Williams Mullen: Gift and Creditor Protection Planning with Virginia’s New Self-Settled Spendthrift Trust Statute
- 06-06-2012
07:05
AM - Author:
BY: FARHAD AGHDAMI JEFFREY D. CHADWICK
On April 4, 2012, Governor McDonnell signed Senate Bill 11 into law, which permits the creation of “self-settled spendthrift trusts” in Virginia. A self-settled spendthrift trust is an irrevocable trust in which the grantor retains a beneficial interest, with such interest being entitled to spendthrift protection against the claims of the grantor’s creditors. In other words, through a properly structured self-settled spendthrift trust, a client may transfer assets to an irrevocable trust and maintain a discretionary beneficial interest in the trust, and the client’s future creditors would be unable to reach the assets held in the trust. These trusts, also known as “asset protection trusts,” are currently available in twelve other states and abroad.
Virginia’s self-settled spendthrift trust provisions will appear in new Virginia Code §§ 55-545.03:2 and 55-545.03:3. These provisions, which will be effective as of July 1, 2012, are the product of the Virginia Bar Association’s Wills, Trusts, and Estates Legislative Committee. This client alert summarizes the statutory requirements for asset protection, describes the grantor’s protected beneficial interest, and illustrates how clients may take advantage of this new legislation to make lifetime gifts in trust.
Statutory Requirements for a “Qualified Self-Settled Spendthrift Trust”
Under the statute, only “qualified self-settled spendthrift trusts” will be entitled to asset protection. A qualified self-settled spendthrift trust must meet the following requirements:
- The trust must be irrevocable;
- The trust must be created during the grantor’s lifetime;
- The trust must include at least one other beneficiary in addition to the grantor;
- The trust must have, at all times, a “qualified trustee” who maintains some or all of the trust property in Virginia, maintains records in Virginia, prepares fiduciary income tax returns in Virginia, or otherwise materially participates in the trust’s administration in Virginia;
- The trust must be governed by Virginia law;
- The trust must include a spendthrift provision, as defined in Virginia Code § 55-545.02, limiting both voluntary and involuntary transfers of the grantor’s qualified interest; and
- The grantor cannot retain a right to veto distributions from the trust.
“Qualified Interests” Are Protected from the Claims of Creditors
Only a grantor’s “qualified interest” is entitled to asset protection. The statute defines a qualified interest as a grantor’s discretionary interest in a qualified self-settled spendthrift trust to the extent that such interest is administered by an “independent qualified trustee.” An independent qualified trustee is any qualified trustee, as defined above, who is not, and whose actions are not controlled by, a person who is related or subordinate to the grantor, a person who is not a Virginia resident, an entity that is related to or controlled by the grantor, or an entity that is not authorized to engage in trust business in Virginia. This specifically precludes persons such as spouses, descendants, parents, siblings, and employees from serving as independent qualified trustees.
Importantly, even if the grantor’s beneficial interest is controlled by an independent qualified trustee, creditors will have five years from the trust’s creation to bring existing claims. Similarly, asset protection will not apply to fraudulent transfers made with the intent to hinder, delay, or defraud creditors. Consequently, a grantor may only protect assets from the claims of future, and not existing, creditors.
Wealth Transfer Opportunity
From a pure asset protection standpoint, Virginia is not as attractive as other jurisdictions, such as Alaska or Nevada. First, Virginia provides existing creditors with five years to set aside an existing claim, which is generally longer than the period provided by most states. Second, the grantor may not retain the power to veto trust distributions, nor may the grantor name a family member or employee as independent qualified trustee. And third, Virginia only protects the grantor’s discretionary interest in the trust, which may cause some of the trust assets to be exposed to the grantor’s creditors. Nevertheless, a trust properly structured under Virginia law may provide clients with adequate asset protection from the claims of future creditors.
Despite somewhat limited utility from an asset protection perspective, Virginia’s new provisions create excellent wealth transfer opportunities for clients and their families. In short, clients may now make large lifetime gifts in trust for the benefit of their children and more remote descendants, yet retain a discretionary interest in such trust in case the client’s financial circumstances change. The reasons for making such gifts in 2012, including the scheduled decrease in the gift tax exemption amount from $5.12 million to $1 million per person in 2013, are detailed in a recent client alert by Farhad Aghdami, which can be accessed here.
To appreciate the impact of Virginia’s new self-settled spendthrift trust statute, consider a common planning scenario:
Martha owns substantial assets and would like to reduce her estate by making a gift to a trust for the benefit of her children and grandchildren. Martha understands that such gift will not only reduce her estate by the amount gifted, but also by all of the appreciation of the gifted assets over time. Martha also desires to make such gifts in 2012, in order to take advantage of the limited window of opportunity to give away $5.12 million without incurring any gift tax. Despite this, Martha is concerned that if her financial circumstances change, she may need the gifted assets at some point in the future and that she would be unable to access the funds held within the trust. Martha decides not to make a $5.12 million gift in 2012 because she may want or need the assets in the future. The $5.12 million appreciates over the next 10 years at 7% per year, and, at Martha’s death, the assets are worth $10,071,814. If the estate tax exemption drops, as scheduled in 2013, to $1 million with a top 55% marginal tax rate, Martha’s heirs will pay $4,838,088 in estate tax.
