Long-term trusts can assist in passing wealth to future generations. Drafting such trusts generally requires consideration of myriad issues. Trusts intended to last multiple generations need to include terms as varied as a client’s specific intentions and circumstances yet remain flexible enough to address both anticipated and unanticipated changes that will occur over time.
In his presentation at the Heckerling Institute on Estate Planning, David A. Handler, a partner at Kirkland & Ellis LLP, provided issues that might be considered, accompanied by practical drafting solutions. He emphasized that a trust is essentially a “rule book that will govern the assets for a long time.”
- Some of the most important provisions relate to trustee appointment, removal and replacement. Empowering those who can appoint, remove and replace trustees to perform such tasks while building in a hierarchy permitting future modification that can trump provisions that no longer function as anticipated helps provide flexibility.
- Addressing how responsibilities will be divided among various trustees and advisors and other fiduciaries is also important. Anticipating that some trustees or advisors might be well suited for certain tasks and responsibilities but not others and defining what they are responsible for and what they will not be responsible for is equally important. Carving out responsibilities and including exclusionary language can also help avoid unintended estate inclusion issues.
- Providing for administrative trustees who can maintain custody of assets, generate reports and otherwise assist other trustees may also create a nexus for administration.
- Pot or spray trusts with multiple beneficiaries often serve an important role but may not be well suited for all assets or over the long term. Over time such trusts can lead to dissent and conflict due to beneficiary differences in risk tolerance, investment, spending, cost of living and other issues. When life choices impact distributions to other beneficiaries, family relationships can be adversely impacted. Conversely, there may be a certain amount of ownership and responsibility that occurs when a beneficiary has a separate trust or share because of what will inure to that beneficiary’s direct descendants. Providing the trustee with flexibility to move money down into separate trusts can be beneficial. Also, if a pot trust is involved, use of permissive (as opposed to mandatory) advancement clauses can also provide flexibility. Examples of categories of distributions that a grantor might indicate be excluded from advancement treatment were provided.
- Rather than including behavioral and incentive clauses (where exceptions can often swallow the rule), consider including a nonbinding statement of the grantor’s values and aspirations to help guide the trustee. Policing behaviors can be difficult and sometimes cutting a person off because they’re engaged in discouraged behaviors (such as a beneficiary with a substance abuse problem) isn’t always the answer when providing needed services such as treatment or housing in a sober living environment might be more effective in attaining the grantor’s aspirational goals.
- It’s helpful to address issues of included and excluded beneficiaries (such an unintended or unknown children with whom no relationship may exist).
- Think about the implications of using split gifts and spousal exemptions.
- As the nuclear family changes, discuss the potential implications of powers of appointment that include or exclude a child’s spouse. Including a child’s spouse as a permitted appointee to all or a portion of a child’s beneficial interest might be desired in a long-term marriage or when it provides a marital deduction that could result in tax savings.
- While “silent trusts” are permitted in many states, mandating that no disclosures be made to the beneficiaries may place a trustee in an odd or uncomfortable position, especially if the beneficiary is getting a K-1 and has to report income from the trust on a personal return. At some point, a silent trust may need to terminate. How is a beneficiary to know they have a power of appointment or understand how the existence of a trust interest impacts the beneficiary’s own estate planning if they don’t know the terms of the trust or the extent of the interest.
- Giving parents of a beneficiary the ability to waive silent provision requirements of a trust can provide flexibility.
- In a time when decanting can provide modification of irrevocable trusts, consider the potential implications when a client believes irrevocable trusts can be changed with relative ease through the use of multiple decanting. Might such repetitive changes at the request of the grantor create potential Section 2036 inclusion issues?
- Granting a third party a nonfiduciary power of appointment can also provide flexibility.
- When granting a power of appointment, address how it can be exercised and whether distributions can be delayed to a later date or in further trust. Also consider state laws that might impact the power of appointment.
- When exercising a power of appointment, don’t forget to follow the confines and parameters of the power granted. While you wouldn’t want to exercise a limited power in favor of a revocable trust, you might exercise such a power in favor of a specified subtrust of a revocable trust to be established for a beneficiary who meets the parameters of the power granted.
- Granting a disinterested trustee the power to grant or eliminate a power of appointment at the beneficiary’s request can also provide flexibility. Estate tax inclusion may be preferable over GST tax when a trust is not GST exempt.
- Providing the trustee with the ability to change trust situs or governing law also provides flexibility.
- When including Crummey powers of withdrawal, instead of mandating provision of a notice indicate that the trustee may provide notice. While a lapse of a Crummey power is OK, a release is a gift. Sample language that a trustee might utilize was among the many practical drafting proposals included in David’s materials.
David Handler’s presentation and materials provided considerations and practical drafting solutions that estate planners might utilize to create needed flexibility in long-term trusts.