE ESTATE TAXES
6. Tax-exclusive calculation
Example: If they wanted to do so, Mr. and Mrs.
Client could intentionally incur a gift tax on
an “extra” gift of $1 million.
•
•
•
•
•
Tax-exclusive vs. tax-inclusive calculation
$1.5 million at 50% equals an estate tax of $750,000, but a gift tax of
only $500,000
Effective gift-tax rate of 33% vs. estate-tax rate 50%
Donor must survive three years
Relatively few clients intentionally utilize this “opportunity”
2008 CHRISTIANSEN COURT
“We do recognize that the incentive to the IRS to audit returns
affected by such disclaimer language will marginally
decrease…. Lurking behind the Commissioner’s argument is
the intimation that this will increase the probability that
people … will lowball the value of an estate…. There’s no
doubt that this is possible. But … fiduciaries … owe a duty to
settle and distribute an estate according to the terms of the
will … [and] the state attorney general has authority to
enforce these fiduciary duties…. We therefore hold that
allowing an increase in the charitable deduction to reflect the
increase in the value of the estate’s property going to the
Foundation violates no public policy and should be allowed.”
THE BISHOP ESTATE
The Christiansen court:
“The famed case of Hawaii's Bishop
Estate shows how effectively the IRS
can use the threat of the loss of
exempt status to curb breaches of
fiduciary duty.”
CHISTIANSEN’s IMPACT
“This case is not likely to stop the
government’s challenge …, although
it likely will empower planners who
have been on the sidelines regarding
this form of planning prophylaxis.”
Jeffrey N. Pennell, Recent Wealth Transfer Developments,
2009 Hawaii Tax Institute, p. 6
VALUE-ADJUSTMENT FORMULA
"I give to X a fractional share of the
property described in Schedule A. The
numerator of the fraction is $1,000,000
and the denominator is the value of such
property as is finally determined for
federal transfer tax purposes. All the rest
goes to the XYZ charity."
SECURITY BLANKETS
Control over investments
Control over entities
Control over remaining estate
Control over identity of trustee
Protectors
Understanding and accepting that control is
relative and fleeting
Complexity?
– Must be willing and able to pay the cost of
doing it right (which includes making it
user-friendly)
– The key ingredient is a trusted adviser
– Challenge is to translate complex strategies
into words, concepts, and images to which
the client can relate
– A picture can be worth 1,000 words
WHY GIFTS SAVE ESTATE TAXES
TAX-FREE TRANSFERS
1.
2.
3.
4.
5.
6.
7.
8.
9.
TAXABLE TRANSFERS
$13,000 annual gifts
Payment of tuition
Post-gift appreciation
Post-gift income
Income taxes on IDIT
income
Interest or rent paid
to IDIT
Discounts
Gift taxes paid three
years prior to death
Etc.
(tax-free transfers)
GIFTS ARE GOOD
(for people who want to save taxes)
The Kids,
Grandkids, Etc.
Uncle Sam lets the
exemption go by, then
grabs at the rate of 45
cents per dollar of value.
ADDITIONAL TOPICS
 GST (exempt) Trusts
 Discount Planning
 Asset Protection Planning
 Fiduciary Duties and Exposure
INTERESTS IN FAMILY ENTITIES
 The sum of the parts does not have to equal
the whole
 An asset's value is no higher than what a
hypothetical buyer would pay for it
 The hypothetical buyer is an outsider who
doesn't already own an interest in the entity
 The hypothetical buyer has no reason to
expect to be treated like family
HIGH WATER MARK?
Keller v. U.S. (Aug. 20, 2009)
 $350 million, mostly liquid assets
 Worried about divorces; investment
 .1% corporate general partner (100% owned, but
planned to sell; 49.95% limited partners as trustee
of trusts for two children)
 Started paperwork (e.g., unsigned check for initial
capital contribution to corporate general partner)
but died before signing
 Successor trustee paid $147,800,245 in estate taxes
 Attended CPE seminar one year later
HIGH WATER MARK?
 Court: “significant and legitimate nontax business purpose
… to consolidate and protect family assets for management
purposes and to make it easier for these assets to pass from
generation to generation.”
 “[T]he primary purpose … was not federal estate tax
avoidance and the actions taken to form these partnerships
were not done so to create a disguise gift or sham
transaction as those terms are used in estate taxation.”
 “[T]ransfer of the [securities] to the Partnership was a bona
fide sale [under IRC Section 2036].”
