Tag Archive for: fiduciary

Spencer Turner | Farrow-Gillespie Heath Witter

Those Pesky Trusts! A Brief Primer on Terminating Unwanted Trusts

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Spencer Turner | Farrow-Gillespie Heath Witter

Estate planning attorneys often wax poetic about the multitude of advantages found in a simple trust instrument. They’re not wrong. A well-crafted trust is an excellent vehicle for addressing a client’s concerns under a variety of different circumstances. Clients may place assets in a trust for tax benefits, creditor and divorce protection, planning for incapacity, family dynamics and a host of other reasons.

Yet no trust exists without a level of complexity and sophistication. Every trust has a trustee who must fulfill strict fiduciary duties and carefully manage the trust assets for the beneficiaries. The terms for distributing property from the trust may involve difficult calculations or restrictive standards that are not easily met. In some cases, a trust instrument’s vague provisions may leave both the trustee and beneficiaries confused as to how to proceed with the trust administration. Eventually, these complexities may become overly burdensome. Life circumstances may also render the trust’s intended benefits and purpose unnecessary.

Whatever the reason, trustees and beneficiaries often find themselves stuck with a trust that no longer meets their needs. But many of these trusts are or have become irrevocable and cannot be unilaterally terminated. Trustees and beneficiaries should not despair, however. Texas law has recognized several different ways to modify or ultimately terminate those pesky trusts.

A. Uneconomical Trusts

The Texas Trust Code enables a trustee to terminate a trust whose assets are valued less than $50,000. The trustee must consider the purpose of the trust and the nature of the assets, and ultimately determine that the value of the assets is insufficient to match the costs of continued administration. A common example of this occurs when a trust established under the provisions of a deceased person’s will receives only minimal funding from the deceased’s estate. The amount held in trust often does not justify the time, effort, and cost in administering the trust.

B. Combining Separate Trusts

Typically, the Texas Trust Code does not allow the outright termination of a trust without petitioning a court of proper jurisdiction for approval. But its provisions do allow for combining two or more separate trusts into a single trust without a judicial proceeding. This is only permissible where the combination would not impair the rights of any beneficiary or prevent the trustee from carrying out the purposes of either trust. Again, this is a great tool for consolidating trusts established under a deceased person’s will.“

C. “Decanting”

Another alternative to judicial termination of a trust, “decanting,” is the distribution of trust assets from one trust to a new trust that may have slightly different terms. The helpfulness of this provision of the Texas Trust Code largely depends on how much discretion the original trust grants the trustee. An attorney will need to carefully evaluate the level of variance the new trust may have under the circumstances.

D. Judicial Termination

A trustee or beneficiary may petition a court of proper jurisdiction to order the termination or modification of a trust. However, the grounds to do so are limited and specifically outlined in the Texas Trust Code. Petitioners should not expect a quick and easy process; terminating a trust in a court of law requires careful preparation, evidence, and a willing judge.

E. Termination by Agreement

Texas case law has recognized that in certain instances the settlor, trustee, and beneficiaries of an irrevocable trust may collectively agree to terminate the trust. This is a great tool if all parties are agreeable. But it does have its drawbacks. If the settlor is dead, then no agreement may be reached. Furthermore, an incapacitated beneficiary may not enter the agreement, further halting any opportunity to proceed under this method.

Trusts are excellent vehicles to achieve any number of tax, asset protection, or family dynamics-related objectives. At some point, these irrevocable trusts may become burdensome and unnecessary. An attorney may use the methods mentioned above to terminate or modify those pesky trusts.

Spencer Turner | Farrow-Gillespie Heath Witter
Spencer Turner

Spencer Turner is an associate attorney at Farrow-Gillespie Heath Witter LLP. Since obtaining his license to practice law in 2016, Mr. Turner primarily has focused his legal efforts in the trust and estates arena. He has been featured as a speaker on various aspects of the probate process at several seminars hosted by the National Business Institute. Spencer graduated from Baylor University School of Law.  

Investment | Farrow-Gillespie & Heath

Uncertainty Continues Around “Fiduciary Rule” Protections for Retirement Investors

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The last 40 years have seen a marked change in retirement benefits, with fewer employer-sponsored defined benefit plans, more defined contribution plans (including 401(k) plans and Simplified Employee Pension (SEP) plans), and a proliferation of individual retirement accounts (IRA). These changes have raised questions among regulators about the protections available to employees who are now increasingly responsible for managing their own retirement funds.

