Best known as a provider of full-service managed trusts at made-to-measure prices, Alaska Trust has started turning heads for offering its directed trusts at a flat fee.

As part of the company’s push into the advisory market, it has eliminated basis point pricing and is simply charging a fixed, flat fee, typically $3,500 a year, for all directed trusts — large or small.

“It’s squarely aimed at the advisors who are a big gatekeeper for a lot of high-net-worth clients,” says Matt Blattmachr, CFP®, a trust officer.

“The flat fee lets us bring Alaska’s unique trust laws to a broader audience than we’ve reached in the past and lets advisors offer enhanced services at a lower price.”

Alaska Trust announced the revolutionary flat-rate policy as part of the launch of “Directed Trust 2.0,” its new white paper laying out the benefits advisors can reap from integrating Alaska-based trusts into their practice. (Click for a free copy.)

The white paper, in turn, kicks off one of the biggest marketing campaigns in the company’s 14-year history.

Given a rough average administration fee of roughly 75 basis points a year in the industry, that $3,500 flat pricing means that every trust bigger than around $470,000 will be saving money.

And the savings go up with the value of the trust. A $500,000 trust would save only $250 a year in fees, but one worth $1 million would recoup a total of $4,000 in fees that would otherwise be lost to the trustee.

Multiply that $4,000 by decades or even a century or two — Alaska is a dynasty trust state — and that “fee drag” can add up to a vast amount of money.

As a bonus, in almost all cases, it’s truly a flat fee. Unless an account truly requires above-and-beyond effort to administer, there are no “alternative asset class management fees,” lock-up charges or other nuisance costs.

No threat to the advisors

Traditional trust companies kept both the administration and investment management functions to themselves.

In effect, advisors who recommended that their clients open a trust were surrendering a portion of their AUM to the trust company, as well as the associated fees.

But the move into directed trust signals Alaska Trust’s willingness to work with advisors and not against them.

As the company points out in “Directed Trusts 2.0,” directed trusts eliminate conflicts of interest between trustee and the grantor’s legacy advisor by appointing the advisor to go on “directing” the trustee’s investment choices.

“A trust company serves as trustee, but the advisor goes right on running the investments and everyone wins,” writes Brandon Cintula, the company’s senior vice president and senior trust officer.

The goal here is to open up new markets for Alaska Trust while helping advisors integrate trusts into their larger service platform.

“A lot of advisors are not necessarily opposed to trusts, but need someone to remind them of what trusts can do for them,” Matt Blattmachr says.

“Ultimately, offering to facilitate these types of accounts and go on managing the underlying assets helps them form even stronger relationships with clients and their clients’ heirs.”

The freedom of the Alaskan frontier

Blattmachr says simply doing business in Alaska is a value add in itself.

First, the state’s pioneering trust rules support all major forms of trusts, including truly “perpetual” dynastic trusts and some of the tightest asset protection provisions anywhere in the United States. All can be built into a standard directed trust.

Second, there is no state income tax or capital gains tax on trusts.

And while some states that allow directed trust insist that the trustee keep watching over the advisor’s shoulder, the Alaska trust code limits the trustee’s monitoring responsibility to making sure no obvious criminal activity is going on.

Beyond that perfunctory duty, Alaska Trust promises that it will never second-guess the way outside advisors invest the trust’s portfolio. And because Alaska allows trusts to hold just about any asset class — including real estate and limited partnerships — the sky is truly the limit.

“It gives the advisors more freedom than they would get elsewhere,” Matt Blattmachr explains.

But although Alaska routinely ranks in the top tier of trust-friendly states, advisors have sometimes been at a loss as to how to provide those great provisions to their clients.

Alaska Trust traditionally focused on getting estate planners and other attorneys to refer business northward — and obviously, since the investment advisor was often left out of that loop, it didn’t matter whether the trusts were directed or not.

Now that the company is moving in a different direction, directed trust at a low flat fee has become the way to introduce Alaska to a new population of high-net-worth investors.

