The TARELLA Times. Tarella Financial Group 110 Henry Street Saratoga Springs, NY (518)

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1 Tarella Financial Group 110 Henry Street Saratoga Springs, NY (518) Provided as a courtesy by David R. Tarella, CLU, ChFC, (CA Ins. Lic#0B78176), Registered Representatives offering securities through NYLIFE Securities, LLC, Member FINRA/SIPC, a Licensed Insurance Agency, 110 Henry Street, Saratoga Springs, NY 12866, (518) Member Agent of the Nautilus Group, a service of New York Life Insurance Company. Financial Adviser offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser. Tarella Financial Group is not owned or operated by NYLIFE Securities LLC or its affiliates. This material may include a discussion of one or more tax related topics. This tax related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed. It is not intended (and cannot be used by any taxpayer) for the purposes of avoiding any IRS penalties that may be imposed upon the taxpayer. New York Life Insurance Company, NYLIFE Securities LLC, Tarella Financial Group and affiliates, agents and employees thereof do not provide tax, legal, or accounting advice. Individuals should consult with their own tax, legal or accounting advisors before implementing any planning strategies. The cash value in a life insurance policy is accessed through withdrawals and policy loans, which accrue interest at the current rate. Loans and withdrawals will decrease the cash surrender value and death benefit New York Life Insurance Company. All rights reserved. SMRU (exp ) The TARELLA Times

2 At Tarella Financial Group, we educate our clients so that they can take charge of their financial lives. We teach principles of wealth management and show them how to direct their money in pursuit of lifetime financial freedom. We help them create financial plans that work uniquely for them, and act as the quarterback of their long-range financial strategies. David R. Tarella What Keeps Our Clients Awake at Night?

3 Estate Planning Appointing a trusted advisor. In recent years, settlors have been using trusts to carry out unique objectives and to own complex assets such as closely held business interests, real estate and oil and gas interests, etc. This can pose a challenge to the trustee s traditional roles and responsibilities with respect to investment management. In such situations, a directed trust with a designated investment advisor may be a solution. The Uniform Prudent Investor Act (UPIA), allows fiduciaries to utilize modern portfolio theory to guide investment decisions. One of the tenets of modern portfolio theory involves the reduction of risk by holding combinations of instruments that are not perfectly positively correlated, or in other words, diversification. In contrast, if a trust is holding mostly closely held business interests, the trusts assets may become overly concentrated in the family business. A trustee failing to diversify such a risky and concentrated position can be considered in breach of his fiduciary obligations to the beneficiaries. A grantor may attempt to waive the trustee s duty in order to accommodate a particular asset or objective, such as by waiving the trustee s duty to diversify, or by waiving the trustee s responsibility over a particular asset. However, such waivers may have questionable effect and the scope and extent of such waivers are frequent sources of litigation. An additional challenge is that the Trustee becomes a significant stockholder and has a say in the operation of the business. A grantor may prefer another person (including himself) with expertise and knowledge to direct the trustee in matters pertaining to the family company. A family with ties to a particular wealth management professional also may prefer her to manage investment decisions regarding the family trust, and not the professional trustee whose specialty consists in fiduciary accounting, custody services, account statement services, distribution services, etc. In these situations, the settlor can fulfill his desires by either delegating the trustee s duty over particular trust property via the appointment of an agent or by completely assigning it using a directed trust via the creation of the office of investment advisor. Generally speaking, state law and most trust agreements give the trustee the ability to hire agents so as to delegate all or a portion of his administrative responsibilities. However, the trustee has continued liability and a duty to monitor agents, second-guess and possibly interfere with their decisions. Directed trusts involve a designated investment advisor who directs the trustee on delineated administrative and discretionary duties pertaining to all or a portion of the assets of the trust. Like the trustee, and unlike the agent, the investment advisor is a fiduciary with the highest standard of liability to the beneficiaries of the trust. The trustee continues to possess the trust power and authority that the direction covers, but the trustee executes those powers at the direction of the investment advisor, thereby excusing the trustee from any continued liability with respect to unique assets or unique objectives. This results in a more accommodating and common-sense solution, with the added benefit that a corporate trustee would lower his fees. An important consideration in directed trusts is the level of continued liability for the trustee when being directed. If the trustee continues to carry full liability such as for gross negligence when following the investment advisor s direction, then he would have a corresponding obligation to monitor, second-guess, and possibly interfere with the decisions of the investment advisor. Thus, because of the threat of liability, little if anything may be accomplished by the assignment. However, if the trustee is generally protected from liability, then the grantor is able to accomplish the assignment. The laws of each state vary with respect to how they limit the liability of the trustee in directed trustee arrangements. As of today, over half of the states have addressed this issue with directed trust statutes of some kind. The remaining states have no statute and the law would be dependent on applicable case law, if any, on the subject

