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Your Estate Plan: 7 Steps to Designing the Perfect Trust, Part 2

Click here for Part 1 (steps 1 & 2).

The seven steps in this series will guide you through the process of building a working outline for a thoughtful and successful trust document. Here is a refresher on what we covered in Part 1:

In Step 1, we started with Why – figuring out your main purpose or motivation for including one or more trusts in your estate plan.

In Step 2, we worked on the Who – listing and describing the people (and possibly charities) your trust will benefit.

And now . . .on to the next steps:

Trust Distribution

Step 3 – Decide How Much & When

Next, we will cover how your estate plan will express the amount and frequency of distributions from the trust to your beneficiaries. The goal of this step is to determine how you would like the trust assets to be paid out.

This does not have to be perfect right off the bat. You’ll refine this in time. To help you get started, let’s review some vocabulary (just for a minute).

Historically, trust distributions have been described in terms of income and/or principal. (Click on those words to see the Glossary definitions.  Go ahead, I’ll wait. If you want more detail on income, principal, mandatory and discretionary distributions, take a look at The Two Types of Trust Distributions.)

Another option – in recent years, the concepts of income and principal have sometimes been tossed aside in favor of a “unitrust” approach. This format directs the trustees to pay a fixed percentage, say 3% of the trust’s assets to the beneficiary each year, based on a selected valuation date. This approach frees the trustee from having to think about how to invest to produce income and grow principal at the same time. The trustee can focus on growing the principal, and distributions will be a percentage of that (hopefully) forever growing amount.

These are the traditional approaches. But there is no right answer.

You may have a good idea about how you’d like trust distributions to be made. Or maybe you’d like to think about it awhile. Either way, look back at your purposes and motivations behind the trust (the Why, from Step 1). Your Why will provide guidance here.

For example, if a primary purpose of the trust is asset protection, you’ll want to grant your trustees broad discretion in deciding whether or not to distribute to a beneficiary. You would not include any mandatory distributions or permit the beneficiary to withdraw from the trust.

Leaving all of the discretion with the trustee would achieve the creditor protection goals. But, this leaves the kids (or spouse, or grandkids, etc.) very little say.

On the other hand, if you intend the trust as more of an opportunity-enhancer or family bank, to provide liberal funding for “ventures or adventures,” you may give your beneficiary more control. Examples:

  • The trustee may be required to distribute all trust income to the beneficiary quarterly;
  • The beneficiary may have the ability to withdraw, say, 5% of the trust principal per year; or
  • Perhaps the beneficiary will receive chunks of principal at stated ages (1/4 at 30, 1/3 at 35, 1/2 at 40, etc.).

These techniques would give your beneficiary a few different “bites at the apple.” You might decide this is a great way to educate and encourage responsibility. However, a trust with all of these features would make a very poorly executed asset protection trust. The mandatory distributions and withdrawal rights would leave gaping holes for creditors and predators.

Of course, there are ways to combine multiple purposes and techniques. Your attorney can help you balance the competing interests. So, quickly writing down what your thoughts are on  distributions, while keeping in mind your primary motivations, will be very helpful to you and the drafter.

Step 4 – Think About Building in Flexibility

Try as we might, we can’t see into the future with certainty.  Even worse, research has consistently shown that one of our worst flaws as a species is having way too much confidence in our ability to do just that.

Even the shortest of trusts are usually expected to last a half-to-a-whole lifetime. And many trusts drafted today are expected to last hundreds of years (for example, Dynasty Trusts). There is simply no way to anticipate or even imagine what our carefully designed trust plan is going to look like 50, 100, 200 years from now.

That’s why flexibility is so important. The best trust agreements don’t try to anticipate any and all circumstances. Rather, they accept that things will change. You need to give the people – trustees and beneficiaries – who are going to be there way into the future, the tools they will need to adapt to change.

Fortunately (or unfortunately*), the law has evolved in this area, and those tools can be built into the trust agreement. Some examples are:

  • Powers of appointment, which enable the beneficiaries to alter the default rules for splitting up and paying out the trust property following their deaths, allowing them to consider the needs of their children in thinking about how the trust will impact their lives;
  • Trust protectors, who can be given the power to alter or amend the trust agreement, or to intervene in and mediate disputes, or even to fire trustees, all under circumstances spelled out in the trust agreement;
  • Amendment powers, also detailed in the trust agreement, to be used in certain circumstances; and
  • Powers granted under state law, such as court or “no-court” trust agreement modification procedures, and –  the latest rage –  decanting.

*Note – this evolution of the law is not without controversy. Some legal scholars and practitioners believe that these new flexibility tools are in fact unfortunate. This group is concerned that all of this flexibility makes it near impossible to guarantee that the trust creator’s intent will be carried out exactly. The response to this argument is that a well-designed trust permits flexibility but adheres to the guidance provided by the trust creator. That’s why providing this guidance is also imperative (see below).

Of course, the trust creator who believes he has anticipated the beneficiaries’ every need 100 years from now is free to prohibit any of these flexibility devices in the trust agreement. (Is my bias showing? Remember, 100 years ago, the federal income tax was born, women were struggling to gain the right to vote,and Ford was putting the finishing touches on something called an “assembly line.”)

Wrapping Up Part 2

As noted at the end of Part 1, don’t worry about all these details now. Just jot down a quick list of the concepts and ideas that appeal to you, and those that don’t. Once you put all the parts together, you’ll have a pretty clear picture of how you and your attorney can build your trust.

