Life moves fast and throws unexpected curveballs. That's why it's important to build flexibility into trusts for clients whose goals, family situations and general life circumstances can change frequently.
Obviously rules are important — that's why there's a trust in the first place — but as a trust and estates attorney I've seen how allowing for "give" in such instruments is pivotal to providing continuous protection for both donors and beneficiaries. In your role as financial advisor, here are issues and suggestions you can raise to increase elasticity injected into these crucial legal instruments.
Trustee appointment and removal provisions
When I meet with clients to review their estate plans, I find they are sometimes taken aback by stipulations they made in the original document, one which could have been drafted years before. Over time, the client's opinion of a named trustee or an appointed guardian for their children can change due to a number of factors. I often come across such reactions when a sibling is involved. Maybe there was a falling out, or maybe the brother or sister simply drifted away from the family over time and no one is close to them anymore. In such circumstances, giving the beneficiaries or others the power to replace them would be helpful.
It's also problematic when a successor trustee — a person or institution who assumes management of a living trust property when the original trustee dies — is selected by a "majority of the beneficiaries." Let's say the beneficiaries are the donor's three adult children and their nine grandchildren. In that situation, the grandkids have the ability to out-vote their parents. Did the donor really intend for that to be the case? If the intention was for the donor's children to make the choice, then that language should have been used.
I've also seen estate plans that leave trust assets to the donor's spouse with the provision that on the spouse's death, the assets be equally divided among the kids as each child attains a certain age — often 25, 30 and 35.
But there may be many reasons why the children should not be treated equally — ones that may only arise after the donor's death. One way to add flexibility is to grant the spouse the power of appointment to make changes. If the kids end up in dramatically different financial circumstances — if one becomes a CEO and another becomes a grade school teacher, for instance — or if a grown child develops a serious health issue, the spouse could exercise the power to adjust the allocations accordingly.
Powers of appointment
A power of appointment can be used to change the trust terms, such as the ages at which trusts would pay out to the offspring. For example, a trust beneficiary could have a daughter who will eventually inherit the assets from his trust, which could result in the assets being distributed to her while she is going through a divorce. The trust assets wouldn't necessarily become reachable by the soon-to-be ex-spouse, but I'd rest easier knowing that the daughter will remain in the trust until the divorce is settled. The beneficiary could exercise a "power of appointment" to direct that the assets pass to a trust for the daughter rather than outright.
Division of trusts
Problems can also arise if a single trust for multiple children doesn't eventually divide into separate trusts. A single trust might be practical when it's initially established but not necessarily in the long run. When beneficiaries are older, they'll have different circumstances, careers, spending habits and needs, and views on money and investments. Flexible provisions can allow a trust to be split into separate trusts at specified points in time. Dividing trusts allows the beneficiaries to utilize assets independently free of judgment or conflict with each other.
On a related note, it might not be ideal if a trust is stipulated to be split into separate trusts for the children only after their parents pass away. If the parents live to be 95, the children could be in their 70s before they receive their share or the trust. This might drastically limit their enjoyment and use of the funds and even defeat the purpose of making them beneficiaries in the first place. Enabling the trust to be divided earlier can allow beneficiaries to use the money more purposefully and at a point in their lives when it might help with expenses like buying homes and paying college tuition for their kids.
In weighing these issues with your client, an in-house estate planner at a financial planning firm is a good resource. But as they will be the first to tell you, they are not acting as attorneys nor can they give legal advice, draft or implement the estate plan. In the end, a private practice attorney needs to give legal advice and execute it. It is much better if your advisory firm's in-house attorney collaborates with the private practice attorney before presenting the client with any kind of developed plan.
