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Build long-range flexibility into estate plan

Estate Plan Edge: The future is uncertain, so an effective estate plan should remain flexible — even long after your death.

The future is unpredictable. Is your estate plan designed to adapt to the times?

Everyone agrees that you don’t want to tie your own hands or fence yourself in, so you keep your estate plan changeable. You can amend it anytime. I’ve written often about the importance of keeping your options open and committing yourself to the regular updating of your plan to adapt to changing laws and circumstances.

Seeing the importance of regular updating, you might say: “No one should lock themselves into anything unchangeable. I’ll never create an irrevocable trust!”

Are you sure about that?

If you and your spouse have a relatively ordinary estate plan, each of you has a revocable living trust that says something like this: “Upon my death, hold my property for the benefit of my spouse for his or her lifetime. Income can (or must) be distributed to my spouse, and principal can be distributed if my spouse needs it to live comfortably.”

Your living trust agreement will say where the remaining assets will pass upon your spouse’s death — probably divided among the children. In the world of family farms, your trust agreement might say, for adult children: “After my spouse and I are both deceased, hold each child’s share of the assets in trust for his or her lifetime. Income can (or must) be distributed to the child, and principal can be distributed also if needed to live comfortably. Upon each child’s death …” and the trust will say where any remaining assets will go.

An estate plan like this offers your surviving spouse and children powerful asset protection benefits. Money and property received by your spouse or child will be accessible to them but protected from major life risks: lawsuits, remarriage and/or divorce, nursing home spend-down and (at your spouse’s or child’s death) estate tax.

Revocable goes irrevocable
This all starts out in a revocable living trust agreement because, as you said, you’d never form an irrevocable trust. However, when those instructions for the protection of assets for your spouse or child go into effect (i.e., upon your death), your plan creates an irrevocable trust for each beneficiary.

Consider those irrevocable trusts you will create. After you die, will they be rigid or flexible? To provide the asset protection benefits, they must meet certain legal requirements. But you would be wise to keep them reasonably flexible, too.

Why? The irrevocable trust for your spouse might easily last eight or 10 years, maybe longer. The irrevocable trust for your son or daughter may last several decades. During those years, laws will almost certainly change. The very finest trust document you could have written — and let’s say you updated everything within a year before you died — will not provide the best advantages to your beneficiaries 10 or 20 years later. It’s just not possible given the frequency of change in personal injury law, divorce law, nursing home law and tax law. After your death, the irrevocable trusts will need to be amended occasionally.

Does that bother you? You don’t want anyone else changing your plan. You wrote those instructions for good reasons, even if you didn’t realize they would create irrevocable trusts. You want your farm protected from taxes and the other risks (divorce, lawsuit, etc.). Maybe your instructions will keep the land in the family for multiple generations. These are “material purposes” of your plan, and no one should be able to change those. But when laws change after your death in a way that undermines a purpose like tax savings or divorce protection, the irrevocable trust should be revised to still fulfill your purposes.

Creating change
One way that trust law has evolved over the last couple of decades is by creating procedures for changing irrevocable trusts. However, the procedures are cumbersome. We often are engaged by families whose trusts were written years ago, are now irrevocable, are creating tax or other problems, and are very difficult and sometimes impossible to fix.

The best way to assure that your plan will fulfill your purposes long after you are gone, even in the face of unforeseeable changes in the law, is to include flexible provisions. Give your beneficiaries “powers of appointment” that allow them to adapt to changing circumstances. Give trustees “discretionary” powers over distributions. Allow the family to appoint a neutral party as a “Trust Protector” with power to amend the trust.

As laws and circumstances change, a good irrevocable trust won’t fall behind.

Ferguson owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.

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