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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

TO: Jonathan R. Caldwell

FROM: Monica Reyes, Associate, Calderwood & Harkness LLP; with input from Sylvia Hartwell, Partner (Tax), Calderwood & Harkness LLP

DATE: April 1, 2023

RE: Trust Flexibility Mechanisms — Caldwell Family Dynasty Trust: Powers of Appointment, Trust Protector Provisions, and Delaware Decanting Statute

MATTER NO.: 1034-00004

BILLING CODE: 78412-JRC

FIRM: Calderwood & Harkness LLP, 375 Park Avenue, 42nd Floor, New York, NY 10152

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I. Introduction and Purpose

This memorandum addresses the flexibility mechanisms built into the Caldwell Family Dynasty Trust (hereinafter, the "Dynasty Trust"), an irrevocable trust agreement executed on April 1, 2023, with situs in the State of Delaware and governed by Delaware law. The purpose of this memorandum is to provide you, as Grantor, with a comprehensive explanation of the three primary mechanisms through which the Dynasty Trust may be adapted over time to respond to changing family circumstances, evolving tax law, and shifting fiduciary requirements — all while preserving the trust's critical generation-skipping transfer ("GST") tax-exempt status.

The Dynasty Trust is administered by two co-trustees: Thomas R. Caldwell, your eldest son, serving as the family co-trustee, and Northgate Trust Company of Delaware, a Delaware-chartered trust company with offices at 1201 North Market Street, Suite 1600, Wilmington, Delaware 19801, serving as the institutional co-trustee. The primary point of contact at Northgate Trust Company is Philip A. Rossiter, Senior Vice President, Trust Administration. The dual-trustee structure was selected to combine the family knowledge and personal attention that Thomas can provide with the institutional continuity, professional investment management, and regulatory compliance capabilities of a Delaware corporate trustee.

You, Jonathan R. Caldwell (date of birth: March 14, 1956; residence: 418 East 72nd Street, Apartment 14A, New York, New York 10021), are the Grantor of the Dynasty Trust. As an irrevocable trust, the Dynasty Trust has been designed so that you retain no powers or interests that would cause the trust to be included in your gross estate for federal estate tax purposes under Internal Revenue Code ("IRC") §§ 2036, 2037, or 2038, nor any powers that would cause the trust to be treated as a grantor trust for federal income tax purposes under IRC §§ 671–679, except as may be expressly provided in the trust agreement with respect to certain swap powers analyzed in separate memoranda.

The Dynasty Trust was initially funded with Five Million Dollars ($5,000,000) in cash. In addition to this initial funding, the trust is expected to receive substantial additional assets as the remainder interests from three zeroed-out Grantor Retained Annuity Trusts ("GRATs") pour into the Dynasty Trust upon termination of their respective annuity terms:

• GRAT A — Caldwell 2023 Securities GRAT: Funded on April 15, 2023, with approximately $60,000,000 in publicly traded securities and concentrated stock positions.

• GRAT B — Caldwell 2023 Realty GRAT: Funded on May 1, 2023, with approximately $80,000,000 in commercial real estate holdings and real estate partnership interests.

• GRAT C — Caldwell 2023 Carried Interest GRAT: Funded on June 1, 2023, with approximately $38,000,000 in carried interest positions in private equity and venture capital funds.

Each of these GRATs has been structured as a "zeroed-out" GRAT, meaning that the present value of the annuity payments to be returned to you over the annuity term equals the full value of the property transferred to the GRAT, resulting in a federal gift tax value of zero (or as close to zero as mathematically possible) for the remainder interest. However, if the assets in each GRAT appreciate at a rate that exceeds the applicable Section 7520 rate — currently 5.0% for transfers in the first half of 2023 — the excess appreciation will pass to the Dynasty Trust free of gift and estate tax. Based on our projections, which assume the GRAT assets outperform the Section 7520 hurdle rate by approximately four percent (4%) annually over the annuity terms, the projected excess appreciation transferred to the Dynasty Trust is estimated at between $35,000,000 and $50,000,000 in aggregate. These projections are, of course, subject to market performance and the specific performance of the underlying assets.

Given the potentially perpetual duration of the Dynasty Trust under Delaware's perpetual trust statute — Delaware having abolished its rule against perpetuities for interests in trust, see 25 Del. C. § 503(a), thereby permitting trusts to endure indefinitely — the flexibility mechanisms embedded in the trust agreement are not merely desirable but essential. A trust that may continue for centuries must be able to adapt to changes in family composition, family dynamics, tax law, state law, investment environment, and fiduciary standards that the Grantor cannot possibly foresee at the time of creation. The flexibility mechanisms discussed in this memorandum are designed to provide that adaptability in a manner that is consistent with the Grantor's intent and protective of the trust's favorable tax status.

Specifically, this memorandum will explain and analyze the following three primary flexibility mechanisms:

1. Limited Powers of Appointment — testamentary powers granted to each primary beneficiary to redirect trust assets at death among a defined class of permissible appointees.

2. Trust Protector Provisions — an independent trust protector role with specified powers to modify administrative and structural provisions of the trust without judicial intervention.

3. Delaware Decanting — the statutory authority under Delaware law (12 Del. C. § 3528) for the co-trustees to "decant" the trust by distributing trust property into a new trust with modified terms, subject to statutory requirements and tax analysis.

For each mechanism, we will address the scope of the power, its intended purposes, the limitations imposed to protect tax-exempt status, and practical considerations for exercise.

The current beneficiaries of the Dynasty Trust are as follows:

Primary Beneficiaries (Children of the Grantor):

• Thomas R. Caldwell (age 38), residing at 55 Perry Street, Unit 3, New York, New York 10014, and his issue per stirpes.

• Katherine C. Hartfield (age 35), residing at 210 Briarcliff Lane, Greenwich, Connecticut 06830, and her issue per stirpes.

• Olivia G. Caldwell (age 30), residing at 1240 North Dearborn Street, Apartment 807, Chicago, Illinois 60610, and her issue per stirpes.

Current Grandchildren of the Grantor (Issue of Primary Beneficiaries):

• James W. Hartfield (age 8), son of Katherine C. Hartfield and Dr. Andrew W. Hartfield.

• Charlotte M. Hartfield (age 5), daughter of Katherine C. Hartfield and Dr. Andrew W. Hartfield.

• Lucas T. Caldwell (age 3), son of Thomas R. Caldwell and Dr. Sarah P. Caldwell.

• Nora E. Caldwell (age 1), daughter of Thomas R. Caldwell and Dr. Sarah P. Caldwell.

The trust also includes provisions for future-born issue of each primary beneficiary, ensuring that the class of beneficiaries expands organically as the family grows across generations.

Spouses of the primary beneficiaries — including Dr. Sarah P. Caldwell (spouse of Thomas R. Caldwell) and Dr. Andrew W. Hartfield (spouse of Katherine C. Hartfield) — are eligible to receive distributions from the Dynasty Trust, but only under the ascertainable standard of health, education, maintenance, and support ("HEMS"). Spouses are not treated as primary beneficiaries and do not hold powers of appointment or serve on the Distribution Committee. This distinction is critical to preserving the Dynasty Trust's character as a trust primarily for the benefit of the Grantor's descendants and to avoiding unintended tax consequences that could arise from granting spouses broader interests.

II. Overview of the Dynasty Trust Structure

Before turning to the specific flexibility mechanisms, it is helpful to summarize the key structural features of the Dynasty Trust that provide context for the analysis that follows.

A. Trust Terms and Distribution Standard

The Dynasty Trust employs a tiered distribution structure designed to balance the beneficiaries' access to trust resources with the long-term preservation of trust assets for future generations.

Distribution Committee. The trust agreement establishes a Distribution Committee consisting of the three primary beneficiaries: Thomas R. Caldwell, Katherine C. Hartfield, and Olivia G. Caldwell. The Distribution Committee serves a governance function with respect to discretionary distributions that exceed specified thresholds, as described below. The Distribution Committee's role is distinct from the co-trustees' role, and the Distribution Committee does not serve as trustee or exercise trustee powers. The Distribution Committee is designed to ensure that the Grantor's children — who have the closest knowledge of family circumstances and needs — participate in significant distribution decisions, while the co-trustees retain ultimate fiduciary responsibility for trust administration.

Standard Distributions. The co-trustees are authorized to make distributions of income and principal to or for the benefit of any primary beneficiary (Thomas, Katherine, or Olivia) and their respective issue for purposes of health, education, maintenance, and support — the well-established HEMS standard drawn from IRC § 2041(b)(1)(A). Distributions under the HEMS standard may be made by the co-trustees in their discretion, without the need for Distribution Committee approval, provided that the amount distributed to any single beneficiary in any calendar year does not exceed One Hundred Thousand Dollars ($100,000). This threshold provides a meaningful safety net for routine needs while ensuring that larger distributions receive additional scrutiny.

Discretionary Distributions Exceeding $100,000. Any distribution of income or principal to a single beneficiary that would cause the aggregate distributions to that beneficiary in a given calendar year to exceed $100,000 requires the unanimous approval of the Distribution Committee. This requirement ensures that significant distributions are made with the collective judgment of the primary beneficiaries and prevents any single co-trustee from making outsized distributions without family consensus.

Spousal Distributions. Spouses of primary beneficiaries — currently Dr. Sarah P. Caldwell and Dr. Andrew W. Hartfield — are eligible for distributions solely under the HEMS standard. Spousal distributions do not require Distribution Committee approval unless they exceed the $100,000 annual threshold. Importantly, spouses are not treated as primary beneficiaries for purposes of the trust's governing provisions: they do not hold powers of appointment, they do not serve on the Distribution Committee, and their interests are subordinate to the interests of the Grantor's descendants. This structure protects the trust from claims by former spouses in the event of a divorce and ensures that trust assets remain within the bloodline.

Per Stirpes Descent. If a primary beneficiary predeceases leaving issue surviving, that beneficiary's allocable share of the Dynasty Trust passes to such issue per stirpes, meaning that the share is divided equally among the branches of the deceased beneficiary's descendants. This ensures continuity of beneficial interests across generations and avoids the concentration of trust benefits in a single surviving child's line to the exclusion of the deceased child's descendants.

B. Perpetual Duration

The selection of Delaware as the situs of the Dynasty Trust was a deliberate and strategic decision, driven in large part by Delaware's abolition of the rule against perpetuities for interests in trust. Under 25 Del. C. § 503(a), a trust created under Delaware law may have an indefinite duration — the trust has no termination date imposed by a rule against perpetuities and may endure, in theory, for centuries or even in perpetuity.

The perpetual nature of the Dynasty Trust is a central feature of the estate plan. A perpetual trust maximizes the benefit of the GST exemption allocation: once the Grantor's GST exemption is allocated to the trust, that exemption shelters the trust assets — and all appreciation on those assets — from GST tax for as long as the trust continues. In a perpetual trust, this means that the GST exemption effectively protects an unlimited amount of growth and accumulation, compounding tax-free across multiple generations.

However, the perpetual nature of the trust also necessitates robust flexibility provisions. A trust that will endure for many generations must be able to adapt to circumstances that the Grantor cannot foresee, including:

• Changes in family composition — marriages, divorces, births, deaths, adoptions, estrangements, and reconciliations across many generations.

• Changes in federal and state tax law — including potential changes to estate, gift, GST, and income tax rates, exemption amounts, and statutory frameworks.

• Changes in state trust law — including possible amendments to Delaware's trust code, the adoption of new fiduciary standards, or changes to Delaware's favorable trust statutes.

• Changes in the economic and investment environment — including the emergence of new asset classes, changes in market conditions, and shifts in investment philosophy.

• Changes in fiduciary practices and institutional trustee capabilities — including the possibility that the institutional co-trustee may cease to exist, merge with another institution, or become unable or unwilling to serve.

Without adequate flexibility mechanisms, a perpetual trust risks becoming an inflexible and potentially dysfunctional instrument that cannot serve the Grantor's intent of benefiting future generations in a manner responsive to their actual needs and circumstances.