Whether the flat fee becomes an industry standard or simply another of the unique features of the Alaskan trust landscape remains to be seen, but we’ll be watching.

Scott Martin, senior editor, The Trust Advisor Blog.

Permalink: http://thetrustadvisor.com/news/directedtrust2

In a stunning turn of events, on December 6 President Obama announced that he reached a deal with Republicans on estate tax and to extend the Bush tax cuts.

Under the deal, the 2010 repeal of the estate tax will not be extended, ending the long uncertainty about the future of federal estate taxes that allowed billionaires to die tax-free this year.

If Congress had not reached an agreement, the estate tax was scheduled to come back next year at a top rate of 55% and in some cases 60% with an exemption of only $1 million for individuals.

Under those circumstances, estate planning attorneys and trust firms insisted that their thriving practices would continue to help wealthy Americans avoid estate taxes and plan for generations to come.

However, as a complete surprise to the trust community, the defeat that Obama suffered in the November 5 election forced him to accept a Republican proposal that will give Americans a tax rate of 35% — the lowest rate since the 1920s — with a $5 million exemption for individuals and $10 million for couples.

On the surface, you would think that that would be great news for wealthy Americans. However this week I have spent hours on the phone listening to financial planners crying the blues about what is going to happen to their practice since the main reason people came to them was to avoid paying estate taxes.

Martin Shenkman, author and estate tax attorney, told me, “Estate planners have had the wind knocked out of their sails.” He added, “They are going to need to work harder to offer new products to get the wealthy clients into their office.”

He added, “What’s going to happen in many cases is that clients are not going to appreciate the benefit of what the planners are doing if a tax motive is not there. They are going to be less inclined to spend the money to do it right, and more inclined to do something on the cheap with a general practice attorney — or on their own because they will argue, ‘How can I screw this up if no taxes are involved?’”

“Dead as a doornail”

To make matters worse, Howard Zaritsky, a Virginia-based estate planning expert, told me that if the current bill passes, “estate planning as we know it may be dead as a doornail.”

“Most clients under $10 million will need very little in the way of tax planning,” he added. “That will as a practical matter almost eviscerate the rank-and-file financial planning business, because that’s the bulk of clients.”

Portability of exemptions is the key here. Historically, while married couples were always allowed full estate tax exemptions for both spouses, they often needed good legal advice to get the value of both exemptions.

The Senate bill has a “portable” exemption that makes this planning much easier. After the death of the first spouse, any unused portion of the spouse’s $5 million exemption may go to the surviving spouse’s future estate.

Up until now, a couple would be required to establish a complex QTIP trust that permits the surviving spouse to receive the credit — but under the proposed portability rule, the credit becomes automatic.

Tony Barnard, a trust marketing expert with Financial Marketing Associates, told me, “Estate planners and trust firms are going to now have to rethink their strategies in order to sustain their current practices.”

“Two reasons that a wealthy client will walk into a planner’s office are to maximize profits or to protect assets from litigation or taxes. Now taxes will become more obscure. Planners are going to have to do a better job at profit and asset protection benefits in order to continue to have conversations with clients.”

New products for the new world

Richard Nenno, an estate planning strategist with Wilmington Trust, told me that without an apparent estate tax hurdle, the equation will have to be more along the lines of directed trust and asset protection trust as opposed to dynasty trusts and other vehicles that deliver tax protection from estate taxes.

Darlynn Morgan of the Morgan Law Group said she agrees that the $5 million exemption will likely chill estate planning for a while, but most of her clients do estate planning for other reasons — including incapacity planning, family dynamics or planning for blended or nontraditional families. She sees no shortage of clients coming in the door to have these critical conversations.

Martin Shenkman added that under the current rules, he still sees a market for GRATs (grantor retained annuity trusts) and other vehicles that permit the protection of taxes for the long haul.

Trafficking in portability credits?

