How Parents Keep Control Both During Their Lifetimes And After They Are Dead
Upcoming SlideShare
Loading in...5
×
 

How Parents Keep Control Both During Their Lifetimes And After They Are Dead

on

  • 281 views

Irrevocable trusts are required if you want to engage in estate tax planning, asset protection planning (creditor planning) and even in a great deal of income tax (including capital gains tax) ...

Irrevocable trusts are required if you want to engage in estate tax planning, asset protection planning (creditor planning) and even in a great deal of income tax (including capital gains tax) planning. However, parents are not thrilled at the idea of having to give away assets to a trust that they cannot revoke!! Do you mean that they can't change it? What if they change their minds about their children? About the trustee? Happily, there are many ways to make the parents comfortable that even though the trust itself is unable to be revoked, it is flexible. The parents, of course, pick as the initial trustee the person they trust to do whatever he or she is told without question but simply out of loyalty. More importantly, the parents can - at any time, without a reason - remove the trustee and name a new one (as long as the new one is not "related or subordinate" as defined in IRC Section 672(c)). The parents can advise the trustee to drop the assets down into a single member LLC and appoint the parents as the non-managing members. The trust can have a protector who can be given the power to remove the trustee; to change the allocation among the children; to add grandchildren and spouses of heirs and charities as beneficiaries; to change the manner of distribution to the heirs. Under California law if all of the beneficiaries and the grantors agree, they can amend an irrevocable trust without having to go to court. There are also other ways to change an irrevocable trust, e.g., decanting to a new trust with better provisions. The trust can start off as a grantor (disregarded) trust for income tax purposes and it can "flip" or "toggle" to a complex trust and, perhaps, flip back again. So, the goal of this presentation is to make people aware that there are ways to make parents comfortable with irrevocable trusts, without which planning would be difficult, if not impossible.

Statistics

Views

Total Views
281
Views on SlideShare
280
Embed Views
1

Actions

Likes
0
Downloads
2
Comments
0

1 Embed 1

https://twitter.com 1

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

How Parents Keep Control Both During Their Lifetimes And After They Are Dead How Parents Keep Control Both During Their Lifetimes And After They Are Dead Presentation Transcript

