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THE LOOMING CONSEQUENCES: LETTING A TRUST GO STALE

by David R. Schneider | Apr 1, 2024 | News & Updates


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STALE TRUSTS MAY CONTAIN OUTDATED INFORMATION

Allowing a trust to go stale means risking the use of outdated information –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 Outdated information may result in unintended consequences, such as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Stale trusts often reflect outdated family dynamics, leading to potential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.




LAW OFFICES OF DAVID R. SCHNEIDER, APC

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Thousand Oaks, CA 91360
Phone: (805) 374-8777 • Fax: (805) 374-7707 • dschneider@drs-law.com

       

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