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________________________________________________ Estate Planning
Strategies Your estate plan needs to meet your current goals and objectives
yet provide flexibility to change if your goals change. For example,
while irrevocable trusts may be advantageous for tax purposes, if
you don't build in flexibility, issues arising in the future may
be difficult to deal with. For maximum flexibility you need to consider
the extent of restrictions you want, your desire for certainty,
and your tolerance for tax risks. An irrevocable trust cannot be
changed, so what happens if a change in your circumstances makes
the trust less desirable? Use
Disclaimers A disclaimer is one tool you can use to build in flexibility, but
only if you plan for it. If a beneficiary does not want to receive
the trust assets, he or she can disclaim them. If done within nine
months of the vesting of the beneficiary's interest, the assets
will pass to someone else as if the beneficiary had never received
them. However, if the beneficiary directs where the assets will
go, the disclaimer will be treated as a gift for tax purposes. Therefore,
successfully using disclaimers means you need to plan ahead when
you initially prepare the trust. When might a disclaimer be useful? If the trust's beneficiary already
has substantial assets, he or she may want to use a disclaimer to
keep the assets out of his or her estate. To provide your beneficiaries with the flexibility to deal with
situations such as these, when drafting your trust, consider who
should receive the benefit if your beneficiary disclaims it. You
can state in the trust document that if the trust beneficiary disclaims
the payout, it should pass to the secondary beneficiary. Exercise
Powers of Appointment One of the most effective ways to alter an estate plan after death
is through the exercise of powers of appointment. A power of appointment
allows a beneficiary to direct the trustee to distribute trust assets
to certain individuals (objects of the power), either outright or
in a new trust. This can be useful if the beneficiary does not need the trust assets
and would like to pass those assets on to someone else, such as
a child or grandchild. With a power of appointment, he or she can
direct or appoint those trust assets to any one or more objects
of the power. As the trust's creator, you can grant the power of appointment
to one of the trust's beneficiaries. If you make the power too broad,
however, it may be deemed a general power of appointment. This will
cause adverse tax consequences for the beneficiary. To avoid this,
you should restrict powers of appointment so that they cannot be
exercised in favor of the beneficiary, the beneficiary's estate
or creditors of either. Typically, a "limited" power to appoint will be exercisable
in favor of your descendants, but sometimes it can be broader and
allow for exercise in favor of people or charitable organizations
other than the beneficiary, the beneficiary's estate or creditors
of either. Exercise
Discretionary Trust Provisions Another means of providing flexibility in an irrevocable document is through discretionary trust provisions. For example, a trust can allow distributions to or for the benefit of the beneficiary according to a broad best interests standard, providing the trustee wide latitude to distribute funds that the beneficiary can use as he or she wishes. Essentially, you can add flexibility to a trust by drafting provisions that:
Reformation
By Court Proceedings One definitive way to change a trust after it has been signed is
through a court reformation proceeding. While this alternative can
be uncertain and expensive, it may achieve the desired result. You
can initiate court reformation proceedings over an ambiguity in
the document as well as under some other circumstances. If you seek
a court reformation, make sure you avoid unwanted tax consequences.
For example, if the trust is exempt from the generation-skipping
transfer (GST) tax, a reformation that affects the quality, value
or timing of any powers, beneficial interests, rights or expectancies
of a beneficiary provided under the terms of the trust can be deemed
a "modification," which can cause the trust to lose its
GST tax exempt status. But, many ways to reform will not cause loss
of the exempt status. Other
Noncourt Trust Reformation Techniques Certain situations allow a trust to be reformed without resorting
to a court proceeding. You can grant a trustee certain powers to
amend the trust agreement, to create a new trust for a trust beneficiary
and to distribute trust property to that new trust. Also, certain
state laws allow reformation of a trust pursuant to agreement of
all trust beneficiaries without the involvement of a court. In all
cases, you need to judiciously use these noncourt reformation techniques
to avoid any adverse tax consequences to the parties involved. Help
Is Available Creating an irrevocable trust may seem to limit your flexibility
once the trust has been implemented. But, by carefully drafting
the trust, or by using tools available to you after the trust is
signed, you can have your cake and eat it too. We would be pleased
to assist you in establishing a trust that will meet your needs.
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Copyright 2001 Fahlman & Olson. All rights reserved.
LEGAL NOTICE
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