Making changes to an irrevocable trust can be difficult. Even minor or administrative changes can require court approval and consent of all beneficiaries to the trust. Many states, including Missouri and Illinois, have addressed this by codifying a new role for trusts known as a “trust protector.”

What is a Trust Protector?

A trust protector is a third party with certain powers over a trust to ensure that the grantor’s wishes are effectively carried out. Generally, it is advisable that the trust protector be someone independent from the grantor and beneficiaries.

A trust protector’s authority is limited to the powers granted in the trust instrument. Examples of powers that may be held by the trust protector include:

• the power to remove and replace a trustee;
• the power to modify the powers of the trustee;
• the power to change the situs or legal jurisdiction of trust;
• the power to modify the trust instrument to incorporate tax planning or change in the law;
• the power to correct errors or clarify language used when the trust was created;
• the power to terminate the trust; and
• the power to amend the trust to modify the interests of trust beneficiaries.

While state statutes often allow trust protectors to exercise broad authority, it is important to note that the trust protector only has powers expressly provided in the trust instrument. This allows grantors to design trust protector provisions that reflect their level of comfort. For example, a grantor may provide a trust protector with authority only to remove and replace a trustee and amend the trust to incorporate tax planning or changes in the law.

Advantages of Including a Trust Protector

Flexibility. It is difficult for a grantor to predict the needs and circumstances of beneficiaries many years into the future. If given proper authority in the trust instrument, a trust protector can make changes to help meet the needs of beneficiaries.

• Beneficiary with Special Needs. If a beneficiary has special needs and would otherwise qualify to receive public benefits, the trust protector can make changes to the beneficiary’s share to preserve their right to receive public benefits.
• Merger of Trusts. Beneficiaries of more than one trust established by a grantor often want to combine such trusts for ease of administration. There are specific statutory requirements for merging trusts, and a trust protector can make administrative changes to allow trusts to be merged.

• Appoint Successor Trustees. In the event that no successor trustee is able or willing to serve, a trust protector can appoint a successor trustee to avoid the need to involve the court in appointing a new trustee.

Tax Planning. A trust protector can modify provisions in the trust to accomplish income and estate tax planning for beneficiaries. This powerful tool can help beneficiaries minimize potential tax liabilities.

Changes in the Law. A trust protector can amend the trust to address changes in the law. For example, there have been numerous changes to tax laws and regulations in recent years. A trust protector is able to adapt the trust to take advantage of any tax benefits and minimize any adverse tax consequences.

Avoids Need for Court Involvement. Changes to irrevocable trusts typically require agreement between trustees and all beneficiaries. In many circumstances, changes to the trust require court approval. Court action to modify a trust usually requires the involvement of lawyers and can take several months or longer to resolve. A trust protector can take swift action without the need for court approval or agreement of all beneficiaries.

To determine whether a trust protector makes sense to include and what scope of authority is appropriate for the trust protector, the grantor should consult an estate planning attorney for a more detailed analysis.

The SECURE 2.0 Act of 2022, signed into law by President Joe Biden on December 29, 2022, makes significant changes to the administration and taxation of retirement plans. It addresses many practical concerns that surfaced after the passage of the original SECURE Act in 2019 and during the pandemic. Some of the key changes are set out below.

Changes to Required Minimum Distribution (RMD) Rules. SECURE 2.0 increases the age at which plan participants must begin taking RMDs. In 2022, individuals were required to begin receiving RMDs upon reaching age 72. SECURE 2.0 increases the RMD age to age 73 on January 1, 2023, and age 75 on January 1, 2033.

Prior to SECURE 2.0, the Internal Revenue Code imposed a 50 percent penalty on RMDs not distributed during any year after the participant attains RMD age. Under SECURE 2.0, the penalty for failing to take an RMD decreased from 50 percent to 25 percent, and if corrected in a timely manner, to 10 percent.

Effective in 2024, Roth accounts in employer retirement plans will be exempt from RMD requirements. This is consistent with treatment of Roth IRAs, which are already exempt from RMD requirements.

Rules for Surviving Spouses. If a participant dies before reaching the RMD age and designates a spouse as the sole beneficiary, then the spouse may make an irrevocable election to be treated as the participant for purposes of receiving RMDs. This will allow the surviving spouse to defer RMDs until reaching the RMD age.