Estate planners in the American Bar Association’s email discussion group for probate and trust law (ABA-PTL) are going back and forth with “what if” scenarios over the proposal and alternative planning opportunities that it could spawn.

According to Arlington, Virginia estate planner Douglas Blair, the wave of the future may end up as something like a “Nevada Domestic Portability Partnership” or “Alaska Domestic Portability Partnership,” neither of which exists as yet but could theoretically  be created by filing documents (or perhaps filling out forms online) from anywhere in the country.

“Mail ‘em in or enter your signature keys, pay your filing fee, and poof! You’re Nevada Domestic Portability Partners, entitled to take full advantage of your partner’s unused portable exemption if he should, sadly, predecease you,” he notes. “And who’s to say you could have only one Nevada Domestic Portability Partner at a time, if you have real need for those unused exemptions? Or, a clever programmer could set up a system of cascading Nevada Domestic Portability Partner online applications, so that when one died, the new partner would be ‘online’ with his exemption waiting, milliseconds later, until the full $10 million was filled up.”

Napa Valley estate planner David Diamond — tongue in cheek — wonders if this could spin out into an entire new business for today’s estate planners:

“Maybe I should retire from the practice of law, get ordained so I can perform marriages, and start a match-making service where I pair up and marry destitute seniors in nursing homes to wealthy unmarried individuals. What’s a $5 million exemption worth? At least $1,750,000 in today’s dollars. Even taking life expectancy into account and discounting to present value, a fee of $50,000 to $100,000 doesn’t seem unreasonable for this service. Putting a few marriages together per year would sure beat sweating out 1,500 billable hours.”

Jerry Cooper, senior editor, The Trust Advisor Blog.

Permalink: http://thetrustadvisor.com/news/estatedeal

Last December, we had clarity on the federal estate tax. The Democratic majority in the House was moving fast to extend the 2009 exemption and rates, and it looked like the Senate would soon follow.

Now, almost a year later, there’s no fix in sight. As a result, there was no estate tax this year and visibility on what estates will end up paying in 2011 has eroded to zero.

Even on Capitol Hill, nobody knows what kind of tax liability people who die two months from now will owe the IRS.

When asked to give a forecast, Michael Briggs, an aide to Senator Bernie Sanders of Vermont, simply says the future of the estate tax is now “totally unpredictable.”

Sanders is one of the members of Congress who’s both most keyed into developments on the estate tax front and — until the November election — most keyed up about making sure no more billionaires die without leaving the federal government a piece of their fortunes.

If his office now acknowledges that there’s no way to tell what’s going to happen next year, ground-level practitioners have even less guidance as they try to prepare their clients for literally anything.

“There’s too much out there, and that makes it so difficult to advise clients,” says Barbara Kogen, a partner at Beverly Hills CPA firm NSBN.

The mood on the street ranges from wry amusement to outright frustration.

“I have given up,” says Andrew Tignanelli, a Baltimore CPA and planner. “This is a perfect example of the totally dysfunctional nature of Washington. Sadly, they are not even ashamed.”

Tired of “all or nothing” outlook

Part of the problem is that even if advisors take the most likely scenarios into account and ignore everything else, there’s still too much ground to cover.

If Congress does nothing, this section of the tax code will automatically reset to 2000 levels on January 1. That means estates will owe the government up to 50% of their taxable value over $1 million.

And since this expands the number of families who have to worry about the tax from zero to about 2 million, advisors who had hoped for a fix before the end of the year are now having to scramble to make sure that even their mass market clients have their estate plans in order.

On the other hand, the most likely alternative would be to either reinstate the 2009 rules or set up a bipartisan compromise between Republicans who want the tax abolished outright and Democratic-leaning types like Sanders who wouldn’t mind charging really big estates even more.

But the 2009 rules would roll the exemption back up to $3.5 million, ensuring that only the biggest fish in any advisor’s book — the 280,000 richest families — would need to worry about their heirs owing the federal government a single dime.

