Issue 5
Feb 6, 2007
Hi :
In this issue:
2007 MOKAN Trust Conference
Trust Schools Provide Training Solutions
Managing Risk
Satisfying the QTIP Requirements for a Trust That Is an IRA Beneficiary
Trustcompare.com
ITA Newsletter Subscription
2007 MOKAN Trust Conference This year's conference will see the return of two of its most popular speakers from past conferences. The opening keynote speaker will be the very energetic Peter Ricchiuti from Tulane University. He will share his informative and entertaining perspective on the financial markets. Ever optimistic economist Brian Wesbury will share his views on the U.S. economy and what we can expect down the road. Some other favorites will be Sally Miller with her Washington Update, Skip Fox with his New Trends in Estate Planning, and Charles Lockwood with his Employee Benefit Update. The theme of this year's conference, Trusts Are Forever, will be a take off on the year 2007. As a tri-chair for this year's conference, you might just see me in a tux drinking a martini - shaken, not stirred! As always, there will be lots of time to network with the plethora of vendors and fellow trust officers in addition to enjoying all that Kansas City has to offer. See you in Kansas City! The School of Trust and Financial Services to be held September 17-21, 2007, in Topeka, Kansas, provides attendees with a comprehensive overview of the complexities associated with operating a successful trust organization. From administration to operations, attendees explore all aspects of the trust business. It is ideal for individual who are new to trust or have been extremely specialized. The Advanced Trust Schools are designed to provide specialized training in trust administration or trust operations. The Advanced Trust Administration School will be held September 18-20, 2007, in Topeka, Kansas, and the next Advanced Trust Operations School will be held September 23-25, 2008, in Omaha, Nebraska. A notable feature of all of the Trust Schools is the opportunity for students to develop a peer network within the industry, while receiving the most current information available from instructors who live their subject daily. Our attendees and faculty traditionally come from 10-14 states each year. The Trust Schools often have previously been approved for continuing education for the CTFA and CFP® designations as well as insurance and CLE requirements (please contact us for specific details). We encourage you to view and print additional information and registration materials by visiting our website at www.schoolsofbanking.com
. For additional information, you may also contact our Advisory Trust Committee member from Iowa - Steven J. McLaughlin of the First National Bank, Ames, Iowa, (515) 663-3035 or steve.mclaughlin@fnbames.com. In addition, I am always available to answer questions. You may contact me at (402) 474-1555 or sean.payant@nebankers.org. Should I be unavailable, please ask to speak with Heather or Kami from our office. Trust accounting systems, arguably, are the most sophisticated systems within the financial services industry today. Not only do they possess many of the feature functionalities of typical bank systems, but they also have the ability to track the cost basis of assets and tax ramifications of transactional activity, allow for securities holdings and valuation, provide automated feeds with custodians and outside investment managers, segregate principal from income cash, to name just a few feature functionalities that other bank systems do not perform. Additionally, there continues to be significant progress in automating many back-office operational processes that used to be manual. With the open architecture technology and the move to outsource non-core competencies, trust officers today are increasingly becoming client relationship managers. However, the one area that most trust accounting systems have not improved significantly is trust administration, and specifically client contact management. Many trust departments have not yet integrated their contact management systems with trust accounting platforms, making client relationship management cumbersome and inconsistent across the department. One of the most common vulnerabilities all of us in the trust industry have experienced one time or another relates to “Murphy’s Law of Trust Processing,” which states that if something can go wrong it will, and it will usually involve the most sensitive of account relationships. To make matters worse, it is usually the client that brings these lapses in service delivery to management’s attention, and these lapses are typically related to something the department has not done, but that it is required to do. This is due mainly to the fact that in nature, and anytime a manual process is involved, it opens an institution to error. Further, because client management systems often are not integrated with other systems, trust departments lose the benefits of having the system report on issues that need to be addressed before the client brings them to the institution’s attention. These breakdowns in processes lead to client complaints, hits to company reputation, or worse, litigation. Another major problem with paper-based, non-integrated