Q. My husband and I are concerned about how to keep our trust up to date in light of changing tax law and changing family circumstances. What if we are too ill to make changes ourselves. Any thoughts on how we can handle these concerns?
A. With the ever-changing tax landscape, keeping your trust up-to-date can be difficult. Here are some techniques to keep your trust flexible to help deal with change, even where you are unable to do so yourself:
1) Use a Power Of Attorney: delegate authority to a trusted agent to amend your trust as tax laws and family circumstances warrant. Your agent would typically act only if you were unable to do so yourself. To be valid, this power must be expressly stated in a Durable Power Of Attorney (“DPOA”) and reciprocal provisions must also be in your trust. Unfortunately, this dual requirement is too often overlooked, resulting in an ineffective delegation of authority.
2) Use a Trust Protector: an emerging mechanism involves naming an Trust Protector (“TP”) in your trust in order to update your trust as need requires. The TP would be independent of your trustee, who would handle normal trust administration. By contrast, the TP would act like a “super trustee”: he would have the power to replace the trustee, modify administrative provisions and even change the ultimate disposition of trust assets in order to meet your stated objectives. Unlike the trustee, who would have a fiduciary duty to act according to the existing provisions of the trust, the TP could modify or override those provisions to comply with changing law and your expressed intent. The TP must be someone who is not a beneficiary under your estate plan, but in whom you have a high degree of trust. Unlike the agent acting under a DPOA, the TP could even make some changes to your trust after your death if necessary to meet your stated goals, e.g. tax avoidance.
3) Include Disclaimer Provisions: a disclaimer is the right to decline a bequest, so that it goes to the next person in line, typically one’s children. Disclaimers can be very effective in postmortem tax planning, especially as a technique to remove future appreciation from one’s taxable estate. Example: assume that a married couple has a combined community property estate valued at just under the current Federal Estate Tax Exemption amount ($5.45 Million/each for persons dying in 2016). Upon husband’s death, assume their estate plan directs that all goes to wife as the surviving spouse. If she reasonably anticipates future appreciation, it is likely that–upon her later demise–the value of her estate will then be above the amount that can escape estate tax. If, however, upon her husband’s death she makes a timely disclaimer of a portion of her “inheritance”, so that a portion goes to their children, the appreciation attributable to the disclaimed assets will then be owned by her children and will escape estate tax at the wife’s later death. This technique can potentially save a significant amount of tax upon the wife’s later demise. The good news is that the decision as to whether, and to what extent, a disclaimer should be exercised can be deferred until the time of the first spouse’s death. Thereafter, it must be timely exercised or it lapses. In our view, appropriate disclaimer provisions should be included in every estate plan.
It has been said that the only certainties in life are death and taxes. I would add a third: change. Make sure that your estate plan includes mechanisms to deal with this “third rail” of estate planning.