New York Estate Planning & Elder Law Blog
IRREVOCABLE TRUSTS COSTS AND BENEFITS
Trusts are valuable estate planning devices that allow for the transmission of wealth with lower tax liability. When proper estate management is picked, they also allow for the creation of future income, potentially allowing for the life of the trust in perpetuity. Trusts also allow for the beneficiaries to benefit from the income of the corpus of the trust, yet insure that their creditors cannot obtain the income producing assets itself. The same also applies for a financially irresponsible beneficiary, in that it provides income but prevents the financially irresponsible beneficiary from squandering the income producing asset. One of the most popular types of trusts is the irrevocable trust. As with anything in life, there are upsides and downsides; one of the downsides to an irrevocable trust is that in most circumstances, and, more particularly, most states, an irrevocable trust is usually irrevocable. Unwinding an irrevocable trust when it no longer functions as it should, due to, for example, a major change in the estate and gift tax law is possible but must be done correctly, whereby the assets from the trust may be transferred or gifted to the beneficiaries or the settlor if still alive.
WHY TO MODIFY OR REVOKE?
There are times when a trust no longer accomplishes the stated intention of the settlor. For example, in December 2010 Congress raised the estate tax exemption to five million dollars, but for only two years. So, at the end of 2012 many people thought that the estate and gift tax exemption was going to go back down to the previous one million dollars and thus created irrevocable trust.
With hindsight we now know that Congress made the then hitherto heightened estate and gift tax exemptions permanent. In addition, in 2011, Congress allowed for a surviving spouse to inherit any unused estate tax exemption. Prior to this, individuals believed that the much lower estate and gift tax exemptions would remain and created trusts optimized to the then lower tax amount. Finally, let us not forget that personality conflict occurs. Sometimes there may be very valid professional reasons why a beneficiary may want to do things according to a certain school of thought, while the trustee favors the opposing school of thought.
NEW YORK LAW
New York law allows a settlor to amend or revoke an irrevocable trust if he/she obtains the informed, express consent permission of the beneficiaries. If the beneficiaries include a minor, the law forgoes the need for informed, express consent of the minor if the amendment or revocation is beneficial to the minor. If it is the trustee that wants to amend the terms of trust by “decanting” or transferring the assets from the trust in issue to a different trust, he/she may do so, although the means by which he/she goes about doing so depends on the specific authority granted to the trustee. Assets can be transferred to a different trust. If the terms of the trust grants the trustee discretion to invade the corpus of the trust for the benefit of the beneficiaries, provided that three things occur:
- that the beneficiaries current right income is not negatively effected; and
- the choice is in the interest of the beneficiaries (“objects of the trust”); and
- the amendment does not reduce the trustee’s responsibility to exercise reasonable care or otherwise increase the trustee’s commission.
The document that memorializes this change must also mention whether some or all of the corpus of the trust is effected. If only some then the percentage of value of the trust effected must be noted.
As with any trust creation or modification, it is best to consult with an experienced estate planning attorney.