Prior to the enactment of Virginia’s self-settled spendthrift trust statute, clients who sought to make substantial gifts to their families while maintaining a financial safety net had few options. Starting July 1, 2012, however, clients may make gifts to a qualified self-settled spendthrift trust, which could be structured as follows:
Martha creates a qualified self-settled spendthrift trust under Virginia Code § 55-545.03:3 and names Qualified Trustee to serve as initial trustee. The trust provides that Qualified Trustee may make distributions of income or principal to or for the benefit of Children and Grandchildren for their health, education, maintenance, and support. In addition, if an Independent Qualified Trustee is appointed, Independent Qualified Trustee may make distributions of income or principal to or for the benefit of Martha for any purpose. Assuming that Martha gifts $5.12 million into a Virginia self-settled spendthrift trust and the assets appreciate over the next 10 years at 7% per year, at Martha’s death, the assets are worth $10,071,814. There is no additional estate tax on the value of the assets in the trust, which pass estate and gift tax free to Martha’s heirs.
The enactment of the Virginia statute creates a compelling opportunity for clients who wish to make gifts in 2012, but who worry that they may want or need the assets at some point in the future.
Conclusion
Self-settled spendthrift trusts create immense planning opportunities for clients and their families, particularly when combined with the favorable wealth transfer tax window of opportunity in 2012. Quite simply, these trusts permit clients to “have their cake and eat it too” – not only can the trust serve as a vehicle to remove appreciating assets from a client’s estate, it can also permit the client to retain access to the trust assets through a discretionary beneficial interest. We are extremely excited for the opportunities this new legislation creates, and strongly believe that the self-settled spendthrift trust provides an optimal structure to make large lifetime gifts in trust.
For more information about this topic, please contact the author or any member of the Williams Mullen Private Client Fiduciary Services Team.
Please note:
This newsletter contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. For more information, please visit our website at www.williamsmullen.com or contact John H. Turner, III, 804.420.6480 or jturner@williamsmullen.com. For mailing list inquiries or to be removed from this mailing list, please contact Julie Layne at jlayne@williamsmullen.com or 804.420.6311.
© 2012 WILLIAMS MULLEN ALL RIGHTS RESERVED
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Margaret M. Hand on California Trustee’s Duty to Account
- 06-11-2012
10:57
AM - Author:
A trustee’s duty extends beyond liability for breach of a
fiduciary duty. One of the trustee’s primary responsibilities is to provide
information and account to the trust’s beneficiaries. Discharging this duty to
account benefits the trustee as well as the beneficiaries. The Probate Code
governs the trustee’s actions in California. In this Analysis, Margaret M. Hand
discusses a trustee’s duty to account. She writes:
[2] Aid to Performance of Other Duties
In some circumstances, the trustee may be absolved of his or her duty to
account, yet nevertheless find accounting an unavoidable necessity. Consider,
for example, the surviving spouse who serves as trustee of a QTIP Trust from
which the trustee may distribute only net income and no principal. Assume the
trust instrument does not define “net income,” which is therefore
defined by California’s Uniform Principal and Income Act. As trustee, the
surviving spouse would be required to distribute to herself all the trust’s
income, but because she is both trustee and the sole person entitled to current
distributions of income, she would not be required to account. Yet she could
not simply subtract her disbursements from her receipts and pocket the
difference. To calculate the net income to which she is entitled, she must
subtract from “receipts allocated to income” those
“disbursements made from income” during the “accounting
period.” Each of these three terms is defined by California’s Principal
and Income Act (hereafter, the Act) apportions receipts and disbursements
between principal and income. This hypothetical, but common, trustee could
determine the amounts to which she is entitled only by preparing schedules of
receipts, gains on sales, disbursements, losses on sales and distributions.
Essentially, this trustee must prepare an account or risk distributing too much
or too little.
The trustee considering
adjustments under the Uniform Principal and Income Act may not exercise the
power to adjust without first computing the trust’s fiduciary accounting income
and comparing that amount with the total return on investment. This comparison
requires the preparation of detailed schedules of receipts, gains, losses and
disbursements, which schedules constitute the bulk of the trustee’s account.
[3] Accounting Protects the Trustee
[a] Three-Year Statute of Limitations
There is a three-year statute of limitations on actions by beneficiaries
against trustees for breach of trust. This statute begins running either
when the beneficiary receives the trustee’s account that “adequately
discloses the existence of a claim against the trustee for breach of
trust,” or when the beneficiary discovers or reasonably should discover
the “subject” of the claim. This statute of limitations is an
absolute bar to claims against the trustee and nothing provides the trustee
with greater protection, certainly not waivers of account.
