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Wealthy families are discovering Tennessee’s legal and tax ecosystem as a key component for their long term wealth strategy. I spoke with ANDREA CHOMAKOS from Pendleton Square Trust on Tennessee around these advantages that the Tennessee Wealth Ecosystem provides in the context of other states’ legal systems and economies. We cover directed trusts and Tennessee situs, and even a tip like the Community Property Trust, which is interesting in both prenuptial tax planning and estate planning contexts.
“The Tennessee Wealth Ecosystem” Transcript
Frazer Rice (00:00.814)
Welcome aboard, Andrea.
Andrea Chomakos (00:03.128)
Thanks, Frazer, happy to be here.
Frazer Rice (00:04.696)
Well, glad to have you on. Always happy to talk to friends of mine at Pendleton, talk about Tennessee and trust administration generally. Our listeners are probably pretty well versed as far as the idea of trusts, but I don’t think it hurts to go and talk a little bit about what the trustee function normally entails as we talk about what is interesting about Tennessee and other jurisdictional issues.
Andrea Chomakos (00:29.358)
Absolutely. So Frazer, it’s great to be here and share some conversation with you and your audience. While I have been in the professional fiduciary role for several years, for several decades before that, I was a practicing attorney. So I would often have conversations with my clients and drafting their documents and asking them decisions about who to appoint as a trustee. One of the very first conversations we would have is what does it mean to be a trustee?
As I have now come over to the other side, broadly stating that the trustee has the responsibility to administer the trust for the sole benefit of the named trust beneficiaries in accordance with the trust terms. That seems like a lot of really big words that don’t make a lot of sense to the average person. I get it.
When I was practicing, a lot of my clients, their reaction would be, okay, so you’re just telling me that this person is the person who makes the decisions about distributions and that’s great. I can go, you know, no big deal. And the reality is, yeah, the reality is it is a big deal. Because it’s more than just making distribution decisions or making them in a vacuum. You have to look at the broader picture.
Frazer Rice (01:41.228)
It’s more than that though.
Andrea Chomakos (01:55.598)
But it also entails managing the trust assets and investments. It means making those important distribution decisions and understanding the impacts those are going to have not just in the short term but the long term. Filing and paying tax returns for the trust. Communicating with trust beneficiaries, providing reports and accounts. And even all of that sometimes seems like not that big of a laundry list but
Let me give like an example that I ran into. Everybody loves a good example. So when I say a trustee is responsible for investing and managing all of the assets of the trust, that also means the protection and preservation of those assets. And it’s incredibly common to see a trust hold some real estate, oftentimes a residence that a trustee or a beneficiary lives in.
Frazer Rice (02:24.58)
That’d be great.
Andrea Chomakos (02:51.094)
And you may say, OK, well, no big deal. Like if something happens, we’ll just get it fixed. Well, it’s more than that, right? You need to really understand what that means and the risks you’re taking and the potential liability you’re taking if you don’t manage those issues in a way maybe different than you would if it was just your own house. So I was at a prior institution and
that institution was serving as co-trustee with a beneficiary who resided in some trust-owned property. And lo and behold, you know, got a call from that beneficiary saying, hey, there was a leak with one of the pipes in the house. So I just went out and got some duct tape and put that around the pipe to stave off the leak, but now it’s gotten really bad. And you’re just sort of like, well, wait a minute. Like that’s.
Frazer Rice (03:34.276)
Hmm.
Andrea Chomakos (03:47.573)
As a trustee, that’s not an appropriate response to fixing a leak, it’s not a roll of duct tape. So it’s things like that that trustees are responsible for.
Frazer Rice (04:00.004)
One of the things too that’s happened in modern legislation is that those three functions you talked about, the investment, the distribution, and the administration have been in many states you’re able to, we like to call it bifurcate them, so that you can put an expert maybe in the investment role, maybe a family member with a corporate trustee in the distribution role, and then a corporate trustee in the administration role who, you know, they’re used to doing the paperwork and the tax filings and the eye dotting and T-crossing.
And in your, I guess in your experiences, we’ve gone through that. How have trust companies evolved to take into account this new flexibility?
Andrea Chomakos (04:42.254)
Absolutely, think you hit the right word. I always say the same thing, Frazier. It’s a bifurcation of those duties and responsibilities. And so there are more trust companies who are embracing what we call the Directed Trust Model, where the corporate trustee is handling the administrative functions.
So the reporting, the trust beneficiary communications, filing the tax returns, all of those very important functions, but ones that oftentimes are overlooked, their importance is overlooked. And other people are given the role of either distribution advisor, and sometimes the corporate trustees in these roles will make distribution decisions.
But certainly the investment function is one. And as you see arise in individuals, families, using private equity for investments, other alternative investments, you see them using RIAs, multifamily offices, to manage their investments that, and those entities don’t have that trustee function. There are more corporate trustees who are filling that role. And I think that we’re only going to see that market increase and that demand increase.
