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.
- Non-Judicial 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.
- Designated 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.