Trusts are regularly used by wealthy families to minimize taxes and transfer assets to heirs. Trusts are also used to insulate wealth from frivolous and unfounded lawsuits and sometimes from divorcing spouses. The way the wealthy maximize the benefit of trusts is—to the degree possible—to ensure control and flexibility. Changes in trust law have created new options that allow for greater family control.
Remove a trustee: According to Vince Annable, CEO and founder of VFO Advisory Group and co-author of Your High-Performing Virtual Family Office: Maximizing Your Financial and Personal Lives. “Who serves as your trustee will have a large impact on how trust assets perform and how they are distributed. A simple yet effective power that gives a family the ability to ensure the right trustee is in place is the power to remove and replace the trustee. The power to remove a trustee incentivizes the trustee to manage the assets well and make distributions when appropriate. No matter what other interests the trustee may have or what their preferences may be for managing the trust if the trustee wants to remain as trustee and the family has the power to remove him or her, the trustee needs to listen.”
A simple provision providing that you have the power to remove a trustee for any reason gives you efficient control over your trust. When you remove a sole trustee, you need to appoint a new one. There are certain limitations on who you can appoint or you endanger the trust’s tax and creditor protection benefits. This ability to remove a trustee coupled with the ability to appoint almost anyone as trustee is an effective check over the person with the ability to make distributions.
Be a trustee: To get tax minimization and creditor protection from a trust, the beneficiaries cannot have the power to make distributions. However, making distributions is just one function of the trustee. In preserving and growing a family’s wealth, how the assets are managed can be just as important as making distributions. You, your spouse, and your children can serve alongside another “independent” trustee or trustees and have all powers of a trustee except for the power to make distributions.
“Combining the ability to serve as a ‘family’ or ‘non-independent’ trustee with the ability to remove the ‘independent’ trustee who has distribution powers, gives a family control and flexibility over the management and performance of a trust,” says Aaron Yen, Senior Partner, Ascendant LLP. “For example, a person could have a close friend serve as co-trustee with distribution powers. However, if the friend’s performance as trustee is not good, he or she can be removed and replaced with someone who would be better suited to the position.”
Changing your existing trust: Your existing trust may have been created at a time when administrative flexibility was not as available. The following mechanisms can be used:
- Amendment: Administrative amendments can typically be used to change trustee provisions. However, because administrative amendments relate only to administrative provisions, they cannot be used to change distribution provisions or extend the term of a trust.
- Trust Decanting: “Decanting” refers to a trustee exercising his distribution power by making a distribution of trust property into a new trust for the benefit of the old trust’s beneficiaries. The new trust can include many updated trust provisions, but decanting is a technique that is not available in every situation and will depend on the provisions of the trust agreement and the governing law of the trust.
- Court Modification: If an amendment or decanting is not available, the trustee can petition a court to modify an existing trust agreement.
- Exercise of a Power of Appointment: A “limited power of appointment” allows the beneficiary of the trust to appoint trust property among a group of permitted appointees You can use this power to subdivide your existing trust or transfer the trust to younger family members who need the assets but would be better served by a different trust structure.
“You should not be passive when it comes to your role as a trust grantor or beneficiary,” says Peter Sasaki, Managing Member and Family Office expert at Odeon Capital Advisors and co-author of Maximizing Your Single-Family Office: Leveraging the Power of Outsourcing and Stress Testing. “Having an inheritance in trust can provide creditor protection that you cannot easily obtain, in addition to significant potential tax savings. And, you can have control with respect to the investment and management of the trust property.”
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.
