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Monday, May 17, 2021

Q&A on Florida's New Directed Trust Act

 Below is a copy of article to be published this evening on Leimberg Information Services:

Florida’s version of the Uniform Directed Trust Act (the “FUDTA”) has passed both houses of the Florida legislature and is expected to be signed into law by Governor DeSantis. Charles (Chuck) Rubin chaired the Florida Bar subcommittee that reviewed and adapted the Uniform Directed Trust Act, and Jenna Rubin also served on the subcommittee. They provide a review of the key provisions that practitioners should be aware of.


Who does the FUDTA principally affect? Trust directors (persons with authority under a trust instrument to give directions to be followed) and directed trustees (the trustees who are supposed to follow the directions).

Can I avoid the application of the FUDTA by not calling the person with the power to direct a protector or trust director? No. The label given is irrelevant. If a person has the power to direct, then they are a trust director.

Can a trustee be a trust director? No, only persons who have a power to direct but are not trustees are trust directors.

So, any non-trustee with a power to direct is a trust director? Mostly, but there are a few powers one can hold that alone will not make you a trust director, such as the power to remove or appoint a trustee, a power of appointment, and a power of a settlor over a revocable trust.

Why should I care whether a power holder is a trust director? Well, there are a lot of rules and benefits that apply under the FUDTA, but probably the biggest implication is that the trust director is subject to fiduciary duty in the exercise of the power of direction in the same manner as a trustee. Note that some states do not impose fiduciary duties on persons with roles similar to a trust director, or allow the trust instrument to remove such duties entirely.

Wow, that’s pretty harsh for a player with a small role. How are settlors supposed to get someone to take on the role if they have such a duty and the liability that comes along with it? Helpfully, like most provisions in the Trust Code, the trust provisions can be drafted to reduce (or increase) the level of duty.

So I can relieve the trust director of all duty and liability? No, the FUDTA will not let you go that far. Just like a trust instrument cannot entirely relieve a trustee of fiduciary duty (the duty to act in good faith and in accordance with the terms of the trust must always remain), a trust director is also subject to the good faith minimum duty no matter what the trust instrument says.

A trust director can only exercise the powers granted to it in the trust instrument, correct? Mostly, but in addition to the express powers, the trust director also has further powers appropriate to the the exercise or nonexercise of the expressly granted power of direction. Draftpersons can breathe easier knowing they do not have to think of and include every explicit power that a trust director may need in order to exercise the desired power of direction.

How can a trust director protect itself from liability? Not serve! But short of that, the Trust Code provisions that shorten the applicable limitations period for breach of trust to six months via the delivery of a trust disclosure document applies equally to trustees and trust directors.

Does the directed trustee have to follow the directions of the trust director, even if the directed trustee disagrees with the appropriateness of the directions? Yes. The only exceptions are if the trust director is acting outside the scope of the power of direction, or if following the directions would result in willful misconduct by the directed trustee.

What if the direction is a breach of trust by the trust director – does that make it outside the scope of the power of direction and thus the directed trustee does not have to follow it? No, that is not the case. The policy is that if the trust director commits a breach of trust in making the direction, that trust director is liable. This encourages the directed trustee to act in accordance with directions, and since the beneficiaries can sue the trust director they have a remedy and do not have to also be able to sue the trustee.

How can the directed trustee protect itself as to questionable instructions? The trustee can go to court and seek instructions as to its obligations to follow the directions, and can charge the trust for fees and costs incurred in doing so.

Can a trust director demand relevant information from the directed trustee? Yes as to information needed to do its job, and the directed trustee can similarly demand needed information from the trust director.

Does the trust director have to keep an eye on the trustee or give advice or notifications to beneficiaries or other interested persons? No, in the absence of trust provisions requiring it. And the same applies to the directed trustee in regard to monitoring the trust director.

A trust director situation seems similar to a trust that gives power to one trustee to direct a co-trustee. Are the duties and obligations of the affected fiduciaries similar under the Florida Trust Code? Yes, the FUDTA coordinates the duties and liabilities in those two situations so that they are pretty much the same.

Are the rules for suing a trust director for breach of trust similar to suing a trustee? Yes. Such actions are subject to the same statute of limitations and defenses.

A trustee and a trust director both exercise powers over a trust. Do all the Florida Trust Code provisions applicable to trustees apply to trust directors? No, they do not. However, there is an extensive list of Florida Trust Code provisions included in the FUDTA that were determined to be appropriate to apply to trust directors, and those listed provisions do apply.

