October 26, 2021

Greetings [FIRST]:

ITA President's Message

Craig Schrader, Vice President Trust, West Bank and President of the Iowa Trust Association

I expect everyone is getting ready to enter “tax season,” which entails a significant amount of extra work for most trust departments.  Fortunately, there doesn’t seem to have been  major changes to the fiduciary income tax provisions of the Internal Revenue Code during this past year.  And since we’ve already experienced one year of a pandemic tax season so I’m feeling somewhat optimistic about how things will play out for the 2020 tax season.

The ITA board has been discussing the upcoming 2021 Fall Conference, which is scheduled for September 30 and October 1..  While the Board remains hopeful that 2021 will allow a return to the traditional in-person conference, it’s too early to determine how things will play out with the vaccine and whether  people will be able to return to their relatively “normal” routines.  

This time of year a topic for most departments is salaries; it’s time for the annual ritual of providing raises to staff members.  Based on my conversations with other department managers and some “head-hunters,” I have some concerns that salaries for existing trust department staff members may not be keeping up with what the marketplace is providing for newly hired trust professionals.  These discussions have left me with the impression salaries may have increased significantly these past few years.  Accordingly, departments may want  to review what has been happening in the marketplace to ensure their salary structure is still competitive.  If a department should have a need to hire a replacement for someone who leaves, the department  may experience “sticker shock” when it looks for a candidate to replace that staff member.  It may be better to be proactive on this topic by, if necessary, adjusting the salaries for the good experienced people already in the department rather than running the risk of having someone realize they are being underpaid and leave for a better offer.  In this competitive marketplace your department may end up paying an unproven replacement candidate more than what it had been paying the person who left.

A related topic would be how departments go about finding new trust officers.  My sense is most departments do not have a training program in place to train trust officers.  The closest thing to a training program might be promoting someone from within the department, usually an administrative assistant or assistant trust officer.  The person who is promoted, however, was not necessarily hired to become a trust officer but rather to fill the job they previously had.  The lack of a training program means many departments are forced to enter the job marketplace to look for an experienced trust officer, which these days seems to provide a fairly shallow pool of potential candidates. 

I’m not sure why this is.  It may be efficiency cutbacks made by many departments during the past twenty years has left departments generally with a staff of older trust professionals, who are now starting to retire.  It may be larger departments, whose trained younger staff members used to be a good source for hiring and promotions, have moved these jobs and employees to trust administration centers in larger out-of-state metropolitan areas so they are no longer a reliable source for new hires.  In any event it has become a challenge for departments to replace experienced trust professionals when someone leaves or retires.  While I don’t have a solution I thought it would be appropriate to mention what seems to be happening. This also goes along with my suggestion departments may want to be proactive in ensuring their salary levels are competitive with the marketplace.

As you may know, on July 1, 2020, Iowa’s new directed trust statute went into effect, benefiting families who desire to assign various management roles within a trust. While Iowa trusts were traditionally administered by corporate trustees controlling all aspects of management, families can now create directed trust structures as part of their estate plan, giving them more flexibility to empower trusted advisors in management roles.

The updated Iowa Trust Code allows for a directed trust structure, which means powers can be divided among several trusted advisors. This flexibility allows a family to give trust powers to those who are in the best position to exercise them, consistent with the family’s estate plan. Here’s an overview of the three powers a family can assign.

The Investment Trust Director
The Investment Trust Director tells the trustee which assets to hold and decides when to buy and sell investments. The person appointed to this role can be any trusted individual, including the grantor, a family member, or anyone else looked to for assistance managing assets in the trust. This may also be an advisory firm or a group of individuals comprising a committee.

The trustee no longer needs to manage the investments within the trust and can instead take direction from the Investment Trust Director. This further allows a trust to better manage investments that a corporate trustee may not be willing to accept, such as concentrated positions, unique assets, real estate, and the family business.

The Distribution Trust Director
The next role the updated Iowa statute creates is the Distribution Trust Director. Traditionally, the sole trustee would receive and respond to all requests for distributions, making decisions on requests that are left to the trustee’s discretion. But certain family circumstances and distribution decisions may be handled more efficiently by a trusted advisor who is closer to the situation. If a Distribution Trust Director is appointed, they can be a person or committee who knows the family well, understands unique family dynamics, and perhaps is more in tune with the intricacies of the family’s estate plan.

The person appointed as Distribution Trust Director can be any trusted individual. Ideally, this person should be a neutral party with no conflicts of interest. Families generally do not appoint the grantor or another beneficiary in this role, as they do not want the person in the position of making distribution decisions viewed as benefiting themselves.

Having a Distribution Trust Director can increase the efficiency of trust management and tailor the management to each family situation. This is particularly helpful when there is a trust beneficiary with significant need, mental health, or addiction issues that impact distributions decisions.

The Trust Protector
Trust planning can establish structures intended to last across two lifetimes. However, within that time, there can be changes to tax laws, the economy, and family dynamics as new generations become beneficiaries. The Trust Protector role is important as it can be empowered to modify the trust for tax purposes, adjust beneficiary interests, replace trustees and trust directors, change which state’s laws apply to the trust, and appoint successors to each role designated in the trust. Families commonly appoint a trusted attorney to this role. 