The US Department of Labor’s Fiduciary Rule

The US Department of Labor (DOL) wrote rules in the 1970s to regulate trustees of pension funds and those providing investment advice to the funds as fiduciaries. DOL began working on updated regulations under President George W. Bush and again under President Barack Obama to address a perceived gap between the standards applied to pension fund investments and to newer forms of retirement accounts. The resulting “Fiduciary Rule” became final in April 2016 and was scheduled to phase in by January 1, 2018.  President Trump asked for a review of the rule shortly after taking office, and implementation has been delayed.

A key feature of the Fiduciary Rule imposes a fiduciary standard not only on investment advisers (who provide ongoing advice for a fee) but also broker-dealers and insurance agents who may recommend a single security or transaction to a retirement investor. The Fiduciary Rule requires all of these professionals to recommend only transactions that are in the best interest of the retirement investor. Under the Fiduciary Rule, unless an exemption applies, professionals cannot receive commissions for those transactions, because commissions create a conflict of interest between the professional and the investor. Finally, the Fiduciary Rule exempts commissions on the sale of fixed rate annuities under more lenient provisions than fixed indexed and variable annuities.

The Fiduciary Rule in Court

Because brokers and insurance agents are traditionally paid on a commission basis per transaction, rather than receiving fees for ongoing advice, the DOL’s Fiduciary Rule raises concerns among those professionals about costs of compliance and potential lost revenue. Several lawsuits have challenged provisions of the Fiduciary Rule and DOL’s authority to write the rule.  In a decision issued March 13, 2018, the United States Court of Appeals for the Tenth Circuit upheld the Fiduciary Rule against a challenge to its provisions differentiating fixed indexed annuities from fixed rate annuities.  Two United States District Courts, one in Texas and one in the District of Columbia, also upheld the Fiduciary Rule in decisions issued February 8, 2017, and November 4, 2016, respectively. Unlike the Tenth Circuit case, the Texas and DC cases challenged the entirety of the Fiduciary Rule as beyond DOL’s authority.

The Texas case was appealed to the United States Court of Appeals for the Fifth Circuit, which issued an opinion on March 15, 2018 that vacated the Fiduciary Rule. Two members of a three-judge panel found that the statutes relied on by DOL do not authorize it to write the Fiduciary Rule. DOL has until April 30 to move for rehearing before the full Fifth Circuit, and it has until June 13 to ask the United States Supreme Court to review the decision.

Regardless whether DOL challenges the Fifth Circuit ruling, other regulators are poised to write protections for self-directed retirement accounts. The United States Securities and Exchange Commission has already said that it is looking at regulating in this area and may announce a rule in the second quarter of 2018. State regulators may become more active, as well, if they feel that federal protections are not forthcoming or not robust. For now, investors and financial services professionals should watch for DOL’s decision on whether to challenge the Fifth Circuit decision as a sign of how DOL views its future role in protecting retirement investors.

UPDATE:

On April 18, 2018, the United States Securities and Exchange Commission proposed rules that would require all broker-dealers and associated persons to act in the best interest of retail customers when recommending a securities transaction or investment strategy, in addition to requiring enhanced disclosures from both broker-dealers and registered investment advisers of the nature of their services, the fees and costs for those services, and conflicts of interest. The SEC’s rules are broader than the DOL’s Fiduciary Rule in that they are not limited to retirement accounts. They also lack the specific restrictions on commissions and certain annuities that have made the Fiduciary Rule so controversial.

DOL failed to seek rehearing by the full Fifth Circuit by the April 30 deadline. While it is still possible that DOL will ask the U.S. Supreme Court to review the decision, it appears likely that any effort to revive the Fiduciary Rule will require intervention by investors or others representing their interests.

Mary L. O'Connor | Farrow-Gillespie & Heath LLP | Dallas, TXMary L. O’Connor’s practice focuses on representing companies and their officers and directors in commercial litigation and arbitration, securities litigation, internal investigations, and regulatory investigations and enforcement proceedings.

During the course of her career, Mary has been named to the list of Best Lawyers in Dallas by D Magazine, and to the list of Texas Super Lawyers (a Thomson Reuters service) by Texas Monthly Magazine.

Liza Farrow-Gillespie | Farrow-Gillespie & Heath LLP | Dallas, TX

Guidelines for a Nonprofit Board of Directors

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Charities are required by state and federal law to have board members, also called “directors.” The purpose of the board is to ensure integrity and accountability in the organization.  It is an honor and a privilege to be asked to serve as a director of a nonprofit, but board membership carries significant responsibilities.

 DUTIES OF THE BOARD

Directors have fiduciary duties to ensure that the organization’s mission is carried out and that its resources are used wisely in furtherance of the Organization’s charitable purposes.

