Art or Science?

“Calvin” visited with me recently, armed with spreadsheets describing the distributions he wanted his revocable trust to implement following his death. He made various assumptions about his investment’s expected rate of return, the amount of money and assets his surviving spouse would require to maintain her current standard of living, the years of his and her deaths, and how the trusts would later distribute to his children and grandchildren. The whole package was quite impressive.

I complemented Calvin on the time and good work he expended to show me how he wanted his plan drafted to satisfy his intent. Calvin explained that during his career he successfully adhered to budgets and projections, so he was simply applying those skills to his personal life in his effort to ensure his loved ones would be well taken care of.

As we proceeded to discuss what he wanted me to draft into his trust, Calvin dictated some fairly detailed and restrictive provisions. I advised that those provisions would work well, provided that all of the assumptions he made in his spreadsheets came true. Then I asked, “How confident are you that all of those assumptions will turn out to be accurate?”

“I’m fairly certain,” he said with a raised brow, “since I usually hit the nail on the head in my corporate career.”

“So you’re telling me,” I continued, “that you are fairly certain you are going to die seven years from now, that your wife will outlive you by eight years, and that during that time period your investments will earn a constant 6% with no fluctuations?”

“Well, when you put it that way,” he answered, “but I do think it will come close to that.”

That’s when I gave Calvin my “estate planning is more of an art than a science” talk.

We all know that life is unpredictable. If it weren’t, all of us would be millionaires rather easily. Tax laws that are affected by politics play a role in future outcomes. Investment markets and real estate have boom and bust cycles that no one can accurately predict. Our lives and the lives of our children and grandchildren take unexpected twists and turns.

Therefore it is usually prudent to have an estate plan that can be flexible. This seems counterintuitive when you realize that most wills or revocable trusts become irrevocable upon the grantor’s death. But trusts can include broad discretionary powers to trustees to make decisions related to distributions, investments and a variety of other topics. While some people cringe at the thought of allowing a trustee to have such control over a beneficiary, consider that the beneficiary herself can be named as her own trustee following the grantor’s death.

An example of this would include a testamentary trust created for a daughter. The trust states that the daughter can distribute income or trust principal to herself for health, maintenance, support and educational purposes (very broad terms allowing for a lot of discretion), or the trustee can choose to make distributions to the daughter’s descendants for the same purposes. So if the daughter would like to distribute some of the income or principal to her child who is attending college, she is free to do so. She may also choose to not distribute income, and allow it to accumulate for her retirement, compounding the earnings over several years.

Another way to make what would otherwise be irrevocable trusts amendable after the grantor’s death is to include something known as a “power of appointment.” A grantor could grant his son the power to appoint the income and principal left in the son’s share of the trust upon his death to a selected class of beneficiaries.

This example would look something like this: “My son shall have the testamentary power to appoint the undistributed and accumulated income and remaining principal in his trust share upon his death to his spouse, descendants and charity in such manner or proportion as he may select.” This allows the grantor’s son to change what would have otherwise been an irrevocable trust. Why is this important? The son can consider the relative economic need of his family members, can divert assets from someone who might be a spendthrift, and can protect assets from the reaches of estate taxes to name just a few benefits.

Having this flexibility typically throws the spreadsheet calculations out the window. But isn’t it better to have some ambiguity and flexibility as opposed to a deliberate outcome that might not be consistent with changing tax laws, investments and family circumstances? Food for thought.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Problems with Trusts

“I know that you’re big on revocable trusts,” Jennifer began during our initial client consultation, “but let me tell you I’m not. I don’t believe in them.”

“Tell me your experience,” I inquired.

“My grandmother formed a trust for me and my brother, bypassing our father,” she began, “and it got ugly shortly after her death. My father only got a nominal amount from the trust as a specific bequest, then sued me and my brother to break the trust for us so he could get some money from it.”

“That sounds awful,” I said, listening to her story unfold. “So what happened?”

“Long story short, my father’s attorney somehow broke the trust and he got a life interest in the assets. On his death it all went to my brother and me.” Jennifer was visibly upset.

“So it ruined your family relationship.” I asked.

“Yes,” she said. “All because of that trust.”

“I don’t believe it was because of the trust,” I began, “whether your grandmother formed a will or a trust, if she wanted you and your brother to enjoy these assets and bypass your father, wouldn’t the same result occurred?”

“What do you mean?” Jennifer asked. “If it wasn’t for the trust, Dad wouldn’t have even known the assets existed.”

“I’m not so sure about that,” I said. “Wasn’t your father entitled to a copy of the trust as a qualified beneficiary anyway? He would have had the same rights – or even more – to a will since wills are public and anyone can read a will filed with the probate court.”

“I didn’t know that,” she said. “Well, if it wasn’t for the trust he wouldn’t have sued us for the money.”

“Are you saying that the fact that the assets were distributed through a trust instead of a will meant the difference as to whether your father would have sued you and your brother? It seems to me the fact that he was bypassed is what caused the lawsuit, not the form in which the bypass occurred.” I opined.

This exchange is typical when discussing why some have adverse feelings towards trusts. The problem with most individuals isn’t the fact that a trust was involved; rather, it was the beneficiaries – the people who were at odds with one another. Jennifer’s case would be like someone blaming automobiles in general for an accident that they happened to be in while on the highway. It wasn’t the automobile, rather it was the driver.

Trusts have many benefits over wills. First, they are active during the grantor’s lifetime, meaning that his assets are transferred into the trust now. If the grantor becomes sick and incapacitated, his successor trustee seamlessly steps in to handle the investments, write checks and pay bills, and accomplish a host of other tasks. Second, they are private. As opposed to wills that are published in the public probate court upon the death of the testator, trusts are only seen by interested parties. Third, assets funded into revocable trusts avoid the probate process, which can be time consuming and more costly than a trust administration.

In many northern states the probate process is not a major hassle, so wills are more popular. Here in Florida the probate process requires an attorney, and the courts take time to act. Moreover, those that own real property in different states benefit since a probate would be required in each state. So with anyone with any degree of net worth that would otherwise be subject to probate, considering a revocable trust is often a wise choice.

Sometimes the objection to trusts is the trustee. You find this most often when a bank or trust company has been named and can’t be removed by the beneficiaries. These restrictive provisions were more common decades ago, although some attorneys still draft their trusts in that manner. When a client names a financial institution, bank or trust company to act as trustee following her death, I usually counsel her to name a party, including the beneficiary of the trust, the ability to remove and replace the corporate trustee. This way, the beneficiary can replace the corporate trustee if their investment performance lags, their fees become excessive, or for whatever reason.

The lesson learned here is to not let irrelevant facts taint your opinion as to what might be right for you and your family.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.