Category Archives: Trustee

January 17, 2017

New Fiduciary Act Brings Both Progress and Uncertainty

by Matthew S. Skotak

You may have previously read on this blog about digital assets, the impact they have on the administration of trusts and estates, the need for fiduciaries to access digital assets, and the privacy concerns that come along with such access. In order to address these issues, Colorado recently enacted the Revised Uniform Fiduciary Access to Digital Assets Act (“RUFADAA”). This new act became effective on August 10, 2016 and can be found at C.R.S. § 15-1-1501 et seq.

RUFADAA is a significant leap by the State of Colorado to catch up to the digital age.  Prior to the passage of the law, the pervasive use of electronic banking and investing has posed a problem for many fiduciaries. Without the receipt of paper statements, personal representatives, financial agents, trustees and conservators have had a difficult time locating an individual’s assets, sometimes leading to an exhaustive search of several banking and financial institutions before asserts are uncovered. Read more >>

July 18, 2016

Seeking Clarity in the Distribution of Mineral Interests from a Decedent’s Estate

by Andy Lemieux, Elizabeth Meck, and Jessica Schmidt

As any practitioner who has dealt with the distribution of mineral interests from a decedent’s estate knows, dealing with these interests can be tricky and the process is not always clear. This is particularly true when old interests have not been distributed properly at the time of death. Thankfully, recent decisions in Colorado, as well as updates to certain provisions of the Colorado Probate Code, provide some clarity to this process.  A recent decision in Utah also provides clarity about who is entitled to the proceeds of production from oil and gas operations when life tenants and remaindermen are involved.

Specifically, Colorado just updated its statutes governing the process for the determination of heirship, found in the Colorado Probate Code at Colo. Rev. Stat. § 15-12-1301, et. seq.  A sub-committee of the Trust and Estate section of the Colorado Bar Association carefully reviewed the existing statutes, coordinated efforts with other sections of the bar, and with the approval of the Trust and Estate section, presented revisions to these statute sections as part of the omnibus bill, SB 16-133, in February 2016.  The committee’s goal was to address the issues Colorado practitioners have experienced in trying to distribute these interests from dormant or previously-unopened probate estates and to make the process to distribute previously undistributed property, including mineral interests, more clear.  SB 16-133 was signed by Governor Hickenlooper on May 4, 2016, thereby adopting the revisions recommended by the committee.  A copy of the Bill as enacted can be found here.

Read more >>

June 6, 2016

Recent IRS Statistics

by Kelly Dickson Cooper

For our litigation clients, a fiduciary’s failure to consider the tax impact of their actions can be the genus for litigation and anticipated tax savings can be the engine that drives a settlement.  For our fiduciary clients, it is important for them to ensure that transfer taxes are minimized for the benefit of their beneficiaries.  For our planning clients, tax planning is a key component in determining the best structure for their wealth transfer planning.  Given the importance of transfer taxes in our practice, we wanted to highlight a few items from the IRS 2015 Data Book relating to estate and gift tax returns:

Number of Tax Returns filed during 2015

  • 36,343 estate tax returns (545 from Colorado)
  • 237,706 gift tax returns (4,492 from Colorado)

Amounts Collected

  • Estate tax returns  – $17,066,589 collected
  • Gift tax returns – $2,052,428 collected

Percentage of 2014 Tax Returns Audited in 2015

  • 7.8% of all estate tax returns
    • Gross estate less than $5 million – 2.1% audit rate
    • Gross estate greater than $5 million but less than $10 million – 16.2% audit rate
    • Gross estate greater than $10 million – 31.6% audit rate
  • 0.9% of all gift tax returns

Results of Audits

  • 22% of estate tax returns examined had no change
  • 34% of gift tax returns examined had no change
  • 70 estate tax returns and 135 gift tax returns had unagreed recommended additional tax
  • 543 estate tax returns and 43 gift tax returns resulted in tax refunds

April 27, 2016

Personal and Family Lending: New Federal and Colorado Regulations

by Desta K. Asfaw

There have been a number of recent changes to the mortgage lending laws.   Under current law in Colorado, certain private loans secured by residential real estate may be subject to compliance with strict licensing and other requirements.   Failure to comply could potentially result in misdemeanor charges and/or fines.

These new obstacles stem from provisions of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), and the Colorado Mortgage Loan Originator Licensing and Mortgage Company Registration Act (“CMLO Act”).

