pitfalls of acting as a successor trustee: taking over a
TRANSCRIPT
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2021 National Conference on Special Needs Planning and Special Needs Trusts
Pitfalls of Acting as a Successor Trustee: Taking Over a Disaster
Peter J. Wall
Director of Fiduciary ServicesTrue Link Financialpeter.wall@truelinkfinancial.comwww.truelinkfinancial.com
Kerry Tedford-Coles
Executive DirectorPLAN of [email protected]
Stephen W. Dale, JD, LLM
The Dale Law Firm, PCPLAN of ConnecticutGolden State Pooled [email protected]
Presenter’s Bio
Kerry Tedford-Coles
Executive Director of Planned Lifetime Assistance Network of Connecticut, Inc. (PLAN of CT)
● Kerry has spent her career serving those with disabilities through both Special Education and the non-profit sector.
● She has been with PLAN of CT since 2004 and has been instrumental in its exponential growth.
● In June of 2016 she added the role of Executive Director of the National PLAN Alliance.
● She is a frequent local and national presenter regarding Special Needs Trusts for community organizations, legal and financial professionals and disability providers.
● She is also a member of the Pooled Trust National Standards Committee, Center for Future Planning Advisory Council and served on the ABLE Act Advisory Committee through the Department of Treasury for the State of Connecticut.
● Kerry lives in Eastern Connecticut with her husband and 2 children, one of which is on the Autism Spectrum.
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Presenter’s Bio
Stephen W. Dale, Esq., LL.M
The Dale Law Firm, Golden State Pooled Trust
● Stephen W. Dale, Esq., LL.M, is an attorney and disability rights advocate, serving on boards and committees of disability rights organizations.
● Received his JD from Armstrong Law School and his LL.M. in Taxation from Golden Gate University.
● Mr. Dale is a disability rights advocate and spends much of his time attending disability rights activities, including legislative hearings and serving on boards and committees of disability-right’s organizations.
● He is a frequent speaker on a variety of disability related topics across the country, and is the recipient of the 2010 Theresa Foundation Award and the 2007 NAELA Powley Award.
● Additionally, Mr. Dale is a long standing member of the Special Needs Alliance.
● Mr. Dale regularly teaches courses to the public, financial professionals, and other attorneys on special needs trusts and trust administration with a special emphasis on achieving independence while maintaining essential government benefits.
● Stephen is also the Executive Director of the Golden State Pooled Trust.
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Presenter’s Bio
Peter J. Wall
Director of Fiduciary Services for True Link Financial Advisors, LLC
20 years of professional trust administration - Focus in Elder Law & SNT Planning
Prior to joining True Link Financial:
● Developed and helped lead the BOK Financial Disability and Elder Trust Solutions division
● President of the Centennial Estate Planning Council
● Member of the Board of Directors for Easter Seals
● President of VSA Access Gallery
● Member of the Academy of Special Needs Planners
Special needs trusts, estate planning, taxation, and trust administration faculty member and presentations include:
● 2016, 2018, 2019, 2020 & 2021 Stetson National Conference on Special Needs Planning and Special Needs Trusts
● CBA 2012, 2014, 2015 & 2017 Elder Law Retreat
● 2013 National Down Syndrome Congress
● 2015 46th Annual Autism Society National Conference
● 2016 CBA Estate Planning Retreat
● 2017 & 2021 National Conference for National Guardianship Association
● 2019 Special Needs Alliance Conference
● 2019, 2020 & 2021 National NAELA Conference
● 2020 CA NAELA
● 2020 PFAC Annual Conference4
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National Landscape
● Institutional/bank trust companies:○ Often lack public benefits expertise
■ May outsource to public benefits advisors (costly)
○ SNTs require additional oversight, knowledge and time
○ SNTs carry increased liability
○ Raising minimum account sizes and fees
■ Annual minimum fees nationally: $3,000 - $20,000
■ Fees may be combined with outside investment advisor fees
PSNTs provide vital specialized services to people with disabilities
BEST PRACTICE TIP: Advise families to review the entire fee structure in total
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Local Bank
Consolidation
1996 - 2008
National Landscape
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PSNTs provide vital specialized services to people with disabilities
National Landscape
OCC/Dodd-Frank Act: increased oversight and regulation
Consolidating operations, reducing perceived liabilities
Shareholder expectations
Interest rate pressure
Slower to adapt new technologies
Conclusion: real opportunity for PSNTs to increase their impact and number of beneficiaries they serve by considering accepting appointment as successor trustee.
