When is a door not a door? (Answer: When it is ajar.)
When is an irrevocable trust not irrevocable? Answer: Pretty much all the time. That is, perhaps the irrevocable trust cannot be revoked per se but, with a little creative thinking and cooperation, it may be possible to modify, decant, or terminate an irrevocable trust. This is not the kind of news that makes headlines (except in our newsletter), but great changes are afoot in trust planning.
In the past 18 years, more than 30 jurisdictions (including DC, MD, and VA) have enacted a version of the Uniform Trust Code, shifting trust law away from arcane rules buried in old court decisions and into the modern era. Many jurisdictions (again including DC, MD, and VA) have also revised laws that used to prohibit extremely long-term trusts, making it possible to create irrevocable trusts that last indefinitely—perpetual or “dynasty” trusts. None of these changes has given estate planners a reliable crystal ball, however, so one innovation of modern trust law is
flexibility for irrevocable trusts.
Often, estate planners will draft for flexibility. With few exceptions, the terms of a trust supersede any contrary provisions of a state’s trust code, so the best place to make a trust flexible is at the drafting stage, in the trust’s language itself. There you may find provisions that:
• Make it easy to add or change trustees;
• Give the beneficiary the power to direct where the remaining trust assets should go at her death;
• Give the trustee broad discretion to distribute income and principal to and among members of a class of beneficiaries (and/or to withhold distributions to a beneficiary for any number of reasons), perhaps even to the point of terminating the trust;
• Authorize trustees, individual beneficiaries, or third parties to select charities to receive distributions;
• Give trustees or a trust protector the power to amend some of the trust’s terms (often to make administration less burdensome or to save taxes);
• Give trustees the power to move the trust to another jurisdiction to take advantage of more favorable laws;
• Allow the beneficiary to decide whether to withdraw assets from the trust or leave them in place;
• Give the trustee the power to confer upon a beneficiary more expansive control over her own trust; or
• Give the trustee the power to decant the trust (see below).
Such provisions build flexibility into the trust’s terms, making it less likely that court involvement will be necessary ten, twenty, eighty, or more years in the future when law changes, beneficiary circumstances, or anything else may create unexpected problems that cannot be resolved without a court.
If the trust’s terms are inflexible, state law may provide needed flexibility; the state’s trust code may allow for certain changes to be made if all relevant persons are in agreement and the court blesses the proposed changes—and it may even allow for such changes to be made without going to court. Many jurisdictions that have enacted the Uniform Trust Code (including DC, MD, and VA) permit non-judicial settlement agreements to modify or terminate otherwise irrevocable trusts as long as (i) the relevant cast of characters agrees to it and (ii) the changes do not violate a material purpose of the trust. In determining the relevant cast of characters—those persons whose OK is needed for the agreement to take effect—many state laws (including DC, MD, and VA) now allow for virtual representation. This means that it may not be necessary to get Beneficiary Betty herself to sign off on the deal if someone else can sign off and bind Beneficiary Betty to the deal in doing so. Typically, the virtual representation rules allow for a parent or other ancestor to agree on behalf of a minor or unborn beneficiary, allow one beneficiary to agree on behalf of another beneficiary whose interest in the trust is substantially identical, and persons with special powers over the trust to agree on behalf of contingent beneficiaries or others whose interests could be defeated by the exercise of such powers. State laws differ in the logistical details, but in some situations it may be possible for the trust’s settlor to designate someone to have authority to represent and bind a beneficiary with regard to trust matters, including with respect to non-judicial settlement agreements.
If the state law governing administration of the trust is not sufficiently favorable to allow for the desired changes, the state law may nevertheless allow the trustees to shift the trust’s situs to a new jurisdiction, where the laws are more favorable.
Virginia, like a number of other states, permits trust “decanting.” This is the term used to describe a trustee’s act of “pouring” assets of one trust into a new trust—presumably, a trust with more favorable terms. Decanting can be a simple and effective tool for changing administrative or ministerial provisions or achieving better tax-efficiency. Changing beneficial interests—within limits—is also possible via decanting, but state rules vary a great deal as to the prerequisites for decanting and how far from the original trust’s terms the new trust may legitimately stray. The restrictions tend to focus on protecting the trust’s material purposes and beneficiaries’ interests; even if the original trust’s place of administration is a state that permits decanting, it may be necessary to move the trust to a decanting-friendlier jurisdiction before proceeding with changes that push the envelope.
