Client and prospect meetings need to include a review of the estate plan – does it still work as expected, is the trust funded, have beneficiary designations been completed, did any laws change, have family or finances changed, how old are the documents, and was there a move to a new state? Recognizing when an estate plan needs to be updated will lead to meaningful discussions about what keeps clients and prospects up at night. When you can help alleviate their concerns, you’re a hero to your clients.
Just When You Thought an Irrevocable Trust Couldn’t Be Changed: 5 Ways to Modify an Irrevocable Trust
Irrevocable trusts shouldn’t be left to languish as the years go by. In this issue, we’ll show you why and how an old or out-of-date irrevocable trust can be modified to benefit you, your clients, their spouses, or other beneficiaries. And, of course, it’s all totally legal.
How Trust Modifications Benefit Your Book of Business
Understanding why and how an old and stale trust can be modernized will benefit your clients and probably also your business because:
● Tax-related complexities of outdated or poorly worded irrevocable trusts—such as high tax rates on capital gains or undistributed income in such trusts, or the forfeited opportunity for a step-up in basis at a second death—may now be at odds with your clients’ goals and circumstances. An up-to-date trust can take advantage of opportunities to save taxes.
● Old trusts may limit your ability to wisely manage assets inside such trusts as part of an integrated total portfolio approach. This may mean poorer investment and tax outcomes for your client and more time-consuming management approaches for you, perhaps without compensation for that extra customization. An up-to-date trust can make management easier for you and more productive for your clients.
● In some cases, your clients may have declined your offers to manage assets in such trusts since making any changes to the existing holdings would trigger income and/or capital gains taxes plus possible surtaxes, all hitting at the aggressively accelerated trust tax-rate schedules. But, if you could show them strategies for getting rid of the handcuffs, not only might your clients value the improved flexibility and diversification, but you might win the opportunity to manage those assets.
● The beneficiaries, trustees, and your clients’ other advisors will appreciate your insight, strengthening their interest to refer you.
Red Flags Indicating an Irrevocable Trust Should Be Modified
After a trust becomes irrevocable, lives, finances, and laws will undoubtedly change. As such, the trust may need to be modified to:
● Obtain a step-up in basis.
● Minimize income taxes or estate taxes.
● Qualify a beneficiary for government benefits.
● Change the trustee, the provisions governing the trustee, or the trustee’s powers.
● Modify the distribution terms or pattern.
● Adjust or remove a power of appointment.
● Add or remove beneficiaries.
● Move the trust to a new jurisdiction.
● Change the governing law.
● Add or remove a trust protector or advisor.
How Irrevocable Trusts Can Be Modified
The appropriate modification method depends on many factors, including trust agreement terms, length of irrevocability, identity of current and remainder beneficiaries, and governing laws. All that being said, an irrevocable trust can be changed by:
1. Judicial Reformation: Reformation consists of going to court and asking a judge to determine that the trust maker’s intent has been frustrated and to restate the trust to meet that intent.
2. Judicial or Non-Judicial Conversion: Conversion involves invoking the provisions of the trust agreement or state law to convert a discretionary income and principal trust into a mandatory unitrust or vice versa.
3. Judicial or Non-Judicial Modification: Modification refers to changing the terms of the trust by agreement or a court order to meet the trust maker’s intent such as tax‐saving objectives. We must show that an unforeseen change of circumstance frustrates the trust maker’s intent.
4. Invoking the Trust Protector: Trust protector provisions allows a third‐party trust protector to step in and exercise specific modification powers as defined in the trust agreement.
5. Decanting the Trust: Decanting is the process of taking the funds from an existing trust and distributing them into a new trust with more favorable terms.
WARNING: Changing an Irrevocable Trust Isn’t Easy and May Not Be the Best Choice
An irrevocable trust that no longer makes practical or economic sense is a prime target for change; however, despite a trust’s shortcomings, it may be impossible to change. Sometimes, the best option may be to terminate the trust altogether and distribute what’s left to the beneficiaries.
Let’s Work Together
We are happy to talk you through the options and pros and cons of trust modification or termination, the steps that would be required, how much it would cost, and how much it can benefit your clients. We are always here to help add value to your client relationships and convert prospects into clients.
To get more information regarding this or any related topic, please visit our website www.TEPLG.com or call us at 630-871-8778.
Everyone has heard of wills and trusts. Most articles written on these topics, however, often presume that everyone knows the basics of these important documents. But, in reality, many of us don’t – and with good reason – as they’re rooted in complicated, centuries-old law.
Let’s face it, if you’re not an estate planning attorney, these concepts tend to remain merely that – concepts. So, if you’re “fuzzy” about wills and trusts, know that you are not alone. After we show you the difference between these two documents, we’ll tell you why a trust is the better choice.
The United States Supreme Court has determined that inherited IRAs are not protected from bankruptcy creditors. Although this development presents a serious risk for clients, it also presents a planning opportunity for financial advisors.
No one likes to think about the possibility of their own disability or the disability of a loved one. However, as the statistics below demonstrate, we should all plan for at least a temporary disability. This issue of The ElderCounselorTM examines the eye-opening statistics surrounding disability and some of the common disability planning options. Disability planning is one area where we can give each and every person and family we work with great comfort in knowing that, if they or a loved one becomes disabled, they will be prepared.
The recent Supreme Court ruling providing equal marriage rights for same-sex couples might have a significant effect on some of your clients’ estate plans. Here are three areas which we encourage you to review with any clients considering a walk down the aisle with someone of the same gender or whose marital status must now be recognized in a state which previously disallowed same-sex marriage.
Your clients likely set up a living trust with the goal of avoiding probate. When properly prepared and funded, a trust based estate plan will avoid the public, costly, and time-consuming probate court process. Shockingly, many people still make a big mistake, catapulting their assets and loved ones right into the oft dreaded probate court system. That mistake? They fail to fund their trust.
Creating family limited partnerships (FLP) can be a great asset protection strategy for business owning clients when it’s time to hand down that business to younger generations. Doing so can reduce gift and estate taxes.
However, the Internal Revenue Service appears to be willing to challenge this strategy in court, according an article in the Wall Street Journal, which highlighted a U.S. Tax Court case where the IRS fought the passing down of portfolios of publicly traded securities at a large discount.
Is “Empire” the best estate planning drama on television?
Season 2 of the well-received Fox show began Sept. 23. WealthManagement.com recently published a great article highlighting the series, explaining why the epic squabbling family drama has grown a legion of dedicated fans. The show has been called “King Lear”-meets-hip-hop by some television critics.
If we set aside the show’s entertainment industry backdrop and wild storylines of murder, manipulation, and mental illness, you’re left with a core story of real-world estate planning issues faced by a business owner.
There’s a not-so-funny joke we hear some clients in midlife say when they don’t have a retirement plan engaged: “Oh, I’ll never retire. I’ll just keep working.”
That’s a pretty naïve outlook when you consider the many potential health, housing and financial pitfalls that can eliminate even the wealthiest client’s life savings.