What might the estate tax look like in a Trump administration?  Ashlea Ebeling of Forbes offers an in-depth look at President Elect Trump’s estate tax plan which boils down to repeal of the estate tax (and possibly the gift tax and the generation skipping transfer tax) plus the imposition of a capital gains tax on assets left to heirs over a $10 Million threshold.

 

This is the final installment of a series of posts that examine recent litigation against bank trustees in Mississippi.  For the prior installments, please see Regions Hit with $4M Judgment over Trust Mismanagement and Renasant Settles Trust Mismanagement Litigation.

While it is critical for a corporate Trustee to have a process, it is equally important that a corporate Trustee not only follow its process but also document adherence to the process.  The story that follows demonstrates the result when a corporate Trustee has a process but the process is not followed or documented (and a cover-up ensues).

THE TRUST

When Dr. William Rosenblatt, a prominent physician, passed away in 1991, his Last Will and Testament created a trust for the benefit of his children and grandchildren.  Dr. Rosenblatt appointed Trustmark National Bank to serve as one of the co-Trustees of the trust.  The head of Trustmark’s Personal Trust Department was the trust officer assigned by Trustmark to manage the trusts.

The Last Will and Testament provided that the primary purpose of the trust is “to maintain . . . my children, or their issue . . . in the standard of living to which they are accustomed.”  In order to further the purpose of the trust, the Last Will and Testament required the Trustee to distribute all of the net income to Dr. Rosenblatt’s children, Cy and Dee.  In addition to mandatory distributions of net income, the Trustee had the discretion to invade the corpus of the trust and distribute trust principal in order to meet any “emergency needs” of Cy and Dee in which the trustee in its sole discretion determines and justifies.  Upon the death of Cy and Dee, the trust would then terminate and the assets of the trust would pass to Cy’s children and Dee’s children (the remainder beneficiaries).

From 1991 when Dr. Rosenblatt passed away until 2002, Trustmark distributed all of the net income to Cy and Dee.  Cy and Dee made no requests for principal distributions until 2002, when the trust was split into two trusts, one for Cy and one for Dee.  After the trust was split into two trusts, each trust was valued at approximately $3.8 Million.

THE INVASIONS OF CORPUS

In 2002, Trustmark began to invade and distribute the corpus of Dee’s trust which ultimately sparked litigation.  In 2002, Trustmark made a distribution of principal in the amount of $32,000 so Dee could purchase a Lexus vehicle.  Over the next 6 years, Trustmark invaded the corpus of the trust 150 times and distributed over $1.75 Million to Dee.

The distributions of principal stopped in 2008.  In August of that year, Dee requested a distribution of principal in the amount of $65,000 to pay a bill at a high-end clothing store.  It was at that time that Trustmark contacted one of the remainder beneficiaries, Dee’s daughter Meg, and asked for her consent before Trustmark made the distribution.  When she was informed of the number and amount of principal invasions between 2002 and 2008, Meg was shocked and refused to give her consent to the distribution.  In 2009, Meg sued Trustmark for numerous breaches of fiduciary duty.  Sadly, as seen too often in trust litigation against bank trustees, Trustmark promptly sued the beneficiaries of the trust.

TRUSTMARK’S POLICIES AND PROCEDURES

As the Court noted in its Opinion, whether the 150 invasions of corpus totaling over $1.75 Million were for “emergency needs” as required by the Last Will and Testament will never be known because Trustmark did not follow the proper procedures to find out.  Trustmark’s Policies and Procedures state that committee approval is required if any distribution of income or principal is discretionary and that complete information regarding the beneficiary’s needs, standard of living and other resources shall be considered by the committee members in making the decision to exercise the discretionary distribution.  In addition, The FDIC Audit Manual requires that the reason for each invasion be documented in the file.

Contrary to Trustmark’s Policies and Procedures, committee approval was never sought or obtained for any of the 150 invasions of corpus.   The Court explained the process of invading the trust as such: Dee would leave a voice message with the trust officer who would then give his assistant instructions to transfer funds to Dee.  As the Court noted, “this all occurred without Trustmark following any of its procedures.”

Likewise, contrary to the FDIC Audit Manual requirement that the reason for each invasion be documented in the trust file, Trustmark had no forms or documentation on any of the 150 corpus invasions.

