silver lining playbook for difficult to administer trusts barry a. givner, senior vice president...

Silver Lining Playbook for Difficult to Administer Trusts

Barry A. Givner, Senior Vice President Senior Wealth Strategist

Estate Planning Council of Greater Miami Workshop

January 2014

Perspective of a Senior Trust Officer

• Overseeing Trust Administration,

• Compliance – Regulation 9 Process

• Discretionary Distributions

• New Business Acceptance

A View From a Corporate Fiduciary

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Where do the Problems Begin Regarding Trust Administration?

• Relationship between the estate planning attorney and the client (grantor)

− During the interview and information gathering and drafting process

• Clients automatically accept the recommendations of the attorney without

questioning the attorney.

• The estate planning attorney becomes only a scrivener when the client does not

allow any meaningful input.

Starting From the Beginning

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What can be done to minimize problems?

•Counsel clients about the effects of Trusts and the reasons they should or should not

be drafted.

•Suggest options in light of the objectives the client expresses.

•Two way open communication is essential.

•If possible, involve all advisors in the process, e.g., CPA, Financial Advisor/Corporate

Trustee.

Minimizing Issues Up Front

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What should be our concern when creating a Trust?

•The identification of the motivation of the grantor

− This should improve the drafting of the Trust

− This should improve the communication between, grantor, drafting

attorney and the trustee.

Primary Focus

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Three Basic Reasons For Trusts

•To provide support to those who cannot support themselves

•To prevent financial misuse or abuse

•Tax planning

•A more common reason a grantor wants to create a trust is they want the beneficiary

to receive funds only when the beneficiary is mature or productive.

− i.e. age attainment (perceived maturity)

− i.e. incentives

Why Create a Trust?

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When deciding whether to accept a Trust

•What is the size of the assets that will fund the trust(s)?

•What type of assets will make up the trust(s)?

•What kind of liquidity and cash flow will be in the trust(s) now and ongoing?

•Is a corporate trustee appropriate or individual trustees or a combination of both?

•Can certain trustee duties be delegated relative to specific assets.

•How will the trustee’s be paid?

•What is the family dynamics and the background of the beneficiaries?

•Review Trust draft and determine ahead of time if the Trust can be administered

according to the wishes of the grantor and potential liability is minimized.

•Will it be profitable for the Corporate Fiduciary.

Questions I Ask

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• Drug Dependency

• Multiple Marriages / Children Conflicts

• Closely Held Business Interest

• Unique Assets, Mortgage Notes, Timber, Oil, etc.

• Special Needs where ward does not qualify for benefits

• Incentive Trusts

• Lack of Diversification, Unproductive Property

Administrative Red Flag Scenarios.

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Provisions Limiting Investments (e.g., AAA Corporate Bonds Only)

•Drafting Solution− Directed Trust with a Trust Protector in charge of investments

− States such as Delaware, South Dakota and Virginia enacted Directed Trust Statutes,

Case history is sparse but generally favorable to Trustees.

− Florida has a Directed Trust Statute but Corporate Trustees have a problem with language.

Would recommend not to limit investments, case in point, current fixed income

interest rate environment.

Difficult to Administer Concepts

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Overly burdensome or invasive standards (e.g., $ to my wife only if she is not

cohabitating)

•Drafting Solution

− Include only easily verifiable standards(e.g., $ to my wife only if she is not legally

married)

− Third party trust protector can be responsible for directing trustee


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Limited Discretionary Provisions forcing trustee to make tough calls (e.g., health

and maintenance only)


− Give independent trustee unlimited discretion or

− Provide for uni-trust or fixed annuity amount so there is no doubt


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Provisions giving beneficial interests in the same Trust to likely adverse

parties(e.g., discretionary distributions to wife #2, remainder to children of wife

#1.)


− Give fixed annuity or uni-trust amount so there is nothing to argue over.

− If possible provide for adverse parties separately either outright or in Trust.