  • May 1, 2014 How Parents Keep Control Both During Their Lifetimes And After They Are Dead Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 1
  • How Parents Keep Control Table of Contents Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 2 1. Introduction: The Problem. p. 5 2. Why Do Clients Dislike Irrevocable Trusts? p. 6 3. What Happens As A Result Of No Flexibility? p. 7 4. The Formula. p. 8 5. What Clients Will Do If They Feel Comfortable. p. 9 6. Jump Right In: The Completed Gift Asset Protection Trust. p. 10 6.1. Direction Of The Lifetime Exclusion. p. 11 6.2. Rule Against Self-Settled Spendthrift Trusts. p. 13 6.3. Cook Islands SSST Rule. p. 14 6.4. Nevada SSST Rule. p. 15 6.5. Diagram 1. p. 16 6.6. Diagram 7. p. 22 6.7. Diagram 8 p. 23 7. List of Techniques. p. 24 8. A Summary. p. 27 8.1. How Can Grantor Retain Powers Directly? p. 28 8.2. How Can Grantor Retain Powers Jointly? p. 29 8.3. How Can Grantor Retain Powers Through A Trustee? p. 30 8.4. How Can Grantor Retain Powers Through A Protector? p. 32 8.5. How Can Grantor Retain Powers Through Others? p. 33 9. Another Way Of Classifying Ways To Retain Control. p. 34 9.1. Change The Control Person. p. 35 9.2. Change The Donees/Beneficiaries. p. 36 9.3. Change How And When They Get Their Gift/Inheritance. p. 37
  • How Parents Keep Control Table of Contents [continued] Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 3 10. Danger Of Too Much Control. p. 39 10.1. In re Yerushalmi. p. 40 10.2. In re Schwarzkopf. p. 41 11. Technique 1: Rev. Rul. 95-58. p. 43 11.1. Sample Trust Language. p. 44 11.2. IRC Section 672(c). p. 53 11.3. Diagram. p. 54 12. Technique 2: State Law. p. 55 12.1. California Probate Code. p. 56 12.2. Maine Probate Code. p. 62 12.3. Other States. p. 64 13. Technique 3: Protectors. p. 65 13.1. What Is A Trust Protector? p. 66 13.2. Nevada Statutes. p. 67 14. Technique 4: Single Member LLCs. p. 72 14.1. Three Types Of Liability. p. 74 14.2. Diagrams. p. 81 14.3. Variation 1: SMLLC with SSST. p. 85 14.3.1. Vanilla Structure. p. 86 14.3.2. APT Structure. p. 88 14.3.3. Why In California We Use Nevada Law. p. 89 14.4. Variation 2: The Very Best Structure. p. 91 14.5. Variation 3: Partnership (Or LLC) To Own An Insurance Policy. p. 93
  • How Parents Keep Control Table of Contents [continued] Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 4 15. Technique 5: Private Trust Company. p. 95 15.1. Letter To Nevada Financial Institutions Division. p. 96 15.2. Approval Letter From F.I.D. p. 97 15.3. California. p. 98 15.4. Diagram. p. 102 16. Technique 6: Grantor Trust Flip Switch. p. 104 16.1. Non-Equation. p. 105 16.2 Powers Used To Achieve Grantor Trust Status. p. 108 16.3. IRC Section 675(4)(C): Reacquire Trust Corpus. p. 110 16.4. IRC Section 677(a)(3): Use Trust Income To Buy Insurance On Grantor’s Life. p. 112 16.5. The Switch. p. 113 17. Technique 7: Powers Of Appointment. p. 115 17.1. IRC Section 2041. p. 116 17.2. Sample Trust Language. p. 117 18. Technique 8: Trustee’s Decanting Powers. p. 118 19. Technique 15: The Bar Mitzvah DVD. p. 121 20. Sample Irrevocable Trust Maintenance Program. p. 125 21. Final Advice On How To Control Children: A Good Whipping. p. 126 22. Questions And Answers. p. 128
  • How Parents Keep Control: The Problem Parents are used to being in dictatorial control while they are alive. On the other hand, trusts must be irrevocable for estate tax and asset protection purposes. So people often get turned off the moment the word "irrevocable“ comes up. And, even when people move forward with an irrevocable trust, they often regret it later when they realize it can't be changed! And if the client can't change a trust later the advisor may regret it too, especially when the trust may later need to be adapted to new estate tax laws. We’ll see how flexibility can be built into irrevocable trust. Also, some parents do not like to contemplate what will happen with their wealth after they are gone. Will their children and later issue dissipate the wealth unwisely? We’ll see how the parents can retain control even from the grave if they wish. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 5
  • How Parents Keep Control Why Do Clients Dislike Irrevocable Trusts? Why do I want to transfer (give away) assets to a trust (which does not benefit me) where I can’t (in the future) change my mind? What if I decide in 10 years that I don’t like the Trustee? What if the Trustee stops doing what I tell him (or her) to do? What if I no longer like my kids and I want to leave the assets to my grandchildren? Or to charity? Or what if I want to cut out one of my children and leave it to the other two? What if I want to change the manner of distribution? Instead of outright on the death of the survivor of the two of us, I want the kids to get income only until they are 50, and then 1/3rd of the principal at 50, 60 and 70? What if I now want to make provision for the children of my second marriage? And for my second wife? And for my favorite charity? Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 6
  • How Parents Keep Control What Happens As A Result Of No Flexibility? (i) The client may decide “to he## with planning, I’d rather keep control.” (ii) The client may decide to postpone planning until he can feel comfortable with the people and the decision. (iii) The client may decide to set up the structures and then subvert them by, when later dissatisfied, having the cooperative trustee transferring the money back to the client/grantor/donor. (Exposing the trustee to the wrath of the beneficiaries when the IRS or a creditor succeeds in striking down the tax or creditor protection benefits.) Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 7
  • How Parents Keep Control All Tax And Asset Protection Planning Involves This Formula: “own” control “own” is a technical term, strictly defined. “Control” is a common English word which the clients understand. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 8
  • 9 If you are successful in ameliorating your clients’ fears, then they will be more comfortable proceeding with the important planning that they need, including: 1. irrevocable insurance trusts; 2. grantor retained annuity trusts; 3. qualified personal residence trusts; 4. domestic asset protection trusts; 5. foreign asset protection trusts; 6. charitable lead and annuity trusts; 7. charitable remainder unitrusts and annuity trusts; 8. self-cancelling installment notes; 9. private annuities; 10. SCIN-GRATs; 11. private foundations and public charities; 12. family limited partnerships and FLLCs; 13. etc. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 9 How Parents Keep Control
  • 10 Completed Gift Asset Protection Trust Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 10 How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 11 $5,340,000 Lifetime Exclusion per person. At a 2.5% COLA: 2015 $5,470,000? 2016 $5,610,000? 2017 $5,750,000? 2018 $5,895,000? 2019 $6,042,000? Completed Gift Asset Protection Trust How Parents Keep Control
  • No Man’s Fortune Is Safe As Long As Congress Is In Session Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 12 Completed Gift Asset Protection Trust How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 13 California’s Rule against Self-Settled Spendthrift Trusts is in Probate Code §15302(a): “If the settlor is a beneficiary of a trust created by the settlor and the settlor's interest is subject to a provision restraining the voluntary or involuntary transfer of the settlor's interest, the restraint is invalid against transferees or creditors of the settlor. The invalidity of the restraint on transfer does not affect the validity of the trust.” See §112.035 of the Texas Property Code: “if the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.” Completed Gift Asset Protection Trust How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 14 Typical offshore law permitting self-settled spendthrift trusts is 13F(1) of the Cook Islands International Trusts Act provides as follows: “For the purposes of this Act, and notwithstanding any rule of law or equity to the contrary, it shall be lawful for an instrument or disposition to provide that any estate or interest in any property given or to be given to any beneficiary shall not during the life of that beneficiary, or such lesser period as may be specified in the instrument or disposition, be alienated or pass by bankruptcy, insolvency or liquidation or be liable to be seized, sold, attached, or taken in execution by process of law and where so provided such provision shall take effect accordingly.” See also §13C, entitled “Retention of control and benefits by settlor.” Completed Gift Asset Protection Trust How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 15 The general tone of Nevada’s protection for spendthrift trusts is evident in N.R.S. §166.120(2): “Payments by the trustee to the beneficiary shall be made only to and into the proper hands of the beneficiary and not by way of acceleration or anticipation, nor to any assignee of the beneficiary, nor to or upon any order, written or oral, given by the beneficiary, whether such assignment or order be the voluntary contractual act of the beneficiary or be made pursuant to or by virtue of any legal process in judgment, execution, attachment, garnishment, bankruptcy or otherwise, or whether it be in connection with any contract, tort or duty.” However, there is a great deal of other such supportive language. Completed Gift Asset Protection Trust How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 16 Completed Gift Asset Protection Trust Diagram 1 “As Is” Harold and