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Mr. Rogerson concluded his portion of the presentation with the five steps to family governance. As provided by Mr. Rogerson, the five steps to family governance are family education, family communication, family values and meaningful experiences, family philanthropy, and healthy family governance. In addition, Mr. Rogerson provided the reminder that family fights are almost never about what they are really about, and in general success requires a combination of family meetings, communication, team and value exercises, family philanthropy, and family wealth literacy education.
For the second part of the presentation, Mr. Rubenstein began with his key takeaways which are as follows: (1) yes there are an infinite number of wrong ways, but there is no one right way; and (2) usually when things go wrong there is not a problem with the drafting, but a problem with implementation. Mr. Rubenstein noted that the problem with implementation is often due to the family being scared away from assistance with implementation due to attorney fees.
Mr. Rubenstein next posed the following question, how do you make an estate plan when the world is constantly changing? In the current environment, he stated that clients must plan for divorce, as well as same-sex marriage, adult adoption, and assisted reproductive technology. He noted that adult adoptions are becoming increasingly more common for same-sex partners, although initially created to ratify pre-existing relationships between stepparents and stepchildren. As a result, he provided that many power of appointments benefiting classes such as spouses or issue might be a point of contention for families. Mr. Rubenstein discussed the benefits of using corporate fiduciary in response to such situations. He also mentioned the benefit of using corporate fiduciaries in situations where children learn only after their parent’s death that money was left in trust instead of outright, especially if the trust is a dynasty trust.
The discussion then moved to factors considered in selecting a fiduciary. Mr. Rubenstein stated that it might benefit the client for the attorney to discourage use of individual fiduciaries. He noted that although individual fiduciaries are often inexperienced in making investment decisions and unqualified for the position for other reasons as well, clients prefer individual fiduciaries over corporate fiduciaries due to a lack of trust and perceived cost. However, Mr. Rubenstein stated that corporate trustees generally provide the entire scope of services needed for trust administration, and as such, are often not as costly as perceived by clients after considering the cost of each service individually. He also provided that a directed trustee might be a solution for these clients.
Mr. Rubenstein also pointed to the potentials conflicts of interest that might arise with corporate fiduciaries, as well as individual fiduciaries. He reminded the audience of the Enron case in which the bank did have a potential conflict of interest, and the potential for the bank to sue itself on behalf of beneficiaries. Also addressed was the use of private trust companies, which Mr. Rubenstein stated are very costly, with high overhead expenses, and probably not beneficial for most clients with small wealth. He also mentioned a case in which a court pierced a private trust company for the creditors of a beneficiary who was also involved in the management of the private trust company. As a final thought, he noted that practitioners must look to the family, their nature (more pretentious, less pretentious), assets, and the duration of trust, making an independent determination each time.
3:50 - 5:20 SPECIAL SESSIONS IV Session IV-A Split-Interest Trusts Created by Entities: When and Why It Will Make Sense...and More! (Charitable Giving Series) Jonathan G. Blattmachr This presentation will provide additional detail on when it will be preferable to have a trust, corporation or partnership create a charitable remainder trust or charitable lead trust. In addition, it will explore the impossible dream: how to create a charitable lead trust that is a grantor trust (so the grantor gets an immediate income tax deduction) without having to report any appreciable taxable income during the lead trust term.
Reporter: Beth Anderson Esq.
This presentation builds on the General Session presentation that was given by Mr. Blattmachr on Thursday morning. The significant highlights are reported here.
In this special session, Mr. Blattmachr expands on the planning techniques he introduced in the morning session. When establishing a grantor trust by an entity, if you get it wrong and the owners of the entity are deemed the grantors of the trust then the transaction is treated as though the entity made a distribution/dividend to the owners, subject to tax, then the owners made a contribution to the trust. The benefits of a corporation creating a charitable remainder trust is tax free deferral until distributions are made and if one contributes an appreciated asset and sells it there is no recognition of gain.
§170 limits individuals to max of 50% AGI for charitable deduction, and no deduction for ordinary income (except at death), but a trust can have 100% deduction.
Wants a charitable deduction on income from trust, but trust terms don’t include the ability to make distributions to charity. If the trustee has broad investment authority, then create a partnership and put trust assets into the partnership. The trust income is income from partnership. If partnership makes a contribution to charity instead of trust, the deduction is passed out to the trust and the trust gets the §642(c) deductions even though terms don’t provide for charitable distributions, and it’s a 100% deduction so long as contribution was not from unrelated business income. §681 applies to distribution by partnership to charity, and the distribution must be paid from gross income and not UBI.
PLR 9821029 non-grantor trust created charitable remainder trust. Step-one, decant from current trust to give a currently exercisable non-general power of appointment to any person or entity. Step two, exercise the power to transfer assets to new charitable remainder trust with the current trust as the unitrust recipient.
Shark Fin CLAT – small payments then when insured dies big payment, Rev. Proc 2007-45 says you can make any annuity payments so long as you can actuarially compute charitable deduction. Some risk that if the payments are too small then the payments may not work. PLR 201216045 IRS expressly approved 10 year CLT with annuity increasing by 20% each year.
§1.170A-8(a)(2) gift of income interest is a “for the use” of charity, and contribution of a remainder is “to” charity.
§170(f)(10) denies income tax deduction and confiscates assets for a transfer “to or for the use” of charity and a non-charity is the direct or indirect beneficiary. Creation of CLT is a contribution “for the use” of charity, and payments of insurance premium from CLT is risky and looks like an indirect payment to a non-charity benefit. Exception for certain CRTs but unsure if this exception applies to CLT. 170(f)(10)(C) and (E).