THE COVER-UP

Since he had not received committee approval for or documented any of the 150 invasions of corpus, the head of Trustmark’s Personal Trust Department forged “Request for Encroachment” forms which contained the signatures of other trust officers.  He then placed these forms in the minutes of the Administrative Committee in order to create the appearance that the committee in fact did approve the 150 invasions of corpus.

THE COURT’S RULING

In a scathing Opinion, the Court found Trustmark liable for multiple breaches of fiduciary duty.  In so finding, the Court described Trustmark’s actions as “willful, grossly negligent and overall egregious,” “grossly derelict,” and “reckless and egregious.”

THE DAMAGES

The Court imposed the following damages:

  • Removed Trustmark as the Trustee;
  • Imposed a surcharge on Trustmark in the amount of $1,755,750;
  • Charged Trustmark interest at a rate of 3% compounded annually for each and every invasion of corpus, beginning on the last day of the year in which each distribution was made (a total of approximately $300,000);
  • Awarded the Plaintiff all of her Attorneys’ fees (a total of $321,630);
  • Charged all costs to Trustmark;
  • Charged post-judgment interest against Trustmark; and
  • Awarded the Plaintiff punitive damages in the amount of $100,000.

The Court specifically noted that a punitive damage award of $100,000 is “nominal considering Trustmark’s egregious conduct and substantial net worth.”  The Court found that Meg benefitted from some of the trust distributions, e.g., for her wedding.  The Court held that “had Meg not benefitted from Trustmark’s grossly negligent conduct, an award of punitive damages would likely have been greater.”

Around The Water Cooler this morning, we’re talking about inflation and Clinton vs. Trump on the estate tax:

  • Thompson Reuters has released its projected inflation-adjusted Estate, Gift, and Generation-Skipping Transfer (GST) Tax Exemptions:
    • Estate, Gift, and GST Tax Exemptions:  $5,490,000 (up from $5,450,000 in 2016)
    • Gift Tax Annual Exclusion:  $14,000 (the same as in 2016)
    • Special Use Valuation Reduction Limit:  $1,120,000 (up from $1,100,000 in 2016)
    • Amount of estate tax deferral on farm or closely-held business interests:  $1,490,000 (up from $1,480,000 in 2016).

Around The Water Cooler this morning, we’re discussing the ongoing Benson litigation, House and Senate Republicans respond to IRC Section 2704 Proposed Regulations, and tax appointment clauses through the lens of the Tom Clancy Estate.

Just when you thought the Benson litigation involving the New Orleans Saints and New Orleans Pelicans was over, it picks back up.  As Gal Kaufman explains, the matter is now heading back to court to wrestle over the swap powers in the trusts and the valuation of the nonvoting interests in the professional sports teams.

In response to the Proposed Regulations under IRC 2704 which would severely limit valuation discounts associated with family limited partnerships and limited liability companies, House and Senate Republicans called for Treasury Secretary Lew to not move forward with the proposed regulations and have introduced legislation which would quash the proposed regulations.

Jean Stewart takes us through the Tom Clancy Estate litigation which highlights the importance of tax apportionment provisions particularly in blended families.

This is the second installment of a series of posts that examine recent litigation against bank trustees in Mississippi.  To read the first, please see Regions Hit with $4M Judgment over Trust Mismanagement.

 

Thomas Longnecker was the long-time owner and president of The Amory Garment Company, a garment manufacturing business based in Amory, Mississippi.  At the time of Thomas’ death, the company was the oldest industry and the largest employer in Amory.  After Thomas’ death and in the wake of NAFTA, the company experienced large scale layoffs and was eventually sold for $20 million.

Thomas’ Last Will and Testament created a number of trusts for his wife, daughter, and grandchildren, and Thomas’ widow, Margaret, established a trust for their daughter and grandchildren and a partnership with their grandchildren.

As a result of its 60-year history with the Longnecker family, The Peoples Bank and Trust Company (now Renasant Bank) was appointed to serve as a trustee of the various trusts created by Thomas and Margaret.  One of the fundamental duties of a trustee is to prudently invest the assets of the trust.  Based on the testimony of the bank’s representative (its “30(b)(6) designee”), in the 1980’s Renasant saw the use of investment managers as a way to grow the bank.  The bank thought it could avoid the costs and contingent liabilities of a fiduciary by delegating its investment responsibility as a trustee to outside investment advisors.  At the same time, the bank thought it could split fees with the outside investment advisors and still recognize substantial income from its trust department.

