Avoiding Trouble with Your Trustee

April 25, 2024

Estate planning and elder law considerations linger in the background of our senior years. We plan for senior living, incapacity, and Medicaid. We create an estate plan to protect and preserve your wealth and provide for heirs after you are gone. Trusts are a smart and well-known estate planning tool that names or appoints a trustee to administer and distribute the assets according to the terms. However, how often do estate owners ask, “What if something goes wrong and the trustee breaches their duties?” This blog offers tips on avoiding trouble with your trustee.

The case discussed in WealthCounsel’s article, “Trustee of Living Trust Who Was Beneficiary of Decedent’s Residuary Estate Had Duty to Collect and Protect Assets Not Yet Transferred to Trust,” reminds us to take steps in appointing the right trustee and to draft the trust’s terms carefully.

The case discussed in WealthCounsel’s article involved three beneficiaries, three co-trustees and assets meant for a restated revocable trust. One of the trustees did not collect and protect untransferred trust assets. The deceased’s three children and their mother sued that trustee for breaching fiduciary duty.

The Barash v. Lembo case underscores a critical aspect of trusteeship: the duty to protect and collect assets awaiting transfer into the trust designated for distribution from the trust. Despite the probate process, trustees must proactively preserve trust assets, even before their transfer.

In this case, the Connecticut Supreme Court emphasized that trustees are entrusted with a fiduciary duty from the moment of acceptance. This duty extends to diligently administering the trust in the beneficiaries’ best interests, including the prudent collection and protection of assets.

Central to the trustee’s role is the obligation to uncover and address breaches of fiduciary duty by prior fiduciaries. Whether it’s compelling the transfer of assets or rectifying breaches, trustees must act in the trust’s best interests.

When a testamentary trust emerges as a will beneficiary, trustees are tasked with pursuing reasonable claims against the estate executor. This duty demands due diligence in securing all trust assets and ensuring comprehensive asset management.

While a duty of due diligence binds trustees, evaluating their performance hinges on contextual considerations. All trustee’s actions are scrutinized within the framework of trust administration dynamics, emphasizing the need for meticulous asset management.

In Barash v. Lembo, the court’s ruling underscores the significance of trustees’ proactive engagement in protecting and collecting trust assets. Trustees must exercise diligence and vigilance, leveraging legal avenues to preserve beneficiaries’ interests.

In your pursuit of avoiding trouble with your trustee, partner with a seasoned estate planning attorney who understands the intricacies of trust administration. If you would like to learn more about trustees and trust administration, please visit our previous posts.

Reference: WealthCounsel (Jan 19, 2024) “Trustee of Living Trust Who Was Beneficiary of Decedent’s Residuary Estate Had Duty to Collect and Protect Assets Not Yet Transferred to Trust.”

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Explore the Intricacies of Business Trusts

April 23, 2024

Entrepreneurs often seek robust mechanisms to safeguard assets and navigate liability in the intricate landscape of business ownership. Enter the realm of business trusts—a lesser-known yet powerful tool entrepreneurs can leverage to secure their ventures. Based on SmartAsset’s article, “What Is a Business Trust and How Does It Work,” we’ll explore the intricacies of business trusts, uncovering their nuances and exploring their potential advantages and drawbacks.

At the heart of business trusts lies a fundamental premise: the delegation of authority to manage a beneficiary stake in a business. Functionally akin to individual or family trusts, business trusts serve as legal instruments facilitating asset management on behalf of the grantor.

A business trust holds the rights to an individual’s stake in a business entity. In a sense, the trust, as a legal entity, owns the business. With the potential to shield against taxes and liability, business trusts offer a compelling avenue for entrepreneurs seeking robust asset protection.

Creating a business trust typically starts with deliberations between involved parties and a trust lawyer. This legal instrument, a declaration of trust, formalizes the terms governing the trust’s operation.

Central to the trust’s dynamics is the fiduciary duty entrusted to the trustee—the individual responsible for managing the trust’s assets in the best interests of beneficiaries. This fiduciary obligation underscores the trustee’s paramount responsibility to act prudently and diligently.

