Posts Tagged ‘planning’

Providing Flexibility by Adding Trust Protectors to Your Estate Planning

May 2, 2011

Trust protectors (aka Trust Advisors) have long been used in British Commonwealth countries, originating with offshore asset protection trusts.  With these trusts, their role was limited mostly to overseeing the foreign trustee and to make sure the trust maker’s intent was fulfilled.

Today, trust protectors are increasingly being used with trusts that are located here in the U.S. And, while their main job is still to oversee the trustee and make sure your intentions are followed after unforeseen changes in the law and other matters, they can be given additional duties that will provide you and your beneficiaries with added flexibility, security and peace of mind.

What is a Trust Protector?

A trust protector is someone you name in your trust document to oversee your trustee and make sure your trust carries on in the way you intended. This should be a trusted friend or advisor, someone who knows and understands your motives, family values and desires when you created your trust. In the case of a trust that will last many years, like a multi-generational trust, a trust protector is often an institution rather than a specific person.

A trust protector can begin to act immediately (for example, if your trust is irrevocable), or can take an active role only under certain circumstances (for example, at your incapacity or death).  Think of your trust protector as your substitute, someone who can speak for you if there is uncertainty in interpreting your trust’s instructions or the law changes and that change affects your trust.  Your trust protector also can provide guidance for the trustee and protect your beneficiaries from a trustee that is not meeting its responsibilities, is overreaching, or is unresponsive.

How Much Power Should You Give Your Trust Protector?

The trust protector’s duties and powers are defined in the trust document, and can range from extremely limited to extremely broad.  How much power you give your trust protector is completely up to you?  Traditionally, the trust protector’s role has been a defensive one: to ensure that the trustee carries out the grantor’s wishes and to protect the beneficiaries from an under-performing or over-reaching trustee.  But if you give your trust protector more power, the role can become a proactive one, allowing your trust protector to act before wrongs occur.

Some of the duties and powers you can give your trust protector include:

Oversee, Remove and Replace the Trustee

Your trust protector can oversee your trustee, providing guidance in interpreting your trust’s instructions and holding the trustee accountable.  You can also give your trust protector the power to remove and replace the trustee.  This authority can be restrictive, limited to specific bad behavior by the trustee that can include being unresponsive to the beneficiaries, not providing acceptable record-keeping, reporting and tax filings, or charging too much for services.  The authority can also be extensive, allowing the trust protector to remove and replace the trustee for no specific reason (without cause).  Usually potential replacements (successor trustees) are named in the trust document, but it may also be possible for the trust protector to select a successor trustee.

Just having these oversight provisions in place is often enough to keep a trustee in line.  And if it does become necessary to remove a trustee, it is much easier for the trust protector to do this (because he or she already has the authority) than for the beneficiaries to reach an agreement and ask for court removal, which is a time-consuming, expensive and unpleasant procedure.

You can also allow your trust protector to control spending by the trustee, and even limit the trustee’s compensation, which can go a long way toward preventing disputes.

Resolve Disputes

You can also make your trust protector the mediator if disputes should arise between co-trustees, between the trustee and a beneficiary, or even among beneficiaries.  Having the trust protector as the final arbiter in disputes over interpreting the provisions of the trust document can sometimes avoid costly and unpleasant trust litigation.

You could even give your trust protector the ability to sue or defend lawsuits involving the trust assets.

Modify Your Estate Plan

You may also want to allow your trust protector to actually make some changes to your trust.  For example, you could allow your trust protector to change the situs (location in which the trust is regulated) to a state that has more favorable asset protection or income tax laws, should the need arise.

You could also give your trust protector the power to amend or revoke the trust agreement, in its entirety or in part; to add or delete specific beneficiaries or classes of beneficiaries; to change the terms of distributions to beneficiaries; even pour into another trust for the same beneficiaries, if your state allows that.  These powers may be extremely beneficial to the trust’s ability to follow your intentions as tax laws change, as well as to protect the assets from potential predators and creditors.

Delegate Responsibilities among Advisors

Traditionally, and still with many trusts, the trustee handles everything – record-keeping, tax returns, distributions, investing, etc.  But over time, people have discovered that it is beneficial to allocate some of this responsibility to different parties that have different strengths.

