Wednesday, April 30, 2008

Investing Prudently Amid Turmoil

Regardless of how a trust is structured, a trustee has a fiduciary duty to invest the trust assets. With all the chaos in the markets these days (look here for the gloom), a trustee may be inclined to look at their mattress as the safest investment vehicle. As any student of the markets knows, however, there are always opportunities amid the crises.

Take stocks, for example. While the Dow has dropped about 10% from its all-time high of 14,279.96 on October 11, 2007, it is only down 2.4% from where it was a year ago. And the U.S. isn't the only place to invest money. European stocks have been pounded over the past year, but the markets in South America, South Africa, Hong Kong, Indonesia and India have all performed very well (this doesn't however take into consideration any erosion of returns cause by the declining dollar, which is another float in the parade of horribles).

Commodities, which include oil, corn and gold, are almost universally way up. It's impossible to know when anything is at the top of its price, but I think it is safe to say that the current upward price pressure cannot last much longer. Once the prices get too high, demand will fall off, and the prices will begin to drop. There is already some indication that demand for gasoline, which is comfortably over $4.00 a gallon here in California and is the only reason anyone cares about the price of oil, is beginning to fall. Commodities such as corn, soy and other food crops will probably be the object of government intervention at some point if their prices don't level off, and there is some amount of speculation built into their price because of their potential as an alternative to oil as a fuel source.

What is a trustee to do? Don't panic, you are a trustee after all. Look to the professionals. Ask your financial advisor for help. If you don't have one, get one. Make sure the trust allows you to hire an advisor and to pay them out of the proceeds of the trust. It's part of your job as a trustee.

I could go on about how and where to look for opportunities. They are out there. If you are a fiduciary, it is important to surround yourself with a trusted financial advisor who can help navigate these waters, which seem filled with sharks, icebergs, alligators, and what have you.

The mattress is never as good as it looks, anyway.

Saturday, April 26, 2008

Of Trusts and Unitrusts

I have been given the opportunity to represent a trust regarding the possible conversion of the trust to a unitrust.

In California, as elsewhere I suspect, unitrusts are used to take advantage of federal tax laws related to the powers of trustees to invest the trust funds. There are other reasons for unitrusts as well.

In my earlier post, I talked about the "essence of estate planning." I defined this essence as carrying out the intentions of the clients, whether they are the settlors, the beneficiaries, or the trustees. What if your client is the trust itself? What does that mean? How do you determine what the best interests of the trust are? Chances are the beneficiaries may be at odds, as income and principle beneficiaries often are.

Probably the most challenging thing about estate planning is walking the fine line between carrying out the intentions of the trustor and minimizing potential conflict with the beneficiaries. The system has many options for addressing this after the fact. Conversion of a traditional net income trust to a non-charitable unitrust is one of those options.

Again, keep your ears open. Listen to all the parties. What are they saying? What is it that they want?

Wednesday, April 23, 2008

The Essence of Estate Planning

Americans spend a great deal of their lives trying to amass financial wealth. They work very hard at it. Some achieve it, while many, if not most, do not. It is the American way, or so it seems.

For those who have achieved some measure of financial wealth, a large amount of time is spent thinking about ways to keep as much of that wealth as possible. To do this, people employ a staff of accountants, financial planners, attorneys, and others to maximize the money they have, and minimize the money that they have to pay to others (i.e. taxes). These professionals spend their time (and their client’s money) preparing ways to make as much money as possible while keeping as much as possible out of the hands of the government. Sometimes, in their zeal to avoid taxes, these professionals get themselves and their clients into trouble. Sometimes these schemes are so complex that it takes a small army of government workers to figure out how they were structured.

We refer to estate taxes as “death taxes.” Trusts are structures with the primary purpose to avoiding paying taxes, or at least to minimize the tax impact. The IRS will find a particular scheme to be an illegal tax shelter if it was prepared with the primary intent of avoiding taxes, and there is no legitimate non-tax purpose. So we find ways to explain away these tools as being primarily for some other purpose. But let’s be honest, if it weren’t for taxes, there would be little or no demand for GRATs, QTIP trusts, marital deduction trusts, or QPRTS (if this alphabet soup is foreign to you, don’t worry. You are not alone).

