In the April 2012 issue of Trusts & Estates, I wrote an article, “The State of the States,” which provided an overview of some new developments in state law related to estate planning. While federal law remains in flux, there’s been considerable state-level activity on a number of trust and estate-related fronts since that article appeared. With numerous legislative proposals swirling and the last legislative sessions of most states having recently ended, which proposals survived?
Here’s an update on some key planning developments across the country, through Sept. 10, 2012.
Estate and Gift Tax
Connecticut. This state made significant changes to its estate and gift tax laws last year, lowering the tax threshold from $3.5 million to $2 million. These changes apply retroactively to estates of decedents dying on or after Jan. 1, 2011 and to gifts made after Jan. 1, 2011.1
In its last session, the legislature introduced three separate bills to repeal the estate tax, and one included a proposed repeal of the gift tax.2 All three died.
Hawaii. On May 1, 2012, Hawaii passed a bill to conform the estate tax exemption amount (previously $3.5 million) to federal law, thereby increasing it to $5.12 million. The new law, which Governor Neil Abercrombie signed on July 6, 2012, applies to individuals dying after Jan. 25, 2012.3
Indiana. This state passed a law phasing out its inheritance tax over a 9-year period, beginning in 2013. Estates of individuals dying in 2013 will receive a 10 percent tax credit, which will increase by 10 percent each year until the inheritance tax is completely phased out for individuals dying after Dec. 31, 2021. 4
Illinois. Having reinstated its estate tax in January 2011,5 Illinois passed legislation in
December 2011 that retains the $2 million state estate tax exclusion amount for decedents dying prior to Jan. 1, 2012, then increases it to $3.5 million for decedents dying in 2012 and to $4 million for decedents dying on or after Jan. 1, 2013.6
On Feb. 8, 2012, the legislature introduced a bill to allow for portability of exclusion amounts between spouses. In the case of a surviving spouse of a decedent who died after Jan. 1, 2012, the bill provided that the Illinois exclusion amount also included the unused exclusion amount of the predeceased spouse.7 The state enacted the estate tax changes, but the portability bill died.
Kentucky. The Kentucky estate tax is tied to the federal credit for state death taxes, the phase-out of which was completed in 2005. The legislature introduced a bill on Jan. 3, 2012 to freeze the federal credit for state taxes as it was in effect on Jan. 1, 2003 and impose an estate tax to the extent that credit exceeds the Kentucky inheritance tax.8 That bill died.
Maine. Pursuant to legislation signed in June 2011, Maine will increase its estate tax exclusion amount from $1 million to $2 million for decedents dying after Dec. 31, 2012. Taxes are payable only on the amount that exceeds $2 million at graduated rates that start at
8 percent and increase to 12 percent.9
Maryland. Under a recently introduced bill, the current estate tax filing threshold ($1 million) would have been retained for decedents dying before July 1, 2012 and then increased (ultimately reaching $4 million) over the next three years. That bill died.10
Minnesota. Pursuant to a bill introduced on March 30, 2012, the Minnesota estate tax exemption amount (currently $1 million) would have been conformed to the federal exemption amount for individuals dying after June 30, 2012.11 That bill died.
New Jersey. The legislature introduced at least 16 estate/inheritance tax bills, ranging from increasing the estate tax threshold from $1 million to $5 million (the estate tax threshold is currently $675,000) to outright repeal.12 There’s been no movement on any of those bills. (New Jersey has a 2-year legislative session cycle.)
New York. The legislature introduced a bill on Jan. 4, 2012 to raise the threshold for estate tax (currently $1 million) for individuals dying in 2012 and, thereafter, to higher amounts (ultimately reaching $5 million) over the next three years. That bill died. 13
Ohio. Pursuant to legislation signed in June 2011, the Ohio estate tax doesn’t apply to individuals dying after Dec. 31, 2012.14
Oregon. Pursuant to legislation signed in June 2011, Oregon replaced its pick-up tax with a stand-alone estate tax that has a $1 million dollar exemption amount and separate rate schedule for individuals dying after Dec. 31, 2011. Taxes are payable only on the amount that exceeds $1 million at graduated rates, which start at 10 percent and increase to 16 percent.15 On July 27, a citizen’s initiative to enact the “Death Tax Phase-Out Act” was approved as a Nov. 6, 2012 ballot measure. Pursuant this proposal, taxes would be reduced to a descending percentage of the tax collectible just before the passage of the Act. The reduced percentage would apply to individuals dying in the listed years as follows:
• 2013: 75 percent of prior tax collectible
• 2014: 50 percent of prior tax collectible
• 2015: 25 percent of prior tax collectible
• 2016: 0 percent of prior tax collectible16
If approved on the November ballot, the Act would take effect on Jan. 1, 2013.
