KTC NEWSLETTER FALL 2020
FALL 2020
KODIAK TRUST NEWS
MEET OUR NEW DIRECTORS
TODD TEEPLES:
Todd has over 25 years of experience in corporate accounting finance. Currently, Todd is the Director of Technical Accounting for ConocoPhillips in Alaska. Todd has worked for ConocoPhillips for over 20 years in various positions that have given him opportunities to manage all accounting functions for over $25 billion in assets including internal reporting, SEC reporting, intern al controls, and audit; conducted economic analysis for major capital projects; developed systems for economic project planning, long-term planning, budgeting and excise tax and provided financial reporting for commercial commodity trading organization. In addition, he has owned and operated his own accounting firm. Todd graduated with a B.S. in Accountancy in 1996 from Arizona State University and received his CPA certification in 2002 through the Arizona Board of Accountancy. Todd has lived with his family in Alaska for 12 years.
BARRY NEAL:
Prior to his retirement from Deloitte Tax LLP, Barry was the West Region Competency Leader and the Senior National Advisor for the Tax Exchange Estate, Gift, Trust and Charitable Planning Competency Group for the Private Wealth Group within Deloitte Tax, LLP. Barry has over thirty four years of public accounting experience, specializing in foreign and domestic wealth transfer tax planning; estate, gift, and generation-skipping transfer tax; administration of large complex estates; fiduciary income taxation, including the taxation of charitable trusts; charitable gift planning; and income taxation of wealthy individuals. Barry and his family live in Reno, Nevada.
DUKE KAHUMOKU:
Duke has lived and worked in Alaska for the past 28+ years. He grew up in Kodiak and has lived in the Matsu, Anchorage and Eagle River. He served a two-year mission for the Church of Jesus Christ of Latter-day Saints in Auckland, New Zealand. Duke graduated with a B.A. in Political Science from the University of Alaska Anchorage. As a former bank manager and commercial lender, Duke understands the fiduciary responsibility to his clients. Duke left banking and joined Kodiak Trust Company where he functions as a Trust Officer and Compliance Officer. He also serves as a member of the Board for Kodiak Trust Company. Duke and his family of six enjoy serving others in church and in the community. They love spending time outdoors and exploring the great state of Alaska.
WES CHARLES:
Wes Charles grew up a military “brat” all over the world. After graduating from college in 1997, he joined the team and ventured into the crazy wild world of Walnut Creek, California. In 2003 he earned his MBA at Brigham University and promptly returned to work with William Wright Associates in California. In 2006, Wes moved to Park City, Utah and started his own firm, WBC Financial Services, which he still heads today. Currently operating in Orem, Utah, WBC functions primarily as a source of competent administrative services to various companies throughout the western hemisphere in areas like estate planning, investment research, accounting, financial controls and budgeting, and fund administration. He is ridiculously interested in college athletics and in sports in general. He also loves to enjoy time with his family of seven in the beautiful outdoors that surround him in Heber, Utah.
TRENDING NEWS
COVID 19
COVID-19 has been in our lives for six plus months and it has been a wake-up call to remind us all just how unpredictable life can be. For most of our clients, it has been a stark reminder that even a basic estate plan is better than no plan.
It is timely for advisors to invite their clients to individual Zoom or Teams meetings to review and update their revocable trust package. Such meetings are being done by some for a flat-nominal fee and others are complimentary. It is a win-win situation: your clients are reassured that their affairs are in order in case of incapacity or death and you have the opportunity to generate revenue through amendments and other legal work. There is an added bonus that satisfied clients refer others.
KEY POINTS TO DISCUSS
SHORT TERM INCAPACITY:
Who are the best agents for health care and financial decisions? Who is the most suitable successor trustee? Clients have had a real reality check since they drafted their documents.
MEDICAL DECISIONS:
The news has been filled with horror stories about COVID-19 patients being on respirators for weeks and even months prior to succumbing to the virus. Rethinking medical directives is a sensitive but timely issue.
LONG TERM AND PERMANENT INCAPACITY:
Who are the best agents for health care and financial decisions? Who is the most suitable successor trustee? Some COVID-19 victims never fully recover; there are cases in the news of those who have residual heart and kidney damage.
DEATH:
Avoiding probate: Are all assets titled in the name of the trust? Is there a piece of real estate in another state not in trust that would require probate? With the shut-down (less staff at work) plus the increased number of deaths, probate courts are taking longer than usual to settle estates. Thus, the time delays and expenses associated with probate have dramatically increased.
