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REPORT NO. 5 - Wednesday, 1/9/02
We haven't received
a report yet on the Tuesday afternoon EGTRRA Drafting session,
so, rather than holding everything else up for that, we
are going ahead and reporting on the following Wednesday CLE sessions
at this time, at least to the extent we have received information
to report on them:
8:30 - 9:15 a.m.
Life Insurance as the Life Preserver for the Closely Held Business
Mary Ann Mancini
No materials received
yet, but they are coming. In the meantime, see the Weinberg
Group report on IRS Notice 2002-8 that is included
at the end of Report #4A.
9:15 - 10:00 a.m.
Non-Tax Considerations in the Succession of Closely Held Businesses
Charles D. (Skip) Fox IV
Skip Fox has reported
the following to us on his session:
My presentation on the non-tax aspects of family business succession
on Wednesday morning was not technical. The following were the
major points that I tried to make:
1. Between 30% and 40% of family businesses will have a
transition in leadership in the next several years. This
is a considerable number since there are 20 million family businesses
ranging anywhere from mom and pop stores to Fortune 500 companies.
2. 85% of the crises faced by family businesses arise from
succession issues. Because of the conflict involved, however,
most families attempt to ignore or fail to plan for succession.
3. Three models of business ownership can help planners
advise families
on succession issues:
a. Controlling owner (dictatorship) in which one person
has control and makes the decisions. This is often the format
at the first generation. However, many companies, such as Forbes
and Beretta have used the controlling owner format for several
generations
b. Sibling partnership. Two or more siblings
or others have control. Sometimes there is one acknowledged leader
and sometimes all have responsibilities for different aspects
of the business. This is often found at the second generation.
c. Cousin consortium. Different family members
from different branches and generations work in the company.
This is often found at the third generation.
4. The likelihood of problems is greatest when the leadership
changes from a simpler form (such as controlling owner) to a more
complex form (such as sibling partnership).
5. The agreement of all the family members is necessary.
6. Even if a succession plan is in place, one critical function
of the planner is to make sure the family implements the plan
and watch out for signs of trouble or failing to adhere to the
transition plan.
7. The succession plan should be developed first and then
and only then should the planner take the steps to minimize the
tax consequences. Tax considerations should not drive a
succession plan. That can be a recipe for disaster.
8. The planner has to listen to all family members in order
to come up with a viable succession plan.
10:00 - 10:45 a.m.
Uses of Installment Sales, Private Annuities and SCINs
Jerome M. Hesch
No report.
11:00 a.m. - 12:30 p.m.
Question & Answer Session
Dennis I. Belcher
Carol A. Harrington
Prof. Jeffrey N. Pennell
No report.
2:00 3:30 p.m.
Special Sessions I
No reports
3:45 5:15 p.m.
Special Sessions II
II-A CASE STUDY Business Succession Planning
Charles D. (Skip) Fox IV
See above
re his Wednesday morning general session.
II-C Asset Protection Planning: Protection vs. Control
Gideon Rothschild
Gideon has reported
the following to us on his Special Session:
My workshop on Wednesday afternoon revolved around 2 case studies
focusing on asset protection.
The first case study dealt with the domestic solutions,
including self-settled trusts in Delaware., Alaska, Nevada and
Rhode Island, tenancy by the entireties, estate planning with
spendthrift, discretionary trusts, and QPRTS and other split interest
trusts. We discussed how the self-settled trust can be a useful
tool to utilize a client's annual exclusion or lifetime exemption
amount where clients aren't sure they can divest themselves of
such amounts and particularly with the looming repeal (?) in 2010.
These trusts can be established as completed gifts in the4 states
(or offshore) and removed from the settlor's estate while the
settlor can still be a discretionary beneficiary thereof in the
event he/she should need access thereto. Similarly, I noted the
utility of Sec. 529 plans. We also discussed special needs trusts
and why planners should encourage their clients to leave their
estates in trust for as long as possible with flexible provisions
therein - to thwart off claims of spouses and creditors.
I noted a few recent cases wherein divorce claims and child support
claims were made and where the creditor-spouse sought to receive
a share of a spendthrift trust where the debtor-spouse was a beneficiary
(and where the trust was settled by debtor's parents, one parent
was still living, the trust could be invaded by her and revoked
by her and he was merely a remainder beneficiary (yes -
the court awarded the creditor spouse an interest therein) and
another case where the beneficiary was also the trustee (of a
trust settled by his parents) and the spouse attempted to reach
it for application of his child support obligations.