C. GST Exemption Allocation

The preservation of the Dynasty Trust's GST-exempt status is a paramount concern that pervades every aspect of the trust's design, including the flexibility mechanisms discussed in this memorandum.

Initial Allocation. You, as Grantor, allocated $5,000,000 of your available GST exemption to the initial $5,000,000 cash funding of the Dynasty Trust. Because the GST exemption allocated equals the value of the property transferred to the trust, the trust's inclusion ratio is zero and its applicable fraction is one. A trust with an inclusion ratio of zero is fully exempt from GST tax — no generation-skipping transfer tax will be imposed on any distribution from the trust to a skip person (e.g., a grandchild or more remote descendant) or on any taxable termination of a trust interest, regardless of the value of the trust assets at the time of the distribution or termination.

GRAT Remainder Interests and the ETIP Rules. Additional GST exemption will be allocated to the Dynasty Trust as the remainder interests from GRAT A, GRAT B, and GRAT C pour into the trust upon termination of their respective annuity terms. It is important to note, however, that during the GRAT annuity terms, the estate tax inclusion period ("ETIP") rules under IRC § 2642(f) prevent the allocation of GST exemption to the GRAT remainder interests. The ETIP rules provide that, for purposes of determining the inclusion ratio of any trust, the value of a transfer that is subject to an ETIP shall not be determined until the close of the ETIP. In practical terms, this means that you may not allocate GST exemption to the GRAT remainder interests until the annuity term of each GRAT concludes and the remainder interest is no longer includible in your gross estate under IRC § 2036. At that time, you (or your executor, if the GRAT term extends beyond your life expectancy) will need to make timely GST exemption allocations to preserve the zero inclusion ratio of the Dynasty Trust.

2023 GST Exemption Amount. The 2023 GST exemption amount is $12,920,000 per individual. Your prior GST exemption allocations and the coordination of future allocations are tracked in the GST Exemption Allocation Memorandum prepared by Sylvia Hartwell, which should be reviewed in conjunction with this memorandum. Coordination of GST exemption allocations across the Dynasty Trust and the GRAT remainder interests is essential to ensure that the trust maintains its fully exempt status as additional assets are received.

Critical Importance of Preserving Zero Inclusion Ratio. Every flexibility mechanism discussed in this memorandum — powers of appointment, trust protector provisions, and decanting — has been designed with the overarching objective of preserving the Dynasty Trust's zero inclusion ratio. Any modification of trust terms, exercise of a power, or structural change that would cause the trust to lose its GST-exempt status could expose the trust to catastrophic tax consequences, potentially subjecting distributions and terminations to a flat 40% GST tax on top of any applicable estate or gift tax. Accordingly, each flexibility mechanism includes limitations, safeguards, and procedural requirements designed to prevent the inadvertent loss of GST-exempt status.

III. Limited Powers of Appointment

A. Nature and Scope of the Powers Granted

Each primary beneficiary of the Dynasty Trust — Thomas R. Caldwell, Katherine C. Hartfield, and Olivia G. Caldwell — holds a testamentary limited power of appointment over his or her allocable share of the Dynasty Trust. This section describes the nature, scope, and legal implications of these powers in detail.

Testamentary Exercise. The power of appointment granted to each primary beneficiary is a testamentary power, meaning that it may be exercised only at the powerholder's death, through a provision in the powerholder's last will and testament. The power may not be exercised during the powerholder's lifetime (the rationale for excluding inter vivos powers is discussed in Section III.D below). To be effective, the exercise of the power must make specific reference to the power of appointment granted under the Dynasty Trust — a general bequest or residuary clause in the powerholder's will that does not specifically reference the power will not constitute an effective exercise. This specific-reference requirement is a deliberate safeguard to prevent inadvertent or unintended exercises of the power.

Allocable Share. Each primary beneficiary's power of appointment extends to his or her "allocable share" of the Dynasty Trust. The allocable share is determined in accordance with the trust agreement's allocation provisions, which generally divide the trust into equal shares for each of the Grantor's children (or their respective issue per stirpes if a child has predeceased). The powerholder may appoint all or any portion of his or her allocable share, and any portion not effectively appointed will continue to be held and administered under the default terms of the Dynasty Trust for the benefit of the powerholder's issue per stirpes.

Permissible Appointees. The class of permissible appointees — i.e., the persons or entities to whom the powerholder may appoint trust property — is limited to the following:

(a) The powerholder's descendants (i.e., the Grantor's grandchildren and more remote descendants through the powerholder's line);

(b) The other primary beneficiaries (i.e., the powerholder's siblings) and their respective descendants;

(c) Charitable organizations described in IRC § 501(c)(3) (which includes The Caldwell Family Foundation and other qualifying public charities and private foundations); and

(d) Trusts for the benefit of any of the foregoing permissible appointees.

Excluded Appointees. The powerholder may not appoint to any of the following:

(a) The powerholder himself or herself;

(b) The powerholder's estate;

(d) The creditors of the powerholder's estate.

The exclusion of the powerholder, the powerholder's estate, and creditors of either is the defining characteristic of a "limited" (or "special") power of appointment, as distinguished from a "general" power of appointment. Under IRC § 2041(b)(1), a power of appointment is a "general" power only if it is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. Because the powers granted under the Dynasty Trust expressly exclude each of these categories, the powers are "limited" powers of appointment within the meaning of IRC § 2041 and § 2514.

Tax Consequences of Limited Power Classification. The classification of these powers as limited (non-general) powers of appointment has critical tax consequences:

• Estate Tax: The exercise, release, or lapse of a limited power of appointment does not cause the property subject to the power to be included in the powerholder's gross estate for federal estate tax purposes under IRC § 2041. This means that when Thomas, Katherine, or Olivia dies and exercises (or fails to exercise) the power, the trust assets subject to the power will not be treated as part of the powerholder's taxable estate.

• Gift Tax: The exercise of a limited power of appointment does not constitute a taxable gift by the powerholder under IRC § 2514. The powerholder is not treated as making a transfer of property for gift tax purposes when he or she directs the appointment of trust assets to permissible appointees.

• GST Tax: The exercise of a limited power of appointment over a GST-exempt trust generally does not cause the trust to lose its exempt status, subject to the limitations discussed in Section III.C below.

These tax consequences are fundamental to the Dynasty Trust's design: the limited powers of appointment allow each generation of beneficiaries to exercise meaningful control over the disposition of trust assets without triggering adverse transfer tax consequences.

B. Purposes Served by Limited Powers of Appointment

The limited powers of appointment serve several important purposes within the overall architecture of the Dynasty Trust:

Adapting to Changing Family Dynamics. Over the course of a perpetual trust, family circumstances will inevitably change in ways that the Grantor cannot predict at the time of trust creation. Children may be born, adopted, or estranged from the family. Marriages may dissolve. Beneficiaries may develop special needs, face financial difficulties, or achieve extraordinary financial success that renders trust distributions unnecessary. A beneficiary who holds a limited power of appointment can take these changes into account at the time of his or her death, redirecting trust assets to the family members or branches that most need or deserve them. For example, if Thomas's line prospers independently while Katherine's line faces financial hardship, Katherine could exercise her power of appointment to concentrate her share on her own descendants, ensuring that her branch receives a greater proportion of trust resources. Conversely, if one of Olivia's children becomes estranged from the family, Olivia could exercise her power to redirect her share away from that child and toward her other descendants or toward the other primary beneficiaries' lines.

Integrating Philanthropy. The inclusion of IRC § 501(c)(3) charitable organizations among the permissible appointees allows each beneficiary to integrate philanthropic giving into the disposition of trust assets at death. This is consistent with the Grantor's expressed commitment to charitable giving, as reflected in the mission of The Caldwell Family Foundation, which focuses on arts, education, and environmental conservation. A beneficiary who wishes to make a substantial charitable contribution at death could exercise the power of appointment to direct a portion of his or her allocable share to one or more qualifying charities, including The Caldwell Family Foundation or other organizations aligned with the family's philanthropic values. This charitable appointment would not generate a charitable deduction for the powerholder's estate (because the property is not includible in the powerholder's estate), but it would effectively remove the appointed assets from the pool available for family distributions and redirect them to charitable purposes.

Creating Sub-Trusts. The power of appointment may be exercised to appoint trust property into one or more separate sub-trusts for the benefit of individual descendants or family branches. For example, Thomas could exercise his power to create separate sub-trusts for each of his children — one sub-trust for Lucas and one for Nora — with terms tailored to each child's particular needs and circumstances. The appointed sub-trusts may include their own trustee designations, distribution standards, and limited powers of appointment for the next generation, effectively extending the flexibility of the Dynasty Trust framework into the appointed trusts.

Avoiding Court Intervention. The exercise of a limited power of appointment is a private, non-judicial mechanism for modifying the disposition of trust assets. Unlike a formal trust modification proceeding, which may require petitioning a court and obtaining the consent of all interested parties, the exercise of a limited power of appointment requires only that the powerholder include appropriate provisions in his or her last will and testament. This simplicity and privacy are significant advantages, particularly for a high-net-worth family that values discretion.

C. Limitations to Protect GST-Exempt Status

While limited powers of appointment provide valuable flexibility, their exercise must be carefully circumscribed to prevent the loss of the Dynasty Trust's GST-exempt status. The trust agreement incorporates several limitations designed to address the specific GST risks associated with the exercise of a limited power of appointment.

Savings Clause — Vesting Period Limitation. Under Treasury Regulation § 26.2601-1(b)(1)(v)(A) and related guidance, the exercise of a limited power of appointment over a GST-exempt trust will generally not cause the trust to lose its exempt status, provided that the exercise does not extend the trust's vesting period beyond the period prescribed under the applicable state rule against perpetuities in effect at the time the trust became irrevocable. Because Delaware has abolished its rule against perpetuities, the Dynasty Trust has no inherent vesting limitation. However, to address potential GST concerns — particularly the concern that an exercise of a limited power of appointment could create a new trust with an indefinite or extended vesting period that the IRS might characterize as a new trust for GST purposes — the trust agreement incorporates a savings clause. This savings clause provides that any exercise of a limited power of appointment must result in appointed interests that vest or terminate within the maximum period permitted under the law of the jurisdiction governing the appointed trust at the time of the appointment. If the appointed trust is governed by Delaware law (which has no rule against perpetuities), the savings clause effectively imposes no additional limitation. However, if the appointed trust is governed by the law of a jurisdiction that does have a rule against perpetuities, the appointed interests must comply with that jurisdiction's rule. This savings clause serves as a backstop to prevent any argument that the exercise of the power creates a "new" trust for GST purposes.

Prohibition on Shifting Beneficial Interests to Lower Generations. The trust agreement provides that the exercise of a limited power of appointment may not be structured in a manner that would shift beneficial interests to a beneficiary who occupies a generation assignment lower than the persons who held the interest before the exercise, in a way that would trigger the "shift" rules under the GST regulations. Under Treasury Regulation § 26.2601-1(b)(4)(i)(D), a modification of a trust that shifts a beneficial interest in the trust to a beneficiary who occupies a lower generation than the persons holding the interest before the modification may be treated as a new transfer for GST purposes. Accordingly, the trust agreement requires that any exercise of a limited power of appointment distribute trust property among the permissible appointees in a manner consistent with the existing generation assignments of the trust's beneficiaries, and does not create a new GST-taxable transfer by disproportionately favoring skip persons over non-skip persons.

Continuation of GST-Exempt Status in Appointed Trusts. The trust agreement includes a provision specifying that any trust created through the exercise of a limited power of appointment shall be treated as a continuation of the original Dynasty Trust for GST purposes, not as a new trust. This provision is designed to ensure that the GST exemption allocated to the Dynasty Trust carries over to any appointed sub-trust, maintaining the zero inclusion ratio. The appointed trust will be treated as having the same inclusion ratio as the portion of the Dynasty Trust from which it was funded, and no additional GST exemption allocation will be necessary for the appointed trust if it is properly structured as a continuation of the original trust.

