One of the many things that the Trust Code has enabled practitioners to do is to change or perhaps simply “freshen” an old irrevocable trust. With the Death Tax exemptions being so high, many of these old trusts are no longer needed—at least not for their original purpose. Some of these changes require judicial approval, but many do not.
Modify to Achieve Income Tax Savings. Lets take that old trust set up under Dad’s Will to use his tax exemption for Mom (still living). Maybe Mom’s estate is not going to incur death taxes even if you took Dad’s trust into account. Maybe the trust holds assets with low tax basis.
Consider terminating the trust to put it into Mom’s estate so that upon her death the assets get a tax basis step-up.
Alternatively, you could give Mom a general power of appointment so that the assets are included in her estate and receive the tax basis step-up, but still pass according to the terms of the trust (assuming she does not exercise the power).
Given the current income tax climate, this could result in significant tax savings.
Modify to Achieve Extended Creditor Protection. I have modified trusts on multiple occasions to extend the spendthrift protections on existing trusts for the next generation.
For instance, take that same trust for Mom set up under Dad’s Will to utilize his death tax exemption. The trust currently says that upon Mom’s death, the trust immediately distributes to the kids. What if one of the kids has a bad marriage? What if one is a Doctor or has serious credit issues? You cause the trust to be extended for the benefit of the kids. This can be done several ways.
Consider giving Mom a limited power of appointment (or a general power if tax basis needs a step-up) to change where the trust goes upon her death. Mom then exercises the power in favor of her own estate planning documents where she has established lifetime trusts for her children. This does two things: (1) extends the trust and (2) freshens/modernizes the trust provisions for the kids.
Changing Trustee. Another common change is to change the provisions related to trusteeship. This is often seen where the trustee and the beneficiaries wish to allow transition from a corporate trustee to allow an individual trustee (perhaps the beneficiaries themselves) to serve as trustee. The Code makes this easier than ever.
Other ideas. Trusts can be modified to add or enhance existing creditor protections. Trusts can be modified to add or clarify tax provisions such as adding provisions to allow the trust to be a shareholder in an S-Corporation.
Consider modifying a trust to add directed trust provisions to allow a beneficiary or a third-party to direct investments or make other administrative decisions.
Particularly considering some of the above examples, you don’t have to think too hard to come up with other creative ways that the old trust can be dusted off and dressed up.
Conclusion. In Uniform Trust Code states, practitioners have a number of tools to update or change that old irrevocable trust. In Tennessee, we have perhaps more tools than most.
The bottom line is that many changes can be made to irrevocable trusts—at least where everybody is on the same page. Sometimes they can be made even if some are not.
GST Tax considerations. Before making any changes to an irrevocable trust funded before the enactment of the Generation Skipping Transfer Tax (“Grandfathered Trust”), you should take extra care. The law here is a bit unsettled. I’ll elaborate on this in a later post.
Gift Tax Considerations. Consideration should also be given to gift tax issues. Does a beneficiary make a taxable gift of a future interest if the beneficiary consents to the extension of a trust for his or her lifetime? Perhaps you don’t care if the amounts involved are not substantial, but if the amounts in play are larger, then decanting can avoid these issues by simply giving notice to the beneficiaries. Maybe simultaneously the beneficiaries indemnify and hold the trustee harmless. What a coincidence…