Rhode Island. The legislature introduced a bill to increase the estate tax threshold to $1.5 million for decedents dying after Jan. 1, 2014, adjusted annually for inflation beginning in 201517 (the estate tax threshold is currently $850,000, adjusted annually for inflation, and $892,865 for 2012).18 It also introduced different bills to increase the estate tax threshold to $2 million and $5 million, adjusted for inflation.19 All of these bills died.
Tennessee. Tennessee passed legislation to eliminate its gift tax retroactively to Jan. 1, 201220 and phase out its inheritance tax through 2015, culminating with full repeal for individuals dying in 2016 or thereafter. Until full repeal, the state exemption amount (currently
$1 million) is to be increased for individuals dying in the listed years:
• 2013: $1.25 million
• 2014: $2 million
• 2015: $5 million21
Vermont. The legislature introduced a bill on Jan. 3, 2012 to conform Vermont’s exclusion amount to the federal applicable exclusion amount that’s in effect. The current estate tax threshold in Vermont is $2.75 million.22 That bill died.
Wisconsin. The Wisconsin estate tax is tied to the federal credit for state death taxes, the phase-out of which was completed in 2005. The legislature introduced a bill on Feb. 27, 2012 to freeze the federal credit for state taxes as it was in effect on Dec. 31, 2002 for deaths occurring after Dec. 31, 2011.23 That bill died.
There’s been a flurry of state-level activity regarding decanting, whereby the assets of an irrevocable trust can potentially be appointed into a new trust with different terms. Ironically, the flurry of decanting legislation arrives against the backdrop of recent Treasury Department and Internal Revenue Service interest in studying the tax implications of a change in the beneficial interests of a trust pursuant to a decanting transfer.24
Recently enacted legislation:
• Illinois: Enacted decanting legislation on Aug. 10, 2012;25
• Kentucky: Enacted decanting legislation on April 11, 2012;26
• Missouri: Enacted decanting legislation on Aug. 28, 2011;27
• New York: Enacted significant amendments and expansions to its decanting statute on Aug. 17, 2011;28
• Ohio: Enacted decanting legislation on Dec. 21, 2011;29
• Rhode Island: Enacted decanting legislation on June 23, 2012;30
• South Dakota: Enacted changes to the decanting regime (to include the ability to grant a power of appointment) on March 2, 2012;31 and
• Virginia: Enacted decanting legislation on April 4, 2012;32
• Michigan: Two different decanting bills have each passed the Michigan Senate and were sent to the House on May 23, 2012;33
Legislation that died during the last legislative session:
• Alaska: On Feb. 29, 2012, the legislature introduced substantial amendments to current decanting laws (which track closely the recent revisions made in New York), but those amendments didn’t pass either house before the end of the last legislative session;34
• South Carolina: The legislature introduced decanting legislation on Feb. 22, 2012, but the legislation didn’t pass either house before the end of the last legislative session.35
While the full impact of the IRS’ interest can’t be known until the study period has concluded and guidance is issued, practitioners should exercise extra caution when considering a decanting that could shift beneficial interests, due to the potential risk that some actions may later be considered recognition events.
Directed Trust/Trust Protectors
A directed trust allows for the separation of investment, distribution and administrative responsibilities traditionally associated with the role of trustee. An issue in many jurisdictions is the extent to which a trustee can rely on the trifurcation of these responsibilities. Case law in many states seems to indicate that there’s some level of continuing fiduciary responsibility and oversight. Some jurisdictions have statutes that clarify separation of responsibilities.
Several states have recently introduced and/or enacted legislation to clarify that obligations can be separated in the trust context, so that a trustee can rely on the direction of an investment or distribution advisor, with no responsibility to monitor, oversee or second-guess the advisor.
Recent state-level directed trust developments include:
Illinois. This state enacted directed trust legislation on Aug. 10, 2012, creating three categories of directing party:
1. investment trust advisor;
2. distribution trust advisor; and
3. trust protector.
