PAT DOWN THE TRUST

DETECTING TRUST PROBLEM AREAS

SHANE T. MCCALLVICE PRESIDENT & TRUST COUNSEL FIRST NATIONAL BANK HUTCHINSON, KANSAS

OCTOBER 2, 2015

IOWA TRUST ASSOCIATION1

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3PAT DOWN THE TRUST4P PARTIES

A ASSETS

T- TERMS CO-TRUSTEES GET R DONE5ITC 633A.4103 Unless the trust provides otherwise:Power held by Co-trustees may be exercised by majority decision.If impasse any trustee may petition the court for a decision.If a vacancy occurs or a co-trustee is unavailable, the remaining trustees may act as if they are the only trustees.

PARTIES6CO-TRUSTEECan Trustees Delegate to outside Agents? 633A.4206. DelegationA trustee shall not delegate to an agent or cotrustee the entire administration of the trust or the responsibility to make or participate in the making of decisions with respect to discretionary distributions, but a trustee may otherwise delegate the performance of functions that a prudent trustee of comparable skills might delegate under similar circumstances.The trustee shall exercise reasonable care, skill and caution in:Selecting an agent; establishing the scope of the delegation; and periodically reviewing the agents actions.A trustee who complies with Sections 1 and 2 is not liable to the beneficiaries or the trust for the agents actions. PARTIESCO-TRUSTEES (DUTIES)71. If a trust has more than one trustee, each trustee shall perform all of the following duties:a. Participate in the administration of the trust.b. Take reasonable steps to prevent a cotrustee from committing a breach of trust, and to compel a cotrustee to redress a breach of trust.2. A trustee who complies with subsection 1 is not liable to the beneficiaries or to the trust for the decisions or actions of a cotrustee.PARTIES8GRANTOR INFORMATIONWhy is the Grantor or Former Trustee Coming to You?

TAX RETURNS3 YEAR STATUTE OF LIMITATIONS

FAMILY HISTORY

FINANCIAL STATEMENT

BENEFICIARIESHow Many Beneficiaries?Do you know the Beneficiaries?What relationship do they have with the Grantor, other Beneficiaries, or your department personnel?

PARTIES9SPOUSES OF BENEFICIARIESMany times the beneficiary is easy enough to appease, however you must consider the influence from the spouse who may be known for disrupting family harmony.

CHILDREN OF BENEFICIARIES (future beneficiaries)If the primary trust beneficiaries are elderly, children of the beneficiary may often try to exert undue influence over the beneficiary and use the parent as conduit to access the trust.

PARTIES10FAMILY ATTORNEY OR ACCOUNTANT

TENANTS

INVESTMENT REPRESENTATIVE

BUSINESS PARTNERS

PARTIES11PREVIOUS TRUSTEE

RECEIPT AND RELEASE WHEN LETTING GO

FAILURE TO DISCOVER AND CORRECT (Look before you cross)

PARTIES12PREVIOUS TRUSTEE 633A.4108. Delivery of property by former trusteeUnless a cotrustee remains in office, a former trustee, or if the trustee's appointment terminated because of death or disability, the Former trustee's personal representative or guardian or conservator, is responsible for and has the powers necessary to protect the trust property and other powers essential to the trust's administration until the property is delivered to a successor trustee or a person appointed by the court to receive the property.

Trust Protector13Powers are a matter of ContractPower to DirectTrustee to do Certain ThingsTo Veto a Trustees actionsRequiring the consent of the ProtectorPower to Deal with Unforseen Circumstances

Typical Trust Protector Powers14Remove, appoint or add a TrusteeDirect, veto or consent to investmentsModify or Amend the TrustTerminate the TrustSettle disputes between Trustee/BenesChange the Situs of the Trust

TRUST PROTECTOR V. GRANTORA TRUST PROTECTOR CANNOT DIRECT THE TRUSTEE TO ACT CONTRARY TO THE TERMS OF THE TRUST.A GRANTOR CAN DIRECT THE TRUSTEE TO ACT CONTRARY TO THE TERMS OF THE TRUST.15

Is a Trust Protector a Fiduciary?16Alaska Statute says Trust Protector is to be treated neither as a Trustee or Fiduciary.Iowa (633A-4207)South Dakota, Wyoming, Idaho and Tennessee all set forth the presumption a Trust Protector is a Fiduciary.Depends on the language in the trust and the State which is the situs of the trust.

