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Some of our 2011 newsletters addressed the reasons why 2011 and 2012 would be the “golden gifting years.” This newsletter will focus on a relatively unknown estate planning technique which can maximize the benefits of these golden gifting years: the “Perpetual Dynasty Trust.”

One of the issues addressed by estate planning is how to move assets from the current owner to the owner’s loved ones while reducing negative consequences, including the burden of the “wealth transfer” taxes which can apply when assets move from one person to another (the gift, estate, and GST taxes). Prior to the 2010 Tax Act, the relatively low exemptions associated with the wealth transfer taxes imposed fairly tight limits on the ability to transfer significant wealth without incurring transfer taxes. As stated above, the 2010 Tax Act’s changes to the wealth transfer taxes greatly increased the exemptions, which also greatly increased the amount of assets which can be transferred during life or at death without wealth transfer taxes. However, because these changes are temporary, the only way at this time to ensure that a person and his loved ones are able to actually benefit from the increased exemptions without the person having to actually die is for the person to make lifetime gifts, effectively locking in the increased exemptions. If no lifetime gifts are made and the exemptions decrease in the future as scheduled, the opportunity to use the current high transfer tax exemptions could be lost forever.² In addition, gifts may become generally less potentially beneficial in the future as the economy recovers and asset values and interest rates rise with the recovery. As a final added incentive to make gifts now, rather than waiting until another year, the government continues to consider making various unfavorable changes to the wealth transfer tax laws, to limit the potential benefits of a number of existing strategies. For these reasons, 2012 stands out as potentially the best year ever to consider and make large lifetime gifts.

If you decide to go ahead and make gifts during 2012, there are many strategies to consider, and the strategies you select should be the ones which best fit your particular situation and goals. However, in many situations, one particular strategy, used alone or in combination with other strategies, may offer the best chance for you to maximize the benefits of your gifts for your loved ones. This strategy is the Perpetual Dynasty Trust.

In the past, each state had a law called the “Rule Against Perpetuities.” The Rule Against Perpetuities is based on very old English court cases. The Rules place fairly strict limits on the period of time for which a trust can exist, and effectively mean that a trust has to provide for its own termination every so often (generally, every 90 years or so, under the modern version of the Rule which applies in many states). Beginning in the 1990s, however, a number of states repealed or modified their Rules Against Perpetuities, resulting in the possibility for creating very long term trusts (such as ones lasting for 360 years) or truly perpetual trusts. A “Perpetual Dynasty Trust” generally means a trust which is set up in a state which has either repealed its Rule against perpetuities completely (such as Delaware, Alaska, and South Dakota) or modified its Rule so that trusts can last for hundreds of years (such as Tennessee and Florida with 360 years and Nevada with 365 years). The intent of a Perpetual Dynasty Trust is for the trust to continue as long as the law and its assets allows.

Why would you want to set up a trust which may last for hundreds of years or longer, well beyond the period of time when you will be alive? A trust can be an incredibly beneficial and protective way to transfer assets to your loved ones. A trust can allow beneficiaries to have fairly extensive control over their assets; such as holding powers of appointment, which can let the beneficiaries direct the way the assets benefit their own loved ones. At the same time, a trust can still provide protection for the assets which pass to the beneficiary – protecting the assets from a beneficiary’s creditors, the beneficiary’s spouse in the event of a divorce, predatory persons who may want to take advantage of the beneficiary, and future wealth transfer taxes. To maximize these benefits, you want the trust to have significant assets at its creation, and you want the trust to be fully exempt from the GST tax, so that there are no transfer tax consequences as the assets move from generation to generation. The current high gift and GST tax exemptions, along with the availability of very long term or truly perpetual trusts, offer an unprecedented opportunity for the creation of well-funded, fully GST tax exempt, Perpetual Dynasty Trusts.

One concern, which prevents many people from taking advantage of the ability to make tax-free wealth transfers, is this: “What if I need the money later?” Proper planned and structured Perpetual Dynasty Trusts, along with other estate planning techniques and good financial advice, can go a long way toward reducing this concern. This type of estate planning should generally include “safety valve” provisions, of which there are a number of different types. When used correctly, these safety valves can help you get assets back if and when you need them, while not preventing you from realizing the transfer tax and other benefits of making the gifts if you don’t need the assets. Your advisor should be able to explain these safety valves to you, and to help you set up a plan which lets you give assets away without feeling any significant economic or emotional discomfort as a result of the gifts.

A word of caution: since Perpetual Dynasty Trusts can last for extreme periods of time, they need to be very carefully drafted, to help ensure that they have maximum flexibility and can allow your wishes to be best carried out and potential future problems to be fixed or avoided most easily. You should include very clear statements describing your intent and desire as to how the trust should be used and managed, and as to the kind of benefits you want it to provide for your loved ones. These are not “off-the-shelf” documents, and should only be prepared by sophisticated, experienced, estate planning attorneys after extensive consultation.

At Morgan & DiSalvo, we have focused for many years on helping our clients transfer their wealth to their loved ones efficiently and effectively, with flexible and sophisticated planning and lots of safety valves. If you would like to learn more about the opportunities presented by the remainder of the golden gifting year 2012, and how you may be able to take advantage of a Perpetual Dynasty Trust or other planning, please contact us at (678) 720-0750 or sollila@morgandisalvo.com to schedule an appointment to talk to either Richard Morgan or Loraine DiSalvo. Remember, time is limited, and the sooner you begin planning, the better.

Disclaimer: This material has been prepared as a tool to assist in a general discussion of the matters discussed herein. These materials should not be relied upon without an attorney being consulted with regard to your particular situation. The interpretation of any laws and rulings should be independently verified by local counsel.

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1 The gift and estate taxes actually do not have an exemption. Instead, a “unified credit” exists against gift and estate taxes. This unified credit is a tax credit which applies against gift and estate taxes which would otherwise be due on lifetime gifts and transfers at death. The credit effectively exempts an amount of assets from gift and estate taxes: currently, the effectively exempted amount is $5,120,000. The effective exemption is referred to in the gift and estate tax statutes as the “basic exclusion amount.” The GST tax does have an “exemption.” For 2012, the GST tax exemption is set at the value of the gift and estate tax basic exclusion amount. For purposes of convenience, this newsletter will generally refer to both the gift and estate tax basic exclusion amount and the GST tax exemption as “exemptions.”

2 After the 2010 Tax Act, many people raised the question of whether there could be a “recapture” or “clawback” at death of taxable gifts made during life under a high exemption if the gift and estate tax exemptions do drop in the future. However, this should not happen. The gift and estate tax “exemption” (referred to by the statutes as the “basic exclusion amount”) is actually not a true exemption or exclusion, but is actually the result of a credit against gift or estate taxes which is given to U.S. citizens and U.S. permanent residents under the wealth transfer tax laws. Gift taxes, which were actually paid by the deceased person during his lifetime, are added to the value of the estate tax credit applied on the person’s estate tax return. The fear of a “clawback” arose because taxable gifts made during a person’s lifetime are added to the value of the person’s gross estate for estate tax purposes at the person’s death. The thought was that, if gifts made under a larger gift tax exemption were added to an estate, and the smaller estate tax exemption were then applied, there would be no offset for the value of the gifts transferred under the lifetime gift tax exemption. However, the actual result should be as follows: if the credit against gift taxes was higher at the time taxable gifts were made than the estate tax credit which exists at the time of the person’s death, the “excess” credit (the amount by which the gift tax credit at the time of the taxable gifts exceeds the value of the estate tax credit at death) will be effectively treated for estate tax purposes as if the person actually paid the gift taxes. This resulting in the person’s estate taxes effectively being calculated as payable only on the amount actually being transferred at death, with no additional amount generated by the past “excess” taxable gifts.

