Tuesday, June 23, 2009

How Does Updating Our Family Trust Affect Our Existing Assets?

This article is in response to a question recently asked by one of my tax clients, Jim, which was, "How does updating our family trust affect our existing assets?" I'm going to start by establishing some basic disclaimers and ground rules regarding my comments below. I am not an attorney, nor do I want to provide legal advice. I work with a number of great attorneys that practice in this area.

My focus in responding to this question will be from a tax professional's standpoint, based on my practical knowledge gained from working with thousands of clients over many years that have (correctly and incorrectly) handled their estate issues with a living trust.


A living trust is considered to be a separate tax entity, originally created for people who were still living, but could no longer handle their financial affairs. The trust document would identify the participants:

--the Grantor - the person whose affairs needed to be handled

--the Trustee - the person or business that would be handling said affairs, and

--the Beneficiaries - the people or causes that would receive any remaining assets in the event of the Grantor's passing.

In addition, the trust document would describe all the instructions for handling their financial affairs, providing certain powers of administration and restricting certain actions of the appointed Trustee. In order for these financial affairs to be able to be managed by the Trustee, the assets would be "transferred" into the trust's name. In plain English, this meant that all the Grantor's assets were retitled into the name and ownership of the living trust.

Over time, the benefit of creating a living trust while the Grantor was still competent was popularized. The legal industry realized that a Grantor could decide ahead of time how and when and where their assets would be managed and distributed to the next generation while reducing or eliminating estate taxes in the process.

As a result, creating a living trust became all the rage. Some attorneys even created living trust "mills", turning out general living trust documents at very low prices. However, these living trusts were created with inherent implementation issues because there was no follow through provided to the Grantors or Trustees by the trust "mill", often making the trust essentially useless.


During the process of solid estate and trust planning, the Grantor's assets are analyzed and reviewed in detail for their proper positioning in the trust document's instructions. Often, an actual assets listing is created to identify which assets should be retitled into the name and ownership of the trust.

However, until the Grantor actually moves the assets into the trust's name and ownership through retitling, the trust is considered to be unfunded. An unfunded Trust does not have any assets to manage or distribute. An unfunded trust does not provide any benefits to the Grantors or the Beneficiaries. An unfunded trust is a useless entity. Retitling the identified assets in the name of the trust as soon as the living trust documents are valid is a critical implementation point that many families miss.


Many living trusts were set up to appoint a well-known bank or trust services as a Trustee, implementing the instructions of the trust document. It was thought that selecting an impartial, objective trustee would provide the trust with better management decisions. Instead, the Trustees were often placed in the position of having to make judgment calls without the value of knowing and understanding the unique situations of the people involved. The impersonal nature of these decisions often had a negative effect on the family and beneficiaries, instead of the supportive and loving intentions the Grantors wanted when the living trust was created.

Since a trustee can hire competent financial management services, it is more important to appoint as trustee, a trusted family member or long-time family friend that knows and cares about the family and beneficiaries related to the trust.


Now to address Jim's initial question. Whenever the tax laws change or there are changes in the family situation, the living trust document should be reviewed by informed legal and tax counsel. Many of the trust "mill" documents of years-past have never been revisited for necessary updating, leaving the living trust's original instructions inadequate. There are two ways that trusts are updated.

1. The simplest update to amend the trust, which provides new instructions and directives with respect to the trust's management. To be valid, an amendment should be properly recorded and any required new actions implemented. Trust amendments do not usually result in the retitling of trust assets. Since each family situation is different, it is important to receive clear implementation instructions from your legal counsel regarding your amendment and work with any financial professionals for any changes required in your assets.

2. Sometimes, a completely new trust is created. In that case, certain assets are identified to "fund" the new trust. Just as in the original trust situation, it is necessary to retitle the selected assets into the name and ownership of the new trust. In this setting, every situation is very different, and the decisions are custom-tailored to the individual family's situation.

Today, most people establish a trust to reduce or eliminate their estate tax liability. Thanks to Congress, this area of the tax law is currently undergoing constant revision and upheaval. It is vital that every family with a living trust stay abreast of the tax and regulatory changes that take place. Having a strong working relationship with your attorney and tax professional can help you make sure that your living trust is going to accomplish your directives.

Remember, any time changes need to be made to your trust document, it is important to involve your tax professional BEFORE the changes are executed. Not all attorneys understand the tax ramifications of your decisions, which incorrectly implemented, can actually increase taxes to you and your estate instead of reducing them.

Copyright (c) 2009 Nick Hodges

Nick Hodges, President of NCH Wealth Advisors, provides US expatriates with the best tools, strategies and planning techniques to help expats manage their tax and financial goals and dreams on a day-to-day basis regardless of their location. To claim your free gift, ExPat Life Portfolio Kit, visit his site at ExPatCFO.com

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