Furthermore, since we would only be rolling back the status quo a year, those clients probably got their trusts and other arrangements in place back before 2009.

Uncertainty leaves too many clients at risk

While probably about 60% of most RIA firms’ bread-and-butter clients have their trusts together as well, that could still leave hundreds of thousands of families rushing to shield their assets ahead of the January 1 reset.

Throw in the post-election uncertainty surrounding the Bush income tax cuts, capital gains tax rates and dividend taxes, and you’ve got plenty of planners who blame Congress for stalling until it’s too late to do much real tax planning of any kind.

“It is inexcusable,” says Todd Ganos, a principal in Monterey firm Doolittle & Ganos.

“When the majority party had 60 seats in the Senate, it could have made permanent whatever solution they proposed,” he adds. “But they did nothing.”

Ganos believes that ultimately the 2009 rules will be put back in place for the estate tax and that President Obama will end up allowing the incoming House Republican majority to extend the Bush income tax brackets as well.

In theory, whatever solution Congress comes up with can be made retroactive. Over the course of this year, tax gurus repeatedly raised this point as a possible hitch for the estates of the several billionaires — including George Steinbrenner, pipeline mogul Dan Duncan and others — which would otherwise pass on without owing the IRS anything.

Some estate planners currently hold out the possibility that a fix will end up covering everyone who dies after January 1, effectively preventing any family from being subject to the almost universally unpopular $1 million exemption.

Rick Shapiro, a Connecticut planner, has dug into the issue with several tax lawyers and CPAs and has tentatively concluded that a retroactive change to the tax code is theoretically possible.

He bemoans the “lack of clear direction” and notes that previous generations of estate planners would have found the freak temporary abolition of the estate tax for a single year vanishingly improbable at best.

In any event, nobody we talked to was inclined to think that a retroactive tax fix would be extended all the way back to this year.

Barbara Kogen sums it up best: There will be no retroactive reinstatement of the estate tax for 2010 because, at this point, too many billionaires have died.

“Steinbrenner, Duncan in Texas, all those people dying, their heirs have the deep pockets and a lot to lose,” she explains. “They’re willing to pay the legal fees. It’s clearly way too late to fix this retroactively.”

Maybe after a year of forgoing billions of dollars in potential estate tax revenue, fielding a few complaints from mere millionaires bristling at their heirs owing a few thousand dollars will get the new Congress to do something next year.

“Chances are we won’t get anything in 2010,” Kogen says. “I think people hope something could happen early in 2011. I hope we get some clarity soon either way.”

Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and reporting.

Permalink: http://thetrustadvisor.com/news/estate2011

Billionaire George Steinbrenner, owner of the New York Yankees, died this week at the age of 80. He was a man with the Midas touch and possessed a perfect instinct for impeccable timing.

Timing again was on his side for dying in a year with no federal estate taxes on the books. News reports from NBC, the Washington Post and the New York Times brought this to the public’s attention.

The Trust Advisor Blog ran a story in January on this topic. At the time, many of our readers and our contributors said this was too good to be true. And as often is the case, when something is too good to be true, it seldom is.

Now that the genie of public outrage is out of the bottle, there will certainly be an argument over whether Steinbrenner’s heirs will avoid up to $600 million in estate tax. Lawmakers in Washington are already using his good name to prevent billion-dollar estates from passing tax-free.

Senator Bernard Sanders (I-VT) and four co-sponsors have introduced a bill that would retroactively return the estate tax to the 2009 exemption level of $3.5 million with a progressive tax rate structure starting at 45% with a 10% surcharge on billionaires.

The debate started last March following the death of Texas pipeline mogul Dan Duncan, who died at 77 with an estimated net worth of $9 billion, ranking him as the 74th wealthiest person in the world. Under the Sanders proposal, that $9 billion would generate billions of dollars in government revenue.