• What planning steps should our clients be taking now?
• What changes should be made to wills and trusts?
• How should the $5.12 million gift and GST tax exemptions be used?

What is your true estate planning intent?

In the fairly recent past, many people focused primarily on three goals when developing their estate plans: (1) reducing the impact of the wealth transfer taxes – the gift, estate, and generation-skipping transfer (“GST”) taxes, (2) ensuring that a surviving spouse was provided for, and (3) ensuring that any remaining assets were divided among other beneficiaries (loved ones and/or charities) in specific shares. The wealth transfer tax exemptions were relatively low, and each state had its own version of an ancient law called the “Rule Against Perpetuities.” The low wealth transfer tax exemptions tended to reduce the amount of assets which could easily be passed in trust for multiple generations without negative tax consequences. The Rules Against Perpetuities also generally prevented trusts from benefitting more than a few different generations of beneficiaries, by limiting the period for which trusts could exist. For these reasons, most estate plans tended to use trusts in very limited ways, and the trusts were often designed to last for a fairly short period of time before the assets would be distributed outright to the trusts’ beneficiaries. Many people never thought much about their non-economic goals and desires for their families, in part because the short-term nature of the trusts used in their plans meant that their ability to have the trust administration truly reflect their desires would be correspondingly short-lived.

However, in the past couple of decades, a number of legal changes have made long-term trust planning both more possible and more attractive for many people. Many states have changed their laws to either significantly amend or abolish their Rules Against Perpetuities. These states now allow very-long-term trusts, from ones which will last for hundreds of years to those that may be truly perpetual. These long term trusts are often referred to as “dynasty trusts.” In addition, the gift, estate, and GST tax exemptions have skyrocketed in the past few years: for example, the estate tax exemption was $625,000 in 1997, it was gradually increased over time, reaching $3,500,000 for 2009, and then recently increased to $5,000,000 for 2011 and 2012. The gift tax exemption and GST tax exemptions are also currently $5,000,000 each – much higher than they have ever been. The combination of these changes to the Rules Against Perpetuities and the wealth transfer tax laws means that people who wish to create very-long-term trusts can now do so much more easily.

In addition to the changes in the laws regarding trust period limitations and wealth transfer taxes, more and more people are becoming aware that trusts, unlike outright gifts or inheritances, can offer a number of benefits beyond just the economic value of the trust’s assets. These benefits can include protecting the trust’s assets from a beneficiary’s spouse in a divorce, from the beneficiary’s creditors, and from predators who could try to take advantage of the beneficiary. The trust can also prevent its assets from being included as part of the beneficiary’s own assets for wealth transfer tax purposes and, sometimes, for other purposes as well, such as determining eligibility for Medicaid or other needs-tested benefits. Trusts can also incorporate provisions designed to encourage beneficiaries to engage in certain behaviors the trust’s creator views as positive, such as getting a college degree, getting married, having children, or engaging in charitable activities, and discourage behaviors the trust’s creator views as negative, such as dropping out of school, refusing to work or be productive, abusing drugs or alcohol, or getting involved in criminal activity. This type of trust is generally referred to as an “incentive trust.”

As a result of both fairly recent legal changes and increased awareness of how beneficial trusts can be, more and more people are beginning to use very-long-term trusts as an integral part of their estate plans. Long term trusts create both an opportunity for trust creators to have their values and goals reflected in the way their assets are used and managed for an extended period. They also create a strong need for clear, well-considered statements of the trust creator’s goals and desires regarding how the trust should be managed and used. A clear statement of the trust creator’s intent is especially important for long-term trusts since the trustee will need to interpret and apply this intent for tens, hundreds, or possibly even thousands of years into the future.

In developing your own estate plan, especially if you intend to use a long-term trust or an incentive trust as part of the plan, you should consider questions such as:

1. Is the trust intended to primarily benefit one person during his or her lifetime, such as a surviving spouse or a child? If so, what benefits, if any, should be provided to others whose lives may be involved with the primary beneficiary’s life, such as the primary beneficiary’s spouse or children? What about others who may someday depend on the beneficiary, such as elderly parents or in-laws, or a niece or nephew for whom the beneficiary becomes responsible?
2. If the trust has multiple current beneficiaries (ones who can receive benefits now, rather than having to wait until after other beneficiaries’ interests have ended), should certain beneficiaries (or groups of beneficiaries) be favored over others, or should all beneficiaries be treated equally?
3. Should one or more of the beneficiaries of a trust be given practical access to and control over some or all the trust’s assets? Do you want a beneficiary to be able to serve as his or her own Trustee, or as a Co-Trustee along with another party?
4. Should the Trustee be able to use assets for one or more beneficiaries as needed even if it means that the trust’s assets will be used up and there will be nothing left for successor or contingent beneficiaries?
5. Do you want trust assets to be the beneficiary’s primary source of support, or to serve primarily as a “safety net” or source of supplemental funds to help the beneficiary accomplish his or her educational, business, and family goals?
6. Do you want the beneficiaries to have a particular standard of living, even if the trust’s assets may end up being depleted to maintain that standard during periods of low investment returns, or should a given beneficiary’s standard of living be secondary to the goal of ensuring that the trust’s assets last over a long period, even if that means the beneficiary’s customary standard of living may not be fully supported by the trust at certain times?
7. Are you concerned about a large trust fund negatively affecting the beneficiary’s desire to work or otherwise be productive? What information should a beneficiary be entitled to receive regarding the trust? Do you want to include incentive trust provisions to encourage or discourage certain behaviors?
8. Is it important to you that your assets be used for certain purposes or to accomplish certain goals? Are there purposes for which you do not want your assets used under any circumstances?
9. Do you have charitable goals or a desire to create significant charitable benefits? Do you want your loved ones to be involved in philanthropic activities? How do you want to address your charitable goals or desires?
10. What messages regarding life, family, religion, charity, and other matters of substance do you wish to pass on? What legacy do you wish to leave behind? How do you want those who knew you to remember you? What impression do you want to make on others who never knew you, but who will be part of your legacy?

Your answers to these sorts of questions, and the extent to which those answers affect your estate plan, will be completely personal to you. If, when considering these types of questions, you discover that you really care about the answers, then you should ensure that your estate planning documents take your desires and concerns into account. Estate planning which truly and accurately reflects your intent will generally result in a fairly complex plan with complex documents. These plans may also involve a good deal more time, thought, effort, and cost than the less-intent-focused planning of the past. However, the rewards of true intent-focused estate planning, both to you and your intended beneficiaries, can be worth much more than the time, effort, and costs incurred. A plan which accurately reflects your true intent allows you to be sure that you will leave your truly desired legacy to your loved ones and community.