Consider giving your trust protector the ability to appoint, oversee and substitute other professionals. For example, the management of your trust could be divided like this:
• An Administrative Trustee maintains trust records, accounts, and tax returns. If the trust is governed by laws in a different state (often for tax or asset protection reasons), the administrator will usually be a local institution or professional.
• A Distribution Trustee or Adviser that has discretion and can make or withhold distributions from the trust to the beneficiaries.  Typically this will be an objective third party, which insulates the trustee from pressure and liability associated with the power to distribute trust assets.  This is especially important if a beneficiary’s creditor tries to force distributions from the trust.
• An Investment Trustee or Adviser oversees or directs trust investments, and may be granted specific powers, including:  to hold, maintain or cancel life insurance; to direct the sale or exchange of property; and to open, manage and close accounts. A general trustee is held to the prudent investment standard because of its fiduciary duty and, as a result, has restrictions on the investments it can make.  Having an investment advisor that is not bound by the prudent investor rule or held to the same standard will provide more flexibility in investments.
• The “General” Trustee handles everything that is not delegated.

Who Should Serve as Trust Protector?

Ideally, your trust protector should be someone who knows you, your motives, desires, and intentions when you established your trust.  It cannot be you or a family member who is a beneficiary of your trust because of possible tax complications.  An unrelated third party – a family friend, an advisor, the attorney who drafted your trust, or your family CPA – is often the best choice.  They obviously must be willing to serve in this capacity, and your trust document should specify if they are to be paid for their services.

Planning Tip: There is currently very little case law on trust protectors, and they are not required by law to be fiduciaries, as trustees are.  Your trust should clearly state whether you want your trust protector to act in a fiduciary capacity and be held to a higher standard, or not act in a fiduciary capacity.

Who Should Have the Power to Remove or Replace the Trust Protector?

This probably should not be you, unless the replacement is explicitly limited in the document to someone who is not related or subordinate to you.  You could possibly give this power to the beneficiaries or an unrelated third party.  Leaving this decision to the courts would be time-consuming and costly.

Planning Tip: If your plan has asset protection elements, no beneficiary should have the power to remove or replace the trust protector. Doing so could cause your trust to be under the control of a beneficiary and that could put the entire asset protection part of your plan in jeopardy.


The use of trust protectors is an excellent way to provide added flexibility, security and peace of mind in trust planning, especially since you can control how much power the trust protector is given.  If you would like to discuss adding a trust protector to your estate planning, please call our office. We are ready to help.

Test Your Knowledge

1. Using a trust protector is a new concept in estate planning.  True or False

2. A trust protector’s main job is to keep the beneficiaries in line.  True or False

3. How much power you give your trust protector is up to you.  True or False

4. A trust protector can only remove a trustee for very bad behavior.  True or False

5. A trust protector is never permitted to make changes to the trust document.  True or False

6. A trust protector is a good choice to be a mediator between the trustee and the beneficiaries.  True or False

7. Your trust protector should be someone who knows and understands your motives, family values and desires when your trust is created. True or False

8. A trust protector can protect your beneficiaries from a trustee that is not meeting its responsibilities, is overreaching or is not being responsive.  True or False

9. The trustee is required to handle all administrative and investment duties of your trust and can never delegate to others.  True or False

10. You can be your own trust protector.  True or False

Answers: 1, 2, 4, 5, 9 and 10 are false.  3, 6, 7 and 8 are true.

A Unique Opportunity

December 23, 2010

The new tax law (2010 Tax Relief Act) creates an once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.


Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax (GSTT), an onerous tax equal to the maximum gift or estate tax rate.  The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.


The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax.  This is because, under the new law, the tax rate is zero for any generation skipping transfer made in 2010. Beginning January 1, 2011, the tax rate for these transfers with be 35%.  In two short years the rate goes back to 55%.


There are three common scenarios offering planning opportunities.  First, make gifts before December 31, 2010 to Skip Trusts.  These are trusts that you create for grandchildren, great grandchildren or more remote generations.  There will be no generation skipping transfer tax.  The gift tax is 35%, after use of the $1 million lifetime gift exclusion.  This strategy is most effective for large taxable estates.  On the gift tax return, you will want to elect out of automatic Generation Skipping Transfer (GST) allocation rules.  For 2010, you will allocate nothing to the GST Exemption because there is no estate tax.  Use a Trust Protector with the power to add beneficiaries (e.g. children/spouse).


The second planning scenario deals with the unique planning opportunities for those who are beneficiaries of trusts that will be subject to GSTT upon distribution from the trust.  Distributions should be made from these trusts before December 31, 2010 because the tax rate is 0%.  After this year, the distribution will be subject to at least a 35% tax rate.  Sometimes, there is concern about beneficiaries getting outright distributions.  Some of these concerns may be alleviated if the trustee invests trust assets in limited partnerships or limited liability companies (LLCs) and then distributes the partnership interests or LLC membership interests.


The third planning opportunity deals with clearing any loans made to trusts.  The most common scenario involves Irrevocable Life Insurance Trusts.  Until the passage of the 2010 Tax Relief Act, there was no way to allocate the GSTT exemption, so loans were used.  With the new act, you can now allocate the GSTT exemption on a timely-filed gift tax return.  If you unwind the loans now, you can save the 2010 annual exclusion that would otherwise be lost.