A directing party is a fiduciary, subject to the same standards as a trustee, unless the governing instrument states otherwise, provided that the governing instrument can’t exonerate a directing party from the duty to act in the best interests of the trust. A directed fiduciary has no duty to monitor, review, inquire, investigate, evaluate or warn with respect to a directing party’s exercise or failure to exercise any power of direction. A directed fiduciary won’t be liable for following a direction except in cases of willful misconduct.
The statute takes effect on Jan. 1, 2013 and applies to all existing and future trusts that appoint or provide for a directing party or any existing or future trust that’s modified to appoint or provide for a directing party.36
Massachusetts. On July 8, 2012, Gov. Deval Patrick signed the Massachusetts Uniform Trust Code (the MUTC) into law. Among other changes, the MUTC introduced a directed trust provision. Consistent with the Uniform Trust Code (UTC) approach, the terms of a trust can confer on an individual the power to direct certain actions of the trustee. The MUTC requires the trustee to act in accordance with the exercise of the power, unless the attempted exercise is manifestly contrary to the terms of the trust, or the trustee knows the attempted exercise would constitute a serious breach of fiduciary duty. The individual who holds a power to direct is, presumptively, a fiduciary who’s required to act in good faith and will be liable for any loss that results from breach of fiduciary duty.37
Missouri. This state enacted trust protector legislation on July 14, 2012. A trust protector can direct the trustee with respect to specific matters.
A trust protector is required to act in a fiduciary capacity, but isn’t a trustee and is exonerated from all liability, unless it’s established by a preponderance of evidence that the trust protector breached his duties in bad faith or with reckless indifference. If a trust protector is granted a power to direct, consent or disapprove a trustee’s investment, distribution or other decisions, then, only with respect to such power, does the trust protector have the same duties and liabilities as if serving as trustee.
Except in cases of bad faith or reckless indifference, a trustee won’t be liable for following the protector’s written direction. The trustee has no duty to monitor the conduct of the trust protector, provide advice to or consult with the trust protector or communicate with or warn any beneficiary that the trustee might have exercised its own discretion differently.38
The statute takes effect on Aug. 28, 2012.
New York. This state introduced directed trust legislation on May 1, 2012 that closely models the Delaware directed trust statute. It says that if the governing instrument provides that a fiduciary is to follow the direction of an advisor, and the fiduciary acts in accordance with the direction, then, except in the case of willful misconduct, the fiduciary won’t be liable for any resulting loss. A directed fiduciary has no duty to monitor or consult with the advisor.39
The legislation failed to pass the last legislative session.
North Carolina. Under prior North Carolina UTC law, a directed trustee had to act in accordance with a direction unless manifestly contrary to the terms of the trust, or the trustee knew that doing so would constitute a serious breach of a fiduciary duty. This state enacted directed trust legislation on June 11, 2012 that draws a distinction between a co-trustee who has the power to direct other “excluded” co-trustees and a “power holder,” who isn’t a trustee, but has the power to direct certain actions of a fiduciary (including the power to direct investments and discretionary distributions). Irrespective of whether a trustee is directed by a co-trustee or a power holder, the directed trustee must act in accordance with the direction and isn’t liable for any loss, unless compliance with the direction constitutes intentional misconduct on the part of the directed trustee. The directed trustee has no duty to monitor the conduct of, provide advice to or consult with the directing co-trustee or power holder. A power holder is a fiduciary with respect to the powers conferred and is required to act in good faith and in accordance with the purposes and terms of a trust and the interests of the beneficiaries.40
Ohio. The House passed detailed legislation on June 13, 2012 that includes a domestic asset protection trust proposal. This legislation has been sent to the Senate. The legislation also includes administrative fiduciary provisions. Ohio law currently allows for a power to direct. The statute provides that a trustee isn’t liable for losses resulting from certain actions or failures to act when other persons are granted certain powers with respect to the administration of the trust. Existing law provides that fiduciaries who are excluded from exercising a power aren’t liable for losses resulting from compliance with an authorized direction. Pursuant to the new proposal, in addition to the provisions regarding an “excluded” fiduciary, the limitations on liability are extended to fiduciaries appointed only to handle administrative duties. The proposal provides that if a fiduciary is appointed to handle only administrative duties, the fiduciary will have no duties other than administrative duties specifically described and (as is the case with excluded fiduciaries) will have no obligation to perform investment reviews or make investment recommendations if there’s an investment director.41
Virginia. Under Virginia’s UTC approach, a trustee must follow the directions of a trust director, unless the directions are manifestly contrary to the trust terms or the trustee knows the action would constitute a serious breach of fiduciary duty. In addition, on April 4, 2012, Virginia enacted a directed trustee statute. The statutory provisions will apply only if they’re specifically incorporated by reference: (1) into the trust document by the settlor; or (2) into a statutory nonjudicial settlement agreement.
