Tuesday, December 11, 2012

Using your "Imagination" in Designing a Living Trust

My clients will often ask if they can provide for certain events in their Living Trust documents. The usual answer is that "the only limit on what you can put in your estate planning documents is your imagination." However, I do temper that with the statement that you should not let your imagination run wild.

     While it is true there is almost no legal limit on what you do in your Living Trust, it may lead to bigger issues later. While we are all concerned that our beneficiaries may not have the maturity or good sense we have developed after a lifetime of experiences, we should be careful not to be so restrictive that it makes it difficult to administer the trust.
     For example, I had a client who wanted to place restrictions on distributions for young children in the event he predeceased them. He wanted to require that they received no inheritance unless they earn a degree from a specific college. While it was a worthy desire, it did not take into consideration that the children might have no interest in attending that college, for any number of reasons unrelated to their desire for a college education. An alternative college might better suit the child's interest and skills. Alternatively, the child might be better suited to entering into a trade rather than going to college for which there is no interest.
     Another client had three daughters and at any given time was at odds with one of them, although not always the same one. Over the course of ten years, one of the three was always excluded from the Trust. I cautioned the client that trying to use her estate to control her children might not be the best way to establish a good relationship, but every twelve to eighteen months, she revised her trust to remove one daughter and provided only for the other two. I did not look forward to the day I had to explain to the three daughters that only two of them were beneficiaries of her trust. Eventually, my client concluded that it was counterproductive to try to control her children with her money and asked that I revise her trust to provide for all three daughters equally. She died unexpectedly a few months later, but the daughters shared equally because of the last trust amendment.
     A third client had three sons, all in their 30s. One son was the "good son" and was to receive a share of the trust immediately upon the death of his parents. The client did not speak with his second son because of a business arrangement gone awry. That son borrowed money from his father to go into business, then grew bored with the business, and left it to his father to clean up the mess. This lead my client to provided that this second son was not to receive any of his inheritance until he reached age 65. The third son was also not to receive his inheritance until age 65, unless "he was not married to that woman." Including provisions such as these (and some even more imaginative) in the trust is the client’s prerogative but, as you can imagine, may cause serious problems and possibly create sibling disharmony when the parents die.
     Many clients desire to promote their own value system to their beneficiaries and discourage unproductive behavior. Trust provisions for this purpose include:
  1. Allowing a Trustee to make distributions to assist in the purchase of an automobile at certain ages and upon achieving a specific grade point average.
  2. Providing for a distribution to a beneficiary upon enrolling in college.
  3. Distributing an annual award for academic performance.
  4. Distributing an award upon receiving a Bachelor's degree, especially within a designated period of time
  5. Providing an award for receiving an advanced degree.
  6. Making a distribution to match the beneficiary's earned income, up to a certain maximum amount.
  7. Allowing distributions to assist in the purchase of a residence.
  8. Allowing distributions to assist in starting a business.
  9. Requiring financial training to assist beneficiaries in managing distributions
  10. Providing for distributions for the cost of traveling to visit family members in an attempt to encourage and maintain relationships among children and grandchildren.
  11. Preventing distributions to those not engage in productive activities or who are substance abusers
     These and many other incentive provisions are possible, but should not be added to a document without serious thought of the consequences as well as possible drawbacks or traps created because circumstances may change in the future.
One of the great freedoms of a Living Trust is the ability to dictate the exact distribution of your assets after you are gone. It is important to temper that freedom with common sense and to engage an experienced attorney to seek out potential problems with your distribution instructions. The trust is a tool that can assist in protecting your loved ones from potential problems in life, but just as it is nearly impossible to use a hammer on a screw, tools have limits. Attempting to work outside of those limits can have unexpected and sometimes disastrous consequences.

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