Do you want to get started on an estate plan which will truly reflect your intent and ensure you leave the legacy you really want to leave? Contact us at (678) 720-0750 or sollila@morgandisalvo.com to set up an estate planning consultation with either Richard Morgan or Loraine DiSalvo. You can discuss your planning intent and find out what benefits a plan which incorporates your intent can offer you and your loved ones. We look forward to helping you with these important matters.

The 2010 Tax Act gave us a federal gift tax exemption of $5 million per person, along with a federal GST tax exemption of $5 million per person and a federal estate tax exemption of $5 million per person. These exemptions alone represent a major change from prior years: in 2009, the estate and GST tax exemptions were $3.5 million each and the gift tax exemption was a mere $1 million, and these amounts were even lower for years before 2009. However, the 2010 Tax Act’s changes to the gift, GST, and estate tax exemptions are scheduled to expire at the end of 2012, and there is no guarantee that the laws will be changed to keep these high exemption amounts in effect past December 31, 2012. Just by combining these high exemption amounts with various estate planning techniques and the generally low asset values, we can help our clients reduce their potential estate and gift tax exposures while also helping protect their assets from creditors and predators. Many estate planning techniques, however, rely on a set of federally-determined interest rates, which include the “Applicable Federal Rate” (“AFR”) (which is actually a set of rates which apply to different situations) and a special rate generally referred to as the “Section 7520 Rate.” As of October 1, 2011, the AFRs and the Section 7520 rate will hit the lowest levels ever previously seen. As estate planners, all we could think when we saw the October 2011 rates was “Wow!”

For loans and promissory notes, you must use an interest rate no lower than the appropriate AFR. For October 2011, the AFRs range from 0.16%, which applies to short-term loans (which have terms of 3 years or less), 1.19% for mid-term loans (which have terms lasting between 3 and 9 years), to 2.91% – 2.95% for long-term loans (which have terms lasting longer than 9 years). For certain planning strategies defined by statutes, such as Grantor Retained Annuity Trusts (“GRATs”) and Charitable Lead Annuity Trusts (“CLATs”) and some others, you must use the Section 7520 rate, which will be 1.4% for October 2011. The lowest Section 7520 rate previously seen was 2.0%.

The reason that low AFRs and a low Section 7520 Rate are important is that these rates effectively set the minimum amount of return on investment that you have to recognize on assets used in an estate planning technique before you will realize any of the desired gift, GST, and estate tax benefits. This rate is often referred to as the “hurdle rate.” For example, if you wanted to transfer assets to a trust you created for the benefit of your loved ones without making a large, taxable gift, you could loan $1 million to the trust, using a properly structured promissory note. The loan could have a nine-year term, which is considered a mid-term loan. In order to help avoid negative income tax and gift tax consequences, the loan would have to bear interest at a rate which is no lower than the AFR for a mid-term loan. Since the current AFR for a mid-term loan made in October 2011 is a mere 1.19%, you only need to beat this hurdle rate of return for the transaction to be successful. This means that, if the trust can earn a greater than 1.19% return on the assets you loan to it, the trust can use some of its returns to pay back the loan and accumulate the excess amount. This can allow the trust to keep the net profit sheltered from estate taxes and, with proper planning, from GST taxes, for your loved ones’ benefit. In addition, and especially if the trust already holds other assets as a result of previous transactions, you may be able to accomplish this transfer of wealth without using any of your available gift tax exemption.

As another example of how the ultra-low federal rates for October 2011 can produce amazing benefits, let’s assume you have a closely held business that you would like to eventually pass on to family members. However, you have been reluctant to begin transferring interests in the business due to the complications and potential tax burdens involved, and because you would still like to retain access to the wealth which the business represents. Under the current, very low rates, you can transfer smaller interests in the business as gifts, using either annual exclusion gifts or, if larger gifts are desirable, you can make taxable gifts and use some of your $5 million gift tax exemption. You can then sell an additional interest in the business in exchange for a promissory note which bears interest at the appropriate AFR. As long as the business returns more than the necessary AFR in earnings and appreciation, the purchaser comes out ahead, and you should be successful in moving future appreciation on the transferred business interest out of your estate from a gift, GST, and estate tax perspective. You can also feel more comfortable than you might with a straight gift of the entire transferred interest, since you will receive assets in exchange for the sold portion.

For those who would like to take advantage of the current, incredible, opportunities but aren’t sure they feel comfortable shifting significant assets out of their direct control, there are many techniques which can help reduce the pain of transferring assets and ensure that, if needed, assets may still be available. You need estate planning attorneys who are well-versed in tax and estate planning, and who have the skill and knowledge necessary to make sure that transactions work as intended to accomplish your goals while maintaining as much flexibility as possible. At Morgan & DiSalvo, we have spent our careers and tremendous amounts of time working to develop a deep and detailed knowledge of the relevant law and concepts. Our goal is to offer our clients whatever level of planning they want and need, whether the goals are simple or the needed techniques are complex, creative, and cutting edge.

Would you like to consider taking advantage of this incredible window of opportunity, or do you know someone who might? Call us at (678) 720-0750 or e-mail us at info@morgandisalvo.com to schedule an estate planning consultation with either Richard Morgan or Loraine DiSalvo. We can discuss your questions and determine what might be the best fit for you. But hurry – the window of opportunity is closing fast.

Richard recently gave a speech at the 2011 Fiduciary Law Institute on important planning under the temporary 2010 Tax Act. While this speech was given primarily to other estate planning attorneys at this prestigious Georgia Institute, we felt that our friends may like to see the video clips as they address some of the topics addressed in our recent newsletters, including:

1. While it is too late to undertake any 2010 transactions, our clients who made transfers in 2010 or whose family members passed away in 2010 may have steps to take to deal with or maximize their benefit under the 2010 Tax Act. Watch this video on Completed 2010 Gifting Issues.
2. Huge planning opportunities exist related to the increase in the gift tax exemption to $5 million until the end of 2012. This is a window of opportunity that should at least be considered and not ignored. Watch these videos on:
   • Exemption/Rate & Gifting Benefits
   • Types of Gifts to Make
   • Caveats to Gifting
   • Financial Insecurity – the Elephant in the Room

These videos cover the issues for those that already made gift transfers during 2010. For individuals considering making significant gifts prior to the end of 2012, these videos include the pros and cons and dealing with the biggest issue: possible financial insecurity concerns to making these type gifts.

We hope that you find them helpful and as always will feel comfortable contacting us with your questions and concerns. Enjoy the videos.

The site is divided into five tabbed sections—Wills & Estate Planning, Probate & Administration, Tax Planning, Business Succession and Charitable Gifts. Each section provides information about Morgan and DiSalvo’s services within that area of need, as well as helpful articles and advice that will assist you and your family with some of the most important decisions you will ever make.

On the site, you will also find a link called News and Articles, which brings all of the information on our site together into a “digital library” you can browse at your leisure. We’ve even included a few “podcasts” for those who like audio format. We hope you’ll enjoy the information we have collected and find it useful.

Please feel free to give us feedback about anything you would like to see in the coming months. This new site was created with you and your needs in mind, so we look forward to hearing your thoughts.

