The author writes that regardless of current uncertainties there remains a suite of planning opportunities and techniques that can make trusts and estate plan far more effective.

The following article about the US trusts sector comes from Nick Bertha of Fieldpoint Private Securities. As this news service has noted in the past, the “trusts jurisdictions” of the US, such as New Hampshire, Delaware and South Dakota, have an important place in the wealth advisory toolkit. Such insights are welcome additions to our analysis, and the editors are pleased to share this knowledge and experience. The usual disclaimers apply to guest articles. Jump into to the debate! Email tom.burroughes@wealthbriefing.com

Trusts are powerful wealth planning tools, but some of their most intriguing capabilities are also the least understood. Not only can trusts be complex, but the rules that govern them vary from state to state. It shouldn’t be surprising that many of the things they can accomplish for families are unknown to the people who could most benefit.

How can trusts be more easily updated and moved?

Your trust is not only a function of your needs and wishes, but also a reflection of the limitations imposed by the state where you set it up. Things like the “lifespan” of the trust, people and entities who can make changes in the future, and privacy provisions are state-dependent.

However, the state whose laws govern your trust has little or nothing to do with the state where you live. States like South Dakota, Delaware, Alaska and Nevada have created more friendly trust laws than many others, including features you will not find elsewhere. If you have established a trust in say New York, New Jersey or Connecticut and want to take advantage of options not available there, your trustee – or their successors – may be able to change the trust’s domicile to a more favorable state.

If you and your estate attorney decide a move is in order (and your trust document and/or state law allows it), it could be as simple as amending the trust to change the governing law, or possibly “decanting” to a newly drafted trust. When initially drafting your documents, if you don’t know whether a move makes sense, but you want to protect the ability for your trustee to make the call if needed after you die, you should consider adding language that allows this.

How can irrevocable trusts be amended? 
Among the trusts that carry the most interesting wealth transfer and tax features, almost all are considered “irrevocable,” a descriptor that implies that their terms cannot be changed once established. Happily, this phrase is misleading. The truth is that irrevocable trusts are amended, reformed and modernized all the time, with various objectives such as adapting to changing circumstances, increasing the trust’s tax savings, asset protection, performance, flexibility/control, and privacy.

One method of amending an irrevocable trust is called “decanting.” Yes, it’s an analogy to wine where you pour from the bottle into a fresh vessel, leaving unwanted residue behind. With a trust, decanting lets you discard unwanted provisions and add new ones.

Here are some reasons why you might wish to decant:

•    Correct old errors and ambiguities, or update for a change in circumstance; 
•    Change the “situs” of the trust to a state with more favorable tax, privacy and other laws; 
•    Empower the trustee to appoint a new fiduciary for the investments; 
•    Separate a single large trust into separate trusts that can better match beneficiaries’ needs; 
•    Change investment provisions to allow for private equity; and
•    Improve a trust’s terms to add protections from creditors, ex-spouses, etc.

For trusts established in states that do not allow decanting or a change in situs, things get more complicated but not hopeless. It may be possible to pursue a “non-judicial” settlement, or the trustee can work with counsel to ask the state’s probate court to allow the trust to move to a state that has a decanting statute. This becomes a state-by-state, judge-by-judge proposition, but with solid rationale will have a reasonable chance of success and may be very well worth the effort.

How can assets be protected from a catastrophic liability risk without forfeiting access during your own lifetime? 
Say you are an obstetrician. Not only do you forfeit much of your income to malpractice insurance, you face an inordinately high risk of a lawsuit at some point in your career – one that could dramatically exceed the limits of that insurance and all but wipe you out financially.

While it is possible to set up trusts with a degree of asset protection from creditors and legal judgment, you typically cannot serve as your own trustee or beneficiary, which means you won’t be able to access those assets if such an emergency never happens. 

However, some states allow for a “domestic asset protection statute” that can serve as an invaluable safety net. Where permissible, these trusts enable you to serve as a beneficiary, protecting assets from some unknown future legal judgment while enabling access to the assets under certain conditions. 

These are also referred to as “domestic self-settled spendthrift trusts.”

How can trusts that make your legacy invulnerable to the estate tax be designed? 
Though the estate tax exemption has increased to $12.06/$24.12 million (individuals/couples) through 2022, for those who pass away before then, the federal tax bill is a steep 40 per cent rate for those who meet the threshold. Several trust strategies exist to ease the impact, but one – the dynasty trust – has an ability to compound wealth at a rate that could enable it to last virtually forever. These trusts are designed to pass wealth over multiple generations free from death taxes and protected from divorce, creditors or other risks. 

Typically funded using the maximum generation-skipping trust and estate tax exclusion, even a relatively conservative return averaging 4 per cent per annum could increase the value of a dynasty trust sixfold by the fourth generation. 

With a little creativity, the technique can play a significant role in comparatively moderate estates as well. In fact, over a long period of time it can grow your estate to levels you might not imagine – levels where sidestepping estate tax will have an enormous impact. 

Say you die with a $5 million estate, two children, and a philosophical wish to cap what your family receives so as not to undermine their ambition and work ethic. You could fund a dynasty trust with half of your estate, $2.5 million, then transfer the other $2.5 million in a way that gives your children access to it. With your children and, by extension, grandchildren, supported by the first transfer, the “mini” dynasty trust could grow untapped for the benefit of the third generation (G3) and beyond.

Regardless of current uncertainties – inflation, rising interest rates, new legislation, geopolitical strife and war – there remains a suite of planning opportunities and techniques that can make your trusts and estate plan far more effective. With the right advisors and strategies, you can make sure that you are passing on your hard-earned assets and legacy for the benefit of generations to come.  

About the author

Nick Bertha works with Fieldpoint Private Securities' clients on complex estate and income tax issues and helps ultra-high net worth families manage their wealth. He is an expert in tax law, wealth transfer and trusts and estates. His extensive career, spanning more than 30 years, includes prominent positions at Credit Suisse, DLJ and US Trust Company, where he led the Financial Counseling Group for many years.