This second part of a three-part series discusses changes to irrevocable trusts using casting. The first part explored changing “irrevocable” trusts through judicial and non-judicial adjustments, and the last part would review the use of the trust protector to amend an irrevocable trust.
Unlike judicial and non-judicial modification or the use of a trust protector, casting relies on the extension of the trustee’s existing power to distribute the trust’s assets. In states that recognize decanting, the trustee exercises its power to distribute the trust’s assets and transfers them from a trust with unfavorable terms to a trust with more favorable terms, such as pouring wine from the bottle into the carafe that brings a better flavor to the wine.
Depending on state law, a new trust can provide opportunities to correct a drafting error, clarify ambiguity, correct and update trust provisions, address problems in administration, change the trust’s location, extend or limit trustee powers, restrict beneficiaries’ rights to information, provide asset protection, or Modify the succession of a trustee, or appoint a trustee, alter distributions, or adapt trust provisions to address changes in the circumstances of the beneficiaries. More than half of all states have laws permitting casting. Each state’s basic laws regarding disbursement vary widely, although most recognize that if the trustee has discretion to distribute the trust pool to the beneficiaries, that power constitutes a special power of appointment that enables the trustee to designate the trust pool into a new trust for the benefit of those beneficiaries themselves.
Even if your state laws specifically don’t allow cashing, you may still have options. If the problematic trust permits a change in location, the trustee or other authorized party can take advantage of this provision to move the management of the trust into a state that permits disbursement. Once the trustee changes location, the trustee can take advantage of the new state’s casting laws. Most countries that allow disbursement have adopted some form of uniform credit casting law. Note that experts tend to cite South Dakota as the state with the best casting platform.
Let’s review an example to see the practical application of casting. Suppose Donald set up a trust for the benefit of his nephews, Huey, Dewey, and Louie, naming Webby Vanderquack as a trustee (Webby is an independent trustee because it is not related to or affiliated with Donald). Webby makes distributions to Huey, Dewey, and Louie at its sole and absolute discretion, and the Terms of Trust provide for direct distribution to Huey, Dewey, and Louie within a few years. Huey recently became disabled and is receiving government benefits. Huey expressed concern that he would lose his advantages if he received the trust’s assets directly. Dewey just finished his third assignment in rehab and Lowe is in the middle of a hateful divorce. Webby is proposing to transfer the trust’s assets into a new trust containing a special needs trust for Huey and lifetime trusts for both Dewey and Louie. This new trust provides additional protection for Huey, Dewey, and Louie, based on circumstances that Donald could not reasonably expect when he established the trust. This is just one example of the myriad ways that a trustee can create a new trust that better meets the needs of its beneficiaries without unfavorable tax consequences.
If you believe that casting may provide a solution to your trust issues, be sure to consult a qualified estate planning attorney regarding casting rules in your state. The trustee needs to comply with his fiduciary duties which become more difficult if the trustee fills the dual role of trustee and beneficiary. You want to make sure that you avoid unintended tax consequences for the grantor and recipients.
Casting provides a great opportunity for estate planning in the current environment. Trust agents, attorneys, and clients alike are encouraged to review their plans, especially the irrevocable trusts established many years ago to ensure that those trusts meet the goals of the grantor and properly protect the needs of the beneficiaries. If the trust fails to properly address the needs of the beneficiaries or some tweaking can be used in another way, casting provides a great opportunity to rewrite the trust on more favorable terms.
The final article in this series will examine trust modification by using a trust protector.
Terina Stead, JD, MA (tax)
Associate Director of Education
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128