Top 5 Tips for Effective Trust Drafting www.zeekbeek.com
1. Flexibility. The first rule of real estate? Location, location, location. The first rule of trust drafting? Flexibility, flexibility, flexibility. Of course you can't always afford the perfect house in the perfect location, but you make the best choice you can under the circumstances - and it's the same with trust drafting. Unfettered discretion can put a lot of pressure on the trustee (and on the trustee succession provisions), and sometimes it's just not warranted or even appropriate. But one should strive to make every trust as flexible as possible consistent with the settlor's wishes and the practical realities of budget and family situation. Creditor protection, tax planning, and positioning for unanticipated family circumstances are all enhanced by flexibility. Just as an example, we have encountered a marital trust that permitted principal distributions only for a standard of support and health, which prevented a complete invasion and termination of the trust, even though that was desired by the family and would have facilitated overall estate planning.
2. Trustees. A trust is only as good as the trustees. Does this mean the trustee must be as good of an investor as Warren Buffet? No. But if the trustee is not a savvy investor, the trustee has to be prudent enough to follow good investment advice -- for example, Warren Buffet's own advice to the trustees for his wife, to invest in an index fund! Beneficiaries who are adult and reasonable can be co-trustees and participate in investment decisions as well. This can help them learn about money management.
It's usually a good idea to have at least one non-beneficiary trustee (or a mechanism to appoint one) as it may be important for such a trustee to exercise certain powers, for example, to fully invade and terminate the trust. Keep in mind that a trust can also be drafted so that different trustees are responsible for different functions (e.g., there can be a trustee responsible for making investments, and a trustee responsible for deciding about distributions).
Trustee compensation should be specified, keeping in mind that family members are often wiling to act as trustee without compensation. Authority to resign, to name a successor, and to name co-trustees are also important to include in trust instruments. Tax matters aside, a mechanism to remove and replace trustees is also advisable if the trust is going to last for awhile, such as for the life of a named person or persons.
3. Grantor Trust – or Not? In the case of a lifetime trust, one must always ask -- is this trust going to be a grantor trust for tax purposes, or is it going to be a separate taxpayer? Of course a revocable (living) trust is always a grantor trust. But in other cases the way the trust is drafted may control the income tax status. There are wealth transfer benefits to grantor trust status, not to mention flexibility for subsequent transactions. If grantor trust status is deliberately structured, however, it's important also to draft the trust with an "off switch" to terminate that status should it become preferable to do so in the future.
4. Be Creative! The renowned 19th century British scholar F.W. Maitland thought trusts were the greatest achievement of English jurisprudence. He may have exaggerated, but they are pretty great, and offer a chance for the estate planning attorney to be creative in tailoring a structure to suit each individual client's needs. Powers of appointment, unitrust interests, ascertainable standards, and interests for life are only some of the many tools available in the trust drafting toolbox.
5. Consider the Big Picture. Each trust, and indeed each estate planning document, is only one piece of the overall puzzle. Maybe life insurance should be in a trust for kids from a prior marriage, while retirement benefits should go outright to the surviving spouse, and the Will should divide property between the wife and kids. If a trust is used under a Will it may well have much different terms then one created during lifetime, even if for the same beneficiaries. For example, the client may want to have some property in a discretionary trust as a protected nest egg, but have other property in a trust with an annual payout or an ascertainable standard demand power. Thus, it's important to step back and consider the estate plan as a whole to see how the trust will fit in and contribute to achieving the client's goals.
Disclaimer – Postings 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.
