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Fidelity Investments® Aligns Clearing and Custody Units; Strengthens Commitment to Innovation in Financial Advice Industry

fidelity-investmeFidelity Institutional, the division of Fidelity Investments that provides clearing, custody and investment management products to registered investment advisors (RIAs), broker-dealers, family offices, retirement recordkeepers and banks, today announced the alignment of its clearing and custody units.

Fidelity Enterprise Services also announced the creation of a new organization, Fidelity Wealth Technologies, a group that will drive and deliver digital solutions across the Fidelity enterprise and throughout the financial advice industry.

Sanjiv Mirchandani, currently the president of National Financial, has been named the president of Fidelity Clearing and Custody, and Michael Durbin, currently president of Fidelity Institutional Wealth Services, will become president of Fidelity Wealth Technologies. These new leadership roles are part of a long-term strategy to recognize the growing, emerging and converging business models in the financial advice industry and to organize the clearing and custody units to better serve clients.

In the last five years, Fidelity has aligned several core functions across the clearing and custody businesses, including the client experience team, the product group and the platform technology team. In July 2013, the business further aligned around several core client segments: banks and broker-dealers under National Financial and registered investment advisors, professional asset managers, strategic acquirers and retirement advisors and recordkeepers under Fidelity Institutional Wealth Services.

“Combining our clearing and custody organizations into one unit under a single leader helps us deliver the best solutions for our clients and is the next logical step in the process that we started several years ago,” said Gerard McGraw, president of Fidelity Institutional.

Since the alignment of the client segments more than 18 months ago, assets under administration in the clearing and custody business have grown by nearly 30 percent1 and client loyalty metrics have improved2 . The Fidelity clearing and custody businesses ended 2014 with a record high of nearly $1.5T in assets under administration, servicing more than 3,200 advisory firms and 5.5 million accounts.

The Fidelity Wealth Technologies group will help to speed innovation on behalf of clearing and custody clients, Fidelity’s broader array of customer segments and firms throughout the financial advice industry. Upon the expected closing of the pending transaction, Edmond Walters, founder and CEO of eMoney Advisor, will report into Durbin and Fidelity Wealth Technologies, and maintain his role leading eMoney Advisor. Fidelity Wealth Technologies will add to or align efforts under this group, based on the needs of Fidelity’s clients and the broader financial advice industry.

“Our clients’ technology needs across the enterprise and the broader technology needs of the financial services industry are limitless, so having a dedicated organization to grow, develop and rapidly deliver technology solutions can help drive our collective success,” said Michael Wilens, president of Fidelity Enterprise Services.

Earlier this year, in parallel to Fidelity Investment’s agreement to acquire eMoney Advisor, Fidelity Institutional committed to a significant, multi-year investment in a next generation technology platform, which will offer comprehensive data management, efficient and integrated workflow capabilities and collaborative tools for investors, advisors and home offices. eMoney Advisor is expected to play a key role in the deployment of the platform, accelerating Fidelity’s efforts with regard to data aggregation and investor/advisor collaboration tools — all in a more integrated fashion.

Mirchandani will continue to report to McGraw, and Durbin will report to Wilens. The Fidelity Institutional Wealth Services senior leadership team members, who have reported into Durbin, will now report into Mirchandani.

“Sanjiv and Mike have done an outstanding job leading their teams and collaborating on behalf of our clients. We are fortunate to have two exceptional leaders that can help propel us forward,” McGraw added.

About Fidelity Investments

Fidelity’s goal is to make financial expertise broadly accessible and effective in helping people live the lives they want. With assets under administration of $5.0 trillion, including managed assets of $2.0 trillion as of January 31, 2015, we focus on meeting the unique needs of a diverse set of customers: helping over 24 million people investing their own life savings, nearly 20,000 businesses to manage their employee benefit programs, as well as providing nearly 10,000 advisory firms with technology solutions to invest their own clients’ money. Privately held for nearly 70 years, Fidelity employs 41,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit

Fidelity Institutional Wealth Services provides brokerage products and services and is a division of Fidelity Brokerage Services LLC. National Financial is a division of National Financial Services LLC through which clearing, custody and other brokerage services may be provided. Both members NYSE, SIPC. 200 Seaport Blvd, Boston, MA 02210


Posted by:  Steven Maimes, The Trust Advisor


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Obama Attacks Advisors Selling Snake Oil, Lauds New DOL Fiduciary Rule

Forbes article by Ashlea Ebeling

snake-oil-salesmanTake two. President Barack Obama called on the Department of Labor to move forward with a proposed rulemaking to require retirement advisers to put their clients’ best interest before their own profits. It’s a rewrite of the dropped 2010 rewrite of the 40-year-old fiduciary rule. (The 2010 rewrite was withdrawn in 2011 amidst industry furor.)

“We’re going to get this right,” said DOL secretary Tom Perez, bemoaning “backdoor payments and hidden fees” that cost Americans up to $17 billion a year in lost retirement savings, according to The Effects of Conflicted Investment Advice on Retirement Savings.