UTC 808 Power to Direct17Does not refer to Trust Protector by name, Subparagraph (4) states that a person, other than a beneficiary, who holds a power to direct (the Trustee or Trust Protector) is presumably a fiduciary who is required to act in good faith with respect to the purposes of the trust and interests of the beneficiaries.ASSETS18Real EstateInspection (Waive if Grantors residence)AppraisalLiability and Casualty Insurance TaxesTitle InsuranceOperating CapitalASSETS19CLOSELY HELD STOCKBusiness Succession PlanBuy/Sell AgreementValuation ClauseLLC UNITS/SHARESManagement Agreement LIVESTOCKMINERAL INTERESTSASSETS20PROMISSORY NOTESAre they contractual; meaning does the Trustee have the power to file a collection suit on the note?Is the note secured?Is the note within the Statute of Limitations?If the trustee distributes an unpaid note or a share of the note to a beneficiary, does that beneficiary have the ability to seek collection from the deadbeat beneficiary?Does the Trustee have the ability to treat beneficiaries unequally when it is clear the note is a bad credit?

SCHEDULE A21AFTER ACQUIRED PROPERTY

ALL INCLUSIVE

PERSONAL PROPERTY STATEMENT

FORMER JOINT PROPERTY DISCRETIONARY DISTRIBUTIONSNothing is more challenging to the trust officer than considering requests for discretionary distributions. Having knowledge of some of the commonly used standards and having some suggestions at your disposal for the attorney drafting the discretionary distribution terms can make the process more efficient and less challenging.

22TERMS23DISCRETIONARY DISTRIBUTIONSCreditor Protection (Beneficiary)Bank as TrusteeInclusion (Trustee/Beneficiary)Beneficiary as Trustee

Fully Discretionary Ascertainable Standard24The Trustee shall have full discretion to distribute trust assets to, or for the benefit of any beneficiary, to the exclusion of others, for the beneficiarys health, education, maintenance or support.[Providing a trustee with full discretion over whether to make distributions prevents beneficiaries and their creditors from having enforceable rights to distributions.] Ascertainable Standard25Health, Education, Maintenance, SupportProtect Trustee/Beneficiary from InclusionAssist the Trustee (There is available guidance as to what constitutes HEMS) (See Definitions in Outline)Its SafeAscertainable Standardv.Fully Discretionary Ascertainable Standard26Trustee shall make distributions of principal for beneficiarys HEMS.Lacks Discretion and thus Creditor Protection

Trustee in their absolute and sole discretion may make distributions of principal for beneficiarys HEMS.Ultimate Creditor Protection

AVOID INCLUSION27Use the Ascertainable Standard (HEMS) to avoid having the power of the trustee/beneficiary construed as a General Power of Appointment and thus includable in the beneficiarys estate for Federal Estate Tax determination. ROUGE STANDARDS28AVOID ROUGE STANDARDS Necessary or AppropriateReimbursement for Income Tax Paid

Why Use Discretionary DistributionsSupport of a BeneficiaryAsset Protection from the Beneficiary or Creditors of the BeneficiaryAs a Yield Sign before distributing funds to a Beneficiary

29TERMS30TERMS CONTRARY TO STATE LAWDoes the Trust grant authority to the Trustee, excuse the Trustee, or direct the Trustee to act contrary to State Law or the UTC?

Exculpatory Clauses31Trust provision designed to relieve the trustee of liability for certain kinds of breaches of trust.Often these clauses broaden the scope of a trustees permissible conduct, rather than excuse the trustee for violating their duty.