Prohibition on Appointee Changes That Would Alter GST Status. Each power of appointment includes a specific prohibition against appointment to a "skip person" in a manner that would change the trust's GST status — for example, by creating a new trust that would not qualify for the GST exemption allocation carried from the original trust, or by concentrating trust benefits exclusively in skip persons in a way that constitutes a constructive new transfer to those skip persons.

D. Inter Vivos Limited Powers — Excluded by Design

The trust agreement does not grant inter vivos (lifetime) limited powers of appointment to the primary beneficiaries. This exclusion is a deliberate design choice, motivated by several considerations.

Avoidance of the Delaware Tax Trap. Under certain circumstances, the exercise of an inter vivos limited power of appointment could inadvertently trigger the so-called "Delaware tax trap." The Delaware tax trap arises under IRC § 2041(a)(3), which provides that the exercise of a power of appointment is treated as a general power of appointment if the exercise creates a new presently exercisable general power of appointment by operation of state law. In Delaware and certain other states, the exercise of a limited power of appointment to create a new trust could, under certain readings of state perpetuities law, be construed as creating a new power that is "general" in nature — particularly if the exercise restarts the perpetuities period and grants the appointee a power that is exercisable in favor of the appointee or the appointee's creditors. While the Delaware tax trap is typically invoked intentionally as an estate planning strategy (to cause inclusion in a beneficiary's estate for the purpose of obtaining a stepped-up basis under IRC § 1014), inadvertent triggering of the trap through an inter vivos exercise would be harmful to the Dynasty Trust's tax posture.

Prevention of Premature Dissipation. The exclusion of inter vivos powers of appointment also serves the practical purpose of preventing premature dissipation of trust assets. A lifetime power of appointment could be exercised impulsively or under the influence of external pressures (e.g., a demanding spouse, a creditor, or a business partner), resulting in the redirection of trust assets in a manner inconsistent with the Grantor's intent of preserving wealth for future generations.

Future Availability Through Other Mechanisms. If a need for inter vivos appointment authority arises in the future — for example, to facilitate a family restructuring or to address a particular tax planning opportunity — the Trust Protector or the decanting mechanism (discussed in Sections IV and V below) may be employed to grant such authority on a targeted and carefully structured basis, with appropriate tax analysis and safeguards in place at the time of the grant.

IV. Trust Protector Provisions

A. Designation and Identity

The Dynasty Trust designates Victoria Chambers of Calderwood & Harkness LLP (375 Park Avenue, 42nd Floor, New York, New York 10152) as the initial Trust Protector. Ms. Chambers serves as the Responsible Partner on the Caldwell engagement and has been intimately involved in the design and documentation of the Dynasty Trust and the overall Caldwell estate plan. Her designation as Trust Protector reflects the Grantor's confidence in her judgment, her deep familiarity with the trust's structure and objectives, and her professional qualifications to exercise the Trust Protector's powers thoughtfully and prudently.

The Trust Protector serves in a non-fiduciary capacity. This is a deliberate and significant choice under the trust agreement, the implications of which are discussed in greater detail in Section IV.D below. In brief, the non-fiduciary designation means that the Trust Protector is not held to the fiduciary duties of care and loyalty that are imposed on trustees under Delaware law. This provides the Trust Protector with greater flexibility and broader discretion in the exercise (or non-exercise) of her powers, and insulates the Trust Protector from liability for decisions made in the course of her service.

B. Powers of the Trust Protector

The trust agreement grants the Trust Protector a carefully defined set of powers, each of which is designed to address a specific category of potential need over the trust's perpetual life. The Trust Protector's powers are intentionally administrative and structural in nature — the Trust Protector does not have the power to make distributions, does not serve as a trustee, and does not hold any beneficial interest in the trust.

Modify Administrative Provisions

The Trust Protector may amend the administrative, procedural, and ministerial provisions of the trust agreement. This power encompasses a broad range of administrative matters, including but not limited to:

• Trustee compensation arrangements, including the fees payable to the institutional co-trustee and any compensation payable to the family co-trustee or successor family co-trustees;

• Accounting frequency and reporting requirements, including the timing and content of annual trust accountings, beneficiary statements, and investment performance reports;

• Investment guidelines and standards, including amendments to the investment policy statement, changes to permitted asset classes, adjustments to risk parameters, and modifications to the allocation framework;

• Trust administration mechanics, including procedures for beneficiary requests, documentation requirements for distributions, and protocols for trustee communication and decision-making;

• Powers granted to the co-trustees with respect to trust administration, including powers to hold, manage, lease, sell, exchange, invest, and reinvest trust property, and powers related to tax elections and filings;

• Administrative provisions relating to the Distribution Committee, including procedures for convening the Committee, voting requirements, and communication protocols.

Importantly, the Trust Protector's power to modify administrative provisions does not extend to modifications that would alter the beneficial interests in the trust. The Trust Protector may not change who the beneficiaries are, modify the distribution standard in a manner that expands or restricts beneficial rights, or redirect the flow of trust benefits from one family branch to another. This limitation preserves the distinction between administrative modifications (which are within the Trust Protector's authority) and substantive modifications (which require other mechanisms such as decanting or the exercise of a power of appointment).

Change Situs and Governing Law

The Trust Protector has the power to change the situs of the Dynasty Trust from Delaware to another state (or from another state back to Delaware) and to change the governing law of the trust accordingly. This power is one of the most critical flexibility mechanisms in the trust agreement, and its importance will likely grow over the trust's perpetual life.

The selection of trust situs and governing law has significant implications for range legal and tax issues, including:

• State income taxation: Some states impose income tax on trusts based on the situs of the trust, the residence of the trustee, or the residence of the beneficiaries. Delaware currently does not impose state income tax on trust income that is accumulated and not distributed to Delaware-resident beneficiaries. However, if Delaware were to change its tax treatment in the future, the Trust Protector could move the trust to another state with more favorable income tax treatment — such as Nevada, South Dakota, or Wyoming, each of which currently has no state income tax. The Dynasty Trust Situs Analysis memorandum (prepared separately) provides a detailed comparison of these jurisdictions.

• Trust law and fiduciary standards: State trust law varies significantly across jurisdictions, and the law of any given state may evolve over time. If Delaware were to adopt trust law changes that are unfavorable to the trust or its beneficiaries — for example, by modifying its perpetual trust statute, restricting the scope of trust protector powers, or imposing new fiduciary obligations — the Trust Protector could move the trust to a jurisdiction with more favorable trust law.

• Asset protection: Different states offer different levels of asset protection for trust beneficiaries. The Trust Protector's ability to change situs allows the trust to take advantage of the most protective statutes available at any given time.

• Decanting law: As discussed in Section V, the scope and procedures of decanting vary by state. If the trust needs to be decanted and the laws of the current situs are restrictive, the Trust Protector could change situs to a jurisdiction with more permissive decanting provisions before the decanting is undertaken.

Remove and Appoint Trustees

The Trust Protector has the power to remove any trustee — including the institutional co-trustee (currently Northgate Trust Company of Delaware) and the family co-trustee (currently Thomas R. Caldwell) or any successor to either — and to appoint successor trustees in their place. This power ensures trustee continuity and accountability over the trust's perpetual life.

Circumstances in which this power might be exercised include:

• An institutional co-trustee that is acquired by another financial institution, resulting in changes to the quality of trust administration services, investment management capabilities, or client service;

• A family co-trustee who becomes incapacitated, develops a conflict of interest, or is otherwise unable or unwilling to continue serving;

• A trustee that is subject to regulatory action, litigation, or reputational issues that could adversely affect the trust;

• A need to appoint a trustee in a different jurisdiction in connection with a change of situs;

• A request from beneficiaries to replace a trustee whose investment philosophy, communication style, or administrative practices are not aligned with the beneficiaries' expectations.

The power to remove and replace trustees without judicial intervention is a significant advantage, as court proceedings for trustee removal can be time-consuming, expensive, and contentious. The Trust Protector's ability to act unilaterally (subject to the limitations described below) provides a streamlined mechanism for trustee succession.

Limitations on Trust Protector Powers

The trust agreement imposes the following express limitations on the Trust Protector's powers:

(a) No Addition or Removal of Beneficiaries. The Trust Protector may not add new beneficiaries to the trust or remove existing beneficiaries, except as an incidental consequence of a change in situs that might affect the designation of minor beneficiaries' representatives under the laws of the new jurisdiction. This limitation prevents the Trust Protector from fundamentally altering the class of persons entitled to benefit from the trust.

(b) No Modification of Beneficial Distribution Standard to Create General Power. The Trust Protector may not modify the distribution standard in a manner that would grant any beneficiary a general power of appointment over trust assets. Granting a general power of appointment would cause the trust assets subject to the power to be includible in the beneficiary's gross estate under IRC § 2041, defeating one of the primary estate tax benefits of the Dynasty Trust structure.

(c) No Self-Dealing. The Trust Protector may not make distributions to or for the benefit of the Trust Protector herself. This prohibition prevents any conflict of interest and ensures that the Trust Protector's exercise of powers is not motivated by personal financial benefit.

(d) No Action Causing Estate Tax Inclusion. The Trust Protector may not exercise any power in a manner that would cause the trust to be included in the Grantor's gross estate or any beneficiary's gross estate for federal estate tax purposes. This catch-all limitation is designed to prevent any exercise of Trust Protector powers that could inadvertently create a taxable event for the Grantor or a beneficiary.

C. Succession of Trust Protector

Given the perpetual duration of the Dynasty Trust, the trust agreement must provide a mechanism for the orderly succession of the Trust Protector role. No individual can serve as Trust Protector for the entire duration of a perpetual trust, and the absence of a Trust Protector could leave the trust without a critical governance mechanism at a time when it is most needed.

Designation by Incumbent. The trust agreement provides that the serving Trust Protector may designate a successor Trust Protector by written instrument delivered to the co-trustees. This designation may be made at any time during the Trust Protector's service, and the Trust Protector may amend or revoke the designation at any time by delivering a new written instrument to the co-trustees. The successor Trust Protector's appointment becomes effective upon the resignation, death, incapacity, or removal of the incumbent Trust Protector.

Court Appointment. If no successor Trust Protector has been designated and the incumbent Trust Protector is unable or unwilling to serve — whether due to death, incapacity, resignation, or any other reason — the trust agreement authorizes the institutional co-trustee (currently Northgate Trust Company of Delaware) to petition a court of competent jurisdiction in the State of Delaware for the appointment of a successor Trust Protector. The court, in making its appointment, should consider candidates who are independent of the beneficiaries, experienced in trust administration and tax law, and capable of exercising the Trust Protector's powers thoughtfully and in the best interests of the trust and its beneficiaries.

Recommendation. We strongly recommend that Victoria Chambers execute a successor Trust Protector designation at the earliest practicable date, identifying one or more successor Trust Protectors who can assume the role promptly if needed. Potential successors should be independent parties — not beneficiaries, not related or subordinate parties within the meaning of IRC § 672(c), and not persons who could be viewed as having a beneficial interest in the exercise or non-exercise of Trust Protector powers. Appropriate candidates include partners of Calderwood & Harkness LLP who are not otherwise involved in the Caldwell family's personal or business affairs, independent trust professionals, or specialized trust protector firms. The designation document should be prepared and executed promptly, and a copy should be delivered to Northgate Trust Company of Delaware for its records.

D. Non-Fiduciary Capacity — Legal Analysis

The designation of the Trust Protector in a non-fiduciary capacity is a significant feature of the Dynasty Trust, and its legal implications merit detailed analysis.