“If you’re working hard and saving money, sacrificing that new car or vacation so you can build a nest egg for later, you should have the peace of mind that the advice you’re getting is sound,” President Obama said, at the Save Our Retirement Coalition event at AARP’s offices in Washington. Coalition members include the AARP, AFL-CIO, AFSCME, Americans for Financial Reform, Better Markets, Consumer Federation of America and Pension Rights Center.

Of course, some financial advisors are honest–President Obama called out Sheryl Garrett, founder of a network of fee-only financial planners; but some are “selling snake oil,” he said. He cited an example of an elderly couple in Illinois who had been sold expensive annuities making it hard to access their money and now the family is struggling to pay for needed nursing care.

The proposed rule is still under wraps—the DOL sent it to the OMB for review today. But a White House fact sheet gives some hints as to what is coming. The proposed rule will expand the types of retirement advice subject to the higher fiduciary standard (as opposed to a suitability standard). It will allow advisers to continue to provide “general education” on retirement saving across workplace retirement plans and IRAs without triggering fiduciary duties. And all common forms of compensation, such as commissions and revenue sharing, would still be permitted, whether paid by the client or the investment firm.

The rule is also likely to address aggressive marketing of IRA rollovers, predicts AARP Director of Financial Security and Consumer Affairs Cristina Martin Firvida. Today most of America’s retirement savings are in IRAs—not ERISA-protected pensions or 401(k)-type plans. There’s $7.2 billion in IRAS, $5.3 trillion in defined contribution plans like 401(k)s, and $3.1 trillion in defined benefit pension plans, according to the DOL.

The Investment Company Institute, the financial services industry lobby, quickly fired off this response to the announcement: “It is vital that any proposed rules be carefully tailored…and regulators must reply upon data and facts—not overheated rhetoric.”

What can you do in the meantime? Find an advisor who is legally obligated to put your interests first.


Posted by:  Steven Maimes, The Trust Advisor


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Making Brokers Toe the Mark

NYT article by Tara Siegel Bernard

moneyIf you are in the market for financial advice, good luck figuring out which financial advisers are legally obligated to act in your best interest. There is a big difference between glorified salesman and true investment advisers, and yet the onus is on consumers to sort it all out.

A long-awaited rule being drafted at the Labor Department, which oversees retirement plans, would try to fix part of this — at least as far as your retirement money goes. The rule, which was supposed to be released last month after the department missed another deadline in August, would require more investment professionals to put their customers’ interests ahead of their own; the legal term for that is fiduciary duty.

Protecting workers’ precious, tax-advantaged retirement dollars seems anything but controversial. But drafting the requirement has been a long and arduous process, now four years and counting, with powerful and well-funded opponents in the financial services industry. And in recent weeks, critics are again writing letters to regulators and planning to revive legislation that would quash the rule, which would apply to the $7 trillion sitting in individual retirement accounts, as estimated by the Federal Reserve.

The latest flurry of activity was prompted by an internal memo from the White House that leaked to the media. The White House memo said it believed the lack of consumer protections cost I.R.A. investors roughly $8 billion to $17 billion annually, or up to 1 percent of their assets, and perhaps more. The memo also signals that the proposal may be inching closer to an internal governmental review, a procedural step that occurs before such rules are released to the public for comment.

“The current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year,” said the memo, dated Jan. 13, from Jason Furman, chairman of the White House’s Council of Economic Advisers, and Betsey Stevenson, a council member. And “many firms have organized themselves on the basis of capturing conflicted payments rather than the delivery of high-quality advice,” they added.

In other words, if brokers don’t sell something, they cannot get paid. And, unlike investment advisers, many brokers do not have to adhere to the stringent fiduciary standard requiring them to act in their customers’ best interest. They only need to recommend “suitable” investments based on an investor’s personal situation, taking into account things like age, goals and stomach for risk. That may sound reasonable, but it leaves enough wiggle room for brokers to recommend a perfectly “suitable” mutual fund — but one that pays them more than other available options at the customers’ expense.

The White House memo said it believed this type of behavior alone may cost I.R.A. investors $6 billion to $8 billion, or 0.35 percent to 0.50 percent of their I.R.A. money annually. It based those calculations on the findings of an academic study that, in one analysis, looked at brokers who recommended a variety of funds unaffiliated with their firms. The researchers found that for every dollar in extra commissions paid to the brokers, they were likely to direct an extra $14 into the fund that paid them more.

“They are influenced by how much they are paid, and larger payments can tilt a broker’s advice towards poor-performing funds,” said Susan Christoffersen, one of the co-authors, who analyzed Securities and Exchange Commission filings from 1993 to 2009, and is an associate professor of finance at the University of Toronto Rotman School of Management.

