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Category Archives: Fiduciary Investments

Generation Skipping Tax hits skip beneficiaries of charitable trust: Trustee fails to inform.

In Hobbs Jr. v. Legg Mason Investment Counsel and Trust Company (N.D. Miss. January 25, 2011), Plaintiffs were allowed to bring a claim based upon failure to inform beneficiaries of generation-skipping tax consequences but lose summary judgment action with respect to alleged damages emotional distress and having to sell securities at a loss to pay taxes all based on trustee’s failure to inform beneficiaries of GST consequences of distributions from trust.

Upon the death of Edward H. Johnson in 1994, a QTIP marital trust was established for the benefit of his wife, Bernice. Lawrence Glover and First American Trust Company were appointed as co-trustees. The trustees allocated the assets of the marital trust into two separate trusts to take advantage of Edward Johnson’s remaining GST exemption. One contained $949,626 of assets exempt from GST tax liability. The other contained $18,420,895 of nonexempt assets. Read more of this post

Corporate trustee did not breach fiduciary duty for failing to diversify.

Karo v. Wachovia Bank, N.A., 2010 U.S. Dist. LEXIS 46929 (May 12, 2010) A Virginia federal district court grants summary judgment in favor of Wachovia Bank as co-trustee on claims of breach of fiduciary duty arising out of loss in value of bank stock comprising 65 percent of the trust portfolio.

In 1966, Rosalie Karo created a trust for the benefit of her husband Toney, her son Drew, and her grandson W.A.K. (a minor), with Toney and Central National Bank as co-trustees. The trust was originally funded primarily with Central National Bank stock. Through a series of mergers, Wachovia Bank became co-trustee and the trust assets included Wachovia stock that constituted 65 percent of the trust portfolio. Read more of this post

Delaware Chancery Court Denies Beneficiary Access to Privileged Information

In N.K.S. Distributors, Inc. v. Tigani, 2010 Del. Ch. LEXIS 104 (May 7, 2010) a Delaware Chancery Court denied a motion by a trust beneficiary to compel production of communications between attorney and trustee on the grounds of the attorney client privilege for advice in connection with matters adverse to the beneficiary.

Bob Tigani was the trustee of a 1986 trust for his own lifetime benefit, and also had the power to appoint the successor beneficiaries of the trust from a class including Bob’s sons, Chris and Bob, Jr., and their descendants. In 2000, Bob exercised his power to name Chris as sole successor beneficiary of the trust. The trust was the majority shareholder of N.K.S. Distributors, Inc.

In litigation between Chris and the company, Chris moved to compel production of communications between Bob and his counsel concerning the trust. Bob’s counsel refused to produce document on the basis of attorney client privilege. The court rejected Chris’s argument that under Riggs National Bank v. Zimmer a trustee must produce to a beneficiary all communications containing legal advice pertaining to the trust or the trustee’s performance of his duties. The court distinguished Riggs on the basis that in this case, Bob’s attorneys were advising Bob on problems with the company that Bob believed Chris was causing, and therefore the legal services could not deemed to be performed for Chris’s benefit.

The court noted that nothing in the law provided justification for the beneficiary of a trust to receive privileged documents where, as in this case, the documents were prepared on behalf of a trustee in preparation for litigation between a successor beneficiary and the trustee. The court further distinguished Riggs on the basis that Chris’s interest in the trust was contingent and subject to Bob’s power, and therefore he was entitled to lesser rights than a primary beneficiary.

The Bucket System for Elder Portfolios

A few years ago, a 91 year old retired minister called me to ask about our asset management services. After telling me a little of his history and background which included riding in a horse-drawn wagon as a circuit preacher, he returned to his investment portfolio and said, “now what I’m looking for is something with long term growth potential.” I asked him to please share with me his secret for such optimism at his age, half wondering if his brand of religion allowed for perpetual trusts, and told him most of my clients his age won’t even buy ripe bananas.

When managing the elder portfolio, I like to use the “bucket system” system of investing. Not to be confused with a Bucket List, meaning the list of things you want to do before you die. The Bucket System of Investing assigns assets to four buckets, each with its own set of requirements. The system works for any age group, but I find that elder clients like the system best. In simplistic terms, each of the buckets can be described as follows:

buckets1. The Income Now Bucket: As its name implies, this bucket identifies the income the elder investor must have now and for the next five to ten years to maintain their current lifestyle. Assets placed in this bucket should be as risk-free as possible, and are limited in scope by the liquidity and safety requirements imposed by this bucket. If fixed income from pensions or social security are sufficient to fund the income requirement, this bucket may only contain a cash reserve fund. If there is a gap, then immediate annuities or short term municipal bonds or bond funds can be used. Due to interest rate risk, longer term bonds or CD’s with maturities greater than five years should be avoided. The point is, this bucket is for short term can’t-miss needs.

