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Flexibility

Providing flexibility to address changing family circumstances, unique investment issues, outdated trust governance procedures or changes in tax law

Introduction

At Northern Trust, we often encounter inflexible irrevocable trusts that leave trustees and beneficiaries unable to address changing family circumstances, unique investment issues, outdated trust governance procedures or changes in tax law.

As just a few examples:

  1. Beneficiaries who are capable of and interested in exercising investment control over closely held family business assets but are precluded from doing so under the terms of a trust that grants the trustee full investment discretion.
  2. A grantor who wants to allow a third party to address changes in the beneficiaries’ circumstances, especially those which cannot be foreseen, through a power of amendment.
  3. A grantor who is concerned that her descendants may not have the maturity until they are further along in young adulthood to handle the family wealth either financially or emotionally.

Fortunately, trust laws have been evolving to allow for greater flexibility in many types of situations, including through decanting, modification of trusts, changing trust situs and granting trustees the ability to confer or eliminate powers of appointment. We have written the following provisions to provide trusts with the types of flexibility which, based on our experience, are most commonly needed by clients and their trustees.

Section 01

Decanting And Trust Modifications

Decanting Authorization

With regard to any trust created by or pursuant to this trust agreement of which the Trustee has the power to invade the principal to make distributions to or for the benefit of one or more persons, regardless of whether such power is subject to an ascertainable or non-ascertainable standard (or no standard), the Trustee may instead exercise the power by appointing all or part of the principal, income or both of such trust (the “First Trust”) in favor of the trustee of another trust, which may be a separate trust or the First Trust as modified after appointment under this Section (the “Second Trust”); provided, however, that (i) the beneficiary(ies) of the Second Trust may only be one or more of the beneficiaries of the First Trust, and (ii) the trustee’s power to invade the principal of the Second Trust shall be subject to the same standard, if any, as the standard to which the Trustee’s power to invade the principal of the First Trust is subject. The Trustee’s power under this Section to appoint the principal, income or both of the First Trust in favor of the trustee of a Second Trust shall include the power to create the Second Trust; provided, however, that if such power to appoint is subject to the direction or requires the consent of another fiduciary hereunder, the power to create the Second Trust shall also be so subject to such direction or consent. [The Trustee’s power under this Section to appoint the principal, income or both of the First Trust in favor of the trustee of a Second Trust shall also include the power to grant a power of appointment under the Second Trust to any one or more beneficiaries who are eligible to receive distributions of principal of the First Trust, and such power of appointment may be exercisable in favor of any class of permissible appointees, including a class that is broader than or otherwise different from the class of beneficiaries of the First Trust.]

Decanting Prohibition

Except as expressly provided herein, no Trustee of a trust created by or pursuant to this trust agreement may exercise any statutory power granted to such Trustee under the laws of the applicable jurisdiction, including, without limitation, the power to merge, consolidate or decant trusts, or the power to enter into a non-judicial trust modification agreement (including a non-judicial settlement agreement), to the extent that the exercise of such power would result in a modification of the terms and provisions of such trust.

Section 02

Change of Trust Situs

Trust Situs

The Trustee of any trust created hereunder shall have the power to remove all or part of the property of such trust or to change the situs of administration of such trust from one jurisdiction to another (including outside the United States) and to elect, by a separate acknowledged instrument filed with the trust records, that the law of such other jurisdiction shall govern the administration of such trust. The Trustee may rely upon the advice of counsel in taking any action pursuant to the authority granted to the Trustee under this Section. The Trustee shall have no duty to monitor the laws of other possible jurisdictions to determine the most favorable situs or governing law for the trust or whether or when to exercise the power granted under this Section.

Alternative (if directed trust) Trust Situs

At any time, the [Trust Protector/or other advisor] of any trust created hereunder may direct the Trustee of such trust to change the situs of such trust, by written instrument signed by the [Trust Protector/or other advisor] and delivered to the Trustee. After receiving such written direction, the Trustee shall, by written instrument filed with the records of such trust, change the situs of such trust in accordance with such direction, and thereafter, unless stated otherwise in the written direction, the laws governing the administration of such trust shall be those of the new situs. In providing such written direction, the [Trust Protector/or other advisor] shall be deemed to represent to the Trustee that such direction does not violate any restriction hereunder on the exercise of the power granted to such [Trust Protector/or other advisor] to direct a change of situs.

