This article provides various options in evaluating whether an irrevocable trust that does not fulfill your wishes or fails to provide the needed flexibility for a change in circumstances. There are several remedies that may be available to fix these trusts even if the trust creator has died or did not retain or give a third party the power to modify the trust.
Trust might need revisions for various reasons:
Circumstances change – While estate planners set up a plan that will work for multiple generations and try to cover various contingencies, there might still be unpredictable changes in the circumstances when a once-successful plan no longer meets the needs of the beneficiaries in the way the client intended. When children become financially independent they might wish to forgo an expected inheritance and let their children to inherit instead. Beneficiaries may develop drug or alcohol problems, experience marital problems or credit issues, or suffer debilitating injuries or diseases for which government assistance would be available but the beneficiaries’ interests in the trust prevents it.
Incomplete information – Also, the estate plan can be defective from the beginning because the planner was unsuccessful in obtaining the client’s true financial picture, goals, or family circumstances. The plan fails when they do not address crucial information regarding assets, family disagreements, children out of wed-lock, or expected inheritances.
Changes in the Family – The plan might also fail when the plan does not contemplate a death out of the expected order, increases in longevity of family members, or the variety of relationships.
Tax laws changes – With the changes in the tax law, income tax planning became more important than estate tax planning. And those who so earnestly tried to avoid estate tax might need to shift their focus to income tax considerations.
Mistakes – anyone can make a mistake. The trust omits a critical clause, or contains a limited power of appointment where a general one was needed.
What are the options?
• Decanting. Frequently, older trusts contain undesired provisions that are unchangeable by the terms of the trust. Decanting is the process by which the assets in the trust with the undesired provisions are poured into a new trust or trusts with more favorable provisions.
• Disclaimers. Disclaimers can be a powerful tool in altering an estate plan. Sometimes called renunciations, disclaimers allow a party who has not accepted the benefits of the trust or gift to renounce the trust or gift so that it passes to another. If the disclaimer is qualified, the party making the disclaimer (the disclaimant) is not considered to have made a taxable gift or otherwise have acquired an interest in the property.
The tax implications surrounding decanting and disclaimers are complex and include issues of income, gift, estate, and generation-skipping transfer taxes. Feel free to contact our offices for review of your irrevocable trust and analysis if your trust qualifies for these
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