Trusts and Estates

17 February

• Problem 3:
  So, in Brainard, the court says there's no trust until there's property. Not that it's unfunded, but that it's invalid: you can't transfer some future unknown thing today.

  In Speelman, there's a gift of future profits on My Fair Lady. She's his "private secretary" (Speelman's widow had some harsh words for her in her memoirs: love potions, or some such... very odd). But the court thinks this is OK: you can give these future profits.

  So why the disparity?

  One thing is that the latter trust is written. And Brainard might have been a tax avoidance ploy. And maybe this is more of a gift than a trust anyway. But the tax ploy is probably the main thing: Brainard is trying to spread his income around to people in lower tax brackets. This was sort of a loophole in those days-- it wasn't really tax evasion, but the courts would still stop it, by coming up with narrowly tailored trust decisions.

  But as a general rule, future profits aren't a problem. So when you see a strict trust ruling, be alert to the fact that it might be a tax issue at the core.

  Law in action point: things are unpredictable. As a general rule, courts favor families over lovers, but here they do.

• Problem 4
  Constructive trusts are a remedy for unjust enrichment. Not clear why the court doesn't just say "the unjust gains will be disgorged," but sometimes they act as though the property is held in trust for the proper owner and require that it be delivered.

  Hieble: oral promises run afoul of the statute of frauds. So the son was unjustly enriched here.

  Rhodes: you have to come to equity with clean hands. If you've given your house away (to get away from creditors, e.g.), then you've given it away.

  Constructive trust is rarely used, rarely successful. In order to get it, you need to be a very sympathetic sort of person. You also see it when one spouse takes marital property to a non-marital property state. See the North Dakota example from week one. Again, that was unjust enrichment.

• Oral trusts are a bad idea: always counsel against them Back on Brainard: the IRS is always suspicious of arrangements whose timing defeats the tax code. And it's impossible to say when an oral trust was established, or what the terms were.
• So, now on to revocable living trusts. This is all about revocable trusts... it's very important to know the difference.
• Problem 5
  OK, so the trust is valid. We could argue that it's not, however, or that it's not able to pass the property at death.

  There's a possible merger argument here. If the person has complete control, there's not really a trust, perhaps. Or, on the other hand, one can argue that it's an attempted testamentary transfer (i.e., an attempted will). So you can say: fine, it's maybe a trust, but it can't transfer property at death.

  But the court says that some little interest was indeed transferred to Williams (a very little piece: a foggy, revocable little interest), but nevertheless enough to say that Farkas didn't quite own exactly 100% any more. This is the modern trend in handling trust law. Courts say "what's the problem here? what's wrong with what the person wants to do?" If the answer is just procedural details, the court blows them off. Trusts decisions are results-oriented: you see reasoning that is hazy or magical, in order to produce the right result. Ones that appear like trusts decisions, but are in fact strictly technical, tend to actually be tax decisions.

  WI has a statute to rescue situations like this: § 701.07.

  Passive trust: a trust where the trustee has no duties. These are prohibited. It doesn't matter, though, unless someone complains, and even then the court is likely to find some duty for the trustee, unless there's some reason it shouldn't (like tax evasion).

• Revocable trusts are very heavily marketed by financial planners, etc. That's all fine, but their importance gets maybe over-emphasized, and sometimes it's UPL and sometimes it's overpriced, and sometimes another revice would serve the purpose just as well.
• Interesting observation about the legal profession: some people would rather go to overpriced incompetent people for inferior service, in order to avoid seeing a lawyer for an estate plan.
• In some jurisdictions, it is really a good idea to avoid probate. CA and HI are notorious this way. Or, if you think that your estate plan might be subject to challenge (meaning: you expect people to want to fight about it), getting it out of probate is a stealth way to avoid it (no notice will be given to potential beneficiaries). Or if you have real property out of state (and don't want to have probate there).
• Remember, though, that a trust is a legal entity, and it's different from owning a thing yourself. So, for example, married couples who own a house sell it, they can avoid paying tax on $500K of profit. If the trust owns it, though, you might miss that tax break. Mortgage, also: if you move the house into a trust, do you need a new one? Homeowner's insurance. So there are things to pay attention to. Details also with cashing in CDs.