 “Lengthy discussions,” “primary purpose … to protect family
assets from … ex-spouses,” “significant … assets outside the
Partnership,” and “upon liquidation, the partners receive
their capital accounts.”
 $40 million refund!
IMPLEMENTING
FAMILY-ENTITY STRATEGIES
Make sure clients understand how the strategy works.
Document the nontax reasons for forming the entity.
Keep outside funds to provide for personal needs.
Keep personal-use assets out, or pay arms-length rent.
Make no gifts or sales until the entity is funded and is
operating smoothly for a significant time.
Consider counsel for each group of interest holders.
Consider tiered entities when appropriate.
Make sure the governing instrument (e.g. partnership
agreement) reflects the intended arrangement, and that it is
followed precisely.
IMPLEMENTING
FAMILY-ENTITY STRATEGIES
Make sure all state requirements (e.g., certificates of
limited partnership; tax licenses; registration statements;
employer ID number; books and records) are met in a
timely and complete manner.
Don’t scrimp on the appraisals.
Communicate with your appraiser before the facts have
been carved in stone.
Review the appraiser’s draft report for factual errors.
Take everything in the right order, and document
everything carefully.
IMPLEMENTING
FAMILY-ENTITY STRATEGIES
Determine that other members of the estate planning
team understand the strategy and their respective roles.
Make only pro rata distributions.
Never use entity funds to pay personal obligations.
If possible, have client give or sell all of their interests at
least three years prior to death.
Consider using a valuation-adjustment mechanism to
reduce or eliminate the risk of an unwanted taxable gift.
Consider the worst that could happen, including that
values could drop precipitously, or that donees could
exercise their ownership rights in ways not contemplated.
INTENTIONALLY DEFECTIVE
IRREVOCABLE TRUSTS (IDITs)
EXAMPLE: Assume a one-time $1 million gift and all of the
following: (1) a grantor and a beneficiary who both are in a
40% state and federal combined income-tax bracket, (2) an
income tax-defective trust that is not estate tax-defective (i.e.,
an IDIT), (3) annual trust income of 6%, all of which is
accumulated and reinvested each year, and (4) a state and
federal combined estate-tax bracket of 50% on the settlor's
estate. Given these parameters, a one-time gift of $1 million
will generate "additional" estate tax savings of $12,000 if the
grantor dies after one year.
INTENTIONALLY DEFECTIVE
IRREVOCABLE TRUSTS (IDITs)
$12,000 is 50% of the amount of income taxes
paid by the donor on trust income (40% x 6% x
$1 million= $24,000).
Using the same approach, the savings grow to
more than $441,427 if the donor lives 20
more years.
That works out to $201,291 in 2009 dollars
(assuming 4% annual inflation).
INTENTIONALLY DEFECTIVE
IRREVOCABLE TRUSTS (IDITs)
Projected savings in 2009 dollars:
10 years = $106,923
20 years = $201,291
30years = $292,223
40 years = $386,286
50 years = $491,248
INTENTIONALLY DEFECTIVE
IRREVOCABLE TRUSTS (IDITs)
• Grantor or anyone else acting in a non-fiduciary capacity can
reacquire trust property by substituting property of
equivalent value without the approval or consent of any
person acting in a fiduciary capacity. Section 675(4)(C)
• IRS uses a 675(4)(C) power in its sample grantor charitable
lead annuity trust
• Trustee has power to distribute trust income to the grantor’s
spouse. Section 677(a)(2)
• Non-adverse trustee has power to add beneficiaries. Section
674(c)
INTENTIONALLY DEFECTIVE
IRREVOCABLE TRUSTS (IDITs)
• Non-adverse, non-independent party as trustee can make
distributions based on standards that are not “reasonably
definite.” Section 674(a)
• Grantor can borrow trust assets without adequate security
(unless the instrument grants such a lending power in
general). Section 675(2)
• Grantor has actually borrowed trust funds and not repaid
them prior to the end of the year. Section 675(3)
• Under the reasoning of Mau v. U.S., 355 F. Supp 909 (D. Haw.
1973) and Rev. Rul. 86-82, the trust arguably would be
defective for the entire year if the grantor borrowed all the
corpus for a single day at any point of the year.
