Archive for September, 2009
Nevada’s New Trust Company Rules Set to Begin October 1st
Posted by Jerry Cooper in News on September 25, 2009
After two failed attempts, determined regulator succeeds in closing Nevada’s low capital loophole.
LAS VEGAS, NV. Sept 25 – This Thursday, October 1st, Nevada’s Financial Institutions Division, the state agency that supervises trust companies, and its Commissioner George E. Burns can celebrate a long fought victory for promoting major trust company regulatory reforms and carrying them through the legislature to the Governors’ desk.
The new law, Nevada Senate Bill SB-310, provides for $1 million in capital to be posted, a 330% increase in the requirement needed to license and maintain a retail trust company in the state. In addition to the need for additional capital, other major requirements include:
- Verifiable physical office to administer trust business in Nevada.
- Nevada employee with trust experience “satisfactory” to the Commissioner.
- Original or “true” copies of business records and accounts readily available for examination.
- Maintenance of the required cash portion of the capital requirement in a Nevada financial institution.
- Services provided to Nevada residents consistent with the business plan.
- Other conditions that the Commissioner may require to protect the “public interest.”
To give time to the state’s currently licensed 17 public trust companies to comply, the new law calls these grandfathered trust companies and provides for a reasonable time to meet the new $1 million requirement:
- $500,000 by October 1, 2010
- $750,000 by October 1, 2011
- $1,000,000 by October 1, 2012
SB-365 Establishes Provisions Relating to Family Trust Companies
A second law, Nevada Senate Bill SB-365, establishes provisions relating to family trust companies. Private family trust companies do not do business with the public and are a lessor concern to Commissioner Burns.
This bill, promoted both by the Nevada Bar Association and noted private trust company expert John P. C. Duncan retains the existing $300,000 capital requirement for licensed private family trust companies. In addition to the lock on lower capital, the bill provides for better definitions of what a family trust company is and a reduced annual fee of $1500.
Most significant about SB-365 is the option to be regulated or unregulated. Section 13 of SB-365 states:
A family trust company:
- Is not required to be licensed pursuant to this chapter or chapter 669 of NRS.
- May apply for a license as: a) A trust company pursuant to chapter 669 of NRS; or b) A licensed family trust company pursuant to this chapter.
This means that an organizer of a private family trust company can choose to be unlicensed and carry on its business with the full blessing of the state without obtaining a trust license from Nevada’s Financial Institutions Division.
Reaction to the New Laws
The reaction to Nevada’s trust company overhaul has been mixed. Les Revzon, an officer with Summit Trust Company, which has been in business since 2004, said reforms were needed. Revzon said: “By promoting the increase in capital and entry requirement standards, Nevada is raising the bar and will attract higher quality institutions.” Revzon added: “Summit already maintains $1 million in regulatory capital and we are pleased to see that now everyone else needs to measure up.”
Christopher Holtby, a Dallas-based wealth manager, said for a wealth manager that has less than $1 billion under management, Nevada makes no economic sense. The cost to maintain $1 million of capital and to support a stand-alone office with full-time staff makes Nevada cost prohibitive for any start-up.
Holtby and several other Dallas area wealth managers chose South Dakota over Nevada to launch Wealth Advisors Trust Company when they learned of the proposed changes in Nevada earlier this year. “The $1 million requirement did not bother us, but we felt that made no sense for a non-custodial institution. Also, that together with our group’s overriding concerns with Nevada’s surge of bank failures and reputation with gambling made South Dakota a better choice.”
Holtby continued: “Perhaps if you are a Morgan Stanley or LPL, Nevada may be the right fit for a trust company. But, I see those firms selecting Delaware over Nevada now with similar requirements. Delaware is a mature well-known trust center with close proximity to the east coast, with plenty of trust talent.”
All of the trust companies interviewed had no problems with the new law. They were pleased with the new rules because they are specific and clear. Most were pleased with the way Commissioner Burns was running the agency, including the handling of examinations. Revzon said: “The two examinations he oversaw on behalf of Summit Trust, the auditor was well trained, very professional, fair and reasonable.”
The Road to Reform
Reforming Nevada’s trust statues which go back to the 1940′s was no easy task. The quest to increase the capital requirements and modernize the licensing and supervision rules governing trust companies began over two years ago in early 2007.