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• Problem 6
  It's just common sense that A should be taxed, really. This is a pretty trivial issue: A has control over the income until the moment it passes to C.
• Problem 7
  So, during life, generally creditors can get at assets in a revocable trust, for the same reason as problem 6: the donor hasn't really given the stuff away yet, if they can revoke the trust.

  So first of all, it might not occur to them not to pay the creditors, even though under WI law, it seems like the creditors don't have a cause of action. Note that § 701.07(3) applies to living trusts.

  With respect to the Appendix F trust, there's language that the personal representative is empowered to ask the trustee for money for creditors. So they probably would get paid in that case, or at least they could.

• Problem 8: Reading the revocable trust agreement.
  • Why transfer $1? We want some nominal amount in there so there's no question of the trust not having assets. § 701.07(1)(c). So put $10 in there (this $1 example is old). This creates the trust as a standby, so it's easy to put assets in there when needed. Sometimes this goes along with power of attorney, so the agent can quickly fund the trust when needed.
  • The pour-over will: the will puts everything into the trust-- that will cover any assets that didn't get in there before death.
  • Succession of trustees: do you want the beneficiaries to be able to fire a trustee and select a new one (e.g., a different bank)? Do you want to have a rigid succession of trustees, all pre-named? Clients differ on this issue, and each has advantages.
  • Exoneration clauses are generally for the protection of new trustees.
  • The 6-month survivorship clause: generally this delays the transfer of property, but often that's at the trustee's discretion. But generally, never distribute anything to anybody unless you are sure you don't need it back.
  • Holding property without disclosing trustee capacity. This is just to make sure that the trustee's powers are extremely broad: they can even hold property in their own name on behalf of the trust. That's a rarely needed power, but it basically says we really really trust the trustee (of course, if you don't, get another trustee).
• A trust can ony govern the assets that have actually been transfered to it. That's one of the hassles of trusts: you have to keep track of that stuff.

19 February

• Uniform Transfers to Minors act. He's going to transfer some M & M's to a minor, and someone will be a custodian of it. We'll revisit this issue next time...
• One wrap-up point about revocable trusts: spousal rights
  Basically the notion that you can't disinherit your spouse comes out of probate law. It's starting to extend to non-probate property, but it ain't necessarily so if the legislature hasn't gotten around to it (WI has). About 30% of states have made this extension by statute. Also so have a few courts. But revocable trusts are a viable way to defeat spousal rights in many jurisdictions.
• The issues about revocable trusts are different from those about irrevocable. For example, the duties with respect to revocable trusts are far more lax, because they can always be changed.
• Remember that these cases need to be considered in context: we need to decide whether the case is a results-driven one, or one that is generalizable.
• Old adage: hard cases make bad law.
• Problem 9
  The Bradley case. One beneficiary is very happy about the administration of the trust, but not others.

  Mandatory vs. Discretionary trusts: can the trustee exercise judgment, or is it fixed by the terms.

  This trust is a mandatory income trust. But nonetheless, Ms. via is complaining-- she wants the trustees surcharged (this is the trust version of malpractice). But what is she complaining about? The trustee did pay out the income.

  It's a question of investment strategy: there's a distinction between trust administration (management) and distribution (making the payments to the beneficiaries). "Mandatory income" is a distribution instruction: distribute the income to these people via these shares.

  So do you invest to maximize income or long-term growth? The trustees managed for income, and perhaps they had a vested interest in doing so (building the Bradley center benefited all the prominent Milwaukee business people who were the trustees).

  So there's no fixed rule that says how much of a portfolio should be invested on immediate cash flow (to the detriment of the long term growth), but there's a range of acceptability, and the allegation is that this was outside that range, regardless of the fact that all the beneficiaries got their share of the income.

  Administration of a trust involves investment decisions, and those decisions have an impact on the distribution (i.e., the amount of income to be distributed). So the maxim "have mandatory income, and that'll avoid disputes" rings hollow.

