There should be this conversation around what your goals are and what’s most important to you. We also need to be looking down the road and considering potential obstacles or risks that could pop up if the worst happens.
I’m a huge basketball fan. I grew up in Kentucky, so college basketball reigns supreme. I’m a huge University of Kentucky basketball fan and also love the NBA. One of my favorite players, as is the case with many people, is Kobe Bryant. He tragically passed away a few years ago in a helicopter crash with his daughter and several other people, and they all passed away. There have been a lot of details around his estate that have come out since then that are very relevant and interesting talking pieces to consider.
I recently read this article about Kobe Bryant’s estate, approximately valued at $600 million. However, there are some issues regarding adding beneficiaries. As I understand it, and this may have progressed further at this point, but this particular article was talking about how they had set up a trust, I believe, before his youngest daughter was born. They had transferred assets to it, and maybe a big chunk of his estate existed inside this trust. However, his youngest daughter, if I have it correct, is not a beneficiary. They’re trying to figure out how they can move his daughter over to this trust as a beneficiary.
Every state is different when it comes to how you update a trust. Historically, when you set an irrevocable trust in place—and this is the kind of trust in question, and really, it’s the most valuable trust because it offers asset protection and also allows for estate tax and generation-skipping tax avoidance if done correctly—they want to figure out how to change this irrevocable trust because it doesn’t accomplish what they need it to accomplish. There might be a variety of different reasons for that. Maybe you executed this trust, then passed away, and didn’t update it before you did.
Historically, you’ve not been able to update irrevocable trusts; you’ve not been able to amend them, or you just didn’t have the flexibility to revisit that trust. In the last 20 or 30 years or so, there’s been this advent of modernizing trust laws. One of the most beautiful things is this role called the trust protector. You can have a trust protector in any irrevocable trust; however, not all states have well-defined laws around the trust protector role, and so it might actually limit the ability of the trust protector to step in and perform its duties.
The big power or authority reserved for the trust protector is the ability to step in and make amendments to the irrevocable trust. One of those is the ability to add or remove beneficiaries. Even in certain states where you have the ability to have a trust protector as defined by law, there still might be laws that limit your ability to add or remove a beneficiary. That’s one thing to consider.
Kobe Bryant, when he passed away, was a resident of California. California is not known for having really flexible trust laws. In fact, I was listening to a podcast recently put out by a trust company, and they had an attorney from California who was talking about this idea of where to set up your trust. He said, “As an attorney in California who works with a lot of California residents, I almost suggest never setting up a trust in California.” Kobe Bryant’s situation is a prime example of why you don’t want to do this.
If you don’t have a trust protector, you have to seek some type of judicial reformation or modification of the trust. You have to go before the court, submit the trust to the court, petition the court, and tell them why you want to update this trust. When you do that, everything in that trust becomes part of the public domain, or at least the details you’re discussing will become part of the public domain. Either way, you’re revealing details that you likely don’t want coming out. I mean, Kobe Bryant—let’s be honest—he didn’t want this coming out, but this is where they are now. They’re seeking the California court to step in and give them the authority to make this reformation or modification to this trust.
So, why is this an issue? Because there’s a better way to do this. This is an issue because there’s a better way to accomplish this. This is the exact reason you want to look at the jurisdiction that might provide you the most flexibility, one that has the best laws around trust protectors. If that’s not a big deal for you, maybe you live in a state that has pretty good trust protector laws. Then you also need to look at two other things: the ability to add beneficiaries or decant, right?
You could take a trust that already exists, like this trust Kobe Bryant set up, and move all the assets over to another trust that perhaps names his youngest daughter as a beneficiary. That’s what decanting is—moving assets from one trust to another trust. Again, the law has to specify that the trust protector or someone in that trust has the ability to do that. California doesn’t have very flexible laws around that.
The last thing to consider is privacy. Even if you go before a court, some states have rules around privacy when you present that trust or the information regarding the trust to the court. Delaware has a law that says that any details that come out regarding a trust in a court proceeding can be sealed by the judge. The judge has the ability to eliminate any of those details from becoming part of the public domain. He or she can put a seal on those details, but they only have the ability to seal it for three years, so it’s going to come out eventually. People love this type of information.
Another state that has a similar statute, but much better, is South Dakota. South Dakota says that any details that come out have an automatic seal. The judge doesn’t even have discretion—they automatically seal any of the details regarding the trust, and there’s a perpetual seal. It lasts indefinitely, lasts forever. There’s no way that any of these details about Kobe Bryant’s trust would have even come out if he had done his trust planning in South Dakota.
Now, I’m licensed in Pennsylvania, Kentucky, Texas (where I’m located), as well as South Dakota. Does someone have to do their planning in South Dakota? No, they don’t have to do their planning in South Dakota. But I love talking about these issues because clients who are high-net-worth—and that can be loosely defined—have certain things that are very important to them. That is privacy, asset protection, and control or flexibility. Control and flexibility.
Estate planning attorneys need to have these conversations with their clients when walking through this process. Maybe it makes sense for you to do your planning in Texas if you’re a Texas resident, but depending on your situation, your family situation, your financial situation, it might make sense to go to South Dakota. Or maybe you’re in Florida; maybe it makes sense to go to South Dakota. It doesn’t matter where you’re located. There should be this conversation around what your goals are and what’s most important to you. We also need to be looking down the road and considering what obstacles or risks could pop up if the worst happens, and this is a prime example of when the worst has happened.