BEST PRACTICE TIP: Volunteer your PSNT organization to act as successor trustee for a local bank trust company’s unwanted SNT accounts.
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Successor Trustee Liability
BEST PRACTICE TIP: if breach is suspected, retain counsel to review all options
● Successor trustees can generally not be held liable for the acts, omissions, or failures to act of the prior trustee○ Typically included in trust document language as well
Primary Principle of trust and fiduciary law:
● If the successor trustee “(a) knows or should know of a situation constituting a breach of trust committed by [their] predecessor and improperly permits it to continue; or (b) neglects to take proper steps to compel the predecessor to deliver the trust property to [them]; or (c) neglects to take proper steps to redress a breach of trustee committed by the predecessor.” (Restatement (Second)) § 223
○ Affirmative duty to proactively remedy errors of prior trustee & suit for any breach?
In Matter of Donald E. Bradford Trust, 524 So.2d 1213 (La. Ct. of App. 1989): successor held liable for not pursuing prior trustee for breach
However, a successor trustee may be liable:
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Successor Trustee Liability
● Typically restricted by state-specific statute of limitations in re: contract or tort law
● O’Connor v. Redstone (896 N.E.2d 595 (Mass. 2008): successor trustee’s knowledge of prior trustee’s breach (not knowledge of beneficiaries) was sufficient to begin statute of limitations
Statute of Limitations for Breach of Trust
UTC § 705 (2000):
Prior trustee continues to be liable for acts or omissions committed during their
tenure
Restatement (Third) § 36:
Resigning trustee continues to have residual obligations to the trust beneficiary
BEST PRACTICE TIP: retain counsel as soon as potential breach by prior trustee is suspected
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Successor Trustee Liability
● PSNT is a professional trustee○ Held to a higher standard○ “Should have known”
● State specific:○ MA & LA: mandatory review of prior trustee’s records +
correction required○ PA: silent○ IL: specifically no duty to review in statute and successors
are not liable for acts or failure to act by prior trustee (Illinois S.H.A. Chapter 17, 1684(2)
Prior Trustee Review
In re Will of Crabtree, 449 Mass. 128, 865 N.E.2d 1119 (2007): successor breached their duty (after accepting appointment) to ensure prior trustee had properly accounted for the entirety of the trust estate
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PSNT organization (Oklahoma) accepts appointment as successor trustee
● Smaller staff (4)● Traditionally only serves in OK
Beneficiary resides in NJ
● Receives SSI, Medicaid - age 35● Currently lives in ALF● Wants to purchase new home and live
independently● May lack capacity
Prior trustee: mother of beneficiary
● Paid herself as caregiver and as trustee● Lives with beneficiary ● “I don’t keep any statements”
Trust:
● $50,000● Trust owned home● Invested all in GOOG and AAPL stock
(highly appreciated)
Due DiligenceCase Study
vPSNT organization is contacted by NJ Medicaid requesting statements for the last 7 years
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Beneficiary Location:
● State-specific regulations for eligibility● PSNT internal staffing requirements● Reporting requirements● Case Management● Ability to provide● Ability to charge● Crisis management
Trust Size:
● Fee considerations● Joinder fee?● Case management fees● Spend down, ABLE, etc.
Due DiligenceAcceptance Considerations
BEST PRACTICE TIP: ensure your organization’s ability to properly serve before accepting appointment
BEST PRACTICE TIP: consider all options before accepting appointment
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Due DiligenceAcceptance Considerations
BEST PRACTICE TIP: review all transactions by prior trustee and potentially engage counsel as necessary
Fernandez v. K-M Industries Holding Co., Inc., 585 F. Supp. 2d 1177 (N.D. Cal. 2008): successor could be held liable for breach for failing to proactively remedy original breach by predecessor
Prior Trustee:
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● Accountings/reports○ Investment/checking account statements○ Reporting to SSA/Medicaid/Courts
● Carefully review layperson trustee actions● ISM distributions● Supplanting vs. supplementing● Sole benefit● Fee structure
Due DiligenceAcceptance Considerations
Beneficiary Social / Emotional Health:
● Emotional wellness● Community connections● History with prior trustee (violent, frequent requests?)● Meeting: in-person or virtual● Family dynamics
○ Support system○ Benefitting from trust?○ Additional legal fees?
● Undue influence○ Who is asking for the successor trustee?