2. The Income Later Bucket: This bucket indentifies the income one has to have down the road – perhaps ten or more years from now. The assets placed in this bucket, and the available investment options vary widely depending on several factors. Nevertheless, the advisor should be able to calculate an amount that should be allocated to this bucket and provide reasonable assurances to his elder client that by the time this bucket is needed to provide income, there will be sufficient funds with which to do so. As the time approaches, some or all of the assets in this bucket are poured into the Income Now bucket and managed according to that bucket’s requirements. For this stage of life, there should be an expectation for some form of long term care costs, either for facility care or home health care. If the person has long term care insurance, then the net cost above what the insurance pays needs to be factored in. Tax-deferred annuities, laddered bonds, or dividend paying stocks or funds may be appropriate vehicles here.

3. The Lump Sum Now Bucket: This bucket identifies the client’s short term lump sum requirements, and often does not employ an investment vehicle at all because the funds are actually spent over a one to three year period. Examples of this for the elder portfolio include paying off a mortgage or prepayments to a long term care facility. Cash Equivalents such as CD’s or Short Term Treasuries, or Ultra Short Bond Funds can be used to fund this bucket.

 4. The Lump Sum Later Bucket: The elder client may face lump sum requirements down the road (five or more years out) that open up the available investment options. But again, these are requirements, not maybe-if-there’s-enough goals (we’ll talk about that bucket next). These are known future obligations that the client doesn’t have the ability or desire to fall short on. Examples may include a balloon note payment, upfront costs to a retirement community, or a business buyout obligation.

5. The Surplus Bucket: Here’s where it gets a little more fun, because at this point, all of the client’s known current and future obligations have been accounted for and funded for in the appropriate bucket. The Surplus Bucket gets whatever is left and can be used for either short or long term items such as funding a grandchild’s education, leaving a charitable legacy, or making gifts to children. Risk is often less of a concern here because you are certain that your required needs have been funded for already.

The Bucket System is not for everyone, and at least one study suggests that investing this way could actually result in lower expected returns than if the entire investment were placed in a single-strategy bucket and income and/or lump sums taken from that bucket as needed. Maybe so. But from a purely psychological standpoint, my experience is that clients weather volatile markets better when they know that their current lifestyle money is not affected by the turbulence while their future lifestyle money is allowed to experience a full market cycle untouched by current requirements. This is especially true for those whose assets are now the source of their monthly paycheck.

When Mom becomes a Tenant

The trust business involves many roles, and most corporate trustees perform well most of the time with the fiduciary and administrative roles that years of statutes and uniform laws have helped to define. At least as important is maintaining a healthy and cooperative relationship with all the parties to a trust in order to handle the inevitable conflicts that will arise given enough time.

Years ago we became trustee of a trust established for the benefit of a minor with proceeds received in a wrongful death litigation. The minor’s mother, as guardian of his estate, was allowed to enter into the trust agreement on the minor’s behalf. Subsequently the court approved the trust’s purchase of a home for the minor, which of course the mother also lived in; as well as monthly support payments to the mother as caregiver for the minor. Read more of this post

SEC Accuses Virginia Advisor Of $7.7M Fraud

CLE image According to a story in FA News, The Securities and Exchange Commission has filed civil charges against a Richmond, Va.-based advisor, accusing him and his companies of orchestrating a $7.7 million offering fraud and Ponzi scheme.
The complaint alleges that from at least January 2006 to November 2009, advisor Nicholas D. Skaltsounis directly, and through his registered reps, fraudulently offered and sold promissory notes and stock to at least 74 investors in at least 14 states. Many of those who bought the fraudulent investments were elderly and unsophisticated investors, according to the SEC. Skaltsounis, 66, and at least one other defendant, are seniors themselves, according to the complaint.
Skaltsounis is CEO and president of AIC Inc., a financial services holding company for three broker-dealers and an investment advisor that were all involved in the scheme.

SEC Accuses Virginia Advisor Of $7.7M Fraud

In Terrorem clause upheld: may cost beneficiary $17 Million

In Shelton, Tamposi v. Tamposi, Jr. & Tamposi, a New Hampshire judge enforced the in terrorem clause of the decedent’s trust, which could result in the beneficiary being forced to disgorge nearly $17 Million in trust benefits received. In terrorem clauses are typically found in wills and are more commonly known as no-contest clauses. Such clauses seek to discourage legal challenges to the provisions of a decedent’s will, often leaving no share to the individual who challenges the will’s provisions.