Lawmakers had a chance to fix the estate tax several months ago, saving Duncan and Steinbrenner’s heirs millions, in a proposal that would have given Republicans just about everything they asked for, including a $5 million exemption rising with inflation and a maximum of 35% maximum rates. But because of party bickering, lawmakers couldn’t agree—and here we are.

Public outcry over billionaire dying tax-free makes great political theater, matching the fuss created in 1995 when President Bill Clinton and Congress plugged the expatriation loophole that let billionaires like Ken Dart escape U.S. estate taxes by renouncing their citizenship and moving to Belize.

Some of the strongest outrage has come from Congress itself. When asked to summarize Senator Sanders’ position, aide Michael Briggs pointed me to a speech he made the day Steinbrenner died.

“We have a situation now where the very wealthiest people in this country are seeing that when someone in their family dies, the estate tax is zero,” the senator said, concluding with “In my view, it is immoral it is unfair that while the middle class struggles to survive, millionaires and billionaire’s get tax breaks.”

Where the rhetoric meets the road

Given that sentiment, it’s not surprising that Sanders and his allies are pushing a bill that would retroactively tax Steinbrenner and others who have died in the last seven months. Meanwhile, Blanche Lincoln of Arkansas and John Kyl have revived their bipartisan proposal, and more would-be fixes and compromises will probably emerge over the next few months.

Right now, it’s all still political theater, says estate planner Phil Kavesh.

“I think this is definitely not going to get resolved until the November election, and at this point will probably be pushed back to January when the new Congress takes office,” he says.

The logic is a little cynical, Kavesh admits, but everyone I talked to agrees.

On one hand, every billionaire who dies is an embarrassment for lawmakers who were supposed to close the loophole last year.

But on the other, the longer the Senate keeps us all in suspense, the more time both Democrats and Republicans have to collect contributions from the upper-middle-class families that will be exposed to the estate tax next year if nothing happens.

“If the estate tax came back next year with only a $1 million exemption, that would be devastating for a lot of relatively middle-class people,” Kavesh notes.

More complicated than it looks

While some members of Congress may think it will be easy to bang out an amendment that raises the exemption back to $3.5 million, by the time November rolls around the budget could tie their hands.

Thanks to “pay as you go” rules, in order to exempt more estates from the tax means finding about $60 billion in additional revenue, or cutting that much from federal spending. Neither is an especially attractive option, but Sanders, Lincoln, Kyl and others are working on solutions.

The Sanders bill, for example, would create a special “billionaire’s tax” designed to spare 99.7% of all families from paying any estate tax at all, while skimming off 65% of what high rollers like Steinbrenner leave behind.

Retroactive headaches

“If I were the executor for the estate of Art Linkletter, George Steinbrenner, Dennis Hopper or any of the other wealthy people who’ve passed away in the past six months, I would be stalling any distributions until I got some clarity,” says Bill Ahern, policy director of the non-profit Tax Foundation.

That’s because Sanders wants to make his tax retroactive to the beginning of 2010 to bring in revenue from the billionaire deaths we’ve seen so far this year—assuming, of course, that they left any taxable assets behind and not in trusts or other tax-shielded vehicles.

“Sad but true, when people mention these billionaires dying in a year of no estate tax, I wonder in the back of my mind how much they would have paid last year,” Phil Kavesh says. “These people can afford very sophisticated legal counsel to avoid estate tax, but this topic has such political cachet that it may trap people in the upper middle class as well.”

Although Max Baucus and the Senate Finance Committee have backpedaled away from retroactivity as the year drags on, it’s anything but a dead issue, Bill Ahern says. As long as it gets the votes, it has a good shot at fending off any constitutional concerns.

“The Supreme Court has been very kind to retroactive taxation, especially within one year,” says Ahern.

Phil Kavesh isn’t so sure. “Quite frankly, retroactivity might not be a workable solution at this point in the year,” he says. “Enough big estates have been affected so far that there is a lot of money at stake, and that means a lot of money to fund fights in the court system that could go on for years.”

