Probate & Trust Law Section Conference Manual ... - Minnesota CLE

Please see example below of a typical trust reformation/modification:
Existing Trust
Delegated
Trust
Original State Law
for Construction,
Validity and
Administration
1. Change Situs to South Dakota by
naming a South Dakota Trustee;
2. Upon change of situs and
appointment of South Dakota
Trustee, reform/modify to SD law
for administration
Existing Trust Modified
Reformed/Modified Trust
Original State
Law for
Interpretation,
Construction,
and
Validity
South Dakota
Law for
Administration,
for instance,
Directed Trust,
Trust Protector
4. Some common reasons why a trust would be reformed/modified are:
a. Change the administrative terms of the trust from a delegated to add directed trust
structure with investment and distribution committees/ advisors;
b. Add trust protector;
c. Change the governing law applicable to the trust;
d. Add flexibility regarding appointment of trustees and other fiduciaries;
e. Improve the trust’s governance structure;
f. Modernize an outdated trust agreement;
g. Improve tax provisions;
h. Save state income taxes;
i. Change dispositive provisions:
i. Change term; for instance, remove term stating 1/3 of principal at age 25, 1/3 at
age 30, and 1/3 at age 35, and make discretionary for asset protection purposes
(family as distribution committee directs SDTC as to distributions);
ii. However, may not be able to change trust duration (i.e., the applicable R.A.P.).
5. INVESTMENT FLEXIBILITY
Many states do not have directed trust statutes, and are only delegated trust states. Consequently,
whether a family or an institutional trustee is involved, due diligence and ongoing monitoring of
the trust assets are required in these delegated trust states.
The family member trustees may not be in compliance and risk individual liability in the event of
a future lawsuit by a beneficiary as a result of improper diversification, asset allocation, a bad
investment or bad performance. Additionally, a heavy concentration in one asset or asset class is
generally not an issue with a directed trust, but can pose major issues for a delegated trust. As a
result, many people choose to reform/modify an existing delegated trust to a directed trust to
alleviate these issues.
6. OLD DISTRIBUTION STANDARDS (I.E., 33% AGE 25, 33% AGE 30, AND 33% AGE 35)
Older trust distribution standards requiring principal distributions at various ages may no longer
be desired. For instance, with the older distribution standards, once distributed, the principal is no
longer asset protected and is subject to estate, generation-skipping transfer, and income taxes.
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