I see many clients who have created revocable trust, sold to them by someone promising tax and probate savings. However, the proper trust to achieve estate tax advantages is a lifetime Irrevocable Trusts. The assets in a Irrevocable Trust pass upon death free of estate tax. To achieve the estate tax advantages, the client needs to give up control, which necessarily means the Trust is irrevocable. However, changes in life or in the law oftentimes make the Trust provisions less desirable. For example, the creator of the Trust (“Grantor”) may want to replace the Trustee, change the location of the Trust or the state law which controls it, or change the dispositive provisions for the beneficiaries.
Fortunately, Texas now allows Irrevocable Trusts to be amended, even without court involvement. “Decanting” and “nonjudicial reformation” are legally acceptable ways to amend provisions without court approval that otherwise would be set in stone. Typically, you need the consent of the Grantor, Trustees, and beneficiaries to comply with state law.
The dilemma is whether these changes could jeopardize the estate tax advantages the client desired and obtained at the creation of the Trust. The good estate tax news is that the IRS has issued a number of Private Letter Rulings that indicate estate and generation skipping tax advantages will still apply even if an Irrevocable Trust is modified. Of course, the devil is in the details, in determining what types of changes are appropriate and the method in which the changes can be done under state law. But at least in the estate tax world, what is irrevocable may be irrevocable only in part.
While a trust is appropriate for some people, the cost of creating, funding and administering a trust outweighs the benefits for many people. The real question is whether the anticipated reduction in future probate costs will be offset by the immediate cost of creating, funding and administering the trust during the remainder of the person’s lifetime. In some limited instances, such as owning property out of state, true tax savings (unnecessary unless you have more than $10.6 million) or a person’s inability to manage their assets, a trust is warranted. But, it is important to decide what your needs are before creating a trust.
If you find yourself with a living trust or irrevocable trust, it is a good idea to have it reviewed periodically to make sure it still meets your goals. If you are not sure whether the trust has been properly funded or maintained or perhaps if it is an irrevocable trust and you want to make changes, then you should defiantly seek an attorney who is trained and familiar with estate planning and probate. The advice they provide will assist you in making sure your plan meets your goals.
—
Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.