Expanding the Trustees Authority32To hold concentrations of stock, units..To retain farm ground despite the returnTo expand a position in a businessTo waive a Conflict of Interest by TrusteeTo invest in non-traditional investmentsTo retain wasting assets

Authority 33Restatement of Trusts (Second) 222Terms of the trust can relieve a trustee of liability for Breach of Trust.Iowa Code 633A.4505Valid so long as doesnt allow Trustee to act in bad faith, with indifference to the interests of the beneficiaries, or for the Trustees gain.Valid so long as it wasnt inserted by threatIf the Trustee drafted or caused the clause to be drafted they should show the terms were explained and understood by the Settlor and the Settlor had counsel.TERMS34MERGER CLAUSEMERGERUpon the merger, consolidation, sale or other transfer of the Trust business or assets by any successor corporate Trustee to another corporation, then any such successor shall automatically become the Trustee, with the same rights, powers, duties and directions conferred or imposed upon the Trustees hereunder.KANSAS MERGER ADMINISTRATIVE CODE359-1606: Authority of consolidated bank or trust company to act as fiduciary. Upon and after the merger or consolidation of any bank or trust company as hereinbefore provided the successor bank or trust company upon acquiring trust authority shall be entitled to be appointed and to act as trustee, executor, administrator, conservator or any other fiduciary capacity to the same extent and with the same authority as the bank or trust company which it succeeds.

IOWA MERGER ADMINISTRATIVE CODE36Rule 197-10.14. Consolidation or merger of two or more associations Where two or more associations consolidate or merge, and any one of such associations has, prior to such consolidation or merger, received a permit from the superintendent to exercise trust powers which permit is in force at the time of the consolidation or merger, the rights existing under this permit pass to the resulting association, and the resulting association may exercise trust powers in the same manner and to the same extent as the association to which the permit was originally issued. No new application to continue to exercise these powers is necessary.

TERMS37NAME OF TRUST Does the Name of the Trust include the words, Living or Revocable

WHEN DOES TRUST BECOMES IRREVOCABLETerms directing Successor Trustee how to determine incapacity of Grantor?What if an Attorney In Fact (other than the Successor Trustee) holds a power to amend the trust?

TERMS38RIGHTS OF THE SURVIVING SPOUSEMarital Residence If the spouses, their trusts or the settlor alone owns the marital residence, under what conditions may the surviving spouse stay in the residence? Who is responsible for maintenance and repairs, should rent be assessed, who pays the insurance, taxes and utilities? Do you need a written agreement with the surviving spouse?

I prefer not placing marital residences in trust, but rather rely on a well drafted GDPOA giving the AIF (hopefully same as Successor Trustee) the authority to place assets in trust and to alienate the homestead.

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Power to Alienate HomesteadIOWA CODE 561.1340The principals spouse consents to alienation by signing the deed or gives an agent the ability to alienate their homestead interest by signing the deed on their behalforThe principals spouse acknowledges in writing their consent for their AIF (so long as it is the other spouse) to alienate the principals interest.TERMS41Consent to Trust If both spouses are living and both spouses are establishing a revocable trusts or if both spouses are living and only one spouse is creating a revocable trust, make sure the opposite or non-trusting spouse consented to the Trust Document.TERMS42No Contest Clause or in terrorem Clause (See Example in Outline)

The in terrorem clause makes provisions to disqualify the bequest of any beneficiary who challenges the terms of the Will or Trust.

TERMS43POWER OF APPOINTMENTGeneralLimited or SpecialGeneral v. Special Power of Appointment44a General Power of Appointment is defined by the Internal Revenue Code of 1986, as amended (the Code), as a power that " is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate." 26 U.S.C. 2041(b)(1) (2000). The result of a power of appointment being classified as a general power of appointment is that the assets subject to the power will be included in the powerholder's estate at death and thus will be taxable to the powerholder.General v. SpecialPower of Appointment45A Special or Limited Power of Appointment is more restrictive and does not allow the original/lifetime beneficiary to appoint the trust to themselves, their estate, their creditors or creditors of their estate. The Special Power of Appointment assures the power will not be included in the powerholders estate for Federal Estate Tax purposes.PROBLEM AREASMultiple Beneficiaries of same trustIowa Code 633A.2707 CombinationDivisionPreserve PurposeDoesnt Impair Interest(Notice?)Advancements

46ADVANCEMENTS47Time Value of Money Is a $20,000 advancement today from a trust with 3 ultimate beneficiaries equal to the $20,000 distributed to the other 2 beneficiaries several years later? Inflation concerns (purchasing power)Should there be an inflation clause in the advancement terms?ADVANCEMENTS48What if an Advancement made during the life of the Grantor (promissory note) exceeds the value of the advanced beneficiarys share?Family Settlement AgreementAssign the note to Survivors Trust and amendAssign the unpaid portion of the note to the other beneficiaries (Except Trust says the note shall not be treated as contractual) ADVANCEMENT49If a family trust provides for the spraying of income and distributions of principal among the grantors children and grandchildren during the lifetime of the children; and upon the death of a child the distribution of the deceased childs share to the grandchildren; Is an Advancement by a child binding upon the grandchildren?Any advancement of principal or discretionary distribution treated as an advancement by my children shall be binding upon any ultimate beneficiary.