Wanda $20,000,000 Estate How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 17 Completed Gift Asset Protection Trust Diagram 2 Harold and Wanda Self-Settled Spendthrift Trust (in the state in which the trustee is located) Establish The Domestic Asset Protection Trust Trust Company (NV or AL) (i) heirs of H and W (ii) charities discretion to: (iii) Harold and Wanda Grantors (Settlors) (Trustors) Co-Trustee #1 Beneficiaries Trusted Best Friend Co-Trustee #2 How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 18 Completed Gift Asset Protection Trust Diagram 3 Harold and Wanda Self-Settled Spendthrift Trust (in state in which trustee is located) Fund The Domestic Asset Protection Trust Trust Company & Best Friend (i) heirs of H and W (ii) charities discretion: (iii) Harold and Wanda Grantors (Settlors) (Trustors) Co- Trustees Beneficiaries $8,000,000 (they used their previous $1,000,000 exclusions - now they file new 709s) How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 19 Completed Gift Asset Protection Trust Diagram 4 SSST Establish The Single Member LLC Trust Company & Best FriendCo- Trustees $8,000,000 Single Member LLC (in state in which trust is located) How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 20 Completed Gift Asset Protection Trust Diagram 5 Option - Establish A Private Trust Company Trust Company (Nevada or Alaska) Harold and Wanda Nevada Heirs’ Trust Step 1: Grantors (Settlors) (Trustors) Step 2: Sole Shareholder How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 21 Diagram 6 Establish The PTC’d SSST Trust Company (Nevada Unregulated) Harold and Wanda Nevada Heirs’ Trust Grantors Self-Settled Spendthrift Trust (in state in which trustee is located) Trustee (i) heirs of H & W (ii) charities (iii) H & W Beneficiaries Completed Gift Asset Protection Trust How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 22 Completed Gift Asset Protection Trust Diagram 7 Establish The LLC For The PTC’d SSST Trust Company (Nevada Unregulated) Self-Settled Spendthrift Trust (in the state in which the trustee is located) Trustee (i) heirs of H & W (ii) charities (iii) H & W Beneficiaries Single (?) Member LLC (in same state in which trust is located) (H&W are non-member managers) How Parents Keep Control
  • Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 23 Completed Gift Asset Protection Trust - NNG Diagram 8 If You Want A Nevada Non-Grantor Trust (to avoid California income tax on non-California source income) Trust Company (Nevada Unregulated) Self-Settled Spendthrift Trust (in the state in which the trustee is located) Trustee Contingent beneficiaries: (i) heirs of H & W (ii) H & W Single (?) Member LLC (in same state in which trust is located) (H&W are non-member managers) How Parents Keep Control
  • How Parents Keep Control List of Techniques Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 24
  • How Parents Keep Control (i) Rev. Rul. 95-58: grantor changes trustee. (ii) State Law, e.g., Cal. Prob. Code §§15403 and 15404. (iii) Protectors (powers limited only by imagination). (iv) Single Member LLCs. (v) Private Trust Company. (vi) Grantor Trust Flip Switch. (vii) Powers of Appointment. (viii) Trustee’s “decanting” powers, e.g., to change trust situs. (ix) Trustee’s power to change trust due to tax laws. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 25
  • How Parents Keep Control (x) Trustee’s power to terminate trust and distribute as needed. (xi) Distribution advisor. (xii) Distribution trustee (to create a “beneficiary controlled” trust). (xiii) Selling assets from one trust to another (common with ILITs). (xiv) Independent Board Of Directors. (xv) The Bar Mitzvah DVD. (xvi) Charitable Foundation to give post-mortem control. (xvii) Extended distribution provisions, including incentive distribution, drug and cult clauses. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 26
  • How Parents Keep Control A Summary 1. Grantor can retain power directly. 2. Grantor can retain power jointly. 3. Grantor retain power indirectly through: 3.1. Trustee; 3.2. Protector; or 3.3. Others. The assignment of a technique to a particular category is ultimately arbitrary, as some techniques might be appropriate in more than one category, e.g., one technique labeled “directly” might be viewed as “jointly”. But having categories helps us think about them. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 27
  • How Parents Keep Control How Can The Grantor Retain Powers Directly? 1. Rev. Rul. 95-58: grantor changes trustee and names new one (as long as the new one is not “related or subordinate.” IRC Section 672(c). 2. Single Member LLCs. 3. Grantor Trust Flip Switch. 4. Powers of Appointment. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 28
  • How Parents Keep Control How Can The Grantor Retain Powers Jointly? 1. State Law, e.g., Cal. Prob. Code §§15403 and 15404. 2. Private Trust Company. 3. Selling assets from one trust to another (common with ILITs). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 29
  • How Parents Keep Control How Can The Grantor Retain Powers Through A Trustee? 1. Trustee’s “decanting” powers, e.g., to change trust situs. 2. Trustee’s power to change trust due to tax laws. 3. Trustee’s power to terminate trust and distribute as needed. 4. Distribution trustee (to create a “beneficiary controlled” trust). 5. Extended distribution provisions, including incentive distribution, drug and cult clauses. 6. Powers which are not “against” the beneficiaries. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 30
  • How Parents Keep Control There are two types of fiduciaries: The one who acts after you are dead. That is the person whose judgment you respect. The one who acts while you are alive. That is the person who asks “how high?” when you say “jump.” We explain the difference to our clients. We can draft the documents so that upon the client’s death or incapacity, the one who asks “how high?” is automatically removed in favor of the one whose judgment is trusted. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 31
  • How Parents Keep Control How Can The Grantor Retain Powers Through A Protector? Powers limited only by imagination. Examples: 1. Anti-beneficiary provisions, e.g., increase or decrease a beneficiary’s share. 2. Remove or add a beneficiary. 3. Remove or appoint a trustee. 4. Direct or veto a trust distribution. See NRS Section 163.5547 for the definition of “protector” and 163.5553 for the powers of a protector. See 12 Del. C. Section 3313 regarding advisers in general, and (f) in particular regarding protectors. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 32
  • How Parents Keep Control How Can The Grantor Retain Powers Through Others? 1. Independent Board Of Directors. 2. Beneficiary’s Powers of Appointment. 3. Charitable Foundation to give post-mortem control. 4. The Bar Mitzvah DVD. 5. Direct or veto a trust distribution. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 33
  • How Parents Keep Control Another Way Of Classifying The Ways To Retain Control The Grantor Can: 1. Change the control person. 2. Change the donees/beneficiaries. 3. Change How And When Beneficiaries Get The Gifts Or Inheritance. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 34
  • How Parents Keep Control How Can Clients Be The Control Person Or Retain The Right To Change The Control Person? 1. Rev. Rul. 95-58. IRS approves grantor’s power to change trustees without causing estate tax inclusion. 2. Irrevocable trust owns an LLC of which the parent is the non- member manager. 3. Protectors. 4. Grantor Trust “Flip” Switch. 5. Extended distribution provisions. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 35
  • How Parents Keep Control How Can Clients Change The Donees/Beneficiaries? 1. Protectors. 2. Power Of Appointment. 3. Private Trust Company. 4. State Law, e.g., Cal. Prob. C. §§15403 and 15404. 5. Selling assets from one trust to another. 6. Extended distribution provisions, including incentive distribution, drug (including testing) and cult clauses. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 36
  • How Parents Keep Control How Can Clients Change How And When Beneficiaries Get Gifts or Inheritance 1. Protectors. 2. Power Of Appointment. 3. Private Trust Company. 4. State Law, e.g., Cal. Prob. C. §§15403 and 15404. 5. Selling assets from one trust to another. 6. Extended distribution provisions, including incentive distribution, drug and cult clauses. 7. Irrevocable trust owns an LLC of which the parent is the non-member manager. 8. Grantor Trust “Flip” Switch. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 37
  • How Parents Keep Control Caution: Do not leave your children liquid assets. If you do, they will drink them. (We do not represent the children. We consider treating the children as the enemy; as the parents age the children may well become that to their parents; as the parents age, the children think they are smarter than their parents. Also, you want the children – or the trustee of the children’s trust, to be represented by separate counsel for estate and gift tax purposes.) Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 38
  • How Parents Keep Control Caution: Danger Of Too Much Control Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 39
