Irrevocable Trust

Strategies for Amending an Irrevocable Trust

Irrevocable-Trust

Irrevocable trusts are important tools in estate planning for many different reasons. For those of modest means, an irrevocable income -only trust is a great way to protect your home and non-retirement assets from the costs associated with long-term care. For the affluent, irrevocable trusts can be a way of saving state and federal estate taxes, as well as state-level income taxes. While setting up a trust that sounds as if its terms are unchangeable can be daunting to some clients, a good lawyer can also quickly explain that an irrevocable trust, despite its name, is subject to change and amendment. Below are four techniques that will allow you to reap the advantages of an irrevocable trust while maintaining the control and flexibility that are the hallmarks of any good estate plan.

1. Exercise of a Power of Appointment

Many irrevocable trusts contain a mechanism known as a power of appointment. This mechanism allows certain individuals to redirect where the trust assets will go. There are two main types of power of appointment: a general power of appointment, in which the holder of the power can appoint property to him or herself, and a limited or special power of appointment, in which power holders cannot appoint trust property to themselves, their creditors, their estates, or the creditors of their estates.

Sometimes, these powers may be exercised by simply filing a notarized instrument with the trustee, and at other times, they may be exercised via the power holder's last will and testament. These mechanisms are often baked into the trust terms to allow planning for future unseen events and provide flexibility in planning. The exercise or non-exercise of these powers can have significant tax and asset protection implications. Consult with your attorney before implementing any changes to an estate plan via this mechanism.

2. Use a Non-Judicial Settlement Agreement

A non-judicial settlement agreement, or NJSA for short, is an agreement among the trust's beneficiaries, the trustee, and potentially the trust's grantor to alter the terms of an irrevocable trust. 

Effectively, if all of the parties to a trust agree to alter its terms, then the trust can be amended. Short of obstructing the trust's initial purpose, an NJSA provides trustees and beneficiaries with a virtually unlimited ability to amend the terms of a trust. An NJSA can also be used to terminate a trust when all parties agree that the initial purpose of the trust has been fulfilled and that continuing the trust would be an uneconomic endeavor.

3. Decanting

Much like pouring a bottle of wine from one container into another, the decanting of a trust can be used to accomplish an amendment of the trust's terms without disturbing its underlying purpose. An important distinction from an NJSA is that a trustee can usually carry out a decanting without the consent of current or future beneficiaries.

Decantings are best used when the administrative provisions of the trust need to be updated to address some unexpected change in either the practical administration of the trust or tax law. For example, a trust may provide that is governed by New York law, but if the majority of the beneficiaries have now relocated to other jurisdictions, the trustee may find that the tax laws of, say, Florida or New Hampshire might provide a better tax result. 

Another instance where decanting might help is if the original trust instrument fails to provide for an adequate succession of trustees due to an intervening death or dementia diagnosis. Here, the trustee can establish an adequate succession mechanism without petitioning the court. 

Importantly, decanting cannot usually be used to change a trust's material purpose or substantially alter a beneficiary's interests. It is thus best used when administrative changes need to be made. These changes may seem minor but can result in long-term savings and efficiency in administration. 

4. Judicial Reformation

When all else fails, a court can be asked to intervene upon the petition of a grantor, trustee or beneficiary to alter the terms of an irrevocable trust. As one may imagine, this process can be time-consuming, and judges are likely to closely scrutinize any requested change that does not have the consent of an interested party. This is the most costly mechanism by which to change a trust and perhaps the route that is least likely to succeed. When drafting a petition to change the terms of an irrevocable trust, care should be given to request a very narrowly tailored remedy that will not upset the beneficial interests of the parties involved. In our experience, judges are more likely to approve such things as the appointment of successor trustees, requests for changes in the situs of administration, and similar changes of an administrative nature. A petition seeking the removal of trustees and changing of beneficial interests is generally an uphill battle and should only be undertaken as a last resort. 

Other Possible Avenues to Explore

Sometimes, more than the above methods are needed to address the situation. Prudent trustees might terminate a trust and start from scratch by distributing the trust assets to an eligible and cooperative beneficiary. Care must be taken, however, regarding the gift tax implications of such a strategy. Similarly, trustees should be transparent with beneficiaries, consistent with their duty to inform and duties of good faith and fair dealing. The revision of an irrevocable trust's terms often involves practical and ethical considerations that are implicated by the trustee's fiduciary status. This is especially true when the trustee is a current or future beneficiary. Before undertaking any preceding steps, trustees should seek legal counsel to thoroughly address the practical, tax, and fiduciary dimensions involved.