Who is the most suitable successor trustee?
Who are beneficiaries and when should they get distributions? The pandemic has changed lives: our youth have been impacted by closed schools, unemployment and much more. Many families need to provide financial assistance sooner than later to their children.
ADVISOR’S CORNER |
ACCUVEST GLOBAL ADVISORS
BRANDS MATTER
In times of uncertainty, investors tend to seek themes that have more stability and predictability. As a dedicated investor in the $44 trillion a year household spending thematic, we continue to see significant opportunities across important consumer spending categories like housing, video gaming, e-commerce, athleisure, mobile payments, and luxury goods.
“Nothing is more predictable than a consumer’s propensity to spend”
Brand relevancy drives consumer purchase intent so our team spends a significant amount of time analyzing the brands that are resonating most across key spending themes.
Our equity strategies tied to the consumption theme allow investors to benefit from high brand loyalty and recurring purchase intent. There is significant evidence that supports the investment case for a dedicated allocation to the most admired global brands. When a business experiences customer obsession, high brand love, is willing to self-disrupt to take market share, has products in high demand across multiple age groups all over the world, strong stock returns often follow. These are the companies we call Mega Brands and what drives the core allocation to our Brands-focused portfolios.
BIDEN VS TRUMP TAX ISSUES
TOP INDIVIDUAL RATE
BIDEN - 39.6%
TRUMP - MAINTAIN 37% AND MAKE IT PERMANENT
SPECIAL SMALL BUSINESS TAX
BIDEN - REPEAL
TRUMP - MAINTAIN 20% TAX RATE REDUCTION AND MAKE IT PERMANANT
CAPTIAL GAINS TAX RATES FOR TOP EARNERS $1M OF INCOME
BIDEN - 39.6%
TRUMP - MAINTAIN AT 20%
ITEMIZED DEDUCTIONS
BIDEN - CAP DEDUCTIONS AT 28% TAX RATE
TRUMP - MAINTAIN CURRENT LAW
ITEMIZED DEDUCTIONS
BIDEN - REDUCE DEDUCTIONS FOR HIGHER INCOME EARNERS
TRUMP - MAINTAIN CURRENT LAW
ESTATE TAX
BIDEN - TAX CAPITAL GAIN ASSET AT DEATH AND ELIMINATE STEP-UP IN BASIS
TRUMP - MAINTAIN CURRENT STEP-UP IN BASIS AND MAKE IT PERMANENT
SOCIAL SECURITY TAXES ON WAGES
BIDEN - EXTENDS 12.4% ON WAGES ABOVE $400K
TRUMP - MAINTAIN CURRENT LAW- NO SOCIAL SECURITY ON WAGES ABOVE $137,000
RETIREMENT SAVING TAX INCENTIVE
BIDEN - INCREASE INCENTIVES TO SAVE IN A RETIREMENT PLAN
TRUMP - CREATE A UNIVERSAL TAX-FREE SAVINGS ACCOUNT
CORPORATE MINIMUM TAX
BIDEN - 15% TAX ON CORPORAE BOOK PROFITS FOR BUSINESSES WITH $100M IN INCOME
TRUMP - NO PROPOSAL
Differences in tax policies between the candidates are stark. In a nutshell, Biden would equalize the tax rate on investing and wages for upper income taxpayers. Thus far, Biden’s proposals to tax the wealthy individuals and corporations are not as extensive as his Democratic colleagues would like. The new Democratic majority favors a larger tax increase on the wealthy and would include a wealth tax or a surtax on wealthy tax payers. President Trump has put forth only a handful of tax proposals mostly centered around improvements to the TCJA passed in 2017. There will be fiscal pressures on who ever is president to generate revenue to pay for past and future COVID-19 relief measures.
FEATURED ARTICLE
Supreme Court cases Kaestner & Fielding: Increased security in out of state trust planning
In recent years, there have been two important Supreme Court cases that should be considered together.
On June 21, 2019, in North Carolina v. Kimberley Rice Kaestner 1992 Family Trust, Docket No. 18–457, the United States Supreme Court (SCOTUS) ruled that the residency of a beneficiary in a U.S. state alone was not sufficient nexus (connection) for a state to tax the undistributed net income of a trust.
Many commentators have written about the case and its implications. However, SCOTUS declining the writ of certiorari to Minnesota’s Fielding case right after deciding on Kaestner should not be overlooked.
