"If they let mom and dad take a loan and it doesn't get repaid, then they have jeopardized the children's inheritance," Smith says.
Daniel Swick, a partner with Herrick, Feinstein LLP in New York, says trusts generally have terms that are flexible enough to allow the person who set it up-or his spouse-to get money out. Swick says he had a client who set up a $500,000 trust for each of his children, and that money was meant to grow and perhaps pay for their college. But that man worked on Wall Street, and his income has since plummeted, and he now wants to use that money for other things, which he can do, provided it is spent on his children. In this case, the trustee was the client's wife, who had no objections.
Swick says he hasn't seen many people trying to break into their trusts, since most of his clients are ultra-wealthy, but he has seen some decide they no longer want to fund the insurance policies inside those trusts. With premiums running anywhere from $30,000 to $150,000 a year, the cost can be hefty. Others are reluctant to set up trusts in the first place, he says.
"Younger guys with a lot of debt, they see their income dropping, their house is not worth what they thought, and their fixed costs are high," Swick says. "People are panicking."
But some wonder whether the ease with which clients can get access to an "irrevocable" trust-either by changing the terms of it or obtaining a loan from it-will set off alarms with the Internal Revenue Service. After all, funds set aside in trusts are supposed to be outside the clients' estates, and outside their access. If the IRS believes a client has retained or exercised too much control over one, it may question whether he ever really parted with the assets.
Indeed, there have been times where the client and his planners took an overly aggressive view of what could be done. The IRS has seized on those cases and tried to set a precedent with them. And once the tax authorities have won a few, they can try to change the law, experts say.
"For years, the IRS and Treasury have been sending proposals to Congress to try to stop or reduce the use of certain family estate-planning techniques, and by and large, those proposals have not been adopted," Rikoon says. "But that can change if people become too aggressive."