When a husband and wife plan the disposal of their estate, one of the major issues can concern the best way to provide for their children’s future needs. With the help of their financial planning attorney, the parents agree that setting up an irrevocable trust is the best way to make sure their assets benefit their children.
The estate attorney crafts an irrevocable trust; therefore, the trust will benefit the couple’s two children according to the parents’ intentions. They name a trustee to provide discretionary trust funds for the best interest of each child. They split the trust equally between their son and daughter and set up outright distribution of all remaining assets when their children reach 30 years of age.
Can the trustee change an irrevocable trust?
Michigan adopted a law in 2012 called trust decanting. The law allows a trustee to change parts of the parent’s original irrevocable trust into a new trust. The trustee meets with the estate planning attorney to discuss decanting—or pouring the original trust into a new trust. A trustee can change an irrevocable trust unless language in the trust states otherwise. The purpose of the new trust is to better serve the beneficiaries—meaning the son and daughter. The trustee can decant an irrevocable trust whenever important tax laws change, or other circumstances arise that could diminish the beneficiaries’ financial position. A new trust will attempt to successfully address those changes and fulfill the parents’ intent to provide for their children.
When should you decant an irrevocable trust?
Assume the parents are now deceased. The son spends any money he receives on drugs. Over the years, the daughter behaves responsibly. She has worked hard to develop her musical talent and wishes to enter a prestigious music school. Meanwhile, the young man has become addicted to drugs and would deplete all his trust funds if he had full access. As this example shows, a trustee of an irrevocable trust may want to periodically meet with an estate planning attorney to assess options to mitigate adverse effects of new laws and maximize other options for the beneficiaries.
In the current example, the trustee wants to change the equal distribution to 75 percent for the young woman and 25 percent for the young man, which the trustee will carefully administer. Also, the trustee suggests he would like to use funds to pay for the young woman’s music education, housing and career efforts. When she is financially stable, he will distribute the remainder of her share outright. He wants to delay the son’s outright distribution an additional 20 years so the young man can have time to recover from his addiction and develop a career; meanwhile, his money will be carefully managed and used for food, housing and a drug rehabilitation program.
What is the best way to decant an irrevocable trust?
The trustee can consult a respected estate planning attorney for best results. While discussing the trustee’s requests, the law professional will suggest ways to draft the new trust for tax advantages and other changes that will provide present and future improvements for beneficiaries. The estate planning professional will also use language in the new trust to protect the trustee’s legal rights to make these changes and not incur repercussions from the transfer.