From left: Melissa Langa and Karen L. Witherell
As every estate practitioner knows, trends happen in estate planning just as often as they happen in all other aspects of life. Some days in our practice, we get the sneaking suspicion that all of our clients got together and decided that asset protection trusts (APT) are the new cool thing and everyone has to have one to maintain their social standing within the group. While we know that there were no such behind-the-scenes machinations, it is hard not to wonder if there is some sort of nexus when client after client comes in looking for asset protection.
There are many wonderful resources out there regarding the pros and cons of asset protection and the various planning techniques. Such resources will walk you through the planning analysis to take when deciding whether or not your client is best served setting up a foreign asset protection trust (FAPT) or would be better advised to look at a domestic asset protection trust (DAPT) structure for their needs. What we wish to focus on in this article is the more human side of asset protection planning for one’s clients, such as: (i) are you are the right attorney for the job? (ii) based on the client’s circumstances, is an APT even appropriate? (iii) is the client actually up for putting such a structure in place and living with the consequences? and (iv) documenting the engagement, trustee selection, and due diligence.
Are you the right attorney for the job?
Before considering taking on an asset protection client, you need to take a hard look at your practice expertise. Not everyone can be an expert in all things, and it is important to know and accept this fact. It is common for trusts and estates lawyers to decide to not include every aspect of trusts and estates as part of their practice. For example, our firm does not do probate litigation as part of our practice because we understand that litigation requires a specialized skill set that takes time and practice to develop.Every time an attorney considers taking on a new area of practice, even one that seems to be a natural offshoot of one’s typical practice, a good attorney should always consider if this is a matter that such attorney can take on. You may never have done a DAPT before, let alone a much more complex FAPT structure. You need to decide for yourself whether and to what degree your practice will include asset protection planning using APT structures. The two most important considerations to review are: (i) your competency, and (ii) the prohibitions against the unauthorized practice of law.
Are you competent to do asset protection trust planning?
The ethical rules governing the practice of law are clear that you cannot accept a client if you are unable to competently address the issues presented by that engagement. So, how do you begin to develop a trusts and estates practice that includes APTs?
1. Research and Read: On your own dime, research and study the law regarding APTs.
2. Don’t Undersell Yourself: Do not underestimate your asset protection knowledge. There are many standard estate planning tools that include asset protection elements. Further, your client may receive ample protection without an APT by using planning techniques that are already part of your wheelhouse.
3. Don’t Oversell Yourself: Do not overestimate your asset protection knowledge. You are not an APT specialist if you’ve never done an APT. Be upfront with your client. If you have done good work in the past, the client may have faith in you. Even so, you cannot proceed unless you independently assess your ability to competently accomplish the task.
4. Align with An APT Lawyer: If you feel you cannot competently undertake your first APT alone, you should align yourself with a lawyer who has APT experience. Three common options are to: (i) co-counsel with an experienced APT lawyer; (ii) hire an experienced APT lawyer yourself to bounce ideas off and to review your work; and (iii) turn the client over to an experienced APT lawyer and shadow the lawyer during the engagement to learn the ropes. Whatever route is chosen, the arrangement must be fully disclosed to the client, and you need to make sure your malpractice insurance provider will cover the arrangement should something go amiss.
Unauthorized Practice of Law: Ethical issues can also arise when the APT will be located in a jurisdiction where you are not licensed to practice. We all can’t live in Alaska, right? To protect yourself from a claim of the unauthorized practice of law, best practices include:
1. Learn Local Ethical Rules: Familiarize yourself with the ethical rules of the APT jurisdiction. Never simply assume the rules are the same as those for your own jurisdiction.
2. Disclose the Need for Local Counsel: In the early planning stages, preferably in the first engagement letter (more on that below), inform your client of the need to engage local counsel to review the APT prior to its implementation. It is not uncommon for a client to balk at what they perceive as unnecessary costs to bring in another attorney. This step is not, however, unnecessary duplication of work but rather a critical part of ensuring that the APT put in place is the best possible protection for the client. If the client refuses, be prepared to cut the client loose. We have noticed in our own practice that a client who starts to balk at the initial stages of APT planning likely will try to nickel and dime the entire process, and in the case of an APT, you really do get what you pay for. As the attorney, you do not want to be pushed into shoddy work due to the client’s economizing. If the client is not willing to pay the costs necessary to set up a well-drafted APT, the client is not right for APT planning.
