Estate Planning: Dealing With Uncertain Certainties
There are three certainties in life: death, taxes and change. These certainties are important in designing and, more importantly, maintaining a sound estate plan.
We are certain we will die, we are also certain that there will be some form of tax whether it is the “death tax”, or whether that death tax becomes an “income tax”. We are also certain that our laws, our family circumstances and our government will all change. The problem is that we don’t know when any of these certainties will occur. Estate planning is all about dealing with these uncertain certainties. Estate plans are designed to help you pass wealth to your loved ones. For example, “dynasty” trusts may be used to preserve your wealth for many generations. Since these documents are intended to function for decades, it is critical that they are flexible to deal with the changes in tax laws, creditor laws, political circumstances and family issues.
Estate plans (especially those with dynasty trusts) may take advantage of the following two techniques that provide you and your family flexibility: “powers of appointment”, and “trust protectors”.
A “power of appointment” gives a beneficiary the ability to modify the trust’s terms to create flexibility for the generations that follow. By comparison, using a “trust protector” allows a trusted, independent third party the ability to modify trust terms for the benefit of all of the beneficiaries. The trust protector can never be a beneficiary of the trust. A collateral benefit of using a trust protector is that not only does it create flexibility in your plan, but it can avoid negative tax consequences, make corrections, and complete planning which was not finished. These changes are possible since the trust protector is given the power to amend the trust (even an irrevocable trust) to address significant law changes and circumstances.
For example, if the law changes to cause the trust to become subject to creditors’ claims (where it was not originally) or estate taxes are eliminated, the trust protector could use its powers to amend the trust instrument to meet these contingencies.
There are times when you may not want to give a beneficiary a “power of appointment”. For instance, if you are in a subsequent marriage, it is common not to give the surviving “spouse” a power of appointment, since this may not meet with the deceased spouse’s intentions. In such cases, consider using a trust protector. Since the “trust protector” is truly independent and has the beneficiaries’ best intentions in mind, the only hurdle that you need to overcome is to find someone with whom you are comfortable.
Creating flexible documents allow future generations to deal with change. Utilizing special powers of appointment and trust protectors creates a flexible, enduring, well-crafted estate plan which can take advantage of the benefits of change instead of being hostage to change.
Steven W. Tarta, Esq. brings more than 45 years of professional experience to his practice, with a sophisticated focus on Estate Tax Planning, Living Trusts and Elder Law.