Just as individual trusts come in various forms, business trusts exhibit diversity in structure and function. Here’s a breakdown of the primary categories:

Grantor Trust Characterized by the grantor’s control over trust assets and taxation, this trust type offers a self-contained framework for asset management.
Simple Trust Operating under IRS verification, this trust directly distributes profits to beneficiaries without accessing principal assets.
Complex Trust Offering greater flexibility, this trust type permits partial distribution of profits and contributions to external entities, such as charities.

While business trusts present enticing benefits—from liability protection to enhanced privacy—they pose certain challenges. Here’s a snapshot of the pros and cons:

Pros:

Liability Protection: Shields beneficiaries from individual liability, akin to LLCs or corporations.
Privacy Enhancement: Offers an additional layer of privacy in asset management.
Flexible Distribution Terms: Facilitates tailored distribution schedules for beneficiaries.

Cons:

Cost and Complexity: Establishing and maintaining a business trust can be expensive and legally intricate.
Legal Compliance Challenges: Navigating legal requirements and compliance hurdles can pose significant obstacles.
Lifetime Limitations: Business trusts are typically constrained by a maximum lifespan of 99 years, limiting multi-generational arrangements.

If you’re considering a business trust, the journey begins with competent legal guidance. Collaborate with a trust lawyer to navigate the intricacies of trust creation and ensure alignment with your business goals and objectives.

While establishing a business trust entails upfront costs and legal complexities, the potential benefits of asset protection and operational flexibility can be substantial. Before proceeding, it’s crucial to weigh the key considerations and assess the suitability of a business trust for your unique circumstances.

Business Trusts Key Takeaways:

Early Consultation is Key: Engage with a trust lawyer early in the process to navigate legal complexities and ensure alignment with your business objectives.
Deliberate Consideration is Essential: Thoroughly assess the pros and cons of a business trust, weighing factors such as cost, complexity, and compliance.
Tailored Solutions Yield Optimal Results: Customize your business trust to align with your unique needs, leveraging its flexibility to achieve optimal asset protection and operational efficiency.

If you are ready to explore the intricacies of business trusts, schedule a consultation with a seasoned estate planning attorney today. If you would like to learn more about business trusts, please visit our previous posts.

Reference: SmartAsset (April 19, 2023) “What Is a Business Trust and How Does It Work”

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New IRS Tax Rule affects Irrevocable Trusts in Estate Planning

April 19, 2024

Trusts have been foundational estate planning strategies for decades and are becoming more popular as economic shifts and the aging population highlight unique estate planning goals. An irrevocable trust is one practical estate planning strategy for excluding assets from an estate’s taxable value, safeguarding wealth and helping to meet asset threshold limits for government benefits like Medicaid. The Tax Advisor details how the 2023-2 IRS tax rule has significantly impacted estate planning strategies, particularly irrevocable trusts. We look at how this new IRS tax rule affects irrevocable trusts in your estate planning.

Capital gains taxes are the heart of the IRS Rule 2023-2 changes. Individuals pay taxes on the difference between an asset’s purchase price and a higher sell price as that asset’s value grows over time. The original purchase price is their cost basis or non-taxed value. Amounts over the cost basis are taxed as a capital gain. Assets include property, investments, cars and anything providing income or profit. If you create or update an estate plan, the IRS rule may change your estate planning or updates in 2024. Work with an experienced estate planning attorney to find the right type of trust for your goals and structure it accordingly.

The cost basis for an asset’s beneficiaries significantly impacts capital gains taxes once they sell. Capital gains from the deceased’s date of purchase will be much higher than fair market value on the date of death. An irrevocable trust typically gave heirs a break by calculating an inherited asset’s capital gains from the fair market value at the owner’s death. That tax break has changed.

The IRS issued Rule 2023-2 in early 2023, which impacts an inherited asset’s cost basis for capital gains taxes. The cost basis was calculated on the fair market value on the date of death but is based on the deceased’s date of purchase as of March 2023. Calculating taxes from the date of purchase is considered a “step-down,” meaning a lower cost base and higher capital gains. Conversely, the date of death means fair market value at a higher cost basis and less capital gains.

