Charter would likely help DM Trust defectors build out a “formidable” platform. PIERRE, SD, Mar 3 – Sterling Trustees LLC, a Philadelphia-area family office service provider, has filed to receive a trust charter in South Dakota, according to a report released this week by the South Dakota Division of Banking. A Sterling spokesman confirmed to […]
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Banks and advisors continue to flock to top-rated South Dakota for favorable trust laws and cost-effective operations.
PIERRE, SD., Feb 12 – Denver-based United Western Bancorp (Nasdaq: UWBK) has applied to receive a trust charter in South Dakota, according to a report released this week by the South Dakota Division of Banking.
A United Western spokesman confirmed to the Trust Advisor Blog that it has filed with the South Dakota Division of Banking to restart its currently Texas-based trust operation, once part of Sterling Trust, with a South Dakota charter.
United Western, according to its website, is the third-biggest savings bank in the western United States, with eight full-service community banking branches scattered across Colorado’s affluent Front Range, $2 billion in deposits and about 370 employees.
In April last year, United Western sold most of its lucrative Sterling Trust Company, a pricy alternative asset custodian, to the Ohio-based owner and operator of Equity Trust Company of South Dakota for $61 million; the deal closed in June. The remainder firm, known as United Western Trust Company or UW Trust Company, is now a relatively small Waco-headquartered and chartered trust company with roughly 12 employees and $26 million in trust (as of September 30, 2009). In its present form, the company primarily provides legacy, escrow, life insurance settlement and paying agent service accounts.
Restarting UW Trust under a South Dakota charter would immediately let United Western take advantage of that state’s bank-favorable regulatory environment, says Denver estate attorney David Kirch. “States have been enacting more trust-friendly laws and South Dakota is definitely one of the friendly types,” he told The Trust Advisor. “That’s probably why they chose it.”
Jon C. Walls, a banking industry expert and former Lehman Brothers investment banker, told the Trust Advisor that “United Western’s Scott T. Wetzel is a veteran banker with experience at both Compass Bancshares and KeyBank. He understands the importance non-spread businesses can play in diversifying the revenue mix of a community bank.”
Walls added, “While capital adequacy issues seemingly prompted the sale of the bank’s trust division in mid-2009, its successful common stock offering last September put it at levels exceeding regulatory requirements.”
Decade-old trust feature that splits trustee and advisor into separate operations has become accepted practice for banks and trust companies nationwide; but questions remain: will they last?
On the surface, directed trusts are an obvious win for everyone. Splitting the administration of a newly created trust from the responsibility of managing the assets within it lets legacy advisors keep their accounts and custody provider—such as Schwab or Fidelity. Trustees avoid the headaches of managing exotic assets, while their clients can feel secure knowing that experts are in charge of every aspect of their wealth.
Jeffrey Lauterbach gets credit for turning the concept into a trust operation that propelled his firm, Capital Trust, from zero to $6 billion in trust assets in six years. “It was always market driven,” he told me in a recent interview. “Advisors told us want they wanted, and we delivered.”
Lauterbach sold his operation in 2005, which was subsequently sold to Wilmington Trust in 2007. He added, “Wilmington tried to make a go of it by itself, but didn’t stick with it long enough to make it work. We did”
Today, firms like Advisory Trust of Delaware (Capital Trust’s successor, owned by Wilmington Trust), Santa Fe Trust, Reliance Trust and Wealth Advisors Trust Company of South Dakota are actively courting advisors who want to add value without handing off the relationships they’ve worked so hard to build. Fees are generally split between trustee and investment manager, which helps make sure everyone stays happy.
These advisor-oriented trust companies are also promoting the directed trust model directly to wealthy people who may benefit from a trust but don’t feel like handing the reins of a family business, for example, to a relative stranger who knows nothing about how to keep the business going. In these cases, setting up a directed trust lets insiders stay in charge and still enjoy the other advantages of ownership under the trust structure.
“A corporate trustee doesn’t want to get involved in running a closely held business, and families don’t want corporate trustees interfering in a lot of their decisions,” trusts and estates lawyer Bruce Stone told Lawyers USA (a professional monthly for the legal profession) back in 2007. “With a directed trust, the corporate trustee only has to do certain things.”
Liability in the Details
So far so good, but if things go wrong, the question of who gets blamed still gets decided on a state-by-state basis. The limits of a trustee’s responsibility to monitor the advisors assigned to direct the trust’s investments are often nebulous, and some have been sued for failing to spot and stop misconduct fast enough.
It’s a controversial topic even among The Trust Advisor’s readership. When we posted back in January our analysis of the most trust-favorable states, estate planners piped up with corrections.