The first proposal was introduced by Commissioner Burns’ predecessor Steve Kondrup for the 2007 Nevada legislative session. The bill, SB-537, asked for similar reforms found in SB-310 but with a $2 million capital requirement. The bill died before it could be heard since the Senate Committee Commerce Chairman Randolph J. Townsend thought the proposal was out of touch with the needs of the industry.
FID’s second attempt to close the loophole came in the form of proposed regulations by the Commissioner of Financial Institutions. On August 20, 2008, proposed regulations to the existing trust company law, NRS 669, were introduced. The regulations titled LCB File No. R134-08 were posted on the agency’s web site.
Most of the content from the 2007 Nevada legislative attempt was inserted into these regulations almost verbatim, making it seem the Commissioner was trying to bypass the approval required by the Nevada Legislature and Governor Jim Gibbons.
This proposal included a requirement that a trust company maintain $2 million in regulatory capital. In addition, there was an unusual provision added in Section 9 of the proposed regulations. It states: “Evidenced that a majority of the operations of the trust company serve residents of the state.” This meant a Nevada trust company would have to do more than half its business only with Nevada residents. This unusual requirement had no precedent anywhere in the country.
The procedure for promulgating regulations in Nevada requires a public hearing, called workshops so that those affected might have a chance to comment and hopefully prevent unnecessary and over-burdensome rules to be created. Among those in attendance was John P.C. Duncan who testified in opposition.
Duncan was concerned that the family trust companies he formed on behalf of his clients might be affected by these requirements. It was Duncan’s arguments which reportedly led to the Nevada FID withdrawing the regulations without further contention. By the time those regulations were withdrawn the window of time that the Nevada Financial Institution Division could introduce a bill in the next legislative session was coming near.
At that point, the Nevada FID abandoned its further attempt to control the trust companies through regulations. It set its sights on a higher and better target of actually getting the law changed. At that point the Division introduced a first draft of SB-310 on March 16, 2009 which contained much of what was requested in the proposed regulations.
Duncan said, according to my interview, that he followed the bill through the legislative process. He realized that if he didn’t reach out to Commissioner Burns, that his private trust company clients could become trampled and caught up in this new far-reaching proposal.
Duncan persuaded Burns that his chances of success were much greater with his help and his trust company credentials in front of the legislature. Duncan was the architect of New Hampshire’s trust company law overhaul and wrote the model trust company law for the Conference of State Bank Supervisors.
Commissioner Burns, according to Duncan, readily agreed to allow Duncan and the Nevada Bar Association retain its existing dominion over private trust companies if Duncan signed on and supported the Commissioner’s proposal for major retail trust company reform.
On April 6, 2009, Duncan delivered and provided testimony before the Senate Commerce and Labor Committee hearings on SB-310. Duncan said: “Can Nevada not only remain but become an even more attractive state for trust companies and family trusts and the good jobs associated with them, while at the same time providing superior protection to the assets and financial health of their clients and trusts?” He added: “In my opinion the clear answer to this question is yes.”
When the Senators heard him say that jobs might be created they easily went along and approved the bill. It was his testimony urging passage of SB-310 that closed the deal for the Commissioner. With only modest compromises, the bill wound up on the governor’s desk for signing on May 30, 2009.
The question still remains: will the reform of the trust company rules really create employment for Nevada as Duncan suggested? Of course, only the future can tell.
However, can a state deep in debt, suffering from a flood of bank failures and the worst housing and mortgage crisis in modern history find prosperity from tightening trust company rules? The likelihood that J.P. Morgan, Merrill Lynch and Citigroup will be lined up at the Nevada FID’s doorstep next Thursday remains to be seen.
As for John P.C. Duncan, the future is clear. His incredible reputation as a trust company law reformer and the nation’s leading expert on private trust companies has assured him a lucrative franchise by continuing to create both regulated and unregulated Nevada private family trust companies.
Duncan said that family trust companies in Nevada under this new set of rules are groundbreaking. He said: “It provides the best possible environment for hosting family trust companies.” He added that beginning October 1st he has five family trust companies that he will set up under the new rules.
