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Irrevocable Trusts and Divorce: Words of Caution

A recurring theme in estate planning is that it is not a once and done activity. Instead, it is critical to revise estate plans following major life changes. 

 

One of the countless life changes that many people still do not think necessitates changes to estate plans is divorce. In reality, divorce changes a number of things about asset ownership as well as forever alters plans that a couple might have for the future. 

 

If you’re navigating the divorce process, you might encounter irrevocable trusts

 

What’s an Irrevocable Trust?

 

In short, the traditional way to explain an irrevocable trust is a type of trust whose terms cannot be altered once the term is created. 

 

In reality, however, there are some limited situations where irrevocable trusts can be altered. One possible way to change the terms of an irrevocable trust is through the decanting process, during which the previous version of the trust is replaced by a new trust document and assets from the original trust are transferred to a new trust. 

 

Why Divorcing Couples Use Irrevocable Trusts

 

Irrevocable trusts are commonly used by married couples because they allow the couple to save on taxes. 

 

When couples decide to divorce, however, the terms of an irrevocable trust might no longer work for the couple. 

 

Besides the end of a marriage, there are a number of other reasons why the decanting process might seem attractive: creating supplemental needs trusts, remedying drafting errors, consolidating multiple trusts, modifying trust provisions, and reducing state income taxes on assets located in a trust.

 

What New York State Says about the Decanting Process

 

Decanting has become a common estate planning tool for many New York residents. 

 

In 1992, the state became one of the first to pass a statute affirming that a trustee with absolute power to invade the principal of a trust on behalf of a beneficiary had the power to move the principal from one trust to another. 

 

In 2011, New York took its fondness towards decanting a step further and passed a law the greatly loosened these requirements.

 

In accordance with New York probate law, a trustee with the power to invade trust principal is capable of appointing the principal assets inside of a trust for a beneficiary. 

 

For trustees with limited powers, the beneficiaries of both the old and new trust must match. A written and signed instrument must also instruct how a trustee will decant assets. 

 

This written form must then be submitted to several parties including the trust’s settlor ocreator, any parties interested in the old trust, and any interested parties in the new trust. In some situations, trustees are also required to file this instrument with the court that has jurisdiction over the original trust. 

 

Speak with an Experienced Estate Planning Lawyer

Handling divorce can be difficult, it can be made even more challenging if changes must be made to your estate plans. Fortunately, an experienced estate planning lawyer can help. Contact Ettinger Estate Planning today to schedule a free consultation.

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