The second case study was a discussion of foreign situs
trust considerations, with discussion of a recent case (Bank
0f Americas v. Weese) in which the debtors (after they already
defaulted on a bank loan) established a Cook Island trust and
the court granted an injunction against the parties and found
they had jurisdiction over the trust since the trust owned realty
in the state and a co-trustee resided therein. We discussed the
considerations of trustee selection, protector considerations,
and fraudulent conveyance issues using a case study approach with
the background of the Weese case and other decisions.
I emphasized that if planners wish to use
foreign trusts they should ensure that they are not assisting
the client in any fraudulent conveyance as it may cause them to
be exposed to litigation or disciplinary action. Attorneys
must engage in adequate due diligence to ensure that their clients
are not intending to defraud existing or probable creditors nor
looking to avoid their tax obligations.
EDITOR'S NOTE: An interesting case [Gorman]
involving a child's remainder interest in a parent's revocable
living trust for purposes of determining what portion of that
trust is considered marital property that is subject to equitable
division in the child's divorce proceedings was recently decided
by the Colorado Court of Appeals. The decision, which is seen
by most commentators as being contrary to the applicable laws,
could have significant adverse ramifications for dealing with
such interests in the future, even for attorneys who are not licensed
to practice law in Colorado but who are drafting such trusts for
parents of children who might reside in Colorado, since it was
not appealed further up to the Colorado Supreme Court. It
is reported here since it also could have serious implications
for people doing asset protection planning for Colorado residents
absent a statutory amendment to overrule or modify the holding
of this case. The authors of this report are Eugene Zuspann
Jr. Esq. and John DeBruyn Esq. of Denver, Colorado (Gene has been
a reporter for us in prior years).
First John DeBruyn
reports:
The Colorado Court of Appeals finds in Gorman, October, 2001,
that a child's remainder in the parent's funded revocable trust
is
property for purposes of the division of marital property in the
child's divorce. Since the child's property rights were
gratuitously
conferred by the parent, only the appreciation in value during
the marriage will become part of the marital property to be subject
to
equitable division with the child's spouse as part of their divorce.
The case is at:
http://groups.yahoo.com/group/tDocs/files/gorman.html
The Court of Appeals observed: "While attempting to place a present
value upon these interests may be difficult, we see no reason
why it cannot be done. Further, we see no reason why the
trial court, after determining the present value that is subject
to division, cannot postpone the physical division of that value
until the [spouse with the interest] comes into possession of
the property, and make such distribution subject to its not being
defeated."
We have had all those situations over the years where the estate
plan with a will has worked better than a funded revocable trust
for
income tax purposes. And here we have a situation where
the funded revocable trusts of the parents gets their property
entangled
in a child's divorce.
Certainly the parent can revoke the interest. But would
the Courts, having taken us this far, with form over substance,
be tempted in
the case of a revocation to nevertheless tag the eventual distribution
of the parent's property via will or another trust to the child
even though the trust had been revoked in the mean time.
Gene Zuspann replies
to John and the closed CBA-TES list as follows:
I agree that John's Gorman case is certainly interesting.
I am not sure where the court is going in these cases. The
courts seem to be going down the path that if there is any vested
remainder subject to divestment or defeasance, no matter how certain
or remote the condition subsequent, that the interest is marital
property under 14-10-113, C.R.S. The significant question
in the divorce then becomes whether a valuation of the asset should
be undertaken now, or whether, as Gorman suggests, that the division
of the trust assets be postponed until the beneficiary spouse
comes into actual possession of the property. Talk about
the mere expectancy discussed in Jones and Rosenblum!
I believe that the court is correct under Colorado law in holding
that the interest of the beneficiaries is a vested remainder.
This result has been reached before.
See
Brenner, 37 Colo App 271 (1976)
DNB v Von Brecht, 322 P.2nd 667 (Colo 1958)
Also, check out Wallis Campbell's article on future interests
in Krendal, Colo Practice Methods, at 2319.
For further reference, check out the following materials.
Balanson - Colo 2001
Jones - Colo 1991
Rosenblum - Colo App 1979
In re Question submitted by the United States Court of Appeals
for the Tenth Circuit, 191 Colo. 406 (Colo. 1976)
Several Colorado Lawyer Articles also discuss the developments:
See, Nancy Crow "What does Balanson mean
to Estate Planners? - Drafting Trusts to deflect the Spousal Creditor,"
30 The Colorado Lawyer __ (October, 2001) discussing the
impact of the portion of the decision involving the family trusts;
Steve Lass and Matt Seidman, "Property or Expectancy: the
Division of Trust Assets as Dissolution of Marriage," 30
The Colorado Lawyer 63 (February, 2001) a discussion of
the appellate court opinion in Balanson; and
David Kirch, "Avoiding Appreciation in Trust Assets Being
Treated as Marital Property," 27 The Colorado Lawyer
58 (March, 1998) regarding trusts to avoid having the trust considered
as marital property.
