Statements from a Judicial Verdict

In a recent decision, Judge Edward Nicholas included the following statements in his Final Judgment:

“Mr. Masterson gave the Court a primer on the criteria necessary to establish a fiduciary duty, both express and by implication. His analysis was thorough, objective and well-reasoned – and the Court afforded his testimony great weight.” “Ultimately, this Court agrees with Mr. Masterson.” Bank of America v. Holmes, et al, 2009CA12859, 12th Circuit, Manatee County, Florida.

My testimony in that case addressed the elements necessary for the existence of a trust/fiduciary relationship. Judge Nicholas summarily referred to my reasoning:

“He stated that no fiduciary duty attached for many reasons, including, but not limited to, because the Plaintiff never held title to the asset, because no money ever came under the Plaintiff’s control, because the Bank had no legal interest in the property/asset, and because the parties were simply lender and borrower. Mr. Masterson concluded that no fiduciary duty arose in the relationship between the Plaintiff and the Defendants.”

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Fiduciaries and The Duty of Prudence: The True Impact of Mutual Fund Fees

Mr. Watkins is right on target.  If you have fiduciary duties when it comes to investments, being prudent with investment costs is one of your primary responsibilities.

Fiduciaries and The Duty of Prudence: The True Impact of Mutual Fund Fees.

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Seller Financing is About to Get Ugly on January 10

Clint Coons, Esq

In 3 months private seller financing will come under the control of the Empire, err… actually the Consumer Financial Protection Bureau (CFPB).   Congressmen Dodd and Frank in their zeal to protect the public from unscrupulous lenders have burdened every real estate investor who engages in seller financing with new regulations that will ultimately feel like 10 additional gravities weighing upon their investing.  If you are not aware of this legislation, it essentially removes the real estate investors’ ability to self-finance the sale of real estate without becoming a licensed mortgage loan originator.  Here is how it works.

  • John recently purchased a mobile home park that included 10 vacant mobile homes in the purchase.  Desirous to monetize his investment, John advertises the mobile homes for sale and begins filling them quickly with his attractive financing.  John offers each purchaser a mobile home for $500 down and the remainder amortized over 20…

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Should I have Co-fiduciaries? A Practical Consideration

Not to sound like a broken record, but selection of a trustee in your estate plan is one of the most important decisions you can make. Here’s a good synopsis of what you should consider if you are thinking about more than one trustee.

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Ohio Court Approves Will Written on Samsung Tablet

As I recall from the myriad statutes I’ve seen over nearly 30 years, there is no requirement that a holographic will be written on paper. Here’s a new twist – when we see the first digital holographic will in Idaho?

Marshall's Oklahoma Law Blog

An Ohio Judge has allowed the admission of a will that was written with a stylus on a Samsung Tablet.  According to the man’s two brothers, the decedent had no paper, and was in the hospital expecting to die.  He told one of his brothers how he wanted his estate distributed, and his brother wrote the provisions on the tablet.  The decedent then signed the tablet in the presence of his brothers.

In Oklahoma, it is likely that a Judge would rule the same way.  Oklahoma recognizes three basic types f wills

1: Nuncupative Wills, which are wills that are dictated to another when a person believes his or her death is imminent while in military service or where the person suffered a mortal trauma on the same day as the will was dictated.  The amount of the estate can be no more than $1,000.00 and there must be actually…

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Who Will Be Your Trustee?

Here is an excellent review of important considerations when choosing a Trustee for your Trust.  These considerations also apply when you are choosing a Personal Representative or an Executor.

Who can you trust…with your Trust?

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PI +

Personal Injury Plus, or PI+, is a collaboration with a couple of local professionals, Pat Wardian and Dan Brownell.  My role is to provide consulting expertise when there is trust solution being considered as part of a personal injury settlement.  Check out the website we just set up:  www.piplusidaho.com.

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Trusts, Obamacare, and the New Tax Act

As pointed out in the article in Forbes, to which I’ve linked in the title of this post, both the 3.8% surcharge on investment income required by Obamacare and the tax increases on capital gains from the recent tax act impact Trusts at a much lower point than individuals.  If you are a Trustee, you will now need to be even more intentional about income tax planning with your beneficiaries. Also, since these tax costs encourage Trustees to distribute more to current beneficiaries, Trustees will need to be more intentional about protecting the interests of future beneficiaries.

