Category: Trusts

Many people believe that once they set up a revocable living trust and change the ownership of their accounts and property from themselves as individuals to their trust, those accounts and property are protected from lawsuits. This is not true. 

While trusts commonly protect a beneficiary’s inheritance, few trusts protect assets (accounts and property) previously owned by the trustmaker from the trustmaker’s creditors. Because the trustmaker can revoke the revocable living trust and often serves as the trustee, courts may determine that creditors can still access the trust’s assets, as the trustmaker’s control over them remains largely unchanged.

No Immediate Asset Protection? Why Should You Create a Revocable Living Trust?

Fully funded revocable living trusts are still excellent tools. Here’s why: 

1. You can protect assets passing to your spouse, children, or other loved ones by placing any desired restrictions on the inheritances to ensure that your beneficiaries can still benefit without being in danger of having their inheritance accessible by creditors, predators, or divorcing spouses.  

2. Your trust can include a plan for managing your assets during your incapacity (when you cannot manage your own affairs), avoiding court interference, ensuring your wishes are carried out, and saving your loved ones time, money, and stress.

3. A properly funded trust allows trust assets to pass to beneficiaries without going through probate court. This, in turn, can minimize the time, stress, and cost of settling your final affairs.

4. By avoiding the public probate court process during your incapacity or at death, details about who is getting what will remain private.

Strategies to Protect Your Assets Without a Living Trust

Comprehensive estate planning can be complemented with a solid foundation of insurance, including homeowner’s or renter’s, personal property, umbrella, auto, business, life, disability, and the like. For business owners and real estate investors, business entities such as limited liability companies can provide additional asset protection. In addition, domestic asset protection trusts can sometimes be used, depending on your unique circumstances. Your revocable living trust is a powerful tool for protecting your loved ones. If you have questions about asset protection planning, call us. We can review your existing plan and determine what additional steps need to be taken to ensure that you and your loved ones have a secure financial future.

If the last time you and your spouse updated your estate plan was more than a decade ago, your estate plan may contain what is sometimes referred to as AB trust planning, which, until 2011, was the only way married couples could take advantage of both spouses’ federal estate tax exemptions. 

An AB trust structure helps married couples reduce estate taxes and control the distribution of the property and accounts owned by the first spouse to die. When the first spouse dies, their assets are split into two subtrusts. Trust A (sometimes called a marital or QTIP trust) holds property for the surviving spouse and avoids estate taxes by using the unlimited marital deduction. Trust B (sometimes called a bypass, family, or credit shelter trust) holds the deceased spouse’s assets for spouse beneficiaries, nonspouse beneficiaries, or some combination of the two, while minimizing estate taxes by using their estate tax exemption, which is $13.99 million in 2025. This setup helps keep money safe and ensures that it goes to the right people. 

Before 2011, if you did not use the deceased spouse’s federal estate tax exclusion amount, it was lost forever. This changed in 2011 when portability of the estate tax exemption between spouses was introduced. Portability allows a surviving spouse to inherit the unused portion of their deceased spouse’s federal estate tax exemption. If the first spouse’s taxable estate at the time of death is below the exemption limit or passes entirely to the surviving spouse under the marital deduction, the unused exemption can be transferred (or ported) to the surviving spouse, provided that an estate tax return is timely filed upon the first spouse’s death. As a result, the surviving spouse can use their own federal estate tax exemption amount plus the amount ported from the deceased spouse to minimize or avoid estate taxes upon the survivor’s passing. The good news is that portability has been made a permanent part of the federal estate tax laws. The bad news is that the AB trust planning in your old estate plan may now do more harm than good.

Take, for example, hypothetical Fred and June, who have been married for 40 years. If Fred dies in 2025 and none of his $13.99 million estate tax exemption is used, June can add Fred’s $13.99 million exemption to her own by filing a timely estate tax return exemption. If June subsequently dies in 2027 and the federal estate tax exclusion amount has been reduced to $7.5 million, she will have $21.49 million (Fred’s $13.99 million plus her $7.5 million) worth of federal estate tax exemption. Also, all accounts and property passing outright to June from Fred’s estate or revocable trust, or by right of survivorship, will receive a full basis adjustment to their fair market values as of Fred’s date of death. (Usually, the basis adjustment is a step-up in basis because property generally increases in value over time.)

