Originally published on WealthManagement.com on December 27, 2019
BY: CORT BETHMANN, JD, LL.M.
Senior Vice President/Wealth Advisor, Argent Trust-Nashville
Special purpose entities (SPEs) could be the hottest trend in estate planning for 2020 in light of the Kaestner U.S. Supreme Court case. As affluent families continue to address the need for a legacy solution for trust advisor succession planning, the SPE provides an important planning opportunity for wealth advisors. The use of SPEs will accelerate in 2020 as more wealth advisors and attorneys recognize the value of this trust-planning tool to help families manage their financial assets into the future.
The role of a trust advisor arose from a need to delegate a specific responsibility to a designated individual. Traditionally, grantors would select individuals they trusted to carry out this duty. While trust advisors did not manage daily trust administration, they would be called upon to make specific decisions. This system worked well for many families, but the reality of mortality created a problem: Who should be the successor trust advisor (and the successor to that trust advisor)?
An SPE helped solve that problem. An SPE is a limited liability company or corporation authorized by state statute. Designed to absorb the management and risk for an affiliated trust, the entity can be managed by an individual or a committee. The SPE retains the ability to make the decisions that a trust advisor would have otherwise made.
An estimated $68 trillion in wealth will be transferred to heirs and charities over the next 25 years, according to research by Cerulli Associates. High net worth families will be advised about the benefits of a trust advisor, but they should equally contemplate the trust administration plan for the future. With the impending “great wealth transfer,” here are three reasons SPEs will become more prevalent:
1. Expert advice on complex assets
One of the most significant benefits of trust advisors is the specialized advice they provide, principally regarding complex assets like a closely held business, oil and gas holdings, timberland, real estate, etc. By creating an SPE, a trust maker can delegate the decision-making authority to experts and trusted advisors within a perpetual entity.
2. Customized dynastic wealth transfer
SPEs empower a trust maker to create a dynastic plan for management of special assets held inside a trust. The SPE can include committees or managers from the family in addition to subject matter experts. This emerging opportunity in the wealth advisor’s toolbox will provide high net worth families with additional options for dynasty wealth transfer planning.
3. State situs and income tax efficiencies
As the implications of the recent Kaestner decision are sorted out, the battle over state income taxes could continue to be a challenging area for trust makers and beneficiaries. The SPE allows trust makers to create a legal entity inside the jurisdiction of their choice and increase nexus within the state by operating the entity within the state’s borders.
Sophisticated wealth advisors have known about the benefits of SPEs in South Dakota since the original inception almost two decades ago. But more states are recognizing the benefits, particularly in the wake of Kaestner. Recently, Tennessee added a SPE statute, and we are likely to see other states follow suit.