The Importance of Estate Plan Flexibility
While many estate planners worry that trust modification can run counter to a trustee’s fiduciary duty to follow the grantor’s intent, the concern over “changed circumstances” sometimes makes it necessary to re-evaluate that intent. People are living longer, and the longer they live, the more likely their circumstances and relationships will evolve. With these changes comes an increased call from the estate planning field and the public for the ability to change trusts to meet those changed circumstances.
Longer Lifespans and Uncertain Tax Policy
Increased life expectancy, and the circumstantial change it creates, increases the demand for grantors and beneficiaries to terminate or modify trust agreements created long ago. Decades ago, if a trust were created, the grantor might have expected to live until about age 70, the trust’s beneficiaries would be in their 40s and there would be 10–20 years between when a trust was created and when its assets were distributed. Decisions were made (“the grantor’s intent”) with that expectation in mind.
But today, a trust grantor’s surviving spouse can live into their 90s and the trust’s beneficiaries (the next generation) may be in their late 60s or early 70s. A trust might have been created decades ago, when the deceased spouse was alive, but neither would have imagined present-day circumstances – meaning the trust may no longer satisfy the grantor’s intent and goals. In this case, terminating or modifying the trust could better reflect the grantor’s actual intent and better benefit beneficiaries than by waiting for the surviving spouse to pass, according to the trust’s terms.
Flexibility is also important because of uncertainty with the federal and state tax laws. In 2018, the Tax Cuts and Jobs Act greatly increased how much people could pass on to their heirs without paying federal estate tax. The TCJA is currently set to expire (or sunset) on December 31, 2025. This legislation was enacted under the first Trump administration, and it is uncertain what changes to it, if any, will be made during the second Trump administration. The possibilities range from extending the current estate tax exemption amounts ($13.99 million per individual, $27.98 million per married couple in 2025) to resetting the exemptions to pre-TCJA amounts, which have been projected to be roughly $7 million for individuals and $14 million for married couples. With a range of uncertainty that large, maintaining as much flexibility as possible with your estate plan is critical.
The Law Is on Your Side
Many states have adopted all or a modified version of the Uniform Trust Code. The UTC has helped state legislators enact modern trust laws that better suit contemporary society and increase uniformity among states.
The Uniform Trust Code allows for trust modifications in certain circumstances. For example, a nonjudicial settlement agreement allows parties to a trust to agree to a modification without approval of a court. For instance, say a trust’s beneficiaries are dissatisfied with the service provided by a current corporate trustee, due to such factors as unresponsiveness or high administrator turnover. Those beneficiaries can use a nonjudicial settlement agreement to change a corporate trustee, even if the trust document does not explicitly permit such a change. These strategies can give beneficiaries the ability to make certain changes to the trust without petitioning the court and incurring legal expenses.
Decanting is another technique made allowable under the UTC. Just like decanting wine from one bottle to another, decanting in the trust world involves transferring assets from one trust to another with modernized terms to better suit the beneficiaries’ needs or current tax environment. This technique usually involves consultation with the family’s estate planning attorney and tax advisor, because replacing the terms of one irrevocable trust with terms in a new trust may involve complex trust and tax issues.
Take Control of Your Trust’s Flexibility
Perhaps the most effective way to ensure that new trust agreements provide future flexibility is to have that flexibility written in the document. Giving beneficiaries the authority to remove a trustee can help ensure that future trustees provide good service and are attentive to the trust beneficiaries. More simply, naming multiple successor trustees – starting with individuals and ending with a reputable corporate trustee – can be an inexpensive way to ensure that a trust is administered properly by a trustee who can truly handle its fiduciary duty.
For larger trusts, naming a trust protector – such as a third-party attorney or a qualified and disinterested individual – has become a powerful technique to ensure effective trust administration. Trust protectors often have the authority to remove a trustee, decline beneficiary distribution requests or engage in other activities that ultimately serve to carry out the grantor’s intent.
Giving beneficiaries powers of appointment are another way to make a trust more flexible. Most often, a power of appointment gives a beneficiary the authority to name alternative trust beneficiaries, usually charitable organizations or direct family members. This allows beneficiaries to direct trust assets to charitable organizations and family members in a more current and relevant way than was originally directed by the grantor.
Trust flexibility helps better ensure a grantor’s intent is carried out, beneficiaries receive an appropriate level of service from trustees and trust assets ultimately pass to relevant individuals and entities at an appropriate time, even many years in the future.
Baird Trust Company (“Baird Trust”), a Kentucky state chartered trust company, is owned by Baird Financial Corporation (“BFC”). It is affiliated with Robert W. Baird & Co. Incorporated (“Baird”), (an SEC-registered broker-dealer and investment advisor), and other operating businesses owned by BFC. Neither Baird nor Baird Trust provide individualized tax, accounting or legal advice. Please consult your accountant or attorney for personal tax, accounting or legal advice.
