Read more about the article Don’t Miss Out on Estate Planning Opportunities – Annapolis and Towson Estate Planning

Don’t Miss Out on Estate Planning Opportunities – Annapolis and Towson Estate Planning

The recent article, “Rooting Out Estate Planning Opportunities,” from Financial Advisor offers a number of frequently missed opportunities in estate planning. Chief among them is failing to update estate plans, as changes to tax laws could mean that strategies used when your estate plan was initially created may no longer be relevant.

Before these opportunities can be discovered, it’s important to have a clear accounting of all of your assets, including a balance sheet of each “bucket” of resources: personal assets, trust assets, qualified plan assets, etc. The secret to success: meeting with your estate planning attorney every few years to review this entire picture to identify potential opportunities.

Once you have a sense of the whole picture, it’s easier to spot opportunities. For instance:

A Spousal Lifetime Access Trust, or SLAT, is an irrevocable trust used when a grantor wants to transfer part of their spousal exclusion into a SLAT to provide for their spouse and descendants. The SLAT keeps assets out of the donor’s estate and authorizes the trustee to make distributions to the grantor’s spouse, while at the same time it allows children or other heirs to be named as beneficiaries. Many couples use these trusts to protect assets from lawsuits.

There are some drawbacks to keep in mind. If one spouse is the beneficiary of the other spouse, all is well while both are living. However, if one spouse dies or becomes incapacitated and all assets are in the trust, the other may lose access to the trust created for the now deceased spouse.

The loss of access and the restrictions on SLAT distribution could be addressed by having both spouses purchase life insurance policies to fill the gap. At the same time, the couple would be well advised to look into disability and long-term care insurance.

Another situation is the use of a credit shelter trust, often called a bypass trust because it bypasses the surviving spouse’s estate. They are not as advantageous as they used to be because of today’s high estate tax exemption. They were also popular when the surviving spouse wasn’t able to use their deceased spouse’s estate tax exemption.

With the federal estate tax exemption up to more than $12 million, many who still have credit shelter trusts may find they don’t make sense in the short term. However, for now the federal estate exemption is set to drop down to $6 million when the Jobs and Tax Act sunsets. Depending upon your circumstances, it may be worthwhile to maintain this trust. Your estate planning attorney will be able to guide you.

Merging old trusts into new ones, or “decanting” them, makes sense in some situations. A new trust can be better crafted to align with the latest in tax laws and serve the same beneficiaries for as long as your state’s laws permit.

The two important takeaways here:

  • Estate planning requires a complete look at all of your assets and liabilities to make the best decisions on how to structure any estate and tax strategies; and
  • Estate plans need to be reviewed on a regular basis—every three to five years at a minimum—to ensure the strategies still work, despite any changes in tax laws and your situation.

If you believe your estate plan may need to be updated, contact us to schedule an appointment to review your current estate plan with one of our experienced estate planning attorneys.

Reference: Financial Advisor (Nov. 1, 2022) “Rooting Out Estate Planning Opportunities”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Do You Need a Revocable or Irrevocable Trust? – Annapolis and Towson Estate Planning

However, below the surface of estate planning and the world of trusts, things get complicated. Revocable trusts become irrevocable trusts, when the grantor becomes incapacitated or dies. It is just one of the many twists and turns in trusts, as reported in the article “What’s the difference between a revocable and irrevocable trust” from Market Watch.

For starters, the person who creates the trust is known as the “grantor.” The grantor can change the trust while living, or while the grantor has legal capacity. If the grantor becomes incapacitated, the grantor cannot change the trust. An agent or Power of Attorney for the grantor can make changes, if specifically authorized in the trust, as could a court-appointed conservator.

Despite the name, irrevocable trusts can be changed—more so now than ever before. Irrevocable trusts created for asset protection, tax planning or Medicaid planning purposes are treated differently than those becoming irrevocable upon the death of the grantor.

When an irrevocable trust is created, the grantor may still retain certain powers, including the right to change trustees and the right to re-direct who will receive the trust property, when the grantor dies or when the trust terminates (these do not always occur at the same time). A “testamentary power of appointment” refers to the retained power to appoint or distribute assets to anyone, or within limitations.

When the trust becomes irrevocable, the grantor can give the right to change trustees or to change ultimate beneficiaries to other people, including the beneficiaries. A trust could say that a majority of the grantor’s children may hire and fire trustees, and each child has the right to say where his or her share will go, in the event he or she dies before receiving their share.

Asset protection and special needs trusts also appoint people in the role of trust protectors. They are empowered to change trustees and, in some cases, to amend the trust completely. The trust is irrevocable for the grantor, but not the trust protector. Another trust might have language to limit this power, typically if it is a special needs trust. This allows a trust protector to make necessary changes, if rules regarding government benefits change regarding trusts.