Statutory Authority. Delaware trust law expressly authorizes the creation of trust protector and trust advisor roles and permits the trust instrument to specify whether these roles are fiduciary or non-fiduciary. Specifically, 12 Del. C. § 3313 provides that a governing instrument may grant powers, including powers to direct, consent to, or disapprove distributions, to persons who are not trustees, and may specify whether such persons serve in a fiduciary or non-fiduciary capacity. If the governing instrument specifies that the person serves in a non-fiduciary capacity, then the person is not subject to the fiduciary duties and standards of care that would otherwise apply to trustees or fiduciaries under Delaware law.

Practical Implications. The non-fiduciary designation has several practical implications for the Trust Protector's role:

• Reduced Liability Exposure. The Trust Protector is not subject to the fiduciary duties of care, loyalty, and impartiality that apply to trustees. This means that the Trust Protector is not required to exercise her powers for the equal benefit of all beneficiaries, is not required to act with the prudence and diligence of a reasonable fiduciary, and is not liable for losses resulting from the exercise or non-exercise of her powers (absent bad faith, willful misconduct, or gross negligence, to the extent such limitations are enforceable under applicable law).

• Greater Flexibility. Because the Trust Protector is not bound by fiduciary duties, she has broader discretion in determining whether and how to exercise her powers. For example, the Trust Protector could exercise the power to change situs based on a single factor (such as state income tax avoidance) without being required to balance that factor against other considerations in the manner that a fiduciary might be required to do.

• Insulation from Beneficiary Claims. The non-fiduciary designation reduces the risk that beneficiaries will bring claims against the Trust Protector for breach of fiduciary duty in connection with the exercise or non-exercise of Trust Protector powers.

Tax Implications. The non-fiduciary designation also has important tax implications. Because the Trust Protector is not a fiduciary and cannot benefit herself from the exercise of her powers, the Trust Protector's powers should not be treated as a general power of appointment under IRC § 2041. A general power of appointment exists only if the powerholder can exercise the power in favor of himself, his estate, his creditors, or the creditors of his estate. The Trust Protector cannot make distributions to herself, cannot appoint trust property to herself, and has no beneficial interest in the trust. Moreover, the Trust Protector is not a beneficiary and is not a related or subordinate party with respect to the Grantor or any beneficiary (within the meaning of IRC § 672(c)). These facts strongly support the conclusion that the Trust Protector's powers do not constitute a general power of appointment and do not cause estate or gift tax inclusion for the Trust Protector or any other person.

E. GST Implications of Trust Protector Powers

The exercise of Trust Protector powers must be analyzed for potential GST implications to ensure that the Dynasty Trust's zero inclusion ratio is not jeopardized.

Administrative Modifications. The exercise of the Trust Protector's power to modify administrative provisions should not affect the trust's GST-exempt status. Administrative modifications — such as changes to trustee compensation, accounting frequency, or investment guidelines — do not alter the beneficial enjoyment of trust property and do not shift beneficial interests to a lower generation. Under Treasury Regulation § 26.2601-1(b)(4)(i), a modification that does not shift beneficial interests to a beneficiary in a lower generation and does not extend the time for vesting of any beneficial interest is not treated as a new transfer for GST purposes. Administrative modifications clearly satisfy both prongs of this test.

Change of Situs. A change of trust situs from one state to another does not, in and of itself, create a new trust for GST purposes. Under Treasury Regulation § 26.2601-1(b)(4)(i), a change of situs is treated as a modification of the trust's terms, and the analysis focuses on whether the change shifts beneficial interests or extends vesting periods. A pure change of situs — without any accompanying change to beneficial interests — should satisfy the regulatory requirements and preserve the trust's GST-exempt status. However, if the change of situs is accompanied by substantive changes to the trust's terms (e.g., changes to the beneficiary class or distribution standard), the combined effect of the modifications must be analyzed to determine whether the "shift" or "extension" tests have been triggered.

Trustee Changes. The removal and appointment of trustees is an administrative action that does not constitute a transfer of property for GST purposes. Changing the identity of the trustee does not alter the beneficial interests in the trust, does not shift enjoyment to a lower generation, and does not extend the trust's vesting period. Accordingly, the exercise of the Trust Protector's power to remove and appoint trustees should not affect the trust's GST-exempt status.

Substantive Modifications — A Cautionary Note. The current trust agreement does not grant the Trust Protector the power to modify substantive beneficial provisions. However, if such authority were to be conferred in the future — whether through an amendment facilitated by decanting, by a change in the Trust Protector's powers pursuant to a beneficiary's exercise of a limited power of appointment, or by other means — the exercise of such expanded powers would need to be carefully analyzed under the GST regulations. Any modification that shifts beneficial interests to a lower generation or extends the trust's vesting period could result in the loss of GST-exempt status for the trust or a portion thereof. We would strongly recommend obtaining a written tax opinion before any such exercise.

V. Delaware Decanting Statute

A. Overview of Delaware's Decanting Law

The third and most powerful flexibility mechanism available to the Dynasty Trust is the ability to "decant" — i.e., to distribute trust property from the existing Dynasty Trust (referred to as the "invaded trust" in statutory parlance) to a new trust (the "appointed trust") with modified terms. This mechanism is authorized by Delaware's decanting statute, 12 Del. C. § 3528, and provides the co-trustees with the ability to effect comprehensive modifications to the trust's structure, terms, and provisions, subject to statutory requirements and tax limitations.

The concept of trust decanting is analogous to decanting wine: just as wine is poured from one vessel into another to separate it from sediment, trust assets are "poured" from one trust into another to separate them from outdated, inflexible, or otherwise undesirable trust provisions. The appointed trust receives the same assets that were held in the invaded trust, but the appointed trust may have different terms, different trustees, different distribution standards, different administrative provisions, and — depending on the scope of the trustee's discretion — different beneficiaries.

Delaware's decanting statute, enacted in 2003 and subsequently amended, is among the most permissive in the United States. The breadth and flexibility of Delaware's decanting law was a significant factor in selecting Delaware as the situs of the Dynasty Trust, as detailed in the Dynasty Trust Situs Analysis memorandum comparing the trust laws of Delaware, Nevada, and South Dakota. Key features of the Delaware decanting statute include:

• No requirement for court approval (the trustee may decant unilaterally, subject to notice requirements);

• No requirement for beneficiary consent (although beneficiaries must receive notice and may object);

• Broad scope of permissible modifications, extending to both administrative and beneficial terms (subject to the scope of the trustee's discretionary authority);

• Compatibility with the perpetual trust framework, as the appointed trust may also be governed by Delaware law and may have an indefinite duration.

B. Who May Decant

Under the Dynasty Trust, the power to decant is held by the co-trustees — the institutional co-trustee (Northgate Trust Company of Delaware) and the family co-trustee (Thomas R. Caldwell, or his successor) — who jointly hold discretionary distribution authority over trust principal. The statutory requirement for decanting under 12 Del. C. § 3528 is that the trustee exercising the decanting power must have the authority to make distributions of principal to one or more beneficiaries. Because the co-trustees of the Dynasty Trust hold such authority, they satisfy the statutory predicate for exercising the decanting power.

The decanting power must be exercised jointly by both co-trustees, consistent with the trust agreement's requirement that the co-trustees act jointly in the exercise of their discretionary powers. A unilateral decanting by one co-trustee without the concurrence of the other would not be effective under the trust agreement.

In addition, the Trust Protector's powers may be exercised in conjunction with a trustee-initiated decanting. For example, if the co-trustees determine that a decanting to a new trust governed by the laws of a different state would be beneficial, the Trust Protector could first exercise her power to change the situs and governing law of the Dynasty Trust to the new state, facilitating a decanting under the laws of that jurisdiction. Alternatively, the Trust Protector could modify administrative provisions of the trust agreement in advance of a decanting to ensure that the terms of the invaded trust are compatible with the proposed terms of the appointed trust.

It should also be noted that the Distribution Committee's approval may be required for certain decanting transactions. If the decanting constitutes a distribution of principal that would cause the aggregate distributions to any single beneficiary in a calendar year to exceed $100,000 — which is likely in the case of a decanting that transfers a beneficiary's allocable share to a new sub-trust — the unanimous approval of the Distribution Committee should be obtained. While there is some ambiguity in the trust agreement as to whether a decanting constitutes a "distribution" for purposes of the Distribution Committee approval requirement, the conservative approach is to obtain Distribution Committee approval for any decanting that could be characterized as such.

C. Permissible Scope of Decanting

The scope of modifications that may be effected through decanting depends on the nature and extent of the trustee's discretionary authority over the invaded trust. Delaware law draws a distinction between trustees with "unlimited" discretion and trustees whose discretion is limited by an ascertainable standard.

Modifying Administrative Terms

Decanting may be used to modify the administrative, procedural, and ministerial terms of the trust without limitation, regardless of whether the trustee's discretion is "unlimited" or subject to an ascertainable standard. Administrative modifications that may be effected through decanting include:

• Updating trustee succession provisions to reflect changes in the institutional trustee landscape or the availability of qualified family co-trustees;

• Changing investment standards to reflect evolving investment theory, new asset classes, or modified risk tolerances;

• Modifying accounting and reporting requirements to conform to current best practices or regulatory requirements;

• Adding, modifying, or removing trust protector powers, including expanding the Trust Protector's authority to address new categories of issues or reducing the Trust Protector's authority if certain powers are no longer needed;

• Altering trust administration mechanics, including procedures for beneficiary requests, distribution documentation, and trustee communication.

Modifying Beneficial Interests (with Limitations)

The extent to which decanting may be used to modify the beneficial interests in the Dynasty Trust — including the class of beneficiaries, the distribution standard, and the allocation of trust benefits among beneficiaries — depends on the characterization of the co-trustees' discretionary authority under Delaware law.

Under 12 Del. C. § 3528, if the trustee has "unlimited" discretion — that is, discretion that is not limited by an ascertainable standard such as HEMS — the trustee may decant to a new trust that modifies beneficial interests, including the addition of new beneficiaries or the elimination of existing ones. If, however, the trustee's discretion is limited by an ascertainable standard, the trustee may only decant to a new trust whose beneficial interests are no broader than those in the invaded trust.

The Dynasty Trust presents a hybrid situation that requires careful analysis:

• HEMS Component. The co-trustees' authority to make routine distributions (up to $100,000 per beneficiary per year without Distribution Committee approval) is subject to the HEMS standard — an ascertainable standard within the meaning of IRC § 2041(b)(1)(A). With respect to this component of their authority, the co-trustees' discretion is limited, and the scope of permissible decanting regarding beneficial interests is correspondingly restricted. Under Delaware law, the co-trustees could not use the HEMS authority as the basis for a decanting that would grant the beneficiaries of the appointed trust interests broader than the HEMS standard that governs the invaded trust.

• Broader Discretionary Authority. In addition to the HEMS standard, the co-trustees have the authority to make discretionary distributions exceeding $100,000 per beneficiary per year, subject to unanimous Distribution Committee approval. This broader discretionary authority is not expressly limited by an ascertainable standard — rather, it is limited by the procedural requirement of Distribution Committee approval. The characterization of this authority as "unlimited" or "limited" for purposes of the decanting statute is subject to some interpretive uncertainty. If the broader discretionary authority is characterized as "unlimited" discretion (notwithstanding the procedural approval requirement), it may support a broader scope of permissible decanting regarding beneficial interests. If, on the other hand, the Distribution Committee approval requirement is viewed as a substantive limitation on the co-trustees' discretion, the scope of permissible decanting may be more restricted.