I strongly encourage you to take advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren.  We can help you structure these gifts so that they meet your goals and objectives, regardless of amount.

Qualified Disclaimers

October 22, 2010

Whether in the context of gift and estate tax planning or probate and trust administration, we have been talking with our clients about qualified disclaimers more than ever.  It is an effective planning technique, but it must be implemented carefully.  The biggest hurdle is that the person making the disclaimer cannot take any benefit from the property to be disclaimed.


Estates & Trusts is one of the leading magazines in this area.  The following is a recent article on qualified disclaimers:


Qualified Disclaimers in 2010

Use this simple and unique solution to add flexibility in dealing with estate tax uncertainty

By Joe Luby, founder and manager of Jagen Investments, LLC in Henderson, Nev.

What a remarkable time to be in the business of advising wealthy families on financial, tax and estate issues!  It’s remarkable both in terms of the changes and significant developments in the field, as well as for the opportunity afforded us as advisors to set ourselves apart and proactively solve client concerns.  Many practitioners are hamstrung this year with indecision, worry and fear about what may or may not happen with income taxes, estate tax, generation-skipping transfer (GST) tax, etc.  It’s unfortunate for their clients because we’re situated in the perfect tsunami of wealth transfer opportunities.  Asset values are way down, tax rates are the lowest they’re going to be in most of our lifetimes and interest rates are near zero.  Wealth transfer strategies should be on the top of advisors’ minds right now.

As of this writing, it doesn’t look like Congress will act anytime soon on estate tax reform legislation.  Common expectations in the industry expect Congress to eventually enact some version of the law we had in 2009, perhaps with some minor variations.  No one knows for sure, but that seems to be the consensus lately.  One fear commonly expressed by practitioners nationwide is that Congress could try to enact retroactive legislation and thereby disrupt any transactions put in place today.  For example, if they retroactively raised the gift tax to 45 percent or 55 percent from the current 35 percent, then gifts made today become more expensive.  The same fear applies to a retroactive GST tax, which could create a double whammy for gifts made in 2010.

Simple Solution

There’s a simple but unique solution to these concerns: the qualified disclaimer (QD).  In short, to be a QD under Internal Revenue Code Section 2518(b), the QD must:


  • be in writing; and
  • be made within nine months of the date of gift or the date the recipient reaches age 21, whichever is later.


Additionally, the recipient may not have accepted the gift, used the gifted asset(s) or benefited from them.  The recipient may not direct where the gifted asset(s) goes upon receipt of the QD (that is, the gift either reverts back to the giver or to the next designated beneficiary, if applicable).

Most of us think of QDs for post-mortem planning opportunities.  For example, the primary beneficiary of a retirement account may use a QD to redirect the funds to the contingent beneficiary for a variety of reasons.  Or, a surviving spouse may use a QD for all or some of the assets in a disclaimer trust,” which specifically incorporates the QD as part of the upfront planning.

In 2010, clients can use QD planning for lifetime gifts to add flexibility and a solution to the issues described above.  Taxable gifts made between now and Dec. 31 are subject to the current gift tax rate of 35 percent under 2010 law.  If we wait to see whether Congress acts retroactively with an increased gift tax rate or GST tax, we will wait ourselves and clients right into 2011 when we know the rate is scheduled to go up.  The time to act is NOW.  Clients can use the QD procedure to undo the gift later, should Congress enact a retroactive tax increase.


Take the following example: Tom Clark would like to gift $2 million of marketable securities to his son Bill.  He establishes a trust naming Bill as primary beneficiary and his wife, Mary Clark as contingent.  The trust is drafted to qualify as a completed gift for tax purposes, and Tom funds the trust with the $2 million securities portfolio.  The family now has nine months (assuming Bill is age 21 or older) to decide if they want the gift to stand.  Should Congress enact a retroactive increase in the gift tax, Bill will simply disclaim his interest in the trust, which then flows to Mary as contingent beneficiary.  The entire transaction is gift tax-free if this option is triggered since the gift is now between spouses.  And if the gift tax rate isn’t increased retroactively, the Clarks have locked in the lower gift tax rate by completing the transaction in 2010.

The same set of circumstances applies to gifts made to grandchildren in the event a retroactive GST is enacted.  Grandparents can use this opportunity to shift significant wealth using the reduced gift tax rate in effect for 2010 and no GST tax, while still retaining flexibility in their planning if necessary to undo the gift.

