Utilizing a Power of Appointment Committee in WINGS
As previewed in my blog post of January 25, 2021, Wyoming laws provide an opportunity to utilize a Wyoming Incomplete Gift, Non-Grantor Trust (“WING”) to potentially avoid state income tax on the sale of assets. My previous post outlined the basic rules that must be followed for the WING to work properly, and in this blog post I want to focus on the distributions by committee in a WING.
The Distribution Committee must have at least two members other than the grantor and his or her spouse who are “adverse.” An “adverse” party is defined in the Internal Revenue Code[1] and Treasury Regulations as someone who has a substantial beneficial interest in the trust which would be adversely affected by the exercise or non-exercise of the power possessed. The other beneficiaries of the trust fit the description of adverse parties and are typically the other members.
Wyoming has one quirk in the statutes which should be noted when creating a WING. W.S. § 4-10-718(b), which is discussing directed trusts, asserts that when one or more persons are given authority to direct, consent to or disapprove a fiduciary’s actual or proposed distribution instructions that the persons given such authority shall be considered trust protectors under W. S. § 4-10-103(a)(xxiii). W. S. § 4-10-711 asserts that trust protectors are fiduciaries “to the extent of the powers, duties, and discretions granted under the terms of the trust instrument.”
Since it is not advantageous for the members of a Distribution Committee in a WING to be considered fiduciaries, one idea is to create a Power of Appointment Committee instead of a Distribution Committee and give the members of the Power of Appointment Committee the authority, in a non-fiduciary capacity, to appoint trust income or principal or both to one or more of the beneficiaries identified in the trust. That way, no one is given the authority to direct the trustee which could cause them under Wyoming law to be considered a fiduciary.
It is my understanding that the trust and estate bar will be approaching the Wyoming Legislature to change the statutes to alleviate this particular concern, but in the meantime, this is a possible alternative.
[1] IRC § 672(a) and Treas. Reg. §1.672(a)-1.