Five Easy Pieces:

Fixing or Redesigning Irrevocable Plans

Clients often consult us about the terms of older trusts or other arrangements that may have been put in place by a spouse, parents or grandparents at a time when the factual circumstances or family objectives were different. Even the terms of a trust created by the client just a few years ago may not be optimal due to a change in the applicable Federal or State tax rules. Typically, the arrangement is irrevocable, as it would need to be in order to achieve tax benefits. Clients ask if we can correct or at least improve an otherwise irrevocable, but no longer suitable, facet of an estate plan. Can we do it in a way that is legally effective, tax-efficient and emotionally satisfying for the client?

Depending on the circumstances, a number of easy fixes may be appropriate:

1. Exercising Discretionary Powers. Many trusts are discretionary, giving the Trustee an unlimited authority to pay out principal and income. Sometimes the solution can be as simple as asking the Trustee to distribute principal to a beneficiary so that it can be used more advantageously. Some examples:

• To allow a beneficiary to engage in planning for his or her own family;

• To intentionally include an asset in a beneficiary’s gross estate to achieve a step-up in basis;

• To create a longer-term “dynasty” family trust;

• To fund a business that would not otherwise be a suitable trust investment;

• To allow a beneficiary to leverage the use of his/her exemption prior to 2026 when the Federal exemption is scheduled to be reduced.