The main differentiator with an irrevocable trust is its ability to exclude assets from an estate’s valuation. The person establishing an irrevocable trust technically no longer owns the assets. This type of trust is a strategy that helps older adults applying for Medicaid benefits meet maximum thresholds.

With the new IRS rule, assets in an irrevocable trust are not part of the owner’s taxable estate at their death and are not eligible for the fair market valuation when transferred to an heir. The 2023-2 rule doesn’t give an heir the higher cost basis or fair market value of the inherited asset. Once they sell that asset, capital gains taxes are calculated using the value when the deceased purchased it.

Families increasingly use irrevocable trusts to safeguard assets from spend-down for government benefits, like Medicaid and VA Aid and Attendance.

Future considerations must include reevaluating how irrevocable trusts are structured to navigate the evolving tax landscape effectively. Planning strategies need to adapt to ensure that assets are protected, and taxes are minimized for the benefit of future generations.

This new IRS tax rule raises important considerations about how it might affect irrevocable trust estate planning. While it may seem like irrevocable trust planning could lead to additional taxes for beneficiaries, the reality is more nuanced. Future considerations in estate planning involve setting up irrevocable trusts that align with new IRS rules. If you would like to learn more about irrevocable trusts, please visit our previous posts.

Reference: The Tax Advisor (Nov. 1, 2023) “Rev. Rul. 2023-2’s Impact on Estate Plans.”

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Estate Planning should be a Major Consideration for Small Business Owners

April 16, 2024

Estate planning should be a major consideration for successful small business owners, especially if they intend to build generational wealth and create a legacy. The title of a recent article from Business Insider says it all: “You might not want to think about estate planning, but as a financial planner, I know it’s essential for small-business owners.”

There are more complex issues for business owners than employees for estate planning. Therefore, be sure to work with an experienced estate planning attorney who will create a plan to protect you, your family and your business. As you go through the process, keep these basics in mind:

Last Will and Testament. This document is the foundation of an estate plan, providing directions to the state probate court regarding your wishes for distributing assets. It also names a guardian responsible for minor children upon your passing. If you don’t have a will, assets are distributed according to your state’s intestacy laws, typically based on kinship. You can update and change your will throughout your lifetime, and it should be reviewed every three to five years.

Revocable Living Trust. Having a revocable living trust gives you more control over assets, which could be necessary to distribute business assets. A revocable living trust can be altered while you are living, so changes in your business can be reflected in the directions in the trust.

Financial Power of Attorney. This document is critical if you are the business owner who performs most of the financial tasks of your business. When a business owner becomes incapacitated, having someone named Power of Attorney gives the POA the ability to pay bills, make bank deposits and withdrawals, file business and personal taxes and make any other financial decisions you wish. POA can be limited if you only want someone to pay bills, or they can be broad, allowing the agent to do anything you would do to keep the business running while you are incapacitated. Your estate planning attorney can craft a POA to suit your needs.Benefi

Business Succession Plan. A business succession plan should be in place as soon as your business gains traction and becomes successful. Distributing shares of the business after you pass is fine. However, what if your heirs don’t have a clue how the business works? Do you want them to sell it after you pass or maintain it for the next generation? A succession plan requires the help of an estate planning attorney, CPA and financial professionals to create a management team, define roles, set performance guidelines, etc.

Digital Estate Plan. We spend so much time online. However, few have plans for our digital assets. If your business is online, has a website, and uses social media, online finances, and cell phones, you need a digital estate plan to identify assets and provide instructions on what you want to be done with those assets after you have passed.

Review Beneficiary Designations. Any account that can name a beneficiary, such as retirement plans, investment accounts, or life insurance policies, must be reviewed every few years or whenever a trigger event, including birth, death, divorce, or remarriage. Upon your passing, these assets will be passed directly to the beneficiary. Be sure the person you named twenty years ago on your life insurance policy is still the right person to receive proceeds upon your passing.

Estate planning should be a major consideration for successful small business owners. An experienced estate planning attorney can review your current estate plan to ensure that it covers all bases for you and your business. If you would like to learn more about planning for business owners, please visit our previous posts.