Board members of a tax-exempt organization have four fiduciary duties:

  • The Duty of Care
  • The Duty of Loyalty
  • The Duty of Compliance
  • The Duty to Maintain Accounts

DUTY OF CARE

Board members have a responsibility to be active in and knowledgeable of the Organization’s activities, and to exercise reasonable care in making policy and operational decisions. To fulfill the duty of care, directors should do the following:

  • Attend board meetings.
  • Prepare for board and committee meetings by reading reports, minutes, and other materials distributed for the meeting.
  • Ensure that the Board Secretary keeps appropriate minutes of board meetings.
  • At each meeting, review and approve the minutes from the prior meeting.
  • Ask questions and obtain the information necessary to make informed decisions.
  • Obtain insurance for the organization and the board (e.g., general premises liability, Directors & Officers insurance (“D&O”), Employment Practices Liability Insurance (“EPLI”)).
  • Hire and oversee the performance of an Executive Director (sometimes called the Chief Executive Officer or President); and delegate day-to-day operational responsibilities.
  • Create committees, as necessary, to plan or oversee certain projects or operations and to report to the board.
  • Retain an accounting professional to handle the organization’s tax accounting and Form 990 reporting.
  • Review and approve leases and other major contracts.
  • Ensure that ALL of the Organization’s operations are in furtherance of the organization’s charitable mission.

DUTY OF LOYALTY

Board members have a duty of loyalty to always act fairly and in the best interest of the Organization without concern for their own interests. To fulfill the duty of loyalty, directors should do the following:

  • Approve a written conflicts of interest policy, and require directors to sign it.
  • Refrain from engaging in any transaction or making any statement that would have a negative impact on the Organization.
  • Refrain from engaging in any activity (other than fundraising for another nonprofit) that competes with the Organization’s financial interests.
  • Refrain from diverting a the Organization business opportunity for personal or family gain.
  • Assist with raising funds.
  • Ensure that no director (or member of a director’s family) benefits financially from any activity of the Organization.

Exception: The organization may conduct business with a board member or a board member’s family, if all four requirements below are met:

    • The organization may not pay more than market value for the product or service; and
    • The board must conduct due diligence that the same or similar product or service is not available elsewhere for a better cost or on more favorable terms; and
    • The board must approve the transaction by a majority vote, which must be recorded in the minutes; and
    • The board member that would benefit from the transaction must abstain from the vote.

DUTY OF COMPLIANCE

Board members have a duty to be faithful to the Organization’s purpose and mission. They must adhere to the Organization’s governing documents and to laws and regulations that apply to the Organization and its operations.  To fulfill the duty of compliance, board members should do the following:

  • Read and be familiar with the Organization’s articles of incorporation, bylaws, and policies.
  • Comply with state and federal laws applicable to nonprofit entities, fundraising, and taxation.
  • Require and approve appropriate employment law and privacy law policies.
  • Retain and consult board counsel for legal questions that arise.
  • Ensure that someone is tasked with filing the Organization’s annual Form 990 with the IRS; review and approve the Form 990 before filing.
  • Ensure that someone is tasked with filing Texas Public Information Reports as required (usually every 4 years); review and approve prior to filing.
  • Register in each state that requires the organization to register.
  • Ensure that the organization’s legal acknowledgment letters are prepared and sent for donations of more than $250.
  • Prior to conducting the following types of highly regulated fundraising activities, ensure that the activity will be conducted in compliance with applicable law:
    • Raffle
    • Charitable sales promotions with a third-party for-profit company
    • Solicitations via a paid independent fundraising agent

DUTY TO MANAGE ACCOUNTS

Board members are responsible for the Organization’s financial stability and accountability. To fulfill the duty to manage accounts, directors should do the following:

  • Develop and approve annual budgets that provide clear direction for organizational spending. Monitor, track, and revise the budget as necessary.
  • Ensure that accurate records of all income and expenditures are maintained.
  • Review current income and expenditures at each board meeting.
  • Commission an audit by a nonprofit organization financial auditor, at least once every two years.
  • Implement checks and balances, and division of financial responsibilities, so that no single staff member or volunteer has total control over finances.
  • Prudently invest assets.
  • Monitor and control fundraising activities.

LEGAL CONSEQUENCES

The legal consequences of a board’s failing to do its job can be serious, including the following:

  • An organization’s failure to follow the rules is likely to result in the loss of donor respect and support.
  • An organization can be held financially responsible by the courts for negligent or willful violation of the law.
  • A director can be held individually responsible for breach of a fiduciary duty. (The organization should purchase D&O insurance to protect its directors from liability.)
  • Transactions improperly benefitting a board member can result in monetary penalties to the organization and the board member, as well as the organization’s loss of tax-exempt status.
  • Failure to follow fundraising laws and income reporting laws can result in monetary penalties to the organization and, in willful cases, criminal penalties to the individuals involved.