Until we have the pleasure of serving you again, we hope you have a sparkling Fourth of July and a wonderful summer!

I like the concept of GST planning. What is the first issue I should start thinking about in trying to design a plan? The first thing you should do if you are interested in using GST planning is to choose a competent estate planning attorney who is well-versed in the issues GST planning can involve. One big issue in GST planning is the need to deal with the possible application of the generation-skipping transfer (“GST”) tax. As discussed in the last newsletter, GST planning uses trusts which are designed to last throughout the lifetime of at least one generation of beneficiaries (for example, a trust created for the benefit of a child will typically remain in existence throughout that child’s lifetime, with the remaining assets passing to the child’s children at the child’s death). Any time a trust is designed to outlive an initial beneficiary and pass to other beneficiaries at the initial beneficiary’s death, there may be a GST tax. In addition, if a trust is created for the benefit of a beneficiary at one generational level, such as a child, and the trust permits distributions to be made to or for the benefit of the beneficiary’s children, a GST tax may apply to any distribution to or for the younger generation of beneficiaries. An attorney who is helping a client with GST planning needs to know how to maximize the use of the client’s GST exemption, to protect the long-term trusts and reduce the GST tax exposure. In addition, since there may be more assets than can be made fully GST tax exempt using a client’s exemption, the attorney also needs to be able to find ways to reduce the potential impact of GST tax on any non-exempt assets. Unfortunately, the GST tax rules are wildly complicated, even compared to many other federal tax rules. In addition, the other potentially applicable federal estate, gift, and income taxes (as well as potentially applicable state taxes of various types) need to be addressed as well as the GST tax, making things even more complex. Many attorneys who do estate planning do not have the level of tax law knowledge necessary to deal with GST planning. Ideally, you should choose an estate planning attorney who is completely comfortable with all of the potentially applicable taxes; this generally means a tax attorney who specializes in estate planning.

Another big issue you should consider when selecting an attorney is the attorney’s willingness to help you look far into the future when discussing the way your estate plan will operate. GST planning is intended to create trusts which last throughout the lifetime of at least one generation of beneficiaries, and usually far into the lives of at least a second generation of beneficiaries. A lot can happen in the many decades these trusts will exist, and your documents should try to self-adjust for as many reasonably forseeable possible situations as they can. Your attorney should ask you questions you may not even have considered, such as:

• If one of your primary intended beneficiaries is not living at the time you want your assets divided up, what do you want to have happen to the share that primary beneficiary would have received (does the share just not get created, does it go to the beneficiary’s children, if any, does it go to another alternate beneficiary, etc…)
• Should a beneficiary’s spouse be allowed to benefit from the beneficiary’s trust while the beneficiary and the spouse are married? How should such benefits be limited in the event of a divorce?
• Should a beneficiary’s committed, but unmarried partner (such as in a same-sex couple situation) be allowed to benefit from the beneficiary’s trust, and how should such benefits be restricted if the beneficiary and the partner dissolve their relationship?
• Should a beneficiary’s surviving spouse or unmarried, committed partner be a beneficiary of the trust after the beneficiary’s death, and, if yes, should the spouse or partner’s interest end if he or she remarries or enters another romantic relationship?
• Should a beneficiary have the power to change the way assets in his or her trust are distributed at his or her death? If yes, do you want to limit the possible beneficiaries of the trust to only certain categories of people, or would you prefer to allow the beneficiary a wide range of options, possibly including people who are not family members and charitable organizations as possible recipients?
• If a beneficiary receives a share and the share is being held in trust, and the beneficiary dies, what happens to that beneficiary’s share? What happens to the share if your first choice alternate beneficiary is not living?
• What happens if, at any time after your death and prior to the termination of any trusts created by your plan, none of your intended beneficiaries is still living? Do you want the remaining property to pass to your heirs, to other individuals, or to one or more charities? If you want other individuals, please remember: you still need to plan for the possibility that those individuals won’t be alive at that time either.

If your attorney is not asking you these kinds of questions, you should consider finding one who does. Attorneys who know to ask these kinds of questions are more likely to be able to draft a plan which adequately provides for multiple possible outcomes, and you are more likely to receive a plan which will operate as intended no matter what happens. Ask a prospective attorney about his or her familiarity with long-term trusts, and about the GST tax. Watch as the attorney begins walking you through the details of a plan, and note whether they are stopping too soon on different issues. If the attorney seems unclear about the issues raised by the GST tax and unfamiliar with planning for long-term trusts, you may want to find a new attorney.

Okay, I feel like I have some idea of how to select the attorney. What else do I need to think about? One of the benefits of GST planning, from the perspective of the person whose estate plan uses it, is that the trusts created for the intended beneficiaries can be made very flexible or very restrictive. In a very flexible trust, the primary intended beneficiary will generally be allowed quite a lot of control over and access to the trust, at least once he or she reaches a certain minimum age. In a very restrictive trust, the primary intended beneficiary could be given no right to control or access the trust at all, and all of the power to decide how the trust assets are managed and used can be given to one or more third party Trustees. Of course, there is a wide spectrum in between these two extremes, and a trust can pretty much be drafted to be as flexible and open or as restricted as the person whose plan will create the trust prefers. GST planning requires that the person doing the estate planning decide how much flexibility or restrictiveness they want to allow their intended beneficiaries.

For example, say you have children who you want to benefit under your estate plan. Your children are all responsible, stable, mature adults and you would feel comfortable allowing them to have immediate, outright, distributions of their inheritances at your death. You decide that you like the various protective benefits which GST planning can provide your children, but you would still prefer that they receive as much control over their own inheritances as possible after your death. In this case, you will likely opt to give your children trust shares with maximum flexibility, by allowing each child to become his or her own Trustee, allowing the child to appoint his or her own successor Trustees or Co-Trustees, and giving the child a broad power to have the remaining trust assets distributed to the child’s desired beneficiaries at the child’s death. Allowing your beneficiary to enjoy maximum control over and access to his or her trust can make the trust feel almost invisible from the beneficiary’s perspective, while still allowing the trust to provide a kind of protective cocoon around the trust assets, to help protect them from the beneficiary’s own potential creditor, divorce, estate tax, or predator problems.

As another example, say you have three children, of whom two are responsible, stable, and mature, and one seems to be unable to make consistently good financial choices, tends to surround himself with unsavory friends, and has a substance abuse problem.  You don’t want to disinherit your less-than-perfect child, but you don’t want him to squander the assets you leave him, have them effectively stolen from him, or use them in self-destructive ways. In this case, you can give the two responsible, stable children trust shares with maximum flexibility, and you can place fairly tight restrictions on the trust share created for your other child. You will likely want to use a third party Trustee to manage the restricted trust share and decide how the funds get used. You can simply give the third party Trustee broad discretion to use the assets for your child’s benefit, while at the same time limiting the child’s ability to make demands. You may also wish to consider more detailed restrictions, such as stating that the trust assets should be used primarily for either “safety net” expenses such as medical care, adequate but not luxurious housing, and moderate transportation costs, or for educational purposes. You could even try to provide your child with incentives to engage in constructive activities and refrain from negative activities. Some examples of incentives for constructive behavior would be providing for an outright distribution of a certain amount to the child upon the child’s graduating from college with a bachelor’s degree or matching income the child earns from holding a steady job. An example of an incentive to refrain from negative behavior could be tighter limits on the child’s benefits from the trust property if the child tests positive for illegal drug use or is determined by the Trustee to be abusing alcohol or prescription drugs.