  • How Parents Keep Control In re Yerushalmi 2009 WL 2982964, Bkrtcy. E.D.N.Y. (Sept. 14, 2009) In 1995 the Yerushalmis consulted an estate planning lawyer purported to plan for the long-term care of their youngest son, Danny, who was diagnosed with dysautonomia, a terminal disease. They said that the family attorney advised they to create a QPRT. H transferred his interest in the residence to W, and W transferred the entire residence to the QPRT on May 9, 1996. Danny died in 2002. H and W filed for divorce in 2003. On April 10, 1998, a former law partner of H sought an accounting due to alleged diversion of receivables. Nine years later there was a judgment against H. Four months later H filed for Chapter 11. Three months later it was converted to Chapter 7. Fifteen months later the BK Trustee filed to avoid the transfers to the QPRT or recover the $2.5 million judgment on the ground the transfers were fraudulent. Since his fraudulent conveyance argument was barred by the 6 year statute of limitations, the trustee amended his complaint to pierce the veil of the trust and declare that it was H’s alter ego. The court allowed the claim to proceed, indicating that it was subject to a 20 year statute of limitations on enforcement of judgments. Note: when finally tried the alter ego claim was denied. Case No. 807-72816-reg, Nov. 19.2012. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 40
  • How Parents Keep Control In re Schwarzkopf No. 08-56974 (November 23, 2010, Ninth Circuit) Debtors created the Apartment Trust and the Grove Trust on June 15, 1992. They named their minor child Sydnee beneficiary and appointed Juan Briones trustee. They transferred stock of a worthless corporation to the Apartment Trust and a time when they were insolvent. The court also found that it was done for fraudulent purposes. The only asset in the Grove trust initially was $25. In 1997 a shell corporation owned by H bought avocado lots for the Grove Trust. The Grove Trust paid H $105,000 in unexplained fees in 2002. The Trustee provided payments to H from both trusts “without complete documentation.” H asked for an received reimbursement from one of the trusts for another daughter’s wedding and for a life insurance policy; the Trustee testified that he did not know who H named as the beneficiary. The debtors lived rent-free with Sydnee in a home bought by the Grove Trust and in one bought by the Apartment Trust. The Trustee maintained no books or records for either trust before 2000 and often intermingled their funds. The trusts shared a bank account for part of 2002 and 2003. The Trustee transferred money between the trusts and made purported loans between them that were not documented, had no terms for repayment and were never repaid. The trusts also paid each other’s expenses. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 41
  • How Parents Keep Control In re Schwarzkopf [continued[ In October, 2003, Debtors filed bankruptcy petitions seeking to discharge $5.4 million in debt. The BK trustee filed an adversary complaint seeking to recover the $4,000,000 in the Apartment Trust and the Grove Trust. The courts held that the Apartment Trust was invalid because one of the Debtors’ purposes in creating it was to defraud creditors. Therefore, the alter ego issue was not relevant. “Properly designating a minor child as a beneficiary does not validate a trust that was created with an improper purpose.” The court held that the Grove Trust was H’s alter ego because he acted as the owner of the trust and its assets: “the named trustee had no role nor took any action…other than to write checks as demanded by [debtor].” He “dominated and controlled all decisions of the Grove Trust.” Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 42
  • How Parents Keep Control Technique #1: Rev. Rul. 95-58. The Grantor’s (Parent’s) Continuing Ability To Remove The Trustee And Appoint A New One Without Causing Inclusion Of The Trust Property In The Grantor’s Taxable Estate. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 43
  • How Parents Keep Control Sample Trust Language Section 6.2. Grantor’s Power. Grantor may, in the Grantor’s discretion, remove any and all Trustees, designate successor Trustees in their place and appoint co-Trustees. [1] However, the Grantor may not appoint a related or subordinate party as the successor Trustee. [1] Rev. Rul. 95-58 (9/5/95): even had the decedent possessed the power to remove the trustee and appoint an individual or corporate successor trustee that was not related or subordinate (within the meaning of §672(c)), the decedent would not have retained a trustee’s discretionary control over trust income. Section 672(c) defines “related or subordinate party” as “any non-adverse party who is (1) the grantor’s spouse if living with the grantor; (2) any one of the following: The grantor’s father, mother, issue, brother or sister; an employee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; a subordinate employee of a corporation in which the grantor is an executive.” Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 44
  • How Parents Keep Control Technique #1: Rev. Rul. 95-58 [continued]. For some reason, this is not a common feature of irrevocable trusts. We include it in every irrevocable trust we draft. Why wouldn’t you want to give that comfort to every parent? By the way, it seldom comes up; it’s seldom used. But I feel a lot more comfortable when I turn the pages in a trust and – ahhhhh – there’s the power. I can make the parent feel comfortable. And “comfort” is what you owe the client. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 45
  • How Parents Keep Control Rev. Rul. 95-58 (August 4, 1995) [The Ruling was prompted by IRS losses in court.] The IRS has reconsidered whether a grantor's reservation of an unqualified power to remove a trustee and appoint a new trustee (other than the grantor) is tantamount to a reservation by the grantor of the trustee's discretionary powers of distribution. This issue is presented in Rev. Rul. 79-353, as modified by Rev. Rul. 81-51. An analogous issue is presented in Rev. Rul. 77-182. The reconsideration is caused by the recent court decisions in Estate of Wall, 101 T.C. 300 (1993), and Estate of Vak, 973 F.2d 1409 (8th Cir. 1992), rev'g T.C. Memo 1991- 503. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 46
  • How Parents Keep Control Rev. Rul. 95-58 (Continued) [The ruling next discusses the two sections that could cause inclusion in the grantor’s estate.] §2036(a) of the Internal Revenue Code, in general, provides that the value of the gross estate includes the value of all property to the extent of any interest in the property that was transferred by the decedent (for less than adequate consideration) if the decedent has retained for life the right, alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 47
  • How Parents Keep Control Rev. Rul. 95-58 (Continued) §2038(a)(1), in general, provides that the value of the gross estate includes the value of all property to the extent of any interest in the property that was transferred by the decedent (for less than adequate consideration) if the decedent held a power, exercisable alone or in conjunction with any person, to change the enjoyment of the property through the exercise of a power to alter, amend, revoke, or terminate. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 48
  • How Parents Keep Control Rev. Rul. 95-58 (Continued) [If the transfer is complete, the plan didn’t work.] §25.2511-2(c) of the Gift Tax Regulations provides that a gift of property is incomplete to the extent that the donor reserves the power to revest the beneficial title to the property in himself or herself or the power (other than a fiduciary power limited by a fixed or ascertainable standard) to name new beneficiaries or to change the interest of the beneficiaries among themselves. See also §25.2511-2(f). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 49
  • How Parents Keep Control Rev. Rul. 95-58 (Continued) [The Ruling distinguishes the Regs. from the cases. For purposes of §§2036 and 2038, it is immaterial in what capacity the power was exercisable by the decedent. Thus, if a decedent transferred property in trust while retaining, as trustee, the discretionary power to distribute the P&I, the trust property will be includible in the decedent's gross estate under §§2036 and 2038. The §§2036 and 2038 regs explain that a decedent is regarded as having possessed the powers of a trustee if the decedent possessed an unrestricted power to remove the trustee and appoint anyone (including the decedent) as trustee. Regs. §§20.2036-1(b)(3) and 20.2038-1(a). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 50
  • How Parents Keep Control Rev. Rul. 95-58 (Continued) [The first taxpayer victory. The second is omitted.] In Estate of Wall, the decedent had created a trust for the benefit of others and designated an independent corporate fiduciary as trustee. The trustee possessed broad discretionary powers of distribution. The decedent reserved the right to remove and replace the corporate trustee with another independent corporate trustee. The court concluded that the decedent's retained power was not equivalent to a power to affect the beneficial enjoyment of the trust property as contemplated by §§2036 and 2038. See also Estate of Headrick, 93 T.C. 171 (1989), aff'd 918 F.2d 1263 (6th Cir. 1990). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 51
  • How Parents Keep Control Rev. Rul. 95-58 (Continued) In view of the decisions in the above cases, Rev. Rul. 79-353 and Rev. Rul. 81-51 are revoked. Rev. Rul. 77-182 is modified to hold that even if the decedent had possessed the power to remove the trustee and appoint an individual or corporate successor trustee that was not related or subordinate to the decedent (within the meaning of §672(c)), the decedent would not have retained a trustee's discretionary control over trust income. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 52
