Re-formatting an Irrevocable Trust

UPIS and the Passage of Time

By Dr. David Edward Marcinko; MBA, CMP™

By Tom Muldowney; MSFS, CFP®, AIF®, CMP™

By Hope Rachel Hetico; RN, MHA, CPHQ™, CMP™

Many trusts, written long ago for physicians, were established when interest rates were substantially higher, certainly higher than they are today. The passage of time and the re-call or maturity of those higher yielding bonds have left bond investors scouring the investment field for anything that will produce a decent income flow … Short of taking a lot of bond risk, they are found lacking.  Thus, these old ‘irrevocable’ income trusts face substantial hurdles in generating the necessary income flow for the income beneficiary and the necessary growth for the remaindermen.

Uniform Prudent Investment Standards [UPIS]

With the acceptance of the Uniform Prudent Investment Standards, many of the several states simultneously implemented trust standards that allow beneficiaries/remaindermen and trustees to request the ‘re-formation’ of these trusts from “Income’ trusts to “total return” trusts on (at least) a statutory basis. By ‘statutory basis’-  we mean that the trustee can reformat the trust and begin making cash flow payments made from total return. This ‘re-formation’ process minimizes or eliminates the problem of ‘income for the beneficiary’ versus ‘growth for the remaindermen.’

Available QTIP Election

How, then, can a physician-investor evaluate a situation in which a QTIP election is available?

The matters to be weighed will include the age and health of the surviving spouse; the projected size of the surviving spouse’s gross estate with and without the inclusion of the QTIP trust corpus; the amount of available unified credit; whether the decedent’s trust includes any precatory language that is intended to guide the trustee in balancing the rights of the surviving spouse with the rights of the trust remaindermen (‘precatory’ language is to provide guidance only…it does not have the force of law) for example, language allowing the trustee to favor the lifetime income beneficiary when making investment decisions); the amount of income that the surviving spouse needs or wants to have generated from the QTIP trust; the relationship between the surviving spouse and the remainderman of the trust (particularly as that relates to the amount of income that the surviving spouse would like to have generated by the QTIP trust and the pressure that would be put on the fiduciary to generate such income); and the likely asset allocation decisions that the trustee would make under the circumstances, given that there is not a single formula that must be applied but that a range of decisions probably are appropriate as the bank or trustee seeks to fulfill its fiduciary duties. In any event, when the long-term view is taken, the most appropriate QTIP election to make is a difficult decision and is best determined by examining a range of alternative outcomes for both the surviving spouse and the remainderman.

Assessment

Of course, this decision is easier if both spouses die before the estate tax return for the spouse who died has been filed (but not all participants are so willing to cooperate.) It has been suggested that with every case, to file an extension of time request for filing the estate tax return in order to delay making the election until the latest possible date.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. 

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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