Irrevocable trusts, whether their purpose is to own life insurance, for asset protection, or for gift planning, can provide significant benefits. However, many clients have difficulty with a threshold issue: in order to obtain the desired estate tax or other planning benefits, the trust must be irrevocable. The “irrevocability” of such trusts causes concern among clients who want to maintain control of the assets, the income, the beneficiaries, or the ultimate distribution of the principal. Clients are sometimes reluctant to take advantage of irrevocable trusts, equating irrevocability with inflexibility. However, with proper planning, an irrevocable trust can be structured with a fair amount of flexibility.
It is possible to draft an irrevocable trust to plan in advance for a number of changes, building flexibility into the trust document at the time of its creation. Some of the concepts which could be considered include:
· The trustee may have the power to make secured loans to any person, including the grantor.
· A trustee may have the power to distribute the property to beneficiaries based upon their “best interests,” provided that the trustee is not a beneficiary.
· The trustee may be given the power to change certain provisions of the trust to account for changes in state or federal tax laws or otherwise.
· The grantor may retain the right to remove a trustee and appoint a successor independent trustee. This right may also be granted to the beneficiaries.
· The trust may provide that the grantor’s spouse will cease to be a beneficiary in the event of divorce.
· A trustee may be given the right to amend or terminate the trust in certain controlled circumstances, provided the trust assets do not revert to or for the benefit of the grantor, and the trustee is not a beneficiary of the trust.
If you are considering an irrevocable trust, you may also want to consider authorizing another person to designate the recipient of trust benefits by means of a special power of appointment, which allows a third party to direct the distribution of interests in the trust property to specified groups or classes of beneficiaries. By way of example, the holder of a special power of appointment might permit someone to override the typical trust distribution rules and redirect trust assets to particular parties in the event of changed circumstances. This technique can be useful because it allows the deferral of decision-making until the most appropriate time.
In the next issue of A Potpourri, we will discuss the issue of amendment of existing irrevocable trusts. If you care to discuss the manner in which flexibility can be designed into otherwise irrevocable trusts, please do not hesitate to contact us.