The updated Iowa Trust Code includes a clear definition of the Trust Protector role and the responsibilities that may be assigned to this role. There are several powers listed in the statute, but the drafting attorney is able to pick and choose the powers that are necessary for each family situation.

Benefits
With the updated Iowa Trust Code, high-wealth Iowans can maintain their advisors without moving the trust out of Iowa. They’ll also be able to work with a local trust service team and an Iowa business. In addition, the Iowa Trust Code provides powers to modify and decant trusts. This can be used for simple corrections or to address larger issues that arise as tax laws change, the economy changes, or challenging issues arise affecting family dynamics.

Nate Birkholz is Managing Director – Private Client Services at Bankers Trust and President of BTC Trust Company of South Dakota. BTC Trust Company of South Dakota has provided Directed Trust services for more than 20 years. Find more articles and insights from Nate on the Bankers Trust Education Center. Bankers Trust Company and its affiliates and their representatives do not provide tax or legal advice, and this article is not intended to provide such advice.  Individuals should consult with their tax and legal advisors regarding their unique situation and needs.

Eric LeSher, Trust Officer, Raccoon Valley Bank
Recently an interesting case was decided by an Appellate Court in California which decided if an intended change to a revocable trust was effectively completed. the proper venue for the settlement of a dispute among a beneficiary and a trust.  Let’s take a look using a case brief format.

Case
Pena v Dey Cal. Rptr.3d 265 (Cal. Ct. App. 2019)

Facts
In 2004, James Anderson (“Anderson”), settlor and trustee, created and executed a revocable trust. In 2008, Anderson executed a First Amendment to the trust in accordance with the method of amendment outlined in the trust document. The First amendment named 15 beneficiaries in various percentages. Anderson was diagnosed with abdominal cancer in 2010 and then brain cancer in 2011. Greg Dey (“Dey”) moved in with Anderson in November 2011 and cared for him until Anderson’s death in May 2014. Anderson contacted an attorney, Michael Shuttleworth (“Shuttleworth”) in February 2014 with the intention of having Shuttleworth made changes to his trust documents. Note: Shuttleworth was not the attorney who had drafted the trust or the Frist Amendment to the trust. Shuttleworth asked Anderson to send copies of the trust and the First Amendment and to put in writing the proposed changes he was considering.

Anderson sent copies of the trust and First Amendment to Shuttleworth which contained handwritten interlineations. More specifically, paragraph 5.5 of the First Amendment contained cross-outs of 11 of the 15 beneficiaries, changes to the percentages of the remaining 4 beneficiaries, and the addition of 3 other beneficiaries with percentages for each of them. One of 3 additional beneficiaries named was Dey. In addition to the trust and interlined First Amendment, Anderson also included a Post-it® note on which Anderson had written, “Hi Scott, Here they are. First on is 2004. Second is 2008. Enjoy! Best, Rob.” Shuttleworth received copies of the trust and First Amendment in March 2014. Staff for Shuttleworth drafted a second amendment to the trust. However, Shuttleworth’s review of the draft caused him to call Anderson in April 2014 to seek clarifications from Anderson. Anderson was out of town when Shuttleworth called and therefore Anderson told Shuttlwworth he would get back to him the following week to discuss the matter. Unfortunately, Anderson was admitted to the hospital later that very day and subsequently died on May 24, 2014 prior to the second amendment being finalized or signed by Anderson. The logical question, I have at this time, might Dey have a case against Shuttleworth for failure to promptly make the changes and make them effective in a timely manner? Perhaps but my opinion is that such a case would be unsuccessful in that Shuttleworth’s response to the, although not as timely as Anderson and Dey might have liked, was not unreasonable and indeed, the ball was in Anderson’s court when he stated he would get back to Shuttleworth the following week.

Issue
Did the trial court error when they ruled in favor of Pena granting her request for summary judgement? More specifically, did the settlor and trustee of a revocable trust validly amend the trust?

Holding
The appellate court affirmed the trial court’s decision to grant summary judgement in favor of Pena, the successor trustee.

Rationale
Dey contends that the trial court made an error in concluding Anderson’s interlineations did not validly amend the trust. In this case, the trial court determined that the terms of the trust controlled how any amendment thereto “shall be made by written instrument signed by the settlor and delivered to the trustee”. As such, the trial court had to determine if the interlineations Anderson made satisfied the prescribed method of amendment. The court determined that although the interlineations were delivered to the trustee, the interlineations did not constitute a written instrument signed by the settlor because the interlineations were not signed by Anderson. But, you ask, as did Dey and his attorney, did not the Post-it® note Anderson sent contain his signature. Well, the trial court determined that the Post-it® note is a separate writing that simply identify the enclosed documents. Anderson sent these documents, along with the interlineations, with the intention of allowing Shuttleworth to prepare a formal second amendment to the trust for his signature, as contemplated by the amendment provision in the trust. If Anderson intended the interlineations and signature on the Post-it® note to amend the trust by themselves, there would have been no need to have Shuttleworth prepare the amendment for his signature.

