Creating Trusts in Uncertain times

In our March newsletter, we covered proposed tax plans that called for decreasing the estate tax exemption and increasing the estate tax rate. In the past couple of months, other changes were discussed by Congress that would have significantly impacted commonly used estate planning strategies such as Grantor Retained Annuity Trusts (GRATs) and sales to grantor trusts. Fortunately, the most recent version of the spending bill out of Congress contains none of these proposed changes, so it seems we may be in the clear—for now. However, if anything is certain, it is that these are uncertain times.

Even without Congress’ involvement, life is uncertain. Changes occur in your life and the lives of your loved ones such as marriage, divorce, birth of new family members, disability, death, or significant changes in financial net worth.

Tennessee law provides some tools that allow for grantors and beneficiaries to make changes to trusts when previously unforeseen circumstances are threatened or come to pass.

For example, Tenn. Code Ann. § 35-15-111 allows for a trustee and the qualified beneficiaries of a trust to enter into a binding “nonjudicial settlement agreement” with respect to any matter involving a trust, to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court. The statute provides a non-exhaustive list of matters that nonjudicial settlement agreements may resolve, including (1) the interpretation or construction of the terms of the trust; (2) direction to a trustee to refrain from performing a particular act or the grant to a trustee of any necessary or desirable power; and (3) the criteria for distribution to a beneficiary where the trustee is given discretion. The Tennessee General Assembly just this year added the following to the list: the approval of investment decisions and the resignation and appointment of trust protectors/advisors and delineation of their powers and duties.

And yet, for better or worse, even the tools available to grantors and beneficiaries change. In 2019, for example, the General Assembly removed the requirement in Tenn. Code Ann. § 35-15-411 that, after the grantor’s death, a court determine that no material purpose of a trust is violated before said trust is modified upon the unanimous agreement of all qualified beneficiaries. The requirement that a material purpose not be violated still exists, but now only the trustee’s approval is required, not the court’s.

This year, the General Assembly re-worked the statutory authority for a trustee to “decant” (transfer) assets from a preexisting trust to a new trust. Among the changes, decanting now can limit or eliminate beneficiary income interests (except in certain circumstances where necessary for tax treatment) and accelerate the beneficial interest of a “future beneficiary” if the grantor is deceased.

When establishing a trust, the key is to allow for flexibility while also ensuring the grantor’s intent is effectuated, even after the grantor’s death. One way to do that is by including intent language or material purpose statements in the trust. Another option is to include powers in the trust document which allow for modifications to be made to the trust, rather than relying on the default powers provided under Tennessee law—which are always subject to change.  

If you are considering establishing a trust, we’d be happy to help you think through these and other important issues. Give us a call at (865) 546-7311.