In the past, trusts often were drafted with little flexibility. Now, more and more, trusts tend to be drafted with more flexibility and there are even ways to change “irrevocable” trusts. This is the first of a three-part series.
This first part examines ways of building flexibility into a trust. The second part examines using Trust Protectors to add flexibility to a trust. The third part examines modifying a trust by going to court.
It’s important to build flexibility into a trust because nobody knows what the future might hold in store for any of us. It’s doubtful anyone expected the boy tinkering in the suburban garage to become a billionaire, yet several did just that. While one child might become the next tech billionaire, another might develop special needs. Such is life’s lottery.
Here are three relatively simple ways to build flexibility into a trust:
First, you can give the trustee discretion in making distributions for the beneficiary’s benefit rather than mandating distributions. This discretion could be limited by an ascertainable standard (such as health, education, maintenance, and support) or could be completely discretionary. There are advantages and disadvantages to each approach, which will be the topic of a future article.
Second, you can give the trustee the discretion to hold back distributions if the beneficiary has circumstances warranting it, such as if the beneficiary has developed special needs or a substance abuse problem. When a child is very young, it’s impossible to know whether they will have a substance abuse problem. But, when they are older, the trustee can turn off the spigot of distributions when those distributions might be harmful to the beneficiary.
Third, you can give limited powers of appointment liberally. A limited power of appointment gives someone the right to appoint the assets to someone else, typically at their death. This allows the beneficiary to use their additional knowledge of the facts which have transpired since the trust was drafted to adjust the disposition.
For example, let’s say the beneficiary has assets in trust for their life. At their death, the assets will go to the beneficiary’s two children equally, unless altered by the beneficiary’s limited power of appointment. When the trust was drafted, the beneficiary’s children were both quite young. When the beneficiary is older and is diagnosed as terminal, their children are both in their 40s. One has a career in the Peace Corp while the other is a surgeon.
Both have honorable career paths. However, the beneficiary may decide to exercise their limited power of appointment to send more of the assets to the child in the Peace Corps due to greater need. The income off the assets also would be taxed at lower rate in the Peace Corps child’s hands than in the surgeon child’s hands.
Flexibility can add a great deal to the utility of a trust. Consider drafting flexibility into your trust because none of us knows how the future might unfold.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
- Double Your Gifting with Spousal Gift-Splitting - January 11, 2022
- Tax Planning for 2022 - December 28, 2021
- Donor Advised Funds: Too Good to Be True? - August 10, 2021