Historically, high federal gift and generation-skipping transfer tax exemptions may make large gifts into trusts seem like a good idea. But it is not as simple as just deciding to make a gift. In fact, there are many considerations that go in to designing an effective trust, and clients often wonder where to start. Below are the building blocks that often go into designing a trust that works for both the client and the client’s family—today and in the future. 

1. Access

Once a client decides to make a gift in trust, the next question often relates to access—both the grantor’s ability to access the funds later, and the appropriate access for the beneficiaries. For the grantor, it is often a question of future financial needs and whether the assets that remain after the gift will be sufficient to cover those needs. While one can never be sure of the future, a financial plan that analyzes the grantor’s assets, cash flow needs and goals can help the grantor determine the appropriate amount to give.

Even with a solid financial plan to help determine the amount of the gift, some clients may still be concerned about needing those gifted assets in the future. A strategy that allows the grantor indirect access to those assets if needed is a Spousal Lifetime Access Trust (SLAT). A SLAT is a type of irrevocable trust that includes the grantor’s spouse as a beneficiary and, therefore, allows the married couple to retain access to the trust’s assets through the ability of the grantor’s spouse to receive trust distributions.

The next step in building the trust is to decide how much access the beneficiaries should have. This is typically done through the use of distribution standards, which can be as narrow or broad as the grantor chooses. Some distribution standards often used in trusts—either alone or together—include:

• Emergencies
• Health
• Education
• Maintenance and support
• Comfort
• Best interests

For those grantors who do not want some or all of their beneficiaries to have access to, or knowledge of, the trust, a Delaware trust may be appropriate. Under Delaware law, the grantor can change the traditional rule that a beneficiary must be informed of a trust and instead provide for a “quiet” trust, which can include the following terms:

• The grantor can direct trustees to not inform a beneficiary of his or her interest in the trust for a period of time specified in the trust document.
• The grantor can specify the age or time at which the beneficiary should be informed of the trust.

2. Control

Once the appropriate access is decided, the next decision is generally who will implement the grantor’s wishes. The trustee of a trust is responsible for administering the trust in accordance with the trust document. The trustee has many responsibilities, including investing the trust assets and making distributions. Some of the skills a trustee should have include technical knowledge, sound judgment and the ability to deal with all beneficiaries.

There are many factors that should be considered before selecting a trustee, such as the size of the trust, the purpose of the trust, the duration of the trust, the location of beneficiaries and the tax ramifications. Options for who may act as trustee include the following:

• Family member, including a trust beneficiary
• Friend
• Lawyer or accountant
• Professional or corporate trustee

Each of these options should be considered in light of the many factors noted above, as well as the responsibilities and skills of a trustee. For example, while a family member might be familiar with the beneficiaries, an institution with substantial fiduciary experience offers the expertise, objectivity and permanence that individual trustees often cannot provide. The grantor can also name multiple trustees who meet the grantor’s goals and have the desired skills. For example, a family member and a professional trustee may serve together.

For those grantors who may want to bifurcate the traditional responsibilities between two or more fiduciaries, a Delaware directed trust may be a good solution. With a Delaware directed trust, the grantor can appoint different individuals or entities to fulfill the trustee’s responsibilities.  For example, the grantor can appoint an investment advisor to control and direct all investment decisions, and a distribution advisor with more familiarity with the family to make all distribution decisions. This gives the grantor greater flexibility to decide who controls which aspects of the trust administration, rather than vesting all of the control in the role of the trustee.   

3. Ability to change

When a long-term, irrevocable trust is put into place, it is important to build in mechanisms to ensure that the terms of the trust can be revisited over time. After all, change is an inevitable part of life—whether it is a change in tax law, a change in family circumstances, or any other change—so including flexible provisions that allow a trust to adapt to that change makes the trust more effective for the family. Two examples of mechanisms that can allow a trust to be changed later are powers of appointment and trust protectors.

A power of appointment is a power granted to an individual (the “powerholder”) to direct trust assets to a specified person or class of people. A powerholder may be a beneficiary or another person (other than the grantor) who has no other interest in the trust. This type of power generally allows the powerholder to direct distributions to one or more people, change the beneficiaries of the trust and/or change the terms that apply to the trust, as long as the directions are consistent with the power of appointment granted. The scope of such power is defined by the grantor and can be as limited (e.g., only the beneficiary’s or grantor’s descendants) or as broad (e.g., any person or organization) as the grantor chooses. A power of appointment can be given to an individual during the grantor’s life and after the grantor’s death, allowing one generation to plan for the next as the family and the world change.

A trust protector is a person who has power over the trust but is not the trustee. Trust protectors have been growing in popularity as they provide a lot of flexibility to a trust. A trust protector is typically given a variety of powers, including the power to remove or replace trustees, change beneficiaries, divide the trust, change administrative provisions or change trust situs. Through these powers, a trust protector can address trust issues and solve problems that weren’t—or couldn’t have been—anticipated when the trust was created.   

While it can be difficult to know where to start when creating a trust, considering the building blocks above can help a grantor think through the many aspects of that trust. The considerations above have many variations and can be used in conjunction with a variety of planning techniques. It is critical to work with qualified professionals when choosing and implementing planning strategies, especially considering this year’s uncertainty regarding tax reform.

Theresa Marx is a senior wealth strategist for CIBC Private Wealth Management in Chicago, with more than 17 years of industry experience. In this role, she is responsible for developing integrated wealth management solutions and providing comprehensive estate and financial planning services to high net worth clients.

© with the permission of Private Wealth Magazine, August 2021.