The #1 Estate Planning Mistake – www.zeekbeek.com
Expect the unexpected. Nothing is certain but change. How often have we heard these old sayings? But the fact is they are true not only in life, but in estate planning. As
a result, experienced estate planners have learned to build maximum
flexibility into the estate plan not only so that the plan will work in
every situation they can anticipate, but even more importantly so that the plan will work even in situations that they cannot now anticipate.
How? One
good way is to use a discretionary trust, that is, a trust where no
distributions are mandated, but rather where the trustee has discretion
about whether and when to make distributions to the beneficiary. Let’s consider an example.
Abe dies survived by two children, Bebe and Cal. He leaves ½ of his estate to Bebe and ½ to Cal. A year later Bebe’s company is sold for $40 million, while Cal files for bankruptcy. In
such a case Bebe didn’t need the inheritance while Cal loses it to
creditors. But what if Abe had left the property in a discretionary
trust for Bebe and Cal? In that case the property in the trust would have been protected from the claims of Cal’s creditors and over time the trustee could have made more of the trust property available to Cal than to Bebe if Cal had more need for it. In fact, such a trust can furnish benefits even if no distributions are made. For
example, the trustee can buy a home, hold it in the trust, pay the
expenses out of the trust, and make it available to the beneficiary to
live in. Added flexibility
can be achieved if spouses, defined as the person to whom the
beneficiary is married from time to time, and issue are also
beneficiaries. For example,
if Cal in our example is having creditor problems, then payments can be
made to benefit Cal’s children or to Cal’s spouse directly, helping the
family unit but avoiding distributions to Cal.
Now there are valid concerns about complexity and also accountability when using discretionary trusts. The
rule of thumb is often that the greater the discretion, the more
complex the trustee governance and succession provisions, and in truth
every situation may not merit the full blown discretionary treatment. Sometimes a discretionary trust might be advisable for part of the estate only. Sometimes there are countervailing considerations, emotional or practical or both, that dictate a different disposition. Like politics estate planning is
the art of the possible, and what makes sense in the abstract does not
always work for a given client in the real world. But the key point is
to recognize that our goal should always be to make the estate plan as
flexible as possible under the circumstances, whatever they may be.
So
for example, consider HEMS (health, education, maintenance and support)
standards, fixed percentage allocations and mandated distributions at
certain ages. All can cause unanticipated headaches. A
HEMS standard may make it impossible to fully invade a trust and
terminate it, even if that would be advantageous for tax purposes. A fixed percentage allocation may preclude adjustments between beneficiaries to address changing circumstances. Mandated
distributions at certain ages may push property out of trust at
precisely the wrong time, such as when a beneficiary is getting
divorced, experiencing creditor problems, or struggling with personal
challenges such as addiction or serious mental illness. It’s
not that one must never include such clauses (though it’s fair to say
every trust should have the ability to be terminated by the trustee),
but that one should recognize the tradeoff and carefully weigh the
benefit against the cost in terms of lost flexibility. Because the #1 estate planning mistake is -- drafting documents that are inflexible and come back to haunt you down the road.
Disclaimer – Blog Not Legal Advice
This blog is not legal advice and no attorney-client relationship is formed. The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. Being general in nature the information and materials provided may not apply to any specific circumstances. Nothing on this blog is intended to substitute for the advice of an attorney. If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.
