By Steven J. Oshins, Esq., AEP (Distinguished)

Corporate Trustee

A corporate trustee is generally either a bank trust department or a trust company.  The employees at these companies have been trained to know how to administer trusts, how to account for their actions and to deal with beneficiaries.  They are licensed and bonded and therefore there is often recourse if something goes wrong.

The Argument for Corporate Trustees

Individuals will often neglect to take care of their responsibilities such as paying bills on time or following the rules required by the language in their trust agreements.  Individuals also sometimes steal.  Corporate trustees, except in very limited instances, do not steal since they have better internal safeguards.  This is not to say that every individual neglects and/or steals, but it does happen much more than it should.

The decision to use a corporate trustee instead almost certainly removes these problems.  Each client must make his or her own decision about whether to put all of the control, some of the control or none of the control in the hands of a corporate trustee.  This is a discussion that the client can have with his or her advisor during the planning process.

When to Use a Corporate Trustee

There is a place for corporate trustees and there is a place for non-corporate trustees.  For the clients who have trusted family members, including beneficiaries who should be given as much control as possible, those clients will generally use the corporate trustee purely to obtain jurisdiction in a favoured trust situs.  But for other clients, a full-service corporate trustee is preferred for the reasons noted above.

General Opportunities using Advanced Types of Trusts

There are many opportunities to help our clients using certain types of trusts.

1. State Income Tax Savings Opportunities: After the 2017 Tax Act, the state and local income tax deduction (also known as the “SALT deduction”) against federal income taxes is now limited to $10,000 per year.  This has magnified the benefits of using special types of non-grantor trusts to avoid state income tax.  Financial advisors who are savvy enough to suggest to their clients that they hold their brokerage accounts in such trusts are often able to invest the brokerage accounts without the state income tax drag that reduces the after-tax returns without this planning.
2. Asset Protection Opportunities: Perhaps the greatest opportunity to separate oneself from the competition exists in the area of asset protection planning simply because so few planners even mention asset protection planning to their clients.  Especially for financial advisors, this is a huge mistake because the first assets creditors go after are the debtor’s liquid assets.  If the debtor owns a brokerage account, some real estate and a business, the creditor first takes the liquid assets.
3. Estate Tax Savings Opportunities: It seems that every time Congress meets we see substantive changes to the Federal Estate Tax.  Decedents whose estates will be subject to Federal or State Estate Taxes can avoid many of these taxes by using certain trusts that are designed to keep assets out of the decedent’s taxable estate.  And just like with creditors, the first assets that are generally used to pay estate taxes are the liquid assets, such as the brokerage account that the financial advisor is (was!) managing.

Specific Opportunities

Following are some of the most important opportunities we can take advantage of by using special types of trusts.

Opportunity #1:  Incomplete Gift Non-Grantor Trust

Depending upon the person’s state of residence, a resident of a state with a state income tax can often place assets into an Incomplete Gift Non-Grantor Trust (“ING Trust”) and avoid state income taxes on the ordinary income and capital gains income in the person’s home state.  The trust creator can be a beneficiary of this trust.  It avoids gift taxes since transfers to the trust aren’t complete for gift tax purposes, yet transfers to the trust are considered owned by a non-grantor trust where the trust pays the taxes on income earned and kept in the trust and which can avoid state income tax.  This technique seems to have made the largest post-Trump Tax Act leap of any income tax technique and therefore it is nearly mandatory that every planner have at least a general knowledge of this opportunity.

Opportunity #2:  Completed Gift Non-Grantor Trust

Just like the ING Trust, a completed gift non-grantor trust can often be designed to avoid state income taxes on income earned by the trust and retained in the trust.  The difference is that the third-party version is generally set up for beneficiaries other than the trust creator and assets transferred to it are completed gifts for gift tax purposes.  The trust creator’s spouse can be a beneficiary as long as an adverse party must approve distributions made to the spouse.  And if this trust is established in a jurisdiction that has Domestic Asset Protection Trust statutes, even the trust creator can be a discretionary beneficiary, but just like with the spouse, distributions to the trust creator must be made with the approval of an adverse party.