“In your chart, you indicated that Florida doesn’t have a power to direct,” wrote Lester Law, a senior vice president at U.S. Trust Bank of America Private Wealth Management working in Naples, Florida. “Can you review the … statute and let me know what you think?” And Boulder, Colorado attorney Scott Robinson alerted us that “The chart indicates that Wyoming does not have a directed trust statute. Wyoming does in fact have such a statute.”
In an influential 2007 white paper on the subject which may be downloaded, “Directed Trusts: Can Directed Trustees Limit Their Liability?,”
After a month of death tax confusion, The Trust Advisor checked in with key providers to see if business slacked off.
Between the threat that Congress will retroactively de-repeal the currently repealed federal estate tax and the ongoing questions about what happens to the tax in 2011 and beyond, the wealthy and their advisors are busier than ever.
We thought that most death tax consultants and trust officers would have taken a long vacation in Hawaii without an estate tax this year to worry about. But it’s shaping up to be just another year in the trust planning business. “The whole repeal is much ado about nothing,” said Phil Kavesh, a Southern California estate attorney and founder of UltimateEstatePlanner.com.
In an interview with The Trust Advisor Kavesh suggested, “Let’s not kid ourselves, there’s going to be an estate tax moving forward. We’re telling our clients to keep planning, full speed ahead.”
That’s the reality. After years of speculation, lobbying and not a little daydreaming to the contrary, nobody seriously believes the estate tax is going away for good, and the rich will have to go on planning around it.
The question is how we’ll be defining “rich” when the tax makes its comeback. If Congress does nothing, estates valued at more than $1 million will be taxable at a rate of up to 55% next year. But as University of California-Davis estate law professor Joel Dobris explained it, that low exemption level would alienate a lot of potential campaign contributors for Republicans and Democrats alike. “It makes for more unhappy upper-middle-class voters.”
An exemption of $3.5 million (as proposed in President Obama’s 2010 budget and passed in a narrow partisan House vote December 4) or $5 million (as the equivalent Senate bill mandates) is far more likely to win bipartisan support. Given the recent adjustment of power on Capitol Hill, there’s a chance Republicans could fight for the higher number. But gridlock would work against them—if they fail to make a deal in the next 11 months, they expose tens of thousands of America’s wealthiest households a year to a new tax liability.
Never the Main Market
In any event, while those households wield a lot of economic heft, there really aren’t that many of them — whether the exemption is fixed at $5 million, $3.5 million or even $1 million.
According to numbers from the Urban Institute and Brookings Institution’s Tax Policy Center, about 1.7% of all Americans who die each year (44,000 estates) would accrue an estate tax liability in 2011 if the $1 million exemption remains in place. Raising the tax bar to $3.5 million shrinks the pool 85% to 6,400 estates; a $5 million exemption would cut that population in half again, leaving only the 3,500 richest estates owing anything to the IRS.
CEO says new funds can be started in minutes, not months, at a fraction of the cost of a mutual fund.
Earlier this month The Trust Advisor reported Westwood Holdings Group, Inc. (NYSE: WHG), through its trust company unit Westwood Trust, helped forge gains by landing large new accounts while other firms sat on the sidelines. Westwood managed to bring in $2 billion in new assets during the toughest year in recent financial memory.
As part two of our report on Westwood Trust, I had an opportunity to chat once again with Brian Casey, President and CEO of Westwood, to drill down into the topic of interest to most wealth advisors – common trust funds.
New Money from an Old Idea
Simply stated, common trust funds or “CTFs” permit the commingling or pooling of investors’ money into one account (known as a common fund) for the purpose of creating a single investment. In other words, they are much like a mutual fund. They actually pre-date mutual funds so they are an old concept. Since they are a bank product, CTFs are not required to be registered with the Securities and Exchange Commission and they are not considered to be a security under state and federal securities laws. They are regulated under OCC Regulation 9 (12 CFR 9.18) and are supervised by state or federal bank regulators.
Casey says there are two types of CTFs. The first are common trust funds or CTFs, a product of a bank or trust company established as a convenience to the trust client. The second are collective investment funds or CIFs. These are utilized primarily by large qualified plan sponsors who are seeking institutional pricing for a large pool of retirement assets such as 401ks. They strike an NAV daily and trade on Fundserve. Casey adds, “We actually have one of these that we developed for a Fortune 100 company 401k plan and the data is available in Morningstar.”
But Westwood’s power products are the CTFs, common trust funds. They are private and only available to clients of Westwood Trust. Casey says that “they are only available to our clients who have a bona fide personal trust relationship with the trust company.” Their minimum account size is $2 million which can be either a taxable or retirement account. But, in other words, to benefit “you have to be a trust client and have seven figures with us to be part of the club.”
According to the Westwood’s 10K quarterly report for the year ending September 30, 2009, $1.4 billion of its $9.5 billion or 15% of its assets under management are held in common trust fund relationships.