(footnotes and citations omitted)
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Williams Mullen: Virginia Enacts Trust Decanting Statute
- 06-13-2012
03:41
AM - Author:
BY: FARHAD AGHDAMI JEFFREY D. CHADWICK
On April 4, 2012, Governor McDonnell signed Senate Bill 110 into law, which allows trustees to exercise the power to distribute trust income or principal to or for the benefit of a beneficiary by distributing the assets to a new trust. The act of distributing trust assets to a new trust is commonly referred to as “decanting.” The best way to understand trust decanting is to visualize the physical act of decanting wine, which involves the pouring of wine from one vessel into another for the purposes of adding oxygen and removing unwanted sediment. In the trust context, practitioners can view decanting as a trustee pouring the assets of an old trust into a new trust, with more beneficial provisions (the so-called “oxygen”) added and with less useful provisions (the so-called “sediment”) left behind.
Virginia’s decanting statute is a product of the Virginia Bar Association’s Wills, Trusts, and Estates Legislative Committee. This client alert summarizes the applicability of Virginia’s decanting statute, situations in which it may be beneficial to decant assets from an existing trust to a new trust, the administrative requirements under Virginia’s decanting statute, and how to limit a trustee’s fiduciary liability when exercising the decanting authority.
Applicability of Virginia’s Decanting Statute
Virginia’s decanting statute, which will be codified at Virginia Code § 55-548.16:1, has an effective date of July 1, 2012. Decanting will be available to any trust administered under Virginia law, regardless of when the trust was created, unless the terms of the trust explicitly prohibit the trustee from decanting. To date, fourteen states have adopted decanting statutes.
Reasons to Decant
Decanting is an incredibly useful tool for trustees, particularly for older trusts with antiquated language. For instance, a trustee may consider decanting to accomplish the following objectives:
- To change the trust’s administrative provisions, such as:
- changing trust situs or governing law;
- providing for the resignation, removal, and appointment of trustees without court approval;
- expanding the powers of a trustee to engage in sophisticated financial transactions, make or guarantee loans, adjust between income and principal, or participate in an initial public offering;
- providing for the division of trustee roles and responsibilities;
- addressing issues related to trustee compensation or liability; or
- consolidating trusts for administrative efficiency.
- To address a beneficiary-related change of circumstances, including:
- limiting distributions to beneficiaries with substance abuse problems or those engaging in other unproductive behaviors;
- removing beneficiaries for tax planning or other reasons;
- transferring assets to a special needs trust for a disabled beneficiary; or
- dividing a single “pot” trust into separate trusts for each branch of the family.
- To respond to changes in federal or state tax law; or
- To correct errors or ambiguities in the trust instrument.
Although Virginia law currently contains provisions permitting modifications of trusts, reformations to correct mistakes, and combinations and divisions of trusts, these mechanisms typically require consent from all of the qualified beneficiaries and, in some cases, court approval. Decanting, on the other hand, allows a trustee to change administrative provisions with minimal court intervention. Decanting, therefore, is a more cost-effective and timely alternative to the methods provided under current law.
Administrative Requirements under Virginia’s Decanting Statute
The Virginia statute is designed to balance the utility that decanting can provide with safeguards for trust beneficiaries and trustees. As a threshold matter, an “interested trustee” – generally defined as an individual trustee who has a beneficial interest in the trust – is prohibited from exercising the decanting authority. Moreover, disinterested trustees who are permitted to decant are still subject to fiduciary duties and are required to give 60 days’ written notice to the grantor (if living), the qualified beneficiaries, and any advisor or protector of the trust. Those persons entitled to notice are given both an opportunity to object to the decanting, as well as an opportunity to waive notice so that the trustee may decant prior to the expiration of the 60-day statutory window. As a practical matter, if the existing trust filed accounts with the commissioner of accounts, the new trust will also be required to file accounts.
How to Limit Fiduciary Liability
Although decanting provides a great benefit to trustees seeking to update a trust’s administrative provisions, some trustees may be concerned that decanting exposes the trustee to fiduciary liability. Fortunately, informed trustees may limit their liability by engaging in a handful of best practices. First and foremost, the Virginia statute contains a number of tax saving provisions, which generally shield the decanted trust from adverse income, estate, gift, and generation-skipping transfer (GST) tax consequences. As discussed above, the Virginia statute also encourages an open and honest process by prohibiting decanting by interested trustees and requiring notice to all qualified beneficiaries. Lastly, trustees may take proactive measures to limit their liability, such as petitioning the court for approval or entering into a release and indemnification agreement with the trust’s qualified beneficiaries.
The Internal Revenue Service has issued nearly two dozen private letter rulings that provide favorable guidance with respect to the income, estate, gift, and GST tax consequences of decanting. Given the increase in the popularity of decanting and the adoption of state statutes (like Virginia’s new statute) permitting decanting, the Internal Revenue Service recently issued Notice 2011-101, in which it requested public comment regarding the tax consequences of decanting. Numerous groups have submitted comments, including the American Bar Association’s Section of Taxation. A copy of the decanting comments by the ABA’s Section of Taxation can be accessed here. It is anticipated that the Service will issue definitive guidance regarding decanting in the near future.