Catch-up Contribution Rules. Catch-up contributions will increase beginning in 2025 for 401(k), 403(b), governmental and IRA account owners. For traditional and Roth IRAs, individuals age 50 and older may contribute an extra $1,000 annually, and SECURE 2.0 added a provision allowing this $1,000 amount to be adjusted annually for inflation.

SECURE 2.0 increases the catch-up contribution amount for 2023 to $7,500 (from $6,500 in 2022). It also adds a special catch-up contribution for participants ages 60 to 63 for the greater of $10,000 (adjusted annually for inflation) or 150 percent of the regular catch-up contribution amount for 2024.

One caveat to the catch-up contribution rules: Beginning in 2024, if a participant has wages over $145,000 during the previous year, all catch-up contributions must be deposited into a Roth account. The $145,000 wage threshold will be adjusted annually for inflation.

Qualified Charitable Distributions. Seniors have the option to use annual charitable donations up to $100,000 to lower RMDs. SECURE 2.0 allows the $100,000 amount to be adjusted annually for inflation, beginning in 2024. In addition, beginning this year, individuals can reduce RMDs by making a one-time qualified charitable distribution of up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, charitable remainder annuity trust, or charitable gift annuity.

Student Loan Payments. Effective in 2024, employer-sponsored plans may consider certain student loan payments as elective deferrals for purposes of employer matching programs. This will permit plan sponsors to make matching contributions based on an employee’s qualified student loan payments.

Expanded Automatic Enrollment in New Employer Retirement Plans. Beginning in 2025, new 401(k) and 403(b) plans must automatically enroll eligible participants. Participants are able to opt out of participation. In addition, employers are now able to offer de minimis financial incentives, such as low-dollar gift cards, to encourage employee participation in workplace retirement plans.

529 Plans. Beginning in 2024, beneficiaries of certain 529 college savings plans that have been open for more than 15 years may roll over up to $35,000 from the 529 plan to a Roth IRA during their lifetime (subject to Roth IRA contribution rules).

Expanded Access to Retirement Funds. Beginning in 2024, employer retirement plans can add an emergency savings account option (designated as a Roth account) in which non-highly compensated employees can contribute up to $2,500 per year. Participants can make up to four tax-free withdrawals annually. SECURE 2.0 permits individuals to withdraw up to $1,000 annually for hardship. It also eliminates the penalty for early withdrawal by terminally ill individuals and allows victims of domestic violence to withdraw up to $10,000 without penalty.

This list of changes is not intended to be an exhaustive inventory of SECURE 2.0. Because of the wide scope of reform, you should consult with your attorney and tax advisor to review the impact of SECURE 2.0 and planning opportunities.

Sometimes leaving an inheritance to a loved one who has a disability can do more harm than good. Many public benefits programs have asset limitations for beneficiaries to qualify to receive assistance. If a well-intentioned relative leaves funds to a beneficiary who has a disability without having the proper safeguards in place, the beneficiary may be required to pay penalties or become ineligible to receive public benefits. There are options available to provide for such beneficiaries without compromising their eligibility for public benefits.

What is a Supplemental Needs Trust?

A supplemental needs trust (“SNT”), also known as a “special needs trust,” is an estate planning vehicle to provide for beneficiaries with disabilities. The SNT can provide for things that public benefits do not cover, such as non-covered medications and therapies, vacations, entertainment, clothing, care managers, and other items to supplement the beneficiary’s lifestyle; however, there are strict requirements for a trust to qualify as an SNT.

When to Create an SNT

A settlor can create an irrevocable trust for the beneficiary as a standalone document. The settlor and others can make gifts over time to the SNT. Another option is for a grantor to incorporate an SNT into their revocable trust that will become effective upon the grantor’s death. These SNTs are also known as “third party supplemental needs trusts.”

If an individual with a disability is under age 65, then that individual (or the beneficiary’s legal guardian) can create and fund an SNT in certain circumstances. This is known as a “first party supplemental needs trust.” First party SNTs are required to include a “payback provision” upon the beneficiary’s death to reimburse public benefits programs for funds expended during the beneficiary’s lifetime.

Common Pitfalls

The rules governing SNTs frequently change. It is important to consider this when creating an SNT and regularly review the document to ensure that it complies with current law. If the SNT is in a revocable trust, then the grantor can amend the trust. The grantor of an irrevocable SNT might include a trust protector or provide the trustee with a limited power to amend the trust to ensure compliance with current law.

