Posts Tagged Richard Nenno
Advisors Predict Obama Tax Deal Will Hurt Trust Business
Posted by Jerry Cooper in News on December 12, 2010
With a new 35% estate tax, $5 million individual exemption and portability, experts say tax savings will no longer motivate clients to hire estate planners. Advisors and planners alike are going to need to change marketing messages to stay ahead.
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
Would the Actors Heirs Have Been Better Off With an Alaskan Will?
Posted by Scott Martin in News on June 26, 2010
Alaska’s new will testing statute allows for “death rehearsals” to give families a chance to correct mistakes before they happen. But some estate planners think the law is just a marketing gimmick.
If Gary Coleman or Dennis Hopper had been able to take advantage of the new Alaskan probate rules, local trust industry leaders say their estates might not be in turmoil today.
Starting in September, Alaska will become one of only a few states that allows for pre-mortem probate, which theoretically lets people resolve disputes around their wills before they die. (Read the new rule here.)
As a result, the state’s estate planners have gotten a lot of calls from non-residents looking to prevent the ugliness surrounding the Coleman and Hopper inheritance battles.
“We’ve gotten a lot of interest in this,” Douglas Blattmachr, CEO of Alaska Trust, told me. “I’m not sure how much we will get on the trust company side, but I think Alaska’s lawyers will get a lot of work out of it,” he added.
But while the lawyers in Anchorage may be generating a lot of out-of-state leads, it remains to be seen whether probate judges in the state where the death actually takes place will surrender their jurisdiction to the Alaskan process.
Settling the arguments in advance
In pre-mortem probate, residents and non-residents alike have the option of distributing their will to interested parties, who then have a limited amount of time to raise any legal objections.
If they fail to contest the will at this point, they forfeit the chance to do so later. Meanwhile, the person who wrote the will is still alive and available to clarify his or her wishes and mental competence in probate court.
Had Dennis Hopper gone this route, for example, he might have been able to argue personally that his estranged wife was not actually living with him, which would have technically broken her pre-nuptial agreement. His art collection would have gone to his children, and not to her.
And if Gary Coleman’s ex-wife or girlfriend wanted to contest his will with spurious or outdated paperwork of her own, the judge could have simply asked Coleman to point to which of the competing documents really represented his plans for his estate after his death.
The sticky point is that while out-of-state trusts have become a familiar part of the estate planning landscape, out-of-state wills are in more nebulous territory.
“I don’t think this would help Dennis Hopper or Gary Coleman,” Delaware probate attorney Peter Gordon of Gordon Fournaris & Mammarella told me. “Coleman is a classic example of a will that is going to be a nightmare because, among other things, a Utah judge sitting in a Utah court with a Utah resident is not going to send the case to Alaska.”
California resident Hopper would be similarly hard-pressed to get a California judge to hear his case early whether his will was drafted in Alaska or not. Unlike trusts, which are separate legal entities resident in the state where they are chartered, a will is simply a document that expresses the deceased person’s instructions about his or her estate, Gordon says.
In other words, in most cases, the will still needs to be probated where the person lived. While the Alaska rules are great for residents, estate planner Steve Oshins has deep reservations about how useful for accounts coming from out of state.
“I don’t see how an Alaska will would work for a non-resident given the jurisdictional issues involved,” he says. “An Alaska trust would have a better chance of success.”
Better for trusts
The Alaska rules extend to both wills and trusts. Someone can set up a trust in Alaska—a popular destination for wealthy individuals looking to take advantage of favorable laws—and distribute an estate plan for pre-mortem testing.
While states like Delaware do not allow pre-mortem probate for wills, this kind of testing has a longer track record where trusts are concerned. Peter Gordon says he’s personally made use of the trust testing rules several times since Delaware authorized them in 2003.
Wilmington Trust managing director Richard Nenno, known universally as “the font” of information on this topic, notes that if the assets are in trust, arguing about the terms of the will is a lot less likely to derail someone’s final wishes.
“The trust is where most people are putting their funds,” he told me. “Adding it for wills might help one or two situations in exceptionally dysfunctional families, but I don’t think it will be all that relevant in many high-end estate planning situations.”
