Volume 10, Issue 1
The Wealth Counselor
Five Ways to Make Trusts More Flexible
Trusts that continue for the benefit of a surviving spouse’s lifetime and then for the benefit of several generations have become the norm. Drafting trust agreements that will cover the administration, investment, and distribution of trust property over the span of multiple decades is challenging. In this issue you will learn how trust agreements can be made flexible to address changes in the lives of beneficiaries and governing laws by:
1. Carefully selecting trustees.
2. Defining trust beneficiaries.
3. Including powers of appointment.
4. Allowing for trust decanting.
5. Providing for the appointment of a trust protector.
If you would like us to review any of your clients’ trust agreements and make recommendations for improving their flexibility, please call our office now.
The Wrong Trustee Can Derail Your Client’s Wishes
Choosing the right succession of trustees for an irrevocable trust that is intended to continue for years into the future is critical to the trust’s success and longevity. Typically the client’s initial thought is to name one or more family members as Trustee(s) who can then appoint additional family members because they will better understand the varying needs of the beneficiaries and will keep the costs of administering the trust down. But in reality family members will not be able to fulfill all of their fiduciary obligations without hiring legal, investment, and tax advisors. These expenses will add up and can ultimately cost more than a corporate trustee, such as a bank or trust company, which will be able to meet all fiduciary obligations under one roof for one fee.
On the other hand, forcing trust beneficiaries to be stuck with the wrong trustee without a reasonable means for removing and replacing the trustees will land the beneficiaries and trustee in court. It is crucial to build provisions into the trust agreement which allow beneficiaries or a trust protector (more on them below) to remove and replace trustees without court intervention.
Planning Tip: Selecting a trustee is one of the most important decisions a client will make when creating a long-term dynasty trust. Serious consideration should be given to naming a corporate trustee, either alone or as a co-trustee with a family member or trusted advisor. A corporate trustee will act as a neutral party to oversee discretionary distributions and investment strategies that benefit both current and remainder beneficiaries. To create flexibility, specific beneficiaries (such as current income beneficiaries) or a trust protector should be given the right to remove the corporate trustee and replace it with another corporate trustee.
Trust Beneficiaries Need to Be Clearly Defined
Clients need to consider who they want to include as trust beneficiaries twenty, thirty, or even fifty years into the future. Should adopted children be included (both minor and adult adoptees)? How about children born using “assisted reproductive technology”? In the past the definition of a “descendant” was straightforward, but today it can encompass much more than blood heirs.
Planning Tip: While clients cannot predict or foresee everything that will happen in the future, they should still take time to consider who they want to take care of after they are gone. Clearly defining the class of beneficiaries who will benefit from the trust will allow for a smooth transition between generations and potentially head off litigation.
Powers of Appointment Can Add or Eliminate Beneficiaries
Clients who are concerned about how children, grandchildren, or great grandchildren will eventually grow up can build flexibility into a dynasty trust by giving a surviving spouse or other beneficiary the ability to include or exclude heirs through a power of appointment. A power of appointment is also important when a trust is designed as a generation-skipping trust but one or more beneficiaries do not have children, and it can also be used to include or exclude charitable beneficiaries.
Planning Tip: Powers of appointment at each generation should be considered when designing a trust that is intended to last for decades into the future. The powers can be as limited or as broad as the client desires without creating any gift tax or estate tax problems.
Trust Decanting Takes Something Old and Makes it New
Trust decanting involves taking the funds from an existing trust and distributing them to a new trust that has different and more favorable terms. Decanting may be authorized under state common law or statutory law and should be included as an option in the trust agreement.
Reasons for decanting a trust may include the following:
Trust Protectors Can Fix Just About Any Problem
A trust protector is an individual or entity that is empowered to make trust changes so that the grantor’s wishes can be ultimately fulfilled. A trust protector’s duties can be as limited or all-encompassing as the grantor chooses. In essence a trust protector can be given the power to modify the terms of a trust without necessarily having to decant it and to address unforeseeable events such as changes in tax laws or family dynamics.
Planning Tip: Of any of the options clients can include in their trust agreements to insure flexibility, a trust protector is in and of itself the most flexible. This is because a trust protector can be given the right to appoint, remove and replace trustees; include or exclude beneficiaries; adjust powers of appointment; and decant the trust into a new one. Therefore, trust protector provisions should be included in all trust agreements.
Are Your Clients’ Trust Agreements Flexible?
Unfortunately trust agreements that are more than a few years old will most likely lack provisions for allowing the trust terms to be adjusted as the needs of the beneficiaries and governing laws change. The good news is that modern trust law contemplates these changes and can be invoked to fix an old trust that has gone sideways.
If you are interested in learning how to help your clients build flexibility into their trust agreements or how a client’s existing irrevocable trust can be modified, please contact us.
200 S. Los Robles Avenue, Suite 530 • Pasadena, CA 91101 • Phone: (626) 795-1600