If a trust is part of your estate plan, you should pay attention to a new Connecticut law that went into effect January 1st.
Chances are you would not be interested in reading the recently adopted Connecticut Uniform Trust Code (UTC), which is over 100 pages long! But there are provisions in this legislation that we feel you should be aware of.
Some of the changes provide you additional benefits of having a trust, and others may cause you to consider updating the trust you have in place.
Here are the changes you should know about:
1. Courts, in some circumstances, now have the authority to amend or terminate an irrevocable trust if it finds that the beneficiaries all consent and that the change does not violate a material purpose of the trust.
Wait a minute. Your trust is a legal document that states your wishes. You created this estate planning document in the first place to specify exactly how you wanted everything distributed after you’re gone. How would you feel if a court changed what you intended for your beneficiaries?
It depends on how you feel about unforeseen circumstances. Take this example of a change in your family situation: Your son has a history of substance abuse, so you set aside his inheritance in trust for his life, but he straightens out his life at age 30 and files a motion in court to modify your trust so he can now directly access all that you’ve bequeathed to him. In this scenario, it is possible the court will direct that the trustee distribute your son’s share directly to him, in spite of what his trust states.
Depending on your objectives, you may be pleased that the court would recognize your son’s recovery and provided him with access to his inheritance or you may feel angry that the court would base its assumption on mere recovery and not on other personal factors that weren’t clearly stated in the trust.
The good news…
You now have the power to limit a court’s ability to make changes to your trust.
You can add language that clearly specifies the purposes for which your trust was established and thereby prevent a future modification that would defeat those purposes. To reduce or eliminate the chances of a misinterpretation of your wishes, we recommend setting some guardrails within which a court would be confined should a beneficiary make a motion to a court (after you die) to modify or terminate the trust document you created for them.
Keep in mind that the UTC does not apply to a revocable living trust during your life, although the new law does affect the trust once you are deceased. The ability of the court to change a trust under the new law applies only to trusts that are irrevocable.
2. Your trust beneficiaries will be better informed – about their rights as beneficiaries and about activities related to the trust. The new law imposes new reporting requirements on the trustee to keep the beneficiaries reasonably informed about the trust’s administration, which includes a duty to provide an annual report that summarizes how the trustee has managed the assets in the trust.
3. You can now designate a representative to receive information on behalf of a beneficiary – which is helpful if your beneficiary has a disability that might make it difficult to understand the information. This is also helpful when there are concerns about sharing sensitive financial information with a beneficiary who has mental health, substance abuse or other personal challenges.
4. Trustees will have more guidance as to what is expected of them, as the Code now includes provisions that list a trustee’s powers and duties. So those you choose for this important role will now have a better understanding of their role.
5. Your trust can provide your beneficiaries enhanced protection from creditors. The new law provides that a beneficiary’s creditors can’t seize trust assets, even if the beneficiary is the trustee of their own trust, or seek a court order compelling a distribution to the beneficiary. The trust must include specific distribution language—most commonly referred to as a “general support” standard—but it provides the trustee/beneficiary with very broad authority. This is important for example, if you want to shield your assets for your child in the case of his or her divorce, preventing your child’s ex-spouse from accessing what’s in the trust. It’s also helpful for beneficiaries who are business owners or who are employed in high-risk occupations, like the medical field. This has always been the case when a trustee and the beneficiary are different individuals, but now your child may also serve in the role as their own trustee so that they can maintain control of their own inheritance.
6. You can have your trust continue for a longer period than before, enabling you to set up a multi-generational trust. This can be a useful tool if you have a child who has a sizable estate of his or her own because the trust can prevent the assets from being taxed in the child’s estate. A multi-generational trust might also make sense if you have a special asset that you want to preserve for many years into the future, such as a family business or special vacation property.
7. You may insulate your own assets from creditors. Connecticut now allows Domestic Asset Protection Trusts (DAPT). Under a DAPT, you may, in limited instances, transfer assets to an irrevocable trust, name someone else as trustee, and shield the assets you transfer from your own creditors. There are many specific conditions that you must satisfy, but this technique takes asset protection planning to a new level.
Changes in Connecticut trust law don’t affect us all, but if you have a trust and think you need to make some adjustments, you will want to call us to set up an appointment. And if you don’t have a trust, now is a good time to learn how a trust can help you plan for your future needs and provide for your family.