Industry insiders have different opinions what motivated Commissioner Burns to promote reform. Las Vegas based financial institutions attorney Matthew Saltzmanwith the law firm of Kolesar and Leatham said he thought allegations of wrongdoing by several Nevada trust companies last year motivated the Commissioner to push for changes. Saltzman said that Burns did not want to see Nevada become a “Tijuana of Trust Companies” where trust companies establish themselves under Nevada’s relatively low capital requirements and then operate in other states. Saltzman’s firm represents many Nevada trust companies, including several that have been the subject of the regulators compliance actions. He is currently appealing the Nevada FID’s denial of a trust company license application that was filed shortly after Burns was appointed Commissioner.
Scott Walshaw, Nevada’s former FID Commissioner said there was no loophole that needed to be closed. “The Commissioner always had the power under the existing rules to require a trust company to put up any amount of capital he deems fit, including $1 million.”
Walshaw would not comment of what he thought of the new rules, but both Saltzman and Walshaw agree that the proposal will not likely attract the big banks and large financial organizations as promised. Walshaw added: “If they hadn’t come to Nevada already they certainly aren’t going to come now.”
Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the reporting.
Does a Client Have a Life After Death?
Posted by Jerry Cooper in Sales and Marketing on September 18, 2009
Advisors Who Manage Family Money Have an 8 out of 10 Chance of Being Fired by Heirs After Their Client Dies
Marketing buffs Russ Alan Prince and Hannah Shaw Grove offer tips to protect your relationship and reduce your chances of losing business.
Marketing strategists Russ Alan Prince and Hannah Shaw Grove recently released a report prepared for Rothstein Kass, a noted CPA firm, that reveals startling statistics about the rate heirs fire their parent’s advisors after they pass away. The report is based on surveys completed by the team over the last four years.
Results indicate that investment advisors are twice as likely to be fired by their heirs than a trust company hosting the vehicle funding their inheritance.
This data provides compelling evidence that advisors, wealth managers and others who manage client money need to be involved at an earlier stage in their client’s wealth transfer planning process. This should include their client’s trust preparation and ongoing administrative process. The data suggests that by either developing a relationship with a trustee provider, or with a directed trust arrangement, and/or starting their own advisor-owned trust company, an advisor can be more certain to hold onto their client’s accounts after the heirs parents pass away.
The simplest, but not necessarily the best way, to lock-in trust relationships is with a directed trust. A directed trust permits an advisor to have full discretion to choose investments that best meet the trust’s objectives including stocks, bonds, mutual funds and other marketable securities. Trust providers include Wilmington, Reliance, Northern, Sterling, Fiserv and other trust companies.
Directed trust arrangements have become better known. In 2007, The Wall Street Journal published an article – How Many Trustees Do You Need? The article highlighted the popular arrangements that more families are using; such as teams of multiple trustees and advisers, each with very specific roles and responsibilities.
The best way to maintain the greatest control is by owning a trust company. This integrated solution gives the advisor the greatest involvement in both trust creation and ongoing administrative process. Over the past few years, advisor-owned trust companies also have increased in popularity. With an advisor-owned trust company an advisor faces much lower odds that the heirs will flee once parents pass away. Advisor owned-trust company arrangements were featured last month in an Investment News article – More advisory firms expected to start trust companies.
The Investment News article pointed out that South Dakota has become a popular state for advisor-owned trust enterprises. Garrison Institutional, a consulting firm that helps advisors start trust companies published a complimentary special report on how the process works – Launching a South Dakota Trust Company.
FATAL ATTRACTIONS
Advisors were not the only providers to get the boot when parents pass away. The most likely providers to be fired are the parent’s business attorney, CPA and private banker. Therefore, developing strong relationships with these professionals could prove fatal as heirs clean house and appoint new players.
Prince performed a similar study early in 2003 for Merrill Lynch Investment Managers – How Inheritors Find Their Advisor. He surveyed 334 inheritors who had inherited at least $1 million in the previous two years and the results corroborated the findings of the recent Rothstein Kass survey.
One theme in particular seemed apparent in both studies. In the earlier 2003 study, 96 percent of clients only wanted to work with wealth managers that had experience handling wealthy clients that had access to otherwise unavailable options such as sub-managers, hedge funds and private equity deals often reserved for the ultra-high net worth investors.