■ Why? (denials/approvals from prior trustee?)● Other fiduciaries
○ Guardian, conservator, agent under POA, etc.
BEST PRACTICE TIP: create a list of demographic questions to use when asked to serve as successor trustee
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Due Diligence
Asset Allocation:
● Portfolio’s construction over different asset classes to balance risk and reward
● Prudent diversification● Coordinates the beneficiary’s:
○ Goals/Optimal Outcomes○ Financial Plan/Budget
■ Beneficiary’s budget is key determinant● Large purchases, LCP, time horizon
○ Risk Tolerance○ Investment Horizon
■ Life expectancy
Diversification:
● UPIA §3 - ”a trustee shall diversify the investments of the trust”
Diversifying holdings:
○ On average yields higher long term-term returns while mitigating risk
○ Smoothes out unsystematic risk (risk specific to the security or the industry)
○ Across capitalization (large cap, mid cap, small cap)
○ ETF/mutual funds○ By geography (domestic vs. international)
● Jicarilla Apache Nation v United States, 112 Fed. Cl. 274 (2013)
Acceptance Considerations
vBEST PRACTICE TIP: consult with an investment advisor before accepting appointment as successor trustee
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Due DiligenceAcceptance Considerations
Capital Gains:
● Embedded/Legacy capital gains are typical in successor trusteeships
● In-kind transfers - possible but necessary?● In-kind assets should not be pooled in a
truly pooled PSNT● Analysis:
○ Asset allocation○ Diversification○ Prudence○ Beneficiary needs○ Tax review
■ TAI vs DNI■ Beneficiary tax levels
Tax Rate Single Married, Filing Jointly
10% $0 - $9,950 $0 - $19,900
12% $9,951 - $40,525 $19,901 - $81,050
22% $40,526 - $81,051 $81,051 - $172,750
Tax Rate Beneficiary’s Income Beneficiary + Spouse’s Income
0% $0 - $40,000 $0 - $80,000
15% $40,001 - $445,850 $80,001 - $501,600
20% $445,851+ $501,601+
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BEST PRACTICE TIP: consult with a tax professional before accepting appointment as successor trustee
2021 Simplified Federal Personal Income Tax Rates
2020* Long-Term Capital Gains Tax Rates
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Due Diligence - Capital Gains
● First Party SNT (i.e., Grantor Trust for tax purposes)○ Note: In a Grantor Trust, all taxability flows out from the trust to the
beneficiary and is taxed at the beneficiary’s applicable tax rates.
● Trust corpus of $100,000 with $10,000 in long-term (i.e., held more than one year) appreciation (or unrealized capital gains)○ Trust’s anticipated annual taxable interest = $500○ Trust’s anticipated annual ordinary dividends = $500
● Beneficiary receives SSI and Medicaid and has no other income sources.○ No itemized personal deductions, 2020 standard deduction = $12,400○ Beneficiary files as “single” taxpayer.○ Beneficiary is 66 years of age.
Conclusion: As all taxable events flow out to the beneficiary in a Grantor Trust, realization of capital gains in full may be appropriate as the beneficiary's “gross income” is below $12,400. (See Internal Revenue Service [IRS] 2020 1040 Instruction Form, Chart A.) Note that SSI is generally not taxable income.
Hypothetical #1
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Due Diligence - Capital Gains
*Note: Changes in fact pattern bolded below.*
● First Party SNT (i.e., Grantor Trust for tax purposes)○ Note: In a Grantor Trust, all taxability flows out from the trust to the
beneficiary and is taxed at the beneficiary’s applicable tax rates.
● Trust corpus of $200,000 with $25,000 in long-term (i.e., held more than one year) appreciation (or unrealized capital gains)○ Trust’s anticipated annual taxable interest = $1,500○ Trust’s anticipated annual ordinary dividends = $1,500
● Beneficiary receives SSI and Medicaid and has no other income sources.○ No itemized personal deductions, 2020 standard deduction = $12,400○ Beneficiary files as “single” taxpayer.○ Beneficiary is 66 years of age.
Conclusion: As all taxable events flow out to the beneficiary in a Grantor Trust, realization of capital gains in full may be appropriate as the beneficiary's long-term realized gains would total $25,000 and thus are taxed at 0%.
Hypothetical #2
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Due Diligence - Capital Gains
Consideration should be given to the fact that the same $25,000 in realized long-term capital gains is includable in the beneficiary’s Adjusted Gross Income (AGI) (Line 11, Form 1040 (2020)). As such, there may still be income tax due on the beneficiary’s personal 1040, calculated as:
Beneficiary AGI: $28,000 (Line 11, Form 1040 (2020))
(long-term capital gains + taxable interest + ordinary dividends)
*Note that SSI is generally not taxable income.