Conservative Approach. Given the interpretive uncertainty, we recommend a conservative approach to any decanting that would materially alter the beneficial interests in the Dynasty Trust. Any such decanting should be reviewed by counsel at the time of the proposed transaction to confirm compliance with the Delaware decanting statute, to assess the tax implications (including GST, estate, gift, and income tax consequences), and to ensure that the decanting is consistent with the Grantor's intent and the trust's overall objectives. In many cases, it may be prudent to obtain a court order approving the decanting or to seek a private letter ruling from the IRS confirming the tax treatment of the pro

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
TO: Jonathan R. Caldwell
FROM: Monica Reyes, Associate, Calderwood & Harkness LLP; with input from Sylvia Hartwell, Partner (Tax), Calderwood & Harkness LLP
DATE: April 1, 2023
RE: Trust Flexibility Mechanisms — Caldwell Family Dynasty Trust: Powers of Appointment, Trust Protector Provisions, and Delaware Decanting Statute
MATTER NO.: 1034-00004
BILLING CODE: 78412-JRC
FIRM: Calderwood & Harkness LLP, 375 Park Avenue, 42nd Floor, New York, NY 10152
Right-click to update Table of Contents
I. Introduction and Purpose
This memorandum addresses the flexibility mechanisms built into the Caldwell Family Dynasty Trust (hereinafter, the "Dynasty Trust"), an irrevocable trust agreement executed on April 1, 2023, with situs in the State of Delaware and governed by Delaware law. The purpose of this memorandum is to provide you, as Grantor, with a comprehensive explanation of the three primary mechanisms through which the Dynasty Trust may be adapted over time to respond to changing family circumstances, evolving tax law, and shifting fiduciary requirements — all while preserving the trust's critical generation-skipping transfer ("GST") tax-exempt status.
The Dynasty Trust is administered by two co-trustees: Thomas R. Caldwell, your eldest son, serving as the family co-trustee, and Northgate Trust Company of Delaware, a Delaware-chartered trust company with offices at 1201 North Market Street, Suite 1600, Wilmington, Delaware 19801, serving as the institutional co-trustee. The primary point of contact at Northgate Trust Company is Philip A. Rossiter, Senior Vice President, Trust Administration. The dual-trustee structure was selected to combine the family knowledge and personal attention that Thomas can provide with the institutional continuity, professional investment management, and regulatory compliance capabilities of a Delaware corporate trustee.
You, Jonathan R. Caldwell (date of birth: March 14, 1956; residence: 418 East 72nd Street, Apartment 14A, New York, New York 10021), are the Grantor of the Dynasty Trust. As an irrevocable trust, the Dynasty Trust has been designed so that you retain no powers or interests that would cause the trust to be included in your gross estate for federal estate tax purposes under Internal Revenue Code ("IRC") §§ 2036, 2037, or 2038, nor any powers that would cause the trust to be treated as a grantor trust for federal income tax purposes under IRC §§ 671–679, except as may be expressly provided in the trust agreement with respect to certain swap powers analyzed in separate memoranda.
The Dynasty Trust was initially funded with Five Million Dollars ($5,000,000) in cash. In addition to this initial funding, the trust is expected to receive substantial additional assets as the remainder interests from three zeroed-out Grantor Retained Annuity Trusts ("GRATs") pour into the Dynasty Trust upon termination of their respective annuity terms:
• GRAT A — Caldwell 2023 Securities GRAT: Funded on April 15, 2023, with approximately $60,000,000 in publicly traded securities and concentrated stock positions.
• GRAT B — Caldwell 2023 Realty GRAT: Funded on May 1, 2023, with approximately $80,000,000 in commercial real estate holdings and real estate partnership interests.
• GRAT C — Caldwell 2023 Carried Interest GRAT: Funded on June 1, 2023, with approximately $38,000,000 in carried interest positions in private equity and venture capital funds.
Each of these GRATs has been structured as a "zeroed-out" GRAT, meaning that the present value of the annuity payments to be returned to you over the annuity term equals the full value of the property transferred to the GRAT, resulting in a federal gift tax value of zero (or as close to zero as mathematically possible) for the remainder interest. However, if the assets in each GRAT appreciate at a rate that exceeds the applicable Section 7520 rate — currently 5.0% for transfers in the first half of 2023 — the excess appreciation will pass to the Dynasty Trust free of gift and estate tax. Based on our projections, which assume the GRAT assets outperform the Section 7520 hurdle rate by approximately four percent (4%) annually over the annuity terms, the projected excess appreciation transferred to the Dynasty Trust is estimated at between $35,000,000 and $50,000,000 in aggregate. These projections are, of course, subject to market performance and the specific performance of the underlying assets.
Given the potentially perpetual duration of the Dynasty Trust under Delaware's perpetual trust statute — Delaware having abolished its rule against perpetuities for interests in trust, see 25 Del. C. § 503(a), thereby permitting trusts to endure indefinitely — the flexibility mechanisms embedded in the trust agreement are not merely desirable but essential. A trust that may continue for centuries must be able to adapt to changes in family composition, family dynamics, tax law, state law, investment environment, and fiduciary standards that the Grantor cannot possibly foresee at the time of creation. The flexibility mechanisms discussed in this memorandum are designed to provide that adaptability in a manner that is consistent with the Grantor's intent and protective of the trust's favorable tax status.
Specifically, this memorandum will explain and analyze the following three primary flexibility mechanisms:
1. Limited Powers of Appointment — testamentary powers granted to each primary beneficiary to redirect trust assets at death among a defined class of permissible appointees.
2. Trust Protector Provisions — an independent trust protector role with specified powers to modify administrative and structural provisions of the trust without judicial intervention.
3. Delaware Decanting — the statutory authority under Delaware law (12 Del. C. § 3528) for the co-trustees to "decant" the trust by distributing trust property into a new trust with modified terms, subject to statutory requirements and tax analysis.
For each mechanism, we will address the scope of the power, its intended purposes, the limitations imposed to protect tax-exempt status, and practical considerations for exercise.
The current beneficiaries of the Dynasty Trust are as follows:
Primary Beneficiaries (Children of the Grantor):
• Thomas R. Caldwell (age 38), residing at 55 Perry Street, Unit 3, New York, New York 10014, and his issue per stirpes.
• Katherine C. Hartfield (age 35), residing at 210 Briarcliff Lane, Greenwich, Connecticut 06830, and her issue per stirpes.
• Olivia G. Caldwell (age 30), residing at 1240 North Dearborn Street, Apartment 807, Chicago, Illinois 60610, and her issue per stirpes.
Current Grandchildren of the Grantor (Issue of Primary Beneficiaries):
• James W. Hartfield (age 8), son of Katherine C. Hartfield and Dr. Andrew W. Hartfield.
• Charlotte M. Hartfield (age 5), daughter of Katherine C. Hartfield and Dr. Andrew W. Hartfield.
• Lucas T. Caldwell (age 3), son of Thomas R. Caldwell and Dr. Sarah P. Caldwell.
• Nora E. Caldwell (age 1), daughter of Thomas R. Caldwell and Dr. Sarah P. Caldwell.
The trust also includes provisions for future-born issue of each primary beneficiary, ensuring that the class of beneficiaries expands organically as the family grows across generations.
Spouses of the primary beneficiaries — including Dr. Sarah P. Caldwell (spouse of Thomas R. Caldwell) and Dr. Andrew W. Hartfield (spouse of Katherine C. Hartfield) — are eligible to receive distributions from the Dynasty Trust, but only under the ascertainable standard of health, education, maintenance, and support ("HEMS"). Spouses are not treated as primary beneficiaries and do not hold powers of appointment or serve on the Distribution Committee. This distinction is critical to preserving the Dynasty Trust's character as a trust primarily for the benefit of the Grantor's descendants and to avoiding unintended tax consequences that could arise from granting spouses broader interests.
II. Overview of the Dynasty Trust Structure
Before turning to the specific flexibility mechanisms, it is helpful to summarize the key structural features of the Dynasty Trust that provide context for the analysis that follows.
A. Trust Terms and Distribution Standard
The Dynasty Trust employs a tiered distribution structure designed to balance the beneficiaries' access to trust resources with the long-term preservation of trust assets for future generations.
Distribution Committee. The trust agreement establishes a Distribution Committee consisting of the three primary beneficiaries: Thomas R. Caldwell, Katherine C. Hartfield, and Olivia G. Caldwell. The Distribution Committee serves a governance function with respect to discretionary distributions that exceed specified thresholds, as described below. The Distribution Committee's role is distinct from the co-trustees' role, and the Distribution Committee does not serve as trustee or exercise trustee powers. The Distribution Committee is designed to ensure that the Grantor's children — who have the closest knowledge of family circumstances and needs — participate in significant distribution decisions, while the co-trustees retain ultimate fiduciary responsibility for trust administration.
Standard Distributions. The co-trustees are authorized to make distributions of income and principal to or for the benefit of any primary beneficiary (Thomas, Katherine, or Olivia) and their respective issue for purposes of health, education, maintenance, and support — the well-established HEMS standard drawn from IRC § 2041(b)(1)(A). Distributions under the HEMS standard may be made by the co-trustees in their discretion, without the need for Distribution Committee approval, provided that the amount distributed to any single beneficiary in any calendar year does not exceed One Hundred Thousand Dollars ($100,000). This threshold provides a meaningful safety net for routine needs while ensuring that larger distributions receive additional scrutiny.
Discretionary Distributions Exceeding $100,000. Any distribution of income or principal to a single beneficiary that would cause the aggregate distributions to that beneficiary in a given calendar year to exceed $100,000 requires the unanimous approval of the Distribution Committee. This requirement ensures that significant distributions are made with the collective judgment of the primary beneficiaries and prevents any single co-trustee from making outsized distributions without family consensus.
Spousal Distributions. Spouses of primary beneficiaries — currently Dr. Sarah P. Caldwell and Dr. Andrew W. Hartfield — are eligible for distributions solely under the HEMS standard. Spousal distributions do not require Distribution Committee approval unless they exceed the $100,000 annual threshold. Importantly, spouses are not treated as primary beneficiaries for purposes of the trust's governing provisions: they do not hold powers of appointment, they do not serve on the Distribution Committee, and their interests are subordinate to the interests of the Grantor's descendants. This structure protects the trust from claims by former spouses in the event of a divorce and ensures that trust assets remain within the bloodline.
Per Stirpes Descent. If a primary beneficiary predeceases leaving issue surviving, that beneficiary's allocable share of the Dynasty Trust passes to such issue per stirpes, meaning that the share is divided equally among the branches of the deceased beneficiary's descendants. This ensures continuity of beneficial interests across generations and avoids the concentration of trust benefits in a single surviving child's line to the exclusion of the deceased child's descendants.
B. Perpetual Duration
The selection of Delaware as the situs of the Dynasty Trust was a deliberate and strategic decision, driven in large part by Delaware's abolition of the rule against perpetuities for interests in trust. Under 25 Del. C. § 503(a), a trust created under Delaware law may have an indefinite duration — the trust has no termination date imposed by a rule against perpetuities and may endure, in theory, for centuries or even in perpetuity.
The perpetual nature of the Dynasty Trust is a central feature of the estate plan. A perpetual trust maximizes the benefit of the GST exemption allocation: once the Grantor's GST exemption is allocated to the trust, that exemption shelters the trust assets — and all appreciation on those assets — from GST tax for as long as the trust continues. In a perpetual trust, this means that the GST exemption effectively protects an unlimited amount of growth and accumulation, compounding tax-free across multiple generations.
However, the perpetual nature of the trust also necessitates robust flexibility provisions. A trust that will endure for many generations must be able to adapt to circumstances that the Grantor cannot foresee, including:
• Changes in family composition — marriages, divorces, births, deaths, adoptions, estrangements, and reconciliations across many generations.
• Changes in federal and state tax law — including potential changes to estate, gift, GST, and income tax rates, exemption amounts, and statutory frameworks.
• Changes in state trust law — including possible amendments to Delaware's trust code, the adoption of new fiduciary standards, or changes to Delaware's favorable trust statutes.
• Changes in the economic and investment environment — including the emergence of new asset classes, changes in market conditions, and shifts in investment philosophy.
• Changes in fiduciary practices and institutional trustee capabilities — including the possibility that the institutional co-trustee may cease to exist, merge with another institution, or become unable or unwilling to serve.
Without adequate flexibility mechanisms, a perpetual trust risks becoming an inflexible and potentially dysfunctional instrument that cannot serve the Grantor's intent of benefiting future generations in a manner responsive to their actual needs and circumstances.
C. GST Exemption Allocation
The preservation of the Dynasty Trust's GST-exempt status is a paramount concern that pervades every aspect of the trust's design, including the flexibility mechanisms discussed in this memorandum.