3. Actually Consult with Local Counsel: Locate and actually consult with counsel in the APT jurisdiction. If you do not know who to consult, most trust companies within the APT jurisdiction can provide you with some introductions. There are always going to be local rules and practices that you will not be able to determine just through your own research. Local counsel will help you avoid pitfalls and help ensure that the product that you provide is in keeping with what is needed in that specific jurisdiction.
OK, You Have Decided That You Are Perfect For The Matter, But How About The Client? Are They The Right Client For You?
It is important to always remember that no one is entitled to your legal expertise. You choose your clients. The old legal practice chestnut that “The most money I ever made was on the client I turned away” applies especially to the realm of asset protection planning. You do not want to make the client’s problems your problems. The one thing that we always recommend keeping in mind is that your law license and your legal reputation are far more valuable to you than any one client can ever be. Careful due diligence before deciding to accept the engagement is incredibly important for your own protection and also to ensure that any structure you put in place will provide the sought protection.
Why has the client contacted you?
The first step in evaluating any client is to determine why they have come to you looking for asset protection planning. If they are looking for protection from a current creditor or they think they are about to be sued, walk away from that engagement! Attempting to craft an effective asset protection plan when the creditor has already knocked on the client’s door is like trying to put toothpaste back into the tube. It’s messy and you should not do it. The one valuable thing that you can do for a client who already has a creditor is to provide the client with an asset protection audit to review what protections may already be in place for them, such as a primary residence with a previously recorded homestead declaration or a retirement account where they have not yet reached the withdrawal age. Also, once the current issue has been resolved and they are again free of current and pending creditors, they may be a good candidate for such asset protection planning in the future.
The right kind of client for asset protection planning is a client who has no current creditors and no expectation of a creditor looming on the horizon. Often, this client is seeking asset protection because she happens to simply work in a field where lawsuits are common, and the client knows that it is a risk. In our own practice, we regularly work with medical professionals and real estate developers seeking information about asset protection since they know a future lawsuit is simply a fact of life in their profession.
Is The Client Willing To Actually Give Up Control Of The Assets? No ‘Wink, Wink’ Clients!
It is not enough for the client to simply be free of any creditor claims; the client must also have the right mindset to participate in asset protection planning for the structure you put in place to work. The web is full of misleading information about APTs, including claims that assets within an APT are fully accessible to a client, that is to say, the client can reach in and take back the assets whenever the client so chooses. A client who believes this claim to be true is not a good candidate for an APT. Why? A client who treats an APT like a personal piggybank will find that a judge will treat the APT the same way. A client cannot think of the APT as a sham arrangement. It is not. The client relinquishes real control to the APT trustee, who is empowered to exercise its discretion — the power to say “yes” to a distribution request includes the power to say “no.” And the client needs to be willing to hear “no” now and then.
Our clients are regularly surprised when we review with them that to get the protection that they want really does mean that the client will give up control over the asset. Some clients accept this as just the cost of getting the protection that they are looking for. Other clients, however, will try to have their cake and eat it too with questions such as, “What if I put in a ‘friendly’ trustee?” or “How about if the trust contained X provision?” Again, these are the clients who are not good candidates for the structure. At best, they will abide by the structure but be resentful about the restrictions and blame you for the situation. At worst, they will constantly try to find ways to work around the structure and ultimately undermine all of the protections of the APT.
A word here about the APT trustee: when interviewing a possible trustee of an APT, be wary of the trustee who is too willing to accommodate whatever your clients want. The “wink, wink” trustee is as bad as, if not worse than, the “wink, wink” client. More on trustee selection below.
Will The Client Embrace ‘Nest Egg’ Planning?
