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DIRECTED ASSET PROTECTION TRUST

Featured by vitellilaw

Effective January 1, 2020, there will be significant changes to Connecticut law concerning the formation, administration and termination of trusts. The recently adopted Connecticut Uniform Trust Code modernizes current law and establishes standards for individuals serving as trustees or in other fiduciary capacities. The new law makes our state an appealing venue for trusts by including an extended rule against perpetuities period and guidance on the formation of self-settled trusts.  Although a complete summary of the new law is beyond the scope of this alert, some key highlights include the following:

  • Dynasty Trust Planning. A trust that continues for multiple generations is sometimes called a “Dynasty Trust.” In previous years, Connecticut law provided that non-charitable trusts could not exist in perpetuity and had to terminate within approximately 90 years of creation. The possibility of a Dynasty Trust that extended beyond the lives of the grantor’s grandchildren was unachievable. Connecticut’s limited trust term often resulted in a grantor’s inability to plan for future generations without having to hire an out-of-state trustee. States with more developed trust laws, like Florida or Delaware, became increasingly attractive because they authorized trust terms that could last significantly longer (360 years in Florida, in perpetuity in Delaware). The new law makes it possible to create a trust in Connecticut that can last up to 800 years, thus, providing an opportunity for creating Dynasty Trusts.  As a result, Connecticut residents no longer have to turn to other jurisdictions to create and administer Dynasty Trusts.
  • Directed Trusts. Prior to this legislation, trustees retained full responsibility over how trust assets were managed, invested and distributed. The new legislation allows a trustee’s duties to be allocated between the trustee and other individuals who may be better able to carry out certain trust objectives. By establishing a Directed Trust, a grantor can now appoint a trust director, that is, a non-trustee individual with authority to manage a specific part of the trust administration. For example, a grantor can appoint a trusted family member as trustee to oversee distributions, and appoint a different individual or a trust company as the trust director to handle investments. A trust director is subject to the same rules and has the same fiduciary duty and exposure to liability as a similarly situated trustee. The new law facilitates the use of trust directors in Directed Trusts by authorizing a division of responsibilities between the trust director and trustees.
  • Asset Protection Trusts. The new law enables the creation of “Self-Settled Asset Protection Trusts”. A Self-Settled Asset Protection Trust is a trust created by an individual for the benefit of himself or herself, which can shield assets from the claims of creditors.  While the Self-Settled Asset Protection Trust is appealing to individuals looking to insulate themselves from potential unknown liabilities, the new law makes it clear that stringent requirements must be met when creating an asset protection trust for the benefit of the grantor so as not to run afoul of fraudulent transfer laws. Among the prerequisites, the trust must: 1) be governed under Connecticut law; 2) be irrevocable; 3) include a spendthrift clause (i.e., a provision that prevents the beneficiary from assigning his or her interest in the trust); and 4) appoint an independent trustee to make distributions to the individual creating the trust. Use of a Self-Settled Asset Protection Trust is a strategy that advisors may recommend to better protect their client’s assets from future creditors.
  • Income Tax Reimbursement. Currently, if a trust permits the reimbursement of income taxes to the grantor of the trust, the principal of the trust can be subject to creditor claims. The new law makes it explicitly clear that such reimbursement authority does not subject the trust assets to claims of creditors as long as the trust agreement expressly provides the trustee with the requisite discretion to reimburse the grantor. Accordingly, an irrevocable trust can permit reimbursement of income taxes to the grantor without jeopardizing trust assets or putting them within reach of uninvited creditors.

Highlighted below are various rules from the new law that will impact the future of trust management and administration here in Connecticut:

  • Non-Judicial Settlement Agreements. As enacted, the law allows interested parties to enter into a binding, non-judicial settlement agreement in matters relating to a trust, such as interpretation of the trust agreement, trustee resignation and appointment, trust accountings, and trustee compensation. The law prohibits interested parties from modifying or terminating a trust by way of a non-judicial settlement agreement.
  • Notice to Beneficiaries. The law imposes new reporting requirements on the trustee to keep each qualified beneficiary (or the beneficiary’s designated representative who is qualified to receive notice on behalf of the beneficiary) reasonably informed about the trust’s administration, and to provide an annual report about the trust property upon request. 
  • Trust Combination and Division. After providing proper notice, a trustee of an inter vivos trust is permitted to combine the trust with other trusts or to divide the trust as needed. For testamentary trusts, the trustee must seek court approval.
  • Modification of Irrevocable Trusts. Certain irrevocable trusts may be modified or terminated if the court finds that the grantor, trustees and beneficiaries all consent. In some circumstances, trust beneficiaries may modify a trust without the consent of the grantor if the court concludes that modification is consistent with the purpose of the trust.
  • Transferring Trusts Out of State. The legislation also prescribes the requisite process for transferring a Connecticut trust to another jurisdiction. For certain inter vivos trusts, the trustees must provide notice to beneficiaries in advance of a transfer and transfers regarding testamentary trusts will require probate court approval. Charitable trusts are prohibited from transferring to another jurisdiction outside of the United States.

A note about effective dates:  In general, the new Connecticut Uniform Trust Code applies to all Connecticut trusts.  However, there are specific exceptions to this rule.  For example, the provisions relating to enhanced notice and disclosure to trust beneficiaries apply only to irrevocable trusts created on or after January 1, 2020, and to revocable trusts that become irrevocable on or after January 1, 2020.