Frazer Rice (06:11.196)
I don’t think I could agree more with that statement. I think the idea of people having all of those functions under one umbrella really ignores just the way wealth is being managed these days, whether it’s sort of peculiar assets or even, you know, regular run of the mill stocks and bonds, people have their advisors and they don’t want to necessarily give that up to take advantage of trust situs and professional trustee services.
Andrea Chomakos (06:21.998)
Listen.
Frazer Rice (06:36.524)
As I talk to people around this topic, the culture of a good trustee, and especially sort of a good corporate or a good administrative trustee, there are a lot of things that go into that. In your experience, what is it that makes a good sort of corporate or administrative trustee for particular family?
Andrea Chomakos (07:01.422)
There’s I mean, that’s a great question. And it should be top of mind for all clients. Right. I think there’s a couple of things. One is the institutional professionalism that a corporate trustee, independent corporate trustee provides, as well as the skill, the background and then the lack of conflict of interest. So when you think about an administrative trustee that’s not managing the investments, we have no dog in that fight as they say about what’s going on with the investments, how they’re being managed, how they’re being allocated.
We, Pendleton Square and others are here to serve the beneficiaries, to facilitate communication, to help beneficiary wealth education, to continue the continuum of family values and conversations, as well as be some be a person who can sit there alongside them and educate them about the trust, about the wealth, about the impact the distributions from the trust are having on their own estate, on their own lifestyle, and really honing in on the things that they’re really good at. And I think predominantly it is that being free of conflict. We don’t have any other interest in the trust.
Frazer Rice (08:28.252)
I think the concept of staying in your lane is important. I think in the old world where the big trust companies did everything and they would allocate resources to that because doing everything required good integration and so on, it made a lot of sense. But nowadays, as we talked about the bifurcation just now, the provision of the administrative trustee functions and the distribution committees, et cetera, that feels more like an accommodation.
Andrea Chomakos (08:30.913)
I’m sorry.
Frazer Rice (08:56.696)
than a sort of focus for them. And so these trust companies that have developed, the new ones that are less worried about the investment function, that that focus is now a strength in the sense that people hire experts in that field in order to get what they need from an estate planning perspective or a site of choice, et cetera, but then to really effectuate that culture we just talked about.
Andrea Chomakos (09:26.956)
Yeah, I mean, think there’s a couple of nuances there that you touch on that always resonate with me. And so one is.
Trust business, it’s a business, we all have to admit that it’s a business, but is it relational or is it transactional? And at its core it’s really relational. You’re working alongside a family for hopefully multiple generations and as an institution you can carry forward that historic bank of knowledge in the grantor’s intent, the family values as you’re administering the trust.
But in many larger institutions, because of just structural considerations and constraints, sometimes you have a lot of turnover in personnel. You have some loss of historic knowledge and information. And you have a compression of what it takes.
not just the skills, but the technology and what it takes to execute on trust to meet the needs of the beneficiaries. And so sometimes those decisions get kind of kicked down the road to a committee that maybe only meets once a month or every couple of weeks, since you may not have an immediate decision. having a more nimble corporate trustee who recognizes that and values the relational side of the trust business is…
really ideal and really the flip side of the coin I think the thing that a lot of clients and some of their professional advisors advocate for is don’t name an entity name a person as trustee and that’s where I think the staying in your lane part gets really complicated. A lot of opportunity for you know the wheel to drift over to the other lane and
Frazer Rice (11:29.816)
Well, as you alluded to before, institutions that have a trust capability but have a lot of other things going on, found that, I use the analogy, sometimes the anaconda of maybe the commercial bank or the investment bank finds the sleeping bunny of the wealth management arm and then by extension the trust company. And then you start getting things, start getting business metrics applied to that part of the business that maybe aren’t.appropriate for the 50 to 100 year nature of what’s going on there.
Andrea Chomakos (12:00.526)
Sure. Yeah, absolutely. And the reality is that the profitability margins in the wealth business in general, and then when you push it down to the trust business in particular, are even close to the margins of financial institution sees from their lending line of business. Because that’s what banks are. Banks are, they’re in the business of lending money, taking in deposits and lending it back out. That’s how they make their money. And so
Frazer Rice (12:28.281)
Right.
Andrea Chomakos (12:30.712)
When you look at an institution, whether it’s Pendleton Square or someone else that is solely a trust company, what we’ve said is we know our lane and we’re sticking to it. Because we’re just gonna do it really well. That’s all we’re gonna do.
Frazer Rice (12:45.902)
So in general estate planning circles, there are lot of favored jurisdictions. Many people know about Delaware, sometimes from the corporate law standpoint, Nevada, South Dakota, et cetera. But Tennessee, especially in the last five to 10 years, has become one of the real top jurisdictions for trust planning and general wealth planning. What are the parts of Tennessee’s attributes, whether tax or legal structure, that makes it appealing these days?