Conclusion
Decanting substantially improves Virginia’s trust law and makes the Commonwealth a more attractive jurisdiction for trust administration. As a growing number of states have recognized, decanting permits trustees to accomplish their objectives in a cost-effective and timely fashion, while still maintaining safeguards for trust beneficiaries and trustees. In many circumstances, decanting can provide an ideal solution to change a trust’s administrative provisions, address a beneficiary-related change of circumstances, respond to changes in federal or state tax law, or address errors or ambiguities in the trust instrument.
For more information about this topic, please contact the author or any member of the Williams Mullen Private Client Fiduciary Services Team.
Please note:
This newsletter contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. For more information, please visit our website at www.williamsmullen.com or contact John H. Turner, III, 804.420.6480 or jturner@williamsmullen.com. For mailing list inquiries or to be removed from this mailing list, please contact Julie Layne at jlayne@williamsmullen.com or 804.420.6311.
© 2012 WILLIAMS MULLEN ALL RIGHTS RESERVED
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Troutman Sanders LLP: Virginia Will Become Friendlier to Trustees on July 1, 2012
- 06-29-2012
13:15
PM - Author:
By David N. Anthony, Melissa Roberts Tannery and Tania S. Sebastian
A change in Virginia law effective July 1, 2012, will limit trustee liability with respect to directed trusts, which is good news for corporate and individual trustees alike. The amendment to Virginia Code Section 55-548.08, which is part of Virginia’s Uniform Trust Code, protects trustees when acting or not acting pursuant to directions from a trust director.
Specifically, the new law provides that a trustee who acts in accordance with a trust director’s direction shall not be liable for any loss directly or indirectly resulting from any act taken or not taken pursuant to the trust director’s instructions or as a result of a trust director’s failure to act after receiving a request by the trustee for direction, consent or action except “in cases of willful misconduct or gross negligence on the part of the directed trustee.” Va. Code Ann. § 55-548.08(E)(2) (as amended effective July 1, 2012).
Thus, even if a trustee was negligent — that is, failed to act with reasonable care — with respect to a directed trust, he or she will be shielded from liability as long as he or she followed the instructions of the trust director or requested instructions or action from the trust director.
Significantly, under the new law, trustees of directed trusts, except as otherwise provided in the trust instrument, shall not have any duty to “(i) monitor the trust director’s conduct; (ii) provide the trust director with information, other than material facts related to the trust administration expressly requested in writing by the trust director; (iii) inform or warn any beneficiary or third party that the trustee disagrees with any of the trust director’s actions or directions (iv) notify the trust director that the trustee disagrees with any of the trust director’s actions or directions; (v) do anything to prevent the trust director from giving any direction or taking any action; or (vi) compel the trust director to redress its action or direction.” Va. Code Ann. § 55-548.08(E)(3) (as amended effective July 1, 2012).
The new law applies if the trust creator (settlor) incorporates the new code provision by reference in the trust instrument or by nonjudicial settlement agreement. Va. Code Ann. § 55-548.08(E) (as amended effective July 1, 2012). The protection of trustees from liability still applies even if not incorporated into the trust instrument or added by nonjudicial settlement agreement unless the trust director’s instructions that the trustee followed were “manifestly contrary to the terms of the trust” or the trustee knew “the attempted exercise would constitute a serious breach of a fiduciary duty” that the trust director owes to the trust beneficiaries. Va. Code Ann. § 55-548.08(B) (as amended effective July 1, 2012).
Where the amended statute applies, a trust director “shall be deemed a fiduciary who, as such, is (i) required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries and (ii) liable for any loss that results from a breach of a fiduciary duty.” Va. Code Ann. § 55-548.08(E)(1) (as amended effective July 1, 2012). Thus, the trust director will be responsible to the beneficiaries for his/her/its actions while the directed trustee will be liable only in cases of willful misconduct or gross negligence.
This trustee-friendly new legislation should minimize fiduciary liability. Plaintiffs asserting breach of fiduciary duty claims will have to meet a higher burden and prove willful misconduct and/or gross negligence by the trustee of a directed trust in order to recover damages. Trustees now will have a stronger defense against these claims.
Troutman Sanders Trust, Estate and Private Wealth Management Litigation Team attorneys can advise you regarding the effect of this new law on claims filed against fiduciaries. In addition, Troutman Sanders Trust and Estate Planning attorneys can assist settlors, trust directors and trustees regarding incorporating this new law into trust instruments and preparing nonjudicial settlement agreements.
Troutman Sanders is an accomplished and experienced leader in helping trustees, executors and beneficiaries resolve a wide range of estate and trust issues and disputes. Our Trust, Estate and Private Wealth Management Litigation Team regularly represents trust departments for national, regional and local banks, trust companies and individual executors, administrators trustees and beneficiaries in litigation of all types. We recognize that claims involving trusts, estates and private wealth management require expertise and knowledge in these substantive areas as well as the special skills to effectively try these disputes before a judge or jury. The Trust, Estate and Private Wealth Management Litigation Team is part of the Troutman Sanders Financial Services Litigation Practice Group, which provides regulatory and litigation services to a broad spectrum of financial services institutions.
© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.
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Troutman Sanders LLP: Virginia Trust Law to Help Protect Assets from Creditors While Still Enjoying the Assets Takes Effect on July 1, 2012
- 07-09-2012
05:00
AM - Author:
By David N. Anthony, Melissa Roberts Tannery and Tania S. Sebastian
Beginning July 1, 2012, Virginia will allow its residents to create qualified self-settled spendthrift trusts and achieve some protection from creditors. Va. Code Ann. §§ 55-545.03:02 and 55-545.03:03. Under current Virginia law, a trust creator (“settlor”) cannot establish an irrevocable trust for his or her own benefit and protect the trust assets against creditors’ claims, even with a spendthrift provision.
For the protections to apply to a settlor’s qualified interest in a trust, several requirements must be met, including: (1) the trust must be irrevocable; (2) the trust must be created during the settlor’s lifetime; (3) there must be a qualified trustee, meaning a person residing in Virginia or a legal entity authorized to conduct trust business in the Commonwealth and who maintains some or all of the trust property in Virginia, maintains trust records in Virginia and prepares fiduciary income tax returns for the trust in Virginia; (4) the trust must be governed by Virginia law; (5) the settlor must be entitled to receive only income and/or principal distributions in the sole discretion of an independent qualified trustee, meaning such trustee must not be or be directed by the settlor’s spouse, descendant, parent, sibling, employee or business entity controlled by the settler or a non-Virginia resident or entity; (6) the trust must include at least one other beneficiary whose beneficial interest in the trust includes income and/or principal mirroring the settlor’s qualified interest; (7) the settlor must not retain the right to disapprove distributions from the trust; and (8) the transfer of assets to the trust must not be fraudulent and/or render the settlor insolvent. See Va. Code Ann. § 55-545.03:3(A)(11)(1-7) and § 55-545.03:02 effective July 1, 2012 (C); see also Va. Code Ann. § 55-545.05(A)(2), as amended effective July 1, 2012.
Approximately a dozen other states allow asset protection trusts (“APTs”). Although Virginia’s new law certainly makes APTs more desirable, Virginia’s law is friendlier to creditors than the laws of other domestic asset protection states. For example, creditors “may bring an action … to avoid a transfer to a qualified self-settled spendthrift trust or otherwise to enforce a claim that existed on the date of the settlor’s transfer to such trust within five years after the date of the settlor’s transfer to such trust to which such claim relates.” Va. Code Ann. § 55-545.03:2(D) (emphasis added). This five year period before trust assets are protected is longer than the period in other APT states.
In addition, unlike some other states, Virginia’s APT law prohibits the settlor from retaining veto power over the distributions to other beneficiaries. Virginia’s requirement of an independent qualified trustee to approve distributions also is more restrictive than other jurisdictions. Moreover, not all of the assets in a Virginia self-settled spendthrift trust may be protected, including any absolute right to receive income or principal.
Trust companies and high net worth persons, particularly those in professions where the risk of malpractice suits is high, interested in protecting their assets from future creditors while still benefitting from those assets should contact Troutman Sanders to see if an asset protection trust may be appropriate for their circumstances.
Troutman Sanders is an accomplished and experienced leader in helping trustees, executors and beneficiaries resolve a wide range of estate and trust issues and disputes. Our Trust, Estate and Private Wealth Management Litigation Team regularly represents trust departments for national, regional and local banks, trust companies and individual executors, administrators trustees and beneficiaries in litigation of all types. We recognize that claims involving trusts, estates and private wealth management require expertise and knowledge in these substantive areas as well as the special skills to effectively try these disputes before a judge or jury. The Trust, Estate and Private Wealth Management Litigation Team is part of the Troutman Sanders Financial Services Litigation Practice Group, which provides regulatory and litigation services to a broad spectrum of financial services institutions.
© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.
©Troutman Sanders LLP
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Troutman Sanders LLP: New Virginia Law Authorizes Trust Decanting, Allowing A Trustee To Change Some Provisions of An Irrevocable Trust
- 07-11-2012
11:00
AM - Author:
By Carol F. Burger, Molly F. James, Melissa Roberts Tannery and Tania S. Sebastian
Effective July 1, 2012, Virginia has a new law which permits the trustee to change some provisions of an irrevocable trust by appointing or decanting income and/or principal of a trust to another trust, under certain circumstances. Unless the terms of a trust expressly prohibit decanting, this law may be applied to any trust governed under Virginia law, without further court approval or consent of the beneficiaries (although a beneficiary has a right to commence a proceeding to approve or disapprove such action by the trustee). Virginia joins at least 14 states that have already passed similar legislation authorizing decanting.