  • How Parents Keep Control IRC §672(c) Related or subordinate party. …“related or subordinate party” means any nonadverse party who is— (1) the grantor's spouse if living with the grantor; (2) any one of the following: The grantor's father, mother, issue, brother or sister; an employee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; a subordinate employee of a corporation in which the grantor is an executive. …a related or subordinate party shall be presumed to be subservient to the grantor in respect of the exercise or nonexercise of the powers conferred on him unless such party is shown not to be subservient by a preponderance of the evidence. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 53
  • How Parents Keep Control Rev. Rul. 95-58 (Continued) Dad Trustee Irrevocable Trust #1: Transfers assets to the trust #3: Controls the trust #2: Retains right to remove trustee and name new (not related or subordinate) one Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 54
  • How Parents Keep Control Technique #2: State Law. The Ability To Modify An Otherwise Irrevocable Trust Using The Provisions Of State Law. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 55
  • How Parents Keep Control CALIFORNIA PROBATE CODE [Edited stylistically to improve clarity] §15403. Modification or Termination of Irrevocable Trust by All Beneficiaries. (a) Except as provided in (b), if all beneficiaries of an irrevocable trust consent, they may compel modification or termination of the trust upon petition to the court. (b) If the trust’s continuance is necessary to carry out a material trust purpose, it cannot be modified or terminated unless the court, in its discretion, determines that the reason for doing so under the circumstances outweighs the interest in accomplishing the material purpose. … Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 56
  • How Parents Keep Control §15403. Modification or Termination of Irrevocable Trust by All Beneficiaries. Example: Trust was drafted to benefit Dad’s two sons. Trust named the two sons as the beneficiaries. (Most trusts use general language, e.g., all children of grantor.) Trust owned a large ($20,000,000) insurance policy on Dad’s life. Dad later remarried and had a daughter. The two sons (minors), represented by their mother (Dad’s first wife), filed a petition with the Probate Court to modify the trust to include the daughter (also a minor) as an equal beneficiary. (Had wife #1 failed to do so, Dad could have easily reduced the share for the sons or disinherited them from the rest of his massive estate.) Since the sons were minors and their mother was his ex-wife, we felt a court order was necessary. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 57
  • How Parents Keep Control CALIFORNIA PROBATE CODE [Edited stylistically to improve clarity] §15404. Modification or termination by settlor and all beneficiaries (a) If the settlor and all beneficiaries of a trust consent, they may compel the modification or termination of the trust. (b) If any beneficiary does not consent to the modification or termination of the trust, upon petition to the court, the other beneficiaries, with the consent of the settlor, may compel a modification or a partial termination of the trust if the interests of the beneficiaries who do not consent are not substantially impaired. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 58
  • How Parents Keep Control CALIFORNIA PROBATE CODE [Edited stylistically to improve clarity] §24. Beneficiary "Beneficiary" means a person to whom a donative transfer of property is made or that person's successor in interest, and: (a) As it relates to the intestate estate of a decedent, means an heir. (b) As it relates to a decedent’s testate estate, means a devisee. (c) As it relates to a trust, means a person who has any present or future interest, vested or contingent. (d) As it relates to a charitable trust, includes any person entitled to enforce the trust. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 59
  • How Parents Keep Control Huscher v. Wells Fargo Bank (2004), 121 CA 4th 956: Modification of a trust by the statutorily prescribed procedure is effective unless the trust’s stated modification procedure is explicitly or implicitly exclusive (decided under predecessor to Probate Code §15401 – former Civ. Code §2280, which was repealed in 1986). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 60
  • How Parents Keep Control §15404. Modification or termination by settlor and all beneficiaries Example: The second successor trustee of the Trust was a bank. Dad and Mom wanted to remove the bank in favor of their two children acting together as the second successor co-trustees should that come to pass. Also, Dad and Mom no longer felt that it was necessary to have principal distributions at ages 35, 40 and 45 after the death of the survivor of Dad and Mom; outright distribution would be fine. Since this trust instrument gave no other ways to accomplish the modification, Dad and Mom and the two children signed a document to modify the Trust in both respects. The children represented their own minor children. All agreed that a court order was unnecessary. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 61
  • How Parents Keep Control MAINE TITLE 18-B §410. Modification or termination of trust; proceedings for approval or disapproval 2. Modification or termination proceeding. A proceeding to approve or disapprove a proposed modification or termination under sections 411 to 416, or trust combination or division under section 417, may be commenced by a trustee or beneficiary, and a proceeding to approve or disapprove a proposed modification or termination under section 411 may be commenced by the settlor. The settlor of a charitable trust may maintain a proceeding to modify the trust under section 413. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 62
  • How Parents Keep Control MAINE TITLE 18-B §411. Modification or termination of noncharitable irrevocable trust by consent 1. Consent of settlor and all beneficiaries. If the settlor and all beneficiaries consent to the modification or termination of an irrevocable trust, the court shall enter an order approving the modification or termination even if the modification or termination is inconsistent with a material purpose of the trust, if the court finds that the modification or termination is in the best interests of the beneficiaries. A settlor's power to consent to a trust's modification or termination may be exercised by an agent under a power of attorney only to the extent expressly authorized by the power of attorney or the terms of the trust; by the settlor's conservator with the approval of the court supervising the conservatorship if an agent is not so authorized; or by the settlor's guardian with the approval of the court supervising the guardianship if an agent is not so authorized and a conservator has not been appointed. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 63
  • How Parents Keep Control Other States Missouri Revised Statutes Chapter 456, Section 456.4A-411 Ohio Revised Code Section 5804.11 Alaska Statutes 13.36.360 Kansas Uniform Trust Code 58a-411 Michigan Compiled Laws 700.7411 New Mexico 46A-4-411 Note how they all use “411” in some fashion. That means they derive from the Uniform Trust Code. A total of at least 21 states have adopted the UTC. So here’s how I would explain it: State law allows you a convenient way to change an irrevocable trust, even with out going to court. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 64
  • How Parents Keep Control Technique #3: Protectors. Appointing Someone In The Irrevocable Trust Who Has The Power To Make Selected Changes In The Future, Presumably At The Urging Of The Grantor (Parent), Without A Duty To The Beneficiaries. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 65
  • How Parents Keep Control What Is A Trust Protector? In offshore Foreign Asset Protection Trusts the role of "Asset Protector" is a standard. Offshore countries have extensive networks of Trust Companies specifically designed to accommodate the implementation of Trust Agreements with ready Trustees. The election to have a TP, who is usually a U.S. Person, is a normal offshore business transaction. Although in Foreign Asset Protection Systems the TP role is standard, in the U.S. only a few states have a legally recognized the dual existence of Trustee and Trust Protector. Those states include Alaska, DE, ID, NV, SD, and Wyoming. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 66
  • How Parents Keep Control Nevada Revised Statutes. [as a sample] NRS 163.5547 “Trust protector” defined. “Trust protector” means any person whose appointment is provided for in the instrument. (Added to NRS by 2009, 788) NRS 163.554 “Fiduciary” defined. “Fiduciary” means a trustee or custodian under any instrument, or an executor, administrator or personal representative of a decedent’s estate or any other person, including an investment trust adviser, trust protector or a trust committee which is acting in a fiduciary capacity for any person, trust or estate. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 67
  • How Parents Keep Control Why Do You (Grantor – Parent) Want The Protector To Not Be A “Fiduciary”? If the Protector is a “Fiduciary,” the Protector owes a duty to the beneficiaries. By contrast, the Grantor (Parent) wants the Protector to do whatever the Parent wants done. That may be something contrary to the best interests of the beneficiaries, e.g., to cut one of them out; to bring in a new beneficiary; to change the manner of distribution. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 68
