Tag Archives: Estate Tax

Trustee or Not to Trustee

Nevada Trust

Most people establishing a revocable living trust select a relative or friend to act as the trustee. Many people feel that this is a bestowal of honor or dignity being conveyed to the nominated individual. The trust creators rationalize the choice of related party as trusts have a very personal element – distributing accumulated assets to loved ones or charities. Yet, the relationships between family and friends grow complicated with emotions and other factors after the trust creator dies. The mere fact of a close relationship is not enough to qualify any individual for the role of trustee. We find that many clients benefit from the inclusion of a professional trustee to administer and distribute the trust estate.

We regularly hear from clients during the estate planning process that “my kids all get along,” and “they would never fight over this stuff.” However, there are frequent disputes between siblings related to the actions or omissions of the appointed trustee. Where parents intend to disinherit one child or make uneven distributions among the children while naming one child as trustee, the groundwork is laid for a conflict. Similarly, parents may desire to leave assets in trust for the benefit of a child, preventing the spendthrift child from blowing the accumulated wealth. By naming a sibling of the spendthrift beneficiary as the trustee of the trust share, clients make the appointed child the bad guy. The chosen trustee may quickly learn that the assigned task is nothing but pain and heartache.

Recently, our firm handled a case where the non professional trustee retained assets in trust for decades longer than she should have. The trust agreement called for the immediate disbursement of assets to several individuals and several charities. Rather than make the prompt distributions, the trustee kept the trust intact and reaped hundreds of thousands of dollars in fees for herself. The charities and individual beneficiaries suffered significant damages which were nearly impossible to collect from the destitute individual trustee.

To avoid these difficulties and provide for a more professional administration, we recommend naming a professional trustee, such as a Nevada trust company or bank. Due to our favorable trust laws and no state income tax, Nevada has a strong industry of professional trust companies. Some argue that professional trust companies charge a higher fee than a lay person. That may be true in isolation. Yet, if the beneficiaries fight the trustee through litigation or the trustee does not appropriately distribute the assets as described above, the professional trustee fees are much lower.

One of the great virtues of trusts is their flexibility. Trusts can be drafted to divide the duties between a professional fiduciary and the individual trustee. A trust company can take responsibility for tax issues, issuing account statements, and making investment decisions. The non-professional trustee can be in charge of making distributions to the beneficiaries. The individual trustee will understand the beneficiaries’ problems and idiosyncrasies and can better address the individuals’ needs.

For those who have trusts presently, you may consider removing and replacing your current trustee with a professional. For those considering a trust, we would be happy to discuss the advantages of naming a professional trustee.

‘Decant’ an Irrevocable Trust

Trust DecantIrrevocable may not mean what you think it means when it comes to trust planning.  Thanks to a process known as “trust decanting,” a trustee can change irrevocable trust terms. The decanting process occurs by figuratively pouring the trust assets from an old trust to a new trust agreement.  Just as one decants wine by pouring from an old bottle to a new one, a trustee can move trust assets to a new, more favorable trust. Nevada, along with 20 other states, has very favorable decanting laws in place.

There are limits as to what can be accomplished with decanting.  Trustees cannot alter a beneficiary’s already-vested interests in a trust.  However, a trustee can push back the age at which the beneficiary receives a payout.  Importantly, the trustee can change the governing law of the trust by moving the situs of the trust.  Nevada is the premier domestic self-settled spendthrift trust state so many trustees look to move their assets to Nevada.  In addition, if there is no successor trustee named, decanting can make it possible to name a proper successor trustee.

Nevada law is very favorable because there is no statutory requirement to notify beneficiaries of the decanting.  The trustee does not need to provide beneficiaries copies of the existing or new trust documents.  These privacy protections greatly favor the use of Nevada trust laws.  The trustee has discretion to seek court approval for the decanting process but is not required to do so.  In reality, the vast majority of trustees seek beneficiary approval before starting the procedure to decant the trust assets.

There are uncertain implications for gift, income, and generation-skipping transfers taxes. The Internal Revenue Service has not issued guidelines related to the federal tax issues presented by decanting.  However, the IRS has solicited comments for several years now and guidance should be forthcoming.  Even without federal income tax guidance, there are state income tax savings to be achieved by moving trust assets to a state like Nevada without income tax.

Democrats Divided Over Future of Estate Tax

One tax element overlooked in the negotiations over the “fiscal cliff” is how Congress and the President will resolve the future of the estate tax. The Wall Street Journal reports that several Democratic senators from conservative states will not embrace President Obama’s plan to raise the estate tax.  Under current law, the estate tax exemption amount will be lowered to $1 million with a 55% tax rate starting January 2013. President Obama proposes to return the estate tax exemption amount to $3.5 million with a 45% rate, the same terms as 2009.