Decanting is permitted if a trustee who is not an “interested trustee” has a discretionary power to distribute principal or income of the original trust to or for the benefit of one or more current beneficiaries. The new law authorizes the trustee to exercise this discretionary power to appoint some or all of the principal and/or income in favor of a second trust, which may also be a trust created by that trustee.
If the trustee’s discretionary power is limited by an ascertainable standard, the same beneficiaries who may benefit from the original trust under this standard must benefit from the second trust, under the same standard. However, only one or some of the current beneficiaries of the original trust need be included in the second trust if the trustee has an unlimited discretionary power. Significantly, whether or not the trustee’s discretionary power is limited, the second trust may confer a power of appointment upon a current beneficiary of the original trust, and permissible appointees of such power of appointment need not be beneficiaries of the original trust.
Decanting can fix administrative issues for the trust as well as respond to changing circumstances of the beneficiaries by, for example, permitting the trustee to decant to a trust that has more modern administrative provisions, changing the trust situs and the governing law, or trustee provisions. Other uses for decanting include where a trust advisor, trust protector or co-trustees are desired but not permitted under the terms of the original trust.
This new law imposes particular restrictions when decanting. For example, a current beneficiary who is a trustee may not decant under this new law. Neither can a trustee who could be removed or replaced by a current beneficiary who has the power to designate a related or subordinate party as a trustee.
Other restrictions under the new law work to preserve marital and charitable deductions taken with respect to contributions to the original trust, to retain the original vesting period for contributions made to the original trust that were treated as annual exclusion gifts, and to maintain consistent treatment in the application of the permissible period of the rule against perpetuities as it related to the original trust, under Virginia’s property laws, specifically Va. Code. Ann. §§ 55-12.1 through 55-13.3. Perhaps the most significant restriction is that the second trust may only include beneficiaries of the original trust.
Although this law permits the trustee to decant without the consent of the original trust’s beneficiaries, absent a signed written waiver by the qualified beneficiaries of the original trust, the trustee must still provide to those beneficiaries, the grantor of the trust (if living), and any persons acting as an advisor or protector of the trust, a written notice of the trustee’s intent to decant at least 60 days prior to the effective date of such action.
At present, the IRS has yet to rule on what possible (adverse) tax consequences may occur by decanting. In Rev. Proc. 2011-3, 2011-1 I.R.B. 111 (and reaffirmed in Rev. Proc. 2012-3, 2012-1 I.R.B. 113), the IRS added decanting to its “no ruling” list, prohibiting rulings and determination letters from being issued on matters pertaining to decanting, until it publishes guidance on this issue. Comments on decanting were requested in IRS Notice 2011-101, and we expect to see guidance published by the IRS very soon.
Troutman Sanders Trust and Estate Attorneys can assist trustees who wish to decant a trust by preparing the necessary documentation.
©Troutman Sanders LLP
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Troutman Sanders LLP: New Virginia Law Authorizes Trust Decanting, Allowing A Trustee To Change Some Provisions of An Irrevocable Trust
- 07-11-2012
11:00
AM - Author:
By Carol F. Burger, Molly F. James, Melissa Roberts Tannery and Tania S. Sebastian
Effective July 1, 2012, Virginia has a new law which permits the trustee to change some provisions of an irrevocable trust by appointing or decanting income and/or principal of a trust to another trust, under certain circumstances. Unless the terms of a trust expressly prohibit decanting, this law may be applied to any trust governed under Virginia law, without further court approval or consent of the beneficiaries (although a beneficiary has a right to commence a proceeding to approve or disapprove such action by the trustee). Virginia joins at least 14 states that have already passed similar legislation authorizing decanting.
Decanting is permitted if a trustee who is not an “interested trustee” has a discretionary power to distribute principal or income of the original trust to or for the benefit of one or more current beneficiaries. The new law authorizes the trustee to exercise this discretionary power to appoint some or all of the principal and/or income in favor of a second trust, which may also be a trust created by that trustee.
If the trustee’s discretionary power is limited by an ascertainable standard, the same beneficiaries who may benefit from the original trust under this standard must benefit from the second trust, under the same standard. However, only one or some of the current beneficiaries of the original trust need be included in the second trust if the trustee has an unlimited discretionary power. Significantly, whether or not the trustee’s discretionary power is limited, the second trust may confer a power of appointment upon a current beneficiary of the original trust, and permissible appointees of such power of appointment need not be beneficiaries of the original trust.
Decanting can fix administrative issues for the trust as well as respond to changing circumstances of the beneficiaries by, for example, permitting the trustee to decant to a trust that has more modern administrative provisions, changing the trust situs and the governing law, or trustee provisions. Other uses for decanting include where a trust advisor, trust protector or co-trustees are desired but not permitted under the terms of the original trust.
This new law imposes particular restrictions when decanting. For example, a current beneficiary who is a trustee may not decant under this new law. Neither can a trustee who could be removed or replaced by a current beneficiary who has the power to designate a related or subordinate party as a trustee.