It is best to be wary of the client whose goal is to place all of her assets within an APT. Think about it. Who would do that? Who would be willing to place herself at the mercy of an APT trustee with complete discretion for any and all access to funds? Hardly anyone, and such a client may well fall into the “wink, wink” category. For a taste of how a judge may view a total transfer of funds, you might read the Anderson case. (Federal Trade Commission v. Affordable Media LLC, 179 F.3d 1228 (9th Cir. 1999). While the case contains egregious facts, the case is illustrative of judicial temperament nonetheless.
The better approach is to treat an APT as “nest egg” planning, where the client keeps sufficient assets outside the APT to support the client’s lifestyle on a day-to-day basis. Those assets remaining outside of the APT will probably be subject to the claims of creditors unless protected in some other manner, such as holding as tenants by the entirety or held within an ERISA retirement account. Limited assets are transferred to the APT, to be kept in reserve for a future date when they might be needed by the family due to unforeseen circumstances.
Does The Client Even Have Assets That Can Be Transferred Into An APT?
Often, a client may look like a great candidate on paper: no known or reasonably anticipated creditors, willing to cede control to an APT trustee, buys into the concept of nest egg planning. But one vital element remains to be analyzed: do the client’s assets align with an APT? Taxable investment accounts, cash equivalents, and cash are best. Even so, if the client has disclosed such individually owned assets on a personal financial statement (PFS) provided to a lender, transfer of those assets into an APT may require an amendment to the PFS.
Some examples of difficult assets include:
1. Real Estate: A real estate developer with multiple parcels of immovable real estate and no liquid assets is not an ideal candidate for an APT. It may be possible to “move the immovable” by placing a parcel of real estate within an LLC, with the APT owning the LLC, but the fact remains that a court in the jurisdiction where the real estate is located may find a way to attach the interest or at least restrict sales and such while litigation is ongoing. And even if the client understands this risk, the existence of a mortgage on the real property may render the transfer to the LLC unattractive due to the need to refinance.
2. Business Interests: Nothing inherently stops an APT from owning a business. But often there are factors that get in the way. These include:
a. The APT trustee does not want the liability of owning a business.
b. Co-owners will not consent to the transfer.
c. The APT may hinder the raising of capital from lenders and investors.
d. An FAPT triggers difficult U.S. tax issues.
3. Retirement Accounts: Since retirement accounts must remain in the name of the individual plan participant, they are unsuitable for funding an APT.
The classic example of a prime APT candidate who falls short in the transferrable asset category is the surgeon with a beautiful home, the island vacation getaway, a great income and a large retirement account. In such a situation, there are not many available assets to plan with as far as an APT is concerned.
The typical estate plan with its revocable trusts and other documents is itself a complicated structure that many a client struggles to understand, despite flow charts, executive summaries and the like. Add an irrevocable APT with its multitude of bells and whistles, and the chance that the overall structure is understood can be slim to none (and Slim just left the building!). The client always looks to the lawyer for its expertise and knowledge, and you must be able to clearly explain the various options available to the client, including the possible perils of each option. Never oversell the ability of an asset protection plan to thwart a creditor. The right client will be one who can digest complex information and make an informed choice. An APT is not for the weak of heart. Be wary of the client who says, “Whatever you say, pal, I’ll do it.” It’s not your choice; it’s their choice.
Documenting the engagement and due diligence
First Engagement Letter
We have found that breaking the asset protection engagement down into separate parts is best for both the lawyer and the client. The first engagement letter should focus solely on the due diligence required to permit the lawyer to understand if the next step is possible, i.e., the actual design and implementation of an APT.
Before the first engagement letter is sent, you might alert the potential client that the purpose of the first engagement is to protect your firm from engaging in any prohibited activity and to protect the client from paying for a plan that will not work. The first engagement letter establishes the attorney-client relationship, thereby providing the amount and degree of confidentiality and protection such a relationship confers under law while due diligence is undertaken.