Andrea Chomakos (13:15.838)
I think there’s a laundry list, Frazier. So as a former state planning professional, I went through an exercise probably about six or seven years ago with a client looking at different jurisdictions for them. Specifically, they wanted to establish some trusts and were interested in going outside of their home jurisdiction, which is a state that does not appear on any of these lists.
Frazer Rice (13:41.572)
I live in one, so yes, I can empathize.
Andrea Chomakos (13:44.663)
You really do live in one. At any rate, we briefly looked at Tennessee, we ended up going to a different jurisdiction for other reasons, but let’s start going through the list. And if you even take out specifically what I think Tennessee’s state laws have done well, if you’re a planning professional or a client, these are some of the things that you’re generally gonna look at.
Number one probably should be, doesn’t always hit number one, but number one probably should be state income taxes. The state income taxation of trusts is very complex and sometimes it cannot be entirely avoided just based on where a grantor resides, where some beneficiaries reside, depending on each state’s laws, which just FYI to the listeners are not uniform between states and very complex and
If you want to have a separate podcast about that, happy to. I talk about it all the time.
Frazer Rice (14:43.716)
No- I’m, acutely aware of being from New York, which really hamstrings you sometimes on that.
Andrea Chomakos (14:46.318)
Yeah, no bueno. So, but, you know, Tennessee does not have an income taxation on trust. And when you look at the ability to, and there is the ability in many circumstances to extricate a trust from the tax grips of one jurisdiction and move them out of that, you know, people…overlook the importance of state income taxation.
That can be anywhere you’re in a jurisdiction where it can be as high as like 12 plus percent. That’s a big drag on a trust’s return if you’re having to pay out 12 percent every year and just in state income taxes. The next thing that a lot of people look at is how long can this trust last?
The legal terminology for that is the dreaded rule against perpetuities. I’m not gonna get into the rule against perpetuities, nobody wants to hear it. But basically, let’s just distill it down, like how long can my trust last? Can it last 100 years? Or 360 years? Can it last indefinitely? For some clients and families, they want to take advantage of that and have that trust last for as long as possible. Because if structured properly, that means wealth can transfer
Frazer Rice (15:38.838)
I’m getting it.
Andrea Chomakos (16:03.886)
for an infinite to an infinite number, indefinite number of generations without estate taxes. So Tennessee’s law is a little bit unique and I’ll distill it this way. If a trust is established in Tennessee, the default rule is a 360 year term for the trust. can last for 360 years, which is probably, you know.
five to six generations, maybe seven, depending on the longevity of your family line.
Frazer Rice (16:37.092)
By the way, the US is going to be 250 years old next year for context.
Andrea Chomakos (16:41.836)
Yeah, that great context. I love it. I love it. So, 360 years. But two years ago, Tennessee modified its statute on this point to say if a trust is moving to Tennessee from a jurisdiction where it had previously been administered, that allows for a longer duration of trust, including an indefinite one then that would be recognized by Tennessee.
In other words, you’re not shortening the duration of your trust’s longevity by moving it from a jurisdiction like Delaware that allows indefinite trust terms. By moving it to Tennessee, you don’t lose out on that. Which I think is a really interesting and important point and shows and demonstrates how proactive Tennessee is in updating its trust laws.
Frazer Rice (17:36.613)
The flexibility that Tennessee gives the practitioner. In terms of being able to decant or modify or change trusts. That started out doing one thing but life evolves, people evolve, the family’s needs evolve, and sometimes these things need tinkering. Tennessee, as I understand it, just continues to have a pretty broad array of tools in the toolkit.
Andrea Chomakos (18:00.417)
It sure does. I think I’ve been impressed with, as a practitioner who’s licensed in North Carolina that does not have as flexible of laws as Tennessee does. It’s really nice to be able to take advantage of Tennessee’s flexibility to modify trusts. A lot of times just from an administrative perspective to say, hey,
This was always at, always anticipated, this trust always anticipated a corporate trustee that invested the assets and handled everything. But now it’s appropriate for us to look at this bifurcated structure we just talked about earlier. In Tennessee, you can do that. You can modify the trust to bifurcate that trustee structure by an agreement of the beneficiaries. You don’t have to go to court. And you don’t have to do anything funky or elaborate to accomplish that objective.
Frazer Rice (18:56.396)
One of the current bees in my bonnet is around the intersection of post nuptial planning and longer term trust planning. And I know that there’s a community property feature to Tennessee’s law that is interesting in certain components of that.