Elizabeth Tamposi, one of twelve beneficiaries of the Sam A. Tamposi, Sr. trusts, had a history of bringing actions against her brothers, Sam, Jr. and Steven Tamposi, for allegedly breaching their fiduciary duties as investment directors of the trusts, but avoided the application of the in terrorem clause until her last unsuccessful attempt which began in 2007. Apparently this judge had seen enough, and ruled that the in terrorem clause had been violated.

In addition to the in terrorem clause, this case is fascinating not just for its notoriety but for the number of fiduciary issues it examines.

First, a little background: Samuel A. Tamposi, Sr. (Sam, Sr.) was a hugely successful real estate developer from New Hampshire. Sam, Sr. had six children including Sam, Jr., Betty and Steve. In his plans for his million dollar estate, Sam, Sr. established the SAT, Sr. Trust (trust) in 1992. The trust was amended multiple times after its creation—the pertinent provisions of which affirmed that the trustee may retain “real estate interests” as a substantial part or all of the trust property and named Sam, Jr. and Steve as investment directors. The trust was to be divided into 12 separate trusts for Sam, Sr.’s children and their children. Perhaps most importantly, the trust contained an in terrorem clause specifying that should any person challenge the trust’s validity and attempt to have it set aside or contest any part of it, that person would forfeit his right in the trust, with his or her share distributed “in the same manner as would have occurred had such person died prior to the date of execution of this trust.”

Upon Sam, Sr.’s death in 1995, his estate was valued at $20.5 million, consisting of various real estate holdings, limited partnerships and corporations (one of which was an interest in the Boston Red Sox). Sam, Jr. and Steve assumed responsibility as investment directors for the 12 subtrusts. Elizabeth was not pleased with her father’s selection of Sam Jr. and Steven, however and sought to have them removed or their actions curtailed. It’s a sad story of family discord, but one that has many lessons for practitioners which I shall examine in subsequent posts.

See “The Cementing of Family Bonds” Trusts & Estates.

Hat tip: Wills, Trusts, & Estates Prof Blog

Mississippi leads nation in “deadweight ratio”

As if Mississippi hasn’t received enough first-place awards for titles we would prefer to not be known for, let’s add highest “deadweight ratio” when it comes to measuring the integrity of our municipal bonds. At least according to Forbes Magazine writer William Baldwin.

Municipal bonds are attractive to high tax-bracket investors because the interest paid on such bonds are exempt from federal income tax. They are also frequently-held assets of fiduciary accounts; often believed to be secure alternatives to taxable government or agency bonds. The principal risks of municipal bonds is credit risk (the issuing municipality’s ability to pay back the bondholders) and interest rate risk (the risk that rising interests rates will decrease the value of lower-interest bonds). According to Baldwin this is only part of the risk investors need to consider.

The traditional measures of credit risk in state and city bonds are the ratings from Standard & Poor’s and Moody’s, budget deficits, outstanding debt  and pension underfunding. These measures are all valuable to investors. But they are only symptoms of the disease.

The structural problem is that government has too many mouths to feed. It’s possible to quantify that problem. The result is a metric that I call the Deadweight Ratio. It tells you how many beneficiaries of government spending there are for every private sector job.

Every state has one set of people contributing to the fisc­—namely, private sector workers—and another drawing from it—namely, government workers and welfare recipients. In healthy states, the contributors outnumber the users. In unhealthy states the reverse is true.

Up to a point, the private sector is willing to carry government employees and welfare moms on its shoulders. Beyond that point, it is not, however worthy the recipients of government largesse are. Employers leave. The jobs go to other states or overseas. That leaves what’s left of the private sector in even worse shape.

To calculate Deadweight Ratios, Baldwin and Forbes statistician Scott DeCarlo used as the recipient count the number of people qualifying for Medicaid at some point in 2007 (the latest year in the relevant database) plus 1.25 times the number of state and local workers. The 1.25 multiplier reflects the fact that, in the bigger state and city plans, pension payouts average 25% of payroll.

By their calculation, Mississippi’s deadweight ratio leads the nation with a score of 120.7. This cannot bode well for our state if we want to attract private sector investment. It also serves as a new risk-measurement tool for those of us who hold Mississippi debt in trusts and other fiduciary accounts. The “Top-Ten” troubled states are shown below.

numbers are in thousands


State & local
Medicaid recipients Deadweight
Mississippi 877 222 750 120.7
New Mexico 635 167 501 117.9
California 11918 2137 10511 113.0
Arkansas 973 199 692 98.9
Louisiana 1566 333 1097 98.6
Arizona 2045 363 1456 96.1
Maine 506 91 350 94.4
New York 7272 1387 4955 93.5
West Virginia 621 130 392 93.0
Alaska 244 69 121 91.2

For the complete list and the full article see, What’s Your State’s Deadweight Ratio? – William Baldwin – Investment Strategies – Forbes


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