A “trust director” is defined as any person who has the power to direct the trustee on any matter. The director is deemed to be a fiduciary who’s required to act in good faith and will be liable for losses resulting from breach of fiduciary duty. A trustee won’t be liable for following the direction of a trust director, other than in cases of willful misconduct or gross negligence. Among other matters, a trustee has no duty to: (1) monitor a trust director, (2) provide the director with information, or (3) warn any beneficiary or third party or notify the director that the trustee disagrees with any of the director’s actions.42
Domestic Asset Protection
Many states have recently enacted or introduced decanting legislation, and several states have recently enacted or introduced directed trust legislation. As part of continuing efforts for states to stay competitive, domestic asset protection may be the next trend.
Ohio. This state has proposed legislation (the Legacy Trust Act) that allows for the creation of a “legacy trust,” by which a transferor is given the ability to make a qualified disposition of assets and remain a beneficiary through actions of a qualified trustee. The transferor must sign a notarized qualified affidavit before or contemporaneously with the qualified disposition and provide that the transferor won’t be rendered insolvent, doesn’t intend to defraud creditors, has no pending/threatened court actions and doesn’t contemplate bankruptcy.
Creditors would generally be prohibited from bringing any action against any person who made or received a qualified disposition, against any property held in a legacy trust or against any trustee of a legacy trust. A creditor can bring an action to avoid a qualified disposition on the grounds that the disposition was made with specific intent to defraud the specific creditor bringing the action.
A creditor from before the qualified disposition must bring the action by the later of: (1) 18 months after the qualified disposition; or (2) six months after the qualified disposition is or could reasonably have been discovered if the creditor files a suit or makes a written demand for payment within three years after the qualified disposition. A creditor from after the qualified disposition must bring the action within 18 months. The burden is on the creditor to prove the matter by a preponderance of the evidence. The court must award attorney’s fees and costs to the prevailing party. Protection is provided for trustees and attorneys involved in the creation and administration of a legacy trust.
Any person can serve as an advisor of a legacy trust, except a transferor, who can act as an advisor only in connection with investment decisions. Advisors are considered fiduciaries.
The transferor may retain the right to veto distributions from the trust, remove and appoint advisors or trustees, hold a special testamentary power of appointment and be a discretionary income or principal beneficiary.
A legacy trust must:
1. Have at least one trustee who resides in Ohio or an entity authorized to act as trustee in Ohio who materially participates in the administration of the trust;
2. Expressly incorporate Ohio law to wholly or partially govern its construction and administration;
3. Expressly state it’s irrevocable; and
4. Include a spendthrift provision.
This proposal passed the House on June 13, 2012 and was sent to the Senate. If enacted, the new law would apply to all qualified dispositions made on or after the legislation’s effective date.43
Virginia. Gov. Bob McDonnell signed Virginia’s asset protection legislation into law on April 4, 2012.
The new law allows assets transferred by a settlor to an irrevocable trust to be protected from creditors if the following conditions are met:
1. The trust is irrevocable;
2. The trust is created during the settlor’s lifetime;
3. The settlor is a discretionary beneficiary only pursuant to the discretion of an independent trustee, and there’s at least one other beneficiary;
4. The trust has at least one trustee who resides in Virginia or an entity authorized to engage in trust business in Virginia that materially participates in the administration of the trust within Virginia;
5. The trust expressly incorporates Virginia law to govern its validity, construction and administration;
6. The trust includes a spendthrift provision; and
7. The settlor doesn’t have the right to veto trust
Among other reasons, the trust won’t be deemed revocable merely because the settlor has a special testamentary power of appointment or because the trust instrument expressly provides for the direct payment of income taxes attributable to trust income or the reimbursement to the settlor for such tax payments.
There’s a 5-year statute of limitations for creditor’s actions, which runs from the date of transfer to the trust. A subsequent transfer to the trust won’t reset the running of the limitations period. Each limitation period commences on the date of each respective transfer, and a distribution to a beneficiary is deemed to have been made from the latest transfer.