Westwood runs 31 separate common trust funds which are based on 15 asset classes. Casey adds, “With institutional quality and thoughtful asset allocation, the client is given a better shot of achieving what it is that they’re trying to do than picking a mutual fund off a list.”
To the client, “expenses matter.” With a CTF the only charge is a management
State legislatures are still enacting trust law enhancements to provide greater protection for your client’s wealth.
As more wealthy families cross borders to protect assets, they choose to set up personal trusts in states other than their own to take advantage of favorable trust laws.
According to recent data, 72 percent of U.S. households with more than $1 million in investment assets use trusts as a key component to their estate planning.
The main reasons to cross borders are:
• Some states don’t tax assets held in a trust, while distributions might be taxable in your home state.
• Trust codes in some states seek to protect assets from lawsuits and creditors.
• Some states allow “dynasty trusts” which permit future generations to avoid estate taxes.
Over the last few years a growing number of states have revised their trust codes to add features that provide for creditor protection, low or no state income tax and ability to establish a dynasty trust which allows for assets to pass to heirs for generations to come.
Nevada recently revised its trust code to provide for directed trusts. Directed trust statutes provide for an ability for the trustee to appoint an investment advisor to manage assets within the trust. This provides for low trustee fees and minimal trustee liability and provides flexibility to the investment manager ultimately benefiting the client.
Steven J. Oshins, an estate planning attorney and author of serveral trust laws in Nevada says, “Nevada’s new directed trust statute is critical to high net worth investors. Nevada now offers everything Deleware offers and more because of the combination of its 365-year dynasty trust law, two-year statute of limitations on self settled asset protection trusts and no taxation.”
Alaska revised its trust code to make it more difficult for divorcing spouses to grab trust assets. State trust laws vary widely and clients should compare jurisdictions for features that best fits their needs. Some of the most important trust features include whether or not a state has income tax.
When setting up a trust arrangement having a trust in a state that has no income tax has a definite economic financial impact on your client’s family. Therefore, no state income tax is amongst the most important.
Dynasty trusts are important beginning next year when estate taxes resume at a 55 percent tax rate. The general rule is the longer the period of time that the trust can exist the better it is.
Other factors include the number of trust providers or independent trust companies in the state which is an indication of whether a trust center is beneficial to a client and the time zone from New York.
But going out of state for a trust may not always make financial sense, especially for smaller trust accounts. Since the most favorable jurisdictions might be in states where you don’t know an individual trustee, you might need to hire a corporate trustee, which can cost about between ½ of 1 % to 1% or less of trust assets per year, depending on the size of the trust.
Moving an existing trust may also involve additional fees and may require court approval, depending on how the trust was originally drafted and state law.
In a year when registered investment advisors have faced impossible challenges to stay ahead, one wealth management firm in Texas found opportunity and success.
Westwood Holdings Group, Inc. (NYSE: WHG) through its trust company unit Westwood Trust, helped forge gains by landing large new accounts while other firms waited, worried, and sat on the sidelines.
Last summer my research team noticed a blip on our radar screen when looking for firms that stood out during the meltdown. These are firms that increased managed assets for the year September 30, 2008 to September 30, 2009.
The firm that stood out was Westwood Holdings Group, company with little press attention, listed on the New York Stock Exchange, and a top performing wealth manager.
Last month I had an opportunity to chat with Brian Casey, President and CEO of Westwood, to discuss how his firm managed to bring in $2 billion in new assets during the toughest years in recent financial memory. Reviewing SEC reports, I looked at money managers that weathered the meltdown and it was not hard to understand how Westwood was able to mark this achievement.
Although Westwood has been in business since 1983, its strategies were illuminated when it became public in 2002. But, the true story of Westwood Trust began in 1998..
Westwood Trust’s mission is to provide high quality products and services to its high net worth clients. Casey calls it “offering a competent investment professional to assist them with structuring a portfolio, and meeting the objectives whatever they may be trying to accomplish.”
Westwood is not a financial planning trust company that provides directed trusts, dynasty trusts or self-settled trusts. It is basically an eloquent investment store for a catered high end investment business segment.
In the past five years Westwood’s managed assets have grown from $4.5 billion to $9.5 billion.
The reason for this growth was due largely to the way the firm had been structured. Many channels of diversification contributed and provided a continuous and steady growth.
Casey, a native Texan for 40 years, describes Westwood as a diversified wealth management organization with three different business lines. The first, Westwood Management Corp., began its investment business in 1983 as an institutional money manager. Next, its trust company, Westwood Trust, a fully licensed and chartered trust company based in Texas that has been up and running for 12 years. Third, its mutual fund business called WHG Funds, which has been in business for four years.