Given these responses, Prince and Grove suggest inheritors need to invest their money in different ways than their parents.
Based on the data of the recent Rothstein Kass survey, the 2003 Prince survey, and other advisors I work with, there are seven solid strategies to follow in building and protecting client relationships:
1. Most important, develop relationships with trust company’s administrative trustees and other trust providers so that advisors are a part of the trust relationship.
2. Be sure that the advisor is named as the investment advisor in any successor of transfer instruments such as a revocable living trust or any other trust that provides for client succession planning.
3. Beyond meeting the parents meet the kids. Involve yourself early on in the family education process. Provide investor education and include the prospective heirs in any major investment decisions.
4. Avoid running into clashes between parent and heir agreements as the client may feel that the advisor is pandering to the heir and that will disregard the advice and the account objectives of the parents.
5. Be empathetic. The emotional toll of having an heir become wealthy immediately means a reassembly of their priorities, life’s goals and investment objectives.
6. Distance yourself from the providers that are most likely to be ditched after death. These include the client’s business attorney, CPA and private banker.
7. Add value to your service. The advisor and trust provider should offer wealth transfer planning and asset protection to create motivation for the heirs to stay put.
In summary, as your client’s wealth begins to grow and multi-generational planning concerns become more apparent, it is important for the advisor not to take the ostrich approach and hide from being involved with the client and heirs in strategic meetings.
Remember, the trust provider and trust company are the least likely to go when your client dies. Develop a strong bond and meaningful relationship with them and you will find yourself less likely to be eliminated when the new regime takes over.
– Jerry Cooper, senior editor, The Trust Advisor Blog
Pet Trust States Grow as Owners Continue to Leave Money to Care for their Dogs and Cats
Posted by Steven Maimes in News on September 11, 2009
Can I put my dog in my will or should I consider a pet trust?
If you’re concerned about what might happen to your companion pet after your death, it’s possible to create a pet trust to provide for the continuing care and well-being of a loved animal or animals.
Connecticut is the latest of 42 states that has a new pet trust statute. Effective October 1, 2009, Connecticut pet owners can pass away knowing their furry creatures will be provided for with this new trust statute. This is an excellent estate planning tool for pet owners to set up enforceable trusts to provide ongoing care for their animals.
Creating a Pet Trust
Pet trusts can offer pet owners a great deal of flexibility and peace of mind. In most states, a pet trust allows a person (grantor) to set aside a sum of money to care for the pet upon the owner’s disability and/or death.
The trustee of the trust can make regular payments to your pet’s caregiver (trust protector) in the manner the trust stipulates. The grantor can make specific instructions regarding feeding, exercise, housing, and veterinary care. Generally, the trust lasts as long as the last animal named lives.
When planning for a pet, there are many concerns to be addressed and it is important to be as specific as possible in drafting a trust for your pet. It is also important to remember that a pet will pass through the owner’s estate as personal property; therefore, the owner’s Last Will and Testament may need to be updated. In addition, the plan should address the final disposition of the pet, including guidelines for when euthanasia would be appropriate.
Many state’s pet trust laws include provisions that allows the courts to reduce a pet trust to a reasonable amount if it’s excessive. It is advised in setting up a pet trust to put into the trust only what is necessary to care for your pet.
Alternatives to Pet Trusts
Pet trusts are relatively unusual in practice and there are alternatives to consider. Most people bequeath their pet to a trusted family member or specific person along with money to care for the pet. Another alternative is to bequest money to a specific person with the condition that the money be spent for the care of your pet.
As all states have different laws and interpret trust provisions differently, it’s important to contact an experienced local trust and probate attorney to discuss the appropriate way to plan for the life for your pet. Estates planning for pets is one of the fastest growing segments of animal law today.
To follow this uniquie topic, estate planner Denny Meek, Esq. edits a fine blog on the topic.
Can a Delaware Dynasty Trust Help Retain Your Client for Generations?
Posted by Jerry Cooper in Sales and Marketing on September 4, 2009
Interview with Daniel F. Lindley, President Northern Trust of Delaware on the Basics
Several weeks ago I received a disturbing phone call. It was from my distant cousin Russell who I hadn’t heard from in over two years. Russell began the conversation with some small talk, but then got right to the point. He needed a loan of $500. I said, “What!” “Russell, when your father died less than two years ago, he left you an inheritance of over $2 million, mostly cash. What happened?”