Read more >>

March 14, 2016

Your Fiduciary Duty to Invest “Prudently”

by Elizabeth Meck

As promised, this is the second post in a series on the fiduciary duties of a trustee. In the first blog in this series, we discussed the fundamental duty of loyalty. In this post, we will discuss the trustee’s duty to exercise care and skill in the management and investment of trust assets.

Acting in the best interests of the trust and the trust beneficiaries, a trustee has the duty to protect and preserve trust assets and, generally, to make the assets productive. In making investment decisions and managing trust assets, the trustee must further abide by the “prudent investor rule,” which requires a trustee to exercise reasonable care, skill and caution. See Colo. Rev. Stat. §§ 15-1.1-101, et. seq. (the “Uniform Prudent Investor Act”) and §§ 15-1-1101, et. seq. (the “Uniform Management of Institutional Funds Act”).

Pursuant to the prudent investor rule, a trustee should consider broad investment factors, such as: current economic conditions, effects of inflation or deflation, tax consequences, the nature of closely-held business interests, alternative investments, expected returns on income and capital, other resources of the trust or trust beneficiaries, the need for liquidity versus preservation of capital, the production of income, the special value or relationship of a particular asset to the trust or the beneficiaries, diversification of investments, and more. See, Restatement (Second) of Trusts § 227. Additionally, while it is important to note that Colorado courts have not officially adopted the Restatement (Third) of Trusts, one could refer to § 90, which lists five helpful “principles” of the prudent investor rule. Generally, any single investment will not violate the prudent investor rule and the trustee should manage the trust portfolio as a whole taking into account these considerations.

The trustee must also abide by any specific instructions in the trust instrument. He should exercise caution in doing so, however, because there are many instances in which blindly following the trust terms may result in unreasonable investment decisions. For example, if the settlor instructs the trustee that he is not required to diversify investments in the case of a closely-held family entity, the trustee would still want to closely monitor the performance of such investments to ensure that the closely-held entity value is not plummeting to the point that the beneficiaries’ interests may be significantly impaired.

It is important to note that poor performance of investments alone will not subject the trustee to a claim for breaching his duties to prudently invest. Beneficiaries frequently and incorrectly think they will have a claim against a trustee simply for poor performance. The trustee, however, will be able to overcome such a claim so long as the underlying investment decisions were reasonably made.

Colorado law does authorize a trustee to hire professionals and to delegate certain aspects of investing and portfolio management. However, the law does not allow for wholesale delegation and the trustee should exercise great caution in hiring professional advisors or fund managers. See Colo. Rev. Stat. §15-1.1-109 (trustee has the authority to delegate investment and management functions, but must engage and monitor such professionals carefully); see also GEORGE G. BOGERT, ET AL, The Law of Trusts and Trustees § 557; Colo. Rev. Stat. §15-1-804(2)(x)(I)(trustee has the power to “employ attorneys or other advisors to assist the fiduciary in the performance of his or her duties” (emphasis added)).

Finally, a trustee should keep in mind that uninformed beneficiaries are uneasy beneficiaries. Not only is it a good idea for a trustee to provide information to the beneficiaries as to investment and asset management decisions, Colorado law requires the trustee to keep beneficiaries “reasonably informed” and to provide accountings to beneficiaries upon reasonable request. Colo. Rev. Stat. § 15-16-303. Keeping beneficiaries informed as to investment decisions not only provides peace of mind to the beneficiaries, but may provide the trustee with an argument particularly in the situation where the beneficiaries have consented to risky or unusual investment strategies. See Beyer v. First Nat. Bank of Colorado Springs, 843 P.2d 53 (Colo. App. 1992).

In sum, the trustee has a duty to continually observe and evaluate investments to ensure that they are consistent with the purpose of the trust, current economic conditions, and the needs of the current and remainder beneficiaries. So long as the trustee exercises reasonable care in investment decisions, exercises care in selecting and hiring investment advisors and professionals, follows the general principles of prudent investing, and keeps the beneficiaries informed, the likelihood of a claim against the trustee for improper investment decisions may be reduced.

December 14, 2015

Now There Are Tax Transcripts In Lieu of Estate Tax Closing Letters

by Carol Warnick

The Internal Revenue Service (“IRS”) announced earlier this year that it would no longer routinely send out an estate tax closing letter and that such letters would have to be specifically requested by the taxpayer. The change in procedure was effective for all estate tax returns filed after June 1, 2015.