Based on this philosophy, Renasant recommended to Lisa Donovan and her children (Thomas and Margaret’s daughter and grandchildren and the beneficiaries of the various trusts) that Oakwood Capital Management, an investment management firm based in Los Angeles, handle the investment of the trust assets.  Oakwood recommended its Concentrated Value Equity Strategy, and Renasant employees claimed that the Oakwood Strategy would be “very conservative” and “very safe.”  Renasant then entered into Investment Management Agreements which delegated its trust investment duties to Oakwood who would have full power “to supervise and direct the investments” of the various trusts.

A large portion of the trust assets were invested in Oakwood’s Concentrated Value Equity Strategy.  The majority of the assets in the Concentrated Value Equity Strategy were invested in Doral Financial Corporation, whose primary asset was Doral Bank, a bank based in Puerto Rico that originated and securitized mortgages.  After revelations surfaced that Doral Bank was engaged in accounting fraud (described by Renasant as “a massive Enron-style fraud”), the price of Doral Financial Corporation shares collapsed (from $49 per share to $15 per share) and the value of Oakwood’s Concentrated Value Equity Strategy plummeted.  As a result, the various trusts and related entities lost approximately $1.8M.  Doral Bank was later closed by government regulators and Doral Financial Corporation filed for Chapter 11 bankruptcy.

The trust beneficiaries filed suit against Renasant (and Oakwood) and claimed that Renasant breached its duty to prudently invest the trust assets, breached its duty to diversify the trust assets (55% of the stocks owned by the trusts were invested in one company, Doral Financial Corporation), and breached its duty to monitor Oakwood.

Since the litigation settled halfway through trial, there is no ruling on liability issues like lack of diversification, imprudent delegation and monitoring, and failure to prudently invest the assets of the trusts.  However, several facets of the litigation are worth highlighting:

  • As Trustee of the trusts established for the grandchildren of Thomas and Margaret Longnecker, Renasant made a number of distributions to the grandchildren.  Those distributions were subject to generation-skipping transfer taxes (“GSTT”).  However, as seen all too often with other trusts, Renasant never provided annual notices to the grandchildren that the distributions were subject to GSTT and failed to provide the annual IRS forms.  Renasant admitted as much in its publicly filed pleadings.  In fact, at that time, Renasant did not even know that the distributions were subject to GSTT, and one trust officer went so far as to testify that he did not remember addressing GSTT on any of the trusts administered by Renasant from 1999-2004.
  • The attorney for the beneficiaries adroitly subpoenaed the reports of all relevant examinations of Renasant Bank from both the FDIC and the Mississippi Department of Banking and Consumer Finance.  The Commissioner of the Mississippi Department of Banking and Consumer Finance resisted the subpoena by filing a Motion to Quash.  The FDIC, on the other hand, did comply with the Subpoena and although it took approximately two years, the FDIC did in fact produce the reports of all relevant examinations of Renasant Bank.
  • The Investment Management Agreements contained an arbitration clause.  The beneficiaries first filed a claim for arbitration against Oakwood and Renasant in Los Angeles.  The beneficiaries then filed suit against Oakwood and Renasant in the Chancery Court of Monroe County, Mississippi.  Renasant promptly filed a petition for injunctive relief.  The Chancery Court granted Renasant’s petition and ordered the beneficiaries to pursue claims against Renasant solely in the Chancery Court of Monroe County.  Likewise, Oakwood filed a Motion for an Order Compelling Arbitration.  After the Chancellor denied Oakwood’s Motion, Oakwood took an interlocutory appeal to the Mississippi Supreme Court which reversed the Chancellor’s ruling and entered a judgment compelling arbitration and staying litigation of all claims against Oakwood in Monroe County Chancery Court.  So, in essence, the beneficiaries were put in the unenviable and expensive position of having to maintain the arbitration claims against Oakwood in California while at the same time pursuing claims against Renasant in Monroe County Chancery Court.
  • Among other arguments, Renasant actually maintained that it “delegated investment advisory and management functions to Oakwood, and is therefore not responsible for any damages suffered in whole or in part by the [beneficiaries].”  Even if the delegation was prudent, Renasant had a continuing duty to monitor Oakwood.
  • Finally, in what might best be characterized as travelling “through the looking glass,” outside counsel who defended Renasant Bank in the matter was also a member of the bank’s Board of Directors.