Opportunity #3:  Domestic Asset Protection Trust

There are 19 domestic jurisdictions that have statutes allowing a person to set up an asset protection trust in which the trust creator is a discretionary beneficiary.  Although there are 19 such states, almost all of these trusts are set up in the top-tier states since those statutes are more protective and more flexible.

Opportunity #4:  Hybrid Domestic Asset Protection Trust

For a client who doesn’t reside in the chosen asset protection jurisdiction, the more advanced asset protection planners use a special twist on this technique called a Hybrid Domestic Asset Protection Trust (“Hybrid DAPT”).  The reason for this is that there is still almost no case law after more than two decades of DAPTs saying for a fact that it protects the assets for a trust creator who isn’t a resident of the chosen jurisdiction.  One very rational conclusion is that this is because the so-called “fear factor” alone causes creditors to either settle or go away altogether.  But still, to the extent the planner can better protect the trust assets and also create an even greater fear for the creditor, the potential settlement number significantly moves in the debtor’s favor, not to mention the near-certainty of a favorable judgment should the case go through the court system.  Enter the Hybrid DAPT!  The Hybrid DAPT is a third-party trust, meaning the trust creator isn’t a beneficiary.  Therefore, the income can generally be distributed to the trust creator’s spouse who can share it with the trust creator.  But just in case the trust creator ever needs to be added as a beneficiary, there is an “escape hatch” via the trust creator’s power to add a trust protector who can add additional beneficiaries, including adding the trust creator (which would be extremely rare because there are so many better ways to access the trust access before resorting to this in an extreme emergency).  Since the trust will almost always maintain its status as a third-party trust, it gives the trust creator the closest to 100% asset protection that one can obtain.

Opportunity #5:  Dynasty Trust

For those clients who might have an estate tax, a Dynasty Trust can be created in a top-tier trust jurisdiction in order to avoid estate taxes for multiple generations, thereby preserving the trust assets for each successive generation to the extent they have not otherwise been distributed from the trust to the beneficiaries.  Although Dynasty Trusts are best-known for their estate tax avoidance capabilities, they can also be drafted to protect the trust assets from the creditors and divorcing spouses of the beneficiaries and to allow for shifting income tax to beneficiaries who are in lower federal and state income tax brackets or to accumulate income without subjecting that income to any state income tax.

Opportunity #6:  Decanting Trusts

Many people mistakenly believe that irrevocable trusts are always irrevocable.  That is the case in many trust jurisdictions, but in other trust jurisdictions the trustee can “decant” the trust by creating a new irrevocable trust for the benefit of one or more of the same beneficiaries and distribute the assets from the current trust into the new trust with different terms.  Historically this was used to fix drafting errors.  However, more recently decanting has become a way to enhance the trust terms in order to accomplish various tax savings, creditor protection opportunities and other possibilities described in this article.  The top-tier trust jurisdictions generally have the most flexible and private decanting statutes and therefore even a trust that was sitused in a different state can often be moved to the top-tier state and then decanted using the superior decanting opportunities often found in the more flexible jurisdictions.

Summary

There are many reasons to use a corporate trustee.  It depends upon the client’s needs and objectives.  This article provides a few good reasons to do so and also describes a number of the most important uses for trusts, whether for tax savings purposes or for creditor protection.

RELATED EDUCATION

If you would like to learn more about some of the techniques discussed above, there are a number of educational programs and marketing kits that Steve Oshins has put together for us that may be of interest to you.

• The Hybrid DAPT
• Asset Protection Other than DAPTs: Overlooked Alternatives That Will Grab Your Clients’ Attention!
• The NING Trust: Saving Significant State Income Taxes for Your Clients in High State Income Tax Jurisdictions
• Advanced-Level Estate Planning Sales & Marketing Kits
• Steve’s FREE State Rankings Charts

ABOUT THE AUTHOR

Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor. Steve was also named one of the Top 100 Attorneys in Worth and is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates Lawyer of the Year in 2012, 2015 and 2018 and Tax Law Lawyer of the Year in 2016 and 2020.  He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.