=================================================== This will be our last Report for the 2005 Institute. While we were unable to cover and report on every session as we had hoped in the beginning due to the limitation on the number of reporters we could have and the fact that on both Wednesday and Thursday afternoons there was a Fundamentals session running all afternoon concurrently with 14 different break out Special Sessions, a review of the sessions that were covered and reported on by us indicates we were fairly successful in accomplishing our mission again this year. Also, we normally would have ended these Reports before now, but this year we had a four-day e-mail crash that put a real wrench in our usual distribution and publishing process. At this time, as your Editor again this year, I want to take this occasion to publicly thank all seven of our reporters for a job well done, especially considering that all but two of them had never been reporters for us before. They were loyal and dedicated to the task at hand in spite of some of the later evening and early morning hours they had to put in so their reports could be prepared and submitted in a timely fashion. Maybe by next year the Fontainebleau hotel will have installed high speed lines in all the sleeping rooms, making our job all that much easier. And now for the last of our Reports for 2005.................. ========================================================== Special Session IV-F - Implementing Total Return Trusts: Solving Three Variable Problems When You’re Bad at Math (Part of the financial planning program series) Thursday Afternoon, January 13, 2005 at Wyndham Hotel Presenter: Paul S. Lee of Bernstein Investment Research & Management Reporter: Jeffry L. Weiler Esq. The decline in interest rates and dividend yields makes it difficult to provide sufficient income to current income beneficiaries when the Trustee is limited to distributing fiduciary accounting income. States have enacted legislation that allow fiduciaries to invest for the highest total return but not hurt the current beneficiary in the process. These trusts are referred to a “Total Return Trusts”. Implementation of these trusts requires an understanding of modern portfolio theory as well as tax and trust law. This speaker’s presentation defines Total Return Trusts, reviews legislation and regulations, quantifies the decision making process and provides guidelines and a methodology for drafting and implementing Total Return Trusts. A Total Return standard for investment performance encourages investors to seek the highest overall return without being restricted by how that return is created. This type of investing creates a conflict in traditional trusts between the income and remainder beneficiaries. A Total Return Trust allows the fiduciary to invest for Total Return and permits an adjustment of the amount to be distributed to the current beneficiary without regard to whether the source of the distribution (dividends, interest, capital gain, etc). Framework for implementation involves solving a three variable
problem: Applicable state law may allow the fiduciary to make equitable adjustments between principal and income. In exercising the power, the fiduciary should consider the nature, purpose, and expected duration of the trust; intent of the settler; identify and circumstances of the beneficiaries; needs for liquidity, regularity of income and preservation and appreciation of capital; assets in the trust; actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; anticipated tax consequences of an adjustment. States have adopted three versions of distributions polices: only equitable adjustment power; dual approach – equitable adjustment power and option to convert of a unitrust; only conversion to a unitrust. US Treas Regs under 643 (b) deals with the computation of distributable net income. Generally capital gain is excluded from DNI and is taxable to the trust rather than to the beneficiary receiving distributions. However, exceptions are provided in the Regs. The current financial planning tools are not limited to historical averages and take into account the alternative returns and as well as the random and unpredictable nature of the markets. It is called stochastic or probabilistic modeling – Monte Carlo modeling. Frequently 10,000 simulated markets are produced to study possible outcomes. Distribution policies: An annuity permits the current beneficiary to avoid downside risk
of a falling market. The portfolio risk is shifted to the remainder
beneficiary. In regard to taxation, the allocation of tax by the fiduciary does not affect the trust assets but does have an impact on what is received by the current beneficiary and the remainder beneficiary. The fiduciary must follow a process concerning trust investment policy. The process protects the fiduciary and is more important that the investment performance. The outline includes a sample total return investment policy statement. =================================================== Reporter: Eugene Zuspann Esq. Lou offered up an extensive fact situation. It addressed many of the issues included in the institute this week. Many of the topics apply to the fact situation. Parents (Harry and Wilma) have 4 children David, Son, married,
has 4 children. Joan, married and has children from a prior marriage. Lou started by explaining his practice in this classes about assumptions outside of the fact situations. If necessary facts are missing, the students are expected to make other necessary assumptions to complete the analysis of the estate. First, who is the client? You need to determine this at the outset. Harry needs to define the scope. If the family gets along and Harry wants to do planning for the children, then Lou would represent the family. However, if something comes up that the family does not agree during the representation, he may have to withdraw from the representation of the entire family. When an in-law is a lawyer, Lou has also found that the person is always looking over his shoulder and ‘‘knows’’ all about estate planning. Given this fact, he may not be willing to represent the family. Lou set out some immediate considerations: 1. Determine potential conflicts and who is the client 2. QPRT’’s 3. Liquidity 4. Restructuring issues for the corporation 5. Employee’’s financial future 6. Asset protection Next, get a comprehensive list of all assets and liabilities and have the client verify its accuracy. This summary is necessary to do the plan and helps avoid problems later when other assets or liabilities are identified. He has an outline about repeal of the estate tax. What would attorneys continue to do if the estate tax is repealed? Only 4 issues would no longer be applicable 1. No planning for the estate tax 2. No using marital deduction planning 3. No planning for charitable gifts for federal estate taxes 4. No gifts at death to avoid death taxes He discussed the various alternatives to the changes in the estate
tax. How will the law change? Will there be a complete repeal? When?
Will the repeal be immediate (this would be the easiest) or will
it phased in? He also raised other non-tax issues and questions that would be relevant after a complete repeal: We will still need to consider one or more trusts for the benefit of the children because one spouse may not need or want to give the other spouse full control of all of the assets. Steve Oshins and Jonathan Blattmachr both stated that almost everything should be left in trust. Some preliminary ideas on planning the estate for Harry and Wilma
1. Create voting and non-voting stock (90% non-voting and 10% voting).
He assumes the premium on the voting stock makes it worth $10mm.
Using the A. Give one-half of the non-voting stock to Wilma 3. Transfer marketable securities to a zero-ed out CLAT. The beneficiaries
are the other two children. A. You may wish to consider the use of the Inheritor’’s
Trust if Harry and Wilma’’s parents are going to be
leaving assets to them. This is for both estate tax protection and
for creditor protection if the software company goes down the drain.
The trust would be a discretionary trust. He does not agree with
Steve Oshins that the UTC good faith standard may cause a problem.
Lou believes the good faith standard applied before the UTC. THE END....................... GENERAL INFORMATION ABOUT INSTITUTE ______________________________________________________ To search the ABA-PTL archives online or manage your subscription, go to http://mail.abanet.org/archives/aba-ptl.html Your e-mail address will only be used within the ABA and its entities. We do not sell or rent e-mail addresses to anyone outside the ABA. To change your e-mail address or remove your name from any future general distribution e-mails you can call us at 1-800-285-2221, or write to: American Bar Association, Service Center, 321 N Clark Street, Floor 16, Chicago, IL 60610 If you are an ABA member, log in to the ABA Web site at http://www.abanet.org/abanet/common/MyABA/home.cfm to edit your member profile. Otherwise, complete the form located at https://www.abanet.org/members/join/coa2.html To review our privacy statement, go to http://www.abanet.org/privacy_statement.html.
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