4 Asset Protection The Life Insurance Hybrid Domestic Asset Protection Trust By Steven J. Oshins, Esq., AEP (Distinguished) It is imperative that the asset protection planner create a plan with the highest probability of success. In some cases, it is possible to significantly increase the protection by simply using a Hybrid Domestic Asset Protection Trust (DAPT) rather than a traditional DAPT. This article describes this structure and also describes a unique ability to take advantage of this technique in order to enhance the traditional ILIT. The Domestic Asset Protection Trust Asset protection has become a much discussed area of law and has become an ideal complement to estate planning. Consequently, the DAPT has become an asset protection tool in the planner s toolbox. As more states have enacted DAPT legislation, practitioners have started doing more DAPTs for their clients. Financial advisors must be knowledgeable in this area in order to understand the opportunities for their clients. A DAPT is an irrevocable trust in which the trust settlor is a discretionary beneficiary along with other discretionary beneficiaries. After a period of time called the statute of limitations, it is possible the DAPT assets could be protected from the settlor s creditors. The statute of limitations applicable to the trust depends upon which of the DAPT jurisdictions is used for the trust. In addition, all DAPT jurisdictions except for Nevada and Utah have at least one type of exception creditor who can pierce through the DAPT. In many of these jurisdictions, divorcing spouses, alimony creditors, child support creditors, pre-existing tort creditors and other classes of creditors are exception creditors who can pierce through the trust. After approximately 20 years since the first DAPT legislation passed, there are no known cases where a creditor has been able to pierce through a DAPT in a non-bankruptcy, non-fraudulent conveyance situation. This may be the case because most creditors feel that winning in court is such an expensive, uphill battle that they are better off settling the dispute before it gets that far. However, despite the potential for protection, whether through a settlement or through the court system, if there is a way to increase the odds of success even more, then such a strategy should be considered since some practitioners still feel that a regular DAPT can be pierced by a creditor of the settlor. The Hybrid Domestic Asset Protection Trust The Hybrid Domestic Asset Protection Trust (Hybrid DAPT) is a strategy that may increase the probability that the trust assets will be protected. The Hybrid DAPT is just like a regular DAPT except that the settlor isn t a discretionary beneficiary of the trust, but can be added later by a trust protector at the trust protector s complete discretion. Thus, the trust is initially set up for the benefit of the settlor s spouse and descendants, for example, but not for the settlor. By not including the settlor as a beneficiary of the trust, the Hybrid DAPT is by definition a third-party trust and therefore generally avoids the potential risk of uncertainty of a regular DAPT. Where the settlor is married and has a strong, trusting relationship with his or her spouse, the settlor may be able to indirectly access the trust assets through the spouse. And the trust agreement should define the spouse using a floating spouse provision that defines the spouse as the person the settlor is married to from time to time.