Andrea Chomakos (19:15.278)
Yep, absolutely. I think to put in context for folks, a lot of people talk a lot about the estate tax. The reality is that the estate tax exemption has more than tripled in the last about 12 years. And from the time I started practicing law,
When I started practicing law, the estate tax exemption amount was $600,000. And it will be $15 million in six weeks per person. Per married, know, spouse and a married couple, so 30 million. For man people, including wealthy people, estate taxes are not as much of an issue as maybe income taxes. And so a lot of…
Planners, attorneys, advisors, CPAs are focusing more on income tax planning for clients in concert with their estate planning. And a nuance to the basis step up rule, so people know. When you die and asset is included in your estate, that asset’s basis adjusts to fair market value as of date of death. So that, everyone knows that.
For community property, because property that’s classified as community property, it’s considered owned by both spouses. Not like jointly with the rights of survivorship, but more as like they both own 100 % of it. When one spouse dies with community property, it gets a full step up in basis. Even though the spouse inherits 100 % of it.
So doing tax income tax basis planning with low basis assets. If you’re not in a community property jurisdiction, which is just a handful of states, you can implement that same benefit. By establishing a community property trust in a jurisdiction like Tennessee.
With that trust agreement, you are creating a community property interest in that asset. You contribute it to the trust. The trust terms can provide specifically what would happen if the married couple dissolved their marriage and who would get that asset back.
So for instance, if it were a separate property asset, you can contribute the property to a community property trust. The asset to a community property trust and get the full set of a basis. Howver, the trust agreement could provide if the marriage dissolves, that asset goes 100 % back to the contributing spouse.
It can address both issues, because a lot of people have that issue, and I get it.
Frazer Rice (22:08.361)
It’s a nice feature to have. When you’re doing your estate planning or pre/post nuptial planning, it’s a good idea to have both sets of expertise in the room. You can have one document that’s at odds with what you’re thinking is supposed to happen in another document. That creates a real unwind situation. See it. See it all the time.
Andrea Chomakos (22:30.869)
Mm-hmm. Yes.
Frazer Rice (22:33.253)
We alluded to some of the things that Tennessee does to stay modern in the trust jurisdiction wars. The Nevadas and the Delawares, et cetera, that make constant revisions. Tennessee stays on top of it as well. Are there any other features that you see in that that are on the horizon or that just taken place?
Andrea Chomakos (22:58.35)
I’m not aware of anything on the horizon. Another adjustment to the statute late last year, is a provision around grantor, irrevocable grantor trusts. In that situation, the grantor of the trust reports all the tax attributes of that trust on their own personal return. They will have potentially, usually most likely, tax implications from that and tax liability.
We estate planners, I still consider myself a state planner, always said like, that’s great. That’s a gift tax free gift, know, paying the grantor, paying the tax on the trust. Assets, but sometimes the grantor gets to a point where that’s a little heavy for them to bear. Many estate planners like myself would not draft a trust to include a tax reimbursement provision. Not in the trust back to the grantor. There had been some IRS rulings that were all over the place about whether that created a problem
The IRS has seemed to kind of backed off of that. In particular when there’s an independent trustee who doesn’t have the obligation to make the payments but can in their discretion reimburse the grantor for the taxes. That seems to be a pass muster with the IRS.
So Tennessee has now included a statute in their trust code. It tatutorily gives trustees the ability to reimburse grantors for their tax liability. That can be really beneficial for a grantor who’s maybe hitting that pain point. However, she doesn’t necessarily want to toggle off grantor trust status or could not without some other adverse tax consequences. And the trust agreement doesn’t include that reimbursement provision.
By resitusing in Tennessee and having the independent trustee, they would have the automatic right to get those tax reimbursements. So, a nice feature for people in those circumstances.
Frazer Rice (25:03.319)
Nice feature. So as we wind down here. What is the best way for people to find out about Pendleton? Yourself? If they want to know more about the Tennessee features? Or otherwise need a corporate or administrative trustee? What’s the best way to find you?
Andrea Chomakos (25:22.85)
That’s great question. We have a really nice website, Pendleton Square Trust Company dot com. We have a great insight page which has a lot of this information we talked about. It has a lot of posts and blogs and insights on the Tennessee advantages. I’m listed on there. You can always find me on LinkedIn, Andrea Chomakos, C-H-O-M-A-K-O-S.
I’m the only Andrea Chimekis in the world, so pretty easy to find me. Yeah, yeah. So always happy to respond to a reach out either through Pendleton Square. Or through LinkedIn and always happy to have the opportunity to share this great valuable information, Frazeer. Thanks for the really insightful questions.
Frazer Rice (25:54.493)
There are multiple Fraser Rices in the world, which always surprised me, but alas.
Frazer Rice (26:17.925) – The Tennessee Wealth Ecosystem
Thank you. All of your information will be in the show notes. Andrea, thanks so much for being on and say hello to my friends back at Pendleton for me.
Andrea Chomakos (26:26.326) – The Tennessee Wealth Ecosystem
I sure will. Thank you.
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