A trust established in another jurisdiction that’s moved to Virginia and meets all the statutory requirements, will be treated as a transfer to the trust on the date the trust is moved.44
Income Tax Reimbursement
The intentionally defective grantor trust is a popular estate-planning technique, whereby the grantor is treated as the owner of the trust property for income tax purposes, but the trust property is typically excluded from the grantor’s estate for estate tax purposes. Payment of the income taxes by the grantor is, in effect, a further gift to the trust, which can grow without depletion for the tax liability. Revenue Ruling 2004-64 provides that a trustee’s discretionary authority (whether or not exercised) to reimburse the grantor for the grantor’s income tax liability attributable to trust assets won’t, by itself, cause the value of the trust’s assets to be includible in the grantor’s gross estate. The IRS cautioned, however, that estate tax inclusion may occur if applicable local law subjected the trust’s assets to the claims of the grantor’s creditors.
Ohio and New Jersey have introduced and Virginia has enacted legislation to clarify the effect of a permissive income tax reimbursement provision. However, these proposals must be read against the backdrop of a proposal included in the General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals, which would subject to transfer taxes assets held in grantor trusts. Pursuant to the proposal, if a grantor is treated as an owner of the trust for income tax purposes: (1) the assets of the trust would be included in the grantor’s gross estate for estate tax purposes, (2) any distribution from the trust to one or more beneficiaries during the grantor’s life would be subject to gift tax, and (3) if at any time during the grantor’s life the grantor ceases to be treated as an owner of the trust for income tax purposes, the remaining trust assets would be subject to gift tax. The transfer tax imposed by this proposal would be payable from the trust. The proposal would be effective with regard to trusts created on or after the date of enactment and with regard to any portion of a pre-enactment trust attributable to a contribution made on or after the date of enactment.
New Jersey. Identical bills introduced in the New Jersey Assembly and Senate on Jan. 10, 2012 provide, in effect, that the trustee’s discretion to reimburse the trust creator for income taxes paid isn’t to be considered a right that would subject the trust assets to the claims of the creator’s creditors. According to the bill summary, the amendment is in response to Revenue Ruling 2004-64 and is modeled after New York’s Estates, Powers & Trusts Law Section 7-3.1(d).45 The Senate bill passed on Aug. 20, 2012 and was sent to the Assembly.
Ohio. A proposal that passed the House and was sent to the Senate (included among the proposals introduced with the Legacy Trust Act), provides that, irrespective of whether the trust contains a spendthrift provision, a trustee’s discretionary authority to pay directly or reimburse the settlor amounts for income taxes payable on trust income won’t subject those amounts to the claims of the settlor’s creditors.46
Virginia. Gov. Bob McDonnell signed a bill on April 9, 2012 providing, in essence, that, subject to a contrary provision, a trustee can pay the settlor’s income tax liability or reimburse the settlor for the settlor’s income tax liability imposed with respect to trust assets. A trustee’s discretionary authority to pay directly or reimburse the settlor amounts for income taxes payable on trust income won’t subject those amounts to the claims of the settlor’s creditors. The new law took effect on July 1, 2012.47
Connecticut, Iowa, Massachusetts, New Hampshire, New York, Vermont and Washington, D.C. currently permit same-sex marriages (with Maryland and Washington state recognition pending).48
On Feb. 23, 2011, the U.S. Attorney General announced the Department of Justice will no longer defend the federal Defense of Marriage Act (DOMA), and multiple courts have recently declared DOMA unconstitutional.49
Recent state activity. In light of these developments, states seem to be racing to poise themselves appropriately if DOMA is declared unconstitutional. Included among the flurry of state-level developments regarding same-sex marriage/unions are:
• Colorado: Introduced legislation on Jan. 11, 2012 recognizing same-sex civil unions. The bill died.50
• Illinois: Introduced legislation on Feb. 8, 2012 recognizing same-sex marriage. The bill died.51
Illinois enacted legislation last year recognizing civil unions. The Illinois Attorney General adopted a new rule52 effective Aug. 9, 2012, regarding the estate tax treatment of civil unions. The rule provides that an Illinois marital deduction, including a qualified terminal interest property (QTIP) election, is allowable between civil union partners. Because civil unions aren’t recognized for federal estate tax purposes, a federal pro-forma return, prepared as if the marriage were recognized for federal purposes, must be filed with the Illinois Estate Tax Return. If there’s a federal filing requirement, a copy of the Form 706 actually filed must also be submitted.