Using Section 675(4)(C)
“A grantor's retained power, exercisable in a non-fiduciary
capacity, to acquire property held in trust by substituting
property of equivalent value will not, by itself, cause the value
of the trust corpus to be includible in the grantor's gross estate
under §2036 or 2038, provided the trustee has a fiduciary
obligation (under local law or the trust instrument) to ensure
the grantor's compliance with the terms of this power by
satisfying itself that the properties acquired and substituted by
the grantor are in fact of equivalent value, and further provided
that the substitution power cannot be exercised in a manner
than can shift benefits among the trust beneficiaries.” Rev. Rul.
2008-22
GST-EXEMPT IDITs
 Section 678
Ascertainable Standards
Crummey powers
QSSTs
“… for purposes of section 678(a), the beneficiary
of [a QSST] shall be treated as the owner of that
portion of the trust which consists of stock in an S
corporation with respect to which the election …
has been made.”
Sec. 1361(d)(3) QSSTs
(A) [A trust] the terms of which require that:
(i) During the life of the current income beneficiary, there shall be
only 1 income beneficiary of the trust,
(ii) Any corpus distributed during the life of the current income
beneficiary may be distributed only to such beneficiary,
(iii) The income interest of the current income beneficiary in the trust
shall terminate on the earlier of such beneficiary’s death or the
termination of the trust, and
(iv) Upon the termination of the trust during the life of the current
income beneficiary, the trust shall distribute all of its assets to such
beneficiary, and
(B) All of the income of which is distributed (or required to be distributed)
currently to 1 individual who is a citizen or resident of the United
States.
A substantially separate and independent share of a trust within the
meaning of section 663(c) shall be treated as a separate trust….
SUPER-DUPER GST-EXEMPT TRUST
• Intervivos QTIP from S1 to S2
• Unlimited marital deduction
• Converts to B trust at death of S2
• S1 is grantor of grantor trust
• Commentator says stepped-up
basis at death of S2 and S1 too!
GRATs
 No need to use exemption (zeroed-out GRAT)
 No risk of inadvertent gift
 Multiple, short-term GRATs magnify results
 Volatile assets magnify results even more
 Grounded in a statute (2702)
 ETIP rules apply
 Continue as IDIT
SALES TO IDITs vs. GRATs
The midterm AFTR is lower than the Section
7520 rate (3.2% in December 2009), and the
short-term rate (.69% in December 2009 for a
3-year note) is much lower.
More flexibility in structuring a note (e.g.,
back-end loaded)
Can apply GST exemption earlier.
Can work even if seller dies within term of the
note.
GRATs vs. SALES TO IDITs
Statutory authority
Concern about inadvertent gifts
Avoid income tax issue completely
QPRTs
 Undivided-interest discounts
 Leaseback opportunity
 On-going IDIT
CRTs
 Tax-free diversification
 Income tax deduction
 Wealth Replacement Plans
 Merrill Lynch case
A CAUTIONARY TALE
Merrill Lynch Trust Company v. Campbell, C.A.
1803-VCN, V.C. Noble (Del. Ch. Sept. 2, 2009;
Memo Op.):
10% CRUT with 50-year expected life
Request to invest in equities
58% decline in value
“Disturbing”
Fiduciary duties
ASSET PROTECTION PLANNING
Cynical: “How do you keep the creditors away
from your hard-earned millions? Consult an
asset-protection attorney, that’s how….
Remember, paying up is for suckers.”
Intelligent: “Perhaps, once upon a time a welldesigned estate plan did not need to involve
deliberate consideration of the asset
protection implications to the client. That
time has long passed.”
ASSET PROTECTION
PLANNING
• Current and Foreseeable Creditors
vs. Future Creditors
• Creditors of Current Owner
vs. Creditors of Others
ASSET PROTECTION PLANNING
•
•
•
•
Risk Management (cost/benefit)
Timing is everything
Part of a well-planned estate
Maybe not every asset and every
creditor and every set of circumstances
• Peace of mind
ASSET PROTECTION PLANNING
The goal should be peace of mind—do APP when you
don’t need it!
All else being equal, exempt property is to be treasured.
Trusts and powers of appointment generally make it
possible to protect property from the claims of a donee’s
creditors, perhaps even if the donee is given the functional
equivalent of ownership over that property.
In many offshore jurisdictions and eleven states a settlor’s
creditors cannot reach property simply because it might be
distributed to the settlor.
ASSET PROTECTION PLANNING
A debtor’s interest in a closely held entity perhaps can be
designed to lose value in the hands of a creditor.
APP strategies revolve around changed legal relationships.
Clients must respect those changes.
Advisors must take reasonable steps to detect, and avoid
involvement in, any form of fraud.
