Emerging Issues and Trends

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1 Fiduciary Education Center, LLC Roger A. Pond Becky T. Kelly Gift Tax Exemption Maximum Gift Tax Rate Tax Exemption Maximum Tax Rate Exemption from GST Tax GST Tax Rate $1,000,000 $1,000,000 $1,000, % 35 % 55 % with 5% surcharge on gifts between $10,000,000 and $17,184,000 $3,500,000 Unlimited $1,000, % None $3,500,000 Unlimited 55 % with 5% surcharge on estates between $10,000,000 and $17,184,000 $1,000,000 indexed for inflation since % None 55 % 2 1

2 Don t Forget These. State Connecticut Delaware District of Columbia Indiana Iowa Kentucky Maine Maryland Massachusetts Minnesota Nebraska New Jersey New York Ohio Oregon Pennsylvania Rhode Island Tennessee Vermont Washington Type of Tax Stand-Alone Tax and County and Stand-Alone Tax Stand-Alone Tax 3 Food for thought What will happen with formula concepts? 4 2

3 Do documents/policy manuals have protocols covering Incapacitated Grantors Incapacitated Beneficiaries Incapacitated Co Fiduciaries 5 Special Needs Trusts What are they? How do they work? Issues and Pitfalls 6 3

4 Typical Expenses Allowable with a Special Needs Trust* out of pocket medical and dental expenses medicalequipmentnot equipment not provided by Medicaid eyeglasses exercise equipment annual independent checkups transportation motor vehicles vehicle maintenance vehicle insurance premiums life insurance premiums physical rehab. services essentialdietary needs materials for hobbies tickets for rec. & cultural events musical instruments costs related to attending meetings memberships in book, health, etc. clubs home improvements computers, etc. cable TV telephones, TVs, radios cameras trips and vacations visits to friends camcorders entertainment newspaper & magazines athletic training & comp. personalcare attendants voc. rehab. or hab. professional services tuition & related expenses cosmetics conferences & seminars *DO NOT REIMBURSE THE BENEFICIARY MUST BE PAID DIRECTLY!!!! 7 Investment Issues Introduction ti of complex products (hedge funds, etc.) Move toward outsourcing investment function Due diligence in selection process Transparency of compensation Monitoring performance Impact of new money market rules Break the buck? 8 4

5 Other outsource options: Proxies why wouldn t you? Tax work Local CPA s Consistence in cost? 9 Decanting Statues What are they? Which states? Alaska, Arizona, Delaware, Florida, Nevada, New Hampshire, New York, North Carolina, South Dakota, Tennessee Typical situations where used? 10 5

6 Assigning Risk Tolerance Basic Factors for Consideration for Account Risk 1 Not Applicable A default code used to identify exceptions and to alert for need to assign correct code. 2 High Bank serves in capacity of trustee or executor for large and complex trusts or estates; potential or existing litigation, environmental concerns or large asset concentrations are issues; portfolios include significant ifi holdings in commercial ilreal estate, hedge funds or closely held companies; specialized investment criteria apply; specialized reports or other administrative services are required; customers require significant attention from multiple personnel Medium Accounts are governed by standard or non complex documents; portfolios may be large but consist primarily of securities for which market data is readily available; special assets (e.g. real estate, mineral interests, and life insurance policies) pose no unusual risks; standard performance reporting and advanced statement formats satisfy customer reporting needs. Bank serves in the capacity of trustee or executor but its exercise of discretion is limited and is clearly defined by the document; customers require routine attention from assigned relationship managers and portfolio managers. 4 Low Accounts are governed by standard documents; portfolios are modest in size and do not contain any special assets; automated portfolio realignment processes may be suitable for the account; customers may prefer telephone or electronic communication channels. 5 None House accounts or other internal accounts not requiring documents or client management. 12 6

7 Assigning Risk Tolerance Let s take this a bit further. RATIONALE HIGH* MODERATE* LOW* Reputation of the Grantor Reputation of the Beneficiaries Conflicts of Interest Assets to be Managed Own Bank Stock Loans/Mortgages Real Residential Farm Commercial Environmental Issues Distance Outside advisor Oil and Gas Lack of Cost Basis Own Bank CDs Closely Held Businesses Concentrations Investment t Action Ati Plan Cost Basis "Exotic Investments" i.e. Hedge funds Life Insurance Realistic Investment Objective Fee Schedule Purpose of Account Do not Custody Assets Document Language Successor Trusteeship *HIGH/MODERATE/LOW: These figures should be based on your own trust department's criteria. The figures are measured either in dollars, percentage of income or percentage of assets. 13 Operations Issues Doing more with less? Where do you get replacements? Dual control issues Management by exception. 14 7

8 of Fridenberg, 2009 WL (Pennsylvania Superior Court, August 24, 2009) Anna Fridenberg died in 1940, leaving a will under which she established a perpetual charitable trust that ultimately provided for the distribution of net income for the support of a surgical floor at the Albert Einstein Medical Center. A corporate predecessor to Wachovia Bank served as executor under the will, and Wachovia served first as co trustee and eventually sole trustee of the charitable trust. After the death of the individual co trustee in 2005, Wachovia filed an accounting for 1978 through 2005 seeking commissions from principal for the time period from 1998 through The state attorney general filed twelve objections to the accounting, but eventually withdrew all of the objections other than the objection to the additional commissions on the market value of the trust paid out of the trust principal. The attorney general s objection was based on a 1917 statute, in effect at the time of Ms. Fridenberg s death, that prohibited a trustee from receiving a 15 second commission for trust services if the trustee received compensation for services as executor under the will that also established the trust. The attorney general relied on the decision of the Pennsylvania Supreme Court in In re Williamson s holding that the repeal of the 1917 statute was not to be applied retroactively. The Orphan s Court sustained the attorney general s objection based on the Williamson case. On appeal, the Superior Court reversed on the basis that (1) the Pennsylvania legislature amended the law in 1953, 1972, 1982, 1984, and 2006 so as to permit compensation based on market value of the trust assets regardless of when the trust was created and (2) subsequent cases had effectively ended the precedential authority of Williamson. The Court refused to address Wachovia s assertion that the attorney general was improperly challenging, rather than enforcing, state statutes because the court found that Wachovia had failed to raise the issue with the trial court or preserve it for appellate review. The Court noted that the attorney general expressly refrained from challenging the facial constitutionality of the state statutes, and that it was the 16 8

9 prerogative of the legislature l to amend the trust t laws to respond to significant historical changes in the nature of trust administration and investment, including the development of total return investing. The Court reversed the Orphan s Court, approved the additional fees, and remanded the case for further proceedings. 17 9