In addition to all the bells and whistles you include in your typical engagement letter, the first engagement letter for an asset protection plan should include:
1. A Limited Scope of Services: For example: “You have requested our representation to advise you regarding estate planning matters. However, before we can enter into such an engagement, due diligence is required. Accordingly, for the present and until modified by a separate engagement letter, our representation is limited to conducting a due diligence review to determine whether or not we will be able to provide effective estate planning advice. Our due diligence review will focus on confirming your solvency, confirming that no assets owned by you or involved in your estate plan are related to money laundering or other prohibited activities, and confirming that you have assets that may potentially fund a protective trust. If we are satisfied that we may proceed, this first engagement will end with our preparation and your signing of an Affidavit of Solvency.”
2. Other Lawyers: If you intend to align with another lawyer outside of your firm with greater APT expertise, disclose your plan in the engagement letter and explain the finances of the arrangement.
3. File Retention Language: Adjust your file retention language to account for the 10-year statute of limitations in bankruptcy.
4. An Advisor Authorization Letter: In addition, it can be helpful to include in the first engagement letter an “authorization letter,” which the client signs, granting the client’s other advisors permission to disclose information to the lawyer. Typical advisors include bankers, wealth managers, accountants, other lawyers (such as a business lawyer, litigation lawyer, and a referring trusts and estates lawyer), trust officers and insurance advisors. At the very least, obtain the name and contact information of each of these individuals. Have your client send an introductory email introducing you to each advisor.
Due diligence checklist
Now that the first engagement letter is signed, it is time to undertake the due diligence required for you and your firm to determine whether or not to proceed to the next stage of planning. Below is a checklist of actions the lawyer should consider to determine that the client both is acceptable to the lawyer and has the ability to implement an APT. For ease of reference and retrieval, keep all the due diligence information in one file.
1. Obtain the following information:
a. The full legal name of the client and any other names that may have been used in the past. (Prior names alone are not a deal breaker — there are many legitimate reasons why there may have been a prior name, such as a marriage, divorce, gender fluidity, or the Americanization of a name following immigration).
b. A reference letter from a banker and accountant. Also include a reference from the referring attorney if there is one.
c. A reference letter from a person who has a long relationship with the client (friend, business associate, clergy).
d. A color copy of the client’s passport and a color copy of the client’s driver’s license — also ask for copies of such documentation for the client’s spouse and children (if any) and all proposed beneficiaries of the APT.
e. A copy of a recent utility or phone bill addressed to the client at the client’s current home address.
f. Copies of the last three years of tax and information returns filed with the IRS.
g. Copies of any gift tax returns.
h. A copy of the client’s resume or 10-year employment history.
i. An explanation from the client as to the source of her wealth.
j. A list (with values) of all the client’s liabilities, including outstanding debts (personal and business), personal guarantees, existing judgments and existing lawsuits.
2. Ask the trial lawyer representing the client in an existing lawsuit, if any, to provide the following information:
a. The name of the case and the court of filing.
b. A professional assessment of the merits of the case.
c. The amount of the client’s professional liability coverage applicable to this claim.
d. An assessment, based upon the trial lawyer’s experience in such matters, of the likelihood that a settlement or judgment would exceed the policy limits.
e. Confirmation on whether any of the client’s property has been attached, whether an injunction against transfers has been issued, and whether any court order prohibiting transfers or estate planning has been issued.
f. A copy of the complaint.
3. Make a list of any reasonably foreseeable creditors of the creditor. Ask for a brief review of the facts and copies of any correspondence related to the possible claim.
4. Ask if the client has ever had a professional license suspended or revoked, or has received a professional reprimand.
5. Perform a web-based search of the client (a real rabbit hole — everyone has their favorite websites).
6. Ask if the client has ever been arrested or convicted of a crime or has been investigated by the IRS.
7. Consider conducting a background check. Some practitioners require the client to consent to a background check.
Once you have gathered all the financial information, you must determine whether the client is “insolvent” (and therefore no planning should be done in light of the fraudulent transfer laws) or whether the client is “solvent” and, if so, to what degree. Here is a simple balance sheet analysis: First, add together all assets that are reachable by a creditor. Do not consider protected assets, such as, for example, a qualified retirement plan account (IRA accounts not exempt in all states), homestead property, tenants by the entirety property, third-party spendthrift trusts of which the client is a discretionary beneficiary, insurance (in some jurisdictions), annuities (in some jurisdictions) or property with a secured creditor.
