Can an Irrevocable Trust be Amended? - Part 2 - Trust Decanting

Last month, I described the several ways by which an irrevocable trust can be amended. However, there are yet other ways to amend an irrevocable trust. This month, I will describe another way. It is call trust decanting. Unfortunately for the local jurisdictions, trust decanting is only applicable to trusts with Virginia situs since Maryland and DC do not have trust decanting statutes. Here is list of how other states allow or don't allow for trust decanting.

Much like pouring a bottle of wine into another vessel to enhance the flavors, trust decanting is the process by which a trustee can enhance the original reasons for establishing the trust. The irrevocable trust is assessed to determine if it meets the current needs for its creation. If it doesn’t meet those needs, all of the trust assets are poured, or in other words distributed, into a new trust that will meet those needs better. However, a word of caution, not all irrevocable trusts can be decanted.

Under, Virginia Code Sec. 64.2-778.1 the trust document must contain language that provides that the trustee can exercise discretion over the principal of the irrevocable trust. Language stating the trustee can exercise discretion over only income is not enough because it is the principal that is moving to a new irrevocable trust. If there is no language like that in the trust, it cannot be decanted. The big advantage of trust decanting over last month’s version of modifying or reforming an irrevocable trust is that decanting doesn’t require consent from all of the qualified beneficiaries in some cases, court approval.

There are a number of restrictions on decanting a trust under Virginia law. The beneficiaries of the second trust must be the same beneficiaries of the original trust. However, the terms of the second trust may confer a power of appointment upon a current beneficiary of the original trust. Thus, a beneficiary may use a power of appointment to bestow distributions to people who are not beneficiaries of the original or second trust. Also, a strict procedure must be followed when decanting a trust including: exercising the decanting power must be done in writing, the trustee must set forth the terms of the second trust, and the trustee must give sixty (60) days written notice to the grantor of the original trust, if living. If the original grantor is not alive, notice must be given to the qualified beneficiaries of the original trust and any trust advisor or trust protector of the original trust.

There are numerous reasons for decanting a trust. The most likely reason is that the original trust staggered distributions at different ages for the beneficiary. The goal then is to transform the trust into a dynasty trust to last for later generations. Another reason could be the trustee wanting to divide the trustee’s responsibilities so that an investment adviser can oversee the trust’s investments. Other reasons might include the desire to combine multiple irrevocable trusts into one trust, splitting a pot trust into multiple individual trusts for beneficiaries with different needs, or adding or removing a spendthrift clause.

As we can see, an irrevocable trust is not quite as irrevocable as you would think. Decanting is another way to provide flexibility to the trustee and beneficiaries to amend an irrevocable trust and to ensure the trust meets the current needs of all interested parties.

Basics of Estate Planning: What is a Corporate Trustee?

There are numerous fiduciary positions in an estate plan. For example, you have the personal representative or the executor in a will, an agent in a medical directive, etc. Many times, someone must be appointed trustee or successor trustee for a trust. Usually, clients have an inkling of the person they are going to name to be trustee, such as a close relative, a sibling, a parent or a child.

What happens if you don’t have an idea whom to name? People often struggle with naming another person trustee (after themselves) for a variety of reasons. For example, a person doesn’t have someone they think they can trust. Perhaps, there are issues with other family members that will cause family discord by the selection of a particularly family member as the trustee. All potential options are notoriously poor with money or are unorganized. Maybe, the best options are too young. Maybe they don’t want to burden loved ones with managing a trust. When this happens, a corporate trustee might be a good option.

Generally, a corporate trustee is a bank’s trust department or trust company. Though, attorneys and CPAs sometime act as trustees. A corporate trustee can offer access to experienced and knowledgeable professionals. A corporate trustee will have more experience dealing with the finance and tax issues that a trust can face.

A corporate trustee also provides a level of objectivity that may be difficult for family members or other individual trustees. A corporate trustee will not get wrapped up in the family drama like a family trustee. Further, a corporate trustee will look at the entire picture of the trust when making decisions. This becomes particularly important when dealing with income beneficiaries (e.g. second wife in a QTIP trust) and remainderman beneficiaries (e.g. children from the first marriage in a QTIP trust) where investment goals can be diametrically opposed. Because of the liability imposed on corporate trustees, they will make decisions cautiously and conservatively.

There are obviously some drawbacks to a corporate trustee. Corporate trustees are generally more expensive than non-corporate trustees. Fees for a corporate trustee can run between one percent (1%) to two and half percent (2.5%) of the value of the trust’s assets. Corporate trustees also typically mandate that they manage the investments in addition to fulfilling the trustee duties, which could incur additional fees. But, you can include language in your trust to permit an independent investment adviser. Lastly, corporate trustees tend to struggle with managing an actually business that is owned by the trust.

If you are struggling with naming a trustee or an alternate successor trustee, having a corporate trustee in the line of succession might be an idea to consider.

Estate of the Month: Lamar Odom

It is not always NFL or former NFL players that seem to have estate planning problems, NBA players can also demonstrate poor or no planning. It is also not often that the subject of the Estate of Month is still living but the recent health incident of Lamar Odom is a perfect demonstrates of what happens if you ignore estate planning.

Odom married Khloé Kardashian in September 2009. While I would rather have my fingernails pulled out than watch “Keeping Up with the Kardashians,” he became a familiar face for the millions of people that watch it. Like many Hollywood marriages, this one was not meant to last, and Kardashian filed for divorce in December 2014 over allegations related to Odom’s substance abuse problems. In a rather quick process, Kardashian and Odom signed and filed the final divorce papers in July 2015. However, the final divorce decree had not received final approval from a judge. But, for all intents and purposes, they were divorced.

Here is where the estate planning issue comes up.

On October 13, 2015, Odom was hospitalized after being discovered unconscious at a brothel in Crystal, Nevada. Blood tests of Odom revealed he had consumed large quantities of cocaine. He was in a coma and placed on life support for a few days before regaining consciousness.

Odom did not have a living will in place. There is also no report of Odom having a healthcare proxy in place, either. Thus, under California law, his legal wife - who was still Khloé Kardashian – was placed in the awkward position of making healthcare decisions for him, even though, they were divorced in all but final legal name. In fact, there were reports that before Odom regained consciousness that Kardashian was preparing to say her final goodbyes to Odom .

What does this demonstrate? You should have these important documents in place. That is pretty obvious. With a living will in place, the doctors and Kardashian would have some direction from Odom in how he wanted to be treated if in a coma. She wouldn't be placed in a position of making healthcare decisions by guessing. While it appears she made the correct ones since he regained consciousness, I can imagine other divorces where the decisions could be the wrong ones.

The next step is to make sure you review your documents when life changing events take place. Life changing events include: death, divorce, marriage, births, law changes and the like require you to review your estate planning documents, making sure the life changing event doesn't alter or negate your current estate plan. Don't assume that a divorce automatically takes care of an estate planning issue. Legally ending a marriage will automatically sever a number of relationships and free the parties from numerous legal responsibilities to each other, but an estate plan is a layered and complicated creature, and the intertwined duties that it are created will often linger, even after a divorce is finalized.

Ironically, in the aftermath of the incident, Odom and Kardashian, have decided to call off their divorce. And, paraphrasing Chris Rock, Odom is probably the first man ever whose marriage was saved by going to brothel and cheating on his wife (or almost ex-wife)…go figure.