However, what if Fred and June have a typical 1990s estate plan that uses an AB trust structure to ensure full use of both spouses’ federal estate tax exemptions? If they neglected to update their 1990s estate plan and Fred dies in 2025, then not only will June be stuck with two subtrusts that were drafted using decades-old planning priorities, but their beneficiaries will also receive no step-up in income tax basis for the accounts and property remaining in the B trust when June dies. Instead, the beneficiaries will inherit the B trust’s accounts and property with the basis calculated as of Fred’s 2025 date of death. As a result, if June lives for a long time, there could very well be a large capital gains tax bill when the beneficiaries decide to sell the inherited accounts or property many years down the road.

Fred and June’s story is only one scenario. It shows the downside of an old estate plan that uses AB trust planning. On the other hand, there are still many good reasons for married couples to keep AB trust planning in their updated estate plans. A two-subtrust structure allows you to provide for your surviving spouse under one subtrust in a tax-efficient way by using the unlimited marital deduction while allowing different beneficiaries under the other subtrust to benefit from accounts and property held in that subtrust immediately upon your death instead of waiting for your surviving spouse to pass away.

If you are married and your estate plan is more than a few years old, call us so that together we can determine whether an AB trust plan still makes sense for you and your family. It is possible that your existing estate plan can be revised to take advantage of the favorable features of AB trust planning while also maximizing the benefits of current estate tax exemption rates and laws such as portability and basis adjustment planning.

While many wines get better with age, the same cannot be said for some irrevocable trusts.  Maybe you are the beneficiary of a trust created by your great-grandfather over 70 years ago, and that trust no longer makes sense. Or maybe you created an irrevocable trust over 20 years ago, and it no longer makes sense for your current situation. Wine connoisseurs may wonder if there is any way to fix an irrevocable trust that has turned from a fine wine into vinegar. You may be surprised to learn that under certain circumstances, the answer is yes—by decanting the old, broken trust into a brand new one.

What Does It Mean to Decant a Trust?

Wine lovers know that the term decant means to pour wine from one container into another to open up the aromas and flavors of the wine. In the world of irrevocable trusts, decanting refers to the transfer of some or all of the accounts and property owned by an existing trust into a brand new trust with different and more favorable terms.

When Does It Make Sense to Decant a Trust?

Decanting a trust makes sense under myriad circumstances, including when you would like to make the following types of changes:

• Tweak the trustee provisions to clarify who can or cannot serve as trustee
• Expand or limit the trustee’s powers
• Convert a trust that terminates when a beneficiary reaches a certain age into a lifetime trust
• Change a trust in which a beneficiary is entitled to receive their inheritance at a certain point or for certain purposes into a full discretionary trust in which the trustee decides when money will be given to the beneficiary in order to protect the trust’s accounts and property from the beneficiary’s creditors
• Clarify ambiguous provisions or drafting errors in the existing trust
• Change the governing law or trust situs to a less taxing or more beneficiary-friendly state
• Merge similar trusts into a single trust for the same beneficiary
• Create separate trusts from a single trust to address the differing needs of multiple beneficiaries
• Provide for and protect a special needs beneficiary   

What Is the Process for Decanting a Trust?

A state’s statutes or case law can allow decanting. Additionally, the trust agreement may contain specific instructions with regard to when or how a trust may be decanted.

Once it is determined that a trust can and should be decanted, the next step is for the trustee to create the new trust agreement with the desired provisions. The trustee must then transfer some or all of the accounts and property from the existing trust into the new trust. Any accounts or property remaining in the existing trust will continue to be administered under its terms; an empty trust will be terminated.

Decanting Is Not the Only Solution to Fix a Broken Trust

While decanting may work under certain circumstances, fortunately, it is not the only way to fix a “broken” irrevocable trust. Our firm can help you evaluate options for fixing your broken trust and determine which method will work best for your situation. If you have a trust that has turned to vinegar and is not what you want it to be, give us a call.

Today, many estate plans contain an irrevocable trust that will continue for the benefit of a spouse’s lifetime and then continue for the benefit of several generations. Because trusts like these are designed to span multiple decades, it is important that they include trust decanting provisions to address changes in circumstances, beneficiaries, and governing laws. 