Beneficiary Taxable Income: $15,600 (Line 15, Form 1040 (2020))
($28,000 AGI minus 2020 standard deduction of $12,400)
Beneficiary Tax Due: $1,678 (Line 16, Form 1040 (2020))
See IRS 2020 1040 Instruction Form, Tax Table.
Conclusion: In this scenario, selling the assets with long-term gains appears to be prudent as the tax due of $1,678 only represents 0.83% of the total trust corpus, which is a de minimis expense for rectifying any diversification, asset allocation, or ease-of-administration concerns.
Hypothetical #2
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Due DiligenceAcceptance Considerations
Unique Assets/Circumstances:
● Beneficiary-occupied residence○ Sole benefit (caregiving agreement?)○ Economic viability○ Ongoing costs (maintenance, insurance taxes, etc.)○ Titling○ Location safety○ Accessibility (current & future)
● Family caregiver○ TEAM
● Vehicles○ Lien recording (tracking)○ Ongoing costs (maintenance, insurance, etc.)○ Sole benefit
● Oil and Gas Interests:○ Tax/legal evaluation○ Investment prudence○ Principal & Income accounting○ Contract/lease negotiations○ Titling
● Real Property (farmland, commercial real estate, etc.)○ Economic viability○ Investment prudence○ Ongoing costs○ Titling○ Sole benefit○ Environmental impact/liability
BEST PRACTICE TIP: consult with a subject-matter expert and perform due diligence before acceptance of appointment as successor trustee. Consider delegation of ongoing management.
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Due DiligenceAcceptance Considerations
Accountings: Most issues can be surfaced through review of all trust accountings including:
● Beneficiary statements● SSA/Medicaid reports● Trust tax returns● Settlor tax returns (was trust properly and completely funded)● Prior trustee ledger
○ What if statements were never sent and there is only a checkbook or excel spreadsheet?● Trust investments’ custodian statements
○ This will ensure accuracy w/the trustee statements● Unique asset statement review
○ Review liens, titles, royalty statements etc.
BEST PRACTICE TIP: A successor trustee should require a final accounting with the understanding that a judicial review may be necessary and should be prepared to engage counsel prior to acceptance
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Due DiligenceAcceptance Considerations
Distributions:
● Past distributions should be reviewed in preparation for needed changes ○ Entitlement compliance issues○ Overspending○ Family being paid directly for care○ Others receiving benefits from the trust
● Prepare for challenging conversations○ Educate the beneficiary of the PSNT’s distribution policies and procedures○ Have an honest conversation about why previous types of disbursements may no longer be permitted○ Ensure that the beneficiary is provided information verbally and in writing to ensure comprehension
BEST PRACTICE TIP: A successor trustee should have a conversation regarding disbursements prior to accepting appointment so everyone is on the same page
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Due DiligenceAcceptance Considerations
Legal:
● Have counsel review the trust language. Considerations can include:○ State specific language requirements○ Mandatory beneficiary visitation by trustee○ Mandated distributions○ No invasion of principal provision○ Incentive/”dead hand” controls ie mandatory drug testing for distributions
● Consider a Hold Harmless Agreement or Indemnification Agreement○ This may relieve the successor trustee from liability of past trustee’s acts, omissions/failures○ This is limited by state statute or local law○ Mandated distributions
BEST PRACTICE TIP: Engage counsel if the organization needs to draft an agreement or needs assistance in reforming trust language
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Testamentary Successor TrusteeTestamentary Successor Trusteeship could provide future security for the PSNT
● As the PSNT becomes more known in the community parents may begin to name the PSNT as successor○ The PSNT should make an effort to educate elder law attorneys about the potential of using the PSNT○ Families should be encouraged to let the PSNT know they are named as successor
■ will allow for better support of the beneficiary/honest conversation of the PSNT capabilities■ will allow for better preparation for the organization■ may encourage the family to name the PSNT outright rather than successor
○ Family members named as trustee will be happy there is an alternative
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Denial ConsiderationsIt is okay to say NO!
● PSNT organizations do not need to be the dumping ground of unwanted trusts/beneficiaries
○ Do not put the organization in danger (physically or financially)
○ Be cautious of non-pooled trust transfers as managing multiple trust documents can become overwhelming and create liability■ Do you have the staff to
consistently refer to each trust document to ensure compliance?