By refusing to grant a writ of certiorari in Fielding, et al. v. Commissioner of Revenue, 916 N.W.2d 323 (Minn. 2018), the Minnesota Supreme Court’s decision in favor of Fielding remains. It is still unconstitutional to tax a trust solely based on grantor residency at the time the trust became irrevocable. As applied to the Fielding trusts, the nexus between the state and the trust is not substantial enough to warrant state taxation.
Two States Impact the Entire Country:
While some analysts believe the Kaestner decision was relatively narrow, the implications of both cases combined are broad, likely resulting in trust taxation changes in North Carolina and Minnesota. However, the implications extend to many other states limiting a state’s ability to tax undistributed income held within trusts. It is unlikely that SCOTUS will entertain another trust taxation case anytime soon. It is now up to the state courts to interpret Kaestner and make the appropriate amendments to their laws. North Carolina and Minnesota and states with similar tax laws have many estate planning opportunities even before states’ legislatures act.
But where will the lines be drawn?
Broad or Narrow Implications?
In Kaestner, the only connection to North Carolina is the beneficiary’s residence in the state. SCOTUS ruled that having a beneficiary in the state was not sufficient to tax the trust. In the Fielding case, the Minnesota Supreme Court ruled that despite additional connections there was not sufficient nexus to permit Minnesota to tax the undistributed net income of a trust.
The United States Supreme Court’s decision in Kaestner was decided somewhat narrowly. The Court relied on three key facts concerning the beneficiary in North Carolina:
“First, the beneficiaries did not receive any income from the Trust during the years in question. Second, they had no right to demand Trust income or otherwise control, possess, or enjoy the Trust assets in the tax years at issue. Third, they also could not count on necessarily receiving any specific amount of income from the Trust in the future.”
It is not entirely clear how SCOTUS might decide a case where the beneficiary received some distributions from a trust. It is also unclear what a case decision would be if it had trust terms that permitted more control over the trust. It is unknown whether the beneficiary would receive some or all of the corpus from the trust in the future.
The Kaestner decision does not address whether a beneficiary’s ability to assign a potential interest in the income from a trust would afford that beneficiary sufficient control or possession over the trust. It also does not address whether the beneficiaries were guaranteed to receive funds (or enjoyment of the property) in the future to justify North Carolina’s taxation based solely on the beneficiary’s in-state residence.
Finally, SCOTUS did not consider the trust’s broader argument that the trustee’s contacts alone determine the state’s power over the trust. In contrast, declining the Fielding writ and allowing the Minnesota Supreme Court decision to stand suggests that the location of the trustee (not the location of the grantor) is most relevant in determining the domicile of a trust.
Current Trust Climate
Here are some salient points about the current trust climate:
Trusts are becoming more like corporations
Corporations, though fictional, are treated like people and have their own rights
The US Supreme Court recognized that trusts have the same rights as individuals
A state must be able to get personal jurisdiction over an individual to tax that
person or exercise power over them
The same is now true for trusts
DECANTING TRUST
For existing trusts, practitioners should look for decanting opportunities to states like Alaska or Nevada that have no income tax. Note that Alaska and Nevada trust laws may provide additional benefits for asset protection and dynasty provisions as well.
Create Your Own Facts
Residents in states outside of Minnesota and North Carolina will benefit from careful planning by structuring around the rulings in Kaestner and Fielding.
Rulings in both cases focus on two key factors: the importance of the trustee’s domicile and not having physical property in the trust.
Develop Flexibility
You can build flexibility, including trust protectors, into a trust structure, even if the facts or laws will change in the future. However, practitioners should be careful. It is possible to give too much power to an in-state trust protector and create a nexus to state taxation.
Carefully Select Trustees
Pick your trustee carefully! A trustee’s connections to your state can tip the scales in the eyes of the revenue authorities. Practitioners should consider out-of-state trust companies, such as Kodiak Trust Company of Alaska, as part of their process. It is crucial to be mindful of out-of-state companies that have a significant presence in your state too.
Employ Discretionary Trusts
The Kaestner decision was very explicit in favoring discretionary trusts. Practitioners should include a spendthrift clause, which prevents a beneficiary from assigning their interest in their trust documents.
In Conclusion:
“With this current climate, now is the time all taxpayers and their advisors and lawyers should consider how a trust that is sitused in Alaska, Nevada of South Dakota, or another taxpayer-friendly jurisdiction might help. The worst-case scenario is that you will pay taxes at the same rate that you pay now. The best case is that you might end up with a much lower tax burden in the future. It is also very attractive since these same jurisdictions also have special trusts for asset protection.”