Changes made to irrevocable trusts can affect tax treatment as well as beneficiaries’ interests, trustees’ powers and duties, and even the rights of beneficiaries’ creditors to reach trust assets. It is very important to seek advice from competent trust counsel before undertaking changes that may have unexpected repercussions, but an “irrevocable” trust may not be as irrevocable as it appears. Our estate and trust attorneys would be happy to assist you with any questions you may have about irrevocable trusts.
B22-0169, the Electronic Signature Authorization Act of 2017, is pending before the DC Council, and it is dreadful. The Uniform Law Commission (ULC), relevant sections of the DC Bar, and a number of DC Fellows of the American College of Trust and Estate Counsel (ACTEC) have submitted, formally or informally, written opposition to the bill. We have it on good authority that this bill is unlikely to pass, and we hope that is the case.
Are electronic wills coming? Of course they are. Last year in Australia, an unsent text message was accepted for probate as someone’s last will and testament. (Unsent! With an emoji in it!) In July of this year, the Michigan Court of Appeals affirmed a trial court decision to accept for… MORE >
Family lawyers are increasingly hearing from divorced clients who are getting ready to retire or have retired and who have a spousal support obligation or a right to receive support under a court order. A court order may result from a trial or as part of a settlement agreement adopted by a court in the judgment of divorce. Some payors think alimony payments automatically end at retirement, or that a court will decide to terminate payments at retirement as a matter of course, but this is not necessarily so.
Court-ordered spousal support terminates automatically only on the death of either party or—in Maryland and Virginia, but not the District—upon remarriage of the recipient. When a court orders indefinite spousal support, i.e., support without a predetermined… MORE >
In June 2018, Eric P. Bacaj joined the firm as an associate after eight years as a criminal prosecutor: almost four years in the Bronx District Attorney’s Office and four years as an Assistant United States Attorney in Charleston, West Virginia. As a former prosecutor he brings a wealth of courtroom experience to his new position with the firm’s Divorce and Family Law Group.
With nearly all of his extended family in the DC area, joining Pasternak & Fidis was a homecoming for Eric. At Denison University, in Granville, Ohio, he got an undergraduate degree in Political Science. In his second year, he took a course on the Supreme Court from Susan Gellman, a civil rights lawyer, who taught it as a typical law school course, with a law school casebook and the Socratic method, requiring students to make legal arguments and challenging… MORE >
Stephanie Perry became the firm’s managing partner in June, following the death of Nancy Fax. Stephanie joined Pasternak & Fidis in 2010, after practicing law for six years in Atlanta, and immediately proved herself an invaluable addition to the firm’s estates and trusts department. Eight years later, with all in agreement that she had the right skills to step into the job, her colleagues unanimously elected her as Nancy’s successor.
Nancy joined the firm as a partner in 2001 and succeeded Marcia Fidis as managing partner in 2004, a post which Marcia had filled for 18 years. Several years ago, Nancy, thinking ahead to a day when she would step down, identified Stephanie as the best person to succeed her. The partners agreed. Stephanie began to work with Nancy to plan for the succession.
The succession plan had… MORE >
On June 4, 2018, we lost our partner, friend and mentor, Nancy Fax. Nancy’s family lost a mother, companion, daughter, aunt, sister, advisor, and friend. Nancy died less than a month after being diagnosed with pancreatic cancer. She faced death the way she faced everything—with calm and grace. She told her law partners, after sharing the news of her diagnosis, “I’ve had a really great life. I only wish I could have another 30 years.”
Nancy would have celebrated her 65th birthday on August 13. Working as she did from her home in Maine for the last few summers, Nancy would have enjoyed an early sunrise followed by an invigorating workout, as she did every day, taking care of herself as she prepared for a day of taking care of her clients. Even at her vacation home, Nancy busily and… MORE >