Real Estate Loan50AppraisalInspect the CollateralCredit ReportConsent from BeneficiariesMortgage PolicyMortgage NoteMortgage

PROBLEM AREAS CONT.LOANS51Authorized by State Law or Trust Duty to all beneficiariesCollection OptionsCreditworthinessSecuring the loanCan an unpaid balance be treated as an advancementCommittee ApprovalWritten Note (binding upon heirs)PRECATORY LANGUAGE52Often the Grantor will make statements of in the document such as, it is my desire, I prefer, I hope, etc This language is not binding upon the Trustee but consideration should be given to the language if it can be carried out in the best interests of the beneficiaries.IRS Technical Advice Memorandum201126030 It is my desire binding as mandatory when referring to the Trustee and Precatory when referring to a beneficiary.

AVOID PRECATORY WORDSIT IS MY DESIRE, HOPE, WISH, INTENT.

USE MANDATORY WORDS54SHALL, WILL, MUST; I GIVE, DEVISE (RE), BEQUEATH (PERSONALTY), TRANSFER, VEST. Gifts by Attorney in Fact or Trustee 1.Authorized by Power of Attorney or Trust Document

2.Previous Pattern of Giving

3.GoodFaith/Affordable/Legitimate Estate Planning Reason

4.Lookback Concerns?

55HELPING YOURSELF56Read the Document if availableIdentify the Standard and visit with the Grantor and AttorneyConsider Power of Appointment and Creditor Protection and Inclusion ProtectionRequire the request to be in writing, make it clear the trustee may request financial information, trustee to consider other sources of income, also require the trustee to present the request to the appropriate committee and to respond to the beneficiary timely.Why put this in the trust? So the Grantor and Beneficiaries know the Drill! There are no surprises and each party knows the rules and process.Can the Trustee make loans to a beneficiary and if so can they pursue any delinquency? Can the trustee treat beneficiaries unequally and if not can the Trustee divide the trust into beneficiary shares. If the trust directs the trustee to consider other income sources of a beneficiary, define what documents might be necessary for the trustee.income tax return, 1099, w-4, credit reports, deposit and investment account statements, balance sheets, financial statement, income statement, budget, etc.

ACCEPTANCE IN IOWA57 633A.4101. Acceptance or declination to serve as trustee1. A person named as trustee accepts the office of trustee by doing one of the following: Signing the trust instrument, or signing a separate written acceptance.Except as provided in subsection 3, knowingly accepting delivery of the trust property or exercising powers or performing duties as trustee.2. A person named as trustee who has not yet accepted the office of trustee may in writing decline to serve as trustee.3. If there is an immediate risk of damage to the trust property, the person named as trustee may act to preserve the trust property without accepting the office of trustee, if within a reasonable time after acting, the person delivers a written declination to serve to the settlor, or if the settlor is dead or lacks capacity, to the beneficiaries eligible to receive income or principal distributions from the trust.

ACCEPTING OR DECLINING TRUSTEESHIP (UTC 701)58Substantially Complying with the Method of AcceptanceExercising Powers or Performing Trust DutiesOtherwise Indicating AcceptanceAccepting Delivery of Trust Property Registering the TrustWithout Accepting a Designated Trustee may:Act to Preserve Trust PropertyInspect Trust Property for Potential Liability POWER TO REMOVE59Who has the Power to Remove the Trustee?

YOU SHOULD KNOW WHO THESE PEOPLE ARE!

WHEN IN DOUBT60DOES THE TRUST ALLOW IT ?

[TRUST CAN ALLOW TRUSTEE TO ACT OUTSIDE THE SCOPE OF THE UTC]Is there an Exculpatory Clause or other Grantor Directive relieving the Trustee from Liability.IS IT WORTH IT?61