client management systems is that some of the most useful information related to a trust account relationship is located outside of the trust accounting system and not integral to the account synoptic record, or the location where all other pertinent information related to the account resides. Should a memo tickler get lost, or not be completed in a timely manner, etc., systemic processes often are not in place to effectively ensure that these ticklers are completed, much less record that it was done in a timely manner or by the employee that completed it, or any other information useful in displaying completion of the task. Another problem with information residing outside of the trust accounting system is that it becomes virtually impossible to utilize this information to analyze what is going on within the department to determine whether or not common patterns of process breakdown are impacting customer service or departmental efficiency. Many organizations are beginning to evaluate, if not already implement Client Relationship Management (CRM) systems to address these trust accounting system shortcomings; however, CRM system implementations have not lived up to expectations, due in large part to project scope creep. While most CRM systems do a fair job of reporting and analyzing total banking relationships within an organization (e.g. checking accounts, loans, brokerage, trust, etc.), just as all trust accounting systems do a fair job segregating principal and income, they have not been the panacea that trust departments have been looking for in integrating and automating client contact management. This is mainly due to the fact that organizations have competing interests when defining and implementing enterprise-wide CRM solutions. The marketing department’s requirement for “mass-customization” to increase account relationships and fees typically overrides the trust department’s need for an integrated and automated contact management system to fulfill its fiduciary responsibility. Given that clients are becoming more litigious and that their beneficiaries are also more demanding and often less informed, it is imperative that senior trust managers look for and demand trust accounting platforms with integrated contact management solutions that eliminate dependence on paper-based memo ticklers and memos to the account file. At a minimum, an integrated contact management system should include the following: Fred Miller has 25 years experience working with trusts and estates and is with AccuTech Systems, a leading provider of trust and financial management software used by over 300 community banks, private trust companies, non-profit organizations and IRA administrators throughout the U.S. and Canada. He can be reached at fred.miller@trustASC.com
However, in some cases the IRA owner may not wish to give his spouse complete control over the IRA assets. For example, the IRA owner may want to be sure that any IRA assets remaining at his spouse's death will pass to his children from a former marriage. Or he may wish to ensure professional management of the assets after his death. In such cases, use of a QTIP (qualified terminable interest property) trust may be appropriate. If a QTIP trust is designated as beneficiary of an IRA, care must be taken to satisfy not only the required minimum distribution (RMD) rules for IRAs, but also the QTIP requirements. For RMD purposes, a certain minimum amount must be distributed from the IRA each year. The amount of required distributions is based on the value of the IRA at the end of each calendar year preceding the distribution year, and not on the amount of income earned in the IRA. However, one of the QTIP requirements is that the surviving spouse must have a "qualifying income interest for life." This means that the spouse must be entitled to all of the income from the property at least annually. (Code Sec. 2056(b)(7)(B)(ii)(I)) In Rev Rul 2006-26, IRS has provided illustrations of three situations in which a surviving spouse will be considered to have a qualifying income interest for life in a decedent's IRA and in a QTIP trust, if the trust is the named beneficiary of the IRA. The three situations reflect different definitions of "income" under state law for trust purposes. (Rev Rul 2006-26, 2006-22 IRB 939) In the first situation, the state whose law governs the trust has adopted a version of the Uniform Principal and Income Act that authorizes a trustee to make adjustments between income and principal. These adjustments ensure that the income beneficiary isn't penalized if the trustee adopts a "prudent investor" strategy under which trust assets are invested for total positive return, including both ordinary income and appreciation. Thus, the trustee may allocate capital gains to income and may allocate dividends or interest to principal, if necessary to treat both parties impartially. In the third situation, the state hasn't enacted the Uniform Principal and Income Act and instead uses the so-called "traditional" definition of income. The surviving spouse has the power to compel the trustee to withdraw the income of the IRA as determined under state law, whether common or statutory. These rules require estate