Estate planning lawyers aim for a stable plan for the estates of their clients. However, the ever-changing political landscape made this difficult. Within the past few years, lawmakers have made significant changes to the Internal Revenue Code (IRC). The changes in legislative actions resulted in substantial adjustments to the strategies estate planners suggest to their clients.
These proposed alterations don’t even stop after a few amendments. There are bills waiting to become laws and proposals waiting to be tabled. To accommodate the changes contained in these legislative proposals, estate planners must curate plans with flexible provisions. This article will discuss these strategies. If you’re ready to learn them, read on.
How Can Your Estate Plan Survive the Ever-Changing Political Environment?
An adaptable plan can shield you from potentially devastating and expensive outcomes while ensuring your readiness for potential changes that could affect the estate. Here are some ways you can curate a flexible plan.
1. Creating a Disclaimer Trust
An alternative approach to mandating the funding of the credit shelter trust would be to establish a “Disclaimer Trust.” In this case, all assets would go to fund the Marital Trust, granting the surviving spouse the discretionary option to “disclaim” assets. It is the most suitable plan for an ever-changing political environment.
By disclaiming certain assets, the surviving spouse can choose to have them funded into the credit shelter family trust, potentially triggering an estate tax for that trust. This strategy places the surviving spouse in control, allowing them to determine which assets, if any, should be allocated to the credit shelter trust.
The structure of the Disclaimer Trust offers extensive flexibility. Aside from empowering the surviving spouse to choose which assets to disclaim, it can also adapt to evolving estate tax laws.
However, it is crucial for the surviving spouse to exercise caution and ensure that a qualified disclaimer is made in accordance with Section 2518 of the IRC. By adhering to these requirements and working with an estate planning attorney, the surviving spouse can effectively leverage the benefits of the Disclaimer Trust while navigating the complexities of estate tax regulations.
2. Go for the Clayton Trust
The flexible Disclaimer Trust approach is not universally applicable as it hinges on specific family dynamics and the grantor’s comfort level in granting the surviving spouse significant control over the estate.
In cases such as blended families, where the grantor desires to safeguard assets for their children, granting the surviving spouse maximum discretion may not align with their objectives.
In such situations, an estate planning lawyer should explore alternative planning strategies to strike a balance between the interests of the surviving spouse and the desire to preserve assets for the grantor’s children.
Each family’s unique circumstances necessitate careful consideration and customization of the plan to achieve the desired outcomes. A Clayton Trust provides the option to elect, on the decedent spouse’s estate tax return, to classify the assets in the B trust as Qualified Terminable Interest Property (QTIP).
Based on the estate planning law, these assets become part of the taxable estate of the surviving spouse upon the death of the first spouse. This election ensures that the assets receive a step-up in basis, potentially offering tax advantages for the surviving spouse.
The Clayton Trust structure offers flexibility in planning by allowing this election and providing a mechanism to optimize tax benefits while preserving assets for the surviving spouse.
3. Add Decanting Provisions to an Irrevocable Trust Plan
The word “irrevocable” means you can’t easily change a trust’s terms. Does this mean it will remain the same despite the changing political and legal environment?
Even if an irrevocable trust achieves what you want now, it’s good to find ways to make it more flexible. It could be done in various ways to make the supposedly unchangeable trust a bit more changeable.
One way to add flexibility to an irrevocable trust is by appointing a “Trust Protector.” This person acts as an overseer of the trust and can make changes if needed. They can resolve conflicts and modify the trust provisions if circumstances or laws go against what the trust creator originally intended in the estate plan.
It’s important to choose an independent third party for the Trust Protector role to avoid tax issues and maintain the trust’s purpose. The powers of a Trust Protector are often limited to making changes to the administrative rules of the trust. However, some trusts allow the Trust Protector to also modify the beneficiaries’ interests in the trust.
Your estate planning lawyer will explain that the Trust Protector role provides a potential option to “start over” with trusts that were validly created but have become outdated due to unexpected changes in laws or personal circumstances. In states that have adopted the Uniform Trust Code (UTC), the Trust Protector role is officially recognized.
However, in other states, the legality of the role may vary, so it’s important to research and ensure that the state’s laws acknowledge this flexible role before including it in a trust document.
Another way to add flexibility to an irrevocable trust is through a “decanting provision.” Note in your estate planning checklist that this provision allows the assets of the original trust to be transferred or “poured” into a new irrevocable trust if the original trust no longer meets the needs of the beneficiaries.
Similar to the Trust Protector role we discussed earlier, the ability to decant a trust depends on the laws of the state. Most states have some form of decanting statute in place. To decant an existing trust with undesirable terms, the trustee (following the rules in the trust document and the law) would distribute all the assets from the original trust into a newly created trust with different terms.
Work With a Credible Estate Planning Lawyer for Wade Through Changing Political Environments
While it may be uncomfortable to think about death, planning for the future is crucial despite the changing external environment. Creating a plan can ensure that your heirs have a suitable guardian and avoid being caught up in family conflicts. With flexible provisions in place, you can make it survive external changes.
To safeguard your children, it’s recommended that you seek legal advice on planning an estate and guardianship. You can contact our law office to schedule a consultation with Cristy J. Carbón-Gaul, an experienced estate planning legal professional specializing in these practice areas.