2. DETECTING TRUST PROBLEM AREAS SHANE T. MCCALL VICE PRESIDENT & TRUST COUNSEL FIRST NATIONAL BANK HUTCHINSON, KANSAS OCTOBER 2, 2015 IOWA TRUST ASSOCIATION 1

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5. PAT DOWN THE TRUST 4  P – PARTIES  A – ASSETS  T- TERMS

6. CO-TRUSTEES “GET R DONE” 5  ITC § 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.

7. PARTIES 6  CO-TRUSTEE  Can Trustees Delegate to outside Agents? § 633A.4206. Delegation A 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 agent’s actions. A trustee who complies with Sections 1 and 2 is not liable to the beneficiaries or the trust for the agent’s actions.

8. PARTIES CO-TRUSTEES (DUTIES) 7  1. 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.

9. PARTIES 8  GRANTOR INFORMATION  Why is the Grantor or Former Trustee Coming to You?  TAX RETURNS 3 YEAR STATUTE OF LIMITATIONS  FAMILY HISTORY  FINANCIAL STATEMENT  BENEFICIARIES  How Many Beneficiaries?  Do you know the Beneficiaries?  What relationship do they have with the Grantor, other Beneficiaries, or your department personnel?

10. PARTIES 9  SPOUSES OF BENEFICIARIES  Many 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.

11. PARTIES 10  FAMILY ATTORNEY OR ACCOUNTANT  TENANTS  INVESTMENT REPRESENTATIVE  BUSINESS PARTNERS

12. PARTIES 11  PREVIOUS TRUSTEE  RECEIPT AND RELEASE WHEN LETTING GO  FAILURE TO DISCOVER AND CORRECT (Look before you cross)

13. PARTIES 12  PREVIOUS TRUSTEE  § 633A.4108. Delivery of property by former trustee Unless 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.

14. Trust Protector 13  Powers are a matter of Contract  Power to Direct  Trustee to do Certain Things  To Veto a Trustee’s actions  Requiring the consent of the Protector  Power to Deal with Unforseen Circumstances

15. Typical Trust Protector Powers 14  Remove, appoint or add a Trustee  Direct, veto or consent to investments  Modify or Amend the Trust  Terminate the Trust  Settle disputes between Trustee/Benes  Change the Situs of the Trust

16. TRUST PROTECTOR V. GRANTOR  A 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

17. Is a Trust Protector a Fiduciary? 16  Alaska 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.

18. UTC 808 – Power to Direct 17  Does 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.

19. ASSETS 18  Real Estate  Inspection (Waive if Grantor’s residence)  Appraisal  Liability and Casualty Insurance  Taxes  Title Insurance  Operating Capital

20. ASSETS 19  CLOSELY HELD STOCK  Business Succession Plan Buy/Sell Agreement Valuation Clause  LLC UNITS/SHARES  Management Agreement  LIVESTOCK  MINERAL INTERESTS

21. ASSETS 20  PROMISSORY NOTES  Are 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?

22. SCHEDULE “A” 21  AFTER ACQUIRED PROPERTY  ALL INCLUSIVE  PERSONAL PROPERTY STATEMENT  FORMER JOINT PROPERTY

23. DISCRETIONARY DISTRIBUTIONS  Nothing 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. 22

24. TERMS 23  DISCRETIONARY DISTRIBUTIONS  Creditor Protection (Beneficiary) Bank as Trustee  Inclusion (Trustee/Beneficiary) Beneficiary as Trustee

25. Fully Discretionary Ascertainable Standard 24 “The Trustee shall have full discretion to distribute trust assets to, or for the benefit of any beneficiary, to the exclusion of others, for the beneficiary’s 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.]

26. Ascertainable Standard 25  Health, Education, Maintenance, Support  Protect Trustee/Beneficiary from Inclusion  Assist the Trustee (There is available guidance as to what constitutes HEMS) (See Definitions in Outline)  Its Safe

27. Ascertainable Standard v. Fully Discretionary Ascertainable Standard 26  “Trustee shall make distributions of principal for beneficiary’s HEMS.”  Lacks Discretion and thus Creditor Protection  “Trustee in their absolute and sole discretion may make distributions of principal for beneficiary’s HEMS.”  Ultimate Creditor Protection

28. AVOID INCLUSION 27  Use 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 beneficiary’s estate for Federal Estate Tax determination.

29. ROUGE STANDARDS 28  AVOID ROUGE STANDARDS  “Necessary or Appropriate” Reimbursement for Income Tax Paid

30. Why Use Discretionary Distributions  Support of a Beneficiary  Asset Protection from the Beneficiary or Creditors of the Beneficiary  As a Yield Sign before distributing funds to a Beneficiary 29

31. TERMS 30  TERMS CONTRARY TO STATE LAW  Does the Trust grant authority to the Trustee, excuse the Trustee, or direct the Trustee to act contrary to State Law or the UTC?

