Building Flexibility Into Your Trust

In my practice, there are a number of reasons why a client may use a trust.  A trust is a fiduciary relationship in which one person, the trustee, holds property for another person, the beneficiary, according to the terms that the individual who established the trust, called the grantor, stated.  The terms of the trust that the grantor has established are embodied in a document called a trust agreement.

When people think of a trust, they think of the trust agreement, but the heart of the trust is actually the relationship of the trustee to the beneficiary.  The trustee owes the beneficiary the highest duty of care to manage and invest the assets of the trust and to distribute those assets to the beneficiary in accordance with the terms of the trust agreement.

Trusts serve important purposes.  The beneficiary of the trust might be a minor who would be legally incapable of managing assets.  The beneficiary might be disabled and need to have his government benefits, such as Medicaid, preserved.  The beneficiary might have issues with drugs and alcohol and need the assistance of another to manage and invest his assets.

A trust agreement can also help protect the assets of the trust from the creditors of the beneficiary or from the beneficiary’s potential divorce.  As long as the assets are in the trust, if someone sues the beneficiary, the assets of the trust can be protected from those lawsuits.

A trust can also direct to whom the assets pass many years after the death of the grantor.  For instance, mom dies and leaves her assets to a trust for her son’s benefit.  Twenty years after the mother’s death, the son passes away.  If the mother had left her assets to the son free of trust, then the mother’s assets would, in all likelihood, pass to the son’s wife.  If the mother left her assets to the son in trust, then the trust agreement could state that after the son’s death, the remaining assets pass to the son’s children, the grandchildren of the mother.  This is probably something that the mother would like to happen with her assets.

The problem with a trust is that a trust confuses people.  People are intimidated by a trust, lawyers and non-lawyers alike.  When people are intimidated, they often become confused, and when people are confused, things that the grantor may not have intended to occur, occur.

Because a trust may go on for many years, the trust agreement may need to change with changes in circumstance.  Or there may be terms in the trust agreement that prove to be unfortunate given the law, changes in law, circumstances of which the grantor was unaware, or circumstances that change after the grantor establishes the trust.  For this reason, it may be advisable to change the terms of the trust in some manner.

Let’s take the trust established above by the mother for her son.  After the mother dies, the trust she established is irrevocable.  An irrevocable trust is a trust that cannot be modified or terminated.  The question then becomes, how do you change an irrevocable trust?

One excellent technique for modifying an irrevocable trust in order to accommodate a change in circumstances is a trust protector.  A trust protector is a person who or institution (such as a bank) that is appointed by the grantor in the trust agreement to effectuate some form of change to the trust agreement or to the trustee if the trust protector believes that a change is warranted.

For instance, the terms of the trust might appoint a relative who isn’t named as the trustee to remove the trustee if the trust protector believes that the trustee isn’t fulfilling his duties or if the trustee and the beneficiary aren’t getting along.  Having a trust protector with this power could avoid a legal action being filed by the beneficiary to remove the trustee.

A trust protector might have the authority to modify the trust in order to comply with tax laws.  For instance, twenty years after the mother’s death, the accountant whom the trustee hires might say “Gee, it would be nice if the trust agreement said XXX because if it said XXX then we could take this tax advantage.”  If the trust protector could modify the trust in order to have the trust agreement say what needs to be said in order to achieve the tax advantage, then a legal action to modify the trust can be avoided.

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