Around The Water Cooler this morning, we’re discussing trustees gone wild, exculpatory clauses, and presidential politics.

  • It appears that the democratic ticket in this year’s general presidential election is not the only candidate who might have issues with a private foundation.  In Bloomberg BNA, staff reporter Colleen Murphy details alleged self-dealing at the Trump Foundation.
  • In Lexology, Luke Lantta at Bryan Cave details and provides commentary on In re Scott David Hurwich 1986 Irrevocable Trust, an Indiana case in which the state Court of Appeals limited the relief from liability provided by an exculpatory clause in the trust agreement.
  • Dawn Markowitz, legal editor at Trusts & Estates, provides an in depth analysis of a court opinion handed down this month in the Southern District of California which found personal liability for unpaid estate taxes.

Courthouse Columns with The Statue of Justice

This is the first in a series of posts that will examine recent litigation against bank trustees in Mississippi.

After five years of litigation, last week a Chancery Court in Mississippi found that Regions breached numerous fiduciary duties with respect to the administration of the Patricia Hall Sheppard Trust and ordered Regions to pay in excess of $4M.  (for full text of Court Orders, see Order and Opinion on liability and Order and Opinion on damages)

Facts

J. E. (“Buddy”) Sheppard, Sr. departed this life in 1997 leaving behind his wife, Patricia, and two children, Victoria and Bud. Buddy’s Last Will and Testament established a trust for the benefit of Patricia, and he appointed Deposit Guaranty National Bank, which through mergers and acquisitions became Regions, as the Trustee. The terms of the Last Will and Testament require that the Trustee distribute all of the net income, at least annually, to Patricia.  In addition, the Trustee may distribute trust principal only if one of three conditions were met: (1) the net income is insufficient to enable Patricia to maintain her standard of living, (2) an emergency arises, or (3) Patricia has any health care needs.  Upon Patricia’s death, 80% of the remaining trust property would be held in trust for the benefit of the children, Victoria and Bud.

The trust established for Patricia’s benefit was funded in 1998 with approximately $2.5M in liquid assets and 33 residential rental properties, which the court characterized as “the largest rental property portfolio in Mississippi.”  Regions served as trustee from 1998 to 2011 when Patricia removed the bank as trustee and brought suit against Regions.

While the Court found many breaches of fiduciary duty, two are particularly concerning; those concerning distributions of principal and management of the real estate.

Distributions of Principal

The regular operating procedure was to give Patricia anything she asked for and he had no idea how Patricia spent the money that was disbursed.

During the time that Regions administered the trust, Patricia thought that she was receiving only distributions of income from the trust.  In fact, Regions began distributing principal from the very outset of the trust, in 1998.  In 2009, a trust officer informed Patricia that the trust principal had been severely eroded and that the liquid assets were worth less than a million dollars at the time.  In fact, in the 13 years that Regions administered the trust, the trustee distributed trust principal 765 times in a total amount of $3,617,250.  What makes matters worse is that while Regions was distributing trust principal, it was not even distributing all trust income, as mandated by the Last Will and Testament, in a number of years.

None of the distributions of trust principal were for emergency needs and only $10,898 were for health care related expenses.  Presumably, the other distributions were to enable Patricia to maintain her standard of living.  However, as the Court notes in its Opinion, “Regions never ascertained what [Patricia’s] standard of living consisted of”; that is, Regions never performed a needs analysis or determined what expenses Patricia had.  As the trust officer testified, the regular operating procedure was to give Patricia anything she asked for and he had no idea how Patricia spent the money that was disbursed.  The investment officer assigned to the trust testified that “we’d make distributions whenever she asked.”  As the Court observed, Regions could never determine if the principal disbursements were maintaining Patricia’s standard of living because Regions never knew what her standard of living actually was.

Management of the Real Estate

The words reasonable and prudent are not synonymous with loosey-goosey.