  • How Parents Keep Control NRS 163.5553 Powers of trust protector. 1. A TP may exercise the powers provided…in the instrument in the best interests of the trust. The powers exercised by a TP are at the sole discretion of the TP and are binding on all other persons. The powers granted to a TP may include, without limit, the power to: (a) Modify or amend the instrument to achieve a more favorable tax status or to respond to changes in federal or state law. (b) Modify or amend the instrument to take advantage of changes in the rule against perpetuities, restraints on alienation or other state laws restricting the terms of a trust, the distribution of trust property or the administration of the trust. (c) Increase or decrease the interests of any beneficiary under the trust. (d) Modify the terms of any power of appointment granted by the trust. A modification or amendment may not grant a beneficial interest to a person which was not specifically provided for under the trust instrument. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 69
  • How Parents Keep Control NRS 163.5553 Powers of trust protector (continued) (e) Remove and appoint a trustee, trust adviser, investment committee member or distribution committee member. (f) Terminate the trust. (g) Direct or veto trust distributions. (h) Change the location or governing law of the trust. (i) Appoint a successor trust protector or trust adviser. (j) Interpret terms of the instrument at the request of the trustee. (k) Advise the trustee on matters concerning a beneficiary. (l) Review and approve a trustee’s reports or accounting. 2. The powers provided pursuant to subsection 1 may be incorporated by reference to this section at the time a testator executes a will or a settlor signs a trust instrument. The powers provided pursuant to subsection 1 may be incorporated in whole or in part. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 70
  • How Parents Keep Control The TP’s power comes from the trust instrument. It sets forth the dual function of the Trustee and the TP. While the Trustee can be a bank or trust company, or other financial institutions, the TP is usually a person close to the family (it could be a CPA, accountant, or lawyer who is already the family consigliore). The TP's powers can take any form, limited only by the wishes of the Grantor(s) and their imagination. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 71
  • How Parents Keep Control Technique #4: Single Member LLCs. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 72
  • How Parents Keep Control Technique #4: Single Member LLCs. Relationship To Creditor Planning Since LLCs commonly arise in a creditor protection context, let us focus, for a moment, on an often ignored aspect of creditor protection planning. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 73
  • How Parents Keep Control Know What Clients Fear: Three Different Types Of Liability Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 74
  • How Parents Keep Control Distinguish Three Different Types Of Asset Protection Up – problem with the asset gets to you You Your Entity Valuable asset #1 Valuable asset #2: someone dies The decedent’s family wants to sue you Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 75
  • How Parents Keep Control Distinguish Three Different Types Of Asset Protection Up – problem with the asset gets to you You Your Entity Valuable asset #1 Valuable asset #2: someone dies But is blocked by your entity from doing so Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 76
  • How Parents Keep Control Distinguish Three Different Types Of Asset Protection Down – problem with you get to the asset You get into a car crash which is your fault and someone gets seriously injured Your Entity Valuable asset #1 Valuable asset #2 The judgment creditor wants to get your assets Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 77
  • How Parents Keep Control Distinguish Three Different Types Of Asset Protection Down – problem with you get to the asset You Your Entity Valuable asset #1 Valuable asset #2 But the judgment creditor is blocked by your entity Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 78
  • How Parents Keep Control Distinguish Three Different Types Of Asset Protection Collateral – problem with one asset get to the other You Your Entity Valuable asset #1: someone dies Valuable asset #2 The decedent’s family wants to get your equity in Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 79
  • How Parents Keep Control Distinguish Three Different Types Of Asset Protection Collateral – problem with one asset get to the other You Your Entity LLC For Valuable Asset #1 LLC For Valuable Asset #2 But they are blocked because each is in a separate LLC Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 80
  • How Parents Keep Control Problem With Single Member LLCs. In Bankruptcy Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 81
  • How Parents Keep Control Nevada Single Member LLC Bad (In re Ashley Albright1 and Olmstead2 (Florida 2010)) 1. 2003 Bankr. LEXIS 291 (Bkrptcy. Colo. Case #01-11367 ABC, 4-4-2003). 2. 2010 WL 2518106 (June 24, 2010). Client Sole Manager and Member Single Member Nevada LLC valuable assets Asset Protection Planning: The Advanced Course 82 Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com
  • How Parents Keep Control Obvious Solution To The Problem With Single Member LLCs. In Bankruptcy Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 83
  • How Parents Keep Control Nevada Multi-Member LLC Note the problem of doing this in California after January 1, 2014, which is why we have switched to using limited partnerships. Client Manager and Member Single Member Nevada LLC valuable assets 84 Children’s Trust Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com
  • How Parents Keep Control Technique #4: Variation 1 SMLLCs With An SSST. The Grantor (Parent) Transfers To The Irrevocable Trust All Of The Membership Interests In A Single Member LLC (“SMLLC”) In Which The Parent Is The Non-Member Manager. (Or, The Trustee Contributes The Assets Down To Such An SMLLC.) Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 85
  • How Parents Keep Control Vanilla Structure Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 86 The first diagram is of a structure that you would set up for a client in any state. The purpose is so that the client can directly manage the assets of the trust without being reliant on the trustee. Your client may well appreciate the fact that his or her sister or brother agreed to act as trustee. However, your client doesn’t want to bother the family member with having to sign escrow papers when real estate is bought and sold, or with approving stock transactions with the broker, or similar paperwork. The danger is that too much control might be viewed by a hostile third party as a way to ignore the trust, perhaps using an alter ego attack.
  • How Parents Keep Control Vanilla Structure Trustee Irrevocable Trust For Kids Single member LLC with $10,000,000 of liquid assets Dad Non-member manager Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 87
  • How Parents Keep Control APT Structure Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 88 The second diagram is of a structure that you would set up for a client in a state with favorable DAPT (domestic asset protection trust) legislation. We use Nevada both because people in L.A. are comfortable with Las Vegas and due to the superior Nevada law (next page). Now you have Nevada trustee that does not want anything to do with the trust assets, so your client wants to directly manage the trust assets without bothering the family member who agreed to act as co- trustee or distribution advisor. Again, there is the danger is that too much control might be viewed by a hostile third party as a way to ignore the trust, perhaps using an alter ego attack.
  • How Parents Keep Control Why In California We Use Nevada Law Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 89 1. People in L.A. are comfortable with Las Vegas both due to proximity (less than 1 hour by air, 5 hours by car) and frequency of visits. 2. Nevada has the 2nd shortest statute of limitations on fraudulent transfers in the country in states with good DAPT laws (Ohio has 6 months; Nevada’s is 2 years; tied with Hawaii; South Dakota and Utah are next with 3 years; all the others, e.g., AK, DE, WY, etc., are 4 years). 3. Nevada has no exceptions to its fraudulent transfer laws. Even Alaska has an exception for a divorcing spouse. Most states have exceptions for child support and pre-existing torts. 4. Effective 10/1/11, the charging order limit is explicitly the sole remedy, even for shareholders of corporations. Equitable remedies such as constructive and resulting trusts and veil piercing are not available.
  • How Parents Keep Control Nevada SSST With SMLLC Three Alternatives For Trustee: (i) a Nevada trust company; (ii) a friend or relative in Nevada; or (iii) establish your own unregulated trust company. Client Sole Manager (in the event of a personal insolvency, the court appointed trustee should not be able to take over as manager) Nevada Self-Settled Spendthrift Trust Grantor/Creator/ Settlor/Trustor Trustee Single Member Nevada or Delaware LLC valuable assets 90 Layering Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com