Previously, an estate tax closing letter was evidence to show that the IRS had either accepted an estate tax return as filed, or if there has been an audit, that final changes had been made and accepted. Receipt of an estate tax closing letter has never meant that the statute of limitations on the return has run, but it has given comfort to the estate administrator that he or she could make distributions and/or pay creditors knowing that the chances of further IRS review of the return was not likely. Many personal representatives and trustees have made it a practice to wait for such a closing letter before funding sub-trusts or making any significant distributions.

On December 4, 2015, the IRS announced that “account transcripts, which reflect transactions including the acceptance of Form 706 and the completion of an examination, may be an acceptable substitute for the estate tax closing letter.”   Such account transcripts will be made available online to registered tax professionals using the Transcript Delivery System (TDS). Transcripts will also be made available to authorized representatives making requests using Form 4506-T. They still must be requested, but may be easier to obtain than an estate tax closing letter.

For further instructions, here is the link to the information on the IRS website: http://tinyurl.com/plhb6f6.

October 26, 2015

Take Time Upon Termination

by Rebecca Klock Schroer

When a trust terminates, beneficiaries are understandably anxious to receive final distributions.  They often do not understand that there is a period of time after a trust terminates to allow the trustee to wind up the administration. 

For example, we recently represented the trustee of a very old trust that terminated on a date certain.  Upon termination, the remaining trust assets were to be distributed among many remainder beneficiaries.  After receiving several phone calls, we quickly learned that the beneficiaries expected to receive final checks on the termination date.  We explained that, as with all trust administrations, the trustee had to take several steps before issuing checks for the final distributions.

First, the trustee must complete a final accounting that separates income and principal.  This is necessary to determine the final distributions, particularly if the income beneficiaries are different from the remainder beneficiaries.  Next, the final expenses need to be estimated, so that the expenses can be prepaid or a reserve can be held back for future payment.  These expenses might include preparation of the final tax return, trustee fees and attorney fees. 

In Colorado, there is a statute that helps limit liability of a trustee that has issued a final accounting.  Colo. Rev. Stat. § 15-16-307 provides that a proceeding against a trustee must be commenced within six months of receipt of a final accounting showing that the trust is terminating. 

For additional security, the trustee often wants to obtain a release from each beneficiary prior to making the final distributions.  Otherwise, the trustee runs the risk of distributing the trust assets and having no assets remaining to defend a lawsuit.  If the beneficiaries refuse to grant releases, the trustee may want to seek judicial approval of the final accounting before making the final distributions. 

The law provides that the trustee may take a reasonable amount of time to wind up the trust administration. See § 1010 of Bogert’s Trusts and Trustees. In our experience, this can take from sixty days to several months or even longer depending on the facts and circumstances.  While it is understandable that beneficiaries are anxious to receive their distributions, they have to allow the trustee to properly finalize the trust administration.

September 1, 2015

The Uniform Trust Code — A Time for Colorado

by Carol Warnick

The Uniform Trust Code (“UTC”) has now been adopted in 31 states.  It is now the law in significantly more states than the Uniform Probate Code.  The UTC is a uniform law drafted by the Uniform Law Commissioners, over a seven-year period.  It is the first comprehensive uniform act dealing with trusts, although several states, notably California, Georgia, Indiana and Texas, all had comprehensive trust statutes at the time.  These statutes, as well as any existing trust statutes in other states, were reviewed by the committee drafting the UTC.  The stated goal of the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) when drafting the model act was to “provide States with precise, comprehensive, and easily accessible guidance on trust law questions.”  The impetus behind the model trust act was the growing use of trusts throughout the country, which coupled with the sparse body of trust law in many states, created significant issues for lawyers and courts trying to deal with trust disputes. 

I practice trust and estate law in three states, Colorado, Utah and Wyoming.  Both Utah and Wyoming have adopted the UTC.  I find that it is so much easier to deal with and solve trust disputes in both Utah and Wyoming because of the provisions of the UTC.  One reason is that the law is set forth much more clearly and gives judges ready authority to back their decisions.  In my experience, bringing a statute to the attention of the court carries more weight than finding a case that is close to “on-point” in the dispute, if finding such a case is even possible.  Because the law is set forth more clearly, everyone going into a dispute knows what the law is.  There is not a significant body of trust common law in any of the states I practice in, therefore the UTC brings significantly more uniformity to the decisions of the variety of judges who have to rule on trust issues. 