The silver lining for estate planners

As a result, Kavesh suspects we could end up with the $1 million exemption after all, at least for as long as it takes to work out a budget-neutral compromise.

Either way, he says it’s the best of times and the worst of times for estate planners. Those who can cope with all the moving parts in play can book a lot of business.

“What with the tax environment shifting as it is, a lot of my clients are seriously looking at taking measures before the end of the year,” he says.

“There’s a lot of rumbling about additional restrictions on certain types of trusts going forward, so whatever happens to the exemption, the time for them to act is now.”

Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes and Scott Martin contributed to the research and reporting.

Permalink: http://thetrustadvisor.com/news/steinbrenner

With Democratic leadership and Republicans blaming each other, it looks like negotiations to roll back the currently repealed federal estate tax to 2009 levels when it kicks back in next year have been wrecked.

A staffer in Finance Committee chairman Max Baucus’ office told me that “Republican objections” had stalemated recent progress toward estate tax clarity.

Since the deal would have given Republicans just about everything they’ve asked for, including a $5 million exemption (rising with inflation) and a 35% maximum rate, those objections were more about Senate procedure than the tax code.

From the Republican camp, John Kyl of Arizona, Senate minority whip, threw the blame back across the aisle.

“We no longer have an agreement,” he told reporters, “because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they’re not going to allow it on the floor.”

Reading between the lines

What Kyl means is that while Baucus and other leading Democrats been ready to deal, many rank-and-file party members would probably balk any serious estate tax overhaul until after the November elections.

If the Senate does nothing, the tax resets on January 1 with an exemption of $1 million and a maximum rate of 60%. Senator Bob Casey of Pennsylvania estimates that maybe 80% of his fellow Democrats are willing to let this happen because, in his words, tax relief for wealthy families looks “offensive” given massive federal revenue deficits.

As the Baucus aide told me, it boils down to not enough votes even if all Republicans are on board. “He understands the political realities of what can pass the Senate,” she says.

Estate planners are disappointed, but not surprised.

“It can be almost impossible to cut through the Washington chatter, but it’s basically shenanigans as usual,” says New York attorney Martin Shenkman. “The underlying mood is that tax rates across the board are rising, and estate tax is part of that conversation,” he added.

Shenkman wouldn’t be stunned to see the Senate run out the clock and let the exemption reset at $1 million, even though that would expose about seven times as many families to estate tax liabilities.

Of course, that would keep Shenkman and his peers busy. Wider estate tax concerns naturally feed interest in trusts and other estate planning vehicles designed to reduce the size of a taxable estate, minimizing the eventual IRS bill or eliminating it altogether.

Paying the death tax in advance

Early gossip around the now-stalled deal focused on whether it would give people the option of paying estate tax while they’re still alive.

On the surface, the idea of transferring property into what Kyl calls a “prepayment trust” is interesting, not to mention a potential growth business for trust companies.

But in practice, there doesn’t seem to be a compelling argument for wealthy families to assign their assets to one of these vehicles and pay their estate tax in installments when they can simply go with an old-fashioned irrevocable trust instead.

While Kyl will probably keep pushing the idea in future negotiations, it’s probably not going to go anywhere.

Likewise, talk of restoring the estate tax in 2010 and making it retroactive to the beginning of the year seems to have fizzled out. Every day the Senate drags out the process makes any retroactive tax a bigger headache for executors. If we don’t get any action before November, the odds drop to near zero.

Nobody expected things to drag on as far as they have. “It’s incredible that Congress had nine years to fix this and not only waited until the deadline, but went past the deadline,” says Jonathan Siegel, a law professor at George Washington University.

“They’re like college students who waited until something was due and then pulled an all-nighter,” he added. “That’s too crazy, even for Congress.”

Scott Martin, contributing editor, The Trust Advisor Blog.

Permalink: http://thetrustadvisor.com/news/estatefix