Initial Allocation. You, as Grantor, allocated $5,000,000 of your available GST exemption to the initial $5,000,000 cash funding of the Dynasty Trust. Because the GST exemption allocated equals the value of the property transferred to the trust, the trust's inclusion ratio is zero and its applicable fraction is one. A trust with an inclusion ratio of zero is fully exempt from GST tax — no generation-skipping transfer tax will be imposed on any distribution from the trust to a skip person (e.g., a grandchild or more remote descendant) or on any taxable termination of a trust interest, regardless of the value of the trust assets at the time of the distribution or termination.
GRAT Remainder Interests and the ETIP Rules. Additional GST exemption will be allocated to the Dynasty Trust as the remainder interests from GRAT A, GRAT B, and GRAT C pour into the trust upon termination of their respective annuity terms. It is important to note, however, that during the GRAT annuity terms, the estate tax inclusion period ("ETIP") rules under IRC § 2642(f) prevent the allocation of GST exemption to the GRAT remainder interests. The ETIP rules provide that, for purposes of determining the inclusion ratio of any trust, the value of a transfer that is subject to an ETIP shall not be determined until the close of the ETIP. In practical terms, this means that you may not allocate GST exemption to the GRAT remainder interests until the annuity term of each GRAT concludes and the remainder interest is no longer includible in your gross estate under IRC § 2036. At that time, you (or your executor, if the GRAT term extends beyond your life expectancy) will need to make timely GST exemption allocations to preserve the zero inclusion ratio of the Dynasty Trust.
2023 GST Exemption Amount. The 2023 GST exemption amount is $12,920,000 per individual. Your prior GST exemption allocations and the coordination of future allocations are tracked in the GST Exemption Allocation Memorandum prepared by Sylvia Hartwell, which should be reviewed in conjunction with this memorandum. Coordination of GST exemption allocations across the Dynasty Trust and the GRAT remainder interests is essential to ensure that the trust maintains its fully exempt status as additional assets are received.
Critical Importance of Preserving Zero Inclusion Ratio. Every flexibility mechanism discussed in this memorandum — powers of appointment, trust protector provisions, and decanting — has been designed with the overarching objective of preserving the Dynasty Trust's zero inclusion ratio. Any modification of trust terms, exercise of a power, or structural change that would cause the trust to lose its GST-exempt status could expose the trust to catastrophic tax consequences, potentially subjecting distributions and terminations to a flat 40% GST tax on top of any applicable estate or gift tax. Accordingly, each flexibility mechanism includes limitations, safeguards, and procedural requirements designed to prevent the inadvertent loss of GST-exempt status.
III. Limited Powers of Appointment
A. Nature and Scope of the Powers Granted
Each primary beneficiary of the Dynasty Trust — Thomas R. Caldwell, Katherine C. Hartfield, and Olivia G. Caldwell — holds a testamentary limited power of appointment over his or her allocable share of the Dynasty Trust. This section describes the nature, scope, and legal implications of these powers in detail.
Testamentary Exercise. The power of appointment granted to each primary beneficiary is a testamentary power, meaning that it may be exercised only at the powerholder's death, through a provision in the powerholder's last will and testament. The power may not be exercised during the powerholder's lifetime (the rationale for excluding inter vivos powers is discussed in Section III.D below). To be effective, the exercise of the power must make specific reference to the power of appointment granted under the Dynasty Trust — a general bequest or residuary clause in the powerholder's will that does not specifically reference the power will not constitute an effective exercise. This specific-reference requirement is a deliberate safeguard to prevent inadvertent or unintended exercises of the power.
Allocable Share. Each primary beneficiary's power of appointment extends to his or her "allocable share" of the Dynasty Trust. The allocable share is determined in accordance with the trust agreement's allocation provisions, which generally divide the trust into equal shares for each of the Grantor's children (or their respective issue per stirpes if a child has predeceased). The powerholder may appoint all or any portion of his or her allocable share, and any portion not effectively appointed will continue to be held and administered under the default terms of the Dynasty Trust for the benefit of the powerholder's issue per stirpes.
Permissible Appointees. The class of permissible appointees — i.e., the persons or entities to whom the powerholder may appoint trust property — is limited to the following:
(a) The powerholder's descendants (i.e., the Grantor's grandchildren and more remote descendants through the powerholder's line);
(b) The other primary beneficiaries (i.e., the powerholder's siblings) and their respective descendants;
(c) Charitable organizations described in IRC § 501(c)(3) (which includes The Caldwell Family Foundation and other qualifying public charities and private foundations); and
(d) Trusts for the benefit of any of the foregoing permissible appointees.
Excluded Appointees. The powerholder may not appoint to any of the following:
(a) The powerholder himself or herself;
(b) The powerholder's estate;
(c) The creditors of the powerholder; or
(d) The creditors of the powerholder's estate.
The exclusion of the powerholder, the powerholder's estate, and creditors of either is the defining characteristic of a "limited" (or "special") power of appointment, as distinguished from a "general" power of appointment. Under IRC § 2041(b)(1), a power of appointment is a "general" power only if it is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. Because the powers granted under the Dynasty Trust expressly exclude each of these categories, the powers are "limited" powers of appointment within the meaning of IRC § 2041 and § 2514.
Tax Consequences of Limited Power Classification. The classification of these powers as limited (non-general) powers of appointment has critical tax consequences:
• Estate Tax: The exercise, release, or lapse of a limited power of appointment does not cause the property subject to the power to be included in the powerholder's gross estate for federal estate tax purposes under IRC § 2041. This means that when Thomas, Katherine, or Olivia dies and exercises (or fails to exercise) the power, the trust assets subject to the power will not be treated as part of the powerholder's taxable estate.
• Gift Tax: The exercise of a limited power of appointment does not constitute a taxable gift by the powerholder under IRC § 2514. The powerholder is not treated as making a transfer of property for gift tax purposes when he or she directs the appointment of trust assets to permissible appointees.
• GST Tax: The exercise of a limited power of appointment over a GST-exempt trust generally does not cause the trust to lose its exempt status, subject to the limitations discussed in Section III.C below.
These tax consequences are fundamental to the Dynasty Trust's design: the limited powers of appointment allow each generation of beneficiaries to exercise meaningful control over the disposition of trust assets without triggering adverse transfer tax consequences.
B. Purposes Served by Limited Powers of Appointment
The limited powers of appointment serve several important purposes within the overall architecture of the Dynasty Trust:
Adapting to Changing Family Dynamics. Over the course of a perpetual trust, family circumstances will inevitably change in ways that the Grantor cannot predict at the time of trust creation. Children may be born, adopted, or estranged from the family. Marriages may dissolve. Beneficiaries may develop special needs, face financial difficulties, or achieve extraordinary financial success that renders trust distributions unnecessary. A beneficiary who holds a limited power of appointment can take these changes into account at the time of his or her death, redirecting trust assets to the family members or branches that most need or deserve them. For example, if Thomas's line prospers independently while Katherine's line faces financial hardship, Katherine could exercise her power of appointment to concentrate her share on her own descendants, ensuring that her branch receives a greater proportion of trust resources. Conversely, if one of Olivia's children becomes estranged from the family, Olivia could exercise her power to redirect her share away from that child and toward her other descendants or toward the other primary beneficiaries' lines.
Integrating Philanthropy. The inclusion of IRC § 501(c)(3) charitable organizations among the permissible appointees allows each beneficiary to integrate philanthropic giving into the disposition of trust assets at death. This is consistent with the Grantor's expressed commitment to charitable giving, as reflected in the mission of The Caldwell Family Foundation, which focuses on arts, education, and environmental conservation. A beneficiary who wishes to make a substantial charitable contribution at death could exercise the power of appointment to direct a portion of his or her allocable share to one or more qualifying charities, including The Caldwell Family Foundation or other organizations aligned with the family's philanthropic values. This charitable appointment would not generate a charitable deduction for the powerholder's estate (because the property is not includible in the powerholder's estate), but it would effectively remove the appointed assets from the pool available for family distributions and redirect them to charitable purposes.
Creating Sub-Trusts. The power of appointment may be exercised to appoint trust property into one or more separate sub-trusts for the benefit of individual descendants or family branches. For example, Thomas could exercise his power to create separate sub-trusts for each of his children — one sub-trust for Lucas and one for Nora — with terms tailored to each child's particular needs and circumstances. The appointed sub-trusts may include their own trustee designations, distribution standards, and limited powers of appointment for the next generation, effectively extending the flexibility of the Dynasty Trust framework into the appointed trusts.
Avoiding Court Intervention. The exercise of a limited power of appointment is a private, non-judicial mechanism for modifying the disposition of trust assets. Unlike a formal trust modification proceeding, which may require petitioning a court and obtaining the consent of all interested parties, the exercise of a limited power of appointment requires only that the powerholder include appropriate provisions in his or her last will and testament. This simplicity and privacy are significant advantages, particularly for a high-net-worth family that values discretion.
C. Limitations to Protect GST-Exempt Status
While limited powers of appointment provide valuable flexibility, their exercise must be carefully circumscribed to prevent the loss of the Dynasty Trust's GST-exempt status. The trust agreement incorporates several limitations designed to address the specific GST risks associated with the exercise of a limited power of appointment.
Savings Clause — Vesting Period Limitation. Under Treasury Regulation § 26.2601-1(b)(1)(v)(A) and related guidance, the exercise of a limited power of appointment over a GST-exempt trust will generally not cause the trust to lose its exempt status, provided that the exercise does not extend the trust's vesting period beyond the period prescribed under the applicable state rule against perpetuities in effect at the time the trust became irrevocable. Because Delaware has abolished its rule against perpetuities, the Dynasty Trust has no inherent vesting limitation. However, to address potential GST concerns — particularly the concern that an exercise of a limited power of appointment could create a new trust with an indefinite or extended vesting period that the IRS might characterize as a new trust for GST purposes — the trust agreement incorporates a savings clause. This savings clause provides that any exercise of a limited power of appointment must result in appointed interests that vest or terminate within the maximum period permitted under the law of the jurisdiction governing the appointed trust at the time of the appointment. If the appointed trust is governed by Delaware law (which has no rule against perpetuities), the savings clause effectively imposes no additional limitation. However, if the appointed trust is governed by the law of a jurisdiction that does have a rule against perpetuities, the appointed interests must comply with that jurisdiction's rule. This savings clause serves as a backstop to prevent any argument that the exercise of the power creates a "new" trust for GST purposes.
Prohibition on Shifting Beneficial Interests to Lower Generations. The trust agreement provides that the exercise of a limited power of appointment may not be structured in a manner that would shift beneficial interests to a beneficiary who occupies a generation assignment lower than the persons who held the interest before the exercise, in a way that would trigger the "shift" rules under the GST regulations. Under Treasury Regulation § 26.2601-1(b)(4)(i)(D), a modification of a trust that shifts a beneficial interest in the trust to a beneficiary who occupies a lower generation than the persons holding the interest before the modification may be treated as a new transfer for GST purposes. Accordingly, the trust agreement requires that any exercise of a limited power of appointment distribute trust property among the permissible appointees in a manner consistent with the existing generation assignments of the trust's beneficiaries, and does not create a new GST-taxable transfer by disproportionately favoring skip persons over non-skip persons.
Continuation of GST-Exempt Status in Appointed Trusts. The trust agreement includes a provision specifying that any trust created through the exercise of a limited power of appointment shall be treated as a continuation of the original Dynasty Trust for GST purposes, not as a new trust. This provision is designed to ensure that the GST exemption allocated to the Dynasty Trust carries over to any appointed sub-trust, maintaining the zero inclusion ratio. The appointed trust will be treated as having the same inclusion ratio as the portion of the Dynasty Trust from which it was funded, and no additional GST exemption allocation will be necessary for the appointed trust if it is properly structured as a continuation of the original trust.
Prohibition on Appointee Changes That Would Alter GST Status. Each power of appointment includes a specific prohibition against appointment to a "skip person" in a manner that would change the trust's GST status — for example, by creating a new trust that would not qualify for the GST exemption allocation carried from the original trust, or by concentrating trust benefits exclusively in skip persons in a way that constitutes a constructive new transfer to those skip persons.