Another common pitfall is failing to provide adequate flexibility to trustees in making distributions for beneficiaries who have disabilities. There are some situations where it may make sense for a trustee to make a distribution that would disqualify a beneficiary from receiving public benefits.  For example, the trustee may wish to make such a disqualifying distribution if the beneficiary does not medically qualify to participate in a public benefit program or wishes to pursue alternative treatment.

For more information about planning with a Supplemental Needs Trust, please contact one of the attorneys in our Trusts & Estates Practice Group.

Missouri Gov. Mike Parson recently signed into law legislation that reduces the state’s individual income tax rate.

The law, signed on Oct. 5, 2022, and effective for the 2023 calendar year, reduces the top individual income tax rate from 5.2 percent to 4.95 percent. It also eliminates the bottom income tax bracket, allowing Missourians to earn their first $1,000 tax-free. In addition, the law allows for an additional 0.15 percent top income tax rate reduction to 4.8 percent when Missouri’s net general revenues increase by $175 million and another 0.1 percent top income tax rate reduction in future years when net general revenue of the state increases by $200 million. If Missouri’s revenue increases as stated above and the corresponding rate reductions take effect, the new legislation will reduce the top income tax rate in Missouri to 4.5 percent.  

Finally, the new law eliminates the imposition of income tax on individuals making less than $13,000 a year and couples making less than $26,000 per year. It does not contain any state-level tax rate changes for corporations.

Previously, Missouri’s top individual income tax rate was scheduled to fall from 5.3 percent to 5.2 percent in January, with the potential to gradually drop to 4.8 percent if revenue thresholds were exceeded in future years. The changes in Missouri’s income tax rates do not affect federal taxes. A summary of the current federal rates for 2022 is below:

The new legislation also included the creation and extension of certain agricultural tax credits.  These tax credits are meant to help develop the state’s agricultural community.

A press release about the law’s signing is available at https://governor.mo.gov/press-releases/archive/governor-parson-signs-largest-income-tax-cut-state-history-law.

Many reconnect with their family during their vacations. Your family may own a home on the beach, in the mountains, or in the country where multiple generations gather each year. The home may have been in your family for generations, or it may be newly purchased. Regardless, the family vacation home is a unique asset that symbolizes important memories and family connections. For this reason, you should specifically address the vacation home in your estate plan to avoid hard feelings and even disputes.

To begin, you should define your goals for the vacation home as it passes to successive generations. These goals should be evaluated in the context of applicable tax laws to determine the impact, if any, that the potential transfer has on any tax benefits. You should understand the available planning strategies and how these strategies will further your goals. Lastly, you should begin to address the ongoing issues often encountered with ownership of a vacation home used by different family lines. With proactive planning, a family can avoid many of the pitfalls that happen as a treasured asset moves from one generation to the next.

Options to consider for the vacation home

You may not be ready to transfer the family vacation home to the next generation as you are still enjoying it, or you may feel your children are not ready to manage the property. Even if you are not ready to transfer the vacation home, you should still plan for how it will pass when you die.

Some distribute the vacation home at their death with their other assets, giving their children an equal interest in the home. Each child’s interest will have certain rights associated with it, including the rights to use and partition the property. The division of expenses, labor, and benefits could be unclear and hard to enforce. A child could transfer the interest in the home to individuals outside the family.

Because of this, you may wish to proactively create a structure to own and care for the home following your death. You may wish to address expense allocation, restrictions on transfers and encumbrances, and removal of the right to partition. You may also seek to protect against potential liability that could arise related to the home.

You could leave the home in a trust specifically designed to own this type of property – often called the Vacation Home Trust. In this type of trust, you designate who has the right to use and enjoy the home. You establish the rules for such use and consequences for failing to follow those rules. You also should set who will manage the home itself. The Vacation Home Trust should own other assets to fund the home’s upkeep and maintenance. Lastly, this type of trust can be designed to last in perpetuity.

Alternatively, you could create a closely held business entity (such as a family limited partnership or limited liability company) to own the home. Once the home is transferred to the entity, it is no longer owned by the individuals themselves, providing a level of creditor protection. This structure is popular when third parties, such as renters, use the home regularly. Many also implement this structure to provide continuity, consolidate management, and proactively implement succession planning among the generations.

