INSIGHTS
February 2021
Photo: Chris Flook, CC BY-SA 4.0, via Wikimedia Commons
Revocable Living Trusts
As if the snow we experienced the first few days of February wasn't enough; adding insult to injury, when I woke up the morning of February 2nd I read:

"We have passed the darkness of night but now see hope and morning's bright light. But now when I turn to see there's a perfect shadow cast of me. Six more weeks of winter there will be!" - Phil's "inner circle"

Yes, the shadow of Punxsutawney Phil is offering six more weeks of winter. I for one, am hoping he is mistaken. If Phil is right and we are stuck inside and have more time for reading and planning, I thought I would share with you a sort of a primer on a revocable living trust.

Revocable means that this trust may be amended or cancelled (revoked) at any time by its creator, who is called the grantor.

Living means that the trust is created during the grantor's lifetime and not by a will (that would be a testamentary trust).

A trust is a fiduciary arrangement in which one party, the trustee, holds and manages assets for the benefit of another party, the beneficiary. In a revocable living trust the beneficiary is typically the grantor. That's right, you can make yourself the beneficiary of a trust that you can create.

But why would you do that?
With Pitchers and Catchers set to report to training camp in a few weeks, sharing the Last Will and Testament of Babe Ruth would be appropriate.

FAMOUS WILL FOR THE MONTH BABE RUTH
CLICK THE NAME TO READ
CLICK THE NAME TO READ

In this month's Informational Article Inheritance Interference there is a lesson for everyone. Don't wait for a health emergency to fix your estate plan--you don't know how much time you have left. There is a lesson for children everywhere to take away.

As I'm finishing up February's newsletter this Sunday morning, I am looking out my window watching snow falling with a fury. Punxsutawney Phil may be right, oh no!

Stay well,
Ira J. Brower, Founder
Inheritance Interference
Frank Gomez was engaged to Louise in the early 1950s, but he broke off the engagement when he was sent to fight in the Korean War. When he returned from Korea, Frank married another woman, Beverly. They had four children together.

In 1998 the Frank and Beverly Gomez Living Trust was created to manage the family assets. Beverly died in 2012. Frank and Louise then rekindled their love affair, which had been dormant for about 60 years, marrying in 2014. Frank's daughter Tammy was upset about the remarriage, as was his son Richard.

Frank had a stroke in 2015. He then began discussing making financial arrangements for Louise in the event of his death. First, he amended his living trust to give Louise a life estate in their home. The next step was the reformation of the trust to become the Frank and Louise Gomez Living Trust, giving Louise a life estate in all the trust assets. Frank discussed the new trust with his estate planning attorney while he was recovering in a nursing home from surgery, and Louise was present for that discussion. 

On August 19, 2016, Frank was sent home under hospice care. His lawyer had an appointment to meet with him the next day at home to sign the new trust documents. However, that morning Tammy and Richard showed up at the house. When Louise warned them that Frank had an appointment with his lawyer, and the children would have to give them some privacy, Tammy demanded that Frank not sign anything. To enforce her desire, when the lawyer arrived, Tammy and Richard barred his entrance to the home.

Frank died about 13 hours later, never having met with the lawyer.

Louise won her lawsuit against Tammy and Richard for the tort of intentional interference with an expected inheritance. The lower court also held that Tammy violated her fiduciary duty to her father when she deliberately prevented a meeting between him and his lawyer. The California appellate court later affirmed that judgment. 

The lesson for everyone should be: Don't wait for a health emergency to fix your estate plan--you don't know how much time you have left. The lesson for children everywhere is that you must respect the wishes of your parents regarding their estate planning. Talking is good, interfering with seeing a lawyer is very bad.

(February 2021)
© 2021 M.A. Co. All rights reserved.
The "Total Return" Trust
"Trust income shall be paid to my wife at least annually, and the trust remainder shall be paid to my children at her death." That common phrase, familiar to generations of trust lawyers, sounds simple, but it is not. What is "income"? 

In a traditional trust, income generally consists of interest and dividend payments. Price changes--capital gains and losses--affect the value of principal, and hence benefit the remainder beneficiaries. For example, assume that a marital deduction trust invests in a technology stock that pays no dividends at all, but it doubles in price in just five years. How much income does that create for the surviving spouse? None at all!

There are several alternatives to the traditional definition of trust income.

The example of the charitable unitrust

When Congress became concerned in the late 1960s about a possible mismatch between the charitable deduction and the amounts that a charity actually might receive from a charitable trust, the resolution included a new statutory definition for a charitable income interest. Thus was born the unitrust, in which each year the income beneficiary receives a fixed percentage of the value of the trust assets, regardless of how those assets are invested.