Forever LinkedIn

by vitellilaw

Four years ago, a lawyer I had reconnected with on LinkedIn the year before passed away suddenly. The year before Steve died, we traded messages a couple of times. Steve and I met shortly after I started practicing law. He became a mentor and friend. However, as our careers moved in different directions, we lost touch. But thanks to social media, we were able to reconnect.

A year and a half after Steve’s death, I received a disturbing message from LinkedIn asking me to Congratulate Steve on a work anniversary. It was weird and creepy. Even so, I assumed that Steve’s adult children, the heirs to his estate in California, would eventually get around to removing Steve’s digital profile from the Internet.

It has now been over four years since Steve passed away suddenly and again I received a request from LinkedIn to Congratulate Steve on a work anniversary. What would otherwise be a benign message left me with an unsettling feeling. There is no way for me to stop the messages from being posted each year. I do not have the authority to delete his online profile. My only recourse is to figure out how to unlink myself from my deceased friend, but his profile will remain forever until someone has authority to remove it.

Ten years ago, we did not have to think about how our online presence would be deleted when we pass, though now we do. If you think about all the online accounts you have with different passwords and methods for authentication, you realize how difficult it would be for your loved ones to access and delete all the accounts. It is even more concerning if your loved ones do not have the passwords to access the accounts and the online entity will not allow access. In this situation, your online presence will continue forever and in the situation of LinkedIn you could receive a haunting message each year to Congratulate a deceased friend on their work anniversary.

None of us think we will die suddenly while out for a ride on our bicycle, but it does happen. You can save your family the grief of recurring messages from online accounts such as LinkedIn after you are gone by planning ahead. When you have a Will that includes language giving access to all your online accounts, websites and devices, your Executor will have the authority to take steps to erase social media accounts like LinkedIn. I am sure that LinkedIn never intended to link you in to deceased persons, but that is what happens when you do not have a plan in place to unlink yourself after you are gone.

ESTATE PLANNING WITH TRUSTS

by vitellilaw

Trusts serve a variety of purposes. They can be part of a Will and funded with assets from your estate or be put into use during your lifetime. If you want to know more about how trusts can be used as part of the foundation for creating your estate plan, I can help to demystify trust agreements and show you how they operate to protect your estate plan. When creating a trust, I will help you navigate the critical decisions necessary such as naming fiduciaries and developing strategies that go beyond property allocation while balancing the pros and cons of different trust arrangements.

Tax Break on 2020 RMD from IRA

by vitellilaw

I recently received clarification regarding the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted by Congress and signed into law on March 27, 2020, suspending Required Minimum Distributions (“RMD”) from most retirement plans for the year 2020, and providing special favorable tax rules for “coronavirus related distributions.”  On June 22nd extensive guidance was issued by the Treasury Department interpreting and clarifying the applicable sections of the 880 page CARES Act while expanding the number of people eligible to withdraw “coronavirus related distributions” (“CRD”) from their retirement accounts and offering substantial but temporary relief to persons who took their RMD prior to the enactment of the CARES Act. 

If you took a 2020 RMD and you would like to put it back into a retirement plan like it never happened so you don’t have to pay tax on it, there are three paths to accomplishing that result:

If the distribution came from an IRA, you can put it back tax-free into the account it came out of by August 31, 2020, even if it is an inherited IRA of which you are a nonspouse beneficiary (despite the fact that nonspouse beneficiaries can “never” roll over distributions from an inherited plan). The “once-per-12-months” limit on IRA-to-IRA rollovers will not apply to these repayments. This totally new and one-time relief does not apply to distributions from non-IRA plans. 

If the RMD is an otherwise eligible rollover distribution, you can roll it over within 60 days or by August 31, 2020, whichever is later. This path is not available to nonspouse beneficiaries and is subject to the once-per-12-months limit on IRA-to-IRA rollovers.

If the distribution qualifies as a CRD, you can roll it over any time within three years after you received it. This path is not available to nonspouse beneficiaries but is not subject to the once-per-12-months limit on IRA-to-IRA rollovers. The guidance from the Treasury Department substantially increased the categories of “qualified individuals” who can receive CRDs, so that now, for example, a pay cut, not just an hours cut, experienced by your spouse or household member, not just yourself can make you CRD-eligible if it resulted in adverse financial effects.

I want to note that there are certain exceptions to the suspension of RMDs.  The 457 plans sponsored by non-government tax-exempt employers (e.g., a credit union) do not have their RMDs suspended for 2020. This is a common occurrence in retirement plan rules because the government-employer-type 457 plans get more favorable deals than 457s sponsored by other tax-exempt employers. Thus, these plans must continue paying RMDs in 2020 and recipients do not have any option to roll them over.

Similarly, Defined Benefit plans do not have their 2020 RMDs suspended if they are §401, §403, or §457 plans. Under the special minimum distribution rules that apply to Defined Benefit plans, every distribution the retired individual receives is an RMD.

Unfortunately, neither the CARES Act, nor the subsequent guidance from the Treasury Department addresses whether an IRA that has been “annuitized” is subject to the “defined benefit” minimum distribution rules. Since with respect to IRAs CARES does not specify “defined contribution” only, it is unclear if an annuitized IRA can skip the 2020 RMD, or whether these IRAs are subject to the same rules as Defined Benefit plans, and so cannot skip the 2020 RMD.

If you need further information about the CARES Act and its implications to your retirement plan, please feel free to contact me.  There is no charge for this consultation.