Taxes that impact the succession plan for the vacation home

In addition to personal planning goals, planning for taxes should be considered. These taxes include federal gift, estate, and generation-skipping transfer taxes, state estate taxes, income and capital gain taxes, and state and local property taxes.

If you anticipate the home will appreciate in upcoming years, it may be an ideal asset to transfer during life. Several advanced planning options are available, including a gift to an irrevocable trust, an installment sale to a defective grantor trust, and a gift to a qualified personal residence trust, which can benefit both you and future generations. Each of these techniques allows you to address the interpersonal and practical use issues that commonly accompany a vacation home while carrying out the overall objectives of implementing tax savings.

Planning to avoid discord

In addition to preserving the home for future generations and tax efficiency, many families have other objectives that can be achieved through proper planning. Transferring a vacation home to future generations typically involves multiple family lines co-owning a single asset. Disagreements will arise.

Frequently, these surround two common themes – the allocation of expenses to maintain the home and the right to use the property. By prospectively addressing these issues, a family can avoid not just hard feelings and disagreements, but possibly litigation.

The important issues to address include arranging for the payment of expenses related to the property (ongoing, ordinary costs and property improvements) and establishing each family member’s rights to use the property as well as the rules related to that use. Many wish to protect the family from liability arising from the use of the home and protect the home from liability related to family members personally. You can address the ability of non-family members to use the property, including whether the home should be rented, and delegate responsibility for managing the property. Lastly, you may decide to limit your family’s ability to sell the home and the conditions upon which a sale, if any, is acceptable.

To achieve these goals and preserve the family vacation home for future generations, your estate plan should implement a structure specifically designed to ensure the transition is consistent with your personal and tax planning goals.

Wolters Kluwer and Bloomberg Tax have released projected 2023 figures for the gift tax annual exclusion amount as well as the estate and gift tax lifetime exemption amount. These figures were determined using formulas contained in the Internal Revenue Code. They are based on the increase in the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) for the 12-month period that ended August 31, 2022.

According to the projections, in 2023 the gift tax annual exclusion amount will increase to $17,000 (currently $16,000) per donee. The estate and gift tax lifetime exemption amount is projected to increase to $12,920,000 (currently $12,060,000) per individual.

The IRS is expected to release official figures near year-end.

Because of storms and flooding in the St. Louis area over the summer, the IRS recognized the city of St. Louis and Montgomery, St. Charles, and St. Louis counties in Missouri as a disaster area. As a result, taxpayers in the disaster area may qualify for tax relief including possible extensions for filings and payments until Nov. 15, 2022.

Please find more information about the tax relief via the following resources from the IRS:

• https://www.irs.gov/newsroom/irs-announces-tax-relief-for-missouri-severe-storms-and-flooding-victims
• https://www.irs.gov/newsroom/irs-missouri-storm-flooding-victims-now-eligible-for-tax-relief-oct-17-deadline-other-dates-extended-to-nov-15

The June 2022 decision by the Federal Reserve to raise the federal funds rate by 0.75 percent marks the largest such increase in 28 years. Among the many areas this move will affect are estate and wealth transfer planning, as many common strategies have an interest component that can have a significant impact on the success of the strategy.

The June increase in the federal funds rate – to a range of 1.5 percent to 1.75 percent – has an indirect impact on many other interest rates, including the Applicable Federal Rate (AFR), which is the minimum rate that may be charged to avoid a gift. Planning strategies such as Grantor Retained Annuity Trusts (GRATs) that use the Section 7520 rate (120 percent of the mid-term AFR) and installment sales to Intentionally Defective Grantor Trusts (IDGTs) that typically use the AFR to determine the interest charged on the loan, provide a greater wealth transfer benefit when the AFR is lower.

In light of increasing rates, it is important to take advantage of these planning opportunities now before rates continue to rise. Other planning options that have somewhat gone out of fashion in the low-interest-rate environment, such as Qualified Personal Residence Trusts (QPRTs) and Charitable Remainder Annuity Trusts (CRATs), may see a resurgence as interest rates rise.

For more information about how to consider the impact of interest rate changes on your estate and wealth transfer planning, please contact someone in our Trusts & Estates group.

To see Applicable Federal Rates (AFRs) for July 2022, please click here.