Fixing Broken Trusts

Posted by Matthew McClintock

It seems like we’re fixing a lot of broken trusts these days. One of the challenges with estate planning is helping people try and predict the future. Trusts set into motion plans that can last for generations and when things change or go sideways, they can be tricky to fix.

We’re working three separate engagements just this week that include trusts that were established many years ago. The law has changed a bunch since the trusts were created. Local trust laws have evolved, the tax laws have changed several times, and new planning opportunities have opened up in more favorable jurisdictions. Besides that, in each case the beneficiaries’ needs have changed, making the original trust design obsolete. Fortunately there are creative ways to change a trust even after it has become irrevocable.

Here are some of the reasons trusts might need to be changed:

  • A beneficiary develops special needs. In one of our current cases a beneficiary has been diagnosed with bipolar disorder. The trust needs to be changed to protect her inheritance from poor stewardship and to allow her to qualify for needs-based assistance due to her disability.
  • A beneficiary makes bad choices. In another current case a beneficiary has been making a series of poor financial decisions, which has been compounded by the knuckleheads he surrounds himself with.
  • Other jurisdictions offer greater protection. In our third case, the beneficiary’s trust is not as protective as he’d like, so we’re decanting his weak Colorado trust into a more protective trust in Nevada.

In each case we are decanting the original trust into new, modern trusts that have significantly improved protections. “Decanting” a trust works much like decanting a bottle of wine. When a trustee decants a trust, he or she designs a new trust for the benefit of the original trust beneficiary and “pours” property from the original trust into the new trust with more favorable terms.

There are several complex steps in the decanting process. In addition to following the procedures outlined in the decanting laws, we have to create a new trust that aligns with the original trust creator’s intent. We then have to assist the trustee in transferring property from one trust to the other. Although there are several moving parts to fixing a broken trust, the result is a much better trust that protects the beneficiaries and preserves their inheritance for them.

In our “proactive” estate planning – plans we put into place for clients today – we include provisions that simplify the trustee’s power to decant, and we include extensive provisions for trust protectors (or trust “advisors,” depending on the jurisdiction) that simplify the process of adjusting trusts over time when things change.

Trusts can – and should – last a very long time. Like anything else, trusts have to be carefully managed and maintained as things change. Many of our trust modification engagements, as well as many complex estate design engagements come to us as co-counsel opportunities with other attorneys.

If you want help exploring ways to improve an outdated trust or implement a superior estate plan, let’s talk to see how we can help you or your clients.

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