Reference: Business Insider (March 22, 2024) “You might not want to think about estate planning, but as a financial planner, I know it’s essential for small-business owners”

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Protect Family Wealth from Third Generation Curse

April 10, 2024

Have you heard of the “Great Wealth Transfer?” It’s the period when Baby Boomers are projected to pass trillions of dollars to the next generation. Creating or updating an estate plan to protect family wealth from the third-generation curse requires communication between generations centered on the values leading to wealth creation and a financial education on how to preserve and grow wealth.

The anticipated $84 trillion expected to be bequeathed to Generation X, Millennials, and Gen Z beneficiaries sounds enormous, but the third-generation curse may leave heirs with far less than expected. Often, wealth is earned by one generation, grown by the second generation who witnessed firsthand how hard their parents worked to maintain their wealth, and mismanaged or wasted by the third generation members, who are too far from the original wealth creation to respect it.

Many estate plans are structured to address tax planning, but that’s only one aspect of estate planning. Communicating the “why” of the estate plan, including where the money came from, how it has been stewarded over the years, and what needs to happen to protect it, will help beneficiaries have a deeper regard for their inheritance.

Boomer values may differ from their heir’s values, but they may also be similar, as they use different language to describe the same thing. Clarifying these values and communicating with heirs may help to give context to their inheritance and its importance.

Understanding your priorities and values should ideally lead to an estate plan reflecting your wishes. For instance, if the family prizes education, your estate planning attorney may advise you to create a trust to fund advanced education. Such a trust should be accompanied by a letter of intent explaining your wishes and values to both trustees and heirs.

If you’re unsure about mandating the use of funds, you may have your estate planning attorney create a discretionary trust with a similar letter explaining what you’d like them to use the funds for and why it’s important to you. Because circumstances change, the trustee will have the flexibility to distribute the funds as they see fit.

Creating or updating an estate plan to protect your family wealth from the third-generation curse will give everyone the peace of mind they crave. When the estate plan is completed, have a series of conversations with family members about what’s in the plan and why. They don’t need to know every detail, but broad strokes will go a long way in letting them know what you’ve done, your wishes, and your hopes for their future. If you would like to learn more about planning for future generations, please visit our previous posts.

Reference: Kiplinger (March 12, 2024) “How Estate Planning Can Thwart the ‘Third-Generation Curse’”

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Inheritance Trust allows Families to Protect Heirs

April 4, 2024

Imagine being a teenager and suddenly having $250,000 in your hands the instant you become a legal adult. This isn’t a fairy tale; it’s what happened to a young man in the northwestern suburbs of Illinois who writes about his experience in an article titled, “What blowing a $250K inheritance taught me.” After turning 18, he received a quarter of a million dollars from his mother’s medical malpractice case, which should have set him up for a bright future. Instead, without guidance or a plan, the money was gone in a flash. An inheritance trust allows families to protect heirs from their inheritance and the inheritance from the heirs.

While many people agree that an 18-year-old is too young to receive a sizable inheritance without guidance, unfortunately, many families make the common mistake of not planning to protect their children from their inheritance. By working with an experienced estate planning professional, parents can create a plan for when and how their children should receive their inheritance should the parents pass away suddenly.

The excitement of having so much money at such a young age is understandable. Our young friend, now with access to his trust fund, embarked on a journey that led from enrolling in two separate universities with no clear direction as to which degree to pursue, to making impulsive purchases and, ultimately, to a lifestyle fueled by partying and bad choices. The lack of a structured plan or financial advice saw this significant inheritance dwindle to nothing over a few short years.

This story isn’t unique. It highlights a common mistake in estate and family financial planning: not preparing heirs to manage their inheritance. More than leaving assets to your loved ones, it’s crucial to guide them on using them wisely. “As my children grow into young adults,” writes the former teen who lost his inheritance, “I can’t in a million years imagine handing them a check for $250,000 with absolutely no advice.”

An inheritance trust, also known as a testamentary trust, is essentially a tool to protect and manage assets for beneficiaries. It’s a way to ensure that the money you leave behind is safe and used in a manner that you deem fit and matches your values. Setting up an inheritance trust is a strategic move for families looking to safeguard their wealth and provide for future generations.