What should have Anderson done with 20/20 hindsight? As succinctly put by the appellate court, “Because Anderson did not sign the interlineations, they did not effectively amend the trust.”

Steve Bruere, Peoples Company
Section 1031 of the Internal Revenue Code provides real property owners with a major tax-deferral and reinvestment opportunity that can be utilized by investors to build long-term growth in their real estate portfolio. Section 1031 establishes a procedure where real property owners may simultaneously realize appreciation from a business-use or investment asset, defer capital gains taxes upon the sale of the asset, and use the equity from the asset to invest in a replacement like-kind business use or investment asset.  

The principal advantage of a Section 1031 tax-deferred exchange is the ability to use the entire equity of a property owned by a taxpayer to acquire replacement property. It eliminates the immediate tax implications of selling real property, thereby allowing property owners to employ their equity into more advantageous real estate positions. If a property owner wishes to continue to invest in real estate, an exchange can be a beneficial alternative to a sale and purchase. A Section 1031 exchange can provide the following benefits to real estate investor: consolidation and diversification of investments, greater cash flow, relocation of investment, “stepped-up basis” for heirs, and appreciation leveraging.

Section 1031 exchanges have two critical timing rules that must be followed for a successful exchange. These are known as the 45-day identification period and the 180-day exchange period. Failure to adhere to these standards will result in an unsuccessful exchange. There are no exceptions or extensions to these two standards.

Property Identification Rules: The individual completing the exchange may identify as many as three replacement properties, regardless of their total value. This is known as the “3-Property Rule”. In the alternative, the individual completing the exchange may identify any number of properties provided their aggregate fair market value on the 45th day does not exceed 200% of the aggregate fair market value of all of your relinquished property on the date of its transfer (the “200% Rule”). If the individual complies with these rules, they do not need to acquire all of the property identified.

Deferring all Capital Gains Taxes: As a general rule, exchanging taxpayers should keep three important considerations in mind. First, replacement property fair market value must be equal or greater than the fair market value of the relinquished property. Second, all of the exchange proceeds from the sale of the relinquished property must be used to acquire the replacement party. Third, the replacement property debt must be equal to or greater than the relinquished property debt so as to avoid taxable gain due to debt relief. Not following these rules may result in taxable gain. These three considerations are mentioned to help exchanging taxpayers structure a Section 1031 exchange. If you do not follow them, you may still do the exchange. However, it is extremely important to speak with your tax advisor regarding the effects of debt relief or receiving cash for personal use.

As a single purpose entity, Delaware Statutory Trust (DST) investment vehicles qualify for Section 1031 real estate exchanges. Section 1031 establishes a procedure where real property owners may simultaneously realize appreciation from a business-use or investment asset, defer capital gains taxes upon the sale of the asset, and use the equity from the asset to invest in a replacement like-kind business use or investment asset. As part of Section 1031 exchanges, individual investors receive shares in the DST Trust. The property is owned and professionally managed by the DST Trust and is leased triple net to a single Master Tenant. When the DST property is sold, any capital distributions to investors remain eligible for subsequent Section 1031 exchanges.

The DST investment vehicle is ideal for Section 1031 exchanges due to the following characteristics:

• 45 Day ID Period - DSTs eliminate much of the hassle of the identification process by offering investors numerous properties that can be identified immediately. Section 1031 exchanges have two critical timing rules that must be followed for a successful exchange.
• Excess Boot - When a replacement property is lesser in value than the previously sold property, the remaining money must be taxed. This leftover money is known as excess boot. With a DST you can invest down to the penny, ensuring that 100% of your exchange funds are invested.
• Backup Insurance - With a DST the property is already purchased, thus removing any closing risk. This makes a DST a great potential backup in your identification process. Some investors choose to identify a DST as “backup insurance” in the event their other identified properties do not close.
• Professional Management - The DST structure allows investors to collect returns without the management demands of typical real estate ownership. DSTs are managed by professional real estate asset managers who provide expert knowledge on the type of real estate and handle all obligations associated with owning property.

DST Farms has formally launched as a sponsor of Delaware Statutory Trust (DST) investment vehicles, focused on a first-of-its-kind offering in the farmland asset class. The application of the DST vehicle to farmland investing is exciting, as it allows investors to take direct ownership in an asset class historically requiring capital at a scale that is out of reach for many investors. DST Farms has contracted exclusively with Peoples Company, a national full-service land transaction firm, to provide professional farm management on all offerings. With its launch, DST Farms is offering its first land tract, Delta Organic Ag Properties, located in Chicot County, Arkansas. Delta Organic Ag Properties boasts 1,102 USDA certified organic acres with corn, rice, soybeans, and rice planned for production. Visit DSTFarms to download a free e-book for more information on the DST investment vehicle and farmland investing.

The Iowa Bankers Association's Legislative Action Center allows bankers to easily contact legislators electronically. Letters on key pending legislation and regulations are posted on the site and can be easily edited and/or personalized for bankers to send to their respective elected officials and regulators at  the state and federal level. The Legislative Action Center is available at the IBA website.