Two other  studies cited in the memo, which looked at arguably more dated fund data from the 1990s through 2004, raised questions about why most money in mutual funds is still invested in actively managed funds when they underperform index funds, particularly when they are sold by brokers.

Ideally, consumer advocates would like the rule to close some of the escape hatches that allow brokers to avoid acting as a fiduciaries when providing advice on money inside I.R.A. and retirement accounts like 401(k)s. The new rules would update the Employee Retirement Income Security Act, or Erisa, which was written in 1975, when pensions reigned, I.R.A.s were in their infancy and 401(k)’s did not yet exist. Nobody knew they would become the dominant vehicles for retirement savings.

Erisa currently requires a person to act as a fiduciary when providing investment advice, but “advice” is defined quite narrowly. If the advice is provided on a one-time basis, for instance, a broker can avoid the stricter rule. That’s why consumer advocates argue that it is easy for brokers providing advice on I.R.A. rollovers — or any I.R.A. money — to dodge the higher standard.

“We think all advice should be subject to a fiduciary standard,” said David Certner, legislative policy director for government affairs at AARP. The financial services industry’s resistance to the rule has “been constant and it’s been heavy, and they have already spent a fair bit of money preventing this rule from seeing the light of day. Unless the rule is completely watered down, I’d expect that to continue.”

According to the financial services industry, a rule to protect investors would actually harm — yes, harm — the average person in need of retirement advice, particularly the smaller investors. How so? The costs of compliance with the new rule may be too high to work with holders of modest savings they argue, or the advisers may be forced to put such investors into more expensive accounts that charge a percentage of the assets being managed.

David Bellaire, executive vice president and general counsel of the Financial Services Institute, said his group represented smaller independent financial professionals with storefronts on Main Streets across the country whose businesses rested on their reputations. “If this was really just about that bumper sticker about the best interest of our clients, our members would say we do that anyway,” he said. “As you increase the burden, then you cause financial advisers to think about how they spend their time.”

“We view the memo as laying out a political line of attack to build support for a rule that we haven’t obviously seen,” Mr. Bentsen said. He is also concerned that the requirements would be so strict that firms would choose not to offer the type of accounts regulated by them.

Consumers may not buy into the logic that a rule to protect investors will actually hurt them, but some members of Congress already have. Senator Ron Johnson, a Wisconsin Republican and chairman of the Homeland Security and Governmental Affairs Committee, sent a letter to the labor secretary asking for an explanation of how the rule would not hurt middle- and low-income Americans, among other things. And Senator Orrin Hatch, chairman of the Senate Finance Committee and a Republican from Utah, recently said he had plans to reintroduce legislation that would prevent the Labor Department from “over-regulating 401(k) plans and I.R.A.s.”

The brokerage industry’s concerns date to 2010, when the Labor Department first released a fiduciary proposal; that was ultimately rescinded after criticism that it was too aggressive. Complying with that proposal, Mr. Bellaire said, would have made it too burdensome, in his estimation, to charge investors commissions, which tend to be used for people with smaller accounts. Several countries, including Britain and Australia, have banned commissions altogether because attaching a payment to the sale of a product — instead of financial advice — was seen as posing a conflict of interest. The White House memo said the proposed rule would not go that far, and instead would find a middle ground.

“The proposal allows businesses to continue using existing, conflicted business models,” the White House memo said (perhaps with a hint of sarcasm), “but requires that they adopt additional consumer protections such as ensuring advisers follow a best-interest standard, enacting policies and procedures to mitigate conflicts,” and refraining from certain transactions.

Yet that statement raises another question: Do you want to entrust your retirement dollars (or any money, for that matter) to a person who is operating within an environment where there are costly conflicts of interest?

Let’s hope any Labor Department rule is strong enough to resist the opposition and will, at the very least, make it easy for investors to plainly and effortlessly see where those conflicts lie.


Posted by:  Steven Maimes, The Trust Advisor


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Advisers Tout ‘Fiduciary’ Label to Stand Out From Crowd

Reuters news by Hilary Johnson

fiduciaryFinancial advisers looking to show they have their clients’ best interests at heart are paying to certify that they adhere to a “fiduciary” standard that regulators have been debating for years.

The U.S. Securities and Exchange Commission has been mulling a requirement that all advisers be fiduciaries, which would require Wall Street brokers to put clients’ interests ahead of their own in every recommendation. The standard would be tougher than current rules for brokers, requiring that they recommend “suitable” investments.

Registered investment advisers, however, overseen by the SEC and states, must already follow fiduciary rules. Many are already trying to distinguish themselves in an increasingly crowded marketplace by turning to firms like Dalbar Inc in Boston and fi360 in Bridgeville, Pennsylvania, which are seeing growing demand for their fiduciary accreditations. The companies offer labels like “Registered Fiduciary” (RF) or “Accredited Investment Fiduciary” (AIF).

The Institute for the Fiduciary Standard, a nonprofit group, is likely to launch a another certification process this year, according to its president, Knut Rostad.