5 This gives the settlor the ability to access the trust assets through a subsequent spouse in the event of a divorce or the death of the settlor s spouse. If the settlor has no spouse, then it becomes more difficult to access the assets using this technique. However, since a good asset protection planner will be sure to leave sufficient wealth outside of the client s asset protection trust, the settlor may not have to work through this issue anytime soon. If the Settlor is added as a Beneficiary In case the settlor needs to be a discretionary beneficiary of the Hybrid DAPT sometime in the future (i.e., if the settlor has no spouse or child that will share a distribution with the settlor and the settlor now needs a distribution), the trust agreement provides that the trust protector can add additional beneficiaries, including the settlor. However, if the settlor is added, then the Hybrid DAPT becomes a regular DAPT and thus risks that the law is still unsettled on DAPTs. Additionally, it will be important to ensure there is no pre-determined arrangement between the settlor and trust protector. If the settlor suspects that a creditor attack may be forthcoming, the trust protector could remove him or her as a discretionary beneficiary. The Completed Gift Hybrid DAPT Most DAPTs are designed as Incomplete Gift DAPTs where the sole objective is asset protection. However, many DAPTs are designed as Completed Gift DAPTs where the settlor is a discretionary beneficiary of a trust designed with the following attributes and objectives: 1. It s a completed gift for gift tax purposes, 2. The settlor is a discretionary beneficiary, 3. The trust assets are protected from the settlor s creditors, and 4. The trust assets are outside of the settlor s estate for estate tax purposes. In Private Letter Ruling , the Internal Revenue Service held that a Completed Gift DAPT would not be included in the settlor s estate where the settlor / resident of a DAPT jurisdiction established the DAPT using the laws of that DAPT jurisdiction. However, with respect to a resident of a non-dapt jurisdiction, whether the trust assets are open to creditors of the settlor is still uncertain since it is unclear which state law will apply for creditor purposes. Additionally, it is important to note that PLRs only apply to that taxpayer who applied for the ruling. The Completed Gift Hybrid DAPT reduces this risk since the settlor isn t a discretionary beneficiary of the trust and, thus, it isn t a selfsettled trust. In an ideal scenario, the settlor will never need to be added as a discretionary beneficiary by the trust protector. The Completed Gift Life Insurance Hybrid DAPT Life insurance policies are often owned by an irrevocable life insurance trust (ILIT) in order to remove the death benefit from the insured s taxable estate. However, especially for insurance products that have high cash value, the insured is often torn between saving estate taxes and having access to the cash value. Also important in this analysis is the perceived risk inherent in the uncertainty of whether a traditional Completed Gift DAPT will ultimately be determined to be out of the settlor s estate. The Completed Gift Life Insurance Hybrid DAPT may be a potential solution to this dilemma since it acts like a traditional third-party ILIT until and unless the trust protector adds the settlor in as a discretionary beneficiary and thus may not take any significant risk until this time. And if the settlor is at the point where accessing cash value is necessary, the settlor s estate may be to the point where estate taxes aren t an issue or are less of an issue. If the settlor has significant assets and merely has a liquidity issue, then the settlor could simply sell illiquid assets to the trust in order to access cash. Steven J. Oshins, Esq., AEP (Distinguished) Partner, Oshins & Associates, LLC, Las Vegas, NV Steve is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He is listed in The Best Lawyers in America and was named the Las Vegas Trusts and Estates Lawyer of the Year by The Best Lawyers in America. He was inducted into the NAEPC Estate Planning Hall of Fame in He has been named one of the 24 Elite Estate Planning Attorneys in America by The Trust Advisor and one of the Top 100 Attorneys in Worth. He has written many of Nevada s most important estate planning and asset protection laws, including the law allowing a 365-year Dynasty Trust, the law making the charging order the exclusive remedy against Nevada business entities and not allowing equitable remedies, and the law making Nevada the only jurisdiction to allow Restricted LLCs and LPs, thereby making Nevada the state allowing the largest valuation discounts

