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, and changes over time in family circumstances, keeping your trust up-to-date can be challenging. Here are some techniques to keep your trust flexible to help deal with change, even where you are unable to do so yourself. You may wish to include one or more in your estate plan:

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 ($12.06 Million/each for persons dying in 2022–2025, but which is likely to revert to a much lower number after 2025, when the current exemption ‘sunsets’).  

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 “skips” her and goes immediately to their children, the appreciation attributable to the disclaimed assets will then be owned by their children and will escape estate tax at the wife’s later death. 

In larger estates, this technique can potentially save a significant amount of tax upon the surviving spouse’s later demise. For more modest estates, since the disclaimed assets “skip over” the surviving spouse and pass directly to the children or other designated successor beneficiaries, it can save the time and expense of a second estate or trust administration upon the surviving spouse’s death. Its use can also accelerate the children’s inheritance. The good news is that the decision as to whether, and to what extent, a disclaimer should be exercised can be made up until 9 months after the first spouse’s death, providing time for reflection. However, if not exercised by that deadline, it then lapses. In our view, appropriate disclaimer provisions should be included in every estate plan.

4) Permit Decanting: Decanting is a term borrowed from wine vintners, and in the trust world it refers to modifying an existing trust to get rid of unwanted provisions (i.e., “sediment”, for vintners), by “pouring” the good provisions into a new trust that is free of the unwanted provisions.  In 2019, California became one of a growing number of states to adopt the Uniform Trust Decanting Act, which now allows a trustee to make changes to a trust without initiating a judicial proceeding, upon notice to, and usually with the consent of, the trust beneficiaries. Decanting can be implemented so long as the trust does not expressly prohibit this technique. Changes via decanting can even be made, in many cases, after the death of the original creator(s) of the trust. Here are some examples of its application: to create a Special Needs Trust to hold the share of a beneficiary then on public benefits; to comply with changes in the tax code; to address changes in family circumstances, etc. For more, see this article written for a lay readership, and this one written for lawyers.

5) Include a Power of Appointment: A Power of Appointment (“POA”) is a power held by a designated individual, usually the surviving spouse, in a couple’s joint trust, to take another look at the plan design and modify it as the power holder feels is then appropriate, typically some time after the death of the first spouse. The survivor can then re-arrange the distribution of trust assets, and add or delete beneficiaries, as he/she feels circumstances then require. It can be very useful when family circumstances have changed since the trust was originally created, for example by deaths, births, divorces or other changes in relationships (whether they be positive or negative).

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 at least some mechanisms to deal with this “third rail” of estate planning.