The starting point for considering how much or how little flexibility to build into your GST planning is your own gut instincts, and your knowledge of your intended beneficiaries, their families, their friends, and their past behaviors. Your attorney should ask you questions and guide you in considering these issues. The attorney should not tell you what trust provisions to use, but should be the person who gives you suggestions about how to handle various concerns and points out potential concerns or pitfalls with a proposed structure. When you are done designing your plan, you should feel comfortable with your choices and the impact your planning choices may have on your intended beneficiaries. Your life does not come out of a box, neither should your estate plan.

It sounds like choosing a Trustee is pretty important in GST planning. How do I go about choosing a Trustee? Yes, the choice of a Trustee for the trusts created in GST planning is very important. There are several potential situations for which you may be choosing a Trustee, and each situation has its own issues which can influence your choice. Some of those situations may apply even in non-GST planning estate plans, such as the choice of a Trustee for your own revocable trust, who may serve during your lifetime, for a trust to be held for the benefit of a surviving member of a couple during the surviving member’s lifetime, or for a young beneficiary during that beneficiary’s youth. In GST planning, however, since trusts for beneficiaries are intended to last for many decades and the lifetime of at least one generation of beneficiaries, the question of selecting initial and successor Trustees can become more difficult.

To a great extent, the choice of a Trustee for GST planning trusts is driven by the degree of flexibility the trust’s creator wants to give to the beneficiary. If the intent is for the beneficiary to eventually have maximum control over the trust, then the beneficiary can be allowed to serve as his or her own Trustee once he or she reaches a certain age. As the trust creator, you can provide a transition period during which a beneficiary serves as Co-Trustee along with the Trustee you select, to help ensure that the beneficiary learns how to manage the trust before taking full control over it. The beneficiary can also be allowed to select his or her own successor Trustees. This level of flexibility makes the trust creator’s Trustee selections somewhat less important over time, since the creator’s selected Trustee may only need to serve until the beneficiary is able to take over.  However, even in this situation, the beneficiary may not ever actually be able to take over (due to death, illness, or injury, for example). So it is wise, at a minimum, to provide an avenue through which a successor Trustee can be appointed without court involvement.

Where a beneficiary is never intended to have full control, the choice of a Trustee becomes even more important, since the Trustee(s) selected by the creator may need to serve for many decades. Your attorney should help you consider the options for selecting a Trustee. In many cases, a corporate Trustee may be the best choice, in place of or in addition to one or more individuals. If you would like more information about Trustee choice, please ask us for a copy of our April 2010 newsletter, which discussed issues relating to the choice of a fiduciary.

How much is this GST planning going to end up costing me and my beneficiaries? It sounds like it could be expensive, what with all these trusts. Many of our clients ask this question. They say that the added protection the GST planning offers for their intended beneficiaries sounds great, but they worry that the costs and hassles of administering the plan will be significant and end up burdening the beneficiaries. However, the added costs of using GST planning are not significant when compared to the benefits it can provide. We often tell our clients that, if you have enough assets to make using a trust worthwhile, it’s often worth using GST planning.

Any time assets are transferred as part of a gift or an inheritance, there will be some costs associated with the need to transfer title to those assets. These costs are generally the same whether the assets are being distributed to a beneficiary outright or whether they are being distributed to a trust. The costs associated with managing the assets and making appropriate investments should also be very similar without regard to whether a trust or the beneficiary owns the assets. The primary differences from an administrative cost standpoint would be (1) the potential need to pay Trustee fees in addition to any investment advisory fees; (2) the costs to keep the trust’s books and records, in addition to the beneficiary’s personal books and records; and (3) the costs to prepare and file the trust’s state and federal income tax returns and any accountings which must be provided to the beneficiaries. These fees can be managed and held to quite reasonable levels even if the beneficiary is not serving as his or her own Trustee, and if the beneficiary is also the Trustee, these costs can be extremely low.

To the extent that income earned in a given year is retained by a trust rather than distributed in the same year, the income tax rate paid by the trust may be higher than the individual beneficiary would have paid on the same income. However, distributions made during a calendar year generally “carry out” portions of trust income earned in the same year, with the effect that the income carried out is taxed at the beneficiary’s rate, rather than the trust’s rate. In many cases, the Trustee may be able to use this income tax treatment to minimize the overall difference between trust income tax rates and individual income tax rates.

Of course, from the standpoint of the person doing the GST planning as part of his or her estate plan, there are also some additional, up-front costs associated with preparing and implementing the plan. In our practice, a client who wishes to use GST planning in his or her estate plan does pay somewhat higher legal fees, in general, for the document preparation work than does a client who does not use GST planning. The legal fee difference is due to the additional complexity of the planning and drafting phases of the GST planning based estate plan versus an estate plan which does not use GST planning. However, keep in mind that an individual beneficiary who wants to protect assets he or she inherits outright would have to spend a lot of money in order to obtain creditor, predator, and estate tax protection benefits which are even close to what you could have provided the beneficiary if you had used GST planning. In fact, even after spending a lot of money and undertaking transactions which are usually much more restrictive than any of the GST planning trusts we create for our clients, the beneficiary would still not be able to get the same level of protection for the beneficiary’s own assets which you could have provided by simply using GST planning in your own estate plan for the beneficiary. So, on the whole, the additional costs associated with using GST planning should be seen as insignificant, while the benefits can be great.

Won’t the beneficiary just end up depleting the trust over time anyhow? If you use careful planning when you and your attorney are preparing your estate plan, and if your Trustee uses careful investment and management techniques, a GST planning trust can actually end up growing over time, rather than being depleted. A GST planning trust can give the Trustee the power to have the trust purchase personal use assets on behalf of the trust’s beneficiary, and then allow the beneficiary to use those assets. This technique allows the trust assets to be invested in assets which may not be traditional investment assets, but which may still appreciate inside the trust, rather than forcing the Trustee to make a distribution to allow the beneficiary to buy the asset himself or herself. “Personal use assets” can include a vacation home, artwork, jewelry, collectibles, antiques, and other assets which may appreciate over time. In addition, with proper drafting, the trust can invest in a business to be run by a beneficiary, which can end up with much of any appreciation in the business accumulating inside the trust, rather than in the beneficiary’s name. Since the trust assets can be used by the beneficiary, there is no good reason in many cases for income or other distributions to be forced out of the trust. This means that, to the extent possible, investments can be made inside the trust and accumulated there. In other words, depending on the amount of assets in the trust and how the trust assets are invested and used, it is entirely possible that the beneficiary’s needs will not deplete the trust’s assets.

What happens if at some point the beneficiary does deplete the assets, or if things change and it is no longer a good idea to have the trust for some reason? We generally recommend using “safety valves” designed to allow a trust to be terminated if the trust’s assets drop to a level at which continuing to operate the trust is no longer economically effective. We also generally recommend having provisions under which a Trustee who is not a beneficiary of the trust can make distributions to or for the benefit of the beneficiary in an essentially unlimited fashion. These provisions help avoid the possibility that a trust which is no longer desirable for some reason can be terminated. If a beneficiary is serving as his or her own Trustee, provisions which allow appointment of successor Trustees or Co-Trustees can be used to trigger these safety valve provisions.