Irrevocable trusts have become less irrevocable over the years, as more states have passed laws concerning “decanting” trusts, reformation and non-judicial settlement of trusts. Decanting a trust refers to “pouring” assets from one trust into another trust—allowing assets to be transferred to other trusts. Depending on the state’s laws, there needs to be a reason for the trust to be decanted and all beneficiaries must agree to the change.

Trust reformation requires court approval and must show that the reformation is needed if the trust is to achieve its original purpose. Notice must be given to all current and future beneficiaries, but they do not need to agree on the change.

The Uniform Trust Code permits trust reformation without court involvement, known as non-judicial settlement agreements, where all parties are in agreement. The law has been adopted in 34 states and in the District of Columbia. Any change that does not violate a material purpose of the trust is permitted, as long as all parties are in agreement.

Reference: Market Watch (Oct. 8, 2021) “What’s the difference between a revocable and irrevocable trust”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Fixing an Estate Plan Mistake – Annapolis and Towson Estate Planning

When an issue arises, you need to seek the assistance of a qualified and experienced estate planning attorney, who knows to fix the problems or find the strategy moving forward.

For example, an irrevocable trust can not be revoked. However, in some circumstances it can be modified. The trust may have been drafted to allow its trustees and beneficiaries the authority to make certain changes in specific circumstances, like a change in the tax law.

Those kinds of changes usually require the signatures from all trustees and beneficiaries, explains The Wilmington Business Journal’s recent article entitled “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess.”

Another change to an irrevocable trust may be contemplated, if the trust’s purpose may have become outdated or its administration is too expensive. An estate planning attorney can petition a judge to modify the trust in these circumstances when the trust’s purposes can not be achieved without the requested change. Remember that trusts are complex, and you really need the advice of an experienced trust attorney.

Another option is to create the trust to allow for a “trust protector.” This is a third party who is appointed by the trustees, the beneficiaries, or a judge. The trust protector can decide if the proposed change to the trust is warranted. However, this is only available if the original trust was written to specify the trust protector.

A term can also be added to the trust to provide “power of appointment” to trustees or beneficiaries. This makes it easier to change the trust for the benefit of current or future beneficiaries.

There is also decanting, in which the assets of an existing trust are “poured” into a new trust with different terms. This can include extending the trust’s life, changing trustees, fixing errors or ambiguities in the original language, and changing the legal jurisdiction. State trust laws vary, and some allow much more flexibility in how trusts are structured and administered.

The most drastic option is to end the trust. The assets would be distributed to the beneficiaries, and the trust would be dissolved. Approval must be obtained from all trustees and all beneficiaries. A frequent reason for “premature termination” is that a trust’s assets have diminished in value to the extent that administering it is not feasible or economical.

Again, be sure your estate plan is in solid shape from the start. Anticipating problems with the help of your lawyer, instead of trying to solve issues later is the best plan.

Reference: Wilmington Business Journal (Jan. 3, 2020) “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Is My Irrevocable Trust Revocable? – Annapolis and Towson Estate Planning

Irrevocable trusts aren’t as irrevocable as their name implies, according to Barron’s recent article, “Are Irrevocable Trusts True to Their Name?” The article says that for both new and existing trusts, there are ways to build in flexibility to make changes to a grantor’s wishes if terms are no longer appropriate or desirable for beneficiaries.

However, there are strict rules that apply. These rules vary between states. One of the main reasons for an irrevocable trust is to remove assets from an estate for estate tax purposes. If the rules aren’t followed carefully, a trust can be rendered unlawful. If that happens, the assets may be returned to the grantor’s estate and estate taxes may apply.

If you want to be certain that beneficiaries have some discretion in the future if circumstances change, grantors should build flexibility into the trust when it’s established. This can be accomplished by giving a power of appointment to beneficiaries. However, if the beneficiaries are looking to change the terms or the structure of an existing trust, the trust must be modified according to state law.

Most states allow trusts to be decanted. When you decant a trust, you pour its terms into a new trust and leave out the parts that are no longer wanted. Just like decanting a bottle of wine, it’s like the sediment left in the wine bottle.

In a state that doesn’t permit decanting, a trustee can ask a judge to allow it. You should be careful with decanting because you don’t want to do anything that would adversely affect the original tax attributes of the trust.

The power of appointment in a trust or the ability to decant can’t be given to the person who set up the trust. Thus, grantors can’t have a “re-do” or rescind the terms. It’s only trustees and the beneficiaries that can do that.

If you and your attorney create a trust with a lot of flexibility for the trustee, you may want to appoint an institutional trustee from a bank, trust, or other financial services company.

They can be either the sole trustee or serve as co-trustees with a personal, non-institutional trustee, like a family member. This can help to eliminate future conflicts.

Reference: Barron’s (June 18, 2019) “Are Irrevocable Trusts True to Their Name?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys