As professional advisors, we help clients plan for the future – yet none of us knows what the future holds. We must therefore do our best to help create a solid, yet flexible, foundation that will accommodate changes to the family, the business, and the tax and regulatory environments. When we work with a client to help create an estate plan, we make sure that plan is implemented and executed. We might then feel that our job is done. But in reality, our job is done only if the client happens to die the very next day.
At the initial client meeting, it is our responsibility to explain that creating an estate plan is an ongoing process. The planning documents are but one frame in a long movie – the script of which has not been finalized, the participants not cast in concrete, and the provisions not intended to be permanent. In other words, estate planning, like life, is a movie, not a snapshot. Once that concept is clearly explained, the client should understand that the plan needs to be continually reviewed and revised.
For many families, the most important estate planning document is the Trust. It is the document that may continue past the client’s lifetime, past the spouse’s death, and past the death of the children. Over the last 20 years, many advisors and clients established a trust for tax purposes – to reduce the estate taxes that the family will pay when both spouses die. But for the past 20 years, there hasn’t been nearly enough focus on the non-tax components of the trust arrangement.
As advisors, we must be aware of the dual components of using trusts in estate planning – organizational and operational. The organizational structure is established when the trust is signed. The operational structure starts from that point and continues on. The family, the laws, and the investments will all change – and the fiduciaries will need to make decisions.
Organizational Components of the Trust. For many clients, the foundation of estate planning is the trust and its provisions. This fundamental organizational document lays the groundwork for later implementation, so it is important to pay careful attention to the wording. Some key organizational components include:
- Who is the donor (person establishing the trust)? Who are the initial players? Who are the beneficiaries? Who are the trustees?
- Does the trust contain a stated purpose?
- Is it revocable or irrevocable?
- What are the provisions that pertain to the trustee powers? How many trustees are required? Must the trustees act unanimously or by majority? What is the standard for trustee removal? What is the standard for appointing new trustees? Are there specific powers authorized in the document, e.g. retaining a family business or selling real estate?
- What are the provisions that pertain to the beneficiaries? Who are the permissible beneficiaries? Spouse only? Spouse for life then children? Spouse and children concurrently? Spouse and descendants? In-laws? Charities?
- Powers of appointment. Does the trust include provisions that give beneficiaries the power in their Will to change who will receive the assets or the terms of the trust? Is it a special power of appointment, limited to a certain class, such as the donor’s descendants? Is it a general power of appointment – meaning the power to expand the group to charities, to creditors, to anyone?
- Does the trust include a spendthrift clause that will protect the trustee assets (as long as they are not distributed from the trust) from the creditors of any beneficiary?
- Jurisdictional issues. What state law governs how the trust will be administered? Can that jurisdiction be changed? If so, who can change it?
- Termination of the Trust. When does it end? After the death of the donor and his/her spouse? When the children reach a certain age? Does it run for the Rule against Perpetuities period? Does it end only when the trustees decide to end it?
Operational Components of Trust Administration. The organizational components of the trust document outlined above are the guide to how the trust will be operated – from the date the trust is signed until the date the trust ends. Key operational components of trust administration include how the clauses in the trust are interpreted and implemented. To understand the scope of the administration it is important to contemplate issues such as:
- Investments. After reviewing the powers in the trust documents, the trustees must then review the law in effect at the time of administration and decide how they will operate the trust. Will the trust be operated for growth? For income? For balance? Will certain assets, even if nonproductive, (such as residential real estate) be maintained? Should rent be charged? Should the trustees provide loans of trust assets to beneficiaries? On what terms? With formal notes? What should be the terms of repayment?
- Distributions of Income and Principal to Trust Beneficiaries. The trustee will review the document and determine who the class of permissible beneficiaries is at any given time. With that in mind, the trustee (guided by the documents and the law) must make decisions regarding distributions. Should they be equal? Income only? Income and principal? Principal only for limited reasons? Should the trustee require an annual budget from the beneficiary before making a decision? Should the trustee authorize regular payments? Should any beneficiary requests be denied?
When making these decisions, the trustee should be aware that the pattern of distribution can have consequences to the creditors of the beneficiary. There may also be considerations in a divorce – what, if anything, is the soon-to-be-ex-spouse of the beneficiary entitled to? The trustee will also have to decide the process for evaluating bequests from the beneficiary. A face-to-face meeting? Communicating by phone or email? Who is to be consulted? Are there provisions in the trust that require monitoring – such as no distributions if it is believed that a beneficiary suffers from substance abuse? If so, how should that be monitored? Is there a withdrawal right? In other words, does the beneficiary have the right to withdraw funds no matter what the trustee says?
- Powers of Appointment. If there are powers of appointment in the document, have they been exercised? To whom and for what duration?
Once the trust is signed, you and the client should discuss when the plan will be reviewed next. Many advisors encourage their clients to write an annual letter to the trustee, which might contain provisions that are read only when the trustee is administering the trust. As life changes, the client could send this letter to help guide the trustee on issues relevant to administering the trust – such as a troublesome marriages, creditor issues, special needs, mental illness, and substance abuse.
Since the primary decision for establishing a trust may no longer be to reduce estate taxes, it is important for advisors and clients keep the organizational and operational components in mind, paying careful attention to meeting the trust’s goals and objectives.
Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime. To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.