32. Exculpatory Clauses 31  Trust provision designed to relieve the trustee of liability for certain kinds of breaches of trust.  Often these clauses broaden the scope of a trustee’s permissible conduct, rather than excuse the trustee for violating their duty.

33. Expanding the Trustee’s Authority 32  To hold concentrations of stock, units…..  To retain farm ground despite the return  To expand a position in a business  To waive a Conflict of Interest by Trustee  To invest in non-traditional investments  To retain wasting assets

34. Authority 33  Restatement of Trusts (Second) § 222  Terms of the trust can relieve a trustee of liability for Breach of Trust.  Iowa Code 633A.4505  Valid so long as doesn’t allow Trustee to act in bad faith, with indifference to the interests of the beneficiaries, or for the Trustee’s gain.  Valid so long as it wasn’t inserted by threat  If 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.

35. TERMS 34  MERGER CLAUSE  MERGER  Upon 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.

36. KANSAS MERGER ADMINISTRATIVE CODE 35  9-1606: 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. 9-1606

37. IOWA MERGER ADMINISTRATIVE CODE 36  Rule 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.

38. TERMS 37  NAME OF TRUST – Does the Name of the Trust include the words, “Living or Revocable”  WHEN DOES TRUST BECOMES IRREVOCABLE  Terms 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?

39. TERMS 38  RIGHTS OF THE SURVIVING SPOUSE  Marital 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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41. Power to Alienate Homestead IOWA CODE 561.13 40  The principal’s 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 behalf…or  The principal’s spouse acknowledges in writing their consent for their AIF (so long as it is the other spouse) to alienate the principal’s interest.

42. TERMS 41  Consent 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.

43. TERMS 42  No 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.

44. TERMS 43  POWER OF APPOINTMENT  General  Limited or Special

45. General v. Special Power of Appointment 44  a 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.

46. General v. Special Power of Appointment 45  A 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 powerholder’s estate for Federal Estate Tax purposes.

47. PROBLEM AREAS  Multiple Beneficiaries of same trust Iowa Code 633A.2707 Combination Division Preserve Purpose Doesn’t Impair Interest (Notice?)  Advancements 46

48. ADVANCEMENTS 47  Time 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?

49. ADVANCEMENTS 48  What if an Advancement made during the life of the Grantor (promissory note) exceeds the value of the advanced beneficiary’s share?  Family Settlement Agreement  Assign the note to Survivor’s Trust and amend  Assign the unpaid portion of the note to the other beneficiaries (Except Trust says the note shall not be treated as contractual)

50. ADVANCEMENT 49  If a family trust provides for the spraying of income and distributions of principal among the grantor’s children and grandchildren during the lifetime of the children; and upon the death of a child the distribution of the deceased child’s 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.”

51. Real Estate Loan 50  Appraisal  Inspect the Collateral  Credit Report  Consent from Beneficiaries  Mortgage Policy  Mortgage Note  Mortgage

52. PROBLEM AREAS CONT. LOANS 51  Authorized by State Law or Trust  Duty to all beneficiaries  Collection Options  Creditworthiness  Securing the loan  Can an unpaid balance be treated as an advancement  Committee Approval  Written Note (binding upon heirs…)

53. PRECATORY LANGUAGE 52  Often 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 Memorandum 201126030 – “It is my desire” binding as mandatory when referring to the Trustee and Precatory when referring to a beneficiary.

54. AVOID PRECATORY WORDS IT IS MY DESIRE, HOPE, WISH, INTENT….

55. USE MANDATORY WORDS 54  SHALL, WILL, MUST; I GIVE, DEVISE (RE), BEQUEATH (PERSONALTY), TRANSFER, VEST….

56. 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? 55

57. HELPING YOURSELF 56  Read the Document if available  Identify the Standard and visit with the Grantor and Attorney  Consider Power of Appointment and Creditor Protection and Inclusion Protection  Require 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.

58. ACCEPTANCE IN IOWA 57  § 633A.4101. Acceptance or declination to serve as trustee  1. 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.

59. ACCEPTING OR DECLINING TRUSTEESHIP (UTC 701) 58  Substantially Complying with the Method of Acceptance  Exercising Powers or Performing Trust Duties  Otherwise Indicating Acceptance  Accepting Delivery of Trust Property  Registering the Trust  Without Accepting a Designated Trustee may:  Act to Preserve Trust Property  Inspect Trust Property for Potential Liability

60. POWER TO REMOVE 59  Who has the Power to Remove the Trustee?  YOU SHOULD KNOW WHO THESE PEOPLE ARE!

61. WHEN IN DOUBT 60  DOES 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.

62. IS IT WORTH IT? 61