  

September 12, 2024

Trust, Asset Protection, Will, Revocable Trust, Irrevocable Trust

Luck of the Irish – the saga of the Murphy family cottage - (based on a true story)

maine_dock 

In 1969, Patrick and Ann Murphy became the proud owners of a lovely cottage on the easterly shore of Pleasant Pond in Bethel, Maine. They spent summers enjoying the peace of being surrounded by nature and dreamed of future generations making memories during their summer vacations and holidays.


Eleven years later, Patrick and Ann followed through on their vision and gave the Murphy cottage in equal 1/7 shares to their seven children with gift deed. That is when the trouble began.

The Murphy family is now celebrating 50 wonderful years of family gatherings and adventures and their great-grandchildren are truly blessed by their legacy. Though, as the current owners make plans to pass their shares to the next generation, they are taking responsible Estate Planning steps and would like other families to learn from their valuable experience.

For starters, had Patrick and Ann had consulted an attorney in 1969, they may have decided to transfer the property through a trust, instead of with a simple gift deed, which would have allowed their children to benefit from a step-up in basis.

Next, as these seven children made their marks on the world, many of them followed opportunities that led them away from home. Their children ended up living in states outside of Maine including New Hampshire, Massachusetts, Maryland and Arizona. This geography led to challenges since there was no formal management agreement in place. The owners relatively close-by in Massachusetts and New Hampshire were able to enjoy the cottage more, but were also disproportionately responsible for the labor-intensive responsibilities of maintaining a seasonal cottage.  The more distant owners in Maryland and Arizona questioned why they need to make equal financial contributions to upkeep and maintenance since they weren’t able to spend as much time enjoying the cottage. 

Then, in the mid-1990’s one of the siblings passed away suddenly and had not done any estate planning. Along with mourning the tragic loss of their brother emotionally, the extended family had to deal with complex, time-consuming, expensive intestacy proceedings in two states.

To complicate matters further, when four of the children decided to sell off their 1/7 shares, one of the children’s spouses volunteered as an attorney to handle the legal paperwork as a cost-savings favor to the siblings. Unfortunately, down the road minor issues such as missing spousal consent waivers required in Maine jurisdiction had major ramifications, so the family would have been better off doing everything by the book instead accepting the good faith effort of a family member.

When Molly, one of the two remaining owners with a 75% share, arrived at our firm to do her Estate Planning, she wanted to make sure the Murphy cottage would be saved as an important part of her legacy and passed on smoothly to her children and grandchildren. Our firm facilitated conversations with Molly and her brother Matthew, the other 25% owner, to bring their wishes to fruition.

Our firm coordinated with local Maine counsel and family members to run a full title search, execute corrective deeds, and transfer the property into the Murphy Cottage LLC with a clear governance structure. Our "Family Vacation Home Holding Structure Chart" provides details on Trust vs. LLC ownership

The Murphy Cottage LLC established terms including:

  • Schedule for contributions to the annual budget and a replenishment of the capital fund based on ownership share;
  • Decision making guidelines for improvement projects;
  • Cottage use rules of conduct to make sure everyone shows respect for the property and its natural setting;
  • Fair labor compensation rates for members that have the time, skills and geographic ability to contribute to tasks such as opening and closing, moving docks and boats, and doing major projects such as building a deck, fixing the structural issues and repairing the rotted screen porch;
  • Allocation and reservation process for prime weeks and procedure for owners offering their weeks to other family members for an agreed reimbursement fee;
  • Succession plan for current owners to designate their direct descendant children as the family branch’s new owner in their individual Trusts;
  • Buy-out clause for any owners that are delinquent and are not able to stay in good standing;
  • Process for selling shares and option for sale of the entire property in the event that 2/3 owners are in agreement.

Thanks to Molly and Matthew’s efforts, future Murphy generations will be swimming in the pristine fresh water, playing with tadpoles and frogs, fishing for trout off the edge of the canoe, reading books on an Adirondack chair, hiking to the top of Mt. Baker for breathtaking views and drifting off to sleep to the eerie, beautiful calls of the loons. 

If you have a summer home that you want to preserve as your legacy, contact us today.

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January 14, 2022

Tax Saving, Trust, Tax Savings, Asset Protection, Will, Revocable Trust, Irrevocable Trust

The Advantages and disadvantages of a Will, a Revocable Trust, and an Irrevocable Trust

Wills_Estate-Planning

 

There are a host of complicated terms associated with the legal practice of estate planning, but the Donohue, O’Connell & Riley team prides itself on making the process as simple for our clients as we can. Download our free comparison chart to learn if a Will, Revocable Trust or an Irrevocable Trust is best for you here.

 

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February 26, 2019