5 Ways To Extend A Trust

Navigating the Challenges of Passing Wealth Through Generations

Passing wealth from one generation to the next is a complex and delicate process, especially when it involves setting up trusts for beneficiaries who may not even be born yet. Many people who establish trusts do so with the best intentions, but they often face a significant challenge: how can they predict the needs and readiness of future generations? When a trust is created, the beneficiaries—often grandchildren or great-grandchildren—may still be very young or even unborn. This uncertainty raises important questions about how to ensure that the trust will serve the beneficiaries well when the time comes. The reality is that many older trusts, which were created decades ago, are far less sophisticated than the trusts we see today. These older trusts often lack the flexibility and modern features that would allow them to adapt to changing circumstances or address unexpected challenges.

The Evolution of Trusts: From Basic to Modern

In the past, trusts were often straightforward and rigid. For example, many older trusts require that distributions be made to beneficiaries at a specific age, such as 18 or 21. While this approach was common at the time, it lacks the flexibility that many families need today. Modern trusts, on the other hand, are designed with a greater degree of nuance and foresight. They often include provisions that allow the assets to remain in the trust for a longer period or give the trustee—or even the beneficiary’s parent—the discretion to delay distributions if necessary. In some cases, the distribution age might be extended to 30 or beyond, while in others, the assets may remain in the trust for the beneficiary’s entire lifetime. These changes reflect a growing recognition of the complexities of life and the many reasons why an inheritance might need to be managed more carefully.

Why Families Choose to Extend Trust Distribution

There are many reasons why families might want to extend the age at which a beneficiary receives their inheritance. One common concern is the phenomenon of prolonged adolescence, where young adults may not be emotionally or financially ready to handle a large sum of money at a young age. Substance abuse, gambling addictions, and the risk of undue influence from others are also pressing concerns for many families. Additionally, some beneficiaries may struggle with managing their finances responsibly, which could lead to wasted resources or unnecessary debt. By keeping the assets in the trust for a longer period, families can provide a safety net that protects the beneficiary and ensures the inheritance is used wisely. In some cases, the goal is to avoid putting too much financial pressure on a young person, allowing them to focus on their education, career, or personal development without the burden of managing a large sum of money.

Taking Action: Options for Modernizing an Older Trust

If you have an older trust that requires distributions to a beneficiary who may not be ready to handle a large sum of money, there are steps you can take to address the situation. Below are five potential strategies to consider, each with its own set of considerations and requirements:

1. Exercising Your Power of Appointment

One of the simplest solutions, if available, is to exercise your power of appointment. This is a provision that allows you to modify how the trust assets will be distributed to your child. By exercising this power, you can redirect the assets into a new trust that offers more flexibility. For example, you might create a new trust that keeps the assets in the trust for the child’s lifetime rather than distributing them at a specific age. This process typically involves updating your will to reflect the changes, but it’s important to consult with an attorney to ensure that the original trust document allows for this kind of modification. It’s also worth noting that this option may not always be available, as it depends on the specific terms of the trust.

2. Decanting the Trust

If a power of appointment is not an option, another possibility is to decant the trust. The term “decanting” comes from the idea of pouring wine from an old bottle into a new one, and the concept is similar when applied to trusts. By decanting, you transfer the assets from the old trust into a new trust with updated terms that better address the current needs of the beneficiary. This can include extending the distribution age or adding other protective measures. However, decanting is not always permitted, so it’s essential to review the terms of the original trust and the laws of your state to determine if this option is viable.

3. Non-Judicial Settlement Agreement (NJSA)

Another option is to enter into a non-judicial settlement agreement (NJSA). This approach allows the trustee and other interested parties to modify the trust terms without going through the courts, even if the trust is irrevocable. This can be a convenient and efficient way to make changes, provided that state law permits it and all parties agree to the modifications. However, one potential hurdle is that the beneficiary (or their guardian, if they are a minor) may need to sign off on the changes, which could lead to disagreements if they are not on board with the plan.

4. Creating a Self-Settled Trust

If the beneficiary is open to the idea of extending the trust, another option is to have them create a self-settled trust. This is a trust that the beneficiary sets up themselves, typically with the assistance of an attorney. Once the trust is created, the beneficiary can transfer the trust assets they receive into this new trust. One key advantage of this approach is that the new trust can be designed to last for the beneficiary’s lifetime and include provisions that prevent them from accessing the assets irresponsibly. However, this option requires the beneficiary’s cooperation and willingness to set up the trust, which may not always be possible.

5. Seeking a Court Order

If none of the above options are feasible, you may need to go to court and request that a judge modify the trust terms. This is typically considered a last resort because it can be time-consuming and costly. However, in certain situations—such as when the beneficiary has a serious issue like a drug addiction that could lead to the misuse of the inheritance—it may be necessary to seek court intervention. The court will carefully consider the circumstances and decide whether modifying the trust is in the best interest of the beneficiary. While this process can be challenging, it provides a way to address severe or unforeseen problems that the original trust was not equipped to handle.

Maintaining Flexibility in Trust Planning

One of the most important lessons from the options outlined above is the value of maintaining flexibility in trust planning. Life is unpredictable, and circumstances can change in ways that no one could have anticipated when the trust was first created. Whether it’s through a power of appointment, decanting, an NJSA, a self-settled trust, or even a court order, there are ways to adapt an older trust to better meet the needs of the current and future beneficiaries. However, these options often require careful planning and the guidance of an experienced attorney who can help you navigate the legal complexities and ensure that any changes are made in compliance with the law.

Conclusion: Planning for the Future with Thought and Care

Creating a trust is an act of love and foresight, but it’s not a set-it-and-forget-it proposition. As families grow and circumstances evolve, it’s important to regularly review and update trust documents to ensure they remain relevant and effective. Whether you’re dealing with an older trust that needs modernizing or you’re setting up a new one, the key is to strike a balance between providing for your loved ones and protecting them from potential pitfalls. By taking the time to explore your options and seek professional advice, you can create a trust that not only addresses the challenges of today but also offers a safety net for generations to come.