Other restrictions under the new law work to preserve marital and charitable deductions taken with respect to contributions to the original trust, to retain the original vesting period for contributions made to the original trust that were treated as annual exclusion gifts, and to maintain consistent treatment in the application of the permissible period of the rule against perpetuities as it related to the original trust, under Virginia’s property laws, specifically Va. Code. Ann. §§ 55-12.1 through 55-13.3. Perhaps the most significant restriction is that the second trust may only include beneficiaries of the original trust.
Although this law permits the trustee to decant without the consent of the original trust’s beneficiaries, absent a signed written waiver by the qualified beneficiaries of the original trust, the trustee must still provide to those beneficiaries, the grantor of the trust (if living), and any persons acting as an advisor or protector of the trust, a written notice of the trustee’s intent to decant at least 60 days prior to the effective date of such action.
At present, the IRS has yet to rule on what possible (adverse) tax consequences may occur by decanting. In Rev. Proc. 2011-3, 2011-1 I.R.B. 111 (and reaffirmed in Rev. Proc. 2012-3, 2012-1 I.R.B. 113), the IRS added decanting to its “no ruling” list, prohibiting rulings and determination letters from being issued on matters pertaining to decanting, until it publishes guidance on this issue. Comments on decanting were requested in IRS Notice 2011-101, and we expect to see guidance published by the IRS very soon.
Troutman Sanders Trust and Estate Attorneys can assist trustees who wish to decant a trust by preparing the necessary documentation.
©Troutman Sanders LLP
….
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Intentionally Defective Grantor Trusts on the Chopping Block?
- 07-11-2012
14:54
PM - Author:
Persons who have relied upon certain trusts as a means of limiting estate taxes upon their death might have cause for concern regarding an Obama administration budget proposal for 2013. While the current proposal remains very broad, and thus might be subject to change down the road, as it stands now, it would require those who set up “grantor trusts” to include trust assets in their own estates for estate tax purposes.
Current tax policy effectively keeps income tax rules and estate tax rules separate. With proper planning, a trust grantor and an irrevocable trust can be treated as the same person under income tax law, meaning that transfers between the two do not trigger an income tax. Meanwhile, trusts designated as grantor trusts can be designed to be separate from the grantor for estate tax purposes and, thus, no estate tax is paid on assets held in these trusts upon the creator’s death.
These trusts are often called “intentionally defective grantor trusts, and are used in sophisticated estate and asset protection planning. Particularly in recent years, many people have relied upon these distinctions to avoid or minimize income and estate taxes. Under the current administration’s proposed policy, this type of planning would no longer be possible.
There’s no real cause for alarm yet, however, as the current state of affairs in Washington most likely prevents any action in the near future.
Gregory
Herman-Giddens, JD, LLM, TEP, CFP, Attorney at Law (NC, FL, TN),
Board Certified Specialist in Estate Planning and Probate Law (NC). North
Carolina Registered Guardian, Solicitor, England and Wales. Follow
his blog, North Carolina Estate
Planning Blog..
….
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Intentionally Defective Grantor Trusts on the Chopping Block?
- 07-11-2012
14:54
PM - Author:
Persons who have relied upon certain trusts as a means of limiting estate taxes upon their death might have cause for concern regarding an Obama administration budget proposal for 2013. While the current proposal remains very broad, and thus might be subject to change down the road, as it stands now, it would require those who set up “grantor trusts” to include trust assets in their own estates for estate tax purposes.
Current tax policy effectively keeps income tax rules and estate tax rules separate. With proper planning, a trust grantor and an irrevocable trust can be treated as the same person under income tax law, meaning that transfers between the two do not trigger an income tax. Meanwhile, trusts designated as grantor trusts can be designed to be separate from the grantor for estate tax purposes and, thus, no estate tax is paid on assets held in these trusts upon the creator’s death.
These trusts are often called “intentionally defective grantor trusts, and are used in sophisticated estate and asset protection planning. Particularly in recent years, many people have relied upon these distinctions to avoid or minimize income and estate taxes. Under the current administration’s proposed policy, this type of planning would no longer be possible.
There’s no real cause for alarm yet, however, as the current state of affairs in Washington most likely prevents any action in the near future.
Gregory
Herman-Giddens, JD, LLM, TEP, CFP, Attorney at Law (NC, FL, TN),
Board Certified Specialist in Estate Planning and Probate Law (NC). North
Carolina Registered Guardian, Solicitor, England and Wales. Follow
his blog, North Carolina Estate
Planning Blog..
….
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Amendment of Trust by Grantor’s Attorney-in-Fact
- 08-08-2012
08:17
AM - Author:
An irrevocable and unamendable
trust can be revoked or amended during the life of the grantor under certain
limited circumstances. New York’s Estate Powers and Trust Law (EPTL) provides
in Section 7-1.9 that upon the written acknowledged consents
of all persons beneficially interested in a trust, a grantor may revoke or
amend the whole or any part of a trust by his or her written acknowledged
instrument.