Finally, the Restatement (Second) Trusts at 150 to 156, and the
UTC at 501 to 506.
Also check out Scott and Bogert on trusts, and Am Jur, Trusts,
and Estates.
Under Gorman, I do not believe the divorce restrictions Karen
suggested work any longer. I agree this is a substance over
form issue, but the law, probably both here and in the common
law, seems to be that the beneficiary's interest vests at the
creation of the trust.
Therefore, for the moment, and until/hopefully this gets appealed,
it seems prudent to either use a will or a discretionary GST trust
as used in Jones and Rosenblum.
To which John
Debruyn replies, and Gene responds in place, as follows:
John, my comments are in the text below - Gene
At 10:13 AM 11/26/01 , John wrote:
>Thanks doing and sharing the research and your observations
>about vested remainder interests in the context of the definition
>and division of marital property in divorce. Your read
of Gorman
>has appeal. It would be most efficient (since the interest
is likely
>to be revoked, no :) to postpone the heavy lifting on the
valuation
>and division process of the remainder until it matured upon
the
>death of the parent as the Gorman may be suggesting.
I think that Gorman is leaving this as an option of the judge.
In other words, divide all other property now, and leave the non-beneficiary
spouse a percentage, to be received upon possession of the beneficiary
spouse, if any still exists. This seems to be an easy solution
for the judge. However, from a practical standpoint, if
the parent is not incompetent, the trust will need to be amended
or revoked as soon as the marriage starts. (Hey, this has
potential) Now, surely, the judge cannot order that the
in-law has an interest in the estate. And further, I would
assume that the valuation of the interest of the child, where
the parent can amend or revoke, has to be about zero.
>Let me, for the sake of discussion, take a different cut on
what
>Gorman may mean here. The trial court is stuck doing some
kind
>of valuation as a threashold matter just to determine whether
>there is any marital property at all--that is the appreciation
during-
>the-marriage component of gift remainder property.
>
>To do that the court probably needs to determine the.acquistion
>(or if later, marriage) value of the property and the date
of
>dissolution value of the property of the trust subject to
the
>remainder interest.
Agreed. They probably need three numbers - basis of trust
to determine income tax (a Davis issue), value at date of marriage
or date of creation, to determine the separate property, and value
at date of dissolution.
>The property of the trust may not even be the same at the
>beginning and ending dates. This process of determining
>appreciation in the property which is subject to an interest
in trust
>creates some good questions in itself. For example,
how does the
>determination of appreciation on an asset by asset basis
>(depreciation in one asset is not offset against appreciation
in
>another) play out.
I am not sure this is necessary - the interest is the remainder
interest in the trust, not in each asset. It seems to me
that the value is the value of the whole, not of each asset.
>Without the beginning and ending valuation the trial court
does not
>know whether there is any appreciation in value (of particual
>assets ?) needed to find that marital property exists.
As along as
>the Court needs those values, then it may as well, efficiency
in
>mind, determine quatum of the fraction that is to be
marital
>property.
It should still need those values to determine the fraction.
Assuming no other assets are allocated to try to compensate for
the interest in the trust, the formula seems to be:
s = value of trust at time that it is separate property (either
date of marriage or date of creation, whichever is later)
d = value of trust at time of divorce
p = percentage of trust that is marital property
p = Max(0,d-s)/d
As a check, see if you agree with the following scenarios
Number 1
s = 500
d = 750
p = 33.3%
Number 2
s = 500
d = 500
p = 0 (there is no marital property, because no appreciation between
s and d)
s = 500
d = 450
p = 0% (because marital property cannot be less than zero - the
max function)
After determining p, the court has to determine what portion belongs
to each spouse. I assume this is normally 50% of p to each
in a long term marriage.
>Then, going down this road a bit farther for the sake of discussion:
> there is the next step, how much of the marital property
fraction
>is to be awarded equitable to each spouse. Perhaps the
Gorman
>court, when it suggested postponement of the "division," was
>thinking that the spouses would divide the future interest
in trust
>that was marital property on a fifty-fifty basis. Whether
a
>particular asset (or group of assets?) should be divided one
what
>or another would seem, since the division is equitable , to
implicate
>the division of all of the other property.
I agree.
