Trusts can be great ways to transfer wealth, especially from one generation to the next. In fact, some last for multiple generations, which can be terrific but also problematic if circumstances change.
Fortunately, a growing number of states have been overhauling their trust laws to make them more flexible and easier to update. Most recently, at the beginning of of this year, California—one of the wealthiest states—loosened the constraints on how trusts can be fixed or otherwise altered.
"Over the past 20 or 25 years, there's been a kind of renaissance in trust law in many states. But in California, a place that attracts a lot of wealth, trust law just wasn't on the minds of the legislature," said Geoff Madsen, chairman and founder of Rapid City, S.D.-headquartered Independent Trust Co. "But now California is starting to catch up. It's starting to acknowledge that it's attractive to have trusts that are more flexible and the tools to update broken trusts without having to go to court."
Clients who have a California-based trust now have new options. With the help of a knowledgeable trust and estates attorney, they can modify all sorts of terms without having to go before a judge.
Madsen cited several examples. Besides making it easier to correct errors, the new California statute allows clients to update trusts for circumstances the original benefactor never foresaw, such as the birth of a special-needs child or changing tax laws. It enables clients to effectively merge two different trusts—perhaps to save on administrative fees—or create a new one and move the assets from the old one into the new one, a process called "decanting." This means clients can effectively resituate the trust in a new state to make it more convenient for heirs who have moved away or to take advantage of different state tax laws.
They can also extend the terms of a trust if, say, it was set to terminate after one generation. They can change distribution standards from, for instance, mandatory to discretionary. They can modify the succession of trustees, or take a piece of the trust and convert it to an asset-protection trust or a dynasty trust.
"There are all kinds of different tools available now for people with California trusts," said Madsen. "The new California law removes restrictions that made California an inflexible place while simultaneously hardwiring in increased flexibility."
Still, tt's not always easy to make changes. California is still relatively restrictive when it comes to decanting irrevocable trusts, for instance. There are high standards for notifying all involved parties, which may make such measures impractical.
"There is more work to do, but this is a really good first whack at dealing with a problem that's been there for years," said Madsen. In the past, he added, California was "frankly trailing other states. [But] now, without too much more work, they could really make it a benefit to be in California."
In the meantime, he said, California has made it easier for trustees, financial advisors and their clients. "What California did was give advisors and trustees an updated toolbelt to help them better meet the needs of families who have trusts in California," he said.