An inheritance trust offers a myriad of benefits:

Asset Protection: It shields your assets from creditors, lawsuits and even some taxes.
Controlled Distribution: You can specify how and when your beneficiaries receive their inheritance, promoting responsible spending and long-term financial security.
Privacy: Unlike wills, trusts are not public records, offering your family privacy during the transfer of assets.

Whether it’s protecting your assets from being squandered, as in the cautionary tale of the Illinois teenager, or planning for your family’s future needs, an inheritance trust can be tailored to suit your objectives. It’s about making informed choices today that will support your loved ones tomorrow.

The story of the teenager who lost $250,000 is a powerful reminder of what’s at stake when parents leave their money in outright distributions to children. It’s not just about leaving wealth behind; it’s about leaving a foundation for wise decision-making and financial stability. An inheritance trust allows families to protect heirs from their inheritance. It can be the guiding light for your heirs, helping them navigate their inheritance responsibly. If you would like to learn more about inheritance trusts, please visit our previous posts.

References: The Week, originally published on LearnVest.com (Jan. 10, 2015) “What blowing a $250K inheritance taught me.”

SmartAsset (Sept. 19, 2023) “How to Keep Money in the Family With an Inheritance Trust”

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Considering Medicaid Asset Protection Trusts?

April 1, 2024

Medicaid, a joint state and federal program, provides health coverage to low-income individuals of all ages. Qualifying for Medicaid requires meeting strict income and asset limits, which vary by state and the type of Medicaid coverage sought. If you are considering Medicaid Asset Protection Trusts, there are a few things to know.

These limits pose a significant hurdle for many, especially those needing long-term care. According to an ElderLawAnswers article, this is where Medicaid Asset Protection Trusts (MAPTs) come into play. MAPTs offer a legal avenue to protect assets, while preserving eligibility for Medicaid benefits.

A MAPT is an irrevocable trust established during your lifetime that transfers ownership of assets to a trust, so Medicaid excludes them from the resource limit during eligibility qualification. Once transferred, you no longer own the assets directly, which helps you to meet Medicaid’s eligibility criteria. Appoint a trustee other than yourself to manage the trust and to transfer the assets, such as real estate or stocks, into the trust’s name correctly.

Key Considerations:

Timing is Crucial: A MAPT must be created and funded with Medicaid’s 60-month lookback period in mind. Assets transferred into the trust within this period may penalize your Medicaid eligibility.
Living Arrangements: Transferring your home into a MAPT doesn’t mean you have to move out. You can still reside in your home, although the trust technically owns it.
Income and Benefits: You can receive income from the trust’s assets. However, this income may affect your Medicaid eligibility.

Medicaid Asset Protection Trusts are a valuable strategy for individuals looking to qualify for Medicaid without sacrificing their assets. If you are considering Medicaid Asset Protection Trusts, work with an attorney to understand how these trusts work and the financial considerations involved, so you can make informed decisions about your long-term care planning. If you would like to learn more about elder law, please visit our previous posts.

Reference: ElderLawAnswers: What Are Medicaid Asset Protection Trusts?

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Risks of Adding a Child as a Life Insurance Beneficiary

March 27, 2024

Life insurance is a critical part of family financial planning, ensuring that your loved ones are taken care of financially when you’re no longer around. A common approach many parents consider is adding their child’s name as a life insurance beneficiary, believing it to be a straightforward way to secure their child’s future. However, this decision carries unexpected complications and risks that many are unaware of. There are hidden risks of adding your child as a life insurance beneficiary.

At first glance, naming your minor child as a beneficiary on your life insurance policy seems like a caring gesture. It’s natural to want to provide for your children’s future directly. However, this well-intentioned move can lead to unforeseen legal and financial hurdles.

Minors are not legally allowed to receive life insurance benefits directly, says Policygenius in an article titled “Naming a child as a life insurance beneficiary.” If a minor is named as a beneficiary, the death benefit payout is delayed until a court appoints a custodian to manage the funds, which can take months. The surviving parent or a guardian named in your will is often appointed as the guardian. During this time, your child would not have access to the financial support you intended, potentially impacting their immediate needs.

