September – October 2014

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
[Laweasy.com Category: Trust Don’t Ask Don’t TellShhhhh! Is your Trust Quiet: A “quiet” trust is one for which disclosures of information concerning8 the trust don’t have to be made. Why might you want a trust to be “somewhat” quiet? You might not want your Millennial kids seeing a statement that reflects the many millions of dollars you have in a trust while you are hoping that they learn how to become financially prudent and begin saving for their retirement. Seeing big numbers might well dissuade them from getting on the financial path you feel in their best interest. But just like the three bears, you want the porridge to be just right, not too hot and not too cold. Many states have enacted laws permitting silent trusts. Often when these are done disclosures are limited until a beneficiary attains a specified age. The Uniform Trust Code Sec. 813 requires keeping qualified beneficiaries reasonably informed and Sec. 105(b)(8) prohibits waiving the duty to inform qualified beneficiaries over 25 years of age.
■ Shocker: Many folks find the entire idea of notifying beneficiaries of a trust surprising. But that may be due to the fact that many people think of individual family trustees who tend to ignore many trust formalities, including communication with beneficiaries. ■ Individual Trustee Warning: The biggest issue is what liability the legions of individual trustees may have to beneficiaries they’ve kept in the dark without a documented basis for doing so. If you’re an individual trustee and have not reviewed with trust counsel the disclosures you are making to beneficiaries this one landmine justifies a meeting yesterday. ■ Institutional Trustee Warning: Trustees who simply send every name possible trust statements and disclosures may be overboard. In their zealous pursuit of less liability exposure perhaps they might actually be increasing it. The Restatement Third Sec. 82 provides: …because of differences in truest and beneficiary circumstances preclude imposing precise, universal rules in all of these matters, the trustee’s duty is to exercise reasonable judgment in deciding when, about what, and to whom information is required to be provided.” Professional trustees should not blindly ignore beneficiary circumstances and the totality of the trust instrument in favor of mass mailings.
Which Beneficiaries Might Get Notice: While the concept of a quiet trust sounds great in theory, too much of a good think may be rather dangerous. If no one who has an interest in the trust is getting disclosures, who will be watching the cookie jar? That trust porridge is too cold. On the opposite extreme, some institutional trustees take the position that, unless the trust provides limitations and state law permits it, they will send a statement of all trust assets to every beneficiary and every person named in the trust. Who might that include? Potentially a lot of people. Modern trust drafting favors listing all descendants as beneficiaries in many types of trusts A broad pool of beneficiaries gives the trustee wider latitude to distribute trust funds for whoever might be in need. Also, having a large pool of beneficiaries gives the trustee more options to spray income to beneficiaries in lower tax brackets, thus saving income tax every year. But every one of those beneficiaries may not be on the list to receive a copy of the trust financial data.
Title 12 Sec. 3303a Says you can delay for reasonable time, say age 25 under UTC. US Trust will accept trusts drafted to withhold until age 25. If not drafted that way all current beneificiaries 18 and above and first line presumptive remainderman (ie vested remaindermen if no power of appointment). Law doesn’t differentiate concept of a SLAT/DAPT which clinet intends to keep. If trust specifically prohibits to age 25 they will do so. They will address one-off situations and send statement to parents or give on line access for short term period. They know beneficiary knows of trust and can get statement eg in pending divorce. Client has to communicate the one-off statement exception. For example, a common one-off is not sending a statement to a child in college so that a statement is not sent to a dormitory. For example send statement to parents. They would revisit this each year. Request has to come from beneficiary. US trust believes that at age 25 the beneficiaires have a right to know. They view core duty the requirement to keep beneficiary informed. Even if there is a primary beneficiary e.g. spouse, they will still send to

Use spouse as only beneficiary subject to lifetime power to appoint so each year could sprinkle income out. This could be a more cumbersome than a ready made class.

They view a core fiduciary duty to disclose. So won’t accept a protector directing to send or not send statements.

They won’t respect letter of wishes that contradicts this.

Example estranged child listed in trust. Parents don’t want kid to get benefit of trust, but institutional trustee will disclose.

How can you have Crummey notice recipients have to send at age 18 at which point a beneficiary could ask for trust and statement.

