Early in my career, I worked for two banks. As an investment officer, I was often asked to sit in the trust department meetings. One meeting is very memorable to me.
I remember the trust committee debating whether a beneficiary was entitled to purchase a car with funds from the trust. No one on the trust committee had ever met the trustee and barely knew the beneficiary. The trust committee quickly decided that the beneficiary could purchase a car with trust funds. The debate became whether the trust committee would grant a distribution to purchase a car along the lines of a Honda Accord or a Mercedes-Benz.
I could not help but think whether they had the right to make such a decision. They did not know the trustee or his wishes. The trust was also very old and times had changed. I suspected the beneficiary felt stuck.
Irrevocable trusts are very difficult to modify even if the changes are in the beneficiary’s best interest. So what happens if things change and you need to amend it?
Luckily, in many cases, a solution exists.
When Could It Be Time to Make a Change?
There are a variety of reasons why one may want to change an irrevocable trust. These reasons could include:
Decanting Is Not Just For Wine….
In the past, changing an irrevocable trust involved a lengthy and costly trip to court with costs potentially reaching tens of thousands of dollars. There could be another option called “decanting”.
Decanting lets trustees change certain terms of the trust by figuratively pouring the assets from an old trust into a new one. This can allow more favorable terms to be present in the new trust. Trustees have limits as to what they can do. In general terms, the trust agreement must allow the trustee to exercise discretion over the principal to decant a trust.
For example, trustees cannot change a beneficiary’s already-vested interest in a trust. They can, however, push back the age at which a beneficiary receives a payout from the trust or move the trust to a state that offers greater flexibility regarding taxes or administrative roles. If the trustee wants to resign, decanting can make it easier to name a new trustee. Decanting a trust takes place outside of court making it far less expensive than court proceedings. Costs typically range from $2,500 to $10,000.
About one half of all states permit decanting trusts, which involve many estate and income tax issues. It is very important to consult with your wealth manager, your estate attorney, and your tax professional before considering this strategy.
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