D. Inter Vivos Limited Powers — Excluded by Design
The trust agreement does not grant inter vivos (lifetime) limited powers of appointment to the primary beneficiaries. This exclusion is a deliberate design choice, motivated by several considerations.
Avoidance of the Delaware Tax Trap. Under certain circumstances, the exercise of an inter vivos limited power of appointment could inadvertently trigger the so-called "Delaware tax trap." The Delaware tax trap arises under IRC § 2041(a)(3), which provides that the exercise of a power of appointment is treated as a general power of appointment if the exercise creates a new presently exercisable general power of appointment by operation of state law. In Delaware and certain other states, the exercise of a limited power of appointment to create a new trust could, under certain readings of state perpetuities law, be construed as creating a new power that is "general" in nature — particularly if the exercise restarts the perpetuities period and grants the appointee a power that is exercisable in favor of the appointee or the appointee's creditors. While the Delaware tax trap is typically invoked intentionally as an estate planning strategy (to cause inclusion in a beneficiary's estate for the purpose of obtaining a stepped-up basis under IRC § 1014), inadvertent triggering of the trap through an inter vivos exercise would be harmful to the Dynasty Trust's tax posture.
Prevention of Premature Dissipation. The exclusion of inter vivos powers of appointment also serves the practical purpose of preventing premature dissipation of trust assets. A lifetime power of appointment could be exercised impulsively or under the influence of external pressures (e.g., a demanding spouse, a creditor, or a business partner), resulting in the redirection of trust assets in a manner inconsistent with the Grantor's intent of preserving wealth for future generations.
Future Availability Through Other Mechanisms. If a need for inter vivos appointment authority arises in the future — for example, to facilitate a family restructuring or to address a particular tax planning opportunity — the Trust Protector or the decanting mechanism (discussed in Sections IV and V below) may be employed to grant such authority on a targeted and carefully structured basis, with appropriate tax analysis and safeguards in place at the time of the grant.
IV. Trust Protector Provisions
A. Designation and Identity
The Dynasty Trust designates Victoria Chambers of Calderwood & Harkness LLP (375 Park Avenue, 42nd Floor, New York, New York 10152) as the initial Trust Protector. Ms. Chambers serves as the Responsible Partner on the Caldwell engagement and has been intimately involved in the design and documentation of the Dynasty Trust and the overall Caldwell estate plan. Her designation as Trust Protector reflects the Grantor's confidence in her judgment, her deep familiarity with the trust's structure and objectives, and her professional qualifications to exercise the Trust Protector's powers thoughtfully and prudently.
The Trust Protector serves in a non-fiduciary capacity. This is a deliberate and significant choice under the trust agreement, the implications of which are discussed in greater detail in Section IV.D below. In brief, the non-fiduciary designation means that the Trust Protector is not held to the fiduciary duties of care and loyalty that are imposed on trustees under Delaware law. This provides the Trust Protector with greater flexibility and broader discretion in the exercise (or non-exercise) of her powers, and insulates the Trust Protector from liability for decisions made in the course of her service.
B. Powers of the Trust Protector
The trust agreement grants the Trust Protector a carefully defined set of powers, each of which is designed to address a specific category of potential need over the trust's perpetual life. The Trust Protector's powers are intentionally administrative and structural in nature — the Trust Protector does not have the power to make distributions, does not serve as a trustee, and does not hold any beneficial interest in the trust.
Modify Administrative Provisions
The Trust Protector may amend the administrative, procedural, and ministerial provisions of the trust agreement. This power encompasses a broad range of administrative matters, including but not limited to:
• Trustee compensation arrangements, including the fees payable to the institutional co-trustee and any compensation payable to the family co-trustee or successor family co-trustees;
• Accounting frequency and reporting requirements, including the timing and content of annual trust accountings, beneficiary statements, and investment performance reports;
• Investment guidelines and standards, including amendments to the investment policy statement, changes to permitted asset classes, adjustments to risk parameters, and modifications to the allocation framework;
• Trust administration mechanics, including procedures for beneficiary requests, documentation requirements for distributions, and protocols for trustee communication and decision-making;
• Powers granted to the co-trustees with respect to trust administration, including powers to hold, manage, lease, sell, exchange, invest, and reinvest trust property, and powers related to tax elections and filings;
• Administrative provisions relating to the Distribution Committee, including procedures for convening the Committee, voting requirements, and communication protocols.
Importantly, the Trust Protector's power to modify administrative provisions does not extend to modifications that would alter the beneficial interests in the trust. The Trust Protector may not change who the beneficiaries are, modify the distribution standard in a manner that expands or restricts beneficial rights, or redirect the flow of trust benefits from one family branch to another. This limitation preserves the distinction between administrative modifications (which are within the Trust Protector's authority) and substantive modifications (which require other mechanisms such as decanting or the exercise of a power of appointment).
Change Situs and Governing Law
The Trust Protector has the power to change the situs of the Dynasty Trust from Delaware to another state (or from another state back to Delaware) and to change the governing law of the trust accordingly. This power is one of the most critical flexibility mechanisms in the trust agreement, and its importance will likely grow over the trust's perpetual life.
The selection of trust situs and governing law has significant implications for range legal and tax issues, including:
• State income taxation: Some states impose income tax on trusts based on the situs of the trust, the residence of the trustee, or the residence of the beneficiaries. Delaware currently does not impose state income tax on trust income that is accumulated and not distributed to Delaware-resident beneficiaries. However, if Delaware were to change its tax treatment in the future, the Trust Protector could move the trust to another state with more favorable income tax treatment — such as Nevada, South Dakota, or Wyoming, each of which currently has no state income tax. The Dynasty Trust Situs Analysis memorandum (prepared separately) provides a detailed comparison of these jurisdictions.
• Trust law and fiduciary standards: State trust law varies significantly across jurisdictions, and the law of any given state may evolve over time. If Delaware were to adopt trust law changes that are unfavorable to the trust or its beneficiaries — for example, by modifying its perpetual trust statute, restricting the scope of trust protector powers, or imposing new fiduciary obligations — the Trust Protector could move the trust to a jurisdiction with more favorable trust law.
• Asset protection: Different states offer different levels of asset protection for trust beneficiaries. The Trust Protector's ability to change situs allows the trust to take advantage of the most protective statutes available at any given time.
• Decanting law: As discussed in Section V, the scope and procedures of decanting vary by state. If the trust needs to be decanted and the laws of the current situs are restrictive, the Trust Protector could change situs to a jurisdiction with more permissive decanting provisions before the decanting is undertaken.
Remove and Appoint Trustees
The Trust Protector has the power to remove any trustee — including the institutional co-trustee (currently Northgate Trust Company of Delaware) and the family co-trustee (currently Thomas R. Caldwell) or any successor to either — and to appoint successor trustees in their place. This power ensures trustee continuity and accountability over the trust's perpetual life.
Circumstances in which this power might be exercised include:
• An institutional co-trustee that is acquired by another financial institution, resulting in changes to the quality of trust administration services, investment management capabilities, or client service;
• A family co-trustee who becomes incapacitated, develops a conflict of interest, or is otherwise unable or unwilling to continue serving;
• A trustee that is subject to regulatory action, litigation, or reputational issues that could adversely affect the trust;
• A need to appoint a trustee in a different jurisdiction in connection with a change of situs;
• A request from beneficiaries to replace a trustee whose investment philosophy, communication style, or administrative practices are not aligned with the beneficiaries' expectations.
The power to remove and replace trustees without judicial intervention is a significant advantage, as court proceedings for trustee removal can be time-consuming, expensive, and contentious. The Trust Protector's ability to act unilaterally (subject to the limitations described below) provides a streamlined mechanism for trustee succession.
Limitations on Trust Protector Powers
The trust agreement imposes the following express limitations on the Trust Protector's powers:
(a) No Addition or Removal of Beneficiaries. The Trust Protector may not add new beneficiaries to the trust or remove existing beneficiaries, except as an incidental consequence of a change in situs that might affect the designation of minor beneficiaries' representatives under the laws of the new jurisdiction. This limitation prevents the Trust Protector from fundamentally altering the class of persons entitled to benefit from the trust.
(b) No Modification of Beneficial Distribution Standard to Create General Power. The Trust Protector may not modify the distribution standard in a manner that would grant any beneficiary a general power of appointment over trust assets. Granting a general power of appointment would cause the trust assets subject to the power to be includible in the beneficiary's gross estate under IRC § 2041, defeating one of the primary estate tax benefits of the Dynasty Trust structure.
(c) No Self-Dealing. The Trust Protector may not make distributions to or for the benefit of the Trust Protector herself. This prohibition prevents any conflict of interest and ensures that the Trust Protector's exercise of powers is not motivated by personal financial benefit.
(d) No Action Causing Estate Tax Inclusion. The Trust Protector may not exercise any power in a manner that would cause the trust to be included in the Grantor's gross estate or any beneficiary's gross estate for federal estate tax purposes. This catch-all limitation is designed to prevent any exercise of Trust Protector powers that could inadvertently create a taxable event for the Grantor or a beneficiary.
C. Succession of Trust Protector
Given the perpetual duration of the Dynasty Trust, the trust agreement must provide a mechanism for the orderly succession of the Trust Protector role. No individual can serve as Trust Protector for the entire duration of a perpetual trust, and the absence of a Trust Protector could leave the trust without a critical governance mechanism at a time when it is most needed.
Designation by Incumbent. The trust agreement provides that the serving Trust Protector may designate a successor Trust Protector by written instrument delivered to the co-trustees. This designation may be made at any time during the Trust Protector's service, and the Trust Protector may amend or revoke the designation at any time by delivering a new written instrument to the co-trustees. The successor Trust Protector's appointment becomes effective upon the resignation, death, incapacity, or removal of the incumbent Trust Protector.
Court Appointment. If no successor Trust Protector has been designated and the incumbent Trust Protector is unable or unwilling to serve — whether due to death, incapacity, resignation, or any other reason — the trust agreement authorizes the institutional co-trustee (currently Northgate Trust Company of Delaware) to petition a court of competent jurisdiction in the State of Delaware for the appointment of a successor Trust Protector. The court, in making its appointment, should consider candidates who are independent of the beneficiaries, experienced in trust administration and tax law, and capable of exercising the Trust Protector's powers thoughtfully and in the best interests of the trust and its beneficiaries.
Recommendation. We strongly recommend that Victoria Chambers execute a successor Trust Protector designation at the earliest practicable date, identifying one or more successor Trust Protectors who can assume the role promptly if needed. Potential successors should be independent parties — not beneficiaries, not related or subordinate parties within the meaning of IRC § 672(c), and not persons who could be viewed as having a beneficial interest in the exercise or non-exercise of Trust Protector powers. Appropriate candidates include partners of Calderwood & Harkness LLP who are not otherwise involved in the Caldwell family's personal or business affairs, independent trust professionals, or specialized trust protector firms. The designation document should be prepared and executed promptly, and a copy should be delivered to Northgate Trust Company of Delaware for its records.
D. Non-Fiduciary Capacity — Legal Analysis
The designation of the Trust Protector in a non-fiduciary capacity is a significant feature of the Dynasty Trust, and its legal implications merit detailed analysis.
Statutory Authority. Delaware trust law expressly authorizes the creation of trust protector and trust advisor roles and permits the trust instrument to specify whether these roles are fiduciary or non-fiduciary. Specifically, 12 Del. C. § 3313 provides that a governing instrument may grant powers, including powers to direct, consent to, or disapprove distributions, to persons who are not trustees, and may specify whether such persons serve in a fiduciary or non-fiduciary capacity. If the governing instrument specifies that the person serves in a non-fiduciary capacity, then the person is not subject to the fiduciary duties and standards of care that would otherwise apply to trustees or fiduciaries under Delaware law.