As such, the new rules do two things for Alaska. First, they bring the trust code in line with other states by allowing pre-mortem testing—and this helps keep the state competitive on the national playing field.
Second, the will testing mechanism is great for state residents, but may not end up as much more than a marketing proposition for Alaska lawyers courting non-resident clients. Although North Dakota, Arkansas and Ohio also allow will testing, none are known as estate planning paradises.
The combination of will and trust may create some residual benefits for people coming to Alaska to get a trust anyway. Steve Oshins says an Alaska co-trustee may be able to work the local system successfully, although he is not convinced that this would do non-residents much good.
As it happens, Alaska Trust could get some add-on business from this, Douglas Blattmachr told me. “We might get appointed as trustees a bit more often,” he says. “A lot of clients are interested in trusts and worried about will contests. This gets those worries out of the way.”
Scott Martin, contributing editor, The Trust Advisor Blog, Jerry Cooper contributed to the reporting, Steven Maimes contributed to the research and editing.
Permalink: http://thetrustadvisor.com/news/premortem
Are Directed Trusts Too Good to Be True?
Posted by Jerry Cooper in News on February 5, 2010
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.”
Two Approaches
In an influential 2007 white paper on the subject which may be downloaded, ”Directed Trusts: Can Directed Trustees Limit Their Liability?,” trust guru Richard Nenno, a managing director at Wilmington Trust Company of Delaware, divides the roughly 30 states that allow directed trust arrangements into two main groups. Most (including, according to the white paper, Florida and Wyoming) followed the approach laid down by Section 808(b) of the Uniform Trust Code.
In these states, trustees have to monitor what’s going on in the investment side and step in if the terms of the trust are in danger of being broken. This means the trustee’s potential liability still exists—in whole or in part—even though the work of managing the assets has been assigned to someone else. “Unless the governing instrument provides otherwise, a directed trustee must devote considerable resources” to the job, Nenno writes. In plainer terms, in these states, second-guessing the legacy money manager can be a grind.
However, other states, including Delaware, South Dakota and most of the Trust Advisor top tier, take what Nenno calls “a more protective approach” based on statutes that go beyond the UTC. In these states, trustees are held more-or-less blameless for anything that goes wrong in an area the trust grantor explicitly assigned someone else to handle.
Utah, for example, assigns directed investment advisors separate fiduciary responsibility; the trust company is almost completely off the hook for following the advisor’s investment calls except in cases of gross negligence or willful misconduct.
In these states, Jeff Lauterbach told The Trust Advisor, it’s cut and dried. “The trustee was directed to do something and the trustee did what he was supposed to do, he’s not liable. The advisor’s liable.”
“A Competitive Issue”
Whether a state has been content to go the UTC route or opted for more comprehensive directed trust rules can make or break its ability to support advisors cultivating directed trust arrangements. Joan Crain, a senior director at BNY Mellon Wealth Management in Fort Lauderdale, told Lawyers USA that it’s “a competitive issue” and that the 2007-era Florida rules didn’t go far enough to protect trustees.
“You still have the duty to oversee, to monitor, to intervene,” she said. “The directed trustee statutes in the few states that have strong ones are explicit as to the lack of responsibility on the part of the trustee for reviewing the actions of the investment manager.”
Even in relatively protected states like Delaware, where directed trust statutes go back to 1986, lawsuits still happen. Nenno’s own Wilmington Trust was a defendant in 2004 after the securities lawyer directed to oversee a trust’s assets sued the trust company for following his advice. The court found Wilmington blameless, noting that the investment advisor was happy to collect management fees and so was implicitly accepting the wages of failure.
As Leo Strine, the court chancellor who heard the case, summed up: “Had he wished for Wilmington Trust to be investment advisor to run a high-risk portfolio, I’m sure Wilmington Trust likes to make money. It would be willing to do it. It costs a lot more.”
Jerry Cooper, senior editor, The Trust Advisor Blog. Scott Martin and Steven Maimes contributed.
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