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Decanting is Not Just for Wine: “Revoking” an Irrevocable Trust

October 19, 2015 by 2 Comments

My how things have changed, or at least, how my understanding of things have changed. I graduated from law school in 1980 thinking that irrevocable meant just that. Once a trust became irrevocable–generally upon the death of the settlor–its terms turned to stone, fixed and barely movable. The only way to turn that stone back into something more malleable was a cumbersome process in which the trustee needed to secure the agreement of all the beneficiaries and then the court, before implementing any change to the trust. Again, that was my understanding at the time. I’m guessing it might be yours as well.

If trust law was ever that way in the past, it is certainly not that way today. The Uniform Trust Code (UTC) and various state “decanting” statutes have insured that. The UTC, implemented by a number of states, including both Wyoming and Utah, allows for judicial modification of trusts in a variety of circumstances, including “modification to achieve settlor’s tax objectives” and “modification or termination because of unanticipated circumstances.” But for our purposes here, I’m more interested in decanting, a process for modifying a trust somewhat analogous to decanting wine.

decanting

With wine, decanting involves pouring wine from one container to another in order to separate the wine from any sediment in the bottle, sediment that can ruin the taste. The process also infuses the wine with oxygen as the liquid passes from one container to another. Apparently–I don’t drink–pouring old wine into new bottles can improve the drinking experience.

With trusts, decanting involves “pouring” the old, irrevocable trust into a newer, more flexible trust, a trust better fitted to the needs of the parties to the trust at the time of the decanting. Maybe the decanting will result in the trustee having more flexible powers to better administer the trust. Maybe it will lead to better state and federal tax benefits. Maybe asset protection is the goal. For these reasons and more, trustees (often encouraged by beneficiaries) are looking to decanting as a way to deal with circumstances and issues unforeseen by the settlor of the original trust.

Decanting is not a new idea. Some argue that it has been allowed under the common law for a long time–at least since 1940–on the theory that if a trustee has discretionary authority to make distributions to a beneficiary from a trust, that trustee also has authority to make distributions in “further trust,” that is, into a new trust. But common law can be finicky and is subject to the whims of the local judiciary, so it’s with some relief that at least 22 states have enacted decanting statutes, codifying what was once only in the casebooks.

Wyoming’s decanting statute (Utah doesn’t have one), enacted in 2013, is short but illustrative:

§ 4-10-816. Specific powers of trustee 

(a) Without limiting the authority conferred by W.S. 4-10-815, [a statute that essentially frees the trustee from court supervision] a trustee may:

. . .

(xxviii) On distribution of trust income or principal pursuant to authority in the trust instrument to make discretionary distributions to a trust beneficiary, whether or not the discretionary distributions are pursuant to an ascertainable standard, make distributions of all or any portion of trust income or principal in further trust. (emphasis supplied)

Notice that there’s no mention of court supervision. No, this is a specific power granted trustees by statute, so the trustee can act on his or her own. That’s not to say that the court should never be involved. In fact, if the new trust contains provisions that might raise the hackles of one or more beneficiaries, the trustee would be wise to seek the court’s  blessing.

Now there are limitations to decanting, and it’s not something to do willy nilly. That said, if you’re a trustee or beneficiary of an irrevocable trust and if the old trust creaks and sways under the weight of today’s needs and demands, maybe it’s worth looking at decanting as a way to resolve those issues.

Filed Under: Decanting, Estate Planning, Trusts Tagged With: ,

Have a Question About Firearms Law?

October 9, 2015 by Leave a Comment

The Bureau of Alcohol, Tobacco, Firearms and Explosives’s website in general and library in particular is a treasure trove of information on firearms laws and regulations, much of it downloadable in PDF format. I’ve found the publications on this page quite helpful, especially

the Federal Firearms Regulations Reference Guide,

the Federal Firearms Licensee Quick Reference and Best Practices Guide,

the Best Practices: Transfers of Firearms by Private Sellers, and

the ATF National Firearms Act Handbook.

The first three are updated occasionally, so check the revision date. The first one is revised annually. The last link, to the AFT National Firearms Act Handbook, is not to a PDF but to webpage because it’s updated regularly.  In any case, all of these and more on the AFT’s site a excellent. Enjoy.

Filed Under: Bill of Rights, Firearms, Gun Trusts, NFA Trusts, Trusts Tagged With: , ,

The Best Way to Take the Stress out of Estate Planning

September 3, 2015 by Leave a Comment

Slide1Brian Vnak, over at MarketWatch, just penned a piece titled “How to Take the Stress Out of Estate Planning.” He gives four ideas to support his title, among them, number 3: “Gift assets while you’re still living — addition by subtraction.” That’s a good idea, by the way, if only to take the monkey off your back, put there by Andrew Carnegie, who famously said:

The man who dies rich, dies disgraced.

