Around The Water Cooler we typically do not dive into discussions about law review articles.  However, several outstanding law review articles have been published in the past year which deserve the attention of trustees, trust beneficiaries and others involved in the administration of trusts.

  • For the past few years, Adam Hofri-Winogradow has conducted an exhaustive survey of professional trust service providers.  After receiving over 400 responses from professional service providers all over the world (full disclaimer: I was one of the respondents), he has now published his findings in The Demand for Fiduciary Services: Evidence from the Market in Private Donative Trusts.  Hofri-Winogradow focuses his analysis and conclusions on (1) perpetual trusts, (2) trustee exculpatory terms, (3) asset protection, and (4) settlor control of trusts.
  • Decanting has become increasingly prevalent in the trust world.  Trust decanting is the process of distributing assets from one trust to a new trust with different terms.  As Steve Oshins describes the process, “Just as one can decant wine by pouring it from its original bottle into a new bottle, leaving the unwanted sediment in the original bottle, one can pour the assets from one trust into a new trust, leaving the unwanted terms in the original trust.”  Despite its attractions, trust decanting has serious policy implications.  In his new article in the Cardozo Law Review, Stewart Sterk examines these policy implications and the social costs and benefits of decanting in Trust Decanting: A Critical Perspective.
  • In Probate Lending in the Yale Law Journal, David Horton and Andrea Chandrasekher fix their focus on the probate loan industry.  One of the most controversial trends in the American legal system in recent years has been the practice of litigation lending whereby companies pay plaintiffs a lump sum in return for a stake in a pending lawsuit.  As the authors detail, a similar phenomenon has quietly emerged in the probate system.  Companies are advancing funds to heirs in probate proceedings.  The authors determined that during the course of one year in one county in California, probate lending companies loaned $808,500 in exchange for $1,378,786, a return of 69%.

Around The Water Cooler this morning, we’re talking about impact investing, family business succession planning, and estate tax liens.

  • The rise of impact investing poses unique concerns for trustees.  Impact investments are designed to align environmental, social, governance and faith-based goals with an investment portfolio.  Casey Clark and Andy Kirkpatrick examine whether impact investing is compatible with the Uniform Prudent Investor Act in Impact Investing Under the Uniform Prudent Investor Act.
  • The succession of a family business can often be akin to Odysseus’ passage through Charybdis, a treacherous whirlpool, and Scylla, a man-eating, cliff-dwelling monster in Homer’s Odyssey.  Approximately 70% of family businesses fail to successfully transition to the second generation, and 90% fail to successfully transition to the third generation.  In Advising Family Businesses in the Twenty-First Century, Scott Friedman, Andrea HusVar, and Eliza Friedman apply new insights from the fields of social neuroscience and positive psychology and offer a new approach to the succession of family businesses.
  • The IRS has issued Interim Guidance which clarifies the process for obtaining a Release of an Estate Tax Lien.  At the moment of death, an automatic estate tax lien is imposed on a decedent’s property, and the lien attaches to all property of the estate.  If an estate wishes to sell property before receiving closing letters from the IRS, the estate would prepare and file IRS Form 4422, “Application for Certificate Discharging Property Subject to Estate Tax Lien.”  In the summer of 2016, the IRS began requesting additional documentation and requiring that the net proceeds of the sale be paid over to the IRS or held in escrow until IRS closing letters are issued.  In Update on New IRS Release of Estate Tax Lien Requirements, Shaina Kamen and Michael Schwartz detail the Interim Guidance and new requirements.

Around The Water Cooler this morning, we’re talking about investing trust assets, trust distributions for health and education, generation skipping transfer taxes, and the Uniform Fiduciary Principal and Income Act.

