Have you ever had a client tell you they want a charitable lead annuity trust, a grantor-retained annuity trust or a sale to a (defective) grantor trust? No? Along with trusts and life insurance, the estate-planning terminology causes people’s eyes to glaze over. While a client might eventually have one or more of these strategies as part of their plan, they came to you to for help in accomplishing their goals and wishes when they die or become disabled. For the client, what it’s called and how it works are not the most important things. What is most important is what it does for the client. If the client likes the result, you’ll need to be able to explain how the technique works. Clients want to make informed decisions.
Think of your client as a mouse (pardon the analogy) that wants cheese. To get it, the mouse has to successfully run through a maze. The mouse doesn’t want to go through the maze. It just wants the cheese. In estate planning, the names of the techniques and how they work is the maze. The client has engaged you to get them through that maze to get results that match their goals.
A good estate planner finds out what the client wants to accomplish (the subject of a forthcoming blog). A good communicator uses stories, metaphors and analogies to relate to the client what’s being done to help them accomplish their goals. Here’s a way to describe trusts that may work for you.
A Trust Is Like a Bank
People know about banks. They know they’re financial institutions that accept deposits, protect those deposits, allow for withdrawals, invest money and make loans. They operate under a special instrument called a charter, which contains rules about how they can operate. In very many ways, a trust is like a bank. It’s meant to hold assets and operates under a special instrument called a trust. The trust has rules as to what can and can’t be done with the assets. But why would a client want one?
Client Makes Giving Decisions
Wealthy clients often help their children financially. If a child needs money for medical expenses, the client may help. If a child needs money to fund education, the client may take care of all or part of it. If a child is in a worthy but low-paying occupation (for example, teacher, cleric), the client may support them. If a child needs money to buy a house, the client may give the child money outright or loan money in the form of a mortgage. If a child wants to start a business, the client may give them money or a loan or become an investor. In effect, the client is acting as a special bank in which they make all the decisions. (In my own case, my children used to call me “The National Bank of Daddy.”)
There are also things a client definitely won’t do. A client won’t give money to support addiction. They won’t want the money they give to be available to a beneficiary’s creditors or future ex-spouses. They won’t support a lifestyle they don’t approve of. While the client is alive, they determine if, when and how a child receives assets.
A Trust Is Like a Bank Charter
What are the alternatives to a “bank” when the client dies? The client can either leaves assets to a child outright or allow for unconditional distributions from a trust at arbitrary ages. This is counter to what most clients do during their lifetime. Is this want the client wants? Without a mechanism in place to stop this, the inheritor can do whatever they want with the money without regard to what the client would have wanted. That’s where a properly drafted trust comes in.
A trust, like a bank charter, creates a framework for administering assets. Instead of a loan committee, it has power-holders (trustee, trust protector, investment advisor) who administer the terms of the trust. In effect, after the trustor dies, depending on the trustor’s wishes as expressed in the trust document (and sometimes a separate letter of wishes or intent), their wishes are carried out by the power-holders. Additionally, this “bank” can protect assets from beneficiary creditors including future ex-spouses, and it can make sure that there won’t be gift or estate taxes on the assets in the future.
Life insurance is a particularly attractive trust asset because it can be funded without making gifts. (See “No-Gift Irrevocable Life Insurance Funding.”) Hence, the “Irrevocable Life Insurance Bank.”
Hurdles
There still are hurdles. In talking to your client about an irrevocable life insurance trust that becomes the bank, or about any trust (bank), it’s important that your client understand one thing: The result (as with everything else in life) isn’t going to be perfect. You can’t account for every contingency, especially if the trust is meant to last for multiple generations. How can you make sure that the power-holders follow the client’s wishes? If a trustee is to be replaced, how is the selection process implemented? The client has a clear choice: to leave assets so that the beneficiaries can do whatever they want or set up a properly drafted trust. If you use the metaphor of the bank to describe a trust, it should be easier for your client to understand and make an informed decision.