Once an adult custodian is appointed, they can only use the money for court-approved expenses, such as living expenses and education. Your child might only access the funds at age 18. This process delays support and limits how the funds are used, contrary to your wishes.

Setting up a trust is the best way to ensure that your child benefits from your life insurance policy without legal entanglements or delays. Creating a trust for your minor child allows you to control how and when the benefits are distributed. You can specify conditions, such as funds for specific types of education, vacations, or an allowance, ensuring that the money supports your child in the most beneficial ways. This setup avoids the need for court intervention, providing a smoother transition of financial support.

While not all families choose to create a trust, naming an adult custodian or guardian for minor children is an essential step for estate planning. Appointing a guardian ensures that the person(s) you choose will both raise your children according to your wishes and financially manage the insurance policy death benefit on behalf of your child until they reach adulthood. Selecting a trusted individual for this role is crucial, since they will have significant control over your child’s financial and caregiving support.

Naming your spouse as the primary beneficiary, with a trust as the secondary, ensures that your spouse can manage household finances and support your child’s future if you’re no longer there. It’s essential to regularly review and update your life insurance beneficiaries to reflect life changes, ensuring that your policy aligns with your current wishes.

Adding a child’s name as a life insurance beneficiary might seem like a simple way to secure their future, but it comes with risks. By considering alternatives, like trusts or adult custodians, you can ensure that your child receives the support you intend without unnecessary legal hurdles or delays. If you would like to learn more about life insurance and estate planning, please visit our previous post.

Reference: Policygenius (Aug. 17, 2023) “Naming a child as a life insurance beneficiary”

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The Complexities of Co-Owning a Vacation Home

March 26, 2024

Dreaming of a vacation home you can escape to at any moment is wonderful. However, the reality of co-owning that slice of paradise with friends or family might be more complicated than you think, explains Better Homes and Garden’s article, “What You Need to Know Before You Buy a Vacation Home with Friends or Family.” Let’s dive into the complexities and considerations of co-owning a vacation home, inspired by insights from experts in the field.

Co-owning a vacation home often starts with a dream shared among friends or family. It’s an appealing idea, especially when the cost of owning a vacation spot on your own seems out of reach. The idea of pooling resources to afford a better, more luxurious property in a prime location is tempting. It promises a place to stay and a shared investment, potentially increasing in value over time.

The main attraction of co-owning is financial efficiency. You can access better properties in desirable locations without shouldering the entire financial burden alone. It allows more frequent visits to your favorite vacation spot and turns an otherwise unreachable dream into a tangible reality. Owning a property with others can also create deeper bonds and shared memories that last a lifetime.

However, with the benefits come significant risks and potential pitfalls. Co-ownership can lead to financial disputes, disagreements over property use, maintenance responsibilities and even conflicts about the property’s future. What happens if one owner wants out of their part of the property or if one owner passes away unexpectedly? What if personal circumstances change, affecting

Before jumping into co-ownership, having detailed conversations about every aspect of the property’s future is crucial. Discussing and agreeing on a budget, usage schedules, guests, pets and even decor can prevent misunderstandings down the line. It’s also wise to consider legal structures, like becoming tenants in common or forming an LLC, to manage the property, ensuring that all agreements are in writing to protect everyone involved.

Getting legal advice from an estate, real estate, or business attorney when considering purchasing joint-owned property is essential. A trusted attorney can help draft a comprehensive co-ownership contract with your friend or family member that outlines each owner’s rights, responsibilities, financial commitments and the procedures for resolving disputes or selling shares in the property. This agreement safeguards your financial interest in the vacation home, ensuring that it remains a source of joy rather than a cause of strife.

Co-owning a vacation home offers a unique opportunity to make your dream of a getaway spot a reality. However, it’s not without its challenges. By prioritizing open communication, financial clarity and professional legal advice, you can navigate the complexities of co-ownership. Remember, the goal is to create a space that enhances your life and relationships, not one that leads to unnecessary stress or conflict. Your estate planning attorney will help you fully grasp the complexities of co-owning a vacation home. If you are interested in learning more about managing real property in your estate plan, please visit our previous posts.