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Naming an inappropriate co-trustee (e.g., unsophisticated, argumentative, or

with a conflict of interest)


− Name three co-trustees, one being a corporate trustee so that the “inappropriate

co-trustee can be involved but yet can be out voted. On the other hand if the

other individual trustee votes with the “inappropriate co-trustee”, a dissenting co-

trustee who joins in an action at the direction of the majority of the co-trustees

and who notifies any co-trustee of the dissent at or before the time of the action

is not liable for the action.


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The Problem with Incentive Trusts

It is not the money that destroys our children, but the parents who earn the money but

neglect to instill values in their offspring. The bottom line is that incentives and

encouragement of productive behavior have to be done during lifetime and are difficult

to make successful in an estate plan when they have not been effective during life.

•What is the effectiveness of money in motivating behavior?

•Money reinforces simple work tasks but backfires for complex cognitively challenging tasks

like money management.

•Incentive Trusts are more likely to thwart development of motivation than support it.

From “The Use and Abuse of Incentive Trusts: Improvements and Alternatives”

John J. Gallo, Eileen Gallo, Ph.D., James Grubman, Ph.D. © 2010


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The Problem with Incentive Trusts (continued)• Three basic approaches to incentive trusts.

− Absolute Discretion – Select Trustee who is perceived as sharing the settlor’s values,

good faith standard is used

− The Listing Approach – Productive Behavior, Graduating form College and Full Time

Employment

− Behavioral Benchmarking – Principle Trust – offer guidance as to the settlor’s values and

principles.




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The Problem with Incentive Trusts (continued)

• Using the Financial Skills Trust Scenario− Trustee can be granted absolute, limited or no discretion in distributing income and

principle to beneficiaries based on behavioral money skill guidelines.

− Uses the ROWE methodology, Results Only Work Environment.

− Purpose is to develop skills through Financial Literacy and Education




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Growing Problems: Grantors’ Desires vs. Trustees’ Comfort Level

• Assets more complex

– Increasing demand by clients to carve out management of unusual assets

• Increased litigation

Common Practices

• Attorneys: draft extensive indemnification into trust documents

• Trustees: make business decisions (evaluate risk)

Co-trustees Regularly Ignored the Co-trustee Ambiguity

• Individual trustees often delegated the investment function to

corporate trustees

Florida Issues

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Co-trustees’ Dilemma

• Uncertainty in Fl Trust Code

• Could co-trustees delegate between/among themselves?

• Individual co-trustees often want to delegate investments to corporate co-trustees

• Query: Was This Prohibited by F. S. 736.0702(5): “A co-trustee may not delegate to another co-trustee the performance of a function which the settlor reasonably expected the co-trustees to perform jointly.”

• Often difficult to know settlor’s intent in this regard

• Arguably, this was more restrictive than the requirements for delegating a function to a non-co-trustee agent!

Note: Slide from presentation titled Directed Trusts Grantors’ Desires and Trustees’ Dilemmas

by Joan Crain from BNY Mellon Wealth Management

Florida Issues

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Current Statutes in Florida

• Issues arise with F.S. 736.0703(9)

• One particularly problematic phrase– “ Except in cases of willful misconduct on the part of the trustee with the authority

to direct or prevent actions of the trustees of which the excluded trustee has actual knowledge, an excluded trustee is not liable, individually or as a fiduciary, for any consequence that results from compliance with the exercise of the power, regardless of the information available to the excluded trustees.”

• In-house counsel for corporate trustees interpret this as requiring ongoing monitoring



Florida’s Directed Trust Statute

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First Changes Came in Specialized Situations

• Special Needs Trusts: common procedures

– Employ specialists to oversee care and comply with Medicaid rules

– Extensive exculpatory language for trustees who follow advice of these specialists

• Trust Protectors: growing use– Offshore concept adopted in domestic trusts to provide for independent oversight

and flexibility

– May also be called “advisors” or an “advisory board”



Florida Developments

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This material is provided for educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice and may not be used as such. Effort has been made to assure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. You should consult your lawyer or your tax professional, or your investment or financial advisor if you want professional assurance that this material, and your interpretation of it, is accurate and appropriate for your unique situation.

Pursuant to IRS Circular 230 we inform you that any tax information contained in this communication is not intended as tax advice and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Questions?

Thank You!

silver lining playbook for difficult to administer trusts barry a. givner, senior vice president...

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