It’s important to make your purpose clear in your estate planning and also include some flexibility that still limits any changes that defy your wishes.
Originally published on Kiplinger.com January 22, 2024
There is something special about starting a new year. Resolutions are made and goals are set, anticipating that the end of the year will reflect progress toward improvement in many important aspects of your life. Being more proactive in your retirement planning and creating, or updating, your estate plan is always a wise goal.
No one can be certain what changes Congress will make in tax law or decisions about spending, particularly in an election year, and how their actions affect the national economy. Nor will there be absolute economic certainty as the Federal Reserve Board considers interest rate changes in response to inflation and other factors. These are not reasons to postpone, or avoid, planning your legacy. But these may be reasons to consider including flexibility in your estate plan.
A careful attorney will typically include a clear statement of your intentions, or the purpose in your plan, when creating a trust for passing your assets to the next generation. In previous articles, I explained that your property can pass directly to your heirs by intestacy, through non-probate means or by your will, unless your will provides for creating a testamentary trust. (See my articles The Best Way to Protect a Parent from Scammers and In Estate Planning, Your Values Can Play a Key Role.)
Laws vary by state
It may be counterintuitive to think that if you leave funds to beneficiaries in trust, your estate plan can be changed after your death. The laws governing trusts vary from state to state, but many states follow similar rules under the Uniform Trust Code (UTC). The UTC and similar laws in many states allow for judicial and non-judicial termination or modification of irrevocable trusts based on changed circumstances or for other reasons. Your trust agreement should allow for some flexibility but limit the ability to make changes that are inconsistent with your wishes.
One way to add flexibility to your estate plan is to name a trust protector. A trust protector is often the drafting attorney or family member and is allowed to make minor changes to assist the trustee or the beneficiaries. A trust protector typically may change an irrevocable trust to adapt to changes in the law, advise the trustee, or remove and to appoint successor trustees or co-trustees. The UTC and the laws of most states also allow a court to modify the terms of an irrevocable trust provided that the proposed modification “is not inconsistent with a material purpose of the trust.”
Recently, I have found many experienced estate planning attorneys, and their clients, are including an expressed statement of the purpose for creating a trust rather than making outright distributions. Among other things, a purpose statement gives the trustee, the beneficiaries and the courts guidance regarding your intentions. Here are a few examples:
- The purpose of this trust is to enhance the beneficiary’s quality of life while she is alive by supplementing her earned income and allowing her to independently manage her resources, enabling her to become truly stable and self-sufficient.
- The purpose of this trust is to provide for my nephew’s needs. My trustee shall give primary consideration to the needs of my nephew and his wife and thereafter to the current or future needs of their children. I intend that my trustees may, in their sole discretion, exhaust the trust during my nephew’s lifetime.
- The purposes of the trust are, one, to allow for the benefit of the professional investment-management services of the initial trustee, and, two, to provide my children the financial security and standard of living lost by my death.
When there’s no clear purpose statement…
When a clear purpose statement is not included, the trustee, the beneficiaries and a court will need to infer a material purpose from the trust terms and extrinsic factors in the face of a proposed modification or termination.
- Considering the first example, if the beneficiary is earning a stable income, has sufficiently proven that she can manage her resources and is self-sufficient, the trustee and a court have guidance when responding to the beneficiary’s request to terminate the trust early, or to make a substantial distribution to the beneficiary for her to purchase a home, or for the trust to substitute cash or investments for a house to be held in the trust.
- In the second example, the trust agreement provides for a class of beneficiaries including the grantor’s nephew, his wife and their children. By including this purpose statement, the trustee and a court are less likely to substantially modify the trust in favor of her nephew’s children during his lifetime.
- The purpose statement in the last example explains that the grantor deliberately selected a specific corporate trustee for its asset management expertise. When added to a later clause requiring a corporate trustee must always be in place, it is less likely that a court would permit the trust agreement to be modified, allowing an individual to serve as sole trustee.
Reviewing your estate planning goals, or simply starting to plan, is an important way to begin the new year. If your plan includes creating a trust that will continue for many years to come, a purpose statement makes a good estate plan even better. It provides all concerned clear insight into your rationale and aspirations. If certain changes are needed over time, you should be comfortable knowing that your trustee, the beneficiaries and the courts will regard your wishes during the life of the trust.
James Ferraro is a vice president and trust counsel in the Shreveport, La., and Kansas City, Mo., offices of Argent Trust Company. Ferraro is a 2003 graduate of the University of Missouri at Kansas City School of Law, past president of the family and the law section of the Kansas City Metropolitan Bar Association, is a member of the Tax and Estate Planning Council of Shreveport and a Regional Ambassador for the Kansas City Estate Planning Symposium.