What is trust decanting?

When a bottle of wine is decanted, it is poured from one container into another. When a trust is decanted, the accounts and property from the existing trust are removed and distributed into a new trust that has different and more favorable terms.  

When should a trust be decanted?

Provisions for trust decanting should be included in trusts that are intended to last decades into the future. Decanting can do the following:

1. Clarify ambiguities or drafting errors in the trust agreement. As trust beneficiaries die and younger generations become the new heirs, vague provisions or outright mistakes in the original trust agreement may become apparent. Decanting can be used to correct these problems.
2. Provide for a special needs beneficiary. A trust that is not tailored to provide for a special needs beneficiary will cause the beneficiary to lose government benefits. Decanting can be used to turn a trust in which the beneficiary is entitled to money into a full supplemental needs trust.
3. Protect the trust’s accounts and property from the beneficiary’s creditors. A trust that gives the beneficiary control or access to their inheritance puts that inheritance at risk of being snatched by the beneficiary’s creditors, rapidly depleting the inheritance if the beneficiary is sued. Decanting can be used to convert a trust without any asset protection features into a full discretionary trust that the beneficiary’s creditors will not be able to reach.
4. Merge similar trusts into a single trust or create separate trusts from a single trust. An individual may be the beneficiary of multiple trusts that have similar terms. Decanting can be used to combine these trusts into one trust that will reduce administrative costs and oversight. On the other hand, a single trust that has multiple beneficiaries with differing needs can be decanted into separate trusts tailored to each individual beneficiary.
5. Change the governing law or situs to a different state. Changes in state and federal laws can adversely affect the administration and taxation of a multigenerational trust. Decanting can be used to take a trust that is governed by laws that have become unfavorable and convert it into a trust that is governed by different and more advantageous laws.   

Final Thoughts on Trust Decanting

Including trust decanting provisions in an irrevocable trust agreement or a revocable trust agreement that will become irrevocable at some time in the future is critical to the success and longevity of the trust. This will help ensure that the trust agreement has the flexibility necessary to avoid court intervention to fix a trust that no longer makes practical or economic sense.  

If you are interested in adding trust decanting provisions to your trust or would like to have the decanting provisions of your trust reviewed, please call our office.

A trustee is a person or entity responsible for managing and administering your trust according to your instructions and in accordance with state law. They are considered a fiduciary (meaning they are held to a higher standard of care and owe certain duties to the beneficiaries). As a fiduciary, a trustee must protect the trust’s investments and act in the best interests of the beneficiaries. They must prepare and maintain trust accounting records and prepare tax-related forms, providing this information to the beneficiaries at their request. At some point, they may need or be required to liquidate or sell the trust’s accounts and property. 

A Trustee’s Authority to Sell Assets While Administering the Trust

When administering a trust, the trustee might encounter situations in which they need to convert trust assets into cash to provide liquidity to the trust. This could mean converting trust assets such as stocks and bonds or selling other trust property such as real estate or other high-value assets to generate the necessary funds. Though this decision must be based on prudent investor rules or standards and be in the best interest of the beneficiaries, trustees generally do not need beneficiary approval to liquidate or sell trust property, but they may seek it to avoid potential arguments in court regarding their decisions and authority. The biggest restriction is that trustees are not allowed to sell trust property for their own benefit. There may be an exception to this restriction if the trustee is also a trust beneficiary.

Creating Liquidity 

A trustee may need to create liquidity for various reasons:

• Meeting financial obligations. The trust may have ongoing financial commitments, such as taxes, mortgage payments, or insurance premiums. By creating liquidity, the trustee can fulfill these obligations without disrupting the overall trust management.
• Covering administrative costs. There could be administrative expenses related to legal and accounting services, as well as fees for managing the trust. Creating liquidity ensures that the trustee can cover these costs promptly and efficiently.
• Fulfilling distributions. If the trust mandates periodic or one-time distributions to beneficiaries, creating sufficient liquidity allows the trustee to meet these distribution requirements in a timely manner.
• Responding to opportunities or challenges. Market opportunities or unexpected financial challenges may arise that require quick access to funds. Creating liquidity enables the trustee to seize favorable investment opportunities or address unforeseen financial needs effectively.