• Trustee duties are not to be taken lightly.
• Alienability. We say a "spendthrift trust," but it's really just a spendthrift provision in the trust, and actually it's an anti-spendthrift provision. The trust can't be used as collateral, or for support to a former spouse, etc. It's a little controversial, whether grantors should be allowed to have this degree of control. These provisions are generally considered OK, though, and are enforced, sometimes strictly. Remember: these clauses are only for third parties (you can't put a spendthrift restriction on yourself), and only in irrevocable trusts.

  This can backfire-- it can interfere with things like tax planning.

• Special needs trusts. This is important stuff, and there are states (IL, e.g.) that have statutorily-created things of this nature. It's a trust created for the benefit of a third party, to be used only to supplement state benefits for their disability. This is a relatively recent concept (older trusts don't explicitly address the question of state funds), and the key is to make the terms of the trust as clear and specific as possible.

  If you make it unequivocal that it's intended to supplement state aid, you're probably OK. If the trust becomes irrevocable before that language is added, then you're at the mercy of the decisionmaker's interpretation of the language of the document.

  This is a growing area, because more people with disabilities are living longer.

• Modification and termination of trusts.
  Obviously, this only is of interest with irrevocable trusts. Sometimes irrevocable trusts have provisions about modification in them (this can create tax issues).

  If all beneficiaries (and this includes unborn ones) get together and agree on a change, some courts will allow it. Often these changes are about taxes-- something about the way the trust is set up causes a lot of tax, so the family goes to the court and asks for a reformation to match the presumed intent of the person who set it up.

• Revocable trusts are used by everyone. Irrevocable ones tend to be more common among the wealthy, but not necessarily (providing for disabled kids, e.g.).

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• Darrel Behnke, USBank.
  • What is a fiduciary? Someone who interprets a trust, and acts on the best interests of the beneficiaries (with respect to common law, statute, and the terms of the trust.
    1. Loyalty: to the absolute exclusion of self-interest
    2. Impartiality: both between beneficiaries and in avoiding conflicts of interest
    3. Reasonableness: due diligence, prudence, did you diversify, avoid undue risk, insure, etc.
    4. Communication: accounting, getting input, etc., but also confidentiality (with the exception of testamentary trusts, which are public)
  • You can take some risk, if you diversify and have a way to offset that risk. Did that apply in 2008? None of it worked...
• Problem 10
  $46K/year is asked. $600K in the trust. Beneficiary is unmarried, no children, and has some health problems. Is it safe to assume that there's nobody else in the picture? If there's anything left, there are residual beneficiaries (nieces, nephews, brothers, sisters). So there's a duty of loyalty there as well, and we have to be impartial among them, maybe. Of course, that depends on the purpose of the trust. And we'll have to interpret that language.

  The language of the trust seems to make one beneficiary the primary concern, but it also seems to assume there are some remaining assets. Which shall it be? Moral: say what you mean, and leave as little room for inference as possible.

  So Clause A pretty much just leaves us with reasonableness. She's asking for 7.7% of the value of the trust. Is that a lot, or a little? Depends on the timeframe. In the long run, you might see a 10% return on stocks. You might generally be able to get an 8% ROI. But maybe we're at the beginning of a long bear market, and we'll wind up depleting principal faster than we expect. And also, there's inflation. And we don't know what these assets are: can we get $46K in cash easily?

  So the size of the trust is really important, when we're deciding how liberal to be when interpreting that "absolute discretion" clause. Also the makeup of the assets: what if the main asset is real property, and can't be easily subdivided?

  Also the history: what was the size of the trust last year? What has the history of her requests been?

  A good practice is to make some projections about burn rates and return rates and share those with the beneficiary to work out a plan. Here are the range of consequences.

  If the beneficiary is intractable, you can explain your concerns, and reduce the amounts of the distributions (i.e., if they refuse to disclose what other assets they have). You need not to let yourself be manipulated (i.e., "grandpa would have wanted me to have this"). And when you communicate options to the beneficiary, you make a record of it.

  Again, so many possible conflicts can be headed off just by being more explicit when drafting your trust.

  A beneficiary is entitled to material information about the trust.