Okay; it all sounds good. How do I get started? Contact us at (678) 720-0750 or sollila@morgandisalvo.com to set up an estate planning consultation with either Richard Morgan or Loraine DiSalvo. You can discuss GST planning and find out what benefits it can offer you and your loved ones. You can also start the process of incorporating GST planning into your own estate plan, if you haven’t already. We look forward to meeting with you.

Why  do  you  call it “GST Planning”? The “GST” in  “GST planning” refers to  the “Generation-Skipping Transfer” tax. The Generation-Skipping Transfer tax is one of three federal “transfer” taxes which may apply anytime assets move from one person to another person in a nonpurely-business context. Those three taxes are the gift tax, which applies to gifts made during the giver’s lifetime, the estate tax, which applies to transfers made at a person’s death, and the GST tax, which can apply to either lifetime or at-death transfers. The GST tax essentially applies any time assets pass by gift or inheritance in a manner which skips a generation for gift and estate tax purposes, and it serves to help ensure that the federal government gets a chance to apply a transfer tax at each generational level. The clearest example of a generation-skipping transfer would be a direct gift from a grandparent to a grandchild, which causes the gifted property to avoid being subject to either gift or estate tax in the child’s level (the child being the grandchild’s parent). Please note, however, that the GST tax is not limited to transfers between family members: for unrelated parties, it is based on the age difference between the transferor and transferee. Like the gift and estate taxes, the federal government also provides an exemption from the GST tax: for 2011, the GST tax exemption can be as high as $5,000,000. This means that an individual who wants to transfer assets during 2011 may be able to transfer up to $5,000,000 worth of assets without generating any GST tax liability. The exemption can also be used to make trusts exempt from the GST tax on a long-term basis, to protect against the possibility  that the GST tax will apply if there are trust beneficiaries who are considered to be more than one generation below the trust’s creator.

We use “GST planning” as a shorthand way to refer to long-term trust based planning, because the planning uses a client’s GST tax exemption to help improve the benefits available to the client’s desired beneficiaries. Most of our clients do not actually skip over their children when using GST planning. Instead, their GST exemptions are used to make the trusts which will benefit their children (or other loved ones) exempt from the GST tax on a long-term basis. This helps allow the trusts to last for as long as possible, without repeated estate tax hits to the trust assets. Long-term trusts offer many potential advantages over outright distributions to beneficiaries.

If I don’t do GST planning, what would I do? Your options are essentially to do “regular,” more common, estate planning, or to do GST planning. In order to contrast regular estate planning with GST planning in the simplest possible context, assume for now that you are an unmarried person (either divorced or widowed), with no significant other, but with three children. You are meeting with an estate planning attorney to have a Will prepared. You intend to ensure that, in the event of your death, your children’s inheritance can be taken care of for them during any period where they are very young or immature, and that any assets they inherit from you eventually benefit the children equally. In setting up your Will and determining how your children will receive their eventual inheritance from you, you have two basic options:

1. Outright distributions, either immediately or deferred for some period of time after your death. This type of plan would generally provide that, upon your death, your remaining assets are distributed into equal shares, one for each of your children. Each share is the child’s inheritance from you. The simplest way to have your children receive their inheritances is to provide that, after your death, each child will receive his or her share of your assets outright. If your children are minors, or if they are adults but still young enough that you fear they may not be ready to handle their own finances wisely if your death occurs in the near future, then you can defer the outright distribution for some period of time. Deferring an outright distribution allows you to have a trustee hold and manage the assets for each child who has not yet attained a certain stage of maturity. Generally, for ease of administration purposes in a non-GST plan, deferring the outright distribution means that a trust will be held until the child reaches certain ages. For example, one-half (1/2) of a child’s trust could be distributed to the child when he or she turns 25, and the rest could be distributed when the child turns 30. The distribution of the child’s trust could also be made  contingent  upon  the  occurrence  of  a  specified  event,  such as  a  child’s graduation from college or a child’s marriage. However, it should be noted that such contingencies can create a number of unexpected trust administration-related and drafting  complications.  Eventually,  however,  the  goal  is  to  get  the  children’s inheritances to them outright, and to have any trusts created be fairly short-term in nature.
2. GST Planning: long-term trusts for your children’s benefit. As in Option 1, GST planning still has each child receive a separate share of your remaining assets after your death. However, instead of a child’s share being distributed to the child outright, either immediately or at some later date, the children’s shares are held in trusts, one for each child. These trusts are intended to exist throughout the children’s lifetimes. Having the trusts last throughout the children’s lifetimes allows the children to maximize the many potential benefits which can come along with a trust which was created for your benefit by someone else. The trusts can be made very flexible, and the children can each be allowed to control their own trust shares to the greatest extent possible without eliminating the benefits of having the trusts. Or, if you, as the ultimate creator of the trusts, prefer, you can restrict your children’s ability to control and demand access to their trusts to some degree. You can also select the default distribution for any assets which remain in trust for the child at the child’s death (for example, a child’s trust could divide into equal shares for the child’s children, if any). You can allow your child to have the ability to pick a different distribution after the child’s death, and you can make the range of permissible changes to the distribution as wide or as narrow as you like.

Okay; you say long-term trusts can create potential benefits. So what are all these potential benefits? The potential benefits of having a trust created for you by someone else (such as a parent, significant other, or other person who loves you and wants to provide for you) are many. One such benefit is creditor protection for the beneficiary. If I create a trust for another person’s benefit, the beneficiary of the trust I create may have creditors. Creditors can include credit card companies, mortgage lenders, and medical care providers. Even the most responsible and levelheaded beneficiary can end up having hard times, due to an illness or injury and related expenses not fully covered by insurance, a divorce, a job loss, difficult economic conditions, a failed business venture, or simple bad luck. A person’s creditors can, subject to a number of different and complex rules, generally reach assets which that person owns in his or her own name, even if the assets are inherited or received as a gift from another person. However, Georgia, and most other states, allow a person who creates a trust for the benefit of another person to include a “spendthrift” provision in the trust. The spendthrift provision essentially states that the trust assets are not intended to be available to the beneficiary’s creditors. Different states may provide different exceptions, such as child support creditors and sometimes tort judgement or criminal restitution creditors, but in general the creditor protection is relatively strong. A beneficiary generally cannot achieve this level of creditor protection for his or her own assets without significant expense and complication, if at all, since most states do not allow you to create a trust for your own benefit with this kind of creditor protection. However, you can provide this protection for your own loved ones quite easily, and at relatively low expense.