planning practitioners to be familiar with the provisions of the Uniform Principal and Income Act as adopted by the state or states in which the practitioner's clients reside. The practitioner must carefully note any differences between the provisions of the Uniform Principal and Income Act and the provisions of the version of that act actually enacted by the particular state. Whenever a client moves to another state, his estate plan should be reviewed to determine whether changes are required to reflect the law of the state of the client's new residence. If the client has an IRA of which a QTIP trust is named as beneficiary, the version of the Uniform Principal and Income Act adopted by the new state should be carefully compared with the version adopted by the old state. IRS says that in the situations described in Rev Rul 2006-26, the surviving spouse would have an income interest that qualifies for QTIP treatment whether the terms of the trust: (1) direct the trustee to withdraw annually all of the income from the IRA and to distribute to the spouse at least the income of the IRA or (2) grant the spouse the power to compel the trustee to do so. Income tax consequences of choosing between spousal power and trustee direction. Including a spousal power, rather than a trustee direction, in the QTIP trust's governing instrument allows for more flexibility in future income tax planning involving the QTIP trust and the surviving spouse. Here's why. If the surviving spouse is empowered to compel distribution of an amount equal to the internal income and she does not do so, then only the RMD amount has to be withdrawn from the IRA. This amount can be allocated to the QTIP trust's corpus and can remain in the QTIP trust. Suppose that instead of to empowering the surviving spouse to compel distribution, the terms of the QTIP trust require the trustee to withdraw from the IRA annually an amount equal to the income earned on the IRA assets and pay that amount to the surviving spouse. The income tax result is the same as it would be if the surviving spouse compels the trustee's action. Thus, if the QTIP trustee is directed to pay over an amount equal to the IRA internal income annually, then the trustee has to withdraw from the IRA the greater of the amount of income earned on the IRA assets during the year or the annual RMD amount. The portion (or all) of the withdrawal equal to the amount of income earned on the IRA assets during the year must be paid to the surviving spouse in the same year. Any portion in excess of the amount of income earned on the IRA assets may be retained in the QTIP trust. Whether or not the RMD amount exceeds IRA internal income is a function of: (1) the life expectancy of the surviving spouse or the joint life and last survivor expectancy of the IRA owner and his spouse, depending upon whether or not the IRA owner dies before his required beginning date, and (2) the rate of return on IRA investments. The longer the life expectancy and the higher the rate of return, the less likely it would be that the RMD amount would exceed IRA internal income. The taxable portion of the IRA withdrawal that is retained in the QTIP trust is taxed to the QTIP trust as IRD. The taxable portion of the IRA withdrawal that is currently paid to the surviving spouse is taxed to the surviving spouse as IRD. The level at which an individual taxpayer's income is subject to the maximum rate is considerably higher than it is for a trust. The after-tax amount is managed by the QTIP trustee and paid to the IRA owner's beneficiaries upon the surviving spouse's death. This protective feature of a QTIP trust arrangement-i.e., preservation of corpus for children and grandchildren-becomes more important the longer the spouse lives after the IRA owner's death because the required withdrawals from the IRA for RMD purposes generally will exceed the amount of IRA internal income in later years. The income tax consequences may be one of the factors that the surviving spouse takes into account in deciding whether to compel distribution to her of the IRA's annual income. Thus, including a spousal power, rather than a trustee direction, in the QTIP trust's governing instrument allows for more flexibility in future income tax planning involving the QTIP trust and the surviving spouse. Betsy McKenny (J.D., Columbia; A.B., Vassar) specializes in estate planning. Before joining RIA in 1988, she was in private practice. Published with Newsletter Ease
by Steven J. McLaughlin, Vice President & Senior Trust Officer, First National Bank, Ames
Be sure to mark your calendar for the 2007 MOKAN Trust Conference that will be held May 9-11, 2007. The conference will be held at the Hyatt Regency Crown Center in Kansas City, MO.
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Trust Schools Provide Training Solutions
by Sean C. Payant, Ph.D., CAE, Executive Director, Schools of Banking, Inc.
Iowa Trust Association (ITA) members joined the Kansas and Nebraska Bankers Associations more than 30 years ago to create the School of Trust and Financial Services. Since then, ITA members have also played a role in the creation of the Advanced Trust Administration School and the Advanced Trust Operations School.