Next, add together all known liabilities with all reasonably anticipated liabilities.
Finally, subtract the liabilities from the reachable assets. If the result is a positive number, say, $2 million, then the client has assets that may be transferred to an APT without the transfer being deemed a fraudulent transfer. (Leave your client some wiggle room — valuations sometimes are fluid.) If the result is a negative number, you have an insolvent client who cannot proceed with an APT structure at this time.
Affidavit of solvency
An affidavit of solvency is important evidence that you have done your due diligence and have come to the reasonable conclusion that you will not be assisting in a fraudulent transfer should an APT be formed and funded. In some APT jurisdictions, it is a required element of the formation of the APT, and almost all legitimate APT trustees will require one. Here is a sample affidavit that a squeaky-clean client might sign:
NOW COMES the undersigned, Nervous Ned of Nest Egg Harbor, Massachusetts, who, being duly sworn upon oath, and in contemplation of the transfer of assets to one or more entities of various nature and in various jurisdictions, in connection with a comprehensive estate plan designed to better suit his family and business objectives, herewith represents to T&E Law Firm PC that the following statements are true and correct to the best of his knowledge:
1. No particular transaction has occurred that I expect will develop into a future claim by any personal creditor of mine.
2. There are no pending, threatened, or reasonably anticipated claims, lawsuits, or other proceedings against me personally. I am not involved in any administrative proceedings brought by or on behalf of any international, national, state, or local government or any agency thereof or any other administrative body as of this date that could result in a claim or claims against me.
3. Following any contemplated or proposed transfer of my property to any individual, limited partnership, limited liability company, foundation, trust, or other entity in which I or my intended beneficiaries may have an interest, I will be solvent and able to pay my reasonably anticipated debts as they come due from my income and from the balance of my property after such transfer. I do not have the intent to hinder, delay, or defraud any existing or anticipated creditor.
4. I am not engaged in or about to become engaged in business activities or any transaction for which the value or extent of my remaining assets will be unreasonable in relation to any personal liability I may have with respect to the business activities or transaction.
5. I do not contemplate filing for relief under any of the provisions of the U.S. Bankruptcy Code or any other bankruptcy law, nor am I involved in any situation that I reasonably anticipate would cause me to file for relief, or give cause for involuntary filing, under any of the provisions of the U.S. Bankruptcy Code or any other bankruptcy law in the foreseeable future.
6. I understand generally the provisions of the Money Laundering Control Act, a copy of which has been made available to me. I have read the attached summary of the Act, and I confirm and represent that none of the assets that I may transfer as contemplated in this affidavit has been derived from any of the activities specified in such Act.
7. I am fully compliant with all of my tax, duty, exchange control, and financial information reporting requirements to every international, national, state, and local government, agency thereof, and other administrative body.
8. I have not been charged with and am not under investigation for corruption, money laundering, fraud, or any other crime in any jurisdiction.
9. The attached personal financial statement is complete and accurate.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this _____ day of ___________, 2021.
[ADD NOTARY CERTIFICATE]
Attachment to Affidavit
Summary Of The U.S. Money Laundering Control Act
The U.S. Money Laundering Control Act (the “Act”) makes it criminal for anyone to conduct or attempt to conduct certain financial activities that involve the proceeds of unlawful activities. As the transfer of assets into a limited partnership, trust or other entity may constitute a financial activity within the scope of the Act, it is necessary that you swear under oath that none of the assets intended to be transferred into such entities was derived from any of the criminal activities specified in the Act. The specified unlawful activities under the Act consist primarily of drug trafficking offenses, financial misconduct, environmental crimes and other specified crimes, each of which is described further below.
Drug trafficking offenses include the manufacture, importation, sale or distribution of controlled substances; the commission of acts constituting a continuing criminal enterprise; the illegal procurement of precursor chemicals; and transportation of drug paraphernalia.