Additional opportunities are present when using QD planning this year as well.  Assume Congress doesn’t act retroactively and thus the current 2010 gift tax rate of 35 percent applies.  However, Tom’s $2 million portfolio suffers significant losses and drops significantly.  The QD option allows the family to reconsider whether paying the gift tax on $2 million (even at the lower rate in 2010) is really the best strategy.  It may make sense to undo the gift via QD and structure a new gift of the now devalued assets, even though the nominal tax rate may be higher in 2011.  If the assets are depressed in value already due to market turmoil over the last few years, the reverse may apply.  If the $2 million portfolio recovers significantly in value, the family wins by having locked in the gift now in 2010 at the lower value and reduced gift tax rate.

Discounted Value Assets

Lastly, any gifting strategy using QDs can be greatly enhanced with the use of discounted value assets.  The net after-tax impact of the gifting strategies described above is even higher when the asset gifted is subject to valuation adjustments.  Examples of such assets are fractional real estate interests, closely held business interests and private investment funds. For example, an asset subject to a 30 percent discount results in a net effective federal gift tax rate on the full asset value of less than 25 percent.  So not only can the client lock in 2010’s lower gift tax rate with the flexibility to undo the transaction later, but also he can even reduce the effective rate via proper advanced planning.


A remedy for estate tax problem?

April 16, 2010

I received an email today about Senate Bill 670, stating that the Elder Law Section of the Wisconsin Bar Association is joining the RPPT Section in support in principle of this bill relating to disposal of a decedent’s property.

The Elder Law Section works to develop and improve laws that affect the elderly, and promotes high standards of ethical performance and technical expertise for those who practice in the area. RPPT pertains to the law of real property, probate and trusts. They support this bill as a remedy for problems experienced by families with estate planning gone awry because of the repeal of the federal estate tax in 2010.

Congressional inaction has resulted in a great deal of uncertainty as to the application of thousands of Wisconsin estate plans (and millions nation-wide) which were premised on, and designed around, the existence of such a tax. Many other states have taken, or are considering, legislative solutions to resolve the issues created in testamentary plans.

The primary issue is that for decades, estate planning attorneys and other planning solutions have utilized formula clauses when creating estates plans or trusts. These formula clauses determine the distribution of assets in an estate or trust while accounting for taxation of such estates or trusts. With no federal estate tax in 2010, there can be (1) significant ambiguity in the interpretation and implementation of these formulas; and (2) the inadvertent disinheritance of children, spouses and charities.

Wisconsin law has long provided that the intentions of a deceased person regarding the disposition of assets are to be respected. Plus, greater certainty in the application of estate planning instruments is in the public interest. SB 670 will further longstanding public policy, reduce protracted litigation and court proceedings, and minimize family and financial dislocations because it says estate planning instruments are to be administered in a manner that is most likely consistent with a deceased person’s expectations and intent.

Statistics – Long-term Care Insurance

February 12, 2010

I have discovered that getting good statistics on long-term care is equally as difficult as getting them for disability. After reading the New York Times article on disability statistics, I couldn’t help thinking that there might be the same problems with what was being said to encourage people to buy long-term care insurance. I made some inquiries and today I got a 137-page report on the subject from the Society of Actuaries.

I intend to read it this weekend. I’ll report back next week with my conclusions.

This is especially important to me because I am in the process of buying long-term care insurance for my wife and myself. As many of you may know, I have been an advocate of this insurance. Now I’ll be forced to reexamine my thoughts on the matter.

There are Statistics, and then there are Statistics

February 8, 2010

On Saturday, February 6, the New York Times had a great article about disability insurance. As a lawyer dedicated to helping people protect their families and businesses, the article shed light where there had been little in the past.

My experience is that disability planning tends to be neglected. Few do it, but nearly everyone should. In an earlier blog entry, I discussed one element of disability; setting aside cash equal to six months to two years of gross income. The New York Times article discusses disability insurance as a legitimate planning tool. The article points out that insurance companies and planners have been overstating the odds of being disabled. For years we have been hearing that a 25-year-old has an 80 percent chance of suffering a disability before age 65 that would result in being out of work for at least 90 days.

As it turns out, for a variety of reasons, this was not accurate. An analysis by the Disability Experience Committee of the Society of Actuaries shows that a 25-year-old actually has a 30 percent chance. Actuaries are high-power mathematicians trained to do these studies.

Personal factors can make your chance even less. White collar workers have less chance. If you have no chronic conditions, eat healthy, and avoid cigarettes, your odds may drop to 10 percent.

Even then, disability planning is important. You may get little or no disability pay from your employer. Social Security may not provide help. It can take more than a year for your claim to be processed. If you have to appeal, it will be much longer. Besides, Social Security disability payments may be too small to cover your needs.

If you are interested in more information on this subject, you can find the original article and additional details here.