Another potential benefit to having assets pass to a beneficiary in a trust is that the trust may help protect the assets against “predators” who may seek to take advantage of or steal from the beneficiary.  A  “predator” could  be  a  beneficiary’s  significant  other,  who  seeks  to  use  the beneficiary’s romantic inclinations to garner gifts or bequests from the beneficiary. A predator could also  be  a  caregiver  for a disabled or elderly beneficiary, who seeks to  use the beneficiary’s dependence on and trust in the caregiver for the caregiver’s improper personal benefit. A predator could also simply be someone who befriends the beneficiary and then uses that friendship to gain gifts or bequests. The predator protection provided by a trust will be strongest if the beneficiary is not his or her own trustee, so you may want to name a third party trustee or co-trustee for a beneficiary you feel maybe exceptionally susceptible to predators. However, because the trust spells out the potential direct beneficiaries, even a beneficiary who is serving as his or her own trustee will have to take deliberate action to allow a predator to receive significant benefits from the trust. In addition, because there will nearly always be someone other than the primary beneficiary who has an interest in the trust (the “remainder” beneficiaries, who will receive assets if the beneficiary dies without making a different provision), there are usually others who will watch over the trust and may object to distributions which improperly benefit a predator. Finally, the trust can limit the potential recipients of trust assets at the beneficiary’s death, which can make it unlikely that a predator could receive bequests from the trust assets.

A third potential benefit is divorce protection. Assets which a person receives as part of a gift or inheritance are generally considered “separate” property if that person gets divorced, even if there is no premarital agreement in place. However, even if the gift or inheritance begins as separate property, if the person receives the gift or inheritance outright it is extremely easy for the person to accidentally convert those assets to “marital” property which is subject to division in a divorce (or to community property for those beneficiaries who live in community property states). For example, if the beneficiary uses his or her inheritance to purchase a house with his or her spouse, the inheritance which was used to make the purchase is now likely to be considered marital property. The conversion could even occur from something as simple as the beneficiary placing the gift or inheritance into a jointly held bank or brokerage account. If a beneficiary’s gift or inheritance is held in a separate trust, however, the beneficiary can simply leave assets in the trust except to the extent they are really needed. By doing so, the beneficiary helps preserve the separate property status of the trust assets. The beneficiary also has to deliberately take assets out of the trust to use them in ways which would result in a potential conversion to marital property, and so has an extra opportunity to think about and consider the possible result of their actions. If a third-party trustee or co-trustee is in place, this protection can be even stronger. Many of our clients have been sold on the benefits of GST planning because of benefit alone, as they often fear that the assets they worked and saved to accumulate  may end up  with  a  beneficiary’s  spouse,  rather  than  remaining  available for  the beneficiary and the beneficiary’s descendants. After all, the divorce rate in the U.S. has hovered around the 50% level for several decades now, and there seems to be no sign that the divorce rate will improve in the future.

A fourth potential benefit to having assets pass to a beneficiary in trust, rather than outright, is that the trust may be able to avoid estate taxes at the beneficiary’s death, even though the beneficiary was able to benefit from and manage the trust during his or her lifetime, and even though the beneficiary could direct how the remaining trust assets passed at his or her death. This benefit  can be provided to the extent that the beneficiary’s trust was made exempt from the GST tax through the use of the trust creator’s GST tax exemption. While a non-GST exempt trust can still be set up to last throughout a beneficiary’s lifetime, if the ultimate beneficiaries of the trust assets after the primary beneficiary’s death may include persons who are considered to be more than one generation beneath the trust’s creator (such as grandchildren or great-grandchildren), the trust will potentially generate a GST tax at the primary beneficiary’s death. Generally, in order to avoid the potential for GST tax, the non-GST exempt trust’s assets are simply made includible in the primary beneficiary’s estate for estate tax purposes (essentially because the GST tax has typically been a flat tax, while the estate tax has generally been a bracketed tax, and because the beneficiary’s estate tax exemption may be able to cover a significant portion of the assets if they are taxable in the beneficiary’s estate). This can be accomplished in many ways, but it’s usually preferable to avoid both the GST tax and the estate tax to the furthest extent possible.

So tell me, who gets to decide how these long-term trusts operate? The person who creates the Will or trust which uses the GST planning is the one who gets to decide how the long- term trusts for the beneficiaries are designed. As the client, you can, if desired, require a third-party trustee or co-trustee for a child who you feel may need additional help or guidance. You can limit the people and/or entities to whom your child can have trust property distributed. You can also set forth the default rules which will apply at the child’s death if the child does not exercise the power to change the trust’s default distribution. You can require certain distributions (although this weakens the protective benefits of the trusts), or you can limit permissible distributions (for example, you can allow distributions to be made only from the trust’s net income, you can prevent a beneficiary from distributing trust assets to his or her spouse, or you can limit distributions to “safety net” type expenses such as medical bills). In short, you can call the shots, but to the extent you want to do so, you can let your primary intended beneficiaries make their own decisions. GST planning can be as flexible or as restrictive as you want to make it.

I have a lot of assets in IRAs and qualified plans. Can I use GST planning and still let my beneficiaries get the benefits of continued income tax deferral on those IRA and qualified plan assets? For clients who want to use GST planning but have a lot of assets in IRAs or qualified plans (“tax-deferred retirement accounts”), it is possible to balance the income tax deferral which may be available to beneficiaries with the protective benefits of the GST trusts. In general, the IRS does not consider a trust or an estate to be a proper “designated beneficiary.” This can mean that naming a trust as beneficiary of tax-deferred retirement account assets will mean that the account assets have to be withdrawn within as few as five years after the original account owner’s death. However, the IRS has rules which allow it to “see through” a trust if the trust meets certain requirements. If a “see through” trust is named as the beneficiary of a tax-deferred retirement account, the IRS will generally use the life expectancy of the trust’s oldest living beneficiary as the basis for determining the minimum required distributions which must be taken out of the trust each year after the original account owner dies. Through the use of careful drafting, it is generally possible to structure the long-term trusts so that they will be considered “see through” trusts by the IRS. It may not be a perfect balance, because one option for complying with the “see through” trust requirements restricts potential beneficiaries of tax-deferred assets in unusual ways, while another option will require any amounts actually withdrawn from a tax-deferred account to be distributed outright to the beneficiary immediately, rather than held in the trust. However, the trustee, not necessarily the beneficiary, gets to determine what amounts, if any, are withdrawn from the tax deferred account in addition to the minimum required distributions. For a young, immature, or spendthrift beneficiary, having the trustee stand between the beneficiary and the tax-deferred account can be a great thing. In addition, the inherited tax-deferred account assets which are still in the account receive much stronger protection, for creditor, predator, and estate tax protection purposes, from the trust’s ownership of the account than they would if the beneficiary owned the account directly. So it is still possible to get many of the benefits of GST planning even if many assets are held in tax-deferred accounts.

How do I get started? Contact us at (678) 720-0750 or sollila@morgandisalvo.com to set up an estate planning consultation with either Richard Morgan or Loraine DiSalvo. You can discuss GST planning and find out what benefits it can offer you and your loved ones. If you’re not ready for a consultation right now, then watch for our next newsletter for a discussion of the issues you should consider when setting up a GST planning based estate plan.

In the estate planning context, a “fiduciary” is someone who will serve in a role of authority with regard to you, your assets, or your minor children. Fiduciary roles which may be part of an estate plan can include an Executor, a Trustee, a Guardian and/or Conservator, an Attorney-in-Fact, and a Health Care Agent. Deciding who will serve in these roles can be one of the most critical decisions you need to make as part of creating your estate plan.