Investment Strategy

A trustee has the authority and responsibility to manage the trust’s investments in a manner that aligns with the trust’s goals and changing financial circumstances. It may be necessary to modify the investment strategy for a variety of reasons:

• Evaluating economic conditions. The trustee must continuously evaluate economic conditions, market trends, and the performance of the trust’s assets, such as accounts and other property. If the existing investment strategy no longer serves the trust’s objectives, the trustee may need to consider adjustments.
• Risk management. Based on the trust’s performance and the financial landscape, the trustee may need to rebalance the portfolio to ensure an appropriate level of risk and potential return. This could involve diversifying investments or reallocating assets.
• Adapting to beneficiary needs. Changes in beneficiary circumstances, such as increased education expenses or healthcare needs, may necessitate a shift in the investment strategy to generate income or accommodate specific beneficiary requirements.
• Long-term growth versus income generation. Depending on the trust’s purpose, the trustee may need to adjust the investment approach to prioritize long-term growth, income generation, or a balanced approach, ensuring the trust’s sustainability and fulfillment of its intended purpose.

You Can Control the Sale of the Trust’s Assets

If you are the trustmaker and have concerns about a trustee’s authority to liquidate or sell accounts and property, you can provide specific guidelines controlling the sale of the trust’s assets.

When establishing a trust, you may have specific assets you would like to preserve, whether for sentimental reasons, future generations, or other purposes. However, you should be cautious when including provisions that restrict the liquidation or sale of particular assets.

Placing restrictions on liquidating or selling assets in the trust can help preserve family heirlooms, properties with historical or emotional significance, or specific investments that align with the trust’s long-term goals. However, overly restrictive provisions can present challenges to the trustee, especially in situations where the trust may require liquidity, when there is a need to change the investment strategy to meet financial obligations or adapt to market conditions, or if there have been changes in tax laws, economic conditions, or family dynamics.

It is essential to strike a balance between preserving important assets like certain property or accounts and allowing the trustee the flexibility needed to effectively manage the trust, ensuring the trust’s long-term viability and the best interests of the beneficiaries.

A Trustee’s Responsibility Regarding Distributions to Beneficiaries

Overall, the trustee must adhere to the instructions laid out in the trust agreement. If the trust’s terms specify that the trustee must distribute money or property to a beneficiary at a particular future date or upon meeting specific conditions, the trustee is obligated to follow these instructions precisely. That is why making informed decisions when creating a trust and defining the trustee’s role and responsibilities is important. 

Stipulating specific instructions regarding when and how distributions should be made to beneficiaries often requires attaching conditions to distributions, such as timelines and other triggering events like a beneficiary’s age or completion of a milestone. Whatever the conditions are, the trustee will usually be required to follow them unless they are illegal or against public policy.

Communication Between a Trustee and Beneficiaries Is Critical When Selling Trust Assets

The trustee should—and in some instances is required to—maintain open communication with both the beneficiaries and any co-trustees, keeping them informed about the trust’s status and decisions when creating liquidity and changing investment strategies that may affect upcoming distributions. Transparency helps answer questions and manage expectations.

Accurate and thorough recordkeeping is essential to demonstrate compliance with the trust terms and the law. Detailed records can help explain the rationale behind each decision, and relevant documents can support the actions taken by the trustee.

If you are a trustee and are unsure about the trust terms relating to the management or sale of assets, we can assist you and any financial professionals with whom you are working. If you are creating an estate plan that includes a trust, working with an experienced attorney to craft a comprehensive trust agreement can help ensure your trustee’s compliance and protect the interests of both the trust and its beneficiaries.

We can help you memorialize your intentions in your trust agreement and strike a balance between preserving your life savings and granting the trustee the necessary flexibility to manage the trust successfully. Give us a call to schedule your appointment today.

Did you know that irrevocable trusts can be modified? If you did not, you are not alone. The name lends itself to that very misconception. However, the truth is that changes in laws, family, trustees, and finances can frustrate the trustmaker’s original intent when the trust was created. Or, sometimes, an error in the trust document is identified. When this happens, it is wise to consider changing the trust, even if that trust is irrevocable.