Does the FUDTA apply only to trusts created after the July 1, 2021 effective date? No, it applies also to trusts created before then, but only as to decisions or actions occurring after that date.

How closely does the FUDTA track the Uniform Directed Trust Act (the “UDTA”)? The FUDTA closely follows the UDTA so decisions from UDTA states will likely be useful in interpreting the FUDTA (and vice-vers_, but care should be exercised since the FUDTA does have some modifications and additions.

Sunday, March 21, 2021

No "All Going to Charity" Exception for Chenoweth/Ahmanson Funding Issue

Taxpayers and planners love to use valuation reductions for partial interests in entities as a method for reducing transfer taxes. Such reductions and discounts can be a two-edged sword, however.

The Ahmanson and Chenoweth cases point out that when a majority interest in an entity is included in a taxpayer's gross estate, the valuation discounts will typically be substantially less than will apply to a noncontrolling or minority interest, and that this can have undesirable consequences when a portion of the entity is transferred to a charity or a marital deduction trust. For example, assume that a 100% interest owned by a decedent as his sole asset in an operating corporation is valued at $10 million, with little or no discounts taken.

Then assume that 60% of the corporation will pass to a bypass trust, with the remaining 40% passing to a charity. One might think that there should be no estate tax, because the 60% is covered by the decedent's unified credit exemption, and the 40% is covered by the charitable deduction. However, the case law advises that the value passing to the charity for which the charitable deduction is allowed is not 40% of the company's reported value. Instead, the 40% interest must be valued on its own, and as a minority interest, larger valuation discounts will apply. Thus, if we assume a 25% combined marketability and lack of control discount on the 40% interest, if it has a gross value of $4 million, the charitable deduction is limited to $3 million in the example. This leaves $1 million exposed to estate tax.

In a recent Tax Court memorandum decision, controlling interests in several real estate holding LLCs owned by a decedent were given 75% to one charity and 25% to a different charity. The IRS argued that the 25% piece going to one charity would need to be heavily discounted (citing Ahmanson), thus reducing the charitable deduction for that piece and having the same issue as noted in the previous paragraph.

The taxpayer tried to rebuff the discount's application by claiming that since 100% of the business interests were going to charity (albeit two separate charities), then no discount should be taken for purposes of the charitable deduction. The Tax Court rejected the argument, noting that there were two separate transfers to two separate charities, and standard valuation principles should apply to each gift on its own.

Note that while this decision involved the charitable deduction, the concept similarly applies to the marital deduction. In planning where marital deduction gifts or charitable gifts are likely and closely held business interests are involved, efforts should always be undertaken to anticipate these issues in the planning stage to avoid the division of a majority interest in a business into minority interests that are used to fund these deductible transfers.

Estate of Warne v. Comm., T.C. Memo 2021-17

Tuesday, March 16, 2021

Cryptocurrency and the IRS - Some Important Updates

 Cryptocurrency is treated like any other investment asset for federal income tax purposes and not "money." Therefore, taxpayers that sell cryptocurrency for a gain incur taxable capital gains for income tax purposes.

It is likely that a fair amount of cryptocurrency has been sold for gain by U.S. taxpayers without that being reported - either out of ignorance or intentional tax avoidance. Importantly, cryptocurrency transactions are not invisible but are available for review on the blockchain. Some sleuthing may be required to tie a particular transaction to a taxpayer, but this is often not that difficult. Further, cryptocurrency exchanges may be able to identify crypto transactions and tie them to specific persons.

Taxpayers with gains in the past or present years should note Operation Hidden Treasure, which was recently revealed by IRS personnel. This is an IRS program focused on taxpayers who omit cryptocurrency income from their tax returns, and is comprised of agents trained in crypto and virtual currency tracking. Civil and criminal enforcement elements of the IRS are involved.

The IRS also updated its Frequently Asked Questions on Virtual Currency Transactions on March 2.  This can be accessed at

One interesting change in the FAQ relates to whether the mere purchase of virtual currency must be reported on a taxpayer's Form 1040 pursuant to the new question that asked whether the taxpayer was involved in any virtual currency transaction during the year. The question itself strongly suggests that the answer is 'yes.' However, the FAQ says 'no.' Here is the question and answer:

I don't know about you, but buying virtual currency sure seems like "acquir[ing an] interest in any virtual currency." A FAQ issues by the IRS does not have the force or effect of law. While one is probably okay with relying on a FAQ to answer 'no' to the question, the more conservative answer would be to answer 'yes' to this question.