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Managing Risk
Fred Miller, AccuTech Systems
Because of the discretionary nature of managing clients’ assets, trust departments are typically the most vulnerable to litigation within the financial services industry. Given the discretionary nature of the business, it is imperative for trust officers to thoroughly document conversations with clients and beneficiaries, automate tasks to ensure that fiduciary responsibilities are fulfilled accurately and in a timely manner for each assigned account and maintain accountability and management oversight. The challenge is further complicated by the fact that clients today expect trust officers to be able to communicate with them through a variety of channels–letter, fax, face-to-face and email.
By integrating contact management systems with trust accounting platforms, senior trust management can improve client service and reduce the likelihood of litigation by automating processes consistent with the department’s policies. In addition, trust officer’s will no longer be subservient to manual task management and can redeploy their energies to ensuring better relationships and account retention.
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Satisfying the QTIP Requirements for a Trust That Is an IRA Beneficiary
By Betsy McKenny, RIA Senior Project Editor
One of the most important features of the estate tax is the marital deduction, which in effect permits a decedent to transfer property to his or her surviving spouse free of federal estate tax. Where an individual's assets include an individual retirement account (IRA), the simplest way to obtain the marital deduction is by naming the spouse as beneficiary.
Under this arrangement, the IRA owner:
When the QTIP approach is used, the IRA will be included in the owner's estate, but it will be shielded from estate tax by the marital deduction to the extent the QTIP election is made. However, on the spouse's death, the amount left in the IRA will be included in her estate. Both the IRA and the trust must make the QTIP election to ensure that whatever remains in the IRA, as well as in the QTIP trust, at the surviving spouse's death is includible in her gross estate.
In the second situation, the trustee determines the income of the trust (excluding the IRA) and the income of the IRA under a statutory unitrust regime under which "income" is defined as a unitrust amount of a specified percentage of the fair market value of the assets determined annually
For RMD purposes, a certain minimum amount must be withdrawn from the IRA each year. It doesn't matter for RMD purposes whether this amount is satisfied out of IRA internal income-i.e., the income earned on the undistributed IRA balance-or out of the IRA's "principal" balance. A portion of the IRA distribution is income in respect of a decedent (IRD), whether it is composed of IRA "income" or "principal." But the rate at which IRA distributions are taxed may depend upon how much of the distribution is retained in the QTIP trust.
But if the surviving spouse compels distribution of the IRA internal income, then the trustee must withdraw from the IRA the greater of the amount of income earned on the IRA assets during the year or the annual RMD amount. The portion (or all) of the withdrawal equal to the amount of income earned on the IRA assets during the year must be paid to the surviving spouse in the same year. Any portion in excess of the amount of income earned on the IRA assets-which is withdrawn to satisfy the RMD rules-may be retained in the QTIP trust.
Typically, in earlier years, what must be withdrawn from the IRA for RMD purposes will be less than the amount of IRA internal income. In later years, or whenever the IRA investments perform poorly, what must be withdrawn from the IRA for RMD purposes will typically exceed the amount of IRA internal income.
Thus, there's a trade-off between achieving more favorable income tax results and achieving certain non-tax, estate planning goals. To the extent that the surviving spouse doesn't compel distribution to her of an amount equal to the IRA's annual internal income, then the entire IRA distribution can be retained in the QTIP trust. A distribution retained in the QTIP trust is taxed to the trust-at a higher rate than it would be taxed if paid to the surviving spouse, unless the surviving spouse is already in the top marginal bracket before receiving the IRA distribution. But having the QTIP trust pay the income tax on the IRA distribution erodes corpus, because the income tax on the IRA distributions will be charged to trust corpus.
In the next issue, Financial News will explore the planning opportunities offered by the charitable provisions of the recently-enacted Pension Protection Act of 2006.
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Trustcompare.com
Trustcompare provides valuable information ranging from broad references to industry standards to specific detail of your strengths and weaknesses. From data submitted by each organization regarding assets, income, expenses and profits, Trustcompare analyzes performance from several perspectives. Trustcompare allows you to compare your trust department performance with that of similar organizations. As a member of the Iowa Trust Association, you will receive 10% off the price. Visit Trustcompare at www.trustcompare.com.
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