>If one takes the foregoing route, then the division that the
Gorman
>court is postponing is just the partition of the future interest
when
>it becomes a present interest between the maritial and nonmarital
>fractions and the marital fraction between the spouses.
I think maybe the Gorman court thought they were avoiding some
work. The quality of the opinion certainly avoided any work.
The Gorman opinion states that the father’s trust "is substantially
identical to the trust involved in Balanson." However,
- The Gorman case does not identify the trustee, but with the
powers enumerated, it is assumed that an independent trustee was
used or the mother would have a general power of appointment.
The father in Balanson was the sole trustee.
- Gorman said that each trust provided that no beneficiary had
any interest in any of the trust property and each trust contained
a spendthrift power. Balanson never addresses this issue.
- In Balanson, the distribution of corpus was
limited to standards, but in Gorman the standard includes the
spouse's welfare.
>Before I get back to some real work, here is another thought.
>
> Unter the Imel case (don't recall at the moment whether there
>are one or two Ms) the spouse of the remainder-person spouse
>has an inchoate undivided property interest in the remainder
upon
>the filing of the petition for divorce. Where does that
take us :)
I will have to check that one out.
To which John
replies back to Gene as follows:
Thanks for threading through the argument for three different
value dates assuming the Gorman suggestion of putting off the
division of the remainder till the death of the parent.
I agree with your examples on the calculation of the fraction.
I have not formed an opinion yet on whether the trust fund would
be one property or multiple properties based on what the trustee
actually held, which is important for whether gains and losses
in a group of assets should be aggregated or just the gain
assets taking into account.
I am wondering whether the remainders in Gorman and Balanson were
subject to the condition of survivorship or not. I think
most of
the forms out there use survivorship language and avoid vested
remainders. However, I got my Simes out and find that contingent
remainders are today generally alienable but that this was not
always the case.
The distinction between vested vs. contingent "'nonvested" remainders
is important for purposes of the rule against perpetuities. Contingent
remainder's must vest within the period, subject to some recent
amendments here in Colorado, if at all.
If a contingent remainder interest is alienable in Colorado, that
needs some more research, is it property eligible to become marital
property for purposes of the division of marital property in divorce.
- - - - - - and
Here is an up date on contingent remainders, vesting et cetera.
The opinion in In re Question Submitted by United States Court
of Appeals for Tenth Circuit, 553 P.2d 382, 191 Colo. 406 (Colo.
08/23/1976) concludes:
Therefore, we answer the question certified to us by the Court
of Appeals for the Tenth Circuit, viz., as follows: under Colorado
law,
the interest of William Arthur Martinson (taxpayer) in the trust
created in his name under his father's will, is not a future interest
subject to a condition precedent. The condition of survival is
a condition subsequent. Taxpayer has a vested right to the moneys
designated for him, but that right is subject to complete defeasance
in the event he does not survive the life tenant,
testator's widow.
It did not jump out at me as I read the facts whether the interest
of son was in fact conditioned upon his survival of his mother
whose
life estate preceded his remainder. I found the Tenth Circuit
Court of Appeals case at 76-1 USTC para 9691. The provisions
of the
trust did require the son to survive and provided for alternate
takers in the event that he did not survive her.
To which Gene
replies as follows:
The question now becomes whether I should change my drafting to
avoid having a vested remainder at all, to keep the interest from
being property in a divorce?
As indicated earlier, Gorman is apparently not being appealed.
Gorman, along with Balanson, are going to assign some value to
that property interest. The judge is going to have to decide
what to do - divide the trust, with possession delayed in both
spouses, or take the value into consideration in dividing up existing
assets. Neither is a satisfactory situation with the client/parent.
To which John
replies as follows:
The remainder interest in the CA 10 case where the Colorado Supreme
Court said the interest was vested was a contingent
remainder interest. The beneficiary had nothing unless he
survived till the end of the preceding interest. If contingent
remainders are
vested, then what--a gift to a purely discretionary trust with
an independent trustee.
But some people are not that enamored with trusts in perpetuity
and the like. Perhaps you make the gift of the residuary
to the
Salvation Army subject to a retained power of appointment exercisable
by will. And then exercise the power in favor of the
child by will. What have you thought about doing.
And tax attorney
Nancy Crow Esq. of Denver interjects as follows:
What a wonderful, spirited
discussion! I've been too bogged down with work to enter
into the fray. But, since I did write about Balanson
recently, I should probably put a word in.