Here are three examples of when an irrevocable trust can, and should, be modified or terminated:

1. Changing tax law. Adam created an irrevocable trust in 1980 that held a life insurance policy. Due to the federal estate tax exemption at that time, Adam needed a tool that would remove the value of the proceeds from his estate at his death. To facilitate this, an irrevocable life insurance trust was created to own the life insurance policy and be the beneficiary of the proceeds at Adam’s death. Today, the federal estate tax exemption has significantly increased and Adam no longer needs to worry about removing the life insurance proceeds from his estate to avoid estate taxation at his death.  

2. Changing family circumstances. Barbara created an irrevocable trust for her grandchild, Christine. Now an adult, Christine has a disability and would benefit from government assistance. According to the current instructions for how money is to be given to Christine, Barbara’s trust would unintentionally disqualify Christine from receiving much-needed government assistance.

3. Discovering errors. David Sr. created an irrevocable trust to provide for his numerous children and grandchildren. However, after the trust was created, his son (David Jr.) discovered that his son (David III) had been mistakenly omitted from the document.  

Are you sure your trust is still working for you?

If you are not sure whether an irrevocable trust is still a good fit or if you wonder whether you can benefit more from your trust, we are happy to meet with you so we can analyze your current trust. Perhaps modifying or terminating your irrevocable trust is a good option. Making that determination simply requires a conversation about your goals and a review of the trust itself. Please call our office now to schedule time to review your current trust or discuss the potential benefits that a trust can provide to address your unique situation and goals.

Trust protectors are commonly used in the United States. Essentially, a trust protector is someone who serves as an appointed authority over a trust that will be in effect for a long period of time. Trust protectors ensure that trustees maintain the integrity of the trust, make solid distribution and investment decisions, and adapt the trust to changes in law and circumstance.  

Whenever changes occur, as they are bound to do, the trust protector has the power to modify the trust to carry out the trustmaker’s intent. Significantly, the trust protector has the power to act without going to court—a key benefit that saves time and money and honors family privacy.  

Here Are 6 Ways a Trust Protector Can Help You 

Your trust protector can take the following actions:

1. Remove or replace a trustee who is not performing their duties appropriately or is no longer able or willing to serve

2. Amend the trust to reflect changes in the law

3. Resolve conflicts between beneficiaries and trustees or between multiple trustees

4. Modify distributions from the trust in response to changes in beneficiaries’ lives such as premature death, divorce, drug addiction, disability, or lawsuits

5. Allow new beneficiaries to be added when new descendants are born  

6. Veto investment decisions that might be unwise

Warning

The key to making a trust protector work for you is to be very specific about the powers available to that person. It is important to authorize that person, and any future trust protectors, to fulfill their duty to carry out the trustmaker’s intent—not their own. 

Can You Benefit from a Trust Protector?

Generally speaking, the answer is yes. Trust protectors provide flexibility and an extra layer of protection for the trustmaker’s intent as well as for the trust’s accounts and property and its beneficiaries. Trust protector provisions can easily be added to a new trust, and older trusts may be changed to add a trust protector. If you have created a trust or are a beneficiary of a trust that feels outdated, call our office now.

Some trusts are irrevocable as soon as they are created, which means that, in general, the trustmaker (the person who created and funded the trust) cannot terminate or modify it and take back the money or property that it holds. You may wonder why anyone would want an irrevocable trust, but irrevocable trusts can provide some very important benefits, particularly asset protection, tax minimization, and maintaining eligibility for government benefits. In contrast, trustmakers may amend or revoke a revocable living trust at any time prior to their death, but at their death the trust becomes irrevocable.

Although irrevocable trusts generally cannot be changed, many states’ laws allow interested parties to modify a trust in certain circumstances using a binding nonjudicial settlement agreement—assuming there is no language in the trust document prohibiting their use or providing another way for the trustee and beneficiaries to consent to modifications. In the absence of a statute permitting a nonjudicial settlement agreement, the interested parties under state law, which may include the grantor, the trustee, or the current or future beneficiaries or their representatives, would have to petition a court to modify the trust or interpret unclear provisions. In states where nonjudicial settlement agreements are permitted, their use can avoid the costs, delays, and lack of privacy associated with judicial proceedings.

When May a Nonjudicial Settlement Agreement Be Used?