• Maine: Placed a referendum on the ballot for the Nov. 6, 2012 election.53
• Maryland: Gov. Martin O’Malley signed legislation on March 1, 2012 recognizing same-sex marriage, but a Nov. 6 referendum is pending.54
Although Maryland doesn’t yet recognize same-sex marriage, its Court of Appeals recently determined that a same-sex couple validly married out-of-state was entitled to get divorced in Maryland.55
• Minnesota: A constitutional amendment prohibiting same-sex marriage is to be submitted to the voters on the Nov. 6, 2012 ballot.56
• Missouri: Introduced a constitutional amendmentto prohibit same-sex marriage recognition on Jan. 9, 2012, but that proposal died.57
• New Hampshire: Introduced a bill to repeal same-sex marriage on Jan. 6, 2011, but that bill died.58
• New Jersey: Introduced a bill recognizing same-sex marriage on Jan. 10, 2012. On Feb. 21, Gov. Chris Christie vetoed the bill and has challenged the legislature to put the issue to a referendum, which it hasn’t yet done.59
• New Mexico: Introduced a constitutional amendment to prohibit same-sex marriage recognition on Jan. 24, 2012, but the proposal died.60
• North Carolina: Voters approved a constitutional amendment prohibiting same-sex marriage on May 8, 2012.61
• Rhode Island: Introduced a bill recognizing same-sex marriage on Feb. 16, 2012. The bill died.62
On May 14, 2012, Gov. Lincoln Chafee issued an executive order directing state agencies to recognize same-sex marriages performed out of state and, unless contrary to law, to extend to those same-sex spouses all the benefits and protections accorded to opposite-sex spouses.63
On May 17, 2012, in response to the order, the Rhode Island Senate introduced a bill to formalize a public policy that discountenances same-sex marriage and would override any obligation of full faith and credit.64 The bill died.
• Vermont: Passed a law that exempts same-sex couples from the 6-month residency requirement for instituting divorce/dissolution proceedings.65
• Washington State: Gov. Chris Gregoire signed legislation recognizing same-sex marriage on
Feb. 13, 2012, but a Nov. 6 referendum is pending.66
• West Virginia: Introduced a constitutional amendment on Jan. 11, 2012 to prohibit same-sex marriage recognition. The proposal died.67
Significance for planners. Amid the flurry of state legislative activity and the recognition (or pending recognition) of same-sex marriage in multiple states, DOMA has been held unconstitutional in several recent high profile court decisions68 and may now be poised for U.S. Supreme Court determination. Accordingly, it seems more prudent than ever for practitioners to consider reaching out to existing clients potentially impacted by these developments to include a scenario in their planning in which DOMA is declared unconstitutional. That approach might obviate the need to urgently revisit planning if DOMA is repealed and prevent unintended consequences in the event of death before estate plans can be revised.
Power to Adjust/Unitrust Regimes
The precepts of the prudent investor rule govern the investment of trust assets. Pursuant to those precepts, a trustee is required to invest for “total return.” That is, a trustee is required to invest in a way that benefits both income and principal beneficiaries.
However, although the concept of investing in a manner that serves the interests of both income and principal beneficiaries may seem straightforward, in reality, many practical challenges are presented. Total return investing isn’t necessarily neutral in outcome. In particular, when beneficial interests clash, the source of return becomes critical, and the tension between investing for income and investing for growth can become more pronounced.
Fortunately, the face of trust investing was revolutionized with two immensely valuable tools—the power to adjust and unitrust regimes. These regimes provide trustees with the means to implement the mandate of total return investing, in effect, by preempting the definition of fiduciary accounting income. Every trustee or advisor should be aware of these powerful tools.
Under a power to adjust regime, the trustee is permitted to make adjustments between income and principal to be fair and reasonable to all beneficiaries. Typically, this will allow a trustee to pursue a more growth-oriented strategy with an enhanced equity allocation and lower yield by redefining a portion of principal as income (income can potentially also be redefined as principal, if the investment allocation favors the income beneficiary). Under the unitrust regime, the trustee can convert the income beneficiary’s interest into a unitrust payout of a fixed percentage of the trust’s principal.
Recent state-level total return developments include:
Alaska. This state introduced amendments to the current unitrust regime on Feb. 29, 2012. Its unitrust regime currently provides for a 4 percent default unitrust payout calculated over a 3-year rolling period. The proposal would have given a trustee the ability to select a unitrust payout between 3 percent and 5 percent and to determine whether the smoothing period should be three, four or five years.69 The proposal died.