6 Insurance Planning Periodic review of life insurance planning needed in light of possible tax reform. There has been widespread discussion regarding the need for tax reform in recent years. Now, with one party holding a majority in both houses of Congress as well as the presidency, it is likely that significant tax reform may occur. At this point, discussion regarding the nature and scope of tax law changes is highly speculative. Equally unclear is when any such changes would take effect. President Trump has called for a repeal of the estate tax and some believe this may occur. Many commentators also suspect that if the estate tax is repealed in its current form, it may be replaced with a capital gains tax at death or some similar scheme. Changes to the income tax rates for both individuals and business entities have also been discussed. In the face of a changing tax landscape, it is increasingly necessary for clients to conduct periodic reviews of their life insurance policies with their advisors for several reasons. First, policies should be reviewed to ensure that they align with overall estate planning goals and financial strategies. For example, suppose that a client purchased a life policy to equalize the inheritances of her children: she had planned to pass her business to her daughter and the death benefit of her life insurance policy, which is of comparable in amount, to her son. A few years after the policy was purchased, however, the daughter pursued a successful career outside of the business and the client sold the business to a third party for a large sum of cash. A periodic review of the policy could determine whether it still makes sense in the overall estate and financial plan or whether different investment choices may be better suitable given the client s goals and her new financial and tax situation. Periodic reviews are also important because previously nonexistent vulnerabilities may arise that may necessitate additional insurance. For example, an unexpected change in the health of a spouse, child or other family member may cause additional persons to be dependent on the client s income, creating a need for additional life insurance. Or, a sudden appreciation of a client s real estate holdings or business interest may have generated a previously unanticipated state or federal estate tax issue and liquidity need that must be addressed. A meeting with a financial professional can help quickly identify new vulnerabilities. Policies should also be reviewed in order to spot policies that may be underperforming and may need to be replaced. An older policy may yield lower interest or have higher administrative costs than a new policy may have. Such a policy may often be exchanged for a new policy through a 1035 exchange (named after the applicable Internal Revenue Code section) without adverse tax consequences. Finally, a periodic review of policies is necessary to ensure that beneficiary designation forms are current. It is not uncommon for beneficiary designation forms to list a person who is deceased or who is an ex-spouse of the insured. In other cases, the client may have put in place a revocable trust with the intent to pass the death benefit to the Trustee, but failed to update the beneficiary designation form while transferring other assets to the trust. Naming an unintended beneficiary may lead to confusion, unintended taxes, family disharmony and even litigation. The periodic review of life insurance policies including beneficiary designation forms with both financial advisors and attorneys can help ensure that benefits will pass in accordance with the client s plan and wishes. Some clients who are underinsured or have a liquidity need may be tempted to postpone planning in light of possible tax law changes. However, when planning is postponed, unforeseen events may foreclose previously available solutions. For example, a sudden change in a client s health may become prohibitive to obtaining a much-needed new life insurance policy. For those with insurance in place, the periodic review of policies with financial professionals and attorneys is equally important. It can help ensure that the policy is aligned with overall estate and financial planning objectives, and that it addresses vulnerabilities. It may also help discover underperformance in policies or outdated beneficiary designation forms. Periodic reviews may be especially important in a changing tax environment.

7 Tarella Financial Group David R. Tarella, CLU, ChFC As a financial services professional for over 27 years, David is a strategic thinker with a highly innovative mindset. He founded Tarella Financial Group to meet the needs of business owners and executives. As a Chartered Financial Consultant, David brings extensive knowledge and understanding as he recommends solutions for his client s retirement planning, estate planning, wealth management, as well as business succession and executive and employee compensation and benefits. He excels at helping his clients to crystallize their goals while helping them create a road map for their success. As a charter Member agent of The Nautilus Group, a Service of New York Life, David belongs to an elite group of financial professionals and has exclusive access to the in-house support of planning professionals with credentials in law, taxation, accounting, insurance and finance. David is also an Investment Adviser Representative with Eagle Strategies LLC, a Registered Investment Adviser. The combination of resources of The Nautilus Group and Eagle Strategies LLC enhance David s ability to provide a more comprehensive platform for his high net worth clients and business clients. Dave is also a consistent 27 year member of MDRT, which is recognized throughout the industry as the standard of excellence in life insurance sales performance.

8 Tarella Financial Group 110 Henry Street Saratoga Springs, NY (518) Provided as a courtesy by David R. Tarella, CLU, ChFC, (CA Ins. Lic#0B78176), Registered Representatives offering securities through NYLIFE Securities, LLC, Member FINRA/SIPC, a Licensed Insurance Agency, 110 Henry Street, Saratoga Springs, NY 12866, (518) Member Agent of the Nautilus Group, a service of New York Life Insurance Company. Financial Adviser offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser. Tarella Financial Group is not owned or operated by NYLIFE Securities LLC or its affiliates. This material may include a discussion of one or more tax related topics. This tax related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed. It is not intended (and cannot be used by any taxpayer) for the purposes of avoiding any IRS penalties that may be imposed upon the taxpayer. New York Life Insurance Company, NYLIFE Securities LLC, Tarella Financial Group and affiliates, agents and employees thereof do not provide tax, legal, or accounting advice. Individuals should consult with their own tax, legal or accounting advisors before implementing any planning strategies. The cash value in a life insurance policy is accessed through withdrawals and policy loans, which accrue interest at the current rate. Loans and withdrawals will decrease the cash surrender value and death benefit New York Life Insurance Company. All rights reserved. SMRU (exp ) The TARELLA Times