Each January, this article reflects on the developments of the past year and their impact on the fiduciary profession. Last year has proven to be the most difficult to write about for a variety of reasons. First and foremost, one would rather forget 2020 than remember it because of the number of tragic and unprecedented events that occurred. Second, because of many of these events, the lessons for professional fiduciaries are numerous. And third, while typically this article delves into the legislative or judicial developments impacting professional fiduciaries, there were few such developments in 2020.
A list of 2020’s “unprecedented” events would naturally lead off with the global pandemic. But, there are more—not all of which are negative, but all of which are unprecedented. They include plague-like conditions such as fires, floods, hurricanes and even locusts. They also include social justice marches, a mass remote work force and migration from urban areas. Economically, we witnessed unemployment, the closing of small businesses, huge fiscal stimulus packages and a stock market crash in March not seen since 1929, followed by the market reaching an all-time high in November. Finally, 2020 held an election marred by accusations of voter fraud and a sitting president who, as I write this a month after the election, still hasn’t admitted defeat. And, finally, we have a Senate that will have a majority that’s either Republican or split—with the deciding vote going to the Democratic vice president—depending on a run-off election in the state of Georgia in 2021, thereby leaving in limbo our ability to predict if our country will be in a position to effectuate sweeping legislation in all areas, including taxation.
Five Lessons Learned
The following list of lessons learned in 2020 merely scratches the surface.
1. Technology matters. Being a technophobe in 2020 wasn’t an option. Without technology, the professional fiduciary couldn’t carry out its obligations. Meetings with trust beneficiaries and investment professionals were conducted through videoconferencing. Wet signatures became nearly impossible to obtain, so e-signatures became the norm. Remote, videoconferenced document executions were required, and state legislators authorized remote notarizations. Beneficiaries of all ages—even our 90 year olds—learned how to use their videoconferencing capabilities and so did the professional fiduciary.
2. Revocable trusts can be preferable to wills. The value of using a revocable trust rather than a will as a main dispositive document came into sharp focus during the pandemic for a variety of reasons.
The number of COVID-19 cases in the United States reported as “recovered” as of this writing is in excess of 8 million with another 5.5 million active cases.1 Many of these cases have been relatively mild. But, severe cases may result in temporary incapacity, especially when requiring a ventilator and induced coma. The fiduciary of a revocable trust can continue to manage the trust’s assets during the grantor’s incapacity and use the assets for the grantor’s benefit. A power of attorney may accomplish the same result, but the trust is usually a better vehicle for a variety of reasons. One reason is that the named attorney-in-fact may also be ill, especially with a disease as communicable as COVID-19. Another is that the trust spells out the rights and responsibilities more clearly than a power of attorney.
One of the unexpected consequences of the pandemic was the closing of the courts. A death during the height of the first wave of the pandemic resulted in a significant delay in probating the will. The time it took to obtain even a preliminary or temporary probate was extended unreasonably. If the decedent’s estate plan was governed primarily by a revocable trust rather than a will, there would be no delay in administering the assets held in the revocable trust.
Fund the revocable trust. Often, revocable trusts are created but left unfunded. As demonstrated above, funding the revocable trust during lifetime has significant advantages over keeping it unfunded. Further evidencing the need for lifetime funding was the market volatility that was created by the pandemic—it was important for a trustee to be able to exercise control and manage assets during incapacity and after death during those volatile times.
3. Consider decanting testamentary trusts into inter vivos trusts. In some instances, individuals who were acting as fiduciaries became incapacitated or died. If that trustee was acting as trustee of a testamentary trust, a court proceeding would have been necessary in many states to replace them. With the courts backed up or closed, it was impossible to appoint a successor testamentary trustee. Inter vivos trusts can allow for appointment of successors without the need for court intervention. Fiduciaries of testamentary trusts may wish to consider decanting into a lifetime trust.
4. Track location of beneficiaries for trust income taxation purposes. With the mass migration of individuals and their ability to work remotely, fiduciaries need to carefully track the location of their beneficiaries to assure that their movement doesn’t change the income taxation of the trust. For example, the trust beneficiary who moves from New York City back to their family home in Connecticut may cause their trust to be subject to Connecticut taxation. Similarly, moves to California or other states may result in unexpected trust taxation results. Equally important is if an individual trustee moves—that could also cause unexpected trust taxation.
5. Consider impact investing. The tragedies that befell the world in 2020 sparked an awareness of the need for charitable giving. One report found that as COVID-19 spread, 56% of U.S. households engaged in charitable giving to assist their neighbors through the crisis.2 The report found that one-third of those households gave directly to charity. The areas that reported an increase in 2020 donations year over year were those human service organizations.3 With widespread unemployment and closure of businesses, areas such as food, health care and donations to front line workers saw inflows. Also, charitable dollars flowed into organizations dealing with issues of social justice. As professional fiduciaries, our beneficiaries have become more interested in investing their trust funds in a manner that furthers their social causes. Much has been written about impact investing, and some fiduciaries are reluctant to seek impact investments out of fear that the portfolio returns will suffer.4 Those fears have proven to be unfounded, and now many investment firms apply, at a minimum, a screen to assess a company’s environmental, social and governance factors. Fiduciaries that hadn’t previously considered these factors may decide to do so going forward.
The year 2020 is gone but not forgotten. Hopefully, the lessons learned will serve professional fiduciaries well into the future.
Endnotes
1. Worldometers.info, as of Dec. 1, 2020.
2. Indiana University’s Women’s Philanthropy Institute.
3. Association of Fundraising Professionals, Research & Reports (July 13, 2020).
4. Tom Mitchell, “Understanding the World of Impact Investing,” Trusts & Estates (September 2016).