20 Things You Need To Know about Selecting a Trustee and Selecting Trustee Powers Stephen R. Akers, Attorney Bessemer Trust Dallas, TX Wednesday, November 5, 2014 8:00 am – 9:15 am Copyright © 2014 Bessemer Trust Company, N.A. All rights reserved. August 22, 2014 Important Information Regarding This Summary This summary is for your general information. The discussion of any estate planning alternatives and other observations herein are not intended as legal or tax advice and do not take into account the particular estate planning objectives, financial situation or needs of individual clients. This summary is based upon information obtained from various sources that Bessemer believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in law, regulation, interest rates, and inflation. TABLE OF CONTENTS I. NON-TAX FACTORS ......................................................................................................................... 1 A. Legal Capacity ................................................................................................................................. 1 1. General Statutory Requirements ................................................................................................. 1 2. Requirements for Corporate Trustee ........................................................................................... 1 3. Requirements for a Foreign Corporate Fiduciary ....................................................................... 1 a. Reciprocity Requirement ...................................................................................................... 1 b. Filing Requirement ............................................................................................................... 2 c. Not Doing Business .............................................................................................................. 2 d. National Associations ........................................................................................................... 2 4. Charitable Corporation .............................................................................................................. 2 B. Personal Attributes of Trustee ......................................................................................................... 2 1. Judgment; Experience ............................................................................................................... 2 2. Impartiality; Objectivity; Lack of Conflict of Interest .............................................................. 3 a. Beneficiaries Having Conflicting Interests ......................................................................... 3 b. Avoiding Family Tension ................................................................................................... 3 3. Investment Sophistication; Track Record; Prudent Investor Act .............................................. 4 4. Permanence and Availability ..................................................................................................... 4 5. Sensitivity to Individual Beneficiaries’ Needs .......................................................................... 4 6. Accounting; Tax Planning; Record-Keeping ............................................................................ 4 7. Fees ............................................................................................................................................ 5 C. Likelihood of Self-Dealing Transactions .......................................................................................... 6 D. Situs Selection Issues........................................................................................................................ 7 E. Power to Allocate Gains to Income Under Section 104 ................................................................... 7 F. Ability of Beneficiary to Force Distributions .................................................................................... 8 G. Summary Personal Attributes Issues................................................................................................ 8 II. DONOR TAX ISSUES .......................................................................................................................... 8 A. Gift Tax Issues ................................................................................................................................. 8 1. Incomplete Gift—Structure Planning Based on Donor’s Intent ................................................ 8 2. Retained Right to Receive Distributions ................................................................................... 9 a. Overview ............................................................................................................................. 9 b. Summary of Application to Selection of Trustee to Avoid Having Transfer Treated as Incomplete Gift .................................................... 10 3. Powers to Change Beneficial Interests .................................................................................... 10 a. Powers to Change Beneficial Enjoyment That Cause Incomplete Gift ............................ 10 b. Ascertainable Standard Exception .................................................................................... 11 c. Power to Affect Time or Manner of Enjoyment, But Not to Shift Among Beneficiaries ............................................................................................ 12 d. Power Exercisable In Conjunction With Others ............................................................... 12 e. Contingent Powers ............................................................................................................ 12 f. Summary of Selection of Trustee Issues as to Donor Retained Rights to Income in Order to Avoid Having Transfer Treated as Incomplete Gift .................. 13 B. Estate Tax Issues ............................................................................................................................ 13 1. Who is the “Grantor ................................................................................................................ 13 a. Reciprocal Trust Doctrine ................................................................................................. 13 b. Indirect Transfers .............................................................................................................. 15 2. Retained Beneficial Interest in Donor ..................................................................................... 16 i a. Statutory Provision--Section 2036(a)(1) ........................................................................... 16 b. Only Donative Transfers Are Subject to Section 2036 ..................................................... 16 c. Types of Retained Interests That Cause Estate Inclusion .................................................. 16 d. Settlor as Totally Discretionary Beneficiary ..................................................................... 20 e. Transfer to Spouse With a Potential of Having Spouse Appoint the Assets Back to Grantor .................................................................................. 24 f. Effect of Trustee Selection on Retained Right to Income ................................................. 28 3. Retained Dispositive Powers in Donor.................................................................................... 31 a. Statutory Provision--Section 2036(a)(2) ........................................................................... 31 b. Statutory Provision—Section 2038. .................................................................................. 31 c. Dispositive Powers that Trigger Application .................................................................... 32 d. Similarities In Application of Sections 2036(a)(2) and 2038 ........................................... 34 e. Differences Between Section 2036(a)(2) and 2038 .......................................................... 35 f. Exception for Powers Held By Third Party Trustee ......................................................... 36 g. Ascertainable Standard Exception .................................................................................... 36 h. Summary of Planning for Ascertainable Standard Exception ................................... 39 i. Effect of Adding That Trustee Makes Decision “In His Sole Discretion ......................... 39 j. Summary of Trustee Selection Issues With Respect to Grantor Powers Over Dispositive Provisions ............................................................... 41 4. Retained Administrative and Management Powers .................................................................. 41 a. Administrative Powers Can Affect Distributions ............................................................. 41 b. Key Issue: Is Exercise of Power Subject to Review By Court ......................................... 41 c. Supreme Court’s Pronouncement in Byrum ..................................................................... 42 d. Broad Powers to Allocate Between Income and Principal ............................................... 46 e. Broad Investment Authority ............................................................................................