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«Aggregated Summary of Reports Provided by ABA-PTL and ACTEC-Prac List serves 2015 Heckerling Estate Planning INSTITUTE Edited, Aggregation of On-Site ...»

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Ms. Harrison closed with explaining what she called the three legs: freezing; discount planning; and intentionally defective grantor trusts. These are each methods for shifting the income tax burden and repositioning assets. She noted that relying on DSUE has some significant disadvantages, and instead she recommended the use of QTIP trusts. Also mentioned was the transfer of grantor trust assets in exchange for partnership preferred interests with a high rate of return, as well as the use of GRAT for scenarios in which the surviving spouses has little to no remaining exemption.

Session II-B A Panel Discussion: The Most Important Elements, Clauses and Ideas for Trust Design David A. Handler, David J.

Herzig, Benetta Park Jenson A panel discussion by experts from the banking, legal and academic worlds regarding design and structure of trusts, key provisions for every trust agreement, and building flexibility into trusts to adjust and evolve over time.

Reporter:Joanne Hindel Esq.

Trusts are not generic and will control for many years – so the trust must be given considerable thought.

The trust terms should be flexible enough to address issues that arise over time.

The panel first discussed dividing trustee duties among multiple trustees or fiduciaries.

Directed trusts are on the rise – the ability to bifurcate duties allows for the right experts to handle aspects of trust administration: investment management versus distributions between corporate entities and individual family members.

Be careful in the drafting of multiple trustee roles to not have them overlap and clarify who will cover what function and who will be relieved of responsibility for someone else’s duties.

Specify terms and conditions as to who can serve as trustee. Specify the trustee’s role and powers. Directed trust statutes may address this is certain states although the trust terms will always control.

State statutes that authorized directed trustees provide protection and clarity regarding the roles of multiple trustees - especially if the statutes that been tested and approved by courts.

The panel then discussed the role of trust protectors.

Trust protectors may have even more authority than the trustee if the trust protector can change dispositive provisions.

Trust protectors can amend the trust but can also make changes for tax purposes or possibly to change beneficial interests. Be careful about allowing the trust protector to amend beneficial interests because the settlor will want to do so through the protector’s exercise regularly.

A better approach is to allow the protector to amend administrative provisions.

Be careful when considering foreigners to serve as trust protectors because their involvement may cause the trust to be considered a foreign trust.

You need to know the tax status for each individual with fiduciary authority over the trust and review that status on an annual basis.

The panel then moved to the concept of dynasty or perpetual trusts.

They questioned whether dynasty trusts are really useful or necessary for most families.

Then they discussed powers of appointment.

Powers of appointment are basically the power to amend either during or after the settlor’s life. It is generally better to give power to family members such as children of settlor. Can be given to a third party but specify provisions as to exercise and scope.

One approach is to give a child a general POA, but give the trustee, upon request of the child, the ability to remove the POA authority of the child.

The Panel then polled the audience to determine the extent to which clients are asking for the grant of powers of appointment in their trusts to spouses and/or children. They also asked to what extent clients are allowing their family members the ability to appoint to in-laws. A decent number in the audience indicated that they are drafting powers to allow for appointment to in-laws.

One option is to limit the amount that can go to an in-law in the trust terms.

The trust terms should define whether the exercise of the power of appointment can occur inter vivos or only testamentary and whether it must be in writing.

One drafting technique is to allow a person to exercise a power of appointment to another trust and continue to retain that power in the second trust. This give the power holder continued control and also removes any possibility that the exercise itself will be considered a gift.

The panel then moved to dividing trusts.

Share toys but not money. The panel recommended including the ability to divide a trust into shares for each of the children.

Give a third party trustee the ability to exercise discretionary distributions in sole and absolute discretion, equally or unequally, considering or ignoring the beneficiary’s financial resources, to or for the benefit of the beneficiary.

Give the trustee the ability to count distributions as advancements if necessary.

Incentive provisions often require the identification of all the exceptions to them to the point where the exceptions will swallow the incentive. Alternatively, give the trustee guidance regarding the discretionary distributions as to whether to consider the beneficiary’s other income and resources. Also, set forth desired behavior.

If you establish perpetual trusts, incentive provisions may be difficult because of changing circumstances over time.





If the settlor wants to identify intent for the trust, it might be best to put guidelines in the trust agreement itself as opposed to a separate letter.

Letter of wishes or intent is not binding and may actually conflict with the trust terms.

The panel also discussed important clauses to put in trusts: divorce clause that removes settlor’s spouse and spouse’s family members; and the spouse of children. Watch also the application of IRC Section 677 that could cause the settlor to be considered the owner (grantor trust) even after a divorce.

Address adoption in the event beneficiaries move and state laws vary. Children born out of wedlock should also be addressed because laws vary depending on whether a child is identified as the mother’s or father’s child.

Definitions should also include identification of “spouse.

Whoever is initially listed as trustee will change. It is important to determine who is empowered to appoint trustees. Empower client, spouse, beneficiaries and others to appoint and remove trustees and to change who can appoint/remove trustees Give the trustee the ability to change the situs and governing law except as to the rule against perpetuities (can’t extend the length of the trust).