In Part 3, we’ll  look at who’s in charge of this whole plan – the trustee – and provide guidance on how to select the right one.

Stay tuned!


Trusts and Estates: 7 Steps to Designing the Perfect Trust– Part 1

If you have thought about your estate plan, chances are you have also done a lot of thinking about the pros and cons of trusts. You might have already decided that trusts will be part of your estate/wealth transfer plan. But where do you go from here?  Organizing your thoughts and desires concerning your trusts and estates plan might be a daunting task, but broken down can become a much more manageable process.  

The following seven steps will help you build a working outline for a thoughtful and successful trust document. 

Trusts and Estates


Why Should I Do This?

Maybe you’re thinking, “Why do I need to go through this process – isn’t that what my attorney is for?” 

Well, yes, but a little preparation will help you and your attorney. You both can get the drafting process rolling faster and more cost effectively if you are precise and able to articulate exactly what you want.

Think of this prep work as learning the basics about clubs and grips before you take your first golf lesson. Or putting together the party’s guest list and menu ideas before meeting with the caterer.

Believe me, your attorney will be thrilled if you arrive at your trust planning conference with an outline prepared from the steps below. Better yet, send it to him or her before. Wouldn’t you rather your attorney be very focused, offering additional guidance relevant to your particular family and personal preferences, rather than spending time taking you through the basics? Of course.

So grab a sheet of paper, open the laptop, start a new note in Evernote – whatever – and run through these steps in order.

Step 1 – Decide Why.

The first step in designing a trust that will stand the test of time is to identify your primary motivation for needing or desiring a trust-centered plan. You may be thinking, “I have already done that.” Even so, it makes sense to be able to clearly articulate your thoughts. Here are some frequently cited reasons for using trusts in an estate plan:

  • Family opportunity enhancement – providing a safety net to enable heirs to pursue their dreams and passions, even if those paths lead to noble, but less-paid professions (teaching, art, research, etc.);
  • Professional management – ensuring that family wealth is invested and managed by qualified financial professionals;
  • Creditor/asset protection – guarding against a litigious world, moving assets out of the reach of creditors, lawsuits, and ex-spouses;
  • Tax planning – taking advantage of various technical strategies designed to minimize income or estate taxes, state or federal.

By identifying one or two of your primary motivations for using trusts, you can help keep your advisors on track in putting your plan together. This also helps to keep the document drafter in the right frame of mind when drafting. Just pick one or two and jot them down.

Step 2 – Identify Who.

The next step is to be clear about who the trust will benefit. Maybe this is an easy question for you: “My kids, their kids and that’s it.” But often this question can lead you down a few rabbit holes. Here’s a checklist of ideas to consider in the “who” department:

  • You? (it’s tricky, but some in states and some situations this can work);
  • Your spouse;
  • Your children;
  • Grandchildren, great-grandchildren – how far down the line? Many states have expanded the trust “term limit” rules to allow 360-year, 1,000-year, or even permanent trusts (see Dynasty Trust);
  • Special rules defining who fits into the above categories:
    • adopted – included in the definition of “child” or “descendant”? What if the adopted “child” is an adult at the time of the adoption?
    • stepchildren and half siblings?
    • ART children? ART stands for “Assisted Reproductive Technology. According to the Center for Disease Control and Prevention (CDC), over 1% of all infants born in the United States every year are conceived using ART. The law is lagging far behind the science here, and new cases and statutes are cropping up to try to determine whether so-called “posthumously conceived heirs” are entitled to inherit when the will or trust is silent on the matter. Do you want your daughter- or son-in-law to be able to use these technologies to add to your heirs if your child should die young? There’s a great dinner table topic, right? The point here is: you get to choose if you are specific in your trust document.
  • Charity – do you want a percentage of the trust assets to be donated to charity each year? At the death of one or some of your heirs? When all your descendants are gone many years from now?

It’s very helpful to your advisors if you list all the individuals and charities you intend to benefit, with their names, ages, and addresses (just city and state are fine). This list is often invaluable down the road when beneficiaries need to be contacted. Also, knowing the age and state of residence of each beneficiary can help your advisors help you think through some age-related and jurisdictional issues you may not have thought about.  You should also check, or ask your advisor to check, the tax-exempt status of any charities.

Wrapping Up Part 1

For now, just make a quick list of the kids, grandkids, favorite charities, etc. Also  don’t worry that producing this list means your attorney will run out and tell your intended beneficiaries about the trust before you’re ready.  This is confidential information that will not be shared without your consent. 

In Part 2, we’ll talk about just how much will get paid out of this trust and when. And, we’ll look at building in some flexibility to help plan for the inevitable: change. In the meantime feel free to contact me with any questions.

We look forward to sharing more information with you to help you plan for your family’s future. Visit our website www.OakstoneLaw.com or call us at 239-206-3454.

Oakstone Law is dedicated to helping clients build a solid future by offering a range of services focusing on estate planning and settlement (click here to view our services). Headquartered in Naples, Florida, the practice offers fair, fixed Client Service Packages, eliminating the traditional hourly rate structure (and headaches). Oakstone Law was founded by attorney Robert Kleinknecht, member of the Florida Bar and Massachusetts Bar. Bob has 15 years’ experience, including serving as a personal, in-house estate, tax and charitable planning attorney for a Forbes 400 family. He also previously served as an estate planning and estate settlement attorney with prominent firms in Boston and Washington, D.C. Click here to ask us a question, or click here to contact us directly.