Fiduciary designations take time and money. Instruction for one of the fi360 accreditations, for example, costs up to $1,950, and requires about 20 hours of study and six hours of continuing education per year.

Some advisers to retirement plan sponsors, who must follow the fiduciary rules of the Employee Retirement Income Security Act, say they have a strong incentive to highlight their fiduciary credentials. The Department of Labor is expected to propose strengthening those rules soon.

Other advisers say the fiduciary label simply helps their businesses. For example, Gregory Kasten, chief executive of Unified Trust Company in Lexington, Kentucky, says its assets under management have grown to over $4 billion from about $1 billion in 2005 thanks to clients’ awareness of his fiduciary responsibilities.

Moreover, the credentials mattered to Kasten personally. A former anesthesiologist, Kasten was used to professional testing and certifications. “I had to codify what I’ve been saying, instead of just ‘Hey, trust me,’” he said.

About 7,000 financial advisers use one of fi360′s certifications, said Chief Executive Blaine Aiken. Another 1,000 or so have certifications from three other fiduciary organizations, including Connecticut-based 3ethos, the companies say.

Not everyone is sold. Nicholas Olesen, a registered investment adviser in King of Prussia, Pennsylvania, is already a Certified Financial Planner, and is stopping there. The proliferation of credentials can confuse clients, he said. He wants a universal fiduciary standard from the SEC to level the field.

Yet more investors are paying attention to what it means for advisers to be fiduciaries. Ginger Scott, an adviser at Wabash Capital in Greencastle, Indiana, mentioned her “Registered Fiduciary” credential earlier this year in a local ad. A couple noticed and came in, mentioning a Consumer Reports story that said advisers should be fiduciaries, Scott said.

They opened an account with her that day.


Posted by:  Steven Maimes, The Trust Advisor


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Financial Advice by the Demographics

NYT article by Tara Siegel Bernard

When a woman calls Fidelity about her investments there, her questions are likely to be handled a bit differently from those asked by a man.

Customer service representatives are more likely to chitchat to establish rapport. And they may frame the conversation around her longer-term goals or the important people in her life — perhaps a child with a college savings account, or an elderly parent. The representative may ask more open-ended questions.

Women will ultimately receive the same guidance that would be offered to similarly situated men — but when appropriate, the representative’s conversational style may differ. Fidelity said its goal was not to patronize women or to wrap its mutual funds and services in frilly pink bows. Instead, it says it wants to connect with different people — including women — about savings and investing in a way that will resonate, based on findings from its internal research and analysis.

Pamela Thomas-Graham, who leads a division at Credit Suisse aimed at serving African-Americans, women and members of the lesbian, gay, bisexual and transgender communities, says, “there are certain segments that have some special needs.”Wealth Matters: Private Banking Firms Turn to Niche Marketing for ClientsNOV. 21, 2014

“With men, many want a Reader’s Digest conversation — they want what they came for,” said Jeanne Thompson, a vice president at Fidelity who was involved in the research. “However, reps realize that women appreciate hearing what it means for them and want a deeper explanation.”

Fidelity, which provides employer-based retirement accounts for more than 13 million workers, along with other retirement plan providers, have begun tailoring their messages for specific employees — including women, but also Hispanics, members of specific generations or income groups, or those, say, who may be borrowing significant sums from their 401(k) plans. Other providers are testing ways to nudge workers to save more with just one click.

“What we are seeing is a big uptick in the number of organizations that are thinking more broadly about financial wellness and understanding it’s not a one-size-fits-all plan that will get results,” said Betsy Dill, a partner at Mercer, the consulting firm. “They have to think about how to segment and microtarget their work force at different points along the way.”

There are a lot of headlines about how women aren’t as comfortable with money as their male counterparts, but the research is mixed. The financial services industry conducts plenty of self-serving surveys reinforcing stereotypes, but they’re trying to capture women’s business: More women are their household’s primary breadwinner, and they control trillions of dollars.

And among women with access to retirement plans? They are doing just fine when compared with their male counterparts, raising questions about whether any special handling is warranted. In fact, some research has found that certain differences in behavior are hinged less to gender and more to socioeconomic status.

Not that women don’t face real financial challenges: They tend to earn less than men, take longer breaks from the work force or work part time, and they live longer (and thus are more likely to need long-term care). So the often-repeated numbers declaring that the average working man’s 401(k) account balance (about $121,000) is more than 50 percent higher, on average, than a woman’s ($78,000), as calculated by Vanguard, isn’t that surprising. It’s largely because the average wage for male savers in Vanguard plans, at $107,000, is about 40 percent higher than the average for female savers.

But when you look a little closer, an entirely different picture emerges. When you compare women and men who earn the same salaries, women actually save at the same rate — or higher — and their average balances converge (or are slightly higher). But men take the lead in savings once again among male and female workers who earn more than $100,000, according to Vanguard. Even though women are saving at the same rate or more, this suggests men’s wages are higher. Fidelity uncovered strikingly similar trends among its participants.