In about five minutes I had heard an astonishing story. Russell had told me that he lost his entire inheritance. I immediately had an idea of what happened. You see, I knew Russell to be a foolish gambler and was known for making poor business decisions. Putting a $2 million bank account under his control, in my opinion, was dangerous.
He told me that he felt that he could run the money up to $8 or $9 million in Las Vegas, but after six short months, most of the money was gone. To make matters worse, he took the rest of the money and placed it on a concentration bet on some high-tech bulletin board company that went into bankruptcy about 6 months after his investment.
Russell’s story of a squandered inheritance is not unique. It was his story, and that fact that most American milionaires have failed to prepare even the most basic estate plans motivated me to write this article.
Earlier this week I spoke to one of the nation’s leading trust experts, Daniel F. Lindley, President of Northern Trust of Delaware.
We talked for close to an hour about Delaware dynasty trusts, their powerful benefits, and the amazing flexibility they offer for parents to provide a safe transition and transfer of wealth from their generation to future generations. Dan offers a strong case why Delaware is one of the best states in the country to host a dynasty trust.
TRUST BASICS
Lindley explained that in 1995 Delaware repealed the rule against perpetuities. Without it trusts can exist only as long as the grantor is alive. The rule against perpetuities abolishes this requirement and permits the trust to remain in force forever.
Lindley added that a Delaware dynasty trust offered compelling benefits:
- Tax Benefits. Assets contributed to the trust can continue for successive generation of the grantor’s descendants without incurring any additional gift tax, estate tax or generation-skipping transfer tax.
- Control Benefits. After the parents or grantor passes away, the trust may be administered to provide for care for the assets for the heirs and the heirs descendants.
- Doubles and as an Asset Protection Trust. If structured properly, the dynasty trust can be arranged to first provide asset protection benefits for the grantor and second conversion to a dynasty trust upon the passing away of the grantor.
- Administrative Trustee. A dynasty trust may also be arranged to serve as an administrative trust, thus permitting the trustee to direct the trust assets to to an outside money manager or wealth advisor.
A dynasty trust is an irrevocable trust that is defective for income tax purposes. Therefore, once money and property are contributed to a dynasty trust it’s one-way. To change the trust you have to go through a protracted procedure in order to get it out. Once it’s created it’s permanent and cannot be changed without either going to court or gaining the consent of all the adult beneficiaries or both.
ECONOMIC BENEFITS
A client’s ability to contribute assets to a trust that will continue for generation after generation without the imposition of any transfer tax is a compelling benefit.
The trust makes sense when you compare the benefits the trust offers to the alternative of passing assets outright, from generation to generation, subject to federal estate tax. The following chart, provided by Northern Trust Company illustrates that a $1 million contribution to a trust, a 5% after-tax rate of return on the investment assets, a new generation, subject to federal estate tax of 45% applied at each generational transfer, the dynastry trust would have an approximate value of $39 million after only 75 years.
The same $1 million held outside of the trust, subject to gift and estate tax occurring at each successive generation would have an approximate value of only $6.5 million. With the passage of each generation, the difference in value between the dynasty trust and the no-trust alternative becomes exponentially larger.
CONTROL FROM THE GRAVE
Had Russell’s father created a dynasty trust with some basics of Lindley’s suggestions that are explained further, Russell would probably still have most of his inheritance in place.
Lindley explained that trusts can be as simple or as complicated, controlling or generous, as the parent’s (grantor’s) desire. The grantor can install provisions in the trust instrument to change the level of distributions or even suspend distributions. Inducements can be created to provide for rewards or punishment that may influence the behavior of the beneficiaries.
Discretion may also be given to the trustee to make decisions about behavior. The trustee in essence becomes an institutional parent administering responsibility, education, and enforcement of the activities and wishes of the deceased parents.
On the positive side, this can include rewards for good behavior, for children graduating college or completing a certain degree; and can encourage heirs or children to go out and make a good living by providing a matching distribution.