Who Else Might Get Notice: But, just like those great late night TV infomercials, there’s more! Many modern trusts will include a number of provisions to assure that the trust is characterized as a grantor trust for income tax purposes. Common provisions to achieve that status are to give a person the power to loan the settlor (the person who set up the trust) money from the trust without adequate security. Another common technique is to give a person the right to add a charity to the class of beneficiaries of the trust. Many modern trusts include a position called a trust protector. This is a person often granted a limited but important list of powers, such as the right to replace an institutional trustee, change the situs and governing law of the trust, and so forth. All these persons may also be on the trust company list for receiving a full disclosure of all trust finances. That trust porridge is not only un-quiet, but way too hot for most!
Middle Ground: The best approach, so the trust porridge is “just right” seems to be to find a workable middle ground that meets any trustee’s reasonable desire for protection, does not mandate disclosures that might actually harm a beneficiary, but nonetheless assures responsible and interested persons have information necessary to monitor trust performance.
Delaware: Delaware is a leading state for trusts and is often on the forefront of trust law. In McNeil v. McNeil, 798 A.2d 503 (Del. 2002) surcharged the trustee for failing to inform a current beneficiary of that status. In McNeil a beneficiary sought but was denied information even as to his status as a beneficiary. The McNeil court seems to have mandated disclosure but in that case there appears to have been a clear bias and damage to the beneficiary involved. The Court found a “pattern of deception and neglect over the span of many years.” Further, McNeil does not seem to require disclosures to non-beneficiaries. The Delaware statute was amended following the McNeil case. § 3303 Effect of provisions of instrument “(a) Notwithstanding any other provision of this Code or other law, the terms of a governing instrument may expand, restrict, eliminate, or otherwise vary any laws of general application to fiduciaries, trusts and trust administration, including, but not limited to, any such laws pertaining to: (1) The rights and interests of beneficiaries, including, but not limited to, the right to be informed of the beneficiary’s interest for a period of time.”
Steps You Might Take: What if your trust is not quiet enough for your comfort? What might be able to do? ■Might an institutional trustee be comfortable making disclosures to an individual trustee and/or trust protector to suffice? If the trust protector is expressly stated to be acting in a fiduciary capacity might that be viewed as a reasonable means of protecting beneficiary interests? Even if the trustee won’t accept that as a blanket basis not to disclose, if there is a beneficiary in difficult circumstances, might disclosure to a trust protector in a fiduciary capacity during that crisis suffice? Might a trustee be taken to task in such a situation for making disclosures that cause harm to a beneficiary instead of relying on a reasonable alternative? ■ The trustee may have the power, by a separate acknowledged instrument filed with the trust records, to amend the administrative provisions of the trust instrument to achieve the desired level of disclosure. ■ The trust protector may have sufficient power under the current document to take an action to modify the trust administrative provisions or clarify the trustee’s duties to disclose. ■ If the trust provides for a distribution trustee or committee the powers provided for that function might be useful to narrow disclosures. ■ If there is no mechanism under the trust and state law that will address the issue the trust itself may have to be changed. In these instances it may be possible to decant the trust into a new trust that addresses the disclosure issues and that is formed under a state whose laws permit non-disclosure. ■ If the trustee has to take a role in the modification or decanting of the trust provisions concerning disclosures that trustee might be less inclined accept the limitations imposed by the process. After all, if the trustee modifies the trust, or consents to a decanting, that gives it the power to disclose, the beneficiary or other person not receiving disclosure might well argue that the trustee created the non-disclosure situation so that no protection should be afforded to the trustee for what it created. Thus, if a decanting or other measure is taken, a new trustee might be necessary.
Possible Mechanism: Consider the following possible approach. Grant the trust protector, the following power: “The power to direct the Trustee as to which beneficiaries, fiduciaries or other persons holding powers hereunder (whether or not in a fiduciary capacity) (individually or collectively “Notice Persons”) shall or shall not be entitled to receive information concerning this Trust, including but not limited to statements and other notifications. While either Grantor is alive and not disabled no such notifications shall be given to any Notice Persons hereunder other than the Grantors and the Trust Protector unless the Trust Protector authorizes same. No trustee shall be liable for notifications following Grantor’s disability until such Trustee has actual knowledge, or receives written notice from the Trust Protector, of Grantor’s disability.” While the approach to be used could vary depending on the circumstances the objective of this sample mechanism is to provide some limitations on disclosures but to endeavor to assure that someone interested in the trust is receiving information. Be careful conditioning disclosure on standards such as the beneficiary “not using drugs,” and the like. Proving when and if such criteria are met can be difficult.
Education: For those concerned about beneficiaries learning of wealth held in trust, the best answer in many cases will be to proactively endeavor to educate the beneficiaries about financial matters, and as they gain knowledge and maturity disclose increasing information about the trust. Many institutional trustees have great programs designed specifically to do just this. Education is best because regardless of legalities if a sibling is getting information and distributions, how long do you think it will be before the younger sibling learns all. If statements are sent to your home, do you think that kids will never see them when visiting?