Covered financial misconduct includes the concealment of assets from a receiver, custodian, marshal or other officer of the court; from creditors in a bankruptcy proceeding; or from the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, or a similar agency or person. It also includes the making of a fraudulent conveyance in contemplation of a bankruptcy proceeding or with the intent to defeat the bankruptcy law; the giving of false oaths or claims in relation to a bankruptcy proceeding; bribery; the giving of commissions or gifts for the procurement of loans; theft, embezzlement or misapplication of bank funds or funds of other lending, credit or insurance institutions; the making of fraudulent bank or credit institution entities or loan or credit applications; and mail, wire or bank fraud or bank or postal robbery or theft.
Environmental crimes include violations of the Federal Water Pollution Control Act, the Ocean Dumping Act, the Safe Drinking Water Act, the Resources Conservation and Recovery Act, and similar federal statutes.
Other specified crimes include counterfeiting, espionage, kidnapping or hostage-taking, copyright infringement, entry of goods by means of false statements, smuggling goods into the United States, removing goods from the custody of Customs, illegally exporting arms, and trading with United States enemies.
Second engagement letter
Congratulations, you have made it past the first planning stage and are ready to begin designing the best plan for your client. A second engagement letter should be signed, and this letter will be very similar to your standard engagement letter with your estate planning clients, except that the financial exploration stage will have already been completed. Additions to your standard letter might include provisions for the client to:
A. Keep Financial Information Current: Your client’s agreement to update financial and liability information throughout the engagement.
B. Update the Affidavit of Solvency: Your client’s willingness to sign another affidavit of solvency if asked (these engagements can go on and on, and you might want to be reassured you are working under current facts).
C. Sign a Local Counsel Agreement: The client’s agreement to retain local counsel in the APT jurisdiction to review documents.
D. Agree to New File Retention Language: The expanded file retention language (mentioned earlier).
It may seem counterintuitive, but once the client decides that an APT is to be a part of her estate plan, the first item of business should be selection of the trustee, not the design of the APT itself.
A. Selecting the Jurisdiction: You must first help your client decide where the APT should be located, as that will drive where you will look for a trustee. Unfortunately, the comparison of DAPT and FAPT jurisdictions is beyond the scope of this outline.
B. Types of Trustees: As stated above, it is very important that an APT be operated as a true discretionary trust and not as the settlor’s piggybank. For this reason, it is often preferable for a trust company experienced in the operation of discretionary trusts to serve in the role of trustee. But it is not necessary.
C. Trustee Interview: Ideally, you and your client will interview several trustees before the client selects the initial trustee. If possible, a generic flow chart of the proposed structure might be given to the trustee in advance so the trustee understands what it is being asked to undertake (for example, whether there will be an LLC owned by the APT and the type of assets that will fund the LLC). Here is a list of questions to use in the interview (some assume the trustee is a corporate trustee):
1. Does the FAPT corporate trustee comply with IRS reporting requirements? Is the trustee willing to work with the client’s U.S. accountant?
2. What are the details regarding the trustee’s indemnity insurance? What are the claim limits?
3. Can the trustee provide references, preferably attorneys they have worked with in the APT arena?
4. What is the process for the trustee to accept the trust? Will the trustee accept an affidavit of solvency prepared by the client’s lawyer, or does the trustee have its own form? What other forms need to be completed (and get copies of such forms)? What are the trustee’s Know Your Customer procedures?
5. Is the trustee willing to serve as a directed trustee and take direction from an investment advisor? Are there any restrictions on what type of assets can be held by the APT?
6. Will the trustee take direction from a trust protector? Is there any internal process undertaken before action is taken based upon the direction?
7. If a beneficiary exercises a power of appointment, what is the internal process to comply with the appointment?
8. How is the trustee fee determined? Is it a fixed fee or a percentage of the assets? What is included in the fee: review and acceptance of the trust? (Or is this a separate fee?) Maintenance of trust records? Trustee meetings and minutes? An annual audit? Is the fee paid annually or more frequently? What is the fee for the registration of an APT (if any — fairly common in FAPT jurisdiction), or is it included in the trustee fee? Does the trustee charge a fee if it is removed as trustee? Is there a termination fee should the APT be moved to another jurisdiction?
9. If the APT must be registered in the jurisdiction, will the trustee take on the responsibility of keeping the registration up to date (with fees paid from the APT)?