If there’s any culprit, it appears to be the persistence of the wage gap. At least that’s the case among women who have access to employer-sponsored plans; just over half of all private sector workers do, according to the Investment Company Institute. Women without access to retirement plans do considerably worse when it comes to retirement readiness. Women would probably be better served receiving training on how to increase their salaries — but no employer is going to offer that.

So why the special treatment at Fidelity? “A lot of this is in reaction to research around the sentiment and confidence of women,” Ms. Thompson of Fidelity added. “But a lot of this is because many women are the heads of households and they are the breadwinners.”

That makes them an attractive target for financial institutions. Some studies suggest women are less confident about their financial knowledge, although women also tend to underestimate themselves and their abilities. Women are also more likely to seek outside help and use professionally managed allocations, like target-date mutual funds or managed accounts.

That willingness to seek help may help explain why some employers and retirement plan providers who have targeted women have seen significant results. AT&T, the communications giant that employs 247,000, found that its female workers were saving at a slightly lower rate than male employees. So last year, the company and its retirement plan provider, Fidelity, devised a workshop for female employees that was loosely based on the format of the talk show “The View,” where a panel of women discuss current events.

During the money-themed panel, which was initially viewed by more than 4,000 female workers either live or on the web, a financial planner interviewed three women in different life stages: a single M.B.A. graduate with student debt, a midcareer professional saving for her daughter’s college tuition and a woman nearing retirement. They discussed issues like budgeting, debt management and retirement readiness, said Marty Webb, vice president of benefits at AT&T, as well as estate planning.

In the month after the workshop, nearly 60 percent of attendees logged into their retirement accounts and 11 percent initiated retirement planning sessions using online tools, according to Fidelity.

“Women are also the ones more likely to change their behavior following an intervention,” said Annamaria Lusardi, an economics and accounting professor at the George Washington University School of Business. “They want the program and they take it and implement it with follow-up behavior.”

While Fidelity and others say personalized messages are often more effective at getting people to save, some employers have been uneasy about the tactic, concerned that targeting people based on their race or gender could give the perception of discrimination, according to a report produced last year by the Erisa Advisory Council. Nevertheless, the report said that more tailored communications work, and some providers and employers are giving it a try.

Lincoln Financial recently fine-tuned the way it approached Latino participants, both in one-on-one meetings and in its written materials. “We found out that family and multigenerational units were very important, so we crafted the messaging with family in mind,” said Linda Jacobsen, a senior vice president at Lincoln, taking the focus away from just the individual. It also had native Spanish speakers write the materials instead of translating it from English, so it had more relevant cultural undertones.

But no matter how hard employers or financial providers try to get workers to save more using specific messaging, nothing is more effective than doing it for them, or automatically enrolling workers in a 401(k)-type retirement plan, typically at 3 percent of salary, and automatically increasing their savings rate each year. Workers need to physically opt out to stop saving.

After freezing its pension, Credit Suisse encouraged workers to save more — using online seminars and other efforts. But it later decided to try something more radical: It automatically enrolled all employees (who weren’t already participating) in its 401(k) plan at an uncommonly high savings rate of 9 percent. That is in contrast to the more typical automatic enrollment rate of 3 percent. As a result, more than 93 percent of workers now save in the plans, up from 83 percent.

When it comes to improving financial behaviors, and particularly saving, anything combining inertia and automation is likely to be more powerful than any marketing campaign — male, female or otherwise.


Posted by:  Steven Maimes, The Trust Advisor

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Northern Trust to Pay $36 Million in Securities Lending Settlement

Pensions and Investments article by Randy Diamond

Northern Trust Corp. will pay $36 million to settle a class-action lawsuit filed by 1,500 retirement plans that accused the firm of causing large losses stemming from the bank’s securities lending program during the financial crisis, said a news release Wednesday from one law firm representing the plans.

Todd Collins, an attorney with the Philadelphia law firm Berger & Montague called the settlement “an excellent recovery” in a statement e-mailed to Pensions & Investments.

“Plaintiffs and the class of ERISA retirement plans faced substantial risks in seeking to prove their claims of imprudent investing and excessive fees,” Mr. Collins said. “The litigation advances the principle that ERISA fiduciaries must be, and will be, held to the highest standards.”

The plans claimed Northern Trust invested collateral posted by borrowers of the securities in risky investments that caused losses for the retirement funds.

A settlement was announced in January 2014, but the details of the agreement had been worked out over the last 15 months between Northern Trust and the 401(k) and pension funds.

Papers announcing the settlement were filed late Wednesday in the U.S. District Court in Chicago.

John O’Connell, a spokesman for Northern Trust, said he was unaware that details of the settlement had been disclosed and could not provide additional comment.


Posted by:  Steven Maimes, The Trust Advisor



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Delaware’s Asset Protection Problem

Forbes article by Todd Ganos

Irrevocable-TrusGreat-grandmother and great-grandfather established a multi-generational trust in the granddaddy of trust jurisdictions: Delaware.

