New trust statutes are being introduced at the state level throughout the country. These laws modernize outdated trust legislation that is no longer suitable for today's increasingly complex family structures and their resulting financial planning needs. However, not all states are participating, and the changes being introduced aren't necessarily the same from state to state.
These changes give grantors enhanced estate planning flexibility, primarily through three major provisions: directed trusts, trust decanting, and trust protectors.
Directed Trusts Allow for Specialized Trustees
Under a traditional single-trustee model, one trustee is responsible for everything, including keeping records, preparing tax returns, selecting and rebalancing investments, and even making distribution decisions.
However this model doesn't always suit each individual's wishes, assets or even their family dynamics. It can lack flexibility, and doesn't account for professional expertise and knowledge of the family. For example, family-member trustees may prefer making distribution decisions based on their intimate knowledge of the family's dynamics. While individuals acting for a corporate trustee may be more confident overseeing financial assets and portfolio management given their limited personal knowledge of the family.
As more individuals include alternative investments, real estate and even family businesses within a trust, it may take several individuals and/or entities with various skills to manage the trust successfully. Given these trends, many states now see value in enacting directed trust statutes to entice trust business to their states.
Directed trust statutes allow the splitting of trust duties between several specialists:
- Trust advisors should be people who know the family and can make sound decisions regarding distributions and beneficiaries
- Administrative trustees are entrusted with record keeping and the management of the investment portfolio
- Investment advisors or committees can make all the decisions regarding a specific asset, such as a family business
Directed trust statutes vary between states, and a grantor doesn't have to live in the state in which he or she sets up a trust, so you can choose the state with the directed trust statutes that best serves your wishes.
Decanting Trusts Leaves Unwanted Restrictions Behind
Traditionally, irrevocable trusts don't allow for modifications to the terms of the trust. But some states are enacting "decanting" statutes, which lets the trustee transfer assets from an old irrevocable trust to a newer, more flexible trust with little or no court involvement.
Decanting allows assets to be "poured" into a new trust, leaving unwanted terms behind in the old trust. It is particularly effective for long-term irrevocable trusts facing tax, family and environmental changes that make it difficult to fulfill the trusts' original purposes.
In 2015, the Uniform Law Commission's Committee on Trust Decanting created the Uniform Trust Decanting Act. The act combines elements of state statutes with case law to guide decision-making in the decanting process.1
By January 2016, more than 23 states had already enacted decanting statutes.2 Through September 2016, another four states, California, Colorado, Illinois and New Mexico have either introduced or enacted decanting statutes.3
This popular new statute allows for updating an irrevocable trust's provisions in the face of new circumstances the grantor couldn't have predicted. Common reasons for decanting may include:
- Correcting mistakes or ambiguities in the original trust
- Segregating trustee duties
- Combining or dividing trusts
- Changing where a trust is located, i.e., its "situs"
- Adding spendthrift language for credit protection
- Adapting to changing situations of or concerns about beneficiaries through means such as delayed distributions or other specific provisions
Trust Protectors Can Represent Your Intent
The additional flexibility of new trust provisions also bring greater complexity and risk, making careful oversight of a trust even more critical than before. Many states have addressed this by introducing "trust protector" statutes.
A trust protector is a person named to oversee the trust and trustees, or to take charge under certain circumstances to make sure the grantor's intent is followed. Potential duties of a trust protector may include:
- Adding and/or removing trustees
- Amending the trust to correct errors
- Changing the trust's situs or beneficiaries
In a nutshell, a trust protector tries to ensure the trust agreement reflects the grantor's original intent in the face of changing circumstances.
Be Specific About What You Want
The additional flexibility of the new trust statutes requires grantors and their planners to be detailed and specific in creating trust documentation that reflects their wishes. In particular, grantors should take the following actions:
- Clearly indicate your intentions so future generations know exactly what you intended.
- Pay close attention to a trust's location ("situs"), bearing in mind variations in state trust law. Review state legislation and choose the state with laws best suited to match your wishes. Note that a connection, such as a home, place of business, residence of beneficiaries or trustees may be a requirement for a trust to be set up in a state. Also, decide if a future representative should be empowered to change the trust's location.
- Remember to draft documents with future flexibility in mind, as further societal and economic change is inevitable.
- Incorporate proper oversight, coordination and control when planning so that the flexibility of new trust laws isn't abused to the detriment of the trust or to such an extent that your wishes are no longer reflected.
1 Orzeske, Benjamin, "Legislative Fact Sheet - Trust Decanting," Uniform Law Commission, September 2016
2 Leimberg, Steve, LISI Estate Planning Newsletter #2372 (January 7, 2016), per National Association of Estate Planners & Councils (NAEPC) Journal of Estate & Tax Planning, Issue 23, January 7, 2016
3 Orzeske, Benjamin, "Acts: Trust Decanting," Uniform Law Commission, September 2016