A
New York Appellate Court has recently reversed a trial court decision and
permitted an attorney-in-fact for the grantor of a trust to amend a trust
pursuant to the above statute with the consent of all its beneficiaries. Matter of Perosi v. LiGreci, 2012 N.Y.
App. Div. LEXIS 5448 (2d Dept. July 11, 2012) [enhanced version available to lexis.com subscribers]. The appellate court held that there need not
be a specific delegation of the power to amend or revoke in the trust instrument
or the power of attorney. The Court stated that as long as the Trust did not
prohibit the grantor from amending the trust through his attorney-in-fact, the
attorney-in-fact, as the creator’s alter ego, could properly amend the trust.
The
appellate court expressed an awareness that there are policy reasons for
prohibiting an attorney-in-fact from amending or revoking an irrevocable trust
similar to a testamentary instrument on behalf of her principal. The Court said
such a policy is for the legislature to determine, not the courts.
In
1991, Nicholas LiGreci created an Irrevocable Life Insurance Trust the beneficiaries
of which were his three adult children. Linda Perosi, his daughter and one of
the beneficiaries was appointed his attorney-in-fact under a statutory short
form power of attorney in April 2010. Nicholas LiGreci had named his brother
John as Trustee and another unrelated party as successor trustee. The Trust
provided that it “shall be irrevocable and shall not be subject to any
alteration or amendment.” The power of attorney granted powers with respect to
estate transactions and all other matters. It also contained a Major Gifts
Rider (MGR) which gave the daughter the authority to establish and fund trusts,
transfer assets to a trust, make gifts, and act as grantor and trustee of a
trust. Concededly neither the trust instrument nor the power of attorney
granted the attorney-in-fact the specific power to revoke or amend an existing
irrevocable trust.
Within
one month of the appointment of the daughter under the power of attorney, she
executed an amendment with the consent of all beneficiaries removing her uncle
and the successor trustee and appointing her son as trustee and another person
as successor trustee. Nicholas LiGreci died 15 days later and never signed the
amendment. Thereafter, the new trustee sought an accounting from the decedent’s
brother John LiGreci, and the turnover of all assets and records of the trust
to the “new” trustee. The decedent’s brother and trustee moved to set aside the
amendment. The Supreme Court denied the petition and granted the trustees’ motion
to set aside the amendment.
The
Supreme Court held that the grantor intended the trust to be irrevocable, that
the power of attorney (POA) granted no authority to amend estate planning
devices created prior to the execution of the POA and the statutory right to
revoke or amend under EPTL 7-1.9 is a personal right exercisable only by the
creator, unless the POA or trust states otherwise.
The
Appellate Court began by recognizing that EPTL 7-1.9 allows the creator and beneficiaries of an
irrevocable and unamendable trust to reform or terminate it. They further
recognized that where a trust instrument specifies a procedure to amend, it
will only be valid if that procedure is followed. Thus they concluded if the
trust does not set forth an amendment procedure, the grantor and beneficiaries
are governed by the statutory requirements. Analyzing the POA in question, the
Court found that under such a POA, the attorney-in-fact is authorized to act
with respect to any matter of the principal with the exception of those acts
which by their nature, by public policy or contract require personal
performance. Such exceptions would include execution of principal’s will, his
affidavit on personal knowledge, or contracting a marriage or divorce. Execution
of an amendment to a trust was not an act requiring the principal’s personal
performance. The Appellate Court rejected the trial court’s determination that
the amendment or revocation of a trust was a personal act, analogous to the
execution or revocation of a will or codicil, stating that any such policy
determination was for the Legislature to enact. The Court also distinguished
other trial court decisions which found that an attorney-in-fact had no
authority to amend a trust on the grounds that the power of revocation or
amendment is a personal right.
It
should be noted that courts and statutes in numerous other jurisdictions have
found attempted amendments, not expressly authorized in the trust document or
POA itself, to be void and ineffective. (Cal. Prob. Code § 15401 (c); Tenn. Code Ann. § 35-15-682; Williams v. Springfield Man. Bank, 131 Ill. App. 3d 417 (1985) [enhanced version available to lexis.com subscribers];
Muller v. Bank of America, 28 Kan.
App. 2d 136 (2000) [enhanced version available to lexis.com subscribers];
Leahy v. Old Colony Trust Co., 326
Mass. 49 (1950) [enhanced version available to lexis.com subscribers];
Garfinkel v. Josi, 972 So. 2d 927
(Fla 2008) [enhanced version available to lexis.com subscribers];
Marital Trust of John W. Murphey, 169
Ariz. 443 (1991) [enhanced version available to lexis.com subscribers];
Weatherly v. Byrd, 566 S.W.2d 292
(Texas 1978) [enhanced version available to lexis.com subscribers].
The
answer to this dilemma appears to be a matter of drafting. If an irrevocable
trust is to be truly irrevocable an explicit provision should be made to draft
around EPTL 7-1.9 in the trust instrument and the POA. If a
grantor wants to create flexibility in the future even with respect to an
irrevocable trust, they should explicitly give the statutory power to amend or
revoke to their agent.
….
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