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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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Discussion Problem #1 -- Who should be named as trust protector?

First Scenario Parents with a Downs Syndrome daughter are considering either their son or a cousin as trust protector of a Special Needs trust they have established for their daughter. A corporate trustee has been nominated in the trust terms.

The possible problem with naming the brother as trust protector is the fact that the remainder beneficiaries of the trust after the daughter’s death will be the brother’s children. Will the brother have a conflict of interest in serving as trust protector and will he try to challenge distributions made on behalf of his sister?

The lawyer counseling the parents should determine the relationship between the brother and sister and also consider the fact that the brother lives abroad.

The cousin is local but is older. Still, since he does not have any inherent conflict of interest, he is likely the better choice as trust protector.

If, however, the trust terms prohibit the trustee from jeopardizing the beneficiary’s governmental benefits then distributions may be limited to small amounts and the conflict of interest that the brother might have is diminished.

Second Scenario Parents with three children have one adult child with mental illness in the form of bipolar disorder. They plan to leave one-third of their estate to this son in trust and name the two daughters as co-trustees of the brother’s trust.

Whom should they name as a trust protector? An uncle who is close to the son or the parents’ attorney?

The likelihood of the lawyer serving as trust protector is remote but the uncle may also not be a good choice because he currently employs the son and is quite a bit older than the son.

It might be best to convince the parents to name a corporate trustee or possibly the attorney and then use one or both of the daughters as trust protector.

The lawyer should discuss with clients the fact that involving siblings as trust protectors will mean putting siblings in the life of the disabled person on a permanent basis. Siblings may not always want that.

The panel pointed out that when a family member is mentally ill, the other family members are often not willing to assume such an active role in that person’s life.

An alternative to the trust protector role might be to have a guardian or conservator appointed to monitor the wellbeing of the mentally ill person.

Discussion Problem #2 -- Is a trust protector always needed? If so, who?

Grandfather wants to set aside funds at his death for his disabled grandchild. He plans to name his son and daughter-in-law as trustees of the trust for his grandchild. Does he need a trust protector?

Because of the length of time that the trust may be in existence (given the young age of the grandchild) it might be necessary to amend the trust at some point. Therefore a trust protector is valuable to the trust.

An alternative would be to ensure that the parents of the disabled child only serve as trustees as long as they remain married (particularly the daughter-in-law) and then the trustees could have the ability to amend the trust to continue to qualify it as a special needs trust.

Discussion Problem #3 -- Should the trust protector be obligated to act or just react?

Co-trustees and brothers of a trust are also current beneficiaries, along with a disabled beneficiary who is another brother. A cousin is serving as trust protector.

The co-trustees are investing the assets to maximize the income of the trust that may not benefit the remainder beneficiary, a local charity. Does the trust protector have a duty to review and question the investment strategy of the trustees?

The panel determined that the trust protector would not be obligated to review the investment strategy unless the trust terms require this. Further, if the trust protector does review the investments it would be for the purpose of determining whether the investment strategy is appropriate for the disabled beneficiary not the remainder beneficiary.

Discussion Problem #4 -- If the parents leave assets to a pooled trust, should they name a protector?

Parents with a disabled child plan to leave a portion of their assets to a pooled trust in order to benefit their disabled child and get the benefit of administration by a professional trustee. The terms of the trust provide that a portion of the funds will be paid to the state at the death of the beneficiary.

Should the parents name a trust protector for the trust?

The panel suggested that instead of naming a trust protector for the pooled trust set aside other funds to be used for the special needs beneficiary which allows the trustee of that trust to monitor the actions of the pooled trust trustee.

Session III-D International Developments Everyone Should Know About Henry Christensen III, Ziva Robertson, Jean-Marc Tirard This session will examine 2014 developments worldwide in the taxation of foreign accounts and trusts and in reporting requirements that apply to just about everyone, as well as important offshore trust judicial decisions everyone should know about.

Reporter: Michelle R. Mieras Appropriately, the panel for this session on International Developments was composed of counsel from New York (Mr. Christensen), London (Ms. Robertson), and Paris (Mr. Tirard).

Ms. Robertson began the session with a fundamental question: Why should you be interested in trust cases in other jurisdictions? The bottom line is that the world is shrinking. When a decision is made in corner of the world, it is often not long before it reverberates throughout the rest of the world. Therefore, keep your eye on trends and developments.





Ms. Robertson discussed international developments in the following areas: 1) mistakes by trustees, 2) sham trusts and transactions, and 3) choice of law.

Mistakes by Trustees:

Across the world, practitioners have been watching the aftermath of the 2013 UK Court of Appeal opinion in Futter v. Futter, which reversed a string of authority under the Hastings-Bass rule from the mid-1970’s. The Hastings-Bass rule essentially allowed a court to reverse a trustee’s action taken without consideration of relevant facts (e.g., a trustee inadvertently takes action that creates immediate tax action) or that had unintended consequences. The Futter court sharply curtailed the rule. The Futter decision encompassed to cases. In one, a trustee took legal advice from competent solicitors, but the solicitors were mistaken. (Ms. Robertson noted, yes, there will be mistakes made from time to time, which all attorneys should remember.) The court said the concept of reversing a trustee’s actions had gone too far. A trustee who makes a mistake can only hope to have it set aside if negligent, and then the beneficiaries – not the trustee – would have grounds to set it aside. In this case, taking advice from a solicitor is not negligent, so it will not be set aside. The trustee, instead of having that ability to have its actions reversed by the court under the Hastings-Bass rule, would instead need to pursue an action against the solicitor to be made whole for any liability found by the trustee. Ms. Robertson described this as a “sea change” in English law.