Define health, support, education.

Give trustee the ability to authorize use of real property held in trust and allow trustee to determine whether rent should be charged.

Considering including a provision that allows the trustee to depart from the prudent person rule and to consider similar trusts as part of the same portfolio.

Define incapacity and address such matters as absence, incarceration, minority, and health.

Specify how trustees will vote – necessity for majority or unanimity. Consider using the single signatory provision.

Provide a conflicts waiver clause for corporate trustees but also for individual trustees who may provide other services. (brother-in-law who is an accountant).

Address what happens when a beneficiary disclaims – don’t rely upon state laws that may change or vary from state to state.

Provide survivorship clauses and identify who is entitled to information about the trust.

Session II-C Keeping It in the Family Louis A. Mezzullo, Christine Quigley The session will explore business succession planning for the closely-held and family owned business, including various exit strategies and techniques to deal with liquidity issues. A hypothetical fact pattern will be used.

The session explored business succession planning for the closely-held and family owned business, including various exit strategies and techniques to deal with liquidity issues. A hypothetical fact pattern was also used. Here are the significant highlights from this session.

The presentation primarily was based on a fact pattern. The fact pattern involved a successful family business, an S corporation, owned by 2 brothers. One of the brothers was happily married with 3 children, a daughter whose husband is in the business (although the marriage is rocky-however a successful and growing part of the business is related solely to his efforts), a son who is very involved in the business, and a son who is successful in his own right with no interest in the business. He is extremely conservative and very frugal in his personal financial affairs. The other brother is recently remarried with a child from a prior marriage who undoubtedly has no future in the business and commitments to his second wife through a premarital agreement. He lives a lavish lifestyle and depends upon the business cash flow to maintain his lifestyle.

In this instance the main operating company as a given was an S corporation. In starting with an engagement such as this one of the preliminary matters is to review business structure. Is it appropriate or should conversion be considered (tax issues) or if a C corporation should S status be considered.

In planning with a family enterprise at the outset need to distinguish ownership and management. They need not be the same and often times for the success of the enterprise they should not be. Ownership should not automatically grant one management rights. Give due consideration to management issues; are there key employees who are not family members. Rather than giving such an employee equity examine phantom stock or other way to incentivize and retain those key employees.

In considering succession planning it is a process. Best if it is considered at the startup phase especially if there are multiple owners or sides of family. Process should be implemented hopefully well in advance of the expected targeted transition date, whether that be retirement or some other event. Hopefully a plan is in place in the event of an unexpected death or order of death.

Succession planning done correctly requires the consultation and involvement of multiple professionals and disciplines, accountant, financial adviser, business attorney, family attorney, business appraiser, banker, insurance professional, possibly depending on the dynamics a business psychologist/consultant.

Initial consideration: is there an existing plan. In any event what are family goals and individual’s family member goals. Often times those are not in sync. Children do not necessarily agree to what the senior generation believes is appropriate. There should be a mission statement which will help define family’s goals, businesses goals. Regular meetings should be considered as well as an outside person(s) to serve on an advisory board. Consider whether nonfamily members should be on the board of directors.

Goals will dictate approach: Is sale a consideration-in the near term or not a consideration; if business is to continue who is to have ownership and who is to have control. Is ESOP a consideration.

When looking at ownership and transitioning consider buy/sell or transfer restriction agreements. In that regard be cognizant of Sections 2703/2704 in drafting such agreements. If one fails those sections decedent ends up with an estate tax value that exceeds the buy/sell price that is paid by purchaser. Consider adding a clause in buy/sell that if the agreement and price determined in the agreement causes an estate tax, the purchaser is obligated to reimburse the estate for the ‘tax cost.’ Agreement should contemplate a possible break up and also conflict resolution whether it be mediation/arbitration so family disputes are not in the public domain and help control expenses.

Are there multiple business lines that can be spun off tax free under Section 355 that aligns business with ownership and management.?

How do senior family members desire to treat family especially if there are multiple children with differing interests and some are not in the business. Is equalization a goal or getting assets to those who should have them, i.e.

ownership to those who are active in the business with an attempt as best as can be done to provide for nonactive family members. Consider placing passive interests, i.e. building in an entity that nonactive family members own.

Consider recapitalization with voting and nonvoting interests giving the nonvoting interests to nonactive family members. If senior family is attempting to equalize values and nonactive members are allocated business interests grant the active members a right/option to acquire the business interest that was allocated to the nonactive family member. It is extremely important that whatever strategy or approach is implemented be conveyed to the family members. Surprise at death or some other event is not a preferred planning result.

If contemplating a GRAT strategy give consideration to how the annuity will be paid. Should confirm there is sufficient cash flow to satisfy the annuity so that business interests do not need to be used to satisfy the annuity obligation causing valuation issues to be addressed and need for appraisals.

Consider whether life insurance is appropriate both in the business context as well as in family member’s personal planning.

Consider if appropriate whether in case of death Sections 6166 or 303 are appropriate or whether planning should consider qualifying for those sections if necessary.

The presentation concluded with a general overview of ethical considerations and conflicts in general when planning. Engagement letter must be provided outlining the considerations and be signed off by all affected persons.



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