Tuesday, September 8, 2015

Decanting: How to Fix a Trust That Isn’t Getting Better With Age


While many wines get better with age, the same cannot be said for some irrevocable trusts.  Maybe you’re the beneficiary of a trust created by your great grandfather seventy years ago that no longer makes sense.  Or maybe you created an irrevocable trust twenty years ago that doesn’t work as it should.  Is there any way to fix an irrevocable trust that has turned from a fine wine into vinegar?  You may be surprised to learn that under certain circumstances the answer is yes, by “decanting” the old broken trust into a brand new one.

What Does It Mean to “Decant” a Trust?

Wine lovers know that the term “decant” means to pour wine from one container into another in order to open up the aromas and flavors of the wine.  In the world of irrevocable trusts “decant” means the legal process through which the trustee appoints or distributes trust property in further trust for the benefit of one or more of the beneficiaries.  In other words, the trustee transfers some or all of the property held in an existing trust into a brand new trust with different and more favorable terms.

When Does It Make Sense to Decant a Trust?

Decanting a trust makes sense under many different circumstances:

·         Tweaking the trustee provisions to clarify who can or cannot serve as the trustee.
·         Expanding or limiting the powers of the trustee.
·         Converting a trust that terminates when a beneficiary reaches a certain age into a lifetime trust.
·         Changing a support trust into a full discretionary trust in order to protect the trust assets from the beneficiary’s creditors.
·         Clarifying ambiguous provisions or drafting errors in the existing trust.
·         Changing the governing law or trust situs to a less taxing or more beneficiary-friendly state.
·         Adding, modifying or removing powers of appointment for income tax or other reasons.
·         Merging similar trusts into a single trust for the same beneficiary.
·         Creating separate trusts from a single trust to address the differing needs of multiple beneficiaries.
·         Providing for and protecting a special needs beneficiary.

What is the Process for Decanting a Trust?

First of all, decanting must be allowed under applicable state case law or statutory law.  Aside from this, the trust agreement may contain specific instructions with regard to when or how a trust may be decanted.

Once it is determined that a trust can and should be decanted, the next step is for the trustee to create the new trust agreement with the desired provisions.  The trustee must then transfer some or all of the property from the existing trust into the new trust.  Any assets remaining in the existing trust will continue to be administered under its terms, otherwise the empty trust will terminate.

Beware:  Decanting is Not the Only Solution to Fix a Broken Trust


While decanting may work under certain circumstances, it is not the only way to fix a “broken” irrevocable trust.  Our firm can help you evaluate all of the options available to fix your broken trust and determine which ones will work the best for your situation.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.
The Advisors Forum

Tuesday, September 1, 2015

What’s Hot in Estate Planning Right Now May Surprise You

Estate planning has truly evolved over the past 20 years.  Gone is the uncertainty about federal estate taxes and the absolute requirement for married couples to use complex trusts to minimize these taxes.  But also gone is planning for the “traditional” family.  In fact, today’s estate planning is more complicated than ever before.

Estate Planning in 1995 Versus 2015

In 1995 the federal estate tax exemption was only $600,000 and the estate tax rate was 55%.  Back then it was easy to accumulate a taxable estate by simply owning a home, a few investments and some life insurance.  And while married couples could pass on two times the exemption ($1.2 million) free from estate taxes by incorporating Marital/Family Trusts into their estate plan, these trusts came with strings attached.  Yet these inflexible trusts were worth it to avoid the hefty 55% tax. 

Today the federal estate tax exemption is a whopping $5.43 million (and will increase annually based on inflation) and the federal estate tax rate has dropped to 40%.  In addition, married couples can now combine their estate tax exemptions and pass on two times the threshold ($10.68 million) without Marital/Family Trust planning by making the “portability” election.  As a result, the focus of estate planning has shifted away from estate tax planning to more relevant concerns:

·         While the federal estate tax rate has decreased from 55% to 40%, since 2012 the top federal income tax rate has increased from 35% to 43.4%, and the top long-term capital gains rate has increased from 15% to 23.8%.  This has made minimizing income taxes an integral part of estate planning.
·         Today many families are blended, dysfunctional or completely estranged.  This has made flexible estate planning and finding ways to modify what was thought to be an irrevocable plan the “new normal.”

Estate Planning for the “New Normal”

Today with the generous and ever-increasing estate tax exemption and “portability” of the exemption available to married couples, it is estimated that 99.8% of Americans will have no federal estate tax exposure.  As a result, traditional Marital/Family Trust planning is no longer a necessity for a majority of families.  Therefore, instead of planning for excluding assets from the taxable estate, the new trend for couples with less than $10 million is to plan for estate inclusion so that their heirs will receive a basis step up.  This can be accomplished by:

·         Leaving assets outright to your spouse and making the portability election; but beware if your spouse is a spendthrift, has creditor issues, or if you want to insure your assets stay within your bloodline.
·         Taking a wait-and-see approach, such as all to the Family Trust with the ability to disclaim to the Marital Trust or vice versa.
·         Including flexibility in the Marital Trust provisions.
·         Using a Family Trust and allowing for basis increase through a customized power of appointment.

But while building flexibility into your estate plan is ideal, what happens if your plan becomes irrevocable before you have had a chance to make it flexible?  What if it would be advantageous to include assets in the estate of your spouse or a beneficiary, change the situs of your trust or its governing law, add or remove beneficiaries, add a trust protector or advisor, or change the trustee structure?  Is it possible to modify or even revoke your inflexible, irrevocable trust?  Under many circumstances the answer is yes; these things can be accomplished by agreement or a court order through:

·         Reforming the trust:  Using judicial interpretation to determine and properly restate your intent.
·         Modifying the trust:  Changing the terms of the trust to meet your taxsaving objectives.
·         Equitably deviating the trust:  Modifying the trust provisions upon the showing of an unforeseen change in circumstance the impact of which would frustrate your intent.
·         Invoking the Trust Protector:  Allowing a thirdparty to exercise specific powers as defined in the trust agreement.
·         Decanting the trust:  Allowing the trustee to distribute property in further trust for a beneficiary.

Where Should Your Estate Plan Go From Here?

Estate-tax-driven estate plans are becoming a thing of the past.  Higher income tax rates, changing state laws, unfavorable jurisdictions and wayward heirs add up to the need for an estate plan that is able to adapt over time.  Modern families need modern estate planning solutions, and our firm stands ready to help you create a flexible estate plan.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.
The Advisors Forum

Aging.gov: A New Resource for Older Americans and Their Families

More than 10,000 people turn 65 in the U.S. every day according to Aging.gov (http://www.hhs.gov/aging/), a new website recently launched by the Obama administration.  The goal of this website is to act as gateway for older Americans and their families, friends and caregivers to locate information about leading a healthy lifestyle, options for health care, preventing elder abuse, and retirement planning. 

Healthy Aging

According to the website, healthy eating habits, physical activity, and involvement in your community help contribute to living a long, productive, and meaningful life.  This section of the website offers links to dietary guidelines for older Americans, the American Dietetic Association, the National Institutes of Health (NIH) Senior Health website, and resources for volunteering and senior employment.

Health Issues

According to the website, focusing on preventive care, managing health conditions, and understanding medications help contribute to an increased quality of life.  This section of the website offers links to various Medicare resources (hospital compare, home health compare, dialysis facility compare); information about mental health, Alzheimer’s disease and dementia; information about other specific diseases, conditions and injuries (arthritis, cancer, diabetes, fall prevention, hearing, heart and lung, HIV/AIDs, vision); and resources for medications (Medicare prescription drug coverage) and treatments.

Long-Term Care

According to the website, long-term care – either through in-home assistance, community programs, or residential facilities – allows you to stay active and accomplish everyday tasks.  This section of the website offers links for finding home care and assisted living facilities; resources for caregivers; securing benefits (Benefits.gov, Medicare.gov); planning for long-term care (LongTermCare.gov, Medicaid.gov); veteran’s services; and preparing for end of life (Advance Directives, funeral planning, organ donation).

Elder Justice

According to the website, millions of older Americans encounter abuse, neglect, exploitation, or discrimination each year.  This section of the website offers links to help you identify scams, prevent fraud, address senior housing issues, stop elder abuse, and find legal assistance.

Retirement Planning & Security

According to the website, planning for retirement will allow you to enjoy financial security as you age without the risk of outliving your assets.  This section of the website offers links to resources for retirement planning, understanding your employer’s retirement plan, and investing (IRAs, investing wisely for seniors, preventing financial fraud).

State Resources

The final section of the website points out that resources to support older Americans and their families, friends and caregivers can vary from state to state and offers links to the departments of aging for all 50 states and the District of Columbia.

Final Thoughts on Aging.gov


Aging.gov offers a diverse amount of information to help you or a loved one navigate the challenges of growing older.  Instead of randomly searching for guidance and advice, this website is a good starting point for locating more specific information related to aging healthy, wealthy, and wise.


To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.
The Advisors Forum