Shortly after Regions began administering the trust, the bank delegated management of the real estate to Orville Hall, Mrs. Sheppard’s brother.  As such, Orville was responsible for collecting rent, making repairs, and documenting vacancy rates.  In delegating one of its functions as the trustee, Regions had a duty to exercise reasonable care in delegating management of the real estate and had a duty to review and monitor the agent’s actions.  Regions’ failure in this regard is alarming.  The Bank’s own in house trust real property manager testified that he:

  • Did not know if anyone at the Bank was checking to ensure all rental payments were accounted for;
  • Did not review Orville’s invoices;
  • Did not know if Orville’s invoices for services and repairs were reasonable;
  • Never monitored the net income of the rental property;

When asked if Regions’ management of the real property could be described as “loosey-goosey”, the Bank’s in house trust real property manager replied, “some of the procedures seemed to be a little on the lax side.”  The court found that “the words reasonable and prudent are not synonymous with loosey-goosey.”  Regions own expert witness testified that Regions did not have definitive rules, but testified that that was not necessarily a bad thing and that only the bottom line counts.  As the court noted, “that sentiment is not correct in the terms of the duties that a trustee has with its beneficiary.”

In 2010, Regions began an investigation into the trust to determine if someone within the trust department was stealing money.  The Bank’s internal investigator determined that Orville was reporting that rent was collected but that the rent was not accounted for in the bank’s records.  In his report, the Bank’s internal investigator determined that the real estate was not being handled properly and that there was a failure of institutional controls.  The investigator submitted his report to the Bank’s Human Resources department and assumed that Human Resources would meet with the trust department to discuss the report and make necessary changes within the trust department.  However, the Human Resources Department never forwarded the report to the trust department and the Bank’s own in house trust real property manager testified that he saw the report for the first time on the witness stand.  Not surprisingly, Orville, who in fact was not a licensed real estate broker, had little to no experience managing real estate, and spent most of his time in Tennessee while all of the real property was located in central Mississippi, disappeared while the Bank’s internal investigation was ongoing.

Damages

After entering its Order finding liability, the Court appointed two special masters to assess damages.  One of the special masters resigned, and the other special master amended his report a number of times before submitting a final report.  The Court adopted the special master’s final report and awarded damages in the amount of $3,363,026 plus prejudgment interest in the amount of 8%, for a total of over $4M.

Around the Water Cooler this morning, we look at decanting (of trusts, not wine), a fascinating story of business succession done well from Canada, the 100th anniversary of the estate tax and September interest rates.

Finally . . . September interest rates.  The current § 7520 rate for use with estate planning techniques such as GRAT’s, CRT’s, CLT’s, and QPRT’s is 1.4%. The applicable federal rate (“AFR”) for use with an intra-family loan having a duration of 3 – 9 years, a sale to a defective grantor trust,  or a self-canceling installment note (“SCIN”) is 1.22%.

The low § 7520 and applicable federal rates continue to present planning opportunities with GRAT’s, sales to defective grantor trusts, SCIN’s and intra-family loans with depressed assets that are expected to perform better in future years.

On August 2, 2016, the IRS issued proposed regulations which would eliminate a common estate tax planning technique for transfers of ownership interests in family-controlled entities, like family limited partnerships and family limited liability companies.  Holly Bastian and Lynn Pearle describe the proposed regulations and the impact on planning in Lexology.

Leah McElmoyl describes “The Top Five Responsibilities of a Trustee of a Special Needs Trust” in JDSupra.

In the Madison State Journal, Dan Caplinger writes about a common estate tax planning technique, the Irrevocable Life Insurance Trust.

The CPA Practice Advisor offers another look at the benefits of Irrevocable Life Insurance Trusts.

Forbes highlights the need for trust planning for minor children.

Shawn Gardner writes about Trust Protectors, an increasingly common tool in estate and trust planning, in the Yuma Sun.

In ThinkAdvisor, Adrienne Penta offers Top 5 Tips for Nonprofessional Trustees.

  • Wrapping up The Water Cooler this morning, two stories at the intersection of presidential politics and the world of exempt organizations:

As first reported by Richard Pollock of the Daily Caller, the IRS Commissioner has referred congressional charges against The Clinton Foundation to the IRS exempt organizations office for investigation; and

In Nonprofit Quarterly, Erin Bradrick offers her perspective on Donald Trump’s rhetoric calling for the repeal the Johnson amendment.