For example, if the inheritor makes a half a million dollars in an enterprise, the trust could match that by giving the inheritor an additional distribution of a half a million dollars from the trust corpus, given of course the funds are there and available. The trust could even reward inheritors or children for having other children to continue the dynasty. These are powerful financial incentives that can reward positive behavior and can ensure the long lasting of one’s family.
On the negative side, onerous trust provisions can be included to discourage self-destructive behaviors. Examples include: substance abuse, compulsive gambling, leading unproductive lives, and being a spoiled trust fund baby lying on the beach and doing nothing but clubbing and womanizing. This can also include creditor problems and provisions may allow the trustee to keep track of a beneficiary’s FICA score to determine that they are not misbehaving by borrowing too much. Another important feature that could be included would punish the providing of false or misleading information to a trustee to gain advantage.
Based on his experience, Lindley said all of these examples and more have been used in the past and set a good template for possible dynasty trust wording to discuss with your estate planning attorney.
SUMMARY
What is a dynasty trust?
A dynasty trust is an irrevocable trust that has two important key features to it. First, it permits the transfer of wealth from one generation to the next generation without paying federal estate tax as one generation ends and the other begins. Second, a dynasty trust provides for a means of control over the disposition of money to the children and heirs to ensure the safety, protection and long lasting of the funds.
Who should set one up?
Any parent that has $1 million or more to leave to one or more children.
Why set up a Dynasty Trust?
To ensure that the trust assets are not needlessly taxed and that the funds that are gifted to the heirs are not lost or squandered.
When should parents set one up?
Hopefully before the parents die but preferably as soon as possible as contributions to the trust can be made at any time.
Where is the best place to locate the trust?
Delaware. Although other states exist that have repealed the rule against perpetuity and those include South Dakota, Nevada, Alaska, Wisconsin, Idaho, Illinois, Maryland, Virginia and Rhode Island.
How does one go about setting one up?
There are three key components that need to be dealt with in setting up a trust.
1. An advisor. Someone preferably from the wealth management organization needs to motivate the client of the necessity for the trust. This should not be a one-time presentation. It should be ongoing and once the trust is started the involvement should be part of the relationship manager’s duties.
2. An estate attorney to draft the trust instrument. This does not have to be an attorney in Delaware. It can be anywhere although a Delaware attorney should review the trust for legal conformity.
3. A. Trustee. Because it is an irrevocable trust either an attorney or an institutional trustee must be appointed to serve as trustee. It’s preferred that an institutional trustee be appointed since decisions may need to be made after the death of the grantor and for many generations. A trust company will not pass away, but an attorney can.
TIPS ON MAKING THE CLIENT PRESENTATION
As a wealth manager speaking to your clients it’s important not to become mired down with detail. Although clients have an appreciation for the fact that you may know your material and be able to get into the weeds and discuss trusts at a technical level, the bottom line is they may not care – but they want to be sure you know the technical part.
Because they trust you as their advisor they feel comfortable looking to you as a confidant and family mentor. You should offer them guidance on what they should do to be certain that their children and their children’s children will be safe and have enough money to live fruitful lives. This of course, includes money for college education, housing, food, subsistence, and a lifestyle in the same manner or better than they are now living or better.
It is best to start the client conversation with the concept that you may be offering a product. You can start with this question: “Are you familiar with the benefits of a dynasty trust.”
Telling a client that you offer trust services or offer trust advice gives the client nothing concrete, but telling the client that you could arrange the set up a trust or a dynasty trust rings in your client’s mind as concrete. It creates curiosity and bewilderment, enough emotions to open the learning process so that they are receptive to what you have to say.
The marketing message should be plain and simple. As Dan and Chip Heath say in their book Made to Stick, it’s best to dumb-down the presentation, add colorful metaphors, and lots of examples like my cousin Russell’s story to get your message through.
RETAIN CLIENTS FOR GENERATIONS
As mentioned, a dynasty trust be also be an administrative trust. This permits the trustee to appoint an investment advisor to manage the funds. This is one of the services of Northern Trust of Delaware. This appointment can ensure that your wealth management organization will be on-board for generations to come.
As starting point, my staff is preparing a complimentary Power Point presentation available to you in a coming edition of the Trust Advisor. If you would like some additional support or suggestions on how to begin now, please feel free to email at at thertrustadvisor@gmail.com
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