Gorman was the logical extension of Balanson; I
don't think the Court of Appeals had much choice but to come out
the way it did. From the drafting perspective, the decision
renders wills a better estate planning tool than revocable trusts
for the parents who are truly concerned about their children's
divorce proceedings. Following death, having the trust wholly
discretionary is the best bet, for people who have a trusted trustee
and like the idea of trusts. Parents who are concerned about
spousal creditors are likely to be concerned about their children's
other potential creditors, so they are generally receptive to
long-term trust arrangements.
Some tougher questions revolve around disclosure and discovery.
Children don't necessarily know, or have a right to know, what
their parents' revocable trusts say. Parents are not parties
to their children's divorce actions and discovery could be intrusive,
to say the least.
From the family law viewpoint, valuation is going to be a significant
problem. Modification of the definition of marital property
to exclude amounts to be received in the future is one possibility,
with the recognition that a contingent vested remainder could
still be an "economic circumstance" to be taken into account by
the court in dividing property and awarding maintenance.
In any event, courts are likely to adopt a wait and see approach
to these future interests, just as they have for retirement plans.
To
which Gene responds to Nancy and John as follows:
I agree with everything that Nancy says, except that a rev trust
with purely discretionary trustee powers after death, a la Jones
and Balanson, would not be property either.
Our problem seems to one of semantics. A vested remainder
subject to a condition subsequent and a contingent remainder both
have conditions attached. However, the former vests subject
to the event happening to divest the interest, where the latter
is not vested until and unless the event occurs. The difference
is whether the condition is a condition subsequent or a condition
precedent.
The facts in the CA-10 case were that the remainder was vested
subject to divestment by a condition subsequent. The following
is the Court's headnote 4. Also, I am not sure the facts
in CA-10 support the conclusion of the court.
The document provided - life estate in mom, followed by life estate
in Taxpayer (T), remainder to 3 other trusts subject to whole
of trust corpus paid out earlier (a condition subsequent).
I do not understand why T does not have a life estate. Especially
in this case, where mom elected against the will and there would
not be any distributions out of the trust for any beneficiary
before the T.
4. Taxpayer - Vested Right - Moneys - Trust - Subject to Defeasance.
Question certified to Supreme Court of Colorado by Court of Appeals
for
Tenth Circuit is answered as follows: Under Colorado law, interest
of the
taxpayer in the trust created in his name under his father's will
is not a
future interest subject to a condition precedent; the condition
of survival
is a condition subsequent; taxpayer has a vested right to the
moneys
designated for him, but that right is subject to complete defeasance
in the
event he does not survive the life tenant, testator's widow.
This is a property interest under the law. A contingent
remainder is one subject to a condition precedent, and does not
vest until the event occurs. In the case of a contingent
remainder, there is no property interest.
Of course you realize, THAT THIS IS MY OPINION, WHICH COULD VERY
WELL BE WRONG, but I don't believe so after reading several articles
on vesting. (But I cant find any of my old hornbooks or other
references which specifically address future interests).
I have looked at Am Jur, Krendal and some old (30's and 40's)
articles by Leach and Casner.
So my conclusions are:
Contingent remainders are not vested. See above. However,
Jones and Rosenblum confirm that a purely discretionary trust
is an expectancy - so this is what I prefer.
As above, I like the purely discretionary trust, but I still have
some remainderman down the road - grandchildren, great-grandchildren.
During the SS or the child's life, a special power of appointment
could do the job. Discretionary but SS could change to a
vested remainder. You could always draft these as a contingent
remainder to eliminate vesting after the death of both spouses.
And (finally)
John responded to Gene as follows:
I agree with your read of what the law of remainders was and should
be, which was that a remainder that required survivorship of the
life estate in order to take was a contingent remainder and that
contingent remainder did not vest until the termination of the
life
estate. I read the Colorado Supreme Court to say in their
response to the CA 10 back in 1976 that a condition requiring
survivorship in order to succeed to the remainder interest is
not a condition precedent, contrary to all that good old stuff
that you and I have
been reading elsewhere, but that such a condition is a condition
subsequent.
The head note you quoted said:
> will is not a future interest subject to a condition precedent;
the
> condition of survival is a condition subsequent; taxpayer
has a
> vested right to the moneys designated for him, but that right
is
> subject to complete defeasance in the event he does not survive
> the life tenant, testator's widow.
If I were a betting man, I would bet that the language conferring
the remainder in the parent's trust on the child in both Balanson
and
Gorman is, more or less, "to my child, if he or she survives me"
or some other tried and true phrase, which under the good old
stuff
that we have been reading about contingent remainders, would have
been a contingent unvested remainder.
_________________________________________________
That is it for Report No. 5. The full text of all the Reports
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