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161 Tr. & Est. 22 (2022)
The Divisible Pot Trust: A Reimagining of the Traditional Dynasty Structure

handle is hein.journals/tande161 and id is 298 raw text is: By Mark Powell, Dana M. Foley & Heather D. Casteel The Divisible Pot Trust A reimagining of the traditional dynasty structure Dynasty trusts are now more en vogue than ever due to the highest federal gift, estate and generation-skipping transfer (GST) tax exemption amounts in history. In addition, more states have modified or abolished the common law rule against perpetuities, and the modernization of trust law under the Uniform Trust Code (UTC) now allows for a variety of ways to modify irrevocable trusts. Consider that trusts funded in 2022 with the $12.06 million of available exemption stand to grow to over $30 million in just 20 years when compounding at a modest 5% rate of return. This means that trusts established and funded with that amount today are likely to last more than just one generation, warranting a perpetual trust structure. Many states' laws now allow for such dynastic trusts, permitting assets to be held in trust without running afoul of the maximum duration for trusts under common law. The cherry on top is that in UTC jurisdictions, clients need not shy away from a perpetual trust for fear of creating a static vehicle that can't be modified for unanticipated changes in family circumstances. Moreover, decanting, modification agreements and nonjudicial settlement agreements are now available in many states, adding newfound flexibility to planning with long-term trusts. These changing laws present an opportunity for practitioners to reimagine the recommended structure in drafting dynasty trusts. While traditionally, the default method of structuring dynasty trusts is to divide trust assets into separate share trusts for children and future generations immediately on the death of the settlor and/or the settlor's spouse, it's important for drafting attorneys to consider whether that approach to trust design should be preferred given the current planning paradigm. While drafting consideration must always be given to a client's individual philosophy in passing wealth on to future generations, the practitioner should educate and guide a client on the various ways in which a dynasty trust may be structured. These options include not only the traditional splitting into separate share trusts but also the possibility that assets can remain in a single share trust or pot trust for longer that can, if necessary, be divided at a later date. Separate Share Trusts For many years, the default trust design was to divide trust assets immediately into either per stirpital or per capita shares to be held in separate share trusts for descendants. This was especially true with lifetime trusts that give the trustee complete discretion in making income and principal distributions. This tried- and-true method of drafting addresses the majority of clients' goals in: (1) treating children equally in the initial division of trust assets, and (2) protecting the beneficiaries' inheritances from the claims of creditors. And yet, while this common approach to trust structuring does address most clients' main objectives in architecting their estate plans, rarely do clients understand that the immediate splitting of the trust estate into separate trusts can result in disparate treatment of beneficiaries just one generation lower. Take, for example, a situation in which one child proves to be more of a spendthrift than their 22 / T~i tSTCS&F PTATF // A22 / MAY 7n77

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