As we have discussed, there have been several significant tax law changes, including the Tax Act, SECURE Act & CARES Act, not to mention the effects of the pandemic. Additionally, we anticipate that there will be numerous changes in the law under the current administration.
Have you had any changes in your financial or personal circumstances that warrant changes to your estate plan? Is your existing estate plan up to date and flexible to meet these changes in the law? Finally, have you completed an estate planning self-audit along with a risk assessment?
This is the fifth of a six-part series on building a comprehensive estate plan.
This plan is designed to protect you and your heirs for many generations to come.
As our mantra states, "Today's Plans Become Tomorrow's Legacy."
Part 1 - Building a Road Map for Estate Planning and Financial Success
Part 2 - Team Building: Original building of estate planning team
Part 3 - Risk Management
Part 4 - Core Documents and Essential Components to a Comprehensive Plan
Part 5 - Customization of Trusts
Part 6 - Legacy Component.
Enjoy the series, and as always, we welcome your feedback. Our goal is to equip you with the insight and information you need to have confidence that you have designed and implemented a solid estate plan.
Part 5 - Customization of Trusts
When building a comprehensive estate plan that works for you, it is crucial to customize the plan to address changing times and changing life circumstances. This article will explain just a few ways we use trusts to create a resilient, long-lasting estate plan.
Trust Dispositive Terms - We draft using formulas that, in general, adjust based on the estate and generation-skipping tax law at the time of application. However, we also anticipate the potential changes and draft to provide great flexibility in the dispositive provisions.
We use several different dispositive approaches to meet your family dynamics/needs. Here are just three different dispositive strategies:
1 - Distributions for HEMS (health, education, maintenance, and support). Distributions for HEMS means that your selected Trustee (boss of your trust) is directed to make discretionary distributions as the Trustee deems appropriate for these "ascertainable" needs.
2 - Distributions based on Unitrust amount. Distributions based on Unitrust amount is a fixed percentage of the amount of assets held in the respective trust(s) on January 1 of each year (or otherwise designated date). These distributions provide a steady income stream without requiring a list of the beneficiaries' needs, providing some regularity and guidance to the Trustee. Note that you can add HEMS discretionary distributions above and beyond the unitrust amount.
3 - Total Discretionary Trust. Total Discretionary Trust is very restrictive and is used in rare cases to protect the beneficiary who has various additional needs, addiction issues, or other proclivities that could warrant total discretion to say "no" to a requested distribution.
Generation-skipping trust - often referred to as a dynasty trust. Typically, trusts are drafted to keep money in the family—the funds transfer to the first generation of beneficiaries for life. If any assets are left over after each first-generation beneficiary passes away, the respective trust transfers to the beneficiaries' descendants. Keep in mind that the trust can vary the terms as the settlor so chooses. Under current Florida law, a trust must terminate within 360 years.
Federal and State Estate Tax Exemption (and formulas). As stated above, we use formulas to deal with the fact that the law often changes, and therefore, we draft trusts to be flexible. For example, we often add state-specific language to address the fact that each state has a different estate and inheritance tax laws.
Selection of Fiduciary. Fiduciary selection is a significant decision regarding selecting the appropriate trusted party who will become responsible for controlling and administering the trust (i.e., the fiduciary). We request that you name at least two back-ups to the first Trustee selected. These successor trustees can be family, friends, professional advisors, or a professional trust company. Note, the trust also provides rules for removing and replacing Trustees if the circumstances require a change.
Step-Up in Basis on Trust Assets (revocable vs. irrevocable trust). Under the present tax law, if you have control over assets included in your federal gross estate, then your heirs will receive the assets under the trust at a new date of death basis (this is referred to as a step-up in basis). Example: If you bought Coca-Cola stock at $25 and it is worth $50 at the time of your death, then the capital gain disappears, and the recipient receives a new date of death value for income tax purposes.
Powers of Appointment. Suppose you wish to allow a beneficiary to decide who takes the assets from the trust in the future. In that case, you can give them the power to vary your specified distribution and make it their own (this is referred to as a power to change or a power of appointment).
Trust Protector. A Trust Protector is an infrequently used trust provision that allows some third party to change an otherwise unchangeable document. When there is a significant change of circumstances or tax law, you can use this power.
This is not an inclusive list of unique or essential trust provisions but, it is a great starting point. One more mention is a special needs trust that can be added to any trust to protect the trust assets if a beneficiary will be collecting government benefits due to a disability or additional needs.
Most important to customizing your trust documents is to provide your attorney with as much family and financial information as possible so that your plan can closely meet your needs.