While it may seem rudimentary, identifying the beneficiaries is critical and isn’t always as straightforward as it may seem. The first step is to determine which state’s laws govern the trust for purposes of construction and validity, as this will determine the definition of key terms such as “issue” and “per stirpes.” Older trust instruments don’t always contain a clause spelling this out, and even if a governing law clause is present, it still may not be determinative because a prior trustee may have transferred the trust to a new state.

It also will be necessary to consider how the revolution in reproductive technology will affect the class of remainder beneficiaries. For example, this past year saw the first child born with DNA from three biological parents.

While sudden, significant wealth can disrupt the stability of a family, education and planning can mitigate against this risk. Advisors should consult with the beneficiaries of soon-to-be expiring trusts to make sure they have an accurate understanding of the provisions of the trusts. This is particularly important when what might seem to be an arbitrary legal distinction (per stirpes distribution vs. per capita, for example) leads to what some family members might perceive as an anomalous result—such as half of a trust being divided among five brothers and sisters, with the other half passing entirely to their only child cousin. Discussing this result with the family ahead of termination will not only give the beneficiaries time to deal with any disparity emotionally, but also may afford opportunities to address equalization strategies. For instance, senior generations of the family might consider adjusting their own estate plans to equalize for the differences stemming from the terminating trust.

Beneficiaries of soon-to-expire trusts will need to focus on their expectancies within the context of their overall estate plans. This can be illustrated in a number of different ways:

• A 60-year-old individual with four children and a net worth of $5 million who might not otherwise feel ready to make annual exclusion gifts could reconsider, once armed with the knowledge that s/he’ll be receiving an additional $10 million from an expiring trust in 10 years.

• A married couple for whom simple “I-love-you wills”—which leave all property outright to the surviving spouse—would otherwise be sufficient might consider executing documents that address state estate taxes if an upcoming trust distribution will significantly augment their assets.

• In some cases, it might make sense to distribute low income tax basis assets to an elderly beneficiary so that the distributed assets receive a basis step-up for income tax purposes at their death.

With some exceptions, assets held in trust for a beneficiary are protected from the beneficiary’s creditors. If it’s important to a beneficiary to maintain creditor protection, they may wish to consider transferring the distributed assets to a self-settled asset protection trust (only allowed in certain jurisdictions). Other options include using limited liability companies to hold distributed assets or immediately and irrevocably transferring the distributed assets into a trust for a spouse or descendants.

Sometimes, a remainder beneficiary isn’t ready to handle a large influx of money responsibly. In that situation, the trustees may be able to effectively extend the trust term by decanting the trust (essentially paying the trust assets to a new trust without the mandatory payouts) in accordance with either express permission to do so in the trust instrument or authority granted under state law.

Notably, when a trust is terminated due to the expiration of the applicable perpetuities period (as will usually be the case with 1930s trusts), decanting isn’t an option. There are still, however, some steps worth considering.

One vehicle that can address concerns about a beneficiary’s readiness is an “arm-twisting” trust, in which parents may persuade the beneficiary to immediately contribute the received assets into a trust that requires parental (or another’s) consent for distributions. However, this method depends on the cooperation of the beneficiary, which may present a roadblock.

Another option, if the trust agreement allows it, would be to bypass the beneficiary in question by making discretionary distributions to other beneficiaries before termination. This option could be coupled with an equalization adjustment to senior-generation members’ estate plans, similar to that mentioned in a previous slide, that leaves assets to the beneficiary in question in trust, rather than outright.

The trustee might also consider transferring trust assets into an entity (such as an LLC) with a third-party manager, so that ultimately the beneficiary receives interests in an entity with a management structure, distribution control and transfer restrictions already in place.

Many trusts are invested in private equity and hedge funds that require subscription agreements and often have stringent requirements as to who’s allowed to invest. For example, they may require that owners be qualified investors under the Investment Company Act of 1940. The change in ownership may even require the unwinding of the investment altogether.

Other trusts may hold real property that will need a framework for post-distribution management. In such instances, it’s prudent to develop an agreement among the ultimate owners prior to the trust’s termination so that a plan is in place for decision making, governance and use.