The great state has been known for a century and a half as the jurisdiction-of-choice of the wealthiest families. And, we know the names of some of those wealthiest families. Great-grandparents’ trust was built to last and it included a range of asset protection features. As we will see, the family might not have the protections they thought they had. It all boils down to one word in the trust document.

The great thing about Delaware trust law is how it came into being. While many believe that trusts are a creation of the English common law regime and that trusts are unavailable in civil law jurisdictions, this is incorrect. The first trusts were created under Roman law, which is the foundation of most civil law jurisdictions. The first trust companies were provided for in the Statute of Institutions. For those who own real property in Mexico’s Restricted Zone (formerly known as the “Prohibited Zone”) and who are not Mexican citizens, such ownership is via one type of trust whose origin stems back to this Roman law. But, while it was Roman law that created trusts, it was English law that evolved trusts into what we think of today.

As individuals began to partner in business ventures, different types of business entities were considered. At first, there was simply the general partnership. But, those partners who simply had an economic interest in a venture and did not materially participate in the business felt they should not be exposed to the same liabilities as those partners who did materially participate. A general partnership exposes all partners to all liabilities. The “economic” partners’ concerns were deemed valid and business structures that limited their liability began to emerge. Of course, today, we have a wide range of corporations, limited liability companies, limited liability partnerships, etc.

In those early days, a trust was one of the structures commonly used by business. Certainly, the real estate investment trust is the most widely known type of business trust in the United States today. But, there is the Massachusetts Business Trust and the Delaware Statutory Trust. Many states have provisions for business trusts. Because of the wide use of trusts as a business structure in those early days, Delaware chose to have trust law cases heard in the same courts as business law cases were heard: the Court of Chancery. As Delaware became the model for business law, it also became the model for trust law.

But, in the early 1970s, a problem for families’ trusts arose in the Delaware courts. The problem related to certain kinds of trusts . . . how they were drafted. And, the problem arose not in the Court of Chancery but in the family law court. The family law court found that each spouse has a duty to support the other spouse. If a trust document was drafted in such a way to provide for “support” for a given beneficiary, because a person has a duty to support one’s spouse, those support benefits of the trust were deemed to extend to one’s spouse. In essence, a spouse obtained a beneficial interest in the trust even if the trust document expressly excludes support to spouses.

As a result, a divorcing spouse could assert his/her beneficial interest in the trust and potentially force family assets to be distributed to or held for the benefit of someone great-grandma and great-grandpa never intended as a beneficiary. Indeed, they expressly excluded this class of individual as beneficiaries.

As other states have enacted statutes that prevent this scenario from occurring, this artifact of Delaware case law has slowly pushed Delaware down in the rankings of asset protection jurisdictions. In the most recent Trust Advisor/Oshins annual ranking of asset protection jurisdictions, Delaware has fallen to seventh.

Families with trusts domiciled in Delaware have a few options. First, leave the trust with the Delaware domiciled trustee, leave the trust document unaltered, and accept the risks. Second, leave the trust with the Delaware domiciled trustee but go into Delaware court to “reform” the trust to remove “support” as a benefit of the trust. As a caution, said trust reformation should be done with care so as not create a deemed shifting of interests that would be taxable. Third, leave the trust unaltered but replace the trustee with one domiciled in a state that – by statute – prevents such outcomes. The third option is perhaps is easiest and least costly course of action.

Update: As to the second option stated above, if the trust document does not expressly prohibit decanting, Delaware trust law allows a trustee to decant assets from one trust to another trust given certain requirements and restrictions.  The trustee could decant a trust that provides for “support” into a trust that has alternative distribution provisions.  Assuming that a given trust can be decanted, the problem would be solved.  That being said, there is an expense associated with decanting, which might not be too different from the expense of going into Delaware court for trust reformation.  As such, using a trustee in a favorable state would seem to be the easiest and least costly course of action.

- For a discussion on decanting, read “About That Irrevocable Trust . . . Change It And Save Tax!


Posted by:  Steven Maimes, The Trust Advisor



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Non-Testamentary Estate Planning Documents Should Not Be Ignored

Greenwood Springs Post Independent article by Matthew Trinidad

estate planningThose planning their estates tend to focus on the testamentary document, such as a will or living trust, and rightfully so. This document oftentimes has the biggest impact on the administration and disposition of a person’s estate. But not always. Other common documents prepared in connection with the typical estate plan are equally, if not more, impactful, so I will briefly discuss those other estate planning documents today.