APP should be carefully and thoroughly documented, and
not hidden.
APP sometimes works even better in practice than it does
in theory, but that alone does not justify it.
When engaged in APP, there is no sure thing.
Who (may) owe fiduciary duties?
Trustees
Personal Representatives
Attorneys-in-fact (agents)
Guardians
Lawyers
CPAs
Financial Planners
Others
WHO IS A FIDUCIARY?
Sold stocks without permission:
 Held to standard of broker with
discretionary accounts (i.e., a fiduciary)
 “…duty to notify the plaintiffs of all the
circumstances of the unauthorized trades.”
$250 million punitive damages ($5.9 million
actual damages)
Fiduciary Duties
• Loyalty (e.g., no conflicts of interest; if cannot
avoid conflicts, then deal with them
“appropriately”)
• Care (e.g., prudent investing)
• Obedience (e.g., follow trust terms)
• Communication (e.g., enable self-protection)
LITIGIOUS SOCIETY
“In the view of the beneficiaries, one is
presumed guilty until found judgment
proof. The search for deep pockets
often leads a beneficiary or heir to the
doorstep of counsel for the fiduciary or
the decedent.” D. Campisi, “The Search for the Deep
Pocket—Is It Yours?, Part I,” ACTEC Journal, at 246 (Winter 1999)
HINDSIGHT BIAS
“When second-guessed by a
hindsightful observer,
misfortune appears to have been
incompetence, folly, or worse.”
B. Fischhof, Hindsight does not equal foresight: The effect of outcome
knowledge on judgment under uncertainty,” JOURNAL OF EXPERIMENTAL
PSYCHOLOGY: HUMAN PERCEPTION AND PERFORMANCE, 1: 298 (1975).
Recent Cases and Current Issues
Two kinds of fiduciary defendants:
Those who have been sued
Those who haven’t been sued
“Good judgment comes from
experience, and a lot of that comes
from bad judgment.”
Will Rogers (circa 1930) and Mulla Nasrudin (circa 1208).
Duty to address
problems/opportunities?
Discount Planning
 Galloway
 Jeanes
 Gunster
 others
Peripheral Vision
“A lawyer* may . . . face liability when he or she fails to
advise a client about a reasonably apparent matter
that could affect the client, the client's rights, or the
client's obligations, even if the client never employed
the lawyer to advise about or to perform services in
relation to the matter. Lawyers must advise clients
concerning collateral matters, or alert the client to
the need to seek other legal counsel regarding a
matter the lawyer declines or lacks the expertise to
handle.” Kerry Holleran & John J. Mueller, Advice Attorneys May Not Think to Give: The Peripheral
Duty in Kentucky and Beyond, 36 N. Ky. L. Rev. 349, 365 (2009).
*Insert “adviser) where “lawyer” or “legal counsel” appears (i.e., although this article
focuses exclusively on lawyers, the issue is not limited to lawyers!).
WHERE DOES IT STOP?
Plain ol’ gift?
Disclaimer to save exemption?
Generation skipping?
Watertight bypass (“B”) trust?
Intervivos funding of bypass or GST trust?
Asset protection?
Special needs trust?
“INFORMED” CONSENT
Baker Botts v. Cailloux, 224 S.W.3d 723 (Tex.
App. 2007)
Widow disclaimed $65.5 million
Consent document prepared
Did the widow understand and agree?
$65.5 million “equitable trust”
Reversed on appeal, THANK GOODNESS!
Referrals
“Doesn't every referral almost by
definition contain at least an implicit
recommendation of the attorney's
skill and professionalism?”
Barry R. Temkin, Can Negligent Referral to Another Attorney Constitute
Legal Malpractice?, 17 Touro L. Rev. 639 (2001).
REFERERALS
“[A]t a minimum, conflicts of interest should
have to be disclosed when referrals are given.
. . . Indirect financial incentives such as
reciprocal cross-referrals between attorneys
with different specialties, or non-financial
incentives such as loyalty to attorney friends,
can . . . conflict with the best interests of the
client, and so should . . . be disclosed to the
client.” Bruce Ching, Attorney Referral, Negligence, and
Vicarious Liability, 33 S. Ill. U. L. J. 217, 237 (2009)
Assuming Greater Responsibility
Merrick v. Mercantile Safe Deposit & Trust,
855 F2d 1095 (4th Cir. 1988) (bank served as
“go-between,” and assured client it would
review the estate plan; failed exercise of P/A)
Nevin v. Union Trust, 726 A2d 694 (Me.