Section 03

Granting a General Power of Appointment

Trustee Power to Grant a General Power of Appointment

Notwithstanding any other provision of this trust agreement, the Trustee of any trust hereunder who is not a beneficiary of such trust is authorized in its sole discretion, upon the written request of a beneficiary of such trust, to:

  1. Grant to a beneficiary, by written instrument delivered to such beneficiary, a general testamentary power of appointment over any part or all of such trust exercisable in favor of [the creditors of a beneficiary’s estate] [such as one or more persons or entities, including such beneficiary, such beneficiary’s estate, or the creditors of such beneficiary or of such beneficiary’s estate] [such beneficiary, such beneficiary’s estate, or the creditors of such beneficiary or of such beneficiary’s estate], if and when a Trustee believes in good faith that the inclusion of any of the principal of such trust in the gross taxable estate of a beneficiary may result in a significant tax advantage to a beneficiary or his or her family by reducing the total estate and generation-skipping transfer taxes otherwise payable at the death of a beneficiary or by producing a higher cost basis of such trust property as a result of inclusion of trust property in the gross taxable estate of a beneficiary to reduce income taxes on the subsequent sale of such trust property;
  2. Revoke any general power of appointment granted to a beneficiary pursuant to this Section at any time prior to such beneficiary’s death by an instrument in writing delivered to such beneficiary.

The decisions of the Trustee under this Section shall be conclusive and binding on all beneficiaries of such trust and their respective estates, successors, and assigns. The Trustee shall have no duty to inquire into the advisability of exercising its power to grant or revoke a general power of appointment under this Section [(and shall not be authorized to exercise such power)] until it receives the written request of a beneficiary to exercise such power with respect to such beneficiary’s trust. The Trustee shall be held harmless from any cost or liability for any exercise or failure to exercise its authority under this Section.

Section 04

Trust Protector Powers

The term “Trust Protector” is used in a variety of different ways.  In this section, “Trust Protector” refers to an individual appointed to exercise powers that the grantor may wish to be exercised in a way that might be inconsistent with a trustee’s fiduciary duties.  A Trust Protector’s powers might include:

  • Removing, appointing, or replacing Trustees or other officeholders;
  • Amending a trust to correct an error, modify administrative or investment provisions, or comply with the grantor’s tax objectives;
  • Granting or expanding a power of appointment or consenting to a beneficiary’s exercise of a power of appointment;
  • Changing the nature of beneficial interests (for example changing rights of withdrawal or directing a trustee to withhold distributions from a beneficiary; adding a beneficiary or terminating the interest of a beneficiary);
  • Granting or rescinding a power that causes the trust to be taxed as a grantor trust and determining whether or not to reimburse the grantor for taxes owed due to the trust’s status as a grantor trust.

The following sample language addresses a few of the possible powers that might be granted to a Trust Protector.

Trust Protector

Notwithstanding any other provision of this trust agreement, there [may from time to time] [shall at all times] be one or more Trust Protectors (the “Trust Protector” or “Trust Protectors”) [of each trust created hereunder] to serve in accordance with the provisions of this Section.

  1. Appointment of Trust Protector and Successors

    The initial Trust Protector shall be [NAME]. Any Trust Protector acting hereunder may (1) resign at any time by delivering written notice of such resignation to the then acting Trustee, and (2) designate his or her successor as Trust Protector by written instrument signed and acknowledged by such Trust Protector and delivered to the Trustee. If at any time a Trust Protector ceases to act and there is no person designated as successor Trust Protector pursuant to this Section able and willing to act, the Trust Protector shall be the first of the following persons, in the order named, who is willing and able to act as the Trust Protector:

    1.       ________________________________________
    2.       ________________________________________
    3.       ________________________________________

    If at any time there shall be a thirty (30) day period during which no person is acting or named or designated and able and willing to act, as Trust Protector, then the Trustee may petition the Court having jurisdiction over the trust to appoint a successor Trust Protector to serve, and any costs relating to the petition shall be borne by the trust. Notwithstanding any other provision of this trust agreement, at no time shall the Grantor or any party related or subordinate to the Grantor within the meaning of Section 672(c) of the Internal Revenue Code be eligible to serve as Trust Protector.

