Today’s blog post about the Heckerling Institute is written by Withum’s Estate & Trust Services Partner, Donald Scheier.
Today started with M. Read Moore’s recognition that U.S. estate planners must now work in a global environment. We can no longer only concern ourselves with the laws of the United States. We must be educated with respect to how various countries will treat the use of certain tax planning devices/methods.
We rely on the widespread use and acceptance of trusts, simplicity in organizing companies and expediency in financial transactions. However, governments and regulators around the world are often skeptical of these features, among other things, suspecting them of facilitating money laundering and tax evasion.
For example, many governments and international organizations think the following are sound public policies:
- Requiring financial institutions, lawyers, accountants, trust and company service providers and others providing services that involve some financial component to determine who actually owns and controls an entity, including in the case of a trust, most or all of the trust’s beneficiaries.
- Having a central register of shareholders of companies and settlors and beneficiaries of trusts that is available for review by law enforcement authorities, interested persons or perhaps even the general public.
- Requiring financial institutions and other persons involved in handling money to disclose information about their foreign customers and clients to governmental authorities or home countries on an automatic basis.
- Requiring lawyers advising clients outside of litigation to disclose known or suspected violations of domestic and foreign law to governmental authorities without tipping off the client.
Although the United States is a member of the Financial Action Task Force (“FATF”), its customer due diligence rules lag behind those in much of the rest of the world. Currently, U.S. financial institutions must generally verify the identity of their customers by taking a copy of their driver’s license or passport and proof of address. Many financial institutions go beyond this with respect to entities and ask for copies of relevant organizational documents, including trust agreements. The United States, however, currently does not require financial institutions to identify the beneficial owners of entity accounts except in certain (two) limited situations.
However, in August 2014, the Department of the Treasury, through the Financial Crimes Enforcement Network or “FinCEN,” proposed certain regulations that would require U.S. financial institutions to increase the information they are required to gather.
Mark R. Parthemer spoke in detail about concerns and problems one faces when trying to select a Trustee. He aptly named his discussion, “The Trustee Selection Minefield.” He focused on the tax and non-tax factors that must be considered in the choice of Trustees, such as the grantor’s desire to keep as much control over the assets and beneficiaries. These choices have to be reviewed in light of the potential pitfalls of appointing a person who can cause complications under IRC Section 2036, 2038, 2014 and situs.
Among the Non-Tax Factors to consider are:
- Legal Capacity
- Personal attributes of Trustee
- Judgement and Experience
- Impartiality and Lack of Conflict
- Investment Sophistication
- Permanence and Availability
- Sensitivity to Individual Beneficiaries Needs
- Accounting, Tax Planning and Record Keeping
- Situs Selection issues
Among some of the more common gift tax issues are:
- Complete or incomplete gift
- Should there be an Ascertainable Standard (HEMS)
Estate tax issues such as who is the “Grantor” is important because of IRC Sections 2036 & 2038 have estate inclusions where certain powers retained by the Grantor will bring the Trust back into the Estate.
To avoid inadvertent adverse tax effects, consider using a “savings clause” to limit automatically any retained powers of the grantor or of the beneficiary.
It is important to understand what the grantor is trying to accomplish in order to determine the powers and limitations that must be incorporated into the trust.
Nancy G. Henderson explored the strategies to use when a poorly drafted or “stale” trust which she defined as an “existing irrevocable trust no longer serving a client’s estate planning objectives.” However, such old and cold trusts can be diamonds in the rough that simply need a little polish to shine again. Her session examined in-depth the use of trust-to-trust transfer techniques such as loans, guarantees, purchases, consolidations, distributions, joint investments and preferred partnerships, among others, to rejuvenate existing inter-vivos and testamentary irrevocable trusts to assist the client in meeting his or her new estate planning goals.
Some alternative strategies for handling a stale trust:
- Just Ride it Out – A Stale Trust might be ignored and minimally maintained. The grantor hopes that, with the passage of time, it will be consumed and disappear.
- Use It for the Benefit of the New Trust – Rather than abandon the Stale Trust, another trust might be created (the “New Trust”) and the assets of the Stale Trust might be used to grow the assets in the New Trust.
- Partner Up with a New Trust – Sometimes the hidden value of the Stale Trust can be realized by partnering with a New Trust in some form of joint venture or joint investment.
Richard S. Franklin’s session on Lifetime QTIPs underscored the multipurpose use of them. These are increasingly the strategy of choice for exclusion use, but these versatile trusts also facilitate minority interest valuation savings, asset protection, gift tax valuation protection, sales to defective “grantor” trusts, and more. His session provided ideas for specific uses (see below) of Lifetime QTIPs and practical implementation guidance.
Some of the Specific Uses of Lifetime QTIPs:
- Funding Testamentary use of Donee Spouse’s Applicable
- Funding Lifetime use of Donee Spouse’s Applicable Exclusion Amount
- Funding use of Donee Spouse’s GST Exemption
- Funding Lifetime use of Donor Spouse’s Applicable Exclusion Amount
- Formula QTIP Election
- Simulated FAC Gift
- Formula Disclaimer
- Decedent’s Surviving Spouse v. Transferor’s Spouse.
- “Grantor” By-Pass Trust
- Minority Interest Planning
- Donee of Excess Value under Formula Allocation Gift or Sale (a la Petter)
- Sales to Defective Grantor Trusts
- Income Tax Basis Adjustment
- Creditor Protection Planning
- Elective Share Planning
- Pre-Separation/Divorce Planning