Reference: Better Homes and Gardens (June 29, 2023) “What You Need to Know Before You Buy a Vacation Home with Friends or Family”

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IRS may End Irrevocable Trust Decanting

March 25, 2024

The term “irrevocable trust” is not quite what it seems, says a recent article from The National Law Review, “Is CCA 202352018 the Death of Irrevocable Trust Decantings?” Generally, they can be modified in one or two ways, depending on the state’s laws. In some states, an irrevocable trust can be modified with the consent of the beneficiaries and the trustees. Some states also require the consent of the settlor if they are living. This is referred to as a “non-judicial modification. ”In other states, an irrevocable trust can be modified by a decanting, a process where an authorized trustee exercises their independent discretion to “pour” over the property of the trust to a new trust with different terms—hence the term decanting. However, the IRS’ Chief Council Advice Memorandum (CCA 202352018) (the “CCA”) means the IRS may end irrevocable trust decantings, as they have been used for years. It’s all about the taxes.

Estate planning attorneys have been concerned that using a non-judicial modification to make changes with the beneficiaries’ consent, such as removing a beneficiary, shifting beneficial interests, or diluting a beneficiary’s interest, might be considered a taxable gift by the beneficiaries. The concern wasn’t present for decantings, since they are effectuated by the independent act of an authorized trustee, who doesn’t have a beneficial interest in the trust without the beneficiaries’ consent – until the CCA.

The CCA Memorandum reviewed a case where, in the first year, an irrevocable inter vivos trust is established for the benefit of a Child and the Child’s descendants, and the trustee may distribute income and principal for the benefit of the child according to the trustee’s discretion. When the Child dies, the remainder will be distributed to the Child’s issue per stirpes.

In year two, when the Child has no living grandchildren or remote descendants, the trustee petitions the state court to modify the terms of the trust. The Child and Child’s issue consent to the modification. Later that year, the State Court grants the petition and issues an order modifying the trust to provide a trustee of the Trust with the power to reimburse the grantor for any income taxes. The grantor pays due to the inclusion of the Trust’s income in the grantor’s taxable income.

The Chief Counsel finds the modification of the irrevocable trust with the consent of the beneficiaries may constitute a taxable gift from the beneficiaries. However, the CCA goes on to say, “[t]he result would be the same if the modification was pursuant to a state statute that provides beneficiaries with a right to notice and a right to object to the modification and a beneficiary fails to exercise their right to object.”

This additional comment from the Chief Counsel is seen as foreshadowing the IRS’ position concerning decanting, and it may prove problematic. Most states currently authorizing trust decanting by statute require the trustee to provide the beneficiaries with notice of the decanting and provide that unless the beneficiaries consent to an earlier effective date, the decanting is only effective after a period of time elapses following the beneficiaries’ receipt of the notice.

It remains to be seen whether this comment from the Chief Counsel will foreclose all possible options for decanting. Decantings are permitted by law in various states, and many estate planning attorneys include provisions in their irrevocable trusts allowing the trustee to decant the trust under the terms of the trust, using the language of an “internal decanting provision.”

Whether the IRS ends the use of irrevocable trust decantings remains to be seen. If you are exploring the possibility of modifying an irrevocable trust, it is always best to speak with an estate planning attorney to review options and possible risks. If you would like to read more about irrevocable trusts, please visit our previous posts.

Reference: The National Law Review (Feb. 29, 2024) “Is CCA 202352018 the Death of Irrevocable Trust Decantings?”

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Category: Trusts

Avoiding Trouble with Your Trustee

Explore the Intricacies of Business Trusts

New IRS Tax Rule affects Irrevocable Trusts in Estate Planning

Estate Planning should be a Major Consideration for Small Business Owners

Protect Family Wealth from Third Generation Curse

Inheritance Trust allows Families to Protect Heirs

Considering Medicaid Asset Protection Trusts?

Risks of Adding a Child as a Life Insurance Beneficiary

The Complexities of Co-Owning a Vacation Home

IRS may End Irrevocable Trust Decanting

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