Florida. Gov. Rick Scott signed a law on April 6, 2012, to amend the unitrust regime to include a 3-year rolling average computation. Under the unitrust regime in Florida, the unitrust payment is computed by multiplying the applicable unitrust percentage (3 percent to 5 percent) by the fair market value (FMV) of the trust assets. The new law requires the unitrust payout to be determined with reference to the average FMV of the trust assets over a 3-year period. Many states have incorporated such a rolling average approach in determining the appropriate payout, in an effort to smooth out short-term volatility.70
Kansas. The Kansas unitrust regime authorizes a payout between 3 percent to 5 percent. Gov. Sam Brownback signed legislation on April 3, 2012 that allows a trustee to modify a previously established unitrust payout percentage to a percentage the trustee initially could have chosen after notice with no objection or with court approval. The new law also permits a trustee to reconvert the trust from a unitrust and restore the power to adjust without judicial procedure, if the trustee determines that the settlor’s intent or purposes of the trust are no longer served by such conversion, and the trustee gives notice with no objection.71
Kentucky. Gov. Steve Beshear signed legislation on April 11, 2012 that includes a new unitrust regime and makes amendments to the existing power to adjust regime.
The new law gives trustees the power to opt into a unitrust regime upon notice, without court approval. Kentucky previously had a power to adjust regime only. The trustee can now select a unitrust distribution payout between 3 percent and 5 percent (with a 4 percent default), using a 3-year rolling average to value the trust assets. The new law also enables a trustee to exercise the power to adjust upon notice, without court approval. Prior Kentucky law required the trustee to obtain court approval before exercising the power to adjust. The new law deletes the previous requirement for an adjustment to be between 3 percent and 5 percent.72
Mississippi. The Mississippi Principal and Income Act, which includes a power to adjust regime, was enacted on April 16, 2012.73
Vermont. Vermont currently has a unitrust regime. Included in a larger bill introduced on Feb. 23, 2011 was a proposal to grant trustees the power to adjust. The bill became law on May 9, 2012.74
Rule Against Perpetuities
South Carolina. The legislature introduced a bill on Feb. 22, 2012 that included a proposal to abolish the rule against perpetuities (RAP). It provided that no interest would be void by reason of any RAP and would have applied to property interests created before the effective date of the legislation, absent a clear indication of contrary intent, as well as to property interests created on or after the effective date.75 The bill died.
—The author would like to thank her colleague Kevin Duncan for his valuable contributions to this article.
—This material is written by Lazard Wealth Management LLC for general informational purposes only and does not represent our legal advice as to any particular set of facts and does not convey legal, accounting, tax or other professional advice of any kind; nor does it represent any undertaking to keep recipients advised of all relevant legal and regulatory developments. The application and impact of relevant laws will vary from jurisdiction to jurisdiction and should be based on information from professional advisors. Information and opinions presented have been obtained or derived from sources believed by Lazard Wealth Management LLC to be reliable. Lazard Wealth Management LLC makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change.
1. 2011 Conn. Acts 6.
2. Connecticut H.B. 5192 (2012), S.B. 8 (2012), S.B. 133 (2012).
3. Hawaii Pub. Acts 2012-220, H.B. 2328 (2012).
4. 2012 Ind. Acts 157, S.B. 293 (2012).
5. Illinois P.A. 96-1496, S.B. 2505 (2011).
6. Illinois P.A. 97-0636, S.B. 397 (2012).
7. Illinois H.B. 5297 (2012).
8. Kentucky H.B. 127 (2012).
9. 2011 Maine Laws Ch. 380, H.B. 778 (2012).
10. Maryland S.B. 402 (2012).
11. Minnesota H.B. 2985 (2012).
12. New Jersey A. 146, A. 615, A. 1037, A. 1509, A. 1626, A. 1955, A. 2604, A. 2703,
A. 2731, A. 2732, S. 239, S. 804, S. 1528, S. 3113.
13. New York S.B. 6015.
14. 2011 Ohio Laws 28, H.B. 153 (2011).
15. 2011 Oregon Laws 526, H.B. 2541 (2011).
16. Oregon OR. V. 84.
17. Rhode Island S.B. 2201 (2012).
18. Rhode Island Gen. Laws Section 44-22-1.1.
19. Rhode Island H.B. 2471, H.B. 7705.
20. 2012 Tenn. Pub. Acts, Ch. 1085, S.B. 2777 (2012).
21. 2012 Tenn. Pub. Acts, Ch. 1057, H.B. 3760 (2012).