10. Is the trustee willing to prepare trust accounts as required by the terms of the trust? Are such accounts included in the trustee fee?
11. Disclose that you will be preparing the trust instrument. Ask if there are any provisions the trustee requires. Ask if the trust instrument will be reviewed by the trustee’s local counsel and, if so, ask the trustee to provide the name and contact information of local counsel. Ask if the trustee has a sample APT to share with you. (Some do, some don’t. Even if you have your own “master” APT form, you should still ask for a copy and see if there is anything you can use to improve your form!)
12. What is the trustee’s experience with APTs? How many? What size?
13. Has the trustee ever had to defend an APT against a creditor?
14. What will be the internal governance structure of the trust? Who is the family’s primary contact?
15. How will the trustee ensure continuity of service should someone involved with the APT move or retire?
16. How does the trustee protect against malfeasance?
17. How does a beneficiary ask for a distribution? How will the trustee exercise its discretion to make distributions to a beneficiary? Will the beneficiary have to provide any financial information?
18. How quickly can a beneficiary get a distribution?
19. How does the trustee educate the beneficiaries on the purpose of the trust and what to expect in terms of distributions and involvement in the business of the trust?
20. Is the trustee comfortable with a “letter of wishes”? How has the trustee used a letter of wishes in the past?
21. How does the trustee keep track of where a beneficiary lives?
22. How does the trustee keep the beneficiaries up to date with how the trust is performing?
23. Is there any information the trustee believes the client would find useful?
Once the terms of the engagement have been fulfilled, and the APT has been formed and funded, it is recommended that you terminate the engagement in writing. Let the APT operate as any fully discretionary trust would operate. Do not get into the business of managing the beneficiary-trustee relationship. If the client wants a distribution, it is the trustee who should receive the request, not you. Where an FAPT exists, and the client would like your ongoing assistance with the multitude of IRS filing requirements, and you’d like to take this on, then this matter can be the basis of an independent engagement.
Whenever contemplating a new engagement in an area that you have not previously worked in, it is important to look beyond the excitement of a new challenge and determine if the engagement is really one you want to be involved in. Expanding one’s practice into asset protection planning can be intellectually and financially rewarding but, as with every new venture, it is important that the decision is made thoughtfully and with full information. The truth of the matter is that not every client who wants an APT structure is going to be right for it — she may not have the necessary solvency, or she may not be able to live with the restrictions, or she may simply not have the liability risk that justifies the expense of an APT structure. Sometimes, the client just needs your counsel as to other protective steps that are more appropriate for her situation and that having an APT to keep up with the neighbors is just not the right plan for her.
Note: This article is based on Melissa Langa’s presentation and presentation materials for the 55th Annual Heckerling Institute on Estate Planning, “The Three Faces of Asset Protection,” May 4, 2021, and a version of the article was published by Wealth Strategies Journal in November 2021.
Melissa Langa is the managing shareholder of Bove & Langa PC in Boston. Her practice includes guiding domestic and international individuals, families, businesses and charitable organizations in designing and implementing customized tax-efficient structures to meet their particular estate planning, business and charitable needs. She also assists clients in the administration of the estate of a deceased family member, advises fiduciaries in the administration of estates and trusts, and counsels families through the proper reporting of foreign assets. She is an adjunct professor teaching estate planning in the Graduate Tax Program at Boston University School of Law and is a fellow of the American College of Trust and Estate Counsel (ACTEC).
Karen L. Witherell is a partner in the Boston law firm of Bove & Langa PC. Her significant background in trusts and estates law and strong commitment to her clients enhance Witherell’s practice, which includes wealth preservation, incapacity and estate planning (both domestic and international), gift transaction planning, preparation of gift and estate tax returns, business succession planning, prenuptial agreements, special needs planning, trust administration and probate administration. In addition to her work in private practice, Witherell teaches estate planning at the Boston University School of Law Graduate Tax Program. Witherell also regularly writes and speaks on various topics relating to trusts and estate law, and is an active member of multiple organizations, including the Massachusetts Bar Association.