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Trust Allocation of Timber Sale Proceeds under the Uniform Principal and Income Act

The Uniform Principal and Income Act (the “UPAIA”) was completed by the Commissioners on Uniform State Laws in 1997.  The UPAIA was adopted shortly afterward by the State of Idaho.  It has been adopted as of the writing of this article with minor variations by 44 states and the District of Columbia.

Much attention has been paid to a few of the innovative provisions of the UPAIA such as the Trustee’s “Power to Adjust” and the treatment of receipts by Trustees from entities.  However, one innovative provision has had little real attention paid to it in professional literature (at least that I can find) and that is §412 (§68-10-412 of the Idaho Code) of the UPAIA dealing with the allocation of receipts by a Trustee from the sale of timber.

§412 was innovative in that it formally recognizes timber as a renewable resource, rather than a depleting resource such as minerals, water and other natural resources.  Prior law in many states only instructed Trustees to allocate the proceeds of the sale of timber between income and principal in a manner that is “reasonable and equitable.” Thus, timber was treated in many cases as a depleting resource for trust accounting purposes. The result was an inconsistent use of statutory depletion rates, the federal income tax depletion rate, or some other method concocted by a trustee and the trust’s accountant.

Idaho adopted the UPAIA with no changes to §412.  Here is the current Idaho statute:

68-10-412. TIMBER. (a) To the extent that a trustee accounts for receipts from the sale of timber and related products pursuant to this section, the trustee shall allocate the net receipts:

1)  To income to the extent that the amount of timber removed from the land does not exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a mandatory income interest;

(2)  To principal to the extent that the amount of timber removed from the land exceeds the rate of growth of the timber or the net receipts are from the sale of standing timber;

(3)  To or between income and principal if the net receipts are from the lease of timberland or from a contract to cut timber from land owned by a trust, by determining the amount of timber removed from the land under the lease or contract and applying the rules in paragraphs (1) and (2) of this subsection; or

(4)  To principal to the extent that advance payments, bonuses, and other payments are not allocated pursuant to paragraph (1), (2) or (3) of this subsection.

(b)  In determining net receipts to be allocated pursuant to subsection (a) of this section, a trustee shall deduct and transfer to principal a reasonable amount for depletion.

(c)  This chapter applies whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust.

(d)  If a trust owns an interest in timberland on the effective date of this chapter, the trustee may allocate net receipts from the sale of timber and related products as provided in this chapter or in the manner used by the trustee before the effective date of this chapter. If the trust acquires an interest in timberland after the effective date of this chapter, the trustee shall allocate net receipts from the sale of timber and related products as provided in this chapter.”

A Trustee does have the option of using §403 of the UPAIA to allocate receipts and disbursements.  §403 is particularly helpful if a timber operation is an ongoing operation that is operated as a sole proprietorship (as opposed to a corporate entity) by the Trustee.  However, it has been my experience that the sale of timber by many Trustees is an incidental transaction that occurs occasionally over time.  The proper allocation of the proceeds of a timber sale are critical to calculating the interests of the trust’s income and principal beneficiaries.

To calculate the proper allocation between principal and income, the Trustee will need to know  (1) the Net Timber Value of the timber owned by the trust and (2) the growth rate of the timber for the year in which the timber is sold.  The Net Timber Value is the gross Merchantable or Saleable Timber Value minus the estimated harvesting and sale costs. The growth rate is the estimated growth is the estimated annual growth rate of the harvestable timber.  To get both of these numbers, the Trustee will need to engage a timber expert or consultant to evaluate the timber and report on the timber’s value and estimated growth rate.  The growth rate can vary depending upon the type of timber, local environmental factors, and recent climate.

There are two basic calculations described in §412(a).  §412(a)(1) addresses the calculation required if the actual sale of timber is less than the growth rate for the year in which the timber was sold.  §412(a)(2) addresses the calculation required if the actual sale of timber is more than the growth rate for the year in which the timber was sold.

Here are two examples, one for each calculation. The examples are based upon an actual timber evaluation on behalf of an income beneficiary of a trust where the Trustee not only failed to properly manage the trust’s timber, but also inadvertently caused the income beneficiaries not to realize the income to which they were otherwise entitled.  The results were justifiable claims in litigation by the income beneficiary. In both calculations the assumed value of the timber owned by the trust is $2,000,000.  The growth rate reported by the timber expert was 1.5% for the year in question.

Example 1 – §412(a)(1):

Gross Merchantable Timber Value                             $  2,000,000

Estimated Harvesting and Sale Costs                            (     972,331)

Net Timber Value                                                       $       1,027,669

Estimated Growth Rate                                                          1.5%

Value of Current Year Growth                                   $         30,000

Actual Net Proceeds of Sale                                       $          25,000

Amount allocated to Income                                      $          25,000

Amount allocated to Principal                                    $             – 0 –

Note:  Since the amount realized from the actual sale of timber is less than the value of current year growth, the entire amount of the sale is allocated to Income.  Note that, to determine the value of current year growth, the estimated growth rate is applied to the gross timber value, not the net timber value.

Example 2 – §412(a)(2):

Gross Merchantable Timber Value                             $  2,000,000

Estimated Harvesting and Sale Costs                            (     972,331)

Net Timber Value                                                       $       1,027,669

Estimated Growth Rate                                                             1.5%

Value of Current Year Growth                                  $           30,000

Actual Net Proceeds of Sale                                       $          342,556

Amount allocated to Income                                     $            30,000

Amount allocated to Principal                                   $          312,556

§412(a)(3) goes on to say that, if a Trustee receives proceeds of a lease or other contract that represents the sale of timber owned by the trust, such proceeds should be allocated by §412(a)(1) and (2) as well.  Further §412(a)(4) instructs the Trustee to allocate advance payments, bonuses, or other amounts that are not allocated by subsections (1) and (2) entirely to principal.

It is critical that a Trustee properly and accurately calculate the allocations between income and principal of a trust.  While the UPAIA gives Trustees discretion to allocate transactions between income and principal, this discretion should not be exercised in hindsight. Proper allocation of timber sales should be done concurrently with the actual sale so that the Trustee fulfills his or her duties to both income and principal/remainder beneficiaries.

Copyright Steve Masterson 2012. All rights reserved.

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“TRUSTEE SCORECARD®” TRADEMARK REGISTRATION AWARDED

 Masterson Receives Registration by US Patent and Trademark Office

Serving as a Trustee of a Trust can be a daunting process for even the most well-prepared person.   The personal liability for a Trustee can be overwhelming, if the Trustee is even aware of it.  Steve Masterson, of Coeur d’Alene, Idaho, has developed and implemented a review process that can be used by a Trustee, or a Beneficiary of a Trust, to evaluate what kind of job the Trustee is doing managing the Trust.  Masterson calls the review process Trustee Scorecard®.

On Tuesday, October 30, 2012, the US Patent and Trademark Office awarded trademark registration of the term Trustee Scorecard® to S&K Ventures, LLC, an Idaho limited liability company controlled by Masterson.

A Trustee’s duties are described in trust documents and in applicable State laws. These duties carry significant personal obligations and liability. Fiduciary litigation is very costly and fiduciary duties can be unexpectedly broad.  Trustee Scorecard® assists a Trustee in assessing the extent to which he or she is meeting the requirements of the relevant trust documents and applicable State and federal laws. After a thorough review of relevant documents and other materials, a Trustee Scorecard® report is delivered detailing strengths and weaknesses, and where applicable, recommendations for improvement.

Trustee Scorecard® is appropriate for Trustees of irrevocable trusts and revocable trusts  where the Trustee is a different person or entity than the current or future beneficiaries. Beneficiaries, you can take advantage of Trustee Scorecard® to assess the job your Trustee is doing for you.  Trustee Scorecard®  can be used to evaluate individual, professional, or corporate Trustees.

Steve Masterson has 29 years experience managing a wide variety of trust and estate assets, designing estate plans for high net worth clients, and creating custom financial solutions for unique family circumstances. He developed his expertise while working for Gardere & Wynne, LLP, Dallas, Texas, Wells Fargo Bank, N.A, and two independent trust companies.  He holds a B.A. from Dallas Baptist University and completed the Texas Bankers Association School of Trust Banking at Southern Methodist University.

Further information can be found at http://www.idahotrustee.com, by email to samasterson61@gmail.com, at www.facebook.com/TrusteeScorecard.

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