The story of success is credited, in part, to Westwood Trust. Casey noted while other firms sat on the sidelines Westwood got its sales team out and prospected for new accounts.
Experts aren’t sure if the tax hiatus is a loophole or pitfall for estates. With taxes set to begin again in 2011, estate planners now wait and wonder how to determine a client’s current estate tax obligations.
In 2011 the estate tax is scheduled to return at a rate similar to that in place prior to tax cuts enacted under President George W. Bush. The one-year repeal of the tax this year has been on the books for years, but estate planners and congress watchers have widely anticipated the congressional democrats would prevent the repeal from taking effect.
Instead, amid disagreement over the proper level for the tax and preoccupation with health care overhaul legislation, lawmakers punted last year and left the repeal intact. Congressman Richard Neal (D-Mass.) said in a recent Wall Street Journal interview “Ten years ago, there was a lot of gallows humor about repeal when somebody said it would never happen.” Neal chairs the House Select Revenue Subcommittee. “Now, one of those never-happen moments has happened, and nobody’s laughing.”
Mr. Neal said “there is no question” that Congress will reinstate the tax, retroactive to January 1. That is also the intention of Senate Finance Committee Chairman Max Bacchus (D-Mont.). But others aren’t so sure.
Veteran estate planner Steven J. Oshins, said in an interview with The Trust Advisor yesterday, “I am anticipating Congress will try to adopt an estate tax that is retroactive to January 1, 2010 in an attempt to fix the problem. However, it is not clear that a retroactive estate tax would be constitutional.” Oshins added, “It is likely that there will be many lawsuits brought by wealthy families of decedents who die in 2010 prior to a retroactive estate tax system being adopted.”
University of Virginia Law School Tax Professor George K. Yin, said in a Wall Street Journal interview last week, “There are plenty of instances where Congress has changed tax laws retroactively but this one is particularly high profile. Since Congress has had so much difficulty around a permanent estate tax solution to begin with, there is no reason to think a retroactive solution would be less controversial.” There are big questions on whether the Democrats will even succeed with a retroactive extension.
All of this uncertainty has left the rich and their financial advisors with no end of planning conundrums and few opportunities. In addition to the estate tax, the so-called generation-skipping tax also disappears in 2010. That tax was imposed at 45 percent in 2009 on gifts to grandchildren.
Multimillionaires might try to take advantage of the repeal of the generation-skipping tax by making large gifts to grandchildren in 2010. However, according to Oshins, those gifts would still be subject to a 35 percent gift tax still in effect for this year.
Look for lower unemployment, higher taxes and more debt. Despite the predictions of skeptics investors will regain confidence and markets will hit historic highs in 2010.
Time magazine made Federal Reserve Chairman Ben Bernanke its person of the year. The economy appears to be taking shape will likely be one of the most remarkable transitions from rags to riches in American history. Bernanke’s achievement was not necessarily what he didn’t do but more of what he did do to subdue an economy that could have collapsed in a way that the markets melted before the Great Depression.
This month marks the Trust Advisor Blog’s sixth month of publishing. It marks an achievement that required me to wear two hats — relationship manager by day and writer by night.
Although I would have preferred to have basked on the beach in the Bahamas this weekend, instead I dug my heels into delicate research to come up with these predictions of what; in my opinion will likely take place next year.
1. Expect unemployment to go down to 8 percent. As investor confidence continues to take hold, markets again will rise. This will inspire confidence in businesses to rehire and expand. This will in turn have a significant effect on employment.
2. The U.S. dollar will likely improve as short-term rates climb next year.
3. Interest rates will begin to rise in the second quarter of 2010 as inflation fears begin to mount and the economy continues to grow.
4. Corporate profits will increase to the upside beginning in the first quarter of 2010.
5. Small caps’ stocks which have been badly beaten in the downturn will rise dramatically making them one of the best performing equity vehicles.
6. Financial regulation will attempt to begin in Congress but the mission and purpose will have been forgotten as most politicians have short-term memories for what took place in the last quarter of 2008.
7. Anti–Madoff/anti-Stanford measures will take a backseat position as new issues emerge.
8. ETFs will become the hottest financial vehicle for investors. Innovators will package commodities, real estate and every conceivable asset class into an ETF so investors can consume them and reunite markets.
9. Apple Computer will announce a large size iPhone – the size of a small book. It will have screen features like a like the iPhone and through its apps will serve as a full computer. It will be called the iTablet or something like that. iPhone applications will appear on its screen. It will have Bose style sound system give sound enthusiasts a a walking, boom-box entertainment system. iPhone’s competitors such as Palm and Blackberry will copy the concept. Amazon.com will likely partner with one of these firms to make its Kindle on-line books available for instant access.