Among many other legal and ethical considerations, the tax-exempt status of the organization is always at stake when board members ignore their duties.  If the organization loses its tax-exempt status, all of its donors lose the ability to deduct donations from their tax returns, sometimes for prior tax years as well as for the year in question.

CONCLUSION

Although these guidelines convey that a board member’s responsibilities are serious indeed, the responsibilities should not act as a deterrent to service. If a director follows these nine rules of thumb, he or she will do just fine:

  1. Show up.
  2. Pay attention and ask questions.
  3. Get the organization good insurance policies.
  4. Hire a good executive director, and let that person do his or her job.
  5. Watch the money very closely.
  6. Make sure your Form 990 is filed with the IRS annually, and your franchise report is filed with the state of Texas when required.
  7. Keep tabs on programs and fundraising.
  8. Consult professionals where appropriate.
  9. Absent compelling circumstances, do not allow the organization to do business with board members or their families.

For more information, contact nonprofit organizations attorney Liza Farrow-Gillespie.

Liza Farrow-Gillespie | Farrow-Gillespie & Heath LLP | Dallas, TXLiza Farrow-Gillespie serves as legal counsel to nonprofit organizations throughout North Texas. Ms. Farrow-Gillespie has been named to the list of Texas Super Lawyers (a Thomson Reuters service) and to the list of Best Lawyers in Dallas by D Magazine in every year since 2013.

Christian Kelso | Estate Planning | 663(b) distributions

It’s Time to Make Your 663(b) Trust and Estate Distributions!

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Trusts and estates often pay more tax than individuals in like circumstances.  This is not because they are taxed at higher rates, but rather because the same rates applicable to individuals are “compressed,” meaning that each marginal rate increase happens at a lower level of income than it does for individuals.  For example, the highest rate of income tax for both trusts and individuals for 2016 was 39.6%, but whereas this rate only applies to income over $415,050 for single individual filers, for trusts and estates, this rate applies to all income over $12,400.  Other tax burdens, such as the 3.8% Net Investment Income Tax (a/k/a the “Obamacare Tax”) and higher rates of capital gains tax follow suit along similar lines.  Obviously, these add up to a significant potential tax burden.

Fortunately, there is a way to mitigate this tax burden.  Trusts and estates may take a deduction for “distributable net income,” which is generally the amount of income that is distributed from the trust to a beneficiary.  When this happens, the income is effectively shifted from the trust to the beneficiary, who simply adds it to their personal return and pays at whatever rate is applicable to them (including the distributed trust income, of course).

Since large amounts of unnecessary tax can be avoided by shifting income to beneficiaries in this manner, it is common practice for trustees to make distributions for this purpose, assuming, of course, that such distributions are permissible and proper under the terms of the trust.  But there is a problem:  How does the trustee know how much income to distribute from a given trust before the close of a given tax year?  Unfortunately, it is impossible, to know exactly how much income a trust has until after the tax year has closed, at which point, it’s too late to distribute all the income.

Enter IRC §663(b).  Under this special provision, a trust or estate may elect to treat any distribution made within the first 65 days of a given tax year as having been made on December 31 of the previous year.  In other words, the trustee gets 65 days after the actual close of the year to calculate how much income should have been distributed and then actually make that distribution.  The trustee then makes an election on the trust or estate’s income tax return (Form 1041) and voila, the problem is solved!

Although §663(b) distributions may provide a significant benefit, the can also represent a significant danger to trustees.  On the one hand, any distribution from a trust should only be made if and to the extent it is proper under the terms of the trust.  Even if such a distribution is permissible, it may not be in the best interests of a given beneficiary, as taxes are only one of many considerations.  On the other hand, a §663(b) distributions can save a significant amount of tax, so failing to make such a distribution, if permitted, could subject a trustee to liability for waste.

Making the right decision requires careful analysis.  The fiduciary attorneys at Farrow-Gillespie & Heath, LLP are well-versed with the applicable law and have the practical experience to understand the nuanced process that is involved with make the right decision.  If we can help you with this, please don’t hesitate to call.

The trust and estate planning attorneys at Farrow-Gillespie Heath Witter LLP, located in downtown Dallas, serve all of your trust and estate planning needs, including:

  • Estate planning for small estates
  • Estate planning for large, taxable estates
  • Trust review and modification
  • Trust and estate administration
  • Trust litigation
  • Will contests
  • Probate
  • Heirship proceedings
  • Guardianships