In addition, there are innovative portions of the UTC that provide more options to trust beneficiaries and potential litigants when issues arise with respect to a given trust.  One example of such innovation are non-judicial settlement agreements.  The UTC specifically provides that parties may enter into binding non-judicial settlement agreements to resolve issues concerning trusts as long as the agreement doesn’t violate a material purpose of the trust and includes terms and conditions that could be properly approved by a court under the UTC or other applicable law.   Examples of matters that can be approved by a non-judicial settlement agreement would be the interpretation or construction of terms of the trust, approval of a trustee’s report or accounting, direction to the trustee to refrain from performing a particular act or to grant the trustee a necessary or desirable power, resignation and appointment of a trustee and determination of trustee compensation, transferring the trust’s principal place of administration, and the liability of a trustee for an action relating to the trust.  Any interested person can also seek court approval of the agreement, but in my experience working with non-judicial settlement agreements in Utah and Wyoming, no one has felt the need to obtain court approval after the negotiation of such an agreement.   Such flexibility allows the interested persons with regard to a trust (defined as those whose consent would be required to achieve a binding settlement if it were to be approved by the court) to collaborate and work out a variety of issues that would otherwise require the additional time and expense of obtaining court approval for such actions.  I have found this option to be invaluable in working out trust issues for clients, especially when the size of the trust does not justify significant court involvement, and often brings about settlement more readily. 

Much to the chagrin of many estate planners, the UTC was defeated in Colorado over a decade ago but is again being studied by a committee at the Colorado Bar Association.  Each state legislature has the ability to adjust the model act and modify it as seems appropriate to reflect local preferences, so there is hope that the model act can be adjusted in such a way that it can be passed next year.  I want to lend my voice of support to the adoption of the UTC in Colorado as an act that would greatly facilitate the ability to solve trust disputes early, more readily, and with less expense. 

August 17, 2015

Colorado Court of Appeals Limits Settlor’s Ability to Exercise Retained Power of Substitution

by Helen Rogers

A recent Colorado Court of Appeals decision suggests that a settlor who retains the power to substitute assets into an intentionally defective irrevocable trust (an “IDIT”) may be prevented from substituting a promissory note into the IDIT, even if the settlor retained the right to substitute assets into the IDIT without the supervision of a fiduciary. The decision, along with the District Court order that it upholds, suggests that a settlor’s retained right to substitute assets into an IDIT is more limited than the settlor might imagine or hope.

In In the Matter of the Trust Created by Mark Vance Condiotti, 14CA0969 (unpublished decision), a settlor established an IDIT (the “Condiotti Trust”) for the benefit of his son. The trust agreement gave the settlor the right to reacquire the trust corpus by substituting other property of an “equivalent value.” The agreement stated that the settlor could exercise this power in a nonfiduciary capacity, without the approval or consent of any person acting in a fiduciary capacity. This “substitution power,” also referred to as a “swap power,” is often included in IDITs because it causes the IDIT to be treated as a grantor trust for income tax purposes but does not cause the IDIT’s assets to be included in the settlor’s estate for estate tax purposes. When an IDIT is treated as a grantor trust, the settlor may pay the income taxes for the IDIT without incurring any gift taxes (thus increasing the value of the trust gift tax-free).

After funding the trust with a diversified portfolio of securities, the settlor notified the trustees of the Condiotti Trust that he intended to reacquire the entire corpus of the Trust in exchange for a promissory note. The promissory note had a face value equal to the value of the Condiotti Trust’s securities, and paid interest at the Applicable Federal Rate.

The trustees refused to accept the promissory note in exchange for the securities. The settlor threatened to sue. The trustees petitioned the District Court of La Plata County, where the trust was then administered, for instructions.

In their petition for instructions, the trustees argued that they could reject the promissory note because the trust agreement only permitted the settlor to substitute assets of equivalent value, and the promissory note did not have a value equivalent to the Trust’s securities because (1) it was unsecured, (2) it bore interest at a low rate, and (3) there was little market for promissory notes. They also argued that the settlor’s proposed substitution was actually a request for a loan from the Condiotti Trust to the settlor, which was not permitted by the trust agreement.

