Posts Tagged: Trust Planning

Happy Thanksgiving to All:

“Although the grantor of an irrevocable trust surrenders the right to revoke the trust and amend its terms, the restrictions are no longer as limiting as they once were. Alternatives to judicial modifications abound. From nonjudicial settlement agreements to new trends in decanting practices to innovations in modifications by consent, clients, trustees, and beneficiaries have many potential avenues for modifying an irrevocable trust to accomplish their legacy planning goals.”

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“The novel coronavirus has led many people – trustees, trust beneficiaries and advisors alike – to relocate their primary workplace or residency for the time being, sometimes across state lines.  An irrevocable trust’s situs, or place of administration, may be impacted as this migration continues through the pandemic and likely into the future.  The results may be intentional or inadvertent, with each having its own benefits and risks that should be evaluated both opportunistically and out of an abundance of caution.”

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“The reciprocal trust doctrine can unwind legacy planning that involves mutually beneficial trusts; however, a careful and deliberate approach can shield transfers against application of the doctrine. In 2020, legacy planning for spouses and other related parties has focused largely on full use of their gift and estate tax exemptions due to the risk of prospective changes in the amounts of such exemptions. This type of planning often involves implementing mutually beneficial irrevocable trusts so that each party continues to have access to resources after the party gives assets away (e.g., spouses who each establish a spousal lifetime access trust (“SLAT”) for the benefit of the other spouse). However, such trusts can sometimes contravene the reciprocal trust doctrine, which applies to interrelated trusts that have substantially identical terms and are part of the same transaction or plan. While the facts of each case are unique, best practices indicate that related grantors vary several factors among the respective trust agreements to reduce the risk of reciprocal trust treatment.”

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“In the absence of life insurance, options for fiduciaries to generate needed liquidity for estate taxes and expenses may be limited, creating additional hurdles for estate administration and post-mortem planning.” 

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“Sample cases targeting trustees vividly illustrate unique fiduciary challenges in terms of trust administration and asset management, including for irrevocable life insurance trusts (“ILITs”).  The growing complexity of life insurance products and the potential for increased gifts in the next several years can make ILIT administration far more complicated than anticipated, particularly for non-professional trustees.”

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“Heckerling presenters emphasized that flexibility in planning will remain key for families and advisors through the on-going roll-out of the TCJA and related guidance.  Given the TCJA’s temporary nature, the possibility for future tax law changes depending on future election outcomes, and the many moving parts of planning for the “modern” family, successful plans will require active management and on-going monitoring of both federal and state tax and legal developments.” 

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“As creators (“grantors”) of irrevocable grantor trusts must pay the trusts’ annual income taxes without receiving any trust benefits, advisors typically suggest incorporating a tax reimbursement power that gives the trust flexibility to reimburse the grantor for the tax payment. Despite their prevalence, however, tax reimbursement powers must be crafted and used with care, not simply exercised as a matter of course.” 

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“With careful planning, donors of nongrantor trusts can achieve benefits similar to those provided by typical grantor trust provisions without triggering grantor trust status.”

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“While changing a trust’s situs can be beneficial to both the trust and the trust’s beneficiaries, the process requires careful navigation of, and compliance with, the terms of the trust instrument and the statutes of both the current and proposed places of administration.”

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