During the 1990s, when interest and dividend rates fell to historically low levels, estate planners began to look to the unitrust model for private trusts as a way to resolve conflicts between income and remainder beneficiaries. At the same time, the Uniform Prudent Investor Act was introduced and began to be adopted around the country. That legislation provides standards by which trustees are measured in the discharge of their fiduciary duties in the investment arena. The new emphasis was less on the appropriateness of each individual trust investment, more on adequacy of the total trust return.

Thus was born the total return trust, a trust without a charitable beneficiary that follows the conventions of a charitable trust in determining what the income beneficiary gets.

Total return trusts are not a magical solution to investment management issues. They don't guarantee growth; they don't prevent losses. But they can ease conflicts among trust beneficiaries and meet beneficiary expectations by providing bright-line definitions of income.

IRS approval

Trusts have tax consequences, and in 2001 the Internal Revenue Service weighed in on total return trusts. Adjustments between income and principal that are consistent with state law will not impair the marital deduction, and a unitrust interest will qualify for the marital deduction if provided for by state law. Generally, the IRS considers that a unitrust interest of not less than 3% and not more than 5% is a reasonable apportionment of the total return of a trust. Existing marital deduction trusts may be converted to total return format under IRS regulations that were finalized in 2004.

When "total return" is not paramount

The rigidity of the total return format may not be appropriate in all cases. Situations in which a traditional trust may be satisfactory:
  • Maximum return is not the goal of the trust. Some grantors are most worried about protection of capital and controlling investment risk. 
  • The surviving spouse is the primary beneficiary. A traditional trust that also permits discretionary invasions of principal to meet the spouse's needs will be adequate in many situations.
  • The trust has a short time horizon. Because stock prices tend to be volatile over short time frames, increased equity exposure may not be appropriate for a trust with a short shelf life.

May we tell you more?

As you can see, modern trust design permits flexible trustee response for maximum financial security. Might you and your family benefit from trust-based financial management? We'd be pleased to tell you more about our services. 

(February 2021)
© 2021 M.A. Co. All rights reserved.
Individual Investor Muscle
As January closed there was some very unusual excitement in the stock markets. The price of shares of videogame reseller GameStop, which had languished for years near $5, suddenly began to rocket skyward, to $40, then $60, then $120, eventually cresting at well over $400 per share before coming back down to earth. This despite an absence of profitability.

Several factors were behind the rollercoaster ride. First, large hedge funds had sold Game Stop share short, with short interest reaching 140% of the available shares of the company. The funds were betting on the company's insolvency. Next, GameStop announced that new board members were appointed to help lead the company into a promising e-commerce future. Finally, a large group of individual investors who participate on the Reddit internet forum WallStreetBets took an interest in GameStop. They began buying up shares of the company and then holding them, encouraging others to do the same. 

That created a problem for the short sellers, as they had to make higher and higher bids for shares to cover their short positions. The risk taken in a short sale theoretically is infinite as share prices go up if holders refuse to sell. A "short squeeze" had developed, to the pleasure of the individual investors and pain of the hedge funds. Reportedly the short sellers have lost tens of billions of dollars this year. Meanwhile the younger participants at WallStreetBets have been boasting that they've been able to pay off college loans with their profits.

The biggest winners, according to the Financial Times, may have been those who make the markets in stocks. Trading volume has broken records. More than 93 billion shares changed hands over five trading sessions, including 24.4 billion on one day alone. Options trading was up 62% in January, compared to the year-earlier period. 

One driver of the growth in individual investor activity is the emergence of firms that provide free trades, most prominently RobinHood. But this incident put a spotlight on why those trades can be free. RobinHood sells its order flow to certain market makers that will profit from the spread between the bid and ask price of the shares. The compensation for RobinHood is a percentage of that spread. RobinHood reported that in the fourth quarter it earned $221.4 million in this way. Put another way, one might say that RobinHood's customers paid $221.4 million for their "free" accounts that quarter. There is no such thing as a free lunch. It is a truism in the internet age that when you get something for free it is because you are the product.

During one heated week RobinHood restricted their users' ability to trade GameStop shares, while the hedge funds remained free to trade. The disparity in treatment has led to calls for an investigation, with the possibility of new regulation or legislation.

Will individual investors continue to band together to move stock prices in ways that are independent of financial fundamentals? Or was the GameStop situation a rare "black swan" in the stock market? 2021 is shaping up as an unusual year for investing.

(January 2021)
© 2021 M.A. Co. All rights reserved.
Articles of Interest
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