Talking T&E for Advisors: Merging Irrevocable Trusts

Welcome to Talking T&E for Advisors, where Trusts and Estates Editor in Chief Susan Lipp and Jamie Hopkins, chief wealth officer at Bryn Mawr Trust, take seemingly complex estate planning issues and break them down for financial advisors.

In this video, they discuss when it’s appropriate to merge irrevocable trusts and some of the considerations in making that decision: 

Read the full transcript below:

Hi, I’m Susan Lipp, editor-in-chief of Trusts & Estates. And today I’m speaking with Jamie Hopkins, who is the CEO of Bryn Mawr Trust Advisors LLC, as well as the chief wealth officer at Bryn Mawr Trust.

Today we’ll be discussing when it makes sense to combine irrevocable trusts. Trusts & Estates did have an article on this topic in our July/August issue written by Chad Baker.

Susan Lipp: So Jamie, what are your options when you end up with multiple trusts?

Jamie Hopkins: Yeah, it’s a great question, Susan, and we get this a lot. You know, we’re a 123-year-old trust company, so we’ve seen a couple of these occur over the years. And here’s the thing, advisors often end up as the ones managing multiple trusts because what happens is a client worked with one estate planner when they lived in Massachusetts and then they moved to Florida and they set up another one and they forgot to tell them that, hey, we had this one we set up years ago. And sometimes you do get what is essentially duplicate trust work done for clients due to a lack of communication being done out there. And so in those types of situations, an adviser might be looking at this saying, “Okay, I’ve got a client with four different trusts.” One option is just to leave it be. There are times where the costs of even going through a process to change, merge, decant is not worth it. And you just accept the fact you’ve got more instruments than you other might otherwise might want.

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I did kind of slip in that word decant. And this is really to wind down, to shut down a trust. That’s another option, which is mentioned in the article too. Another one is to merge. And a fourth one is really to amend an existing one, too. So, you might actually not merge it. You might say, “There are some benefits of this particular trust we have out there. We might want to go amend it.” And those kind of become your four main options as an advisor when looking at a client with a bunch of trusts when they might come through your door.

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SL: Are there any specific factors where you would want to merge a trust versus not merging a trust together?

JH: I think the biggest one why you would want to merge a trust together is actually simplicity. So often when we see it a lot of the front-end cost is already done that time, energy and effort. So while that comes up a lot in the article too, it can be a big factor, but I think usually it’s simplicity. Do we just have more instruments floating out there than we need? Let’s simplify your life. Pull this together.

I think the next one was that it’s cost. If you’re paying a corporate trustee or annual trust fees on all of these, it could be cheaper to merge them into one. Now, that’s not always the case. I have seen situations where mergers are going to be more expensive. You know, the complexity, figuring it out, having to go to court. It could actually be more expensive sometimes to merge trust together. So, it’s not always a cost saver, but cost is definitely a factor here.

But those would be the biggest two reasons honestly for merging trusts together. Why you would not there’s a whole lot of reasons there too. You know we can mention the other one cost is one you have to look at that it’s not always cheaper to merge them together. Another one that you want to watch out for is, you know, beneficiaries. And that is really the biggest risk factor I think you run into is that there could be, you know, maybe not the first line beneficiaries, but subsequent beneficiaries that are different in different trust documents. And kind of merging them together could cause some beneficiaries to lose an interest or overall interest in the trust and actually create potential future litigation. That’s really one of the last things you’re going to want to do here is create any type of legal risk. So, always know who the beneficiaries are, both the current and subsequent beneficiaries, because that’s a big factor of why you might not want to.

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Another thing is understand the purpose of the trust. There’s a lot of different purposes and often there are very good reasons to have multiple different trusts out there. that is a big part of the estate planning practice is there are good reasons to have different types of irrevocable trusts. Sometimes it’s problem assets or single member LLCs that you want to have kind of subset over into one trust. Sometimes we’re talking about generation skipping tax transfers and that could be another reason to have separate trusts or to separate out trusts for your spouse versus your children. So there are a lot of legitimate reasons and you don’t want to kind of muddy them all in together just for the sake of simplicity, right?

SL: Say you’re an advisor looking at a client with a complicated trust situation and numerous trusts. Where do you even start?

JH: I think the very first place to start is to get the trust documents. Doing anything before you have those is really a waste of time because in those trust documents sometimes you’ll see they might have limitations on the ability to amend to decant or to merge a trust and if there are limitations written into the document that’s going to require you to go to court could be very costly and really is going against the original kind of definition and terms of the trust.

So it’s just going to be a challenge and, by actually getting the trust documents, you’ll understand that what rights do the trustees have, what rights are there inside of the trust and you know what is the true purpose of this trust. So start there, get the trust documents, and do a thorough review of them, and likely at that point, right bring legal counsel in your trusted estate planner to review these with you to say what our options are here.

I would also point out that if you’re working in one of these situations, right? You what’s the reason that you’re getting involved as the advisor here, too, is also a good thing to kind of pause yourself sometimes and ask that question. If the estate plan is working, do you really need to put yourself in the middle of all these trusts? I’ve seen some advisors do that and some advisors regret it later on because it’s a little bit outside of their area expertise. So that’s where I said bring in that trusted estate planner or trust officer. It might be a better world for them to review. So sometimes, really, if you see the mess, get the trust documents, help the client, and get them over to somebody and maybe take a half step back after that point.

SL: It sounds like it’s one of those situations where collaboration is really important. So what are some other key items that advisors should look out for?

JH: And this one’s near and dear to our advisors, but tax issues. A lot of estate planning and trust work is done with very careful kind of sculpting around existing state and federal tax laws. And all of a sudden, when you start merging these together, decanting, amending them, you can create pretty significant tax issues. So you want to always be aware of that. A good tax place to start is just is this a grantor retained or a not trust. And if it’s a grantor trust, that’s a little bit different, right? They’ve retained some tax complications with themselves. So merging it or combining it with a non-grantor trust will create some probably unintended tax consequences. I mentioned generation skipping transfer tax or just a state kind of you know if you’re trying to kind of a a shelter trust to spousal benefits. You’re going to want to be aware of those situations and combining them together with another trust could wipe out some of those tax benefits that the initial two trusts were designed to create.

So I think tax issues are a really big one. I mentioned really briefly earlier, but you know hard to deal with assets, right? Problem assets. And what I mean by that is you don’t always want to put all assets into one trust. There are certain assets, and I’ll just use this as an example. You own an oil field in Texas. You don’t necessarily want to put that same asset inside where your investable assets are, your house, your car, and all of those things. The liability around that can get a little messy. So often what you see is when people own businesses and they’re using a trust as part of their estate and family transfer techniques, they’ll actually set up LLC’s in a Nevada, in a Delaware that actually hold that underlying company, and they kind of separate that out into its own trust because there’s a whole world of complications around that. And a little bit of it is you’re actually trying to separate that from some of your other assets and liability and the ability to transfer that or freeze the value of that versus your other assets can be very different. So those more complicated assets you just want to be aware that are you creating more complexity and risk here by combining these and simplicity if there are challenging assets held with inside of this trust.

SL: Thank you so much for breaking down this for us. It is sort of a complicated topic and we really appreciate your insights on this.

JH: Thanks for having me on. It is a complicated topic. The article is great and diving into it and you know, I’ll close with the last comment is we talked about it a little earlier, Susan, but this is an area where you need to get a bunch of people involved, right? It is working together figuring out what’s the best solution for the client and hopefully bringing a more simplified