Sometimes, despite best intentions and best efforts, an estate plan leaves unintended problems for heirs, trustees and others to solve. For example, a trust may have become outdated because of changes in tax laws, the birth or death of family members, or special circumstances like an heir’s disability. And so diligent estate planners need to know how to fix these problems, whether during the client’s lifetime or afterward.
An irrevocable trust, as its name says, can’t be revoked. But under some circumstances it can be modified. It might, for example, have been drafted to give its trustees and beneficiaries power to make certain modifications under carefully defined circumstances. For instance, a trust may specify that it can be modified to comply with changes in tax law. Those kinds of modifications typically require signatures from all trustees and beneficiaries.
It may also be possible, if circumstances have changed enough that a trust’s purpose has become outdated, or its administration is too expensive, to petition a judge to modify a trust. The key to this option (other than needing a lawyer with expertise in trusts) is to show that the trust’s purposes can’t be achieved without the requested change.
Here’s a warning that good, qualified legal advice is essential. Without getting too far into the weeds, I’ll just say there are huge complexities about how state property laws and federal tax laws intersect. This is a task for an expert!
An alternative that’s increasingly used when setting up a trust is to allow for a “trust protector,” a third party who may be appointed by the trustees, the beneficiaries, or a court. That protector can determine whether a change to the trust is warranted. This option is only available, though, if the original trust was written to specify the trust protector option.
Another provision that can be written into the trust is to give “power of appointment” to trustees or beneficiaries. That power makes it simpler to modify the trust for the benefit of current or future beneficiaries.
An option that may be even simpler, if an original trust can’t be modified, is “decanting.” Just as old wine can be poured from a bottle into a decanter, leaving the sediment behind, so the assets of an existing trust can be “poured” into a new trust with different terms. Those might include extending the trust’s life, changing trustees, correcting errors or ambiguities in the original language, and even changing the legal jurisdiction. State laws do vary, and some allow much greater flexibility in how trusts are structured and administered.
An example: Some states require that all beneficiaries must be notified, with copies of the old trust, and agree to any changes. That may be unacceptable to the trust’s creator, who may not have wanted some beneficiaries to know how much they stand to inherit. Other states permit decanting but not adding new beneficiaries. North Carolina is among the states with fairly flexible decanting rules; those were set by a 2017 law.
A more drastic alternative may be best if other options would cost too much, take too much time, or create legal complications. That is simply to end the trust. The assets would be distributed to the beneficiaries and the trust dissolved. That requires getting approval from all trustees and all beneficiaries. If that’s not possible, it may require going to court and getting a judge’s permission to wind up the trust.
One common reason for so-called “premature termination” is that a trust’s assets have diminished in value so much that administering it isn’t “feasible or economical,” in the words of one state statute.
Controlling costs – or, put another way, avoiding unnecessary tasks that will deplete a trust’s assets – is a motivation for another after-the-fact tactic, asking beneficiaries to waive their right to an accounting. That can speed up distribution of assets and maximize the amount distributed.
There’s an obvious downside for beneficiaries, of course. Waiving an accounting means they have to trust the trustee to act fairly and in good faith. Usually, it’s a very good idea to know exactly how your money has been managed. But sometimes circumstances – a person badly needs some money, right now require that a beneficiary give up the right to an accounting. It’s important to know that such a waiver can be rescinded, too.
A release is similar: It’s how a beneficiary agrees to a trust’s final dissolution and distribution of its assets, and frees the trustee of any further obligations. As with waivers, releases should be handled with great care. Beneficiaries shouldn’t feel pressured to grant a release, and should be as fully informed as possible about their rights and what they are actually agreeing to.
One fairly routine complication concerns minor children or legally incompetent adults, and who can speak for them. Assigning formal guardianship can be a complex and costly process. Fortunately, so-called “virtual representation” laws permit a competent adult to be assigned to speak for beneficiaries who can’t legally speak for themselves. This can include people whose identity may not be known (such as “all grandchildren” in a scattered or estranged family) or just can’t be found.
It’s wise, when using virtual representation, to get the agreement of all the other beneficiaries to the representative’s appointment. Also, of course, that representative’s own interests should not conflict with those of the person being represented.
Another vexing problem is a will that leaves property that the heir doesn’t want or doesn’t need, or that can present unwelcome tax burdens. A useful solution to that is known as a renunciation or disclaimer. In simple terms, the heir can “renounce” or “disclaim” the inherited asset, putting it into a trust for the benefit of somebody else.
What all this adds up to, of course, is a strong argument for getting your estate plan in good shape from the beginning. Anticipating problems, rather than trying to solve them after the fact, is always the best strategy. But when wills and trusts do cause trouble, it’s vital to have competent professional help to set things right – and not inadvertently create fresh problems. The estate-planning experts at Old North State Trust understand these wrinkles, and can help ensure that your wishes are carried out with minimum grief or hassle for your heirs.
As Marketing Director, Alyce works to develop, budget, and implement marketing plans, which include advertising, coordination of conferences, special events, and development and maintenance of marketing materials. She also oversees the company’s website, in-house articles, and fostering community initiatives within the organization. Alyce received a BS degree in Interior Design from East Carolina University with a concentration in Business Administration and obtained her teaching certification from UNCW. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.
Cece Nunn - Mar 30, 2020
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