Planning With Trusts

1. Planning With Trusts • How to Raise Responsible Rich KidsThe Eroding Protection of Trusts in DivorceRevocable Trust Planning for Transplants • Hawaii Estate Planning Council • May 26, 2016 • Susan von HerrmannPartner

2. Do Trusts Create Trust Fund Babies? • The dark side of wealth • Preparing the next generation • Distribution standards • Other distribution considerations • Guidance to the fiduciary • Incentive trusts—do they work? • Selection of trustees

3. The Dark Side of Wealth • Many wealthy parents fear that their descendants will be spoiled, lack basic life skills, live beyond their means and fail to understand prudent wealth management • Shirtsleeves to shirtsleeves in three generations

4. The Challenges • Raising well adjusted children in an affluent family can be difficult where motivation to succeed not driven by necessity • Money can lead to self indulgence and an expectation of always getting what is desired • Children in wealthy families may face emotional and family issues similar to those experienced by children in low income families

5. Preparing the Next Generation • Children must be trained to receive wealth • Communication is key; kids know more than parents think • Start early; money personalities largely in place at 14 and solidly entrenched in 30’s • Tell the story of family legacy and shared values • Teach the value of a dollar • How to invest and make investment decisions • The role of trusts and trustees

6. Distribution Standards • Typically, the wealthier the family, the more customized the distribution standard • Consider tax issues; typically a beneficiary who is also trustee should be limited to an ascertainable standard • If trustee has discretion, decisions will generally be enforced unless there is an abuse of discretion or bad faith

7. Distribution Standards • Support and maintenance = normal living expenses at standard of living during settlor’s life • Legal obligations of support may be part of living expenses • Best interests -- permits a higher standard of living • “Education” typically includes college but not grad school

8. Distribution Standards • “Health” includes all routine medical care, medication, surgery and hospitalization, as well as expenditures for extended nursing care and mental health • “Emergency” = restrictive terminology; may not be ascertainable standard • “Happiness”= expansive • “Sole and absolute discretion” may or may not be enforced literally • “Standard of living”—be clear about time period

9. Other Distribution Considerations • Unequal distributions should be explicitly authorized • In a trust benefitting multiple generations, it’s best to specifically establish priorities • Consideration of a beneficiary’s other assets • the most flexible approach is to permit but not require

10. Guidance to the Fiduciary • A list of permitted purposes for which distributions can be made may not be enough • Consider authorizing the trustee to consider a beneficiary’s personal characteristics or to require certain information from the beneficiary • With a best interests standard, consider a letter of wishes or an ethical will

11. Incentive Trust Provisions • Designed to encourage certain behavior or achievement or to reward beneficiaries for reaching certain goals • Viewed by some as inflexible or discriminatory • Consider guidance that focuses on values and principles and gives the trustee discretion to reward those behaviors

12. Selection of Trustees • Trustees play a critical role— • investment/management, distribution and interpretation • The use of co-trustees can leverage various strengths; duties can be divided • Consider use of an advisory committee • Mimic outright distribution by allowing beneficiaries to be sole trustee at a certain age • Include appointment/removal powers

13. Eroding Protection of Trusts in Divorce • Dividing the economics upon divorce • Treatment of trusts in divorce in Hawaii • Treatment of trusts in divorce in other states • Estate planning responses • Prenuptial planning • Postnuptial planning

14. Dividing the Economics • Resources subject to division: (i) property settlement; (ii) support/maintenance; (iii) child support • What is property of the marriage and what is separate? • In community property states, property ownership rules control • In other states, actual ownership governs; marital property only relevant upon divorce

15. Treatment of Trusts in Divorce • The rules in Hawaii • The rules in other jurisdictions • The law of the jurisdiction governing the divorce will control • Characterization of property • Whether trust interests are considered property of the beneficiary

16. Estate Planning Responses • Powers of appointment • May prevent assets from being considered available • May be used to alter a future beneficiary’s interest • Revocable trust planning prior to marriage

17. Prenuptial Agreements • Determines respective property rights in the case of divorce, death or both • Requirements for validity • Written and signed • Voluntary • Consideration • Fairness • Disclosure

18. Post-Nuptial Planning • Requirements similar to those for prenuptial agreements • Adequacy of consideration is an issue, as is whether the agreement is signed in contemplation of divorce • Best to deal with these issues before the wedding, particularly when family assets are involved

19. Planning for Transplants from Community Property States • The basics of community property • Why it’s important to preserve community property • Estate planning tips

20. The Basics of Community Property • In the absence of a premarital agreement, assets acquired by a couple through their efforts after marriage = community property • Gifts and inheritance, as well as assets owned on the date of marriage = separate property • The character of property can be changed through transmutation • Unless waived, there is a separate property right of reimbursement in the event of divorce

21. The Basics of Community Property • Community generally liable for debts of the couple • Title not dispositive • Presumption that property is community property • Uniform Disposition of Community Property Rights at Death Act

22. Why it’s Important to Preserve CP • Community property subject to favorable income tax treatment • 100% of the community property receives a basis step up to FMV at the first death • With proper structuring, assets will receive a second step up at the second death

23. Estate Planning Tips • Preserve community assets in the community property trust • Consider separate Hawaii trusts for non-community property acquired and to support residency • Update powers of attorney and advance health care directives on Hawaii forms • Consider tenancy by the entirety • Consult California counsel on property tax issues

24. Planning With TrustsHow to Raise Responsible Rich KidsThe Eroding Protection of Trusts in DivorceRevocable Trust Planning for Transplants Hawaii Estate Planning Council May 26, 2016 Susan von Herrmann, Perkins Coie LLP svonherrmann@perkinscoie.com • How to Raise Responsible Rich Kids • The Eroding Protection of Trusts in Divorce • Revocable Trust Planning for Transplants