Fund the CLAT with cash and substitute the policy later – is this ok? Make distribution of cash, pay the policy, then when policy is paid swap assets – cash for policy. Can’t be “planned” step transaction doctrine may apply, collapse the transaction and §170(f)(10), but also run into self-dealing because transactions between trust and disqualified person. Query if a power to swap is self-dealing which could disqualify the trust as a CLT no income tax deduction and potential 200% §4941 excise tax.
Ideal solution – use a non-MEC – use an old/cold life insurance policy, but if you want to do the CLT now but don’t have an old non-MEC policy then use a policy that isn’t defined under §7702(a). Frozen net cash value policy (FNCV) – 10M premium and continues to grow over the years, even though flunk §7702(a) test don’t pick up any income under §7702(g) because the net cash is frozen at the premium paid. Normally a single premium policy is a MEC, but the MEC rules only apply to policies that meet 7702(a). Now you can borrow against the FNCV to pay the annuity and not worry about §170(f).
Session IV-B Case Studies in the Ethical Considerations in Acting as an Executor or Trustee (Ethics Session) Charles D. “Skip” Fox, IV, Amy K. Kanyuk, Mary F. Radford Using case studies, the panel will examine different ethical issues that arise when a lawyer or other professional acts as an executor or trustee.
Reporter: Carol A. Sobczak Esq.
This session builds on the General Session on the same subject that Mr. Fox presented on Thursday morning. As with that Report, this one too is about the significant highlights. This session used the Model Rules of Professional Conduct and the ACTEC commentaries, and could not be state-specific as to the issues presented. Practitioners are warned to review their own state laws and ethics opinions The issues we all need to consider are: competence, conflicts, communications, compensation, and gifts.
There were 20 case studies, and we cannot discuss them all in this summary, so this reporter will attempt to summarize some of the traps we as attorneys should avoid.
If you represent several generations of the same family, and are asked to do something that may be to the detriment of one generation, first ascertain who is the client, and then make sure you disclose who your client is and perhaps suggest separate representations.
An attorney may represent conflicting interests if (i) he satisfies himself that he can provide competent representation, and (ii) everyone waives the conflict.
If you are asked to represent a beneficiary and an administrator of a holographic will, you may want to be sure that state law will validate such a will. Then any conflict may be waived. The best practice is to acknowledge any conflict in writing and to suggest separate counsel. Think of possible conflicts down the road. It’s easier to decline the representation rather to have problems later.
Conflicts are prevalent in our area of practice, especially with respect to joint representation. We need to identify conflicts and manage them. The advantages of joint representation are that it saves clients money; clients think of us as “family” lawyers; it may be impractical for each party to have a separate lawyer; you can lose clients by suggesting more lawyers; you have history with clients and may be able to better find solutions. Written consent to joint representation is not enough - you need to have discussions with the clients. On the other hand, if all parties consent but you have no writing, it might not be OK.
When you represent a fiduciary, who is client? Majority view is that the fiduciary is the only client. There is disagreement among the states. There is a “privilege exception” that, in trust administration, the beneficiaries are the “real” clients of the lawyer. Beneficiaries may be entitled to all communications if the lawyer who now represents a trustee in litigation was previously representing the trustee in administration.
Does a lawyer owe a duty to his trustee/client to tell him about rumors of an investment he is about to make which would make the investment worthless? Rule 1.4 says a client needs to be kept reasonably informed. Is the lawyer obliged to reveal to a beneficiary what she learned in course of representation? No, but the Restatement says a lawyer who represents a fiduciary where there are beneficiaries who can’t protect their own rights can reveal information to a non-client to the extent the lawyer can prevent a breach of duty where the breach would be a crime or fraud. Check state ethic opinions and model rules since there is variance.
Can you represent two of a decedent’s three children as co-executors of a will and one child as a beneficiary? What if they received unequal shares of the decedent’s estate? Under Rule 1.7 there is a conflict, but the lawyer can represent all parties if she can do so adequately and get informed consent in writing. How to get informed consent?
Later on the clients may say they didn’t give informed consent because they didn’t know all the facts. Do you really want to take this representation where there is potential for dispute? The beneficiaries may not be happy in the future. Even if you get consents, if someone gets unhappy, they’ll say they didn’t know what they were signing.
ACTEC commentaries say a lawyer is precluded to act where interests conflict to a “substantial” degree. With multiple parties, especially where their interests differ, or with co-fiduciaries, you must monitor the relationships during representation.
If a lawyer tries to probate an estate which consists of all joint tenancy property, the lawyer is either incompetent (a violation of the rules) or is violating his ethical duty to the client.
A policy of appointing yourself as fiduciary in a majority of your clients’ wills and trusts is not OK. But you are allowed to tell clients you are available to serve. But always include a trustee removal and replacement clause so it doesn’t seem like it’s lifetime employment for you.
A lawyer should not give advice to unrepresented persons. Rule 4.3 says a lawyer who represents a fiduciary should tell the beneficiaries that he doesn’t represent them and they should seek separate counsel. You should have a meeting with the beneficiaries at the outset of administration and let them know that you don’t represent them.
A lawyer should not solicit any gift or prepare a document on behalf of client that gives the lawyer a gift.
If some children are disinherited, can the lawyer tell them why? Attorney-client privilege survives death of client.
Exception - testamentary exception in restatement - applies even if fiduciary does not consent. If decedent would have wanted full disclosure. See variations in the states.
The bottom line is usually the smell test - if it doesn’t smell right, check the Model Rules, check state law, check your state ethics opinions, and, as my Aunt Blanche used to say, “If in doubt, sit it out.” I think that is the best advice ever.