Senator LandrieuSenator Mary Landrieu of Louisiana, Max Baucus of Montana, and Mark Pryor of Arkansas said they would prefer not to raise the estate tax.  This week, Ms. Landrieu took a very strong position by stating that she would oppose any deficit-reduction package that raises the estate tax. One common element among Landrieu, Baucus, and Pryor is their party affiliation, another more important aspect is that all three are up for re-election in 2014.  The three are diverging from the Democratic party’s position to endorse a position likely favored by their conservative constituents.

Republican lawmakers continue to support estate tax repeal altogether.  At the very least, the Republican leaders expect a continuation of the Bush-era tax cuts which would maintain the estate tax exemption at $5 million and a 35% tax rate.  Under the current policy, the Tax Policy Center estimates that $161 billion of tax revenue will be generated over the next 10 years.  Under President Obama’s proposal, $276 billion would be raised.  Considering the highly-charged political climate, we may not have a resolution to the future of the estate tax in the near future.

Facebook Billionaires Avoid Taxes with GRATs

Forbes recently highlighted how Facebook co-founders Mark Zuckerberg and Dustin Moskovitz established grantor retained annuity trusts (GRATs) to transfer significant amounts of wealth tax-free.  In 2008, Zuckerberg and Moskovitz established GRATs which will enable the Facebook executives to transfer as much as $185 million to future offspring or others without paying any gift tax.  Most wealthy individuals recognize that this year offers a golden opportunity to transfer $5.12 million in assets without incurring any gift tax. However, the Facebook executives followed a similar tax strategy to the Walmart founders, the Walton family, by funding their GRATs with their rapidly appreciating Facebook shares.

ImageGRATs function by allowing a grantor (Zuckerberg and Moskovitz) to place shares or other assets into an ­irrevocable trust and retain the right to ­receive an annual payment back from the trust for a period of time.  Typically, to avoid the risk of premature death, advisors select a shorter time period of 2 to 4 years. If the grantor survives that period, any property left in the trust when the annual payments end passes to family members, other beneficiaries, or another trust.

A crucial aspect is determining the value of the remainder interest in the annuity. In calculating how much value will be left at the end of the annuity term (the remainder) — and thus how big a gift the grantor is making — the IRS does look at the performance of the actual stock (or any other asset) in the trust. Instead, the IRS assumes the trust assets are earning a meager government-determined interest rate. With a zeroed-out, or “Walton” GRAT, the grantor receives an annuity that leaves nothing for heirs if assets grow only at the IRS’ lowly interest rate. If the assets grow faster, the excess goes to the heirs gift tax free. If assets or stock under-perform or decrease in value, there is no downside for the grantor because the annuity can be paid by returning some shares each year to the grantor.

As a result, a GRAT is an ideal instrument to shift assets you expect to suddenly increase in value.  Hence, rapidly appreciating stock of technology giants (Facebook) or growing retails empires (Walmart) have proven to be the perfect assets to utilize within a GRAT.  President Obama and Democrat legislators have targeted zeroed-out GRATs as tax loopholes of the wealthy and have proposed legislation which would eliminate their use.  Until that time, the GRAT remains a valuable wealth transfer tool.

Choose Lawyers Instead of the Internet

The Internet has changed numerous industries including the legal market.  Despite the many advantages of online services, there are considerable drawbacks when comparing the use of web-based estate planning forms versus hiring a competent attorney. The following list comes from a North Carolina attorney. Rather than relying on the bare information fed into a computer, a skilled lawyer can:

  1. Listen to your goals and desires and incorporate them into your plan.
  2. Offer advice, not just words on paper.
  3. Help with referrals to other trusted professionals.
  4. Make sure that the documents are properly executed.
  5. Make sure that any trusts are properly funded.
  6. Make sure that beneficiary designations are properly completed.
  7. Make sure that accounts and real estate are  properly titled.
  8. Help with managing assets of incapacitated family members.
  9. Help with probate and trust administration.
  10. Help with income, gift and estate tax matters.
  11. Help ensure governmental benefits for disabled or incapacitated family members.
  12. Serve as an advocate in dealing with financial institution and governmental bodies.
  13. Care about you and your family.

Of course, there is a sinister view that attorneys embrace computer-based estate planning programs because such planning generally leads to a much more costly probate proceeding.  To avoid the added cost and delay involved in a probate,  and enjoy the benefits listed above, consult with an estate planning specialist today.