Directly Restrict Trustee: Direction Not to Inform or Account to Discretionary Beneficiaries. During the shorter of Grantor’s lifetime or a judicial determination of Grantor’s incapacity, no Trustee shall be required to inform any beneficiary who is not entitled to a mandatory distribution of income or principal from the trust on an annual or more frequent basis of the trust or the court in which the trust is registered and the Trustee’s name and address. In addition, during the shorter of Grantor’s lifetime or judicial determination of Grantor’s incapacity, no Trustee shall be required to provide any beneficiary who is not entitled to a mandatory distribution of income or principal from the trust on an annual or more frequent basis with a copy of the terms of the trust and shall not be required to provide a statement of accounts of the trust. The Trustees and the Trustees’ officer, agents, and employees, if any, shall be indemnified out of and held harmless by the trust estate from any and all liability to any beneficiary for any loss of any kind that may result by reason of any action or non-action taken by the Trustees and the Trustees’ officers, agents, and employees in accordance with the directions in this paragraph.###########

Education: For those concerned about beneficiaries learning of wealth held in trust, the best answer in many cases will be to proactively endeavor to educate the beneficiaries about financial matters, and as they gain knowledge and maturity disclose increasing information about the trust. Many institutional trustees have great programs designed specifically to do just this. Education is best because regardless of legalities if a sibling is getting information and distributions, how long do you think it will be before the younger sibling learns all. If statements are sent to your home, do you think that kids will never see them when visiting?

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
[Laweasy.com Category: ### ]
Checklist Article Title: Save Money on Your Estate Plan

Summary: So you want to save money on your estate plan. That’s a reasonable goal, but most folks go about it the wrong way. There are smart ways to keep costs down, and there are ways that, depending on your circumstances might be worthwhile or perhaps not. Then there are ways you can save money but only to the detriment of yourself or those you are trying to protect.
√ Ways to Save Money That Won’t Adversely Affect Your Plan: ■ Prepare ahead of time. Put together all the background information your advisers need before anyone turns a clock on. You can easily assemble lists of family members and other key people and their contact data, copies of beneficiary designations, and so forth. The more organized your data not only the less costly the process, but the better the result. ■ Web meetings. While nothing can substitute for a face to face meeting to establish a relationship, or to address really tough decisions, some meetings, such as reviewing a draft document can be most efficiently handled by web conference. This will be quicker than an in person meeting since so many of the social conventions aren’t necessary. ■ Ask the planner you hire what steps might be reasonable to save money without jeopardizing your results. Most will be pleased to make recommendations. ■ Meet regularly. Boy that sounds like a sales pitch. But keeping planning current and cleaning up the inevitable lose-ends will save money in the long run, maybe even in the short run. Small problems are much easier to correct before they become big problems spanning many years. ■ Make up your mind. Changing the name of your executor or guardian at every meeting adds up to extra costs that can be avoided if you evaluate key personal decisions before and after your introductory meeting.
√ Ways that Might be Worthwhile to Save Money but Evaluate Them Carefully:■ Not having all your advisers at a meeting. Some complex situations require having your CPA, trust officer, wealth manager, estate attorney, and others at a sit down. It will be costly, but essential to achieving the results you want. However, in many cases having your estate planner call your CPA and wealth manager might suffice. Another cost effective approach is to let your advisers have a web or phone conference without your involvement. In that way they can talk in technical terminology that is the most efficient. ■ Use less comprehensive or less tailored documents. This can be disastrous in some situations, but might be palatable in others. A young couple with a modest estate likely can use more standard documents than someone much older with a larger estate. But it is important to bear in mind that in some cases it is well worth the extra cost to have a document tailored to your specific needs. For example, when you are young with a smaller estate you might use a standard power of attorney form. When your estate grows and circumstances become more complex you might instead rely on a form tailored to your circumstances by an attorney. As you get older or health issues develop you may choose to rely on a fully funded tailored revocable living trust that is merely backstopped by the power of attorney. Saving money is good, but picking the level of planning and cost appropriate to meet your goals is much better. ■ Ask if there is a simpler less costly way to achieve close to the result you want. Frequently, unusual bequests or other specialized provisions that sound simple are actually quite costly to translate into formal language in a document that will be effective. Many times using a simpler approach can get you 90% of what you want for lot’s less. Ask!
√ Ways that Will Save Money to Your Detriment: ■ Hiring the least costly adviser (attorney, CPA, etc.) is never the way to go. That doesn’t mean you have to hire the most costly either. Try to find the adviser best suited for your needs. Most people handle this by asking what the hourly rates are. That is not particularly informative. A smarter approach would be to ask prospective advisers if you can briefly describe your circumstances so that they can tell you if you and the adviser are a match. For example, some planners will prepare documents with a modicum of planning as their standard level of service. Other advisers may charge substantially more but their standard level of service may include a much longer more comprehensive meeting, a detailed memorandum, and more. Picking the right advisers will get you the best result for the least cost. Ask “How often do you handle estates my size? How often do you deal with [explain] issues?
Recent Developments Article 1/3 Page [about 18 lines]:
■ Succession Planning: If you really implement a succession plan and bring Junior into the family widget business, can you still be viewed as being actively involved? This has a wide range of important tax implications. If you can still be “active” after turning over much control to Junior your estate may qualify to defer estate taxes over 14 years under IRC Sec. 6166. If you are sufficiently active you may be deemed to still “materially participate.” That can have a profound impact on how earnings or losses you realize from business operations are treated for purposes of the passive loss runes under IRC Sec. 469. If you can still be deemed to be active you may avoid the dreaded (and insanely complicated) 3.8% Medicare tax on passive income. In a recent case the Tax Court found that even though the parent turned over many management responsibilities in the family business to his son, the father remained an active and material participant in the business. Wade, TC Memo 2014-169. See also Treas. Reg. Sec. 1.469-5T(f).
■ Bailout While you Can: A great planning technique is to donate stock in a closely held business to a charitable remainder trust (CRT). You can get a juicy tax write off. Later when the business is sold the portion of the capital gain realized by the trust is not recognized immediately but rather comes out to you as annuity or unitrust distributions are made from the CRT to you in future years. This might help you avoid the Medicare Surtax of 3.8% if in those future years your income is under the Surtax limbo bar. This cool technique is affectionately called a “charitable bailout.” Proposals by Camp’s would prevent you from deducting the fair market value of capital gain property like a close held business (a few exceptions are provided for, e.g. publicly traded stock). The proposal would limit your deduction to your adjusted basis in the stock. For most closely held businesses that is zippo. Moral of this tax tail, bailout while you can!