Beneficiary designations: Beneficiary designations are a commonly overlooked estate planning document. The disposition of retirement plans such as 401(k)s, IRAs and annuities as well as life insurance policies are controlled by beneficiary designations, not a will or trust. Beneficiary designations are of often prepared without counsel when an individual first sets up the retirement plan or insurance policy. Beneficiary designations are often forgotten and often found to conflict with the carefully crafted testamentary objectives expressed in a will or trust. The beneficiary designation forms designed by investment or insurance companies tend to be blunt instruments. Sometimes the beneficiary designation can be crafted to align with an individual’s testamentary objectives, but sometimes, and increasingly, they can’t. When a beneficiary designation form or the self-serving limitations imposed by an insurance or investment company are too rigid, then it is necessary to make the beneficiary designation and the will or trust work together to accomplish a testator’s objectives. I could go into some detail on this, but this type of planning is complex and should only be undertaken with qualified, personal guidance (and probably not the customer service agent on life insurance company’s hotline).

Power of attorney for property: This document may be used to appoint an “agent” or “attorney in fact” to exercise decision-making authority over the maker’s property and finances. It may be designed to take effect upon its creation or to take effect upon a person’s disability or incapacity, and the scope of authority may be narrowed or enlarged to accommodate the preferences and objectives of the maker. Financial institutions and others who may be asked to rely on a power of attorney may not always be cooperative, for understandable reasons. Although Colorado law mandates that powers of attorney are to be observed, it may be necessary or advisable for an individual to pave the way for his or her agents by notifying certain institutions of the terms of the power of attorney or by making a separate power of attorney provided by the institution in question on its own forms.

Power of attorney for health care: This document may be used to appoint an agent or attorney in fact with authority over the maker’s health care and personal decisions. The power of attorney for healthcare can also be limited or enlarged to suit the needs of the maker. Like the power of attorney for property, this document can be revoked by the maker (who has capacity), who will also retain the authority to overrule the instructions or actions of the agent.

Necessity of Powers of Attorney: In large part, the above-referenced powers of attorney are designed to avoid the need for going to court to establish a conservatorship or guardianship when an individual becomes incapacitated. An otherwise healthy person is statistically more likely to become incapacitated during his or her lifetime than to die (meaning, incapacity is likely to happen more than once). Court proceedings are expensive and can aggravate disputes among family members, so it is beneficial for everyone, even young people with small estates, to prepare powers of attorney.

Living Will: This document has limited applicability. A living will provides end-of-life instructions when a person is close to death as a result of a terminal condition or is subject to a persistent vegetative state. The instructions range from prolonging life as long as possible to immediate cessation of life-sustaining procedures and artificial nutrition. If a person is capable of communication, then his or her expressed instructions will trump the provisions of a living will. The maker of a living will may also authorize his or her agent under a health care power of attorney to overrule the instructions in a living will. Most people are familiar with the Terri Schiavo case and want to avoid that fate, so a Living Will has been a part of almost every comprehensive estate plan that I have prepared.

Guardian Appointments: Parents of dependent children, individuals who are serving as guardians for another person’s children, and guardians of an incapacitated adult may appoint a successor guardian using this instrument. The guardian appointment will make it much simpler to establish legal authority over the so-called “ward” upon the death or disability of the parent or the currently-serving guardian.

Delegations of Parental Responsibility: A delegation of parental responsibility is basically a power of attorney for decision making authority for children. A delegation can be revoked at will, and, by law, it will expire automatically after a year. This document is useful if, for example, parents temporarily send their children to live with a friend or relative when the parents travel out of the country.

Instructions with respect to disposition of last remains: A person can make legally binding instructions with respect to the disposition of his or her remains. I will prepare this document on occasion, mostly when a client has specific preferences, often derived from religious tradition, for the disposition of remains. As a practical matter, given the accelerated time frame for the disposal of human remains, it’s often more effective simply to discuss the matter with loved ones than to create a legal instrument.

Five Wishes: “Five Wishes” is an advanced directive often supplied by hospitals and other health care providers. It has its merits and is better than nothing when there is no power of attorney for health care or living will. When I was a young lawyer, I was supplied the Five Wishes form by hospital admissions when I went in for surgery. I had no counsel with respect to its use or content, and I had virtually no time to study or contemplate it. Importantly, if signed, it would have had the effect of revoking my power of attorney for health care. Those who have a power of attorney and a living will should ordinarily refrain from signing a Five Wishes form.

DNR & MOST: DNR’s (or Do Not Resuscitate instructions) and MOST (Medical Orders for Scope of Treatment) forms are advanced directives that should have limited use. In most states, such directives require the counsel and assistance of a physician. It is my understanding that most physicians will reserve DNRs and MOST forms to physically frail, geriatric patients who would be unlikely to survive emergency life sustaining procedures if they were to be administered. If you have specific questions concerning the use of these forms, seek counsel from your physician

- Matthew Trinidad is an attorney with Karp Neu Hanlon PC.


Posted by:  Steven Maimes, The Trust Advisor


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The Top ETFs Used by the Top Wealth Managers: Are They for You, Too?