A nonjudicial settlement agreement is only valid if it does not violate a material purpose of the trust or terminate the trust in an impermissible manner and any modification would have been approved by a court if the parties had petitioned the court. Although there are variations in each state’s statute governing nonjudicial settlements, there are several situations in which a nonjudicial settlement agreement is typically allowed, including the following:

• Interpretation of the terms of the trust document if they are unclear
• Approval of a trustee’s report or accounting
• Authorization or prohibition of certain actions by the trustee
• Appointment or resignation of a trustee or determination of the trustee’s compensation
• Transfer of the location where the trust is administered
• Determination of the liability of the trustee for actions related to the trust

Many states’ statutes also broadly allow a nonjudicial settlement to address any matter that a court otherwise would resolve. A nonjudicial settlement must be signed by all interested persons to be valid.

Examples

1. Assume Mike creates a trust for the benefit of Marcia, Jan, Cindy, Greg, Peter, and Bobby and names Carol as trustee. The trust document does not name a successor trustee and does not specify a method for naming a replacement trustee. On a trip to Hawaii, Mike and Carol are killed in a car accident after they find a mysterious tiki idol thought to bring bad luck to whoever touches it. The beneficiaries, who are all adults, may enter into a nonjudicial settlement agreement to appoint a new trustee.  

2. Assume Morticia creates a trust naming her husband, Gomez, as trustee, and leaving one half of the funds in her savings account to each of her children, Wednesday and Pugsley. Unfortunately, before Morticia passes away, Wednesday dies in a freak accident while trying to teach Lurch to dance, leaving three of her own adult children. The trust does not clearly state whether Wednesday’s one-half share of the savings account should go to her children; the funds should be split equally, with Pugsley and Wednesday’s three children each receiving one-fourth; or all of the funds in the savings account should go to Pugsley. Pugsley and Wednesday’s three children, who are all adults, may enter into a nonjudicial settlement agreement in which they mutually consent to an interpretation of the terms of the trust regarding distribution. It is important to note that gift tax consequences result when value shifts from one beneficiary to another. However, a settlement resulting from a bona fide dispute or litigation should be treated as a transfer for full and adequate consideration and not a gift for gift tax purposes.

3. Assume that Homer and Marge own a snow plow business that their son Bart has been operating for twenty years. However, Homer and Marge’s trust leaves everything, including the business, to all of their children—Bart, Lisa, and Maggie—in equal shares. The business was the main piece of property owned by the trust. After Homer and Marge pass away, Bart wants to purchase the business and fund Lisa and Maggie’s shares with the proceeds of the sale. Bart, Lisa, and Maggie, who are all adults, may enter into a nonjudicial settlement agreement agreeing to deviate from the original distribution specified in the trust document. 

What Are the Downsides to a Nonjudicial Settlement Agreement?

Possible tax consequences. If a nonjudicial settlement agreement changes a trust’s distribution provisions or the beneficiaries’ interests, the change may result in transfer or income tax liability. For example, if a modification shifts a beneficial interest in the trust to a beneficiary who is a generation younger than the prior beneficiary, liability for the generation-skipping transfer tax may occur. If a nonjudicial settlement agreement involves the transfer of an interest in property to another beneficiary, for example, to settle a dispute, gift tax liability may arise. Certain modifications may also have income tax consequences. It is also important to keep in mind that some states impose their own inheritance taxes on certain transfers to relatives or third parties, which should be considered.

May be contrary to your loved one’s intentions. The trustmaker may have had strong feelings about how the money and property transferred to the trust should be handled, and a modification or termination of the trust pursuant to a nonjudicial settlement agreement may not be what they would have wanted. For example, terminating a trust prior to the original termination date because the beneficiary needs the funds for daily living expenses may not violate a material purpose of the trust; but, if the trustmaker thought the beneficiary was too immature to handle the funds before a certain age, they would not want the trust to terminate early.

We Can Help

If you are the beneficiary or trustee of a trust with provisions that are confusing or incomplete, or if circumstances have changed since the trust document was drafted that make its application difficult or impossible, a nonjudicial settlement agreement may be able to resolve those issues. Call us today so we can meet to discuss these or other issues that you have encountered in the administration of a trust.