22. Vermont S. 196 (2012).
23. Wisconsin A.B. 637 (2012).
24. See Notice 2011-101, issued on Dec. 20, 2011.
25. Illinois P.A. 97-920, H.B. 4662 (2012).
26. 2012 Kentucky. Acts, Ch. 59, H.B. 155 (2012).
27. Mo. Rev. Stat. Section 456.4-419.
28. 2011 N.Y. Laws, Ch. 451 (2011).
29. 2011 Ohio Laws No. 65 (2011).
30. 2012 Rhode Island Pub. Laws, Ch. 413, 403.
31. South Dakota H.B. 1045 (2012).
32. 2012 Virginia Pub. Acts, Ch. 559, S.B. 110 (2012).
33. Michigan S.B. 978, 980 (2012).
34. Alaska S.B. 165, H.B. 292 (2012).
35. South Carolina H.B. 1045 (2012).
36. Illinois P.A. 97-0921, H.B. 4663 (2012).
37. 2012 Mass. Pub. Acts, Ch. 140, S.B. 2128 (2012).
38. Missouri S.B. 628 (2012).
39. New York S. 7183 (2012).
40. 2012 N.C. Pub. Acts, Ch. 18, H.B. 707 (2012).
41. Ohio H.B. 479 (2012).
42. 2012 Virginia Pub. Acts, Ch. 562, S.B. 180 (2012).
43. Ohio H.B. 479 (2012).
44. 2012 Virginia Pub. Acts, Ch. 555, S.B. 11 (2012).
45. New Jersey S.B. 765, A.B. 1086 (2012).
46. Ohio H.B. 479 (2012).
47. 2012 Virginia Pub. Acts, Ch. 718, S.B. 432 (2102).
48. Kerrigan v. Commissioner of Public Health, 289 Conn. 135 (2008); Varnum v. Brien, 763 N.W.2d 862 (2009); Goodridge v. Mass. Department of Public Health, 440 Mass. 309 (2003); N.H. Rev. Stat. Ann. Section 457:1-A; N.Y. CLS Dom. Rel. Section 10-a; 15 V.S.A. Section 8; D.C. Code Section 46-401.
49. Statement of the Attorney General, available at www.justice.gov/opa/pr/2011/February/11-ag-222.html.
50. Colorado S.B. 2 (2012).
51. Illinois H.B. 5170 (2012).
52. 86 Ill. Adm. Code 2000.200.
53. Maine L.D. 1860 (2012); Maine Secretary of State Press Release, available at www.maine.gov/sos/news/2012/samesexmarriage.html.
54. 2012 Laws of Maryland, Ch. 2 (2012), Maryland Board of Elections Press Release available at www.elections.state.md.us/petitions/Certification_Notice_civil_marriage.pdf.
55. Port v. Cowan, 2012 Md. LEXIS 283 (May 18, 2012).
56. 2011 Laws of Minnesota, Ch. 88.
57. Missouri S.J.R. 45.
58. New Hampshire H.B. 437 (2011).
59. New Jersey S. 1 (2012).
60. New Mexico H.J.R. 22.
61. 2011 N.C. Pub. Acts 409, S. 514 (2011).
62. Rhode Island S.B. 2504 (2012).
63. Rhode Island Executive Order 12-02.
64. Rhode Island S.B. 2987 (2012).
65. Vermont H. 758 (2012).
66. 2012 Washington Sess. Laws, Ch. 3.
67. West Virginia S.J.R. 2 (2012).
68. See Massachusetts v. U.S. Department of Health and Human Services, 2012 U.S. App. LEXIS 10950 (1st Cir.); Windsor v. U.S., 2012 U.S. Dist. LEXIS 79454 (S.D.N.Y 2012); Golinski v. Office of Personnel Management , 824 F. Supp.2d 968 (N.D. Cal. Feb. 22, 2012) and Dragovich, et al. v. Department of the Treasury, et al., 2012 U.S. Dist. LEXIS 71745 (N.D. Cal. May 24, 2012).
69. Alaska S.B. 165 (2012).
70. 2012 Florida Pub. Acts, Ch. 49, S.B. 1050 (2012).
71. Kansas S.B. 403 (2012).
72. 2012 Kentucky Pub. Acts, Ch. 59, H.B. 155 (2012).
73. Mississippi H.B. 732 (2012).
74. Vermont H. 327 (2012).
75. South Carolina S. 1243 (2012).