The settlor argued that the promissory note did have a value equal to that of the Condiotti Trust’s assets because it had a face value equal to the value of the trust’s securities, and, under Section 7872 of the Internal Revenue Code, a promissory note is valued at its face value as long as it pays interest at the Applicable Federal Rate and the Settlor is solvent.

The District Court issued an order stating that the trustees were entitled to reject the proposed substitution. First, it stated that, in the context of an asset substitution involving an IDIT, assets will be considered to be of equivalent value if they have (1) an equivalent value under the Internal Revenue Code, AND (2) an equivalent fair market value. As the settlor’s promissory note bore interest at a low rate and there is little market for reselling promissory notes, the District Court found that the note did not have an equivalent fair market value to the Condiotti Trust’s more liquid diversified securities.

Second, the District Court held that the trustees could reject the proposed substitution because it was in fact a request for a loan from the Trust to the settlor, which was not permitted under the trust agreement.

On appeal, the Court of Appeals upheld the District Court’s finding that the proposed substitution was a request for a loan from the Trust to the settlor. The Court provided four questions for courts to consider when determining whether a particular transaction is a loan: (1) do the parties stand in the relationship of debtor and creditor; (2) was a promissory note executed; (3) was interested agreed to or paid; and (4) did the parties agree that the recipient would repay the monies received?

The Court of Appeals did not address the District Court’s finding that the note was not of equivalent value to the trust’s assets.

What does this case mean for settlors who wish to exercise their retained powers of substitution?

First, a settlor should ensure that his or her proposed substitution transaction does not appear to be a loan, especially where the trust agreement does not allow the trust to make loans to the settlor. In fact, the Court of Appeals’ four questions suggest that a settlor should never attempt to substitute a promissory note for trust assets. It is difficult to imagine a scenario in which a substitution of a promissory note into a trust does not result in (1) a debtor-creditor relationship between the settlor and the trust, (2) an executed promissory note, (3) agreed-to interest, and (4) an agreement that the settlor would repay the trust.

Second, any settlor who exercises his or her power of substitution should ensure that the asset being substituted into the trust is truly of equivalent value to the assets being taken out of the trust. The District Court’s Order indicates that a trustee may scrutinize both the tax value and the fair market value of any asset that a settlor proposes to substitute into a trust, and that the trustee may reject a substitution if it determines that either of those values is too low. Additionally, the settlor risks rejection if the property being substituted into the trust could not be resold to the same extent as the property being removed from the trust.

July 21, 2015

Opposition to the Uniform Fiduciary Access to Digital Assets Act

by Morgan Wiener

Despite the final version being passed by the Uniform Law Commission two years ago, the Uniform Fiduciary Access to Digital Assets Act (“UFADAA”) has not yet enjoyed widespread passage by state legislatures.  According to the Uniform Law Commission, to date, UFADAA has only been enacted in one state – Delaware.  An additional 26 states introduced legislation to enact a version of UFADAA during the first half of this year, but none of those measures have been passed.  As tempting as it may be to lay the blame on the sluggish pace of the legislative process, it’s important to note that UFADAA also faces substantive resistance.

Although much of the commentary surrounding UFADAA, both on this blog and in the estate planning community at large, has been positive, industry and consumer groups have both opposed the act on privacy grounds.  For example, letters published by both Yahoo! and a coalition of civil liberties groups have raised concerns that the relatively unfettered access to digital assets allowed by UFADAA goes too far and does not do enough to protect the privacy interests of not only a decedent, but also those who communicated with a decedent during his lifetime.  These letters can be found here and here.  The Internet Coalition, a group that represents the interests of major e-commerce and social media companies, the State Privacy and Security Coalition, Inc., and NetChoice, a group whose goal is to promote e-commerce, have all also opposed UFADAA’s enactment in various states.

NetChoice has gone further than simply opposing UFADAA and has proposed its own alternative to UFADAA – the Privacy Expectation Afterlife and Choices Act (“PEAC”).  Rather than providing automatic access to a decedent’s digital assets, PEAC contemplates that the probate court will grant access only upon making certain findings and contains a number of provisions that appear designed to protect the holders of digital assets.  You can read the full text of PEAC here.

It will be interesting to see whether UFADAA gains more traction during the next legislative session or whether the opposition holds firm.  Watch this space for updates.