Why am I going on about this? Because sometimes you have to just have to give it up and pay some taxes. Some really rich people have been talking about how too much effort has been spent on tax avoidance, and how the tax code is rife with loopholes that allow people to pay a proportionately low share of taxes. These people include Warren Buffett (really rich), and Bill Gates, Sr. (not as rich as his son, but still pretty rich).

Most Americans don’t have to deal with this issue in their estate planning because they don’t have that much money in their estates. Their main concern is making sure they leave some money to friends and loved ones, and making sure that their wishes are carried out properly. That is the essence of estate planning.

I have spent a lot of time talking with other trust and estate attorneys with clients who have large estates, and most of what they talk about is how the beneficiaries and heirs complain over getting “their share” of the money, and complaining about how others are getting too much, or how others are exerting too much influence over the trustee, or how the trustee isn’t doing their job properly (read: maximizing their take). It is doubtful that the person whose money they are fighting over intended such a result. As attorneys, it is our job to structure a plan that carries out the client’s wishes while minimizing potential family discord. Easier said than done, but it is the only way to accomplish the true essence of estate planning.

Tuesday, April 22, 2008

Yes, It's Earth Day

Estate planning and the environment are not as far apart as you would think. Actually, they are pretty far apart, but in this post I will try to find a link.

Today is Earth Day, so we celebrate our home planet and lament what a mess we've made of it. For one day, we'll walk the two blocks to the store instead of drive, take public transit to work, maybe pull those abandoned tires out of the creek bed. Or maybe not.

If you read the New York Time, you probably saw the Magazine section last Sunday and its coverage of all things environmental. In it, there was an article about the no impact man (I sometimes feel like the no impact man, but for different reasons). Anyway, his challenge for a year was to live without generating any environmental impact. So no electricity, no garbage, walking everywhere (he lives with his wife, child, and dog in Manhattan, so it is a lot easier than those of us who don't. At least for the walking part.) The fact is, that if we change how we look at the world, and what we expect from it, then we begin to realize that a great many things are possible. We also begin to see how the decisions we make can have consequences (good and bad) that we may not have thought about when we made them.

I used to drive to the post office box I use for work. Yesterday, I realized that it was only 0.67 miles away from our house. I cannot justify driving anywhere that is less than one mile away, so I have now resolved to walk to the PO box (some more encouragement for this: I also filled up my 23 year-old diesel BMW - at $4.55 per gallon!)

Estate planning is all about thinking ahead and predicting the future - For both the attorney and the client. The decisions made today about your estate will affect future generations in ways you may never imagine. You may be mad at your children, so you respond by cutting them out as beneficiaries to your plan. In doing so, however, you will virtually guarantee a trust battle when you die.

Did the people who built the houses in this photo think about where the people who would live in them would work? Where they would go shopping? How they would get there? They probably assumed that they would just drive. As you can see in the photo, there is construction on the highway. It is being widened to accommodate increased vehicle traffic. The car in the photo is going about five miles per hour. The people who built the houses were thinking about providing housing and making money. They didn't think about increased traffic, smog, congestion, asthma, global warming, etc., but all of these things have come about because of their planning.

Estate planning is like a puzzle. The challenge is to make the pieces fit together. This requires thinking about how the plan will take effect. Similar to how we should think about the environment (since, again, this is Earth Day - so recycle your batteries!). A decision today will affect future generations in ways you may not realize right now. Think. Think. Think.

Saturday, April 19, 2008


The current issue of Harper's includes an article about how we have strayed from our understanding that the world and its resources are finite, that our knowledge and understanding are finite, and how we must re-learn to understand limitations and to work within them. Wendell Berry uses the example of artists, who use their creativity within the limitations of their chosen medium, e.g., a painter who is limited to colors and types of paints, and the size of the canvas. The challenge is for all of us to understand our limitations, and to work and think creatively within those limitations.