  • How Parents Keep Control Technique #4: Variation 2 SMLLC With An SSST And A PTC (preview of the next technique). In this structure the client establishes the client’s own unregulated private trust company to be the trustee of the self- settled spendthrift trust. See IRS Notice 2008-63 (July 11, 2008) on when the use of a PTC will cause the value of the trust assets to be included in a grantor’s estate under IRC Sections 2036(a) or 2038(a), and other important issues. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 91
  • How Parents Keep Control THE VERY BEST STRUCTURE. Nevada SSST Client Single Member LLC Client as beneficiary Non-member manager Children’s Trust Nevada Private Trust Company owns trustee trustee 92 Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com
  • How Parents Keep Control Technique #4 Variation #3: Using A Partnership To Own A Life Insurance Policy. Instead Of Establishing The Typical ILIT (Irrevocable Life Insurance Trust), The Parent Establishes (Or Uses An Existing) FLP (Family Limited Partnership) To Own Life Insurance On The Parent’s Life. Avoids Crummey Notice Issues. Requires Other Assets For It To Be A “Real” Partnership. Requires Minimization Of Parent’s Interest In This Particular FLP To Minimize Amount Of Insurance Proceeds Included In Parent’s Estate. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 93
  • How Parents Keep Control Enterprises, L.P. $1,000,000 in a securities account and $10,000,000 policy on Dad 2% GP 8% LPProperties, Inc. Heirs’ Trust #2 90% LP Family Trust Heirs’ Trust #1 Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 94
  • How Parents Keep Control Technique #5: Private Trust Company. Using Notice 2008-63, Mom and Dad set up their own PTC. They can be the officers and the board of directors. However, if the PTC is the trustee of their SSST, they cannot be on the (i) discretionary distribution committee and (ii) amendment committee. Otherwise, the trust’s assets will be included in their estate. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 95
  • How Parents Keep Control George E. Burns, Commissioner Financial Institutions Division Nevada Department of Business and Industry 2785 East Desert Inn Road, Suite 180 Las Vegas, NV 89121 Re: Givner Holdings, Inc. Family Trust Company Notification Dear Mr. Burns: I am writing on behalf of Givner Holdings, Inc., a Nevada corporation (the “Company”), to notify you of the Company’s intention to act as a non-licensed family trust company in the State of Nevada. The Company intends to act as a “family trust company,” as that term is defined in Section 10 of recently enacted Senate Bill No. 365, for the Givner family. The “designated relative” of the Company, as that term is defined in Section 7 of Senate Bill No. 365, is Bruce Givner. The Company warrants and represents that it does not: transact trust company business with; propose to act as a fiduciary for; or solicit trust company business from, persons who are not family members. Please provide me with written confirmation of your receipt of this letter and let me know if you have any questions or require additional information regarding this matter. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 96
  • How Parents Keep Control Technique #5: Private Trust Company. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 97
  • How Parents Keep Control The next three slides are the body of a February 25, 2010, e- mail response which we received from a nice man in the Department of Financial Institutions (1810-13th Street, Sacramento, California 95811-7118). This was in response to a question about whether we could set up an LLC to act as the trustee of an irrevocable trust which holds life insurance policies on the lives of Bruce and Kathy Givner for the benefit of our children, without the LLC having to be licensed. That was one in a series of e-mails with the nice gentleman (assistant general counsel). Be clear: his response is not binding on the DFI. It was his thoughts on that given day. He might change them later. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 98
  • How Parents Keep Control The trust company laws of California are blunt and difficult at the same time. Financial Code Section 107.5 provides, in part, that "It shall be unlawful for an person, corporation, limited liability company, partnership, firm, or any other form of business entity allowed by law, to engage in or transact . . . trust business within this state except by means of a corporation duly organized for that purpose.“ Financial Code §106 defines "trust business" as "the business of acting as executor, administrator, guardian or conservator of estates, assignee, receiver, depositary or trustee under the appoint of any court, or by any authority of any law of this or any other state or of the United States, or as trustee for any purpose permitted by law." Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 99
  • How Parents Keep Control While the two sections taken together would appear to preclude [Givner’s] proposal, that is not necessarily the case. The DFI has in previous situations focused on what the Legislature meant in §106 by the phrase "the business of." We have generally held that the entity must be engaged in more than one transaction (e.g., more than one executorship) with the intent to make a profit to fall within the confines of being in "the business of" trust business. This position is bolstered by the exception to conducting intrastate business found in Corporations Code §191(c)(8) (although we concede that not all trust activities may be concluded in 180 days). (Also, the non-profit corporations laws of this state allow for a non-profit corporation to act as trustee under any trust incidental to the principal interests of the corporation. (See Corporations Code §§5140(k), 7140(k), 9140(k).)) Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 100
  • How Parents Keep Control So, under our current interpretation of the law, if an entity is going to conduct more than one activity that would be considered "trust business" for profit (i.e., act as trustee for more than one estate), then it may only do so in the form of a corporation licensed by the Department of Financial Institutions to conduct trust business. I hope this helps guide you to a decision. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 101
  • How Parents Keep Control Children’s Trust Private Trust Company Single member LLC with $10,000,000 of liquid assets owns trustee of Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 102
  • How Parents Keep Control Maurits Cornelis Escher (June 17, 1898 – March 27, 1972) Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 103
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch.* *We will not, today, address the fascinating question of whether a change from grantor trust status to complex trust status (or the termination of grantor trust status) causes a recognition of gain when there is an installment note outstanding. Similarly, the switch from complex trust status to grantor trust status may be fraught with income tax problems. So before engineering a switch, the income tax issues must be addressed. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 104
  • How Parents Keep Control The Conceptual Problem: The Income Tax and the Transfer Taxes are not In Pari Materia (from the same material - comparable). As a result: income tax “own” transfer tax “own” Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 105
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch (cont’d #1). For all clients, virtually all CPAs, and even most estate planning lawyers, the concept of a trust which is “owned” by the parent for income tax purposes but not “owned” by the parent for estate tax purposes is nearly impossible to understand. The real difficulty is picking those powers which cause income tax ownership without estate tax ownership. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 106
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch. Default Status: Grantor Trust For wealthy clients the irrevocable trust for the benefit of their children is automatically a grantor trust – ignored as to the parents. This way the parents pay the income tax on the trust’s earnings, depleting the parents’ estate by the income tax without that payment being considered a gift. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 107
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch (cont’d #2). There is no absolute agreement on which powers should be used for this purpose. However, we use these two: (i) Section 675(4)(c), the grantor’s “power to reacquire trust corpus by substituting other property of an equivalent value” (problem with a trust created by husband and wife when one of them dies) and (ii) Section 677(a)(3) the trustee’s power to apply “income without the approval or consent of any adverse party” “to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse…” Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 108
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch (cont’d) Para. 2.3. Grantor Trust Rules. The following subparagraphs give Grantor a power which will cause the Trust to be treated as a so-called “Grantor Trust” for income tax purposes. One of the following subparagraphs gives the Trustee a power which will cause the Trust to be treated as a so-called “Grantor Trust” for income tax purposes. In other words, “the grantor…shall be treated as the owner of [the] trust…” However, these paragraphs do not cause the Trust’s assets to be included in Grantor’s estate. If any trust property is included in Grantor’s gross estate as finally determined for Federal estate tax purposes under any IRC provision, then an amount equal to the taxes attributable to that inclusion shall be distributed to Grantor’s estate, and each Trust beneficiary’s Trust interest shall be reduced proportionately. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 109