■ Do you have the staff to perform what that trust is requiring?
BEST PRACTICE TIP: When the organization is asked to act as successor, start with basic questions:
● Why does the present trustee not want to serve?
● How much money is in the trust?● How much is the trust
presently distributing?● Have taxes been properly filed?● Was the trust ever contested?● Is there a letter of intent for the funds?● What is the beneficiary’s disability?● How difficult is the beneficiary?● Does the beneficiary want a new trustee?
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BACKGROUND
Local law firm requests organization take over as successor trustee of d4a trust they drafted and are administering. Trustee provides the following information:
● Trust size is now small (approximately $70,000), under probate jurisdiction and their fees are rapidly depleting trust
● Funds of over $100,000 were from settlement in which client was hit by a drunk driver while in his wheelchair on a sidewalk
● Beneficiary is on SSI, T-19 (including PCA waiver) and Section 8 housing● 28 year old male, diagnosed with Cerebral Palsy, can use walker, but mainly uses
power wheelchair. Client communicates via text/email even in person● State it is an easy trust to administer as the trust only pays a phone and cable bill
each month. Regular payments have not increased his rent
Final Case Study
TRANSITION
● Review of trust by outside law firm states trust is appropriately drafted. ● Probate Court appoints organization. Court requests final accounting from trustee. ● Organization engages with beneficiary and asks to fill out personal care plan.● Organization attends final accounting hearing and finds that:
○ Beneficiary was able to convince bank of past trustee that they were his funds and withdraw approximately $25,000
○ Trust had been paying rent for multiple months and SSI is reduced○ Client had already “lost” 2 cellphones, so a total of 3 iphones have been purchased by
the trustee○ Client has already requested a $900 gold chain, annual pass to local 6 Flags, a pair of Air
Jordans etc.
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INITIAL MISTAKES
● Not requesting financial records prior to accepting appointment● Not meeting the beneficiary prior to appointment as successor● Not having a more formal interview process with the law firm despite
knowing them well
Final Case Study
ONGOING ISSUES
● Beneficiary spent first year+ with organization○ Requesting multiple hearings to have organization removed as trustee○ Pawning nearly every item purchased by the trust including a cellphone○ Hiring only attractive young women as his PCAs who sat on the couch
the entire time○ Sending emails riddled with expletives demanding money○ Getting evicted for having multiple people move in with him○ Attempted to withdraw from college classes that the trust paid for to
get refund
LESSONS LEARNED/SHOULD WE HAVE SAID NO TO BEGIN WITH?
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THANK YOU!
2021 National Conference on Special Needs Planning and Special Needs Trusts
Pitfalls of Acting as a Successor Trustee: Taking Over a Disaster
Kerry Tedford-Coles
Executive DirectorPLAN of [email protected]
Stephen W. Dale, JD, LLM
The Dale Law Firm, PCPLAN of ConnecticutGolden State Pooled [email protected]
Peter J. Wall
Director of Fiduciary ServicesTrue Link Financialpeter.wall@truelinkfinancial.comwww.truelinkfinancial.com
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DisclosuresTrue Link’s Investment Management Services are provided through True Link Financial Advisors, LLC, (the “Adviser”) an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) and wholly-owned subsidiary of True Link Financial, Inc. (“True Link Financial” and, together with the Adviser, “True Link”) Registration with the SEC authorities as a Registered Investment Adviser does not imply a certain level of skill or training nor does it constitute an endorsement of the advisory firm by the SEC. True Link Financial, Inc. provides the trust administration software and record-keeping platform as well as the True Link Visa Prepaid Card.
All content available within this presentation is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Nothing contained herein should be deemed legal, tax or investment advice or a recommendation to purchase or sell any specific security. All scenarios contained herein are “made up” situations for purposes of education only, is not individualized, and is not intended to serve as a basis for your legal, investment or tax-planning decisions. Specifically True Link does NOT provide legal or tax advice. Individuals are urged to consult with their own tax or legal advisors before entering into any advisory contract. Individual investor’s results will vary. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected.
Peter Wall is not a licensed attorney or tax professional. The information contained herein is confidential and is not to be shared, distributed, or otherwise used, for any other purpose or by any other person without the written permission of Peter Wall and True Link.
The information contained herein reflects the opinions and projections of Peter Wall, not True Link, as of the date hereof, which are subject to change without notice at any time.
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