What can you do when a family member passes away unexpectedly, leaving in place trusts that are inflexible to future changes? Estate documents must ensure your wishes are carried out but remain flexible enough to allow for minor changes that do not require amending the documents. Consider the following questions:

  • Have you thoroughly discussed your wishes with your future trustee? Are you confident in the trustee’s ability to administer your estate?
  • Have you allowed for actions to be taken to reduce the surviving spouse’s estate tax liability (increased tax rates, etc.)?
  • Do your documents clearly provide for the surviving spouse to maintain his or her lifestyle?
  • Have you considered the impact of other unexpected deaths or births?
  • Have you considered the impact of future children and/or grandchildren?
  • If a child or grandchild develops an illness that limits their ability to handle an inheritance, do you have provisions permitting the trustee to step in?
  • Who will control the family business after your death?
  • If you have designated a family member to take control of the business after your death, do you have a contingency plan in case that family member’s death coincides with yours?
  • How will your family be affected if the family business changes entity structure?
  • Will your estate documents allow the family to sell the business if doing so is in the best interest of the surviving family members? Have you intentionally, or inadvertently, written language preventing such a sale?

The number of unknowns is infinite, and the language you use in your estate documents will determine how much flexibility your trustee will have.

In cases in which a family is subject to a trust whose provisions do not account for significant changes to the business or the family, we may discuss the possibility of decanting the trust. Decanting a trust is a process in which the assets of an existing trust “pour into” a new trust, which is structured to address the incorrect or conflicting matter.

Vogel worked with a family that had assets “trapped” inside a trust that would be included in the surviving spouse’s taxable estate. The trustee’s hands were tied by the inability to make discretionary distributions to the surviving spouse that would allow effective estate planning. Because of the wording of the original trust, a significant portion of the assets would be lost to estate taxes. The remaining assets passing to the next generation(s) would be reduced by tens of millions of dollars. In this situation, the family needed to understand the option of decanting the trust.

The first step was determining if the existing trust permitted decanting. The trust was silent with respect to decanting, and so we looked to the laws of the state that governed the trust. Because the state permitted decanting, we were able to move to the next stage. If the situs of the trust does not permit decanting, you may change the situs to a state that permits decanting, provided the trust documents permit such a change. Decanting may prevent the change in the trust document to be sealed from becoming public record.

Once it was determined that decanting the trust could be accomplished, the trustee had a new trust document created, addressing the restrictive provisions of the original trust and the event that caused the old trust document to be ineffective. The spirit of the original document was to be maintained; however, the restrictions needed to be removed.

We worked with the trustee to critically evaluate the original document and the change in circumstances to determine what modifications were needed and how the beneficiaries would be affected. Vogel quantified the potential income, estate and gift tax implications. We prepared visual aids and written commentary to assist the trustee in their review of the multiple alternatives. Once the decision to decant was made, we worked with the family’s attorney to ensure the new trust document accomplished the desired results. Vogel coordinated the transfer of the assets and accounting records that must be maintained to support the transition.

When a new trust is established, the ability to decant, or specifically state that decanting is not permitted, should be addressed. To permit or restrict decanting is not a decision to be made lightly. In this case, had the trustee not had the ability to decant the trust, the cost to the surviving beneficiaries would have been enormous. However, the trustee had extensive knowledge of the deceased individual’s wishes, was independent of the family members and could make the decision to decant after evaluating the benefits quantified by our analytics.