We recently posted about situations that may make it important to revise your estate plan, and about how reviewing your estate plan is an important part of ensuring it is accurate and secure. One component of an estate plan that continues to grow in popularity and functionality is a trust. However, what happens when a trust no longer serves the purpose for which it was established? Life events and other factors can significantly impact how effective your trust will be, and it is important to monitor your trust on a regular basis to ensure it still meets your needs – and to take steps to fix it if it doesn’t.
When might a trust break?
The law is always changing. Estate planning law is no exception. Some changes in laws that affect estate planning decisions can cause a trust to break. For instance, if a trust was created many years ago when the gift tax, estate tax, and generation-skipping transfer taxes had lower exemption values. Consequently, such trust may no longer be necessary to help you avoid certain tax burdens that they were designed to avoid. The changing exemptions and other factors surrounding these taxes can also make the prospect of paying taxes associated with the trust less appealing than taxes that would be due without the trust.
While laws can have an impact on a trust, personal circumstances are more often the cause of a broken trust. Life events like births, deaths, divorce, and other similar occurrences can greatly impact how you choose to distribute your assets. Divorce can cause a trust created for your former spouse no longer necessary, and your children may eventually prefer that you distribute your wealth to their children instead. Your financial situation can improve or deteriorate, and either can make changes in your trust necessary.
How can you fix a broken trust?
There are five common ways to fix a broken trust. In New York, even irrevocable trusts can be modified in some situations. Reviewing your circumstances with your estate planning attorney can help you understand which option is best for you if you are faced with the task of fixing a broken trust.
- Modification – Depending on the state where your trust is located, modification may be permitted in order for you to ensure the trust meets its purposes. Some states require you to obtain court permission to modify a trust.
- Relocation – If life has taken you to a new location, it may also be possible to take your trust with you depending on the laws of the state you are now residing in and the state where the trust was created. This can help you take advantage of more favorable laws in a new location.
- Decanting – New York was a leader in “decanting” laws. These laws are called decanting laws because they essentially allow you to pour the assets out of one trust into another trust that more appropriately meets your needs.
- Division/Consolidation – Some laws allow you to divide a single trust into two or more trusts, and similarly to combine two or more trusts into one. This can help you merge assets into a vehicle that is more suited for your needs or to create trusts with different goals as your personal wishes evolve.
- Reformation – Generally this option is only available when the original trust was created based on either a factual or legal mistake. The usual process for reformation of a trust involves asking a court to “rewrite” a trust in a way that conforms with the original intent.
There are restrictions on each of these mechanisms for fixing a broken trust. It is important to speak with an experienced estate planning attorney to help you determine which option is best for you and to make sure that you are aware of any potential consequences related to your decision.