The Motley Fool article by Selena Maranjian

richIf you spend any time wishing you were wealthy so that you could have a huge house, a fancy car, and a “wealth manager” to oversee and advise you on your finances, I have a little bit of good news for you. I can’t get you the house or car, but I can tell you that many of the top wealth managers have parked some of their customers’ money in exchange-traded funds (ETFs) — ones that you, too, can invest in. And better still, they’re actually good investments.

Last year, the folks at Forbes listed the top 50 wealth managers ranking them by assets under management. (The top-ranker managed $13.1 billion, and No. 50 managed $2.5 million.) Among their findings was that though half of the managers parked assets in ETFs, they were only a small portion of assets, overall. The list of top ETFs used by these folks is interesting, because they’re good choices for many of us smaller investors, too — and they’re rather inexpensive, to boot.

Here are the top five, along with their expense ratios (annual fees) and recent dividend yield:

Name – Expense Ratio Recent Yield

iShares Core S&P 500 ETF (NYSEMKT: IVV) 0.07%  1.9%

Vanguard Emerging Markets ETF (NYSEMKT: VWO)         0.15%   2.8%

SPDR MidCap 400 ETF (NYSEMKT: MDY)   0.25%   1.2%

iShares Emerging Markets ETF (NYSEMKT: EEM)   0.68%   2.2%

SPDR S&P 500 ETF (NYSEMKT: SPY)            0.09%   1.9%


Are they for you?

These are all ETFs that would be suitable for most of us smaller investors. For starters, all are relatively inexpensive, if not downright cheap. Consider that the typical managed stock mutual fund charges around 1.00% per year, and that 0.07% will rightfully look like a bargain — especially when you consider that broad-market index funds tend to beat their managed counterparts over long periods. The 0.68% charge for the emerging markets ETF might look pricey, but international funds do generally cost more. So, compared to its global counterparts, it’s also a low rate.

Let’s consider their content now. The iShares Core S&P 500 ETF and the SPDR S&P 500 ETF are basically the same thing, just offered by different fund families. They park your money in the S&P 500 index’s component stocks, and lest you think that’s just a modest subset of the market that sports thousands of stocks, know that these 500 are big — and make up about 80% of the overall market’s value. For many, if not most, investors, simply parking all your long-term stock money in such an index fund is all you really need to do.

If you want to add some smaller companies, then the SPDR MidCap 400 ETF is perfect, as it adds the next 400 biggest US companies after those in the S&P 500, giving you a solid and diversified exposure to mid-cap stocks.

Finally, you might aim to boost your portfolio’s overall growth rate by adding some exposure to emerging markets. That’s because developing economies, such as those in China, India, and Brazil, can grow more rapidly than our big, established one. For that, the iShares Emerging Markets ETF and the Vanguard Emerging Markets ETF are solid choice, but I’d favor the latter, as it’s a bit cheaper, offers a bigger dividend yield, and has a track record that’s a bit stronger.

Note that all of these even offer you some dividend income. It’s not much, but with a $100,000 portfolio, you might receive $1,000 to $3,000 in cash per year.

Not being a millionaire or multimillionaire might keep you from tapping the services of many wealth managers, but you can still invest in some of their recommended investments — and do very well.\\


Posted by:  Steven Maimes, The Trust Advisor



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New Case: Dahl v. Dahl

Wills, Trusts & Estates Prof Blog post by Gerry W. Beyer

caswIn Dahl v. Dahl (2015), the Utah Supreme Court held that a trust is not a Domestic Asset Protection Trust (DAPT).

Dr. Charles Dahl and Ms. Kim Dahl were married for nearly eighteen years. On October 23, 2002, Charles executed a trust instrument called The Dahl Family Irrevocable Trust that named Charles as Settlor and his brother C. Robert Dahl as Investment Trustee. Nevada State Bank was named as Qualified Person Trustee.  The trust named Nevada as the domicile in its choice of law provision.

On October 23, 2002, Charles transferred 97% of Marlette Enterprises, L.L.C., a Utah limited liability company, to the Trust, keeping 1% for himself and 1% for each of the parties’ two children.  As of December 31, 2002, the LLC owned brokerage accounts with a total value of $935,996.

On June 20, 2003, Charles and Kim jointly deeded their primary residence to the Trust.

Charles filed for divorce on October 24, 2006 and the Decree of Divorce was entered July 20, 2010. Kim subsequently sought a share of the Trust assets, which she claimed were marital property.  Specifically, she argued that the Trust was null and void, that the Trust was revocable as a matter of law, that she was a settlor of the Trust, and that she was entitled to an accounting from the Trust.  The parties filed cross-motions for summary judgment, and the district court granted the Trust Defendants’ motion, dismissing Kim’s claims

On appeal, the Utah Supreme Court determined that Utah has a strong public policy interest in the equitable division of marital assets and that Utah state law should apply to the trust even though the stated choice of law in the trust was Nevada. The court said that the trust was clearly intended to be a DAPT.


Posted by:  Steven Maimes, The Trust Advisor


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