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Potpourri ½ Page:
■ Trust: Home State versus Delaware: Most folks (and lawyers) tend to set up trusts in the state where they live and their lawyer practices. While this might seem logical, and it’s what has been done for a zillion years, it may not be the grooviest approach. Compare NJ to Delaware.
■ Delaware has a directed trust statute, NJ does not. So in Delaware the trust document can name an adviser or committee to direct the trustee on investments. Delaware has had this for over 100 years. This can be critical to holding a closely held business or other unique asset in a trust and still securing a top tier trustee.
■ DAPTs or self-settled trusts which is a trust you set up and for which you are a beneficiary. Delaware has permitted DAPTs since 1997. About 1/3rd to ½ of new Delaware trusts are some type of asset protection trust.
■ Silent trusts are not sanctioned by statute in New Jersey (so if you’re a trustee in NJ have you been disclosing all to the beneficiaries?) In Delaware if the governing instrument says that trustee does not have to notify beneficiaries of interests in the trust the trustee can honor that. If the document is silent then Delaware trustees have to provide notice under the McNeil case which requires current beneficiaries to get notice.
■ Perpetual trusts are allowed in Delaware. NJ also allows perpetual trusts. Score one for the Garden State! But has your state jumped on the perpetuities bandwagon? NY hasn’t.
■ Pre-mortem validation of a trust is feasible in Delaware. NJ does not have a statute for this. In Delaware the trustee can send notice as to what the trust says to a beneficiary and then the beneficiary has 180 days to contest. If she does not do so that beneficiary is precluded from challenging it later. The more substantial the planning done in advance of the notice the better. So if the trust is not funded, e.g., trust only had $100, then after death $100M pours into it, the courts might not uphold it.
■ If you fund an irrevocable trust in Delaware during lifetime then your probate estate won’t pay the NJ estate tax. Think if the savings by funding a DAPT today!
■ Delaware offers more flexibility in drafting. Example, you can set up a trust that instructs a trustee not to diversify portfolio.
■ Delaware updates its trust laws more frequently.
■ Income taxation of trusts is more favorable in Delaware. If a NJ resident sets up irrevocable non-grantor Delaware trust (DING) it will avoid NJ capital gains tax. NY has restricted this technique.
■ NJ is one of only 3 states to tax charitable remainder trusts (CRTs) at the trust level. So if setting up a CRT set it up in Delaware not in NJ.
♥ Home may be where the ♥heart is but Delaware (and a few other choice states) is where the trust is. Thanks to Dick Nenno, Esq. of Wilmington Trust.

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