- Consider what changes are needed to achieve desired goals.
This is the up-front analysis that may need some significant and deep thought. This is not considering the type of legal process, but considering the technical changes needed to achieve the desired outcome. For example, if a trust is considered to be a grantor trust for income tax purposes, but non-grantor trust status is desired, all of the trust’s provisions and the identity of the beneficiaries and the trustee must be considered to make sure all issues are addressed to achieve the desired result.
- Consider the provisions in the applicable trust, other legal documents, and applicable state law that could be used to achieve or prevent the desired changes.
It may be that all the powers that are needed to make the desired changes are already in the applicable legal documents or applicable state law. These powers could include, among others, (a) distribution powers, power to add, remove or otherwise change trustees, co-trustees or others with power/authority over trust related matters, (b) inter vivos (lifetime) or testamentary (at death) limited or general powers of appointment, (c) power to split or combine/merge trusts, or (d) the power to remove the trust’s situs and thereby change applicable state law. Of course, care must be taken to also consider applicable trust, legal document, and state law provisions that could prevent achieving the desired changes.
- If desired changes cannot be achieved by using only the applicable trust, other legal documents, and state law, then need to consider modifying trust via judicial or non-judicial modification, decanting, etc.
In this case, need to consider both applicable state law, statutory and common law, and the possible need to move the trust’s situs to get access to more desirable state law. It is these types of laws that became effective in GA on July 1, 2018 under GA legislation known as HB 121. These new powers to modify include expanded judicial powers, decanting by the trustee, and non-judicial settlements.
- In analyzing the various state law trust modification options, should consider who will need to be notified and who will need to give consent to any proposed changes.
Each state law modification option has different requirements as to notice and consent and these differences may affect which option(s) are most viable after considering the involved parties who may or may not want the intended changes to be made, the costs and hassles as to each option, and effects on beneficiaries and creditors. Notice and consent can be made directly or indirectly, depending on the circumstances. The power to obtain indirect notice and consent was significantly expanded in HB121 by adding statutory virtual representation provisions.
- Last, but not least, the tax consequences and fiduciary duty/liability implications must be considered.
It is important to note that utilizing a legally acceptable technique to modify a trust does not necessarily shield you from potentially significant tax and fiduciary liability implications.
One of the key take-a-ways from HB121 is that, for the most part, it was drafted with only limited protective training wheels attached. In other words, much more flexibility to modify an existing trust will exist, but utilizing these state law powers creates risk for those using these powers. Care must be taken to safely modify trusts.
To reduce this risk, deeper analysis of the law may be needed and protective actions may be desired, including having a court bless the proposed changes/transactions to reduce fiduciary liability risk, and IRS Private Letter Rulings (PLR) may be considered to reduce tax risks where the risk is deemed significant and/or the amount at issue is significant. Of course, these steps may significantly increase the cost, especially if a PLR is desired.