  • Emily Bruner offers considerations for investing assets of Grantor Trusts, Non-Grantor Trusts, Insurance Trusts and Charitable Trusts in Investing for Trusts.
  • Griffin Bridgers and Christopher Harrison provide practical insights on trust distributions for the purposes of health and education in Health and Education in Trust Administration.
  • In Diagnosing the GST Tax Status of a Trust, Nathan Brown and Brandon Ross offer an outstanding analysis at the intersection of trusts and generation skipping transfer taxes.
  • A drafting committee of the Uniform Law Commission has been hard at work on the Uniform Fiduciary Principal and Income Act (“UFIPA”), a revised act to the Uniform Principal and Income Act (“UPIA”).  UFIPA retains the power to adjust and the default income and principal allocation rules in UPIA, and UFIPA includes a broad unitrust provision.  The drafting committee should complete its work this summer.

 

 

Around The Water Cooler this morning, we’re talking about trust investments, the importance of updating retirement account beneficiaries, and “directed trusts.”

Around The Water Cooler this morning, we’re talking about “Generative Trusts” and taxes.

  • Many in the trust field have long known of the work of “John A.” Warnick at The Purposeful Planning Institute.  His has long been a wise voice in the field.  If you are not aware of John A.’s work or The Purposeful Planning Institute, I encourage you to check it out.  John A. recently published an excellent piece on Generative Trusts and Trustees as a guest blogger on Holland and Hart’s Fiduciary Law Blog.  As John A. writes, a generative trust is one that could start out with, in the words of Jay Hughes, “This trust is a gift inspired by love, faith and hope.  The paramount purpose of this trust is to nurture the growth and well-being of the beneficiaries.”
  • And now, taxes:

Court Awards Punitive Damages in Breach of Fiduciary Duty Suit Against Regions

A Chancery Court in Mississippi has entered a final Order (as amended) awarding punitive damages to the Plaintiffs in their suit against Regions Bank for breach of fiduciary duty, a case we’ve looked at in the past (see Regions Hit with $4M Judgment over Trust Mismanagement).  The total damage award is $6,464,254 as follows:

  • $3,363,326 actual damages;
  • $1,000,000 punitive damages;
  • $966,740 attorneys’ fees;
  • $175,867 expenses;
  • $958,321 pre-judgment interest at 8% from date suit was filed through the date the Court’s Order on liability was entered;
  • In addition, the Court awarded post-judgment interest at 8% from the entry of its Final Judgment.

Some of the compelling findings of the court include:

  • “[T]his Court finds that the overall breach of duty to be reprehensible.”
  • “Regions knew they were required to conduct a needs analysis, yet they never did.  There were hundreds of transactions conducted over the course of 11 years and not once did Regions take into consideration the needs of Mrs. Sheppard to maintain her present standard of living.  They were giving her money any time she asked for it, distributing principal when income was available in the trust, and they never swept the account.  They violated their own policies and this rises to the level of reckless behavior.”
  • “The court also notes that Regions’ actions and intentional concealment regarding the Trust really set the family on a course that would have been very different if Regions had performed its duties. . .  Evidence reveals that [Regions’] actions had a severe impact on the family and the Trust.  Ironically, the impact on the family Trust was exactly what Mr. Sheppard was trying to ensure never happened.”
  • “A substantial punitive damages verdict would send Regions the message that it cannot utilize a ‘let the buyer beware’ mentality when it serves as a fiduciary.”
  • The trust officer’s supervisor testified that he didn’t properly supervise the trust officer “because he knew very little about trusts.”
  • “Evidence revealed that [the investment manager assigned to the Trust] took orders from Birmingham (Regions’ headquarters) and she never questioned why the entire principal was being disbursed from the trust in such a manner.”

Trustees and Proprietary Products

Elsewhere, over at Bloomberg BNA, Daniel Hauffe looks at another case in Mississippi involving Regions Bank.  In his article, Prudence in Violating the Prudent Investor Act, Hauffe offers some precautionary measures when a Trustee invests trust assets in its own proprietary financial products.

Decanting

At Wealth Management, David Silvian and Phyllis Johnson ask, Do Trustees Have a Duty to Consider Decanting?

High Investment Concentration

Finally, one of the largest banks in the world, Fifth Third Bank, has found itself in the middle of a claim that it failed to diversify the assets of a trust settled by one of the founders of the Standard Register Company.  Margarida Correia explains in Fifth Third Battles heirs of Standard Register Founders.

 

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.

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.