1999)(bank held itself out as adviser and
recommended discount planning; bank liable
when lawyer botched the planning)
PRUDENT INVESTING
Duty to invest for optimal total return?
Duty to diversify?
Duty to perform due diligence?
Duty to document decision-making
process?
Duty to buy low and sell high?
BUY LOW, SELL HIGH?
An heir to the $2 billion Campbell Estate has sued Central Pacific
Bank (CPB) for being “asleep at the switch” while his stocks
were falling in value. According to the suit, CPB managed an
investment account when AIG, Citibank, and Bank of America
began to tumble. For example, CPB paid $69.26 per share for
AIG stock in March of 2008 and sold it for $2.17 per share in
September of that year. That stock eventually bottomed out at
about 35 cents per share in March of 2009. According to the
complaint, CPB “neglected to take any action to end the
hemorrhaging” (i.e., it didn’t sell sooner). The plaintiff’s lawyer
said, “It appeared that [CPB] was buying and selling stocks with
no apparent strategy.”
Growney vs. Central Pacific Bank, Circuit Court No. 1CC09-1-001374 (2009).
DIVERSIFICATION IS NOT ALWAYS
THE RIGHT THING TO DO
In re Sky Trust, p. 157: The corporate trustee held a large block
of its own stock in a revocable trust. Shortly after the settlor’s
death, the bank diversified the trust’s holdings, without first
inquiring as to the health or financial circumstances of the
surviving spouse, who was quite ill and survived less than two
years. The trial court found the trustee grossly negligent, and
the Superior Court affirmed: “Diversification cannot become a
goal in and of itself … [it’s] a tool that can provide the means to
effectuate a settlor’s goals … if used properly and prudently
with due regard to the specific facts and circumstances that exist
in a particular case.”
OTHER EXAMPLES
Despite precatory language in the governing instrument that the
decedent was “particularly desirous” that his holdings in TRW be
retained (in addition to the surviving spouse’s desire that it be held), the
trustee sold about half of that stock within two months of the
decedent’s death to diversify the trust estate. It pointed out language in
the governing instrument that encouraged retention “unless compelling
reasons arise for the disposal thereof.” The need to diversify was
compelling, according to the trustee. Unfortunately, the TRW stock went
up in value after the trustee sold it, and the widow sued. The Surrogate
ordered the trustee to repurchase the stock and to pay the widow’s
attorney fees and costs. The Appellate Division affirmed because
diversification was not a “compelling” reason to sell, at least not in light
of the widow’s objections.
In re Estate of Kettle, 423 N.Y.S.2d 701 (App. Div. 1979), aff’d 434 N.Y.S.2d 833 (App. Div. 1980)
ANOTHER EXAMPLE
Several months after a charitable lead trust was funded
entirely with IBM stock, a corporate trustee decided to
hold off selling stock until the price recovered from a
recent decline. Rather than bounce back, however, the
price continued downward and soon lost half its value.
The Surrogate Court found that the trustee had been
negligent for not diversifying relatively soon after
taking the position. The Appellate Division agreed and
noted that the trustee had “failed to follow its own
internal protocol . . . [and] failed to conduct more than
routine reviews of the IBM stock . . . [with] no
particular consideration to the unique needs of this
particular trust.” In re Rowe, 712 N.Y.S.2d 662 (App. Div. 2000), appeal
denied, 749 N.E.2d 206 (N.Y. 2001).
Retention of Inception Assets
Dumont, Nelson, Wege, Americans for the
Arts, Webb, Rhodehamel, Scheidmantel,
Wood, etc.
Numerous cases with unique facts
Bishop Estate
Authorization vs. Instruction vs. Exculpation
TRUST ACCOUNTING
 Evolution of trust accounting rules
 UPIA Section 104 statutory adjustment
power
 Unitrusts
 Constrained investing
 Impact of the meltdown, etc.
DUTY TO COMMUNICATE
A bank trust company “failed to bring
their professional expertise to bear”
when assisting lay trustees who had
neglected to tell beneficiaries about the
exact nature of their interests in the
trust. Losses 20% of fee in “public
flogging.” McNeil v. Bennett, 792 A.2d 190 (Del. Ch. 2001), aff’d in
part and rev’d in part, McNeil v. McNeil, 798 A.2d 503 (Del. 2002)
THE END
CREATIVE
WEALTH
PLANNING