  2. Trust Protector Powers

    The Trust Protector [of each trust created hereunder] has the power to:
    1. Modify or amend this agreement: (a) to achieve favorable tax status or respond to changes in the federal tax laws, state tax laws, or the rulings and regulations under any such laws, (b) to correct any error, omission, ambiguity, or inconsistency in the language of this trust agreement; (c) to make changes to the administrative or investment provisions of this trust agreement [provided, however, no such modification or amendment may grant a beneficial interest to any individual, class of individuals, or other parties not specifically provided for under the trust instrument];
    2. OR
      Grant or expand a power of appointment granted to any beneficiary of such trust, provided, however, that no power of appointment may be granted or expanded to include any person or class of persons as permissible appointees who were not objects of the original power or who have no beneficial interest under this trust agreement, or to reduce or eliminate any power of appointment granted to a beneficiary of such trust;
      OR
      Grant a beneficiary of such trust the testamentary power to appoint all or part of such beneficiary’s trust to the creditors of the beneficiary’s estate;
    3. Remove, appoint, or remove and appoint, a Trustee, Investment Advisor, or Distribution Advisor, or designate a plan of succession for future holders of any such office;
    4. Change the situs of the trust, the governing law of the trust, or both; and
    5. While serving as Trust Protector, designate one or more successor Trust Protectors, or designate a plan of succession for future Trust Protectors.

  3. Liability

    The Trust Protector [of each trust hereunder][,if any,] shall exercise the Trust Protector’s functions in a fiduciary capacity and in a way that the Trust Protector reasonably believes to be in accordance with the purposes of this trust agreement. The Trust Protector shall not be under any duty to inquire into or ensure the performance by the Trustee, [Investment Advisor, or Distribution Advisor] of its duties and shall not be liable for any loss to such trust (unless such loss results from actions in bad faith by or the willful misconduct of the Trust Protector). In the absence of bad faith or willful misconduct, the Trust Protector shall not be liable for any exercise or failure to exercise the powers granted under this Section.

  4. Trustee Has No Liability for Trust Protector

    The Trustee shall not participate in or have any liability for the selection of the Trust Protector. The Trustee shall not have any duty to seek any direction or action from the Trust Protector. While a Trust Protector is serving, the Trustee shall have no responsibility to monitor the performance of the Trust Protector.

    In addition, the Trustee shall have no duty to communicate with, warn or apprise any beneficiary or third-party concerning instances in which the Trustee would or might have exercised the Trustee’s own discretion in a manner different from the manner in which the Trust Protector exercised (or declined to exercise) the Trust Protector’s powers under this Section.

Explore More Provisions

Our collection of will and trust provisions offers a path forward for grantors to fulfill their vision while meeting the needs of future generations.

Grantor IntentGrantor IntentAn approach bridging grantors' and beneficiaries' prioritiesThe Modern FamilyThe Modern FamilyMeeting unique needs overlooked by conventional trustsModern Investing and Special AssetsModern Investing and Special AssetsNavigating emerging investment philosophiesTrustee PowersTrustee PowersThe authority to fully serve beneficiaries' best interests

LEARN MORE ABOUT OUR MODERN TRUST PROVISIONS

We welcome opportunities to work with other advisors to help shared clients fully realize the goals they have for their wealth. To explore how we can collaborate, or request a copy of our Modern Trust Provisions, please request a meeting.

Disclosures

This collection of sample trust provisions is designed to be used by estate planning attorneys only. If you are not an estate planning attorney, please consult with one. This collection of sample trust provisions is made available with the understanding that neither Northern Trust nor any individual who worked on these provisions is rendering legal, accounting, or other professional services through the presentation of this collection.

Although the collection of sample trust provisions is the product of much thought and effort, using this collection is not a substitute for informed legal judgment. The attorney must make an independent determination as to whether a particular sample provision is generally appropriate for a client’s trust documents, how it must be modified for applicable state law and to meet any special circumstances and objectives of the client, and whether or not a different provision or provisions not included in these materials would be better suited for a given client or client situation.

Northern Trust makes no representation that any provision in these materials effectively accomplishes its purpose or is valid under applicable state law. Northern Trust reserves the right to require different or revised provisions in the trusts it administers. Northern Trust assumes no responsibility for the sample provisions or their use. By using a sample provision from this collection, the attorney acknowledges that the attorney (and not Northern Trust) is responsible for any document which the attorney prepares that includes any such provision. The attorney must adapt and customize the sample provision(s) for the law of the applicable state and the client’s specific situation.

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