Fiduciary Perspective: Practical Problems and Practical Solutions

Estate planning is drafted at a single point in time. Most documents are drafted with as much flexibility as possible, but sometimes facts and circumstances change which may necessitate creative solutions. Some of the most common problems that need solving are discussed below.

Concerns Regarding Beneficiaries Having Knowledge Too Soon

A common concern as beneficiaries are approaching age 18 is that the grantor or others do not want them to have the information about the trust because of the concern that they are not prepared to have access to wealth. As trustees, there is an obligation to provide the beneficiary with information about the trust and statements once they reach age 18. Some grantors will suggest that the trust should be amended to make it a silent trust. The trust usually cannot be modified this way because it is not permissible to alter a material purpose of the trust and it violates the trustee’s duty of impartiality to the beneficiaries. However, most 18-year-olds use their parents’ address as their primary residence. The statement can be mailed annually to the parents’ address and what happens to it when it gets there is not the trustee’s concern.

Drafting for Family Issues

Many clients have concerns about their beneficiaries and how the funds will be distributed to them. Issues of mental illness and substance abuse are important and must be considered. Trust terms must be clear, and the trustee must be able to actually follow them. Some examples of trust terms that are very difficult to comply with:

1. Beneficiary must lead a purposeful life.
2. Beneficiary must lead a sober life – drug and alcohol testing and attending treatment.
3. Beneficiary must attend a religious institution.
4. Beneficiary must work so many hours in the previous summer before the trustee can pay education expenses.

The trustee has almost no means by which they can effectively monitor these types of provisions.

What can a trustee do?

A trustee can monitor for abuse and adjust distributions accordingly and pay vendors directly to make certain rent and insurance are maintained. A trustee can encourage the correct behaviors and make resources available for those behaviors or decline to provide resources if the correct behaviors are not occurring.

Trustees can provide education and understanding to beneficiaries who are not knowledgeable regarding finances and help beneficiaries understand how the money can grow over time and about the sustainability of the trust over time. Trustees can also be a buffer against those who might like to take advantage of a beneficiary.

Trustees, drafting attorneys and families can work together to achieve clients’ goals while permitting enough flexibility for the trustee to be able to function effectively.

Asset Issues

Corporate trustees can accept many assets – closely held businesses, residential real estate, promissory notes, tangibles, mineral interests all can be held. However, cannabis assets and individually held cryptocurrency require special care. For any of the assets which are difficult to hold, a special fiduciary may be appointed to manage the assets. Alternatively, an LLC can be created to hold the assets with the trust as the member of the LLC and an independent manager for the LLC.

Cannabis

Cannabis and cannabis-related businesses are problematic for most trustees. The federal regulations make it difficult for federally regulated banks to hold these types of assets or cash derived therefrom. This is a result of the dichotomy between federal treatment of cannabis as an illegal substance and state laws that permit limited recreational use of cannabis. While cannabis may be legalized in Michigan, cannabis use, possession, production, distribution and marketing remain illegal under federal law.

The simplest work around is for an independent fiduciary to be appointed to manage cannabis assets, or the assets could be placed in an LLC. The trust instrument should give the trustee the authority to appoint an independent fiduciary to carry out the duties associated with the transfer of a cannabis-related business and its licenses. Grantors should take care that all beneficiaries can hold the requisite licenses.

Individually Held Cryptocurrency

Most trustees can hold cryptocurrency which is publicly traded; however, cryptocurrency which is not publicly traded has potential pitfalls. The transfer of cryptocurrency is not well-established. Cryptocurrency is treated as property, such that any sale or exchange of cryptocurrency, including its conversion to dollars, constitutes a taxable event that can lead to the recognition of capital gains or losses. For those who inherit cryptocurrency and want to claim a ‘step-up’ income tax basis, the owner will have had to maintain complete records of acquisition dates, purchase prices, transaction dates and any fees associated with cryptocurrency trades to document that ‘step-up’ in basis.

Cryptocurrency does not allow for conventional methods of recovery, and there is no central authority to go to once a ‘wallet’ is compromised or a ‘wallet’ key is lost. A 2018 Wall Street Journal article estimated that about 20% of all Bitcoin tokens had been lost and were no longer retrievable. Any successor owner must have the necessary information to retrieve the cryptocurrency on the owner’s death.

The Revised Uniform Fiduciary Access to Digital Asset Act, adopted by Michigan in June 2016 [MCL 700. 1001 et seq] allows a fiduciary to access certain digital assets, but only if the estate planning instruments clearly and expressly authorize that access. Accordingly, the owner’s Will or Trust needs to explicitly grant authority to the fiduciary to access and manage digital accounts, in order to reduce delays or avoid legal challenges. “My fiduciary may manage my digital assets” is insufficient when it comes to managing, accessing, and liquidating cryptocurrency held in an estate or trust.

Because of this host of potential problems, it is imperative that there be detailed information which can be accessed by the owner’s successors.

Delegation of Investment Authority

Most professional trustees will have no issues serving as a directed or divided trustee where the document clearly states the authority of an investment or distribution trustee and relieves the other trustees from liability. Sometimes the trustee is asked to delegate investment authority to a third-party provider. An example is that the client has an established relationship with an investment advisor who does not have trust powers and the trust needs a professional trustee. If the trust does not contain directed language, the trustee is being asked to fully delegate investment authority to an outside advisor while retaining all the liability associated with the investments. To solve this problem, the trust can usually be modified to include directed language. Modification may require a change of situs to a state with broader modification provisions, and sometimes the trust must be decanted into a new trust, but it allows the client to have the best of both worlds.

Nearly all potential problems can be solved if addressed proactively and with trusted advisors.