The solution may be to terminate such trusts entirely if your clients have them, and put all the assets back into the spouse’s name. The result may be simpler, better tax results.

However, you also have to make sure there are no liabilities (such as medical costs) that could dissipate those assets if the trust is terminated and the assets are distributed to the surviving spouse. To proceed, the client’s attorney needs to review the trust to determine whether it can be terminated, to confirm that there are no legal reasons for keeping it, confirm other beneficiaries are agreeable and then to draft the documents to end the trust. Again, that gives advisors another way to involve the attorneys in critical discussions and form collaborations that could be beneficial to both.

Decanting Old Trusts
Some trusts terminate at specified dates, and donors might want to create a new trust to last as long as possible.

Why extend a trust? Things have changed. In the past, trusts often paid out assets to beneficiaries who had reached a certain age, say 30. But now donors have to contend with new problems. The divorce rate is 50%, and we live in a litigious society. It might be better to keep shielding the assets.

One way you can do that is by merging old trusts into new ones (or “decanting” them, in legal parlance). The new trust can then be better crafted and serve the same beneficiaries for as long as state law permits. That protects the clients and their beneficiaries (no client wants their child’s inheritance lost in a divorce settlement). Maybe the parents trust the child (or whoever else is the beneficiary) and are happy to give him or her control of the assets at age 30 (or any age). But they might still want those assets to be protected as they appreciate, something the long-term trust affords.

If so, the client can have the new trust name the beneficiaries as trustees, too—as long as the heirs are limited in making distributions to themselves for specific purposes, including their health, education, maintenance and support (what’s called the “HEMS” standard).

Planning software can create summaries of trusts. That makes it efficient to identify these opportunities. And again, it’s critical to getting the client engaged with the process. When you explain the benefits to the client, in many cases (if not most), they will appreciate that you found the opportunities for them. After that, the attorney will confirm the legal requirements to decant the old trust and create the new one before drafting the documents.

Putting It Into Practice
Let’s take an example based on a real life scenario we’re familiar with at our firm. Let’s say we have a husband and wife, Steve and Jane, who have four minor children. They created their wills and revocable trusts in 2016. In this case, the advisor uploaded their documents using FP Alpha’s “Estate Snapshot.”

According to the distribution plan, the descendants’ trusts will be created immediately upon the deaths of the latter spouse. When each child reaches age 30, the trustees are to distribute one third of the trust’s principal to them. Another third goes to the child when he or she reaches age 35, and the rest when they turn 40.

Let’s say Steve and Jane’s financial advisor shares the distribution plan with them. The software shows them a graphic and numerical illustration of their plan. Like many clients, Steve and Jane have never seen their plan flow-charted before. This helps them focus on key discussion points, including divorce and lawsuit protection, and the acknowledgment that they don’t know what the future financial management abilities of their young heirs will be. The presentation resonates with Steve and Jane, since one of their family members just went through a devastating divorce.

At the suggestion of their advisor, Steve and Jane consult their attorney for advice, and the attorney advises that their plan should be revised to include lifetime trusts as well as other necessary changes.

The outcome is that Steve and Jane have received needed help, the attorney got more work (with the help of the advisor) and both professionals provided a favorable planning benefit to the clients. As a result, the attorney has become a new referral source for the advisor.

This is just one example of how advisors can both add value to their clients and forge better relationships with client attorneys, and another reason they might want to consider the myriad ways they can uncover estate planning opportunities for their clients.

Martin M. Shenkman, CPA, MBA, PFS, AEP (distinguished), JD, is an attorney in private practice in Fort Lee, N.J., and New York City. His practice concentrates on estate and tax planning, planning for closely held businesses and estate administration.

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