Practical Implications. The non-fiduciary designation has several practical implications for the Trust Protector's role:
• Reduced Liability Exposure. The Trust Protector is not subject to the fiduciary duties of care, loyalty, and impartiality that apply to trustees. This means that the Trust Protector is not required to exercise her powers for the equal benefit of all beneficiaries, is not required to act with the prudence and diligence of a reasonable fiduciary, and is not liable for losses resulting from the exercise or non-exercise of her powers (absent bad faith, willful misconduct, or gross negligence, to the extent such limitations are enforceable under applicable law).
• Greater Flexibility. Because the Trust Protector is not bound by fiduciary duties, she has broader discretion in determining whether and how to exercise her powers. For example, the Trust Protector could exercise the power to change situs based on a single factor (such as state income tax avoidance) without being required to balance that factor against other considerations in the manner that a fiduciary might be required to do.
• Insulation from Beneficiary Claims. The non-fiduciary designation reduces the risk that beneficiaries will bring claims against the Trust Protector for breach of fiduciary duty in connection with the exercise or non-exercise of Trust Protector powers.
Tax Implications. The non-fiduciary designation also has important tax implications. Because the Trust Protector is not a fiduciary and cannot benefit herself from the exercise of her powers, the Trust Protector's powers should not be treated as a general power of appointment under IRC § 2041. A general power of appointment exists only if the powerholder can exercise the power in favor of himself, his estate, his creditors, or the creditors of his estate. The Trust Protector cannot make distributions to herself, cannot appoint trust property to herself, and has no beneficial interest in the trust. Moreover, the Trust Protector is not a beneficiary and is not a related or subordinate party with respect to the Grantor or any beneficiary (within the meaning of IRC § 672(c)). These facts strongly support the conclusion that the Trust Protector's powers do not constitute a general power of appointment and do not cause estate or gift tax inclusion for the Trust Protector or any other person.
E. GST Implications of Trust Protector Powers
The exercise of Trust Protector powers must be analyzed for potential GST implications to ensure that the Dynasty Trust's zero inclusion ratio is not jeopardized.
Administrative Modifications. The exercise of the Trust Protector's power to modify administrative provisions should not affect the trust's GST-exempt status. Administrative modifications — such as changes to trustee compensation, accounting frequency, or investment guidelines — do not alter the beneficial enjoyment of trust property and do not shift beneficial interests to a lower generation. Under Treasury Regulation § 26.2601-1(b)(4)(i), a modification that does not shift beneficial interests to a beneficiary in a lower generation and does not extend the time for vesting of any beneficial interest is not treated as a new transfer for GST purposes. Administrative modifications clearly satisfy both prongs of this test.
Change of Situs. A change of trust situs from one state to another does not, in and of itself, create a new trust for GST purposes. Under Treasury Regulation § 26.2601-1(b)(4)(i), a change of situs is treated as a modification of the trust's terms, and the analysis focuses on whether the change shifts beneficial interests or extends vesting periods. A pure change of situs — without any accompanying change to beneficial interests — should satisfy the regulatory requirements and preserve the trust's GST-exempt status. However, if the change of situs is accompanied by substantive changes to the trust's terms (e.g., changes to the beneficiary class or distribution standard), the combined effect of the modifications must be analyzed to determine whether the "shift" or "extension" tests have been triggered.
Trustee Changes. The removal and appointment of trustees is an administrative action that does not constitute a transfer of property for GST purposes. Changing the identity of the trustee does not alter the beneficial interests in the trust, does not shift enjoyment to a lower generation, and does not extend the trust's vesting period. Accordingly, the exercise of the Trust Protector's power to remove and appoint trustees should not affect the trust's GST-exempt status.
Substantive Modifications — A Cautionary Note. The current trust agreement does not grant the Trust Protector the power to modify substantive beneficial provisions. However, if such authority were to be conferred in the future — whether through an amendment facilitated by decanting, by a change in the Trust Protector's powers pursuant to a beneficiary's exercise of a limited power of appointment, or by other means — the exercise of such expanded powers would need to be carefully analyzed under the GST regulations. Any modification that shifts beneficial interests to a lower generation or extends the trust's vesting period could result in the loss of GST-exempt status for the trust or a portion thereof. We would strongly recommend obtaining a written tax opinion before any such exercise.
V. Delaware Decanting Statute
A. Overview of Delaware's Decanting Law
The third and most powerful flexibility mechanism available to the Dynasty Trust is the ability to "decant" — i.e., to distribute trust property from the existing Dynasty Trust (referred to as the "invaded trust" in statutory parlance) to a new trust (the "appointed trust") with modified terms. This mechanism is authorized by Delaware's decanting statute, 12 Del. C. § 3528, and provides the co-trustees with the ability to effect comprehensive modifications to the trust's structure, terms, and provisions, subject to statutory requirements and tax limitations.
The concept of trust decanting is analogous to decanting wine: just as wine is poured from one vessel into another to separate it from sediment, trust assets are "poured" from one trust into another to separate them from outdated, inflexible, or otherwise undesirable trust provisions. The appointed trust receives the same assets that were held in the invaded trust, but the appointed trust may have different terms, different trustees, different distribution standards, different administrative provisions, and — depending on the scope of the trustee's discretion — different beneficiaries.
Delaware's decanting statute, enacted in 2003 and subsequently amended, is among the most permissive in the United States. The breadth and flexibility of Delaware's decanting law was a significant factor in selecting Delaware as the situs of the Dynasty Trust, as detailed in the Dynasty Trust Situs Analysis memorandum comparing the trust laws of Delaware, Nevada, and South Dakota. Key features of the Delaware decanting statute include:
• No requirement for court approval (the trustee may decant unilaterally, subject to notice requirements);
• No requirement for beneficiary consent (although beneficiaries must receive notice and may object);
• Broad scope of permissible modifications, extending to both administrative and beneficial terms (subject to the scope of the trustee's discretionary authority);
• Compatibility with the perpetual trust framework, as the appointed trust may also be governed by Delaware law and may have an indefinite duration.
B. Who May Decant
Under the Dynasty Trust, the power to decant is held by the co-trustees — the institutional co-trustee (Northgate Trust Company of Delaware) and the family co-trustee (Thomas R. Caldwell, or his successor) — who jointly hold discretionary distribution authority over trust principal. The statutory requirement for decanting under 12 Del. C. § 3528 is that the trustee exercising the decanting power must have the authority to make distributions of principal to one or more beneficiaries. Because the co-trustees of the Dynasty Trust hold such authority, they satisfy the statutory predicate for exercising the decanting power.
The decanting power must be exercised jointly by both co-trustees, consistent with the trust agreement's requirement that the co-trustees act jointly in the exercise of their discretionary powers. A unilateral decanting by one co-trustee without the concurrence of the other would not be effective under the trust agreement.
In addition, the Trust Protector's powers may be exercised in conjunction with a trustee-initiated decanting. For example, if the co-trustees determine that a decanting to a new trust governed by the laws of a different state would be beneficial, the Trust Protector could first exercise her power to change the situs and governing law of the Dynasty Trust to the new state, facilitating a decanting under the laws of that jurisdiction. Alternatively, the Trust Protector could modify administrative provisions of the trust agreement in advance of a decanting to ensure that the terms of the invaded trust are compatible with the proposed terms of the appointed trust.
It should also be noted that the Distribution Committee's approval may be required for certain decanting transactions. If the decanting constitutes a distribution of principal that would cause the aggregate distributions to any single beneficiary in a calendar year to exceed $100,000 — which is likely in the case of a decanting that transfers a beneficiary's allocable share to a new sub-trust — the unanimous approval of the Distribution Committee should be obtained. While there is some ambiguity in the trust agreement as to whether a decanting constitutes a "distribution" for purposes of the Distribution Committee approval requirement, the conservative approach is to obtain Distribution Committee approval for any decanting that could be characterized as such.
C. Permissible Scope of Decanting
The scope of modifications that may be effected through decanting depends on the nature and extent of the trustee's discretionary authority over the invaded trust. Delaware law draws a distinction between trustees with "unlimited" discretion and trustees whose discretion is limited by an ascertainable standard.
Modifying Administrative Terms
Decanting may be used to modify the administrative, procedural, and ministerial terms of the trust without limitation, regardless of whether the trustee's discretion is "unlimited" or subject to an ascertainable standard. Administrative modifications that may be effected through decanting include:
• Updating trustee succession provisions to reflect changes in the institutional trustee landscape or the availability of qualified family co-trustees;
• Changing investment standards to reflect evolving investment theory, new asset classes, or modified risk tolerances;
• Modifying accounting and reporting requirements to conform to current best practices or regulatory requirements;
• Adding, modifying, or removing trust protector powers, including expanding the Trust Protector's authority to address new categories of issues or reducing the Trust Protector's authority if certain powers are no longer needed;
• Altering trust administration mechanics, including procedures for beneficiary requests, distribution documentation, and trustee communication.
Modifying Beneficial Interests (with Limitations)
The extent to which decanting may be used to modify the beneficial interests in the Dynasty Trust — including the class of beneficiaries, the distribution standard, and the allocation of trust benefits among beneficiaries — depends on the characterization of the co-trustees' discretionary authority under Delaware law.
Under 12 Del. C. § 3528, if the trustee has "unlimited" discretion — that is, discretion that is not limited by an ascertainable standard such as HEMS — the trustee may decant to a new trust that modifies beneficial interests, including the addition of new beneficiaries or the elimination of existing ones. If, however, the trustee's discretion is limited by an ascertainable standard, the trustee may only decant to a new trust whose beneficial interests are no broader than those in the invaded trust.
The Dynasty Trust presents a hybrid situation that requires careful analysis:
• HEMS Component. The co-trustees' authority to make routine distributions (up to $100,000 per beneficiary per year without Distribution Committee approval) is subject to the HEMS standard — an ascertainable standard within the meaning of IRC § 2041(b)(1)(A). With respect to this component of their authority, the co-trustees' discretion is limited, and the scope of permissible decanting regarding beneficial interests is correspondingly restricted. Under Delaware law, the co-trustees could not use the HEMS authority as the basis for a decanting that would grant the beneficiaries of the appointed trust interests broader than the HEMS standard that governs the invaded trust.
• Broader Discretionary Authority. In addition to the HEMS standard, the co-trustees have the authority to make discretionary distributions exceeding $100,000 per beneficiary per year, subject to unanimous Distribution Committee approval. This broader discretionary authority is not expressly limited by an ascertainable standard — rather, it is limited by the procedural requirement of Distribution Committee approval. The characterization of this authority as "unlimited" or "limited" for purposes of the decanting statute is subject to some interpretive uncertainty. If the broader discretionary authority is characterized as "unlimited" discretion (notwithstanding the procedural approval requirement), it may support a broader scope of permissible decanting regarding beneficial interests. If, on the other hand, the Distribution Committee approval requirement is viewed as a substantive limitation on the co-trustees' discretion, the scope of permissible decanting may be more restricted.
Conservative Approach. Given the interpretive uncertainty, we recommend a conservative approach to any decanting that would materially alter the beneficial interests in the Dynasty Trust. Any such decanting should be reviewed by counsel at the time of the proposed transaction to confirm compliance with the Delaware decanting statute, to assess the tax implications (including GST, estate, gift, and income tax consequences), and to ensure that the decanting is consistent with the Grantor's intent and the trust's overall objectives. In many cases, it may be prudent to obtain a court order approving the decanting or to seek a private letter ruling from the IRS confirming the tax treatment of the pro

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

MATTER NO.: 1034-00004

BILLING CODE: 78412-JRC

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