Some fiduciary positions must generally be filled by individual appointees, such as the roles of Attorney-in-Fact, Health Care Agent, and Guardian. Other fiduciary positions, such as the roles of Executor, Trustee, or Conservator, can be filled by individuals, but in some cases it may be better to use a corporate fiduciary, such as a bank or trust company. A corporate fiduciary can also be used along with an individual co-fiduciary in certain cases.

How do you select a fiduciary? Certain criteria apply to any fiduciary choice, and the consideration process should look at the following factors:

• Is the nominee honest and trustworthy beyond doubt? A fiduciary role generally carries with it a lot of power, often coupled with low or no outside supervision. You do not want a fiduciary role filled by someone who may be tempted to abuse its power.

• Is the nominee responsible and willing/able to spend the time and effort to manage all needed tasks? A fiduciary is responsible for carrying out a number of tasks, many of which have strict timing requirements, and many of which are tedious and potentially time-consuming. You need to be sure that the nominee will do everything needed in a timely manner, and with great attention to detail. The fiduciary will often be able to hire people to assist with tasks, but the fiduciary is still responsible for ensuring everything gets done on time and correctly.

• Is the nominee generally reasonable and willing to work out disputes in a calm and logical manner? If disputes or concerns arise, you want the fiduciary to be someone who will deal with the issues in a reasonable manner and help keep the various parties calm so the issues do not get out of hand. Part of the fiduciary’s job is to help avoid potentially destructive litigation, not to throw fuel on any fires.

• Is the nominee someone who is good with financial issues? Many fiduciary roles involve dealing with assets – either your own or ones you have left to loved ones. Any nominee for such a fiduciary role needs to be able to handle financial and economic issues with safety and being conservative in mind. The fiduciary should not be someone who will make high-risk investments or take imprudent risks with the assets, and the fiduciary should also be someone who has enough sense to hire appropriate advisors, such as investment advisors, lawyers, and CPAs, when dealing with issues the fiduciary is not fully equipped to address alone.

• Is the nominee someone who is not likely to create disharmony among your beneficiaries, and who does not have any strong conflicts of interest? Some fiduciaryroles, especially those of Executor and Trustee, have powers and responsibilities over beneficiaries and can affect the beneficiaries’ interests in ways which the beneficiaries may not like. If the fiduciary is someone who is also a beneficiary, or who has a family relationship with the beneficiaries, the chance that the fiduciary’s actions will make the beneficiaries unhappy may be significantly increased. For example, if one child is named as Executor or Trustee, where he or she needs to deal with issues such as how assets are invested or distributed, the other children may be unhappy even if all of the fiduciary child’s actions are perfectly reasonable, simply due to resentment that the one child was given power over them. An all out family dispute can be the result of this situation. As another example, if a child is both the fiduciary and one of the beneficiaries, that child has to balance his beneficiary interest with his fiduciary duty to treat all beneficiaries fairly. If the other beneficiaries perceive the fiduciary child’s actions as benefitting that child over other beneficiaries, it could lead to accusations that the fiduciary child breached his fiduciary duties, which can again lead to resentments and potentially destructive litigation.

How do you decide to select a corporate fiduciary instead of, or in addition to, an individual?If there are insufficient assets available, then a corporate fiduciary may not be a realistic option (normally at least $500,000 – $1,000,000 in asset value, depending on the desired corporate fiduciary). However, if there are sufficient assets, you should consider selecting a corporate fiduciary, especially where there is not an obvious individual choice available. Corporate fiduciaries generally meet the criteria for fiduciary selection discussed above. In addition, the corporate fiduciary usually provides a team of dedicated professionals who are used to dealing with estate or trust administration issues, who have extensive experience and resources behind them, and who are dedicated to maintaining contact with the beneficiaries. Many people are afraid that a corporate fiduciary will cost too much. However, the fees charged by most corporate fiduciaries are often lower than the fees which would be paid to an individual fiduciary under Georgia statute, and the corporate fiduciary often provides many services for which the individual fiduciary would have to hire third parties, such as investment management and tax return preparation.

Corporate fiduciaries provide a neutral, third-party perspective, which can be very helpful when dealing with potentially sticky issues such as when and how to make distributions to different beneficiaries of an estate or trust. However, for situations where the advice of a family member, close friend, or an individual advisor who knows the beneficiaries well may also be helpful, a corporate fiduciary can be named along with the desired individual(s) as co-fiduciaries. In such a situation, the corporate fiduciary can focus on the more routine tasks such as investment management, bill paying, and records maintenance, leaving the individual fiduciary free to focus on the beneficiaries’ needs and wants. A great example of a situation where it can be beneficial to have both an individual and a corporate fiduciary would be a supplemental needs trust, where the trust is intended to provide for a disabled beneficiary without causing the beneficiary to lose eligibility for
needs-tested benefits such as Medicaid. The corporate co-trustee of a supplemental needs trust can generally be counted on to ensure that the trust meets all restrictions and requirements, and the individual co-trustee can focus on communicating with the beneficiary and his caregivers to ensure that any needs or wants which the trust could fulfill are known, and that the beneficiary is receiving appropriate care and services, as well as companionship and fun.

What specific tasks do the different fiduciaries handle?

An Attorney-in-Fact is someone who can handle your finances and property matters on your behalf without court approval or oversight while you are still living. Having a Durable Power of Attorney which appoints an attorney-in-fact can help avoid the need for someone to be appointed as your conservator if you become incapacitated on a long-term basis during your lifetime. However, if you do not have someone who is completely trustworthy to serve in this role, you may be better off not creating a Durable Power of Attorney, since this position is easily abused.

• A Health Care Agent works with your doctors, hospital personnel, other health care providers, and health insurance companies on your behalf if and when you are incapacitated or otherwise unable to deal with these matters on your own behalf. Having an Advance Directive which appoints a Health Care Agent can help you avoid the need to have someone appointed as your guardian. It can also help ensure that the person making these decisions for you is the person you would want making them.
• A Trustee handles the long-term administration of any trusts created under your estate plan, including deciding how trust assets are invested and used for or distributed to the trust’s beneficiaries. Please note, a Trustee can serve either for you, during your lifetime, if you have created a revocable living trust, or for your desired beneficiaries after your death.

• The Executor handles the probate and estate administration processes after your death, if there are any assets which need to be distributed under your Will. This is a relatively short term position. If the Will provides for assets to be distributed to any trusts, the Trustee appointed will take over eventually.

• The Guardian will take custody of any minor child or children who survive you (if the children’s other parent is not still living), and effectively acts as a replacement parent.

• A Conservator is appointed to take care of any assets which may pass to a minor child outright; if you have a well-drafted estate plan which provides for trusts to be created for minor children, a conservator may not be needed, unless the children already have assets in their names before your death

As part of developing an estate plan, it is critical to consider fiduciary selection issues and select appropriate nominees for the various fiduciary roles. We at Morgan & DiSalvo have lots of experience in helping our clients think about these issues. We also have additional materials which discuss fiduciary roles and fiduciary selection. To request further information on these issues, or to schedule a meeting with us to review your current fiduciary choices and consider any necessary or desirable changes, please do not hesitate to contact us at (678) 720-0750 or by e-mail to sollila@morgandisalvo.com.