Dear Clients and Friends,

Welcome to the inaugural edition of Trust Matters, our periodic update on noteworthy trust planning issues designed specifically for professional advisors. The content of this newsletter is provided through our association with National Advisors Trust Company. CIS is a Trust Representative Office of National Advisors Trust.

We have found that many clients prefer the professional guidance and confidentiality of their financial advisor and are reluctant to involve a large, impersonal financial institution for trust and custodial services.

The independent investment advisors who created National Advisors Trust (including CIS) formed an independent trust company that honors and supports the client-advisor relationship. The model relies on a strong foundation of an estate planning professional, the registered investment advisor, and the trust company. The three parties focus on what they do best. The result is a solid trustee and investment management solution for clients, one that protects their wealth and the future of their estates.

One of our core beliefs is that clients are better served when their professional advisors work as a team. We encourage you to speak with us about working with CIS and National Advisors Trust Company to address your clients’ investment and trust needs.

We hope you find this newsletter to be helpful and encourage you to share it with a colleague, another professional or a client.


Sincerely,

THOMAS N. ALVARÉ, CPA/PFS
Managing Member
Comprehensive Investment Solutions, LLC (CIS)
CPA Investment Solutions, LLC (CPAIS)

New SEC Rule Places Greater Burden on Custodians

Here’s How to Determine Custodianship, and Avoid the Risk

Are you a custodian? The SEC wants to know. Some attorneys, CPAs and investment advisors may be in for a surprise.

In a somewhat delayed response to the Madoff affair and similar cases, the SEC has issued regulations regarding the issue of a registered investment advisor and a custodian residing in the same four walls and operating under the direction of the same management. The resulting regulation, which places greater burden and risk on custodians, went into effect March 12 of this year.

There are seven of "acid test" questions you can ask to determine if you or anyone involved with your client is considered by the SEC to be a custodian:

1. Do you physically custody any assets for clients?
2. Do you hold Power of Attorney over any client accounts?
3. Do you serve as a trustee for any client accounts?
4. Do you perform bill payment services with signature authority for clients?
5. Do you have distribution authority on any client accounts?
6. Do you operate a trust accounting system within your firm as the "official book of record" for accounts?
7. Do you prepare and deliver account statements to clients from your portfolio accounting system and suppress the custodian’sreports?

If you said yes to any of the above questions, or had to think about any for more than a few seconds, you need to dig a little deeper to determine if there is risk the SEC will deem that you are acting as a custodian.

If considered to be a custodian, you will be subject to, among other things, retaining an auditing firm to conduct a surprise audit of your firm. You will also be required to contract for an SAS 70 audit. Both will need to be completed on an annual basis.

Though not insurmountable hurdles, they are not things you would want to do or pay for if they can be avoided. These items are a little like heart surgery. All are possible and can be completed successfully⋅⋅⋅ but not unless you really, really need it.

As a federal savings bank with national trust powers, National Advisors Trust can step in to take on the activities you may be fulfilling today and take the "custodian" risk off the table. As a trust company, National Advisors Trust is set up and prepared to provide these services for clients. Under this arrangement, the client’s investment advisor, under the direction of the trustees, continues to manage the client relationship, maintains investment authority, manages account assets and provides instructions on behalf of your client.

National Advisors Trust is the largest independent trust company in the country owned by independent RIAs for the benefit of their clients. It can serve in a custodian or trustee capacity and currently has more than $5 billion in assets under administration.

The Time is Right for GRATs

A grantor creates a GRAT ("Grantor Retained Annuity Trust") by transferring assets to an irrevocable trust for the benefit of one or more non charitable beneficiaries and retaining an annuity interest for a term of years. Neither additional contributions nor distributions to or for the benefit of anyone other than the holder of the retained interest during the initial term may be made. For transfer tax valuation purposes, the amount of the taxable gift is the fair market value of the property transferred minus the value of the grantor’s retained annuity interest. At the end of the term reserved by the grantor, the trust assets are distributed to the beneficiaries selected by the grantor. If the grantor dies during the term of the GRAT, the value of the remainder interest in the trust is included in the grantor’s taxable estate under the retained interest provisions of Section 2036 (retained income, possession , or enjoyment of property) or Section 2039 (retained right to receive annuity in transferred property)

Traditional methods will determine the value of the retained interest if the trust qualifies as a GRAT. IRS valuation tables based on the Applicable Federal Rate (AFR) are used to determine the annuity factor, which is then multiplied by the amount of the annual payment to provide the value of the retained interest. The difference between the value of the transferred property and the retained interest is the amount of the gift. Since the gift is a future interest and not a present one, it does not qualify for the annual gift tax exclusion. In theory, the gift tax value of GRATs may be driven to zero if the annual payment is set at an amount that (based on the AFR) exhausts the fund by the end of the GRAT term.

Since GRATs are grantor trusts for income tax purposes, trust income is taxable to the grantor. However, no loss or gain is recognized on the creation of the GRAT, and the payment of the annual annuity by the GRAT to the grantor is not considered for income tax purposes. Therefore, the distribution of appreciated property that satisfies the annuity is not recognized as gain by the grantor.

While the Federal estate tax has been repealed for 2010, the estate tax is set to reappear in 2011, and it is always important to consider estate taxes when planning for GRATs. While the trust assets are included in the grantor’s gross estate if the grantor dies during the trust’s term, the question arises as to how that included value is calculated. Final regulations on this topic provide that Section 2036 is applicable. The value included in the grantor’s estate is the amount of the annual annuity payment divided by the AFR at the time of death. This calculation results in the amount of capital required to generate sufficient income at the AFR to pay the required annuity. Because of the mortality risk associated with the potential for inclusion in the grantor’s estate, reversionary language may be included in the trust document (making trust assets payable to the grantor’s estate if the grantor dies before the trust term). While there is an increase in gift tax value due to the inclusion of this language if the grantor does not survive the GRAT term, it will assure that the estate has sufficient funds to pay estate taxes on the included value.

On March 24, 2010, the House passed, but not as of yet the Senate, the Small Business and Infrastructure Jobs Tax Act of 2010 which has a provision instituting a ten-year minimum term for GRATs and requires that the remainder interest for GRATs be greater than zero. Considering this potential adverse legislation and current low interest rates, 2010 is still a good time to create and transfer property to GRATs. Also consider that a GRAT may be funded with any type of asset and that you may also create different GRATs for different asset classes. Closely held business interest, real estate, and any other assets (subject to discounts and having a cash outflow) can be quite beneficial in funding a GRAT.