3 Considerations For Building Flexibility Into Trusts
When the Tax Cut and Jobs Act (TCJA or Act) was passed in December 2017, many high net worth individuals and families were ecstatic. The new laws provided for a doubling of the federal estate, gift and GST tax exemption amounts, as well as the continuation of both the spousal portability provision and the step-up in tax basis for property passing at death.
However, many estate planners were skeptical given the Act’s complexities and that many of its provisions expire, or “sunset,” at the end of 2025—assuming Congress doesn’t repeal it before that time. Knowing that these laws are likely to change, many estate planning professionals are reiterating the importance of building maximum flexibility into trust documents so that a trust can adapt to changing times, circumstances and tax laws.
As you review and update your estate planning documents, three key considerations can help ensure that your trust can be adapted as your circumstances and tax legislation evolve.
Recently, there’s been a growing trend towards drafting trusts that are fully discretionary, meaning no beneficiary is entitled to any distributions. Instead, the beneficiaries must wait for the trustee to exercise its distribution powers. Discretionary trusts can be helpful when beneficiaries have the potential to erode trust assets due to, among other reasons, irresponsible behavior or poor money management skills.
When trustees are given discretion, beneficiaries have no property interest in the trust, only “mere expectancy.” The trustee decides if, when and how much to distribute to the trust beneficiaries. It’s also important to note that with a fully discretionary trust, the trustee has no decision-making restrictions. Therefore, when drafting trust documents for a discretionary trust, it can be helpful to build in certain standards by which the trustee must abide.
Flexibility in trusts can also include decanting, which allows for the distribution of assets from an old trust and placing them into a new one that reflects changing family circumstances, more favorable terms or broader investment parameters. In other words, decanting can address an existing irrevocable trust with terms that are incorrect, inappropriate or insufficient to accomplish the grantor’s intentions.
At the moment, decanting is allowed in many states, but not in all 50. If the state doesn’t currently have a decanting statute, the grantor of the trust may be able to authorize the trustee to decant by including decanting provisions in the trust agreement.
Another popular strategy for building flexibility into trusts is establishing a trust protector. A trust protector is a person who has powers over the trust but is not the trustee. A protector is typically named to provide watch over a trust that will be in effect for a long time and is, therefore, more susceptible to changing circumstances.
Trust protectors are practical for addressing issues and solving problems that were not or could not have been anticipated at the time of the trust’s creation. In addition, trust protectors have the power to remove or replace trustees, change beneficiaries, veto investment decisions, change administrative provisions and change trust situs as appropriate.
Now more than ever, building flexibility into trust documents is essential to adapt to changing circumstances with family, finances and the prevailing regulatory environment. Without the proper provisions, court involvement may be necessary to make amendments to an existing trust. Since the legal process can become expensive and time-consuming, it’s important to think ahead when developing estate planning documents and incorporate enough flexibility to accommodate an ever-changing future.
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The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.