On January 1, 2020, a new statutory regime will apply for the creation, administration, and termination of trusts in Connecticut. The new law will make Connecticut a very appealing jurisdiction for trusts, and will allow for an extended rule against perpetuities period, the ability to create self-settled asset protection trusts and increased flexibility in modifying and reforming trusts to address changed circumstances. These new provisions provide opportunities for individuals to establish new trusts and to update existing trusts to better meet their estate planning goals.
Provided below are some key takeaways from the new statutes.
- Dynasty Trusts:
Prior to this enactment, the duration of a trust was limited to
about 90-120 years, resulting in the required termination of a
trust after only a few generations. For trusts created after
January 1, 2020, a Connecticut trust may now exist for up to 800
years before it must terminate. To put this length of time into
perspective, if a person living at the time the Magna Carta was
signed established a trust and had to expire after 800
years—it would just now be terminating. Individuals should
discuss with their estate planning professional whether their
estate plans should include this dynasty trust feature. In
connection with this review, individuals may want to create new
irrevocable trusts to maximize their gift, estate and
generation-skipping transfer (GST) tax
exemption to coincide with the increase to $5,100,000 in
Connecticut’s gift and estate tax exemption also as of
January 1, 2020 (which will increase yearly to match the federal
exemption in 2023).
- Directed Trusts: The
new legislation allows a trustee’s duties to be allocated
between the trustee and others (known as “directors”)
who may be better able to carry out certain trust objectives. A
grantor will be able to provide for directors to manage a specific
part of the trust’s administration or assets, particularly
assets which require special skills to manage or are of a character
that a trustee may be reluctant to accept. For example, a director
may be appointed to manage distributions or a specific asset (such
as the family business or real estate), which would relieve the
trustee of this responsibility. These directors are subject to
fiduciary duties, so they will need to act as trustees, but with a
more limited focus over the administration.
- Modification of Irrevocable
Trusts: Under current Connecticut law, there are only a
few instances where the terms of a trust may be modified, which can
result in antiquated provisions inhibiting the effectiveness of the
trust. Beginning January 1, 2020, there will be various statutory
provisions that will allow for the modification of trusts. This
will provide the tools to make an existing trust a more effective
vehicle to administer family wealth.
Settlements: As enacted, the law allows interested parties
to enter into a binding, non-judicial settlement agreement in
matters relating to a trust, such as interpretation of the trust
agreement, trustee resignation and appointment, trust accountings,
and trustee compensation. This will allow parties to resolve issues
related to the trust in a binding fashion with far less intrusion
and cost when compared to judicial proceedings.
Representatives: The new law introduces the concept of a
“designated representative”, whereby an individual that
establishes a trust can designate a party to be able to receive
notices and consent to trustee actions on behalf of a trust
beneficiary. This will allow a person creating a trust to limit
involvement from a beneficiary by designating a party other than a
beneficiary to receive various notices from the trustee.
- Reporting Requirements to
Beneficiaries: The law imposes new reporting requirements
for trustees to keep each qualified beneficiary reasonably informed
about the trust’s administration and to provide other updates
to beneficiaries within given time periods. These rules apply to
existing trusts, so fiduciaries will need to ensure their protocols
comply with the new law.
- Asset Protection
Trusts: The legislation also allows for the creation of
self-settled asset protection trusts. A self-settled asset
protection trust is an irrevocable trust funded by an individual
who is also a beneficiary of the trust. Despite funding the trust
for himself or herself, the trust’s assets are generally
shielded from the claims of the settlor’s potential future
creditors. Self-settled asset protection trusts are likely to be an
attractive strategy to individuals in high-liability professions,
young adults receiving inherited wealth from terminating custodial
accounts or trusts, unmarried individuals as an alternative or
supplement to a premarital agreement, or others seeking extra
liability protection against future claims. These trusts also
present some opportunities for tax planning.
- Expansion of Statutory Law: The explanation above covers some of the major provisions of the new statutory regime. The expansive scope of the new law presents opportunities for new and existing trusts alike. Fiduciaries, beneficiaries, and those interested in creating trusts should contact their Withers Bergman advisor to discuss how this impacts their own situation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.