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch (cont’d). Para. 2.3.1. Reacquire Trust Corpus. Grantor may reacquire the trust corpus by substituting other property of an equivalent value. This is intended to make this Trust a Grantor Trust for income tax purposes. This power (i) is not held in a fiduciary capacity, and (ii) may be exercised without the consent of any fiduciary of this Trust. No claim of fiduciary duty may be asserted as a defense against the exercise of this power. Grantor shall have the right to release this power at any time. The Trustee shall have the authority to re-grant this power to Grantor at any time after it is released. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 110
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch (cont’d). Para. 2.3.2. Restriction. Grantor may not reacquire the Trust corpus to the extent the Trust corpus consists of a residence that was contributed to this Trust from Grantor’s qualified personal residence trust. In other words, this power to reacquire Trust corpus may not be used to avoid the Reg. §25.2702-5(c)(9) prohibition on the sale or transfer of the residence to Grantor or a grantor trust. The Trustee is also prohibited from selling or transferring that former residence of Grantor to Grantor, Grantor's spouse, or an entity controlled by Grantor or Grantor's spouse. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 111
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch (cont’d #6). Para. 2.3.3. Right To Apply Trust Income. Trustee shall have the right to apply the income of the trust corpus to the payment of premiums on a policy or policies of insurance on Grantor’s life. The Trustee shall have the right to terminate this power at any time. The Trustee shall have the authority to revive this power after it has been terminated. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 112
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch (cont’d #7). Para. 2.3.4. Trustee’s Discretion. The Trustee may (i) terminate, or (ii) apply to a lineal descendant of Grantor, either or both of the preceding powers which make this a grantor trust. The Trustee shall have the authority to revive either or both of these powers after either or both has been terminated. Also, the Trustee may reconfigure this Trust as one or more electing small business trusts or qualified subchapter S trusts. See Article 7. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 113
  • How Parents Keep Control Technique #6: Grantor Trust Flip Switch (cont’d #8). Para. 2.3.5. Support Obligation. Grantor intends this rule to apply during periods in which the Trustee does not wish the trust to be a grantor trust for income tax purposes. However, the preceding sentence is a guide for the Trustee’s exercise of discretion. Trust distributions may not be used to discharge a support obligation of the parents of the recipient of the distribution. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 114
  • How Parents Keep Control Technique #7: Powers Of Appointment. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 115
  • How Parents Keep Control Section 2041 Powers of Appointment. (a) In general. The value of the gross estate shall include the value of all property— …. (2) Powers created after October 21, 1942. To the extent of any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power of appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under sections 2035 - 2038, inclusive. For purposes of this paragraph (2), the power of appointment shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 116
  • How Parents Keep Control Sample Trust Language 5.5.1. Appointment Power Upon a beneficiary’s death, the Trustee shall distribute the undistributed balance of that beneficiary’s Trust to the beneficiary’s spouse, or to one or more of the beneficiary’s issue then living, and on the terms and conditions, either outright or in trust, as that beneficiary shall appoint. The beneficiary shall exercise this by (i) an acknowledged instrument specifically referring to and exercising this continuing withdrawal power and delivered to the Trustee; or (ii) a Will specifically referring to and exercising this appointment power. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 117
  • How Parents Keep Control Technique #8: Trustee’s Decanting Powers. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 118
  • How Parents Keep Control Trustee’s “decanting” powers. New York was the first state to enact decanting legislation. Although amended since its original enactment in 1992, it essentially allows a trustee who has authority to invade the trust corpus for a beneficiary to pay the corpus over to another trust for the beneficiary. See N.Y.E.P.T.L. section 10-6.6. Legislation somewhat similar to that in New York now has been enacted in Alaska, Arizona, Delaware, Florida, Nevada, New Hampshire, North Carolina, South Dakota, and Tennessee, which appears to reflect an acknowledgment of such a statute's utility. Alaska Stat. section 13.36.157; Ariz. Rev. Stat. section 14-10819; Del. Code Ann. tit. 12, section 3528; Fla. Stat. section 736.04117; Nev. Rev. Stat. section 163.37; N.H. Rev. Stat. section 564-B:4-418; N.C. Gen. Stat. section 36C-8-816.1; S.D. Laws sections 55-2-15 to 55-2-21; Tenn. Code Ann. section 35-15-816. Also, with heightened appreciation for the authority to distribute to new trusts, many practitioners now include decanting provisions in their trust forms. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 119
  • How Parents Keep Control The goals or purposes of using decanting include: (1) Addressing changed circumstances, such as changes in applicable fiduciary or tax law or changes in family circumstances or dynamics. (2) Protecting the tax treatment of a trust. (3) Modifying administrative provisions, e.g., restrictions on investment powers or to create a directed trust. (4) Granting a beneficiary a power of appointment, presently exercisable or otherwise. (5) Reducing administrative costs. (6) Altering trusteeship provisions such as the identity or manner of appointing fiduciaries. (7) Extending the termination date of a trust. (A large corporate trustee will probably refuse to accept a trust the purpose of which is to accomplish this.) (8) Converting a nongrantor trust to a grantor trust or the reverse. (9) Changing a trust's governing law. (10) Dividing trust property to create separate trusts. (11) Reducing potential liability. (12) Converting a trust into a supplemental needs trust to permit a beneficiary to qualify for certain governmental benefits. (13) Making trust interests spendthrift or the reverse. (14) Correcting a drafting error without the necessity of going to court. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 120
  • How Parents Keep Control Technique #15: The Bar Mitzvah DVD. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 121
  • How Parents Keep Control The “Bar Mitzvah” DVD The ideas behind this: 1. With extended distribution provisions, the trustees – 20 years from now – will be asking themselves “what would Joe have wanted us to do in this situation?” 2. Some language is best left out of a trust. Some intent is not even well written as “precatory” language. 3. Maybe you will need one DVD for the trustees; another one for the board of directors of the business; and yet another for your great- grandchildren. After all, how much are your great-grandchildren likely to know about you? Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 122
  • How Parents Keep Control The “Bar Mitzvah” DVD + Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 123
  • How Parents Keep Control The “Bar Mitzvah” DVD 1. Write and re-write the script, so you are clear on the points you wish to cover. Have someone else review and edit the script. For wealthy clients, hire an independent writer, e.g., someone who would write a biography of your client. 2. No more than 40 minutes. 3. Professional taping and editing if possible, e.g., $1,500. 4. Store on the web. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 124
  • How Parents Keep Control Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 125 [sample – first page] Irrevocable Trust Maintenance Program Each service is performed by means of a phone call from our office to you twice each year. The annual fee is eight hundred dollars ($850) per year. Exceptions are noted. Service Fees TRUST INSTRUMENT Still happy with the: specific bequests, if any? beneficiaries? manner of distribution to the beneficiaries? contingent remainder beneficiaries? trustees? successor trustees? protectors? grantor trust status? If the answer to any question is “no,” can the change be made by: grantors (you) under the trust instrument? protectors under the trust instrument? Beneficiaries under the trust instrument? If so, we prepare the documents. If not, is a Probate Court petition appropriate? Included Included Included Included Included Included Included Included Included Included Included Included As incurred
  • How Parents Keep Control Advice From A Parent With Two Perfect Children: The Final Technique: When All Else Fails, A Good Whipping Will Keep A Child In Line Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 126
  • How Parents Keep Control As a result of these whippings, I spoiled my children. But they are not spoiled. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 127
  • How Parents Keep Control Questions and Answers Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 128