Is Your Estate Plan a Contract or a Covenant?

When considering your estate plan, I ask this question: do you consider it a contract or a covenant? How you view your estate plan makes a difference in how you approach it and, ultimately, the results you hope to achieve.

Many consider the words “contract” and “covenant” synonymous; they’re anything but. A contract is defined as an exchange which is to the mutual benefit and self-interest of both parties. There are two types of contracts – a commercial contract and a social contract.

A commercial contract is where two parties agree to an exchange that benefits each financially. A social contract is where the individual cedes liberties to the king or the state in exchange for protection from external forces and the implementation of an internal rule of law. Three Enlightenment thinkers, Thomas Hobbes, John Locke and Jean-Jacques Rousseau, are credited with establishing a standard view of the theory of the social contract. A commercial contract creates the market while a social contract creates the state.

A covenant, on the other hand, isn’t like that. A covenant is more like a marriage than it is an exchange. A covenant is where two or more parties, each respecting the dignity and integrity of the other, come together in a band of loyalty and trust to achieve what neither can accomplish alone. A covenant isn’t about interests rather it is about identity. A covenant isn’t about me the voter or me the consumer, instead it’s about us. In a broad sense, a covenant does not create a market or a state, rather it creates a society. In relation to a family unit, a covenant frames core values.

Many describe a revocable living trust as a contract between the grantor of the trust – the person who creates the trust’s governing provisions – and the trustee of the trust – the person or party who is responsible for carrying out the trust terms. The interesting thing is that in a revocable trust the titles of grantor and trustee are often initially held by the same person. But when the grantor dies, the trust terms dictate to the successor trustee how the assets are to be used and enjoyed by the trust beneficiaries. So we do have two contracting parties, the deceased grantor and the trustee responsible for carrying out the deceased’s wishes. The beneficiaries’ enjoyment is subject to the contractual obligations between the deceased and the trustee.

The trust might be extremely liberal in the sense that the beneficiaries receive the trust assets outright and can do with them as they please, or it might be restrictive imposing many rules and conditions on the consumption and use of those assets.

But is it a commercial or social contract that we’re after? Most of my clients don’t like to think of the bequest of their hard-earned assets as a commercial transaction. It’s not “I’ll work hard for my entire life, deny myself certain luxuries, goods and services so you may lose your ambition, become an unrestrained consumer and live off the inheritance for the rest of your life.”

Nor do many of my clients believe that the inheritance they leave behind constitutes a social contract, although this is where many clients mistakenly believe they should go to avoid the feeling that their plan is nothing more than a commercial transaction. An estate plan with social contract elements might contain restrictive language where the monies can only be used for very specific purposes. Financial protection is offered but only under strict preconditions.

I believe that many desire something beyond a contract. We want to create a covenant between the generations. We want to instill a unique legacy. This is more everlasting than any transaction could be, and it speaks to clients’ core values. We hope that our progeny not only rise to what we ourselves have achieved, but also excel beyond our capabilities. We accomplish this, however, not by overly restricting our family’s direction, but by building a framework of love and trust.

Taking this to an estate planning context, what covenant do you wish to build within your family? What is it that each generation, fully respecting the dignity and integrity of the other, can come together in a band of loyalty and trust to achieve that neither can accomplish alone? What family core values do you wish to cultivate? Is it to produce highly educated, engaged members of society? Is it instead to continue an entrepreneurial innovative character whether in business or social works? Is the promotion of religious or spiritual aspirations important? Are there charitable or societal goals that you’ve achieved and hope your family surpasses? Such covenants can be built inside of an estate plan in such a way as to give each generation leeway to find its own path.

Ultimately it’s not about the interests of the individual beneficiaries; instead consider what language you’d like to include in your estate plan to foster the identity your family has spent generations building.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

2018-03-28T16:59:39+00:00

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