Trust and estate law, as is all law, is defined by its limitations. The challenge for an estate planning attorney is to craft a plan that accomplishes the goals of their client as efficiently and creatively as possible. Attorneys like to think that they know everything, and can solve any problem. This often leads to promising results for their client that are either not really possible, or that create problems that don't show up for many years.

Lawyers can't do everything. Our challenge is to listen to our clients and craft solutions based on what we hear. This does not need to result in piling on clauses in a trust document that turn it into a long, unreadable tome that tries to cover every base whether it needs to be covered or not, and may create more problems than it solves. For example, does a trust need a long, detailed instruction on creation of a special needs trust for a potential beneficiary when none of the intended beneficiaries have special needs? Should a trust contain boilerplate clauses to reduce estate tax exposure when the size of the estate is not likely to trigger the estate tax? In the litigation context, should a trust or will contest for an omitted child be attempted where there is only scant evidence that the parent lacked capacity or was unduly influenced?

Understanding the limitations of what we can do for our clients, and the limitations of our scope of representation for our clients, and drafting a thoughtful and creative solution. That makes us better lawyers, and it helps our clients in the long run, even if it sometimes means telling a client something that they might not want to hear.

Thursday, April 17, 2008

More on Listening

Further to yesterday's post, Blawgletter talks about streamlining litigation. The context is business litigation, but the concept is the same: don't just do what you've always done before. Listen carefully to what you client is saying (and what he or she is not saying), and determine what they want. Then craft your litigation plan to achieve the result as quickly and efficiently as possible.

In the context of trusts and estate litigation, this may mean restructuring a trust document to allow family members to receive something where they were originally omitted as beneficiaries. At the Alameda County Bar Association Estate Planning Committee meeting I attended yesterday, the topic drifted to trust litigation. An attorney had a client who was a beneficiary of her husband's trust (husband is still living). She was concerned that her husband's children from a previous marriage were going to challenge the trust, which did not provide anything to them. One of the attorneys suggested finding a way to restructure the trust document to include a gift to the kids, and avoid the messy and expensive litigation that is likely to occur. The kids want something because they feel left out. It might not even be that much, but you have to start by listening to them. The spouse wants to avoid litigation and confrontation with the children. What does the husband want? If he wants to make his wife happy (which presumably does, and is why he is giving her everything), then he may be willing to listen to the options.

As litigators, it's too easy to fall back on the tools of our trade: pleadings, threatening letters and discovery, to "solve" problems. This piles up expenses and animosity and stress for our clients (and ourselves as well). Listening can avoid all this, and elevate the level of our practice.

Wednesday, April 16, 2008


What do clients really want? In Estate Planning, when a client comes to their attorney for advice and to prepare an estate plan, is it avoiding estate and gift taxes that they want? Do they want to favor a certain person? Punish a certain person? The biggest challenge for any attorney, it seems, is to keep their ears open and their mouths shut. But doing this will work wonders for the relationship, because ultimately, attorneys are in the service industry. Providing a service means listening to a customer's needs and using our knowledge and experience to counsel them.

Sometimes that means doing things that stray from the script. Forget the script. Throw it away. It's only made out paper, after all, not stone.

(ok. put the script in the recycle bin, not the trash.)

Back From Outer Space

Loyal Readers:

I have not been tending to my blogging duties lately, and for that I apologize. Part of my time away has been spent studying the blogs and the web presence of others (lawyers and non-lawyers alike)for ideas about how to make this blog better. I have tons of ideas and plans.

Lots of things coming up, and lots of things to talk about. I will be attending the Alameda County Bar Association Trust and Estate section's Estate Planning meeting in a few minutes. I'll post about that when I return (live blogging is one of the plans I have, but for now it is just a plan).

Stay tuned. I promise to let no dust gather here in the future.