Because Futter so departed from the long-standing Hastings-Bass rule, several offshore jurisdictions, including Jersey, Guernsey and Bermuda, introduced legislation to formally implement the ability of courts to reverse a trustee’s act taken due to mistake. The Chief Justice of the Cayman Islands also indicated that it will not follow Futter. In the future, trustees may wish to take advantage of another jurisdiction with more favorable law.

Sham Trusts and Transactions:

Ms. Robertson then discussed sham cases. She explained that the family courts in England have legislative power to amend and vary trusts, both English and foreign, if they were created in anticipation of a marriage or during marriage, or even if the trust is drafted in terms that describe someone in his or her spousal capacity. Calling London the divorce capital of the world, she warned against references to “spouse” in trust under English law, as the spouse can run to matrimonial court and seek to vary the trust.

For example, she pointed to A v A, in which a wife argued that a trust set up for her husband by his parents and brother were a sham, as husband was, at the time, divorcing his first wife. The wife claimed the assets were simply placed in trust to try to hide the assets. The judge referred to the wife’s claim as lacking in a number of respects. A sham is really an attempt to mislead third parties into thinking there is one structure in place when there is, in fact, a different structure.

A sham requires there to be an intention to mislead that is shared between the trustee and settlor, and that intent must be manifest at the commencement of the trust. English and offshore law provide that if it is not a sham at the beginning, it cannot become a sham. On the other hand, if a sham trust exists and then a new trustee is appointed, if the new trustee does not share the sham intent, then the sham ceases.

Choice of Law:

How effective is a clause that purports to confer exclusive jurisdiction to certain courts? In the recent Jersey case Crociani, the trust included a provision conferring exclusive jurisdiction in the country of administration. The trust was transported into Jersey, then later away from Jersey. Did that clause confer on the Jersey court sole jurisdiction? The court said no. Ms. Robertson stated that even if you think the jurisdictional provision is sufficient tight to require all litigation be held in one jurisdiction, there will be cases where it gets heard in another court. So practitioners are fine-tuning their language.

Ms. Robertson then turned the session over to Mr. Tirard, who discussed the EU approach to exchange of information, as well as the upcoming European Succession laws. He wanted to make three overall points: 1) tax transparency is the new world, 2) trusts are under attack and offshore trusts are less and less effective, and 3) tax planning is becoming a risk-planning exercise.

Automatic exchange of information is the phrase of the day. FATCA, which originated in the US, has spread its roots across the globe. While US financial institutions may groan at FATCA compliance, foreign governments agreed it might be a good idea, and a proposed global automatic exchange of information between taxing authorities (GATCA) was developed. Note that the US thinks FATCA is sufficient and has no intent of participating in GATCA (as does the UK, added Ms. Robertson).

The basic idea is that the government must get detailed financial information from institutions and exchange the information annually with other jurisdictions. Mr. Tirard gave examples of the information collected and exchanged.

He then stated that trusts are under attack. Trusts are seen as a way for the rich to hide money offshore. As a result, there can be punitive tax treatment – not only for the trust, but for the settlor and beneficiaries as well. For example, in 2011 France introduced tax provisions that tax beneficiaries regardless of distributions. The result could be that a beneficiary must pay taxes on assets never received.

Mr. Tirard explained that even though France does not recognize trusts, it does have a trust registry. It is still unclear whether it would be open to the public. An audience member commented about the risk of having to disclose minors on the registry, and questioned whether there were concerns that this could promote kidnappings.

In a world of tax transparency, Mr. Tirard suggests you advise your clients to become compliant, and take advantage of voluntary disclosure programs while they are in place. France has already collected two billion Euros, and expects to collect another three billion Euros in 2015, though its voluntary disclosure program.

Mr. Tirard concluded with what he called his “only piece of good news”: the EU succession regulation coming later in 2015. This seeks to resolve the application of different succession laws by implementing a uniform system of recognition of succession law. It is broadly based on aperture residence of the decedent, and does not distinguish between movable and unmovable assets. Only three committee countries have opted out (Denmark, Ireland, and the UK). A person in a non-participating state can still elect to have the law apply. For example, a Mexico citizen owning property in the EU who wants to avoid forced heirship can sign a will stating the laws of Mexico apply.

Mr. Christensen believes the moral of Mr. Tirard’s story is as bad as you may think FACTA is, stay out of the EU because it is worse over there.

Mr. Christensen reminded the audience that FATCA is in effect and that reporting from foreign financial institutions begins in March. Recall that back when FATCA was passed as part of the HIRE Act in 2010, everyone screamed about how expensive it would be to comply. The response was that the US would receive a lot of foreign money from those that want to take advantage of the kind of protection FATCA provides. But now, foreign jurisdictions are implementing their own versions.

The idea all along was to get intergovernmental agreements (IGAs) between the US and its trading partners to implement FATCA compliance, and get information about foreign accounts held by US investors. Why not just make foreign banks issue 1099s? Because the US doesn’t have the authority to make them do that. So instead we have FATCA, which causes massive over reporting.

Mr. Christensen discussed the basic operation of FATCA. He characterized FATCA as a set of withholding rules under Sections 1471-1474 of the Code. The definitions are a significant part of FATCA, and he pointed out the definitions of “US account,” “financial institution” and “foreign financial institution” (FFI). A participating FFI is one that has agreed to comply with FATCA. The FFI then registers with the IRS, and must keep certain records and make disclosures to the Treasury. A deemed compliant FFI is a non-participating FFI which still is deemed compliant with FATCA.



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