The Looming Consequences: Letting a Trust Go Stale and Its Effects on Errors and Changes
Trusts are powerful instruments that individuals and families use to manage assets, plan for the future, and ensure a smooth transition of property. However, like any well-oiled machine, trusts require regular attention and maintenance to function optimally. All too often, individuals and entities neglect the importance of actively managing their trusts, allowing them to go stale.
Stale Trusts May Contain Outdated Information
Allowing a trust to go stale means risking the use of outdated information – what was right then may not always be right in the future. This can lead to errors in asset distribution, beneficiary designations, and other critical components. Outdated information may result in unintended consequences, such as leaving out new family members or failing to account for significant changes in the financial landscape. A recent review of a trust written in 1995, but never amended, had the effect of leaving the property in the hands of a corporate trustee, who refused to take up control of the trust. The beneficiary is incapacitated and the assets are just sitting and unavailable for the settlor of the trust.
Legal and Regulatory Compliance Issues
Laws and regulations governing trusts change over time. Failure to update a trust accordingly may expose trustees and beneficiaries to legal and regulatory risks. Stale trusts may not align with current tax laws, which may lead to unforeseen liabilities and complications. Case in point: is the rising lifetime exemptions, which make the AB Trust provisions no longer necessary for a majority of married couples, yet a majority of trusts I review still contain these provisions, even though the law changed in 2017.
Technology Gaps
In an era of rapid technological advancement, trusts that are not regularly reviewed and updated may lack compatibility with modern systems. This can lead to inefficiencies, security vulnerabilities, and difficulties in accessing and managing trust-related information.
Family Dynamics
Stale trusts often reflect outdated family dynamics, leading to potential conflicts among beneficiaries. As families grow and evolve, so do their needs and expectations. Failure to adapt the trust structure to these changes may result in disputes and strained relationships. Case in point: a family chooses to use one of their children as the successor trustee, does not change/update the trust and as the child has grown, they have shown themselves to not be the best at handling finances. Another common instance occurs when the dynamics of the relationships between the grown children change – there is no reason to believe that a present divergence in personalities will be cured when that child needs to step up and act in the trustee position. The divergence will just be exasperated.
Financial Landscape
Economic conditions, investment strategies, and financial goals certainly change over time. A trust designed for a specific financial climate may become inefficient or ineffective as circumstances evolve. Resisting necessary changes can hinder the trust’s ability to adapt to new economic realities. Case in point; in today’s economic reality, owning real estate, particularly residential rentals can produce significant income streams and lead to homeownership for the next generation. I am often instructed to write that “… the home will not be sold” or to “… maintain all investments with ABC Financial Group.” We are not that far removed from the Great Recession where every other home on the block was vacant and being begrudgingly taken in foreclosure. Thousands lost millions of dollars. Financial institutions are bought/sold with regular business; mergers move firms from friendly, personal, attentive advisors to corporate institutions which may lack the personal touch the parents relied upon, but that the children find they cannot relate to.
Missed Opportunities
Stale trusts may miss out on new and innovative financial strategies and opportunities. Failing to adapt to changing market conditions could mean lost potential for growth, tax savings, or other advantages that may arise with updated trust structures. Case in point: a trust which reads that the family home should be granted to one specific child, while the other child is to inherit the cash investments. Changing circumstances can result in an inability to adjust to the changes.
Other Planning Documents
Staying updated on other estate planning documents can also lead to confusion, lack of a realistic plan and frustration. Case in point: choice of an adult child to make healthcare decisions for the parent. Now that child lives on the other side of the country or the adult child has issues of their own and this is not a viable choice anymore. There is an unrealistic belief that the healthcare directive is only for the decision re life and death, rather than the more mundane decisions which are far too common in dealing with continuing care and assistance during what may be a long period of incapacity.
These same issues may occur when selecting the nomination of a guardian for your minor children. Case in point: the client chooses to use their brother and sister-in-law who have children of a similar age group, say 3-5. Now the children are young teenagers or pre-teens and moving, changing schools, leaving friend groups and differing parenting dynamics can all play a significant, if not oversized, role in the raising of children who have just suffered one of the most catastrophic events a young person could face. These choices cannot just be set and forgetten.
Don’t Let a Stale Trust Hurt Your Family’s Future
Letting a trust go stale is a recipe for disaster, introducing errors, and hindering the trust’s and trustees’ ability to adapt to changes. Regular reviews and updates are essential to ensure that trusts remain effective, compliant, and aligned with the goals and dynamics of the beneficiaries. By acknowledging the evolving nature of family, finance, and law, individuals and organizations can avoid the pitfalls associated with stale trusts and pave the way for a secure and flexible financial future.
Contact an experienced team of estate planning attorneys today at DRS Law.