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Oxford Financial Group, LTD


Oxford Financial Group, LTD


Expert Perspective

News, research and market insights from our team of experts.


Current Issue | December 20, 2018

Trust Modifications – Estate Planning’s Technology Upgrade

By: Kara Talbott, CPA/PFS, CFP®, Senior Wealth Strategist

Many people find it nearly inconceivable not to upgrade to the latest technology, whether the newest phone, tablet, application, smart TV or other high speed, high tech device. "Early adopters", as they are called, stood in line for hours on end to be the first to adopt the new iPhone 7 in late September 2016. It is estimated that over 70 million iPhone 7 units were sold in the fourth quarter of 2016, some people making the change mere months after the previous model’s release. Whatever factors lead to this urge to upgrade, not all facets of our ever-changing lives are treated in the same manner. When it comes to trust documents, few people realize just how outdated theirs may have become. They essentially have the Commodore 64 version purchased decades ago from Radio Shack. While you might still be able to type on the Commodore 64, you will not be able to video chat with your grandchildren on it.

Likewise, I was recently disappointed to find that my iPod from the early 2000's (which had all of my favorite songs from decades of music downloaded, not from iTunes, but rather from a vast CD collection) was not compatible with my current laptop or iPhone. Essentially, the technician laughed when I placed my iPod on the counter but became somewhat sympathetic when telling me there was no way to transfer those songs from my iPod to my new computer or my iPhone. However, he said, trying to be encouraging, if I still had the CDs, I could transfer each song to my new devices from the original CDs. Similarly, old trust documents may be inconsistent and perhaps even incompatible with newer trusts many families have recently created.

Creating a Cohesive Trust Structure for Current and Future Generations
How can families create a cohesive trust structure for current and future generations? By modifying their trust documents to incorporate the latest trust law which provides for flexibility, consistency and alignment with their family's philosophies in governance and dispositive provisions. Trust law is fluid. It is different between state jurisdictions and changes within the same state over time. Like technology today, trust law is modernized almost continuously. If a family's trust documents are not reviewed in light of the most modern trust and tax laws, the family may miss opportunities to maximize significant benefits for current and future generations.

Flexibility is defined as capable of modification or adaptation, pliable. Consider the changes that may occur within a family over time. If the family’s trusts are not flexible, they cannot adapt, or might not be compatible with these various changes.

  • The family's advisor relationships may change. The ability to easily remove and replace powerholders is key to the family having comfort and confidence in administration, investment management and distribution decisions.
  • The family will grow over time. As more family lines move into adulthood, the family needs to have the opportunity to continue holding certain trust assets together or separate along those now mature family lines. The need for distributions will be different at various times, among different individuals and for different generations.
  • Tax laws will change over time, perhaps significantly and often, as we have seen in the last 15 years with the gift and estate tax laws which are still in a state of substantial uncertainty.

Consistency is defined as "harmony or compatibility among the parts of a complex thing". A family's trust structure may be complex. If the separate trusts making up the full structure are not designed in sync with one another, the structure will not operate effectively. Trusts drafted at different times, under various laws with differing information and perspectives may lack consistency. Having different trustees and advisors may mean that each trust is considered in a vacuum. For example, the interplay between trusts with respect to asset protection, required distributions and estate inclusion will not be considered. Therefore, distribution requests may not be made in the most tax efficient and asset protective manner. Dispositive provisions may not align in a way that provides independent resources and incentivizes beneficiaries while also maximizing asset protection. Additionally, state income tax treatment of the trusts may not be minimized to the fullest extent.

Values and Philosophies
Families have certain values and philosophies. It is important that each generation revisit these philosophies, add to them and modify them based on their own experiences and situations. The trusts need to match these philosophies over time and be able to speak to a variety of circumstances, including beneficiaries with special needs, beneficiaries with their own independent wealth, unmotivated beneficiaries and maturing beneficiaries.

Trust Modification
Trust modification can be an effective means of updating a single trust to incorporate modern trust law, providing flexibility for future circumstances and accomplishing current goals for the beneficiaries. It can also be utilized to renovate an entire suite of trusts to create a cohesive, flexible structure for the family for generations. Trust modifications may be accomplished under state law. The laws of the states vary, but the states with the most progressive trust laws generally allow for modifications under any of several means including decanting, judicial or non-judicial modification or non-judicial settlement agreements. Which provisions may be modified under the different methods varies. Therefore, it is important to match the desired updates and modifications with not only the appropriate state jurisdiction but also with the method of modification that will accomplish the desired result.

My iPod's faults only came to light due to changes in technology, changes that I did not foresee, but occurred nonetheless. Don't wait until your family encounters a problem or difficult situation to carefully review and modify your trusts. Modernize your trusts now while family members are harmonious. Build in as much flexibility, consistency and alignment with your family's philosophies as possible.

The above commentary represents the opinion of the authors as of 2.8.17 and is subject to change at any time due to market or economic conditions or other factors. This information is not intended to serve as tax or legal advice. As always, tax and legal counsel should be engaged before taking any action.