Yankee’s short piece could have been even shorter, had he talked to me first. The best way to take the stress out of estate planning is to get it done. To do it now. To be done with it.

Filed Under: Estate Planning 101, Trusts, Wills

Six Things to Ask Yourself as a Business Owner

August 28, 2015 by Leave a Comment

Another helpful link, this one from Northern Trust: 6 Things to Ask Yourself as a Business Owner. Sorry for the quick spate of links to videos and webinars. I happen to be on the look for something else, and found these instead. I thought they may be of interest to my readers. This one is short–about 2 minutes–but the six questions may prompt you to think more deeply about what you want to do with your business. Enjoy.

Filed Under: Business Planning, Trusts, Wealth Transfer

Estate Planning: How to Get Going and Why You Shouldn’t to Do It Yourself

August 28, 2015 by Leave a Comment

Slide1Courtesy of the ABA, here’s a link to an on-demand webinar that should answer a lot of your questions about estate planning. As the brief description of the webinar says, “The program is intended for the general public and does not require a background in the law of wills or trusts or tax.” Click on the link near the bottom of the page, enter your e-mail address and a few other details, and you’re set.

The webinar is 1 hour long and covers a lot of issues. If you have any questions, feel free to contact me.

By the way, access to the webinar ends in October 2015, so take advantage of access now.

 

Filed Under: Estate Planning 101, Trusts, Wills

5 Reasons You Might Need a Trust

August 15, 2015 by 1 Comment

Virtually everyone should have a will. To see why, go here. But most people would do well to have a trust. Get that? You don’t have to be Bill Gates to need a trust. Here are five reasons why:

1. Avoid probate. Probate is the word we use to describe the legal process, the court proceedings, that virtually all wills must go through, so that your property goes where you want it to go, so that the court can decide whether the guardian you chose for your children is the best person for the job, so that . . . the list goes on and on. A revocable trust saves you from all that. Rather than passing your property via your will, set up a revocable trust, then title your bank accounts, your home, and your other property in the name of the trustee–you–and you can avoid probate, at least for all the property in the trust. A by product of that process is that you can . . .

2. Preserve your privacy. Hand in hand with probate is the loss of your privacy. What do you think “the public record” means if it doesn’t mean the record of what goes on inside a court room? Go down to your local clerk of court’s office and ask for the court file for a recent probate, and you’ll see what I mean. Revocable trusts? They don’t go through probate; hence, your maintain your privacy.

3. Keep control. If you’ve ever seen Brewster’s Millions or Easy Money, you know all about control. In Brewster, Richard Pryor must spend $30 million in 30 days in order to inherit a larger estate. In Easy Money, Rodger Dangerfield has to turn his vices into virtues before he can inherit. Control. In some cases, it might come in handy. A trust can give it to you–even when you’re long gone.

4. Protect your property. Protect it, that is, until your intended beneficiaries are old enough or mature enough to take care of it on their own. Trusts can do that. Wills can’t.

5. Take care of you should you become incapacitated. Coupled with what is called a durable power of attorney, the trustee of your living trust can step in an manage your estate should you become incapacitated. With the power of attorney and the trust powers, he or she will essentially walk in your shoes and speak in your voice–be you . . . essentially.

Bonus: Reduce or eliminate your estate tax. Of course, if you have a lot of money, that is, if you have $5,430,000 or you and your spouse together have twice that amount–$10,860,000–you can use a trust to avoid or delay the estate tax on amounts over those sums. It gets complicated, so we’ll stop here.

Filed Under: Estate Planning, Estate Planning 101, Trusts

Trusts 101

July 1, 2015 by Leave a Comment

Slide1A trust is a fiduciary relationship between a trustee and beneficiaries of the trust. Trusts can be implied and express. Implied trusts are court created in order to prevent unjust enrichment (a constructive trust) or to carry out what the parties intended, but failed to do properly.

In estate planning, we concerned almost entirely with express trusts, trusts set up intentionally to achieve some goal or purpose, to avoid taxes or direct money to a charity, for example. To set up such a trust, a person–the settlor–must have the intent to do so and then must comply with three formalities:

1. There must be a res or property, a bank account, a piece of real estate, a life insurance policy, or some such.

2. The trust must have ascertainable beneficiaries. Why have a trust if there are no beneficiaries, right?

3. Finally, the trusts must have a trustee, though a court can appoint the trustee if the trust document doesn’t name one.

Express trusts are almost always laid out in a trust document that names the res, the beneficiaries, and the trust. Those documents also explain the trust’s purpose, list the trustee’s powers, and the like.

Express trusts can be testamentary, that is they come into existence upon death. Such trusts are generally established in a will and must always comply with the formal requirements of a will, In Wyoming that means the testator or maker of the will must sign the written/typewritten document and that at least two disinterested people must witness the testator’s signature. Though testamentary trusts are irrevocable upon death, the testator can change the terms of the trust while he is still alive.

Express trusts can also be established during the settlor’s lifetime. They are called inter-vivo trusts. People often set up revocable inter-vivos trusts, so they can test drive them before they die. Revocable trusts are not separate taxable entities. Thus, if you have a revocable trust with an investment account as part of the trust property, you will have to report the trust’s taxable income on your 1040 form. Upon the settlor’s death, that revocable trust become irrevocable.

Intervivos trusts can also be irrevocable from the beginning, but by doing so, you may also create a taxable event because, remember, the trust has to have a res, and if that res is large enough, you will have to transfer that property from your pocket to the trust’s pocket, if you will. We call that a gift, and a large enough gift will be subject to the federal gift tax system. Why? Because a revocable trust is a separate taxable entity, a separate person. But that’s enough on that subject for now.

Though the wealthy often use trusts to save estate taxes, they can also be a valuable estate planning tool for the middle class. But more on that later, in another place on this site.

Filed Under: Estate Planning, Estate Planning 101, Trusts, Wealth Transfer

5 Reasons You Need a Will

June 25, 2015 by Leave a Comment

No matter your economic circumstances, you should probably have a will, especially if you have a spouse, even more so if the two of you have children. Here are five reasons why:

1. You can use that new will to revoke the one you already have. That’s right: you already have a “will,” the one your state legislature drafted for you. Say, for example, that you live in Wyoming and you and your spouse have two children. And say that you die without having an attorney draft a will for you, that is, you die “intestate.” The Wyoming laws of intestacy–that “will” you didn’t think you had–direct that 1/2 of your estate goes to your spouse and the other 1/2 goes to your two children to share equally, regardless of whether that’s what you wanted to happen.

A state’s laws of intestacy cover all sorts of contingencies: Spouses with no children. Surviving children and no spouse. Deceased children who leave grandchildren. Etc. etc. etc. The problem is, of course, that the law probably doesn’t cover the situation the way you would want it covered. A properly drafted, valid will does.

2. A valid will is portable. Now suppose you’re fine with Wyoming’s law of intestacy. You love your spouse and both of your children. You’re okay with the “will” the Wyoming legislature drafted for you. In fact, you’re glad that your two children will share in your estate when you die. But suppose that you and your family decide to move to Utah, so you can take a new job. And suppose that you suffer a massive heart attack the first day on your new job. Guess what? Your children get nothing from your estate. Your spouse gets it all. Why? Because the Utah legislature says so, that’s why. Utah’s laws of intestacy are different than Wyoming’s, and because you moved to Utah, its laws govern. That doesn’t happen with actual wills because they’re portable; they go where you go, live where you live. (By the way, this discussion ignores a surviving spouse’s so-called “elective share,” which is a matter for another post.)

3. You can use your will to name a guardian for your minor children. If you don’t, the state will step in and do the job for you. Truth be told, the state will probably step in anyway if you nominate dud as guardian–the state takes the welfare of children seriously. However, if you are of sound mind when you name a guardian and if that person is a stand-up person, the court will generally approve your decision. Best practice, then, is to nominate a guardian in your will.

4. Your will is the place to name your personal representative (or executor). A personal representative or executor is charge with carrying out the instructions in your will about how to handle your property. Again, if you don’t name your personal representative, the state will.

5. Your will makes sure all your property makes it into your trust–if you have a trust. Such a will is called a pour-over will; that is, it “pours” the residue of your estate–the odds and ends, small accounts and expensive vases, you may have overlooked as you planned your estate–into a trust. If you have a trust. A subject for another 5 Reasons post, perhaps?

BONUS reason. Setting an appointment with an attorney to prepare a will that carries out your wishes will cause you to give serious thought to your family and your estate and to focus on the things that matter in a way that few other exercises will. Trust me. That’s